Annual Reports

 
Quarterly Reports

  • 10-Q (Nov 9, 2017)
  • 10-Q (Aug 9, 2017)
  • 10-Q (May 10, 2017)
  • 10-Q (Aug 9, 2016)
  • 10-Q (May 10, 2016)
  • 10-Q (Nov 9, 2015)

 
8-K

 
Other

Knoll 10-Q 2017
Document
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
                                             
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2017
 
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                    to                       
 
Commission File No. 001-12907
KNOLL, INC.
A Delaware Corporation
 
I.R.S. Employer No. 13-3873847
 
1235 Water Street
East Greenville, PA 18041
Telephone Number (215) 679-7991
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)  Yes o No x
 
As of May 8, 2017, there were 49,358,830 shares (including 891,610 non-voting restricted shares) of the Registrant’s common stock, par value $0.01 per share, outstanding.
 




KNOLL, INC.
 
TABLE OF CONTENTS FOR FORM 10-Q
 
Item
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


PART I - FINANCIAL INFORMATION
ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
KNOLL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share and per share data)
 
March 31,
2017
 
December 31,
2016
ASSETS
(Unaudited)
 
 

Current assets:
 

 
 

Cash and cash equivalents
$
3,035

 
$
9,854

Customer receivables, net of allowance for doubtful accounts of $7,488 and $8,059, respectively
83,081

 
84,425

Inventories, net
146,200

 
142,072

Prepaid expenses
27,431

 
27,461

Other current assets
12,480

 
12,996

Total current assets
272,227

 
276,808

Property, plant, and equipment, net
200,371

 
197,084

Goodwill
141,471

 
141,391

Intangible assets, net
241,048

 
241,870

Other non-trade receivables
26

 
26

Other noncurrent assets
1,436

 
1,434

Total assets
$
856,579

 
$
858,613

LIABILITIES AND EQUITY
 

 
 

Current liabilities:
 

 
 

Current maturities of long-term debt
$
10,000

 
$
10,000

Accounts payable
89,923

 
97,518

Income taxes payable
44

 
81

Other current liabilities
94,403

 
114,774

Total current liabilities
194,370

 
222,373

Long-term debt
232,549

 
208,383

Deferred income taxes
80,265

 
76,854

Post-employment benefits other than pensions
5,053

 
5,124

Pension liability
15,388

 
17,428

Other noncurrent liabilities
17,777

 
18,982

Total liabilities
545,402

 
549,144

Commitments and contingent liabilities


 


Equity:
 

 
 

Common stock, $0.01 par value; 200,000,000 shares authorized; 65,425,961 shares issued and 49,364,084 shares outstanding (including 907,860 non-voting restricted shares and net of 16,061,877 treasury shares) at March 31, 2017 and 64,741,648 shares issued and 49,096,290 shares outstanding (including 993,962 non-voting restricted shares and net of 15,645,358 treasury shares) at December 31, 2016
494

 
491

Additional paid-in capital
48,667

 
55,148

Retained earnings
304,862

 
297,011

Accumulated other comprehensive loss
(43,060
)
 
(43,403
)
Total Knoll, Inc. stockholders' equity
310,963

 
309,247

Noncontrolling interests
214

 
222

Total equity
311,177

 
309,469

Total liabilities and equity
$
856,579

 
$
858,613


See accompanying notes to the condensed consolidated financial statements.

3

KNOLL, INC. 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
(dollars in thousands, except share and per share data)




 
Three Months Ended March 31,
 
2017
 
2016
Sales
$
256,820

 
$
284,629

Cost of sales
161,146

 
176,865

Gross profit
95,674

 
107,764

Selling, general, and administrative expenses
72,640

 
75,915

Operating profit
23,034

 
31,849

Interest expense
1,671

 
1,554

Other expense, net
203

 
2,604

Income before income tax expense
21,160

 
27,691

Income tax expense
5,764

 
10,280

Net earnings
15,396

 
17,411

Net (loss) earnings attributable to noncontrolling interests
(8
)
 
11

Net earnings attributable to Knoll, Inc. stockholders
$
15,404

 
$
17,400

 
 
 
 
Net earnings per common share attributable to Knoll, Inc. stockholders:
 

 
 

Basic
$
0.32

 
$
0.36

Diluted
$
0.31

 
$
0.36

 
 
 
 
Dividends per share
$
0.15

 
$
0.15

 
 
 
 
Weighted-average number of common shares outstanding:
 

 
 

Basic
48,456,225

 
47,904,593

Diluted
49,382,892

 
48,594,395

 
 
 
 
Net earnings
$
15,396

 
$
17,411

Other comprehensive income (loss):
 

 
 

Pension and other postretirement liability adjustment, net of tax
(137
)
 
138

Foreign currency translation adjustment
480

 
4,049

Total other comprehensive income (loss), net of tax
343

 
4,187

Total comprehensive income
15,739

 
21,598

Comprehensive (loss) income attributable to noncontrolling interests
(8
)
 
11

Comprehensive income attributable to Knoll, Inc. stockholders
$
15,747

 
$
21,587

 
See accompanying notes to the condensed consolidated financial statements.

