Knoll, Inc. (KNL), a leading designer and manufacturer of furnishings, textiles and fine leathers for the workplace and home, today announced results for the first quarter ended March 31, 2019.
“We are very pleased with our strong start to 2019," commented Knoll Chairman and CEO, Andrew Cogan. "Our strategy to diversify our sources of revenue into higher margin Lifestyle categories with both residential and crossover workplace applicability, combined with efforts to improve the profitability of our Office segment, is delivering strong top line growth, margin expansion and EPS growth. Furthermore, it has positioned us to meaningfully benefit from the trend towards more social and hospitality-based workplaces as evidenced by the accelerating penetration of ancillary spaces we saw this quarter."
Net sales were $332.8 million for the first quarter of 2019, an increase of 12.2%, from the first quarter of 2018. Net sales for the Office segment were $202.2 million during the first quarter of 2019, an increase of $17.1 million, or 9.2% compared to the first quarter of 2018. The increase was driven primarily by investments we've made in expanding our range of height adjustable tables and wood products as well as continued growth of Rockwell Unscripted. Net sales for the Lifestyle segment were $130.6 million during the first quarter of 2019, an increase of $19.1 million, or 17.2% compared with the first quarter of 2018. Sales growth was led by strong organic growth at Muuto and KnollStudio as both increased their crossover penetration of workplace settings plus an additional 3 weeks of Muuto shipments compared to last year.
Gross margin for the first quarter of 2019 was 37.2%, representing an increase of 90 basis points compared to 36.3% in the prior year. The increase in gross margin was primarily the result of increased volume, net price realization and continuous improvement initiatives, partially offset by transportation and commodity inflation.
Operating expenses were $94.6 million for the first quarter of 2019, or 28.4% of net sales, compared to $85.2 million, or 28.7% of net sales, for the first quarter of 2018. Operating expenses in the first quarter of 2019 included acquisition related expenses of $2.5 million. Acquisition related expenses included amortization of acquired intangible assets of $2.1 million, retention agreements for key employees of $0.3 million, and other acquisition related expenses of $0.1 million. Operating expenses also included restructuring charges of $0.1 million which were related to the Company's footprint optimization initiatives. Excluding these items, adjusted operating expenses were $92.0 million for the first quarter of 2019, or 27.7% of net sales compared to $82.0 million, or 27.6% of net sales in the first quarter of 2018. The increase in adjusted operating expenses was related primarily to incremental operating expenses from an additional three weeks of Muuto, incentives from higher volume, and strategic investments in information technology infrastructure and product development.
During the first quarter of 2019, interest expense was $5.2 million, a decrease of $0.3 million compared to the first quarter of 2018. This decrease was due primarily to a $1.4 million loss on extinguishment of debt included in interest expense in the first quarter of 2018. Excluding this charge, interest expense increased $1.1 million primarily due to higher interest rates and higher average outstanding debt levels in the first quarter of 2019.
Other income during first quarter of 2019 declined $3.5 million compared to the first quarter of 2018. The decrease in other income was due primarily to a reduction in net periodic benefit income from the Company's pension and other post-employment benefit plans and foreign exchange losses in the first quarter of 2019 as compared to foreign exchange gains in the first quarter of 2018. Foreign exchange losses were primarily driven by a depreciation of the US dollar against the Canadian dollar in 2019. Other income for the first quarter of 2019 also included a pension settlement charge of $0.2 million related to the cash payments from lump sum elections.
Net earnings for the first quarter of 2019 were $18.0 million, or $0.37 per diluted share, compared to $15.3 million, or $0.31 per diluted share, for the first quarter of 2018. Excluding the impact of acquisition related expenses, restructuring charges, and pension settlement charges, adjusted net earnings for the first quarter of 2019 were $19.9 million, or $0.41 per adjusted diluted share, compared to $18.7 million, or $0.38 per adjusted diluted share for the first quarter of 2018.
The effective tax rate for the first quarter of 2019 was 26.6%, down from 27.1% in the first quarter of 2018. The mix of pretax income and the varying effective tax rates in the countries and states in which we operate directly affects our consolidated effective tax rate.
Capital expenditures for the first quarter of 2019 totaled $9.2 million compared to $8.5 million in the prior year. The Company paid a quarterly dividend of $7.3 million, or $0.15 per share, and made payments of accrued dividends of $0.5 million in the first quarter of 2019 compared to a quarterly dividend of $7.4 million, or $0.15 per share and payments of accrued dividends of $0.3 million in the first quarter of 2018.
Business Segment Results
The Company has two reportable segments: Office and Lifestyle. The Office reportable segment is comprised of the operations of the Office operating segment. The Lifestyle reportable segment is an aggregation of the Lifestyle, Europe, and Muuto operating segments. All unallocated expenses are included within Corporate.
The Office segment includes a complete range of workplace products that address diverse workplace planning paradigms in North America and Europe. These products include: systems furniture, seating, storage, tables, desks and KnollExtra® accessories as well as the international sales of our Office products. The Office segment includes DatesWeiser, known for its sophisticated meeting and conference tables and credenzas, sets a standard of design, quality and technology integration.
The Lifestyle segment includes KnollStudio®, HOLLY HUNT®, Muuto, KnollTextiles®, Spinneybeck® (including Filzfelt®), and Edelman® Leather. KnollStudio products, which are distributed in North America and Europe, include iconic seating, lounge furniture, side, cafe and dining chairs as well as conference, training and dining and occasional tables. HOLLY HUNT® is known for high quality residential furniture, lighting, rugs, textiles and leathers. In addition, HOLLY HUNT® also includes Vladimir Kagan Design Group, a renowned collection of modern luxury furnishings. The KnollTextiles®, Spinneybeck® (including Filzfelt®), and Edelman® Leather businesses provide a wide range of customers with high-quality fabrics, felt, leather and related architectural products. Muuto rounds out the Lifestyle segment with its ancillary products and affordable luxury furnishings to make the Lifestyle segment an all-encompassing “resimercial”, high-performance workplace, from uber-luxury living spaces to affordable luxury residential living.
During the first quarter of 2019, the Company changed the structure of its internal organization which caused the composition of its reportable segments to change. As a result, DatesWeiser is now a component of the Office operating segment as opposed to the Lifestyle operating segment.
The tables below present the Company’s segment information with Corporate costs excluded from operating segment results. Prior year amounts have been recast to conform to the current presentation.
