Knoll, Inc. a designer and manufacturer of furnishings, textiles and fine leathers for the workplace and home, today announced results for the second quarter ended June 30, 2020.
Second Quarter Highlights Versus Prior Year
Net Sales decreased 25.4% to $274.1M
GAAP Gross Margin decreased 340 bps to 34.9%
Adjusted Gross Margin decreased 310 bps to 35.2%
GAAP Net Earnings decreased $31.2M to ($9.6M) or (3.5)% of net sales
Adjusted EBITDA decreased $22.8M to $25.6M or 9.3% of net sales
GAAP Diluted EPS decreased $0.64 to ($0.20)
Adjusted Diluted EPS decreased $0.29 to $0.19
Financial Results
”Our revenue declined less than the industry and we remained solidly profitable on an adjusted basis. On the top line, sales of $274.1 million were down 25% versus the prior year as early quarter weakness, driven by the shutdown in Italy and at HOLLY HUNT were partially mitigated by the explosive growth in our Fully e-commerce work from home division and our own Knoll.com sales platform. Office segment sales declined by 19%, or 29% organically, bolstered by the inclusion of the full quarter of Fully’s work from home e-commerce sales. Lifestyle sales declined 35% as near-total shutdowns in Europe and at HOLLY HUNT impacted our ability to manufacture and deliver product. From an end market standpoint, Residential sales, which represented approximately 25% of this quarter’s sales, including Fully, were a highlight only declining 3% compared to a 30% decline in Workplace activity.
“As anticipated, we experienced negative deleveraging of 47% on the gross margin line, as we were impacted by absolute closures in some locations, and 24% on the adjusted EBITDA line as stringent operating expense controls kept us in the range of our 20-30% deleveraging expectations. This helped us keep adjusted EBITDA margins just under 10%, and leverage at 2.93:1 compared to our 4.0:1 covenant. Adjusted EPS of $0.19 was solid given the magnitude of the disruption we experienced due to Covid-19.
“After brutal incoming orders declines in April and May, we saw a nice sequential and across the board improvement in June in terms of both a reduction in the rate of decline and an improvement in absolute orders dollars. This also validated trends we saw develop in the quarter where the contract office business has understandably been the weakest performer with orders declining at a rate of 30% plus. Our residential business has steadily improved as stay in place orders were lifted and individuals focused on improving their home environments, declining in the mid-single to low teens, and then e-commerce performing the best as work from home online demand has popped, growing 130%.
“We expect these trends to remain in place for the balance of the year. Looking ahead, this suggests a back half sales decline of approximately 20% over prior year for Knoll, Inc., thanks to our strong residential and work from home mix and channel diversification, continuing to outperform contract furniture data.”
Maximizing Liquidity and Scaling Knoll to Ensure We Remain Profitable and Cash Flow Positive
We took immediate action at the start of the pandemic to maximize our liquidity and protect our free cash flow. These steps included aggressive use of furloughs where we were unable to operate, salary freezes, suspension of 401k contributions and ultimately the elimination of approximately 400 positions across Knoll. Together with reductions in T&E and other programmatic spending, we reduced our run rate costs by approximately $50 million. Additionally, to maximize liquidity, we reduced our dividend by 76%, lowered planned CAPEX by approximately $20 million, worked with our landlords to defer rent payments and offered our dealers enhanced credit terms to maximize receivables. We also took advantage of CARES Act provisions, including payroll tax deferrals and the Employee Retention Credit, and Canada Emergency Wage Subsidies.
While we were confident that these actions would have a meaningfully positive impact on our financial position, on June 23, 2020 we also announced an agreement to issue $164.0 million of convertible preferred stock to a subsidiary of Investindustrial VII L.P. This preferred stock carries a 4.5% dividend and an initial conversion price of $16.75, a 45% premium to our then thirty-trading day volume-weighted average price. With this additional capital, we have over $350.0 million in liquidity and our leverage ratio on a pro forma basis, utilizing the proceeds of this investment to reduce debt, would have been approximately 1.94:1 at the end of the second quarter, well below our 4.0:1 covenant that runs through the August 2024 expiration of our credit facility. This transaction closed on July 21, 2020, positioning us with a fortress balance sheet such that we are confident that we will continue to have the resources to execute our strategic plan in the face of an uncertain macroeconomic environment.
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 accessories as well as the international sales of our Office products. The Office segment includes DatesWeiser and Fully. DatesWeiser is known for its sophisticated meeting and conference tables and credenzas, sets a standard of design, quality and technology integration. Fully is an ecommerce furniture brand selling height-adjustable desks, ergonomic chairs and accessories principally for individual home offices and small businesses.
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. 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.
The tables below present the Company’s segment information with Corporate costs excluded from operating segment results.
The following table reconciles reported Net Sales Growth to Organic Net Sales Growth.
The following table shows Workplace and Residential Sales by segment for the periods indicated.