4

KNOLL, INC. 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)

 
Three Months Ended March 31,
 
2017
 
2016
CASH FLOWS FROM OPERATING ACTIVITIES
 

 
 

Net earnings
$
15,396

 
$
17,411

Adjustments to reconcile net earnings to cash provided by operating activities:
 

 
 

Depreciation
5,089

 
4,560

Amortization expense (including deferred financing fees)
989

 
989

Inventory obsolescence
744

 
647

Loss on disposal of property, plant and equipment
25

 
7

Unrealized foreign currency (gains) losses
(12
)
 
1,262

Stock-based compensation
3,344

 
2,138

Bad debt and customer credits
(509
)
 
91

Changes in assets and liabilities:
 

 
 

Customer receivables
1,876

 
8,570

Inventories
(4,765
)
 
(7,348
)
Prepaid and other current assets
1,456

 
7,749

Accounts payable
(5,105
)
 
1,299

Current and deferred income taxes
2,447

 
578

Other current liabilities
(13,895
)
 
(16,393
)
Other noncurrent assets and liabilities
(3,255
)
 
(304
)
Cash provided by operating activities
3,825

 
21,256

CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 

Capital expenditures, net
(10,650
)
 
(7,017
)
Cash used in investing activities
(10,650
)
 
(7,017
)
CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 

Proceeds from credit facility
130,000

 
99,500

Repayment of credit facility
(106,000
)
 
(99,500
)
Payment of dividends
(8,427
)
 
(7,196
)
Proceeds from the issuance of common stock
526

 
399

Purchase of common stock for treasury
(10,348
)
 
(1,902
)
Contingent purchase price payment
(6,000
)
 
(5,000
)
Cash used in financing activities
(249
)
 
(13,699
)
Effect of exchange rate changes on cash and cash equivalents
255

 
616

Net (decrease) increase in cash and cash equivalents
(6,819
)
 
1,156

Cash and cash equivalents at beginning of period
9,854

 
4,192

Cash and cash equivalents at end of period
$
3,035

 
$
5,348

 
See accompanying notes to the condensed consolidated financial statements.


5

KNOLL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Knoll, Inc. (the “Company”) have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations.  The consolidated balance sheet of the Company, as of December 31, 2016, was derived from the Company’s audited consolidated balance sheet as of that date. All other condensed consolidated financial statements contained herein are unaudited and reflect all adjustments which are, in the opinion of management, necessary to summarize fairly the financial position of the Company and the results of the Company’s operations and cash flows for the periods presented. All of these adjustments are of a normal recurring nature. The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries and any partially owned subsidiaries that the Company has the ability to control. All significant intercompany balances and transactions have been eliminated in consolidation. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2016.
New Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”, which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. This ASU supersedes the revenue recognition requirements in FASB ASC Topic 605, “Revenue Recognition,” and most industry-specific guidance. This ASU sets forth a five-step model for determining when and how revenue is recognized. Under the model, an entity will be required to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2016. The FASB subsequently deferred the effective date of this standard to December 15, 2017 with early adoption permitted as of December 15, 2016. The Company will adopt the new standard in the annual period beginning January 1, 2018. The standard permits the use of either the full retrospective or modified retrospective (cumulative effect) transition method. Transition practical expedients are available for both methods. The Company plans to apply the modified retrospective transition method. The Company assembled an implementation work team to assess and document the accounting conclusions for the adoption of ASU 2014-09 and will continue to evaluate and assess the impact on the Company's consolidated financial statements. At this time, the Company does not believe the impact to the financial statements as a result of the adoption of this ASU will be material.
In July 2015, the FASB issued ASU 2015-11 - Inventory (Topic 330), which amends existing guidance for measuring inventories. This amendment will require the Company to measure inventories recorded using the first-in, first-out method at the lower of cost and net realizable value. This amendment does not change the methodology for measuring inventories recorded using the last-in, first-out method. This amendment is effective for fiscal years beginning after December 15, 2016. Early adoption is permitted. The Company adopted this standard during the three months ended March 31, 2017, and the impact on its consolidated financial statements was not material.
In February 2016, the FASB issued guidance codified in ASC 842, Leases, which supersedes the guidance in ASC 840, Leases. ASC 842 will be effective for the Company on January 1, 2019, and the Company will adopt the standard using the modified retrospective approach. While the Company continues to evaluate the provisions of ASC 842 to determine how it will be affected, the primary effect of adopting the new standard will be to record assets and obligations for current operating leases. The Company is currently in the process of evaluating the impact of adoption of the ASU on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the accounting for goodwill impairment by removing the second step of the goodwill impairment test that requires a hypothetical purchase price allocation. Under the new guidance, goodwill impairment will be measured and recognized as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill allocated to the reporting unit. The revised guidance does not affect the reporting entity’s ability to first assess qualitative factors by reporting unit to determine whether it is necessary to perform the quantitative goodwill impairment test. The guidance is effective for goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017.

