Knoll, Inc. (KNL), a leading designer and manufacturer of furnishings, textiles and fine leathers for the workplace and home, today announced results for the second quarter ended June 30, 2019.
“The strong top and bottom line results we delivered this quarter directly flow from the pursuit of a differentiated strategy, organic investments to improve our top and bottom line and acquisitions like Muuto that we've been able to move through our existing distribution channels," noted Knoll Chairman and CEO, Andrew Cogan. "Our co-founder Florence Knoll once wisely commented that 'Knoll became successful because it was unique, not just another furniture company.' That could not be truer than in the 2nd quarter of 2019 when we were the first to celebrate our inaugural Design Days show at our new flagship home in the emerging Fulton Market neighborhood of Chicago."
Second Quarter Results
Net sales were $367.3 million for the second quarter of 2019, an increase of 13.6%, from the second quarter of 2018. Net sales for the Office segment were $223.2 million during the second quarter of 2019, an increase of $28.6 million, or 14.7% compared to the second quarter of 2018. The increase was driven primarily by investments we've made in expanding our range of height adjustable tables and improved storage system offerings, as well as continued growth from DatesWeiser and Rockwell Unscripted. Net sales for the Lifestyle segment were $144.1 million during the second quarter of 2019, an increase of $15.3 million, or 11.9% compared with the second quarter of 2018. Sales growth was led by strong growth at Muuto, Spinneybeck and KnollStudio, primarily from increased crossover penetration in commercial workplace settings.
Gross margin for the second quarter of 2019 was 38.3%, an increase of 140 basis points compared to 36.9% in the prior year. Gross margin in the second quarter of 2018 was negatively impacted by an acquisition related inventory adjustment of $0.9 million, or 30 basis points. The increase in gross margin was primarily the result of increased volume and continuous improvement initiatives, partially offset by transportation and commodity inflation.
Operating expenses were $106.8 million for the second quarter of 2019, or 29.1% of net sales, compared to $94.4 million, or 29.2% of net sales, for the second quarter of 2018. Operating expenses in the second quarter of 2019 included acquisition related expenses of $2.2 million. Acquisition related expenses included amortization of acquired intangible assets of $2.1 million and integration related expenses of $0.1 million. Excluding these items, adjusted operating expenses were $104.6 million for the second quarter of 2019, or 28.5% of net sales, compared to $89.5 million, or 27.7% of net sales in the second quarter of 2018. The increase in adjusted operating expenses was related primarily to higher incentive based compensation from increased volume, and strategic investments in increased sales force headcount, information technology infrastructure and our showrooms.
During the second quarter of 2019, interest expense was $5.5 million, an increase of $0.2 million compared to the second quarter of 2018. This increase was due primarily to higher interest rates, partially offset by reduced average outstanding debt in the second quarter of 2019.
Other income was $0.5 million during second quarter of 2019 compared to other expense of $1.8 million in the prior year. Other income and expense included pension settlement charges of $0.5 million and $4.6 million in second quarter of 2019 and 2018, respectively. Pension settlement charges resulted from cash payments of lump sum elections in the second quarter of 2019 and the purchase of annuities for certain pension plan retirees as well as cash payments from lump sum elections in the second quarter of 2018. Excluding pension settlement charges, other income decreased $1.8 million compared to the second quarter of 2018, due primarily to foreign exchange losses driven by the depreciation of the US dollar against the Canadian dollar and a reduction in net periodic benefit income from the Company's pension and other post-employment benefit plans in the second quarter of 2019 compared to the second quarter of 2018.
Net earnings for the second quarter of 2019 were $21.7 million, or $0.44 per diluted share, compared to $13.1 million, or $0.27 per diluted share, for the second quarter of 2018. Excluding the impact of acquisition related expenses and pension settlement charges, adjusted net earnings for the second quarter of 2019 were $23.6 million, or $0.48 per adjusted diluted share, compared to $20.8 million, or $0.42 per adjusted diluted share for the second quarter of 2018.
The effective tax rate was 25.1%for the second quarter of 2019, compared to 26.0% for the second 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 second quarter of 2019 totaled $12.7 million compared to $7.6 million in the prior year. The Company paid a quarterly dividend of $8.3 million, or $0.17 per share in the second quarter of 2019 compared to a quarterly dividend of $7.3 million, or $0.15 per share and payments of accrued dividends of $0.4 million in the second 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 DatesWesier, 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.
