Knoll, Inc. today announced financial results for the first quarter ended March 31, 2021.
First Quarter Highlights Versus Prior Year
Net Sales decreased 22.3% to $264.2M
Gross Margin increased 20 bps to 36.2%
GAAP Operating Expenses decreased $17.5M to $93.4M or 35.4% of net sales
Adjusted Operating Expenses decreased $13.6M to $87.3M or 33.0% of net sales
GAAP Net Earnings/(loss) decreased $12.8M to $(1.9)M or (0.7)% of net sales
Adjusted EBITDA decreased $11.5M to $21.7M or 8.2% of net sales
GAAP Diluted EPS decreased $0.30 to ($0.08)
Adjusted Diluted EPS decreased $0.36 to $0.04
One quarter into the year, our thesis around 2021 being a year of robust residential and consumer growth and a transitional year for our commercial contract business as clients return to the office later this year remains intact. On $264.2 million of total sales, favorable mix and the benefit of our footprint consolidation was able to offset under absorption of fixed costs and modest inflation to hold gross margins relatively flat at 36.2%. Combined with good operating expense controls we were able to generate upper single-digit adjusted EBITDA margins of 8.2% and better than expected EPS performance.
Sales to residential end-users represented almost 40% of our revenue, up from 20% a year ago. These sales increased 46% over the prior year, and helped reduce our first quarter net sales decline to just over 22%. The improvement in our residential activity has been broad based and is consistent with strong demand for interior design services as noted in the most recent American Society of Interior Designers report. Looking at our Lifestyle segment, this strong residential performance drove bottom line adjusted EBITDA growth in the segment, with 15.7% adjusted EBITDA margins that were up 440 bps from prior year. We continue to believe that we are just scratching the surface of what the residential potential for our cornerstone brands can be.
On the commercial contract front, we are the most optimistic we have been in the last several quarters as we can start to see the return to the office market activity materialize in our pipeline and forecasts. The Kastle Return to Work Barometer has improved from a low of 15% occupancy early this year to a mid 20% occupancy at the end of the first quarter, so the trend is positive. Furthermore to the anecdotal trends, the February Architecture Billings Index data showed a notable uptick in design contracts and billings for the first time in over a year, moving into positive territory. This aligns with the significant jump in the number of new workplace opportunities we recorded in March over February. Our own RFP data is now consistently running up 25% over prior-year levels and, most encouragingly, our sequential pipeline of orders activity increased 27% as we moved from the low of Q1 into Q2, with further sequential increases anticipated in Q3 and Q4. In fact, our Q4 pipeline is now up a whopping 64% from Q1 levels. While we expect a lag from when these orders will convert into shipments, it all paints a consistent picture of meaningful demand improvement in the back half of 2021 that should continue into 2022.
In the interim, we are carefully monitoring our operating expense levels and keeping an eye on growing inflationary pressures, most acutely in our metals and logistics spend. We have a price increase going into effect in May and are already looking at another increase in Q4 if these pressures do not relent. Fortunately, our team locked in steel pricing for the first half of 2021, so this is mostly a back half issue that we would hope to offset with increased fixed cost absorption and better pricing. In addition, the next phase of our footprint rationalization kicks in this coming quarter with the consolidation of multiple US distribution centers and warehouses into a single East Coast location, which will result in additional savings later this year and into 2022.
In closing, while we work toward closing the proposed merger with Herman Miller, Inc., we believe we have taken the worst of the COVID-19 hit and are now positioned for broad based success as our commercial clients return to the office and our investments in residential and digital initiatives continue to build on the momentum of the past year. Thank you for your continued interest in Knoll.
Effective as of the beginning of the first quarter of 2021, the Company implemented a segment reorganization in order to more closely align its segment reporting with its current operating structure (the “Segment Reorganization”). The Company’s new reportable segments are: Workplace and Lifestyle.
The Workplace reportable segment is comprised of the operations of the Workplace operating segment, which, following the Segment Reorganization, reflects the reassignment of the Spinneybeck and KnollTextiles businesses from the Lifestyle segment, as well as the reassignment of the Europe Office business from the legacy Office segment to the Lifestyle segment. The Lifestyle reportable segment is an aggregation of the Holly Hunt, Muuto, KnollStudio North America and Europe operating segments. All unallocated expenses are included within Corporate.
The Workplace segment includes a complete range of products that address diverse workplace planning paradigms in North America. These products include: office systems furniture, seating, storage, tables (conference, training), desks (fixed and height-adjustable), textiles, high-quality fabrics, felt, leather and KnollExtra® accessories. The businesses comprising the Workplace segment serve a broad range of customers, from geographically diverse global accounts to consumers and small businesses, and do so through various physical and digital interfaces, including a direct sales force, Company and dealer showrooms, and multiple e-commerce platforms.
The Lifestyle segment product offerings, which are distributed globally, include iconic seating, lounge furniture, side, café and dining chairs, dining and occasional tables, lighting, rugs, leather and related architectural products. The businesses comprising the Lifestyle segment serve affordable luxury and high-end luxury markets that often blur the distinction between commercial and residential spaces, but understand and appreciate the impact that furnishings borne out of exceptional design and made with high-quality, innovative materials can have on their respective environments. Lifestyle products are sold through a global network of showrooms, e-commerce websites, retail stores and independent dealers.
The tables below present the Company’s segment information with Corporate costs excluded from Operating segment results.