6

KNOLL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits (Topic 715). The new standard improves the presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The new standard will require all components of the Company's net periodic benefit cost (income), with the exception of service cost, currently reported within selling, general and administrative expenses, to be reclassified and reported within other expense. The adoption of this new standard will have no impact on pre-tax income or net income reported.
NOTE 2. INVENTORIES
Information regarding the Company's inventories is as follows (in thousands):
 
March 31, 2017
 
December 31, 2016
Raw materials
$
59,810

 
$
60,217

Work-in-process
7,327

 
7,186

Finished goods
79,063

 
74,669

 
$
146,200

 
$
142,072

Inventory reserves for obsolescence and other estimated losses were $10.1 million and $9.5 million at March 31, 2017 and December 31, 2016, respectively, and have been included in the amounts above.
NOTE 3. PENSION AND OTHER POST-EMPLOYMENT BENEFITS
The following table sets forth the components of the net periodic benefit income for the Company's pension and other post-employment benefit plans (in thousands):
 
Pension Benefits
 
Other Benefits
 
Three Months Ended March 31,
 
Three Months Ended March 31,
 
2017
 
2016
 
2017
 
2016
Service cost
$
175

 
$
468

 
$

 
$

Interest cost
2,390

 
2,416

 
43

 
49

Expected return on plan assets
(4,615
)
 
(3,612
)
 

 

Amortization of prior service credit

 

 
(371
)
 
(280
)
Recognized actuarial loss (gain)
154

 
123

 
1

 
(62
)
Net periodic benefit (income) cost
$
(1,896
)
 
$
(605
)
 
$
(327
)
 
$
(293
)
For the three months ended March 31, 2017$0.9 million of pension income was recognized in cost of sales and $0.9 million was recognized in selling, general, and administrative expenses. For the three months ended March 31, 2016$0.3 million of pension income was incurred in cost of sales and $0.3 million was incurred in selling, general, and administrative expenses.
NOTE 4. FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial Instruments
The fair values of the Company’s cash and cash equivalents, customer receivables, and accounts payable approximate carrying value due to their short maturities.
The fair value of the Company’s long-term debt approximates its carrying value, as it is variable rate debt and the terms are comparable to market terms as of the balance sheet dates, and are classified as Level 2.

7

KNOLL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The following table represents the assets and liabilities, measured at fair value on a recurring basis and the basis for that measurement (in thousands):
 
Fair Value as of March 31, 2017
 
Fair Value as of December 31, 2016
Liabilities:
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Contingent purchase price payment - Holly Hunt
$

 
$

 
$

 
$

 
$

 
$

 
$
6,000

 
$
6,000

Contingent purchase price payment - DatesWeiser

 

 
1,100

 
1,100

 

 

 
1,100

 
1,100

Total
$

 
$

 
$
1,100

 
$
1,100

 
$

 
$

 
$
7,100

 
$
7,100

Pursuant to the agreement governing the acquisition of HOLLY HUNT®, the Company may be required to make annual contingent purchase price payments. The payouts are based upon HOLLY HUNT® reaching an annual net sales target, for each year through 2016, and are paid out on or around February 20 of the following calendar year. The Company classifies this as a Level 3 measurement and is required to remeasure this liability at fair value on a recurring basis. The fair value of such contingent purchase price payments, totaling $16.0 million, was determined at the time of acquisition based upon net sales projections for HOLLY HUNT® for 2014, 2015, and 2016. The Company paid the remaining $6.0 million contingent purchase price in the three months ended March 31, 2017, as a result of HOLLY HUNT® achieving the 2016 net sales projections. Excluding the initial recognition of the liability for the contingent purchase price payments and payments made to reduce the liability, any changes in the fair value will be included within selling, general and administrative expenses.
Pursuant to the agreement governing the acquisition of DatesWeiser, the Company may be required to make annual contingent purchase price payments. The payouts are based upon DatesWeiser reaching an annual net sales target, for each year through 2020. The Company classifies this as a Level 3 measurement and is required to remeasure this liability at fair value on a recurring basis. The fair value of such contingent purchase price payments was determined at the time of acquisition based upon net sales projections for DatesWeiser for 2017, 2018, 2019 and 2020. Excluding the initial recognition of the liability for the contingent purchase price payments and payments made to reduce the liability, any changes in the fair value will be included within selling, general and administrative expenses.
There were no additional assets and/or liabilities recorded at fair value on a recurring basis as of March 31, 2017 or December 31, 2016.
NOTE 5. INDEBTEDNESS
The Company's long-term debt is summarized as follows (in thousands):
 
March 31, 2017
 
December 31, 2016
Balance of revolving credit facility
$
71,500

 
$
45,000

Balance of term loan
172,500

 
175,000

Total long-term debt
244,000

 
220,000

Less: Current maturities of long-term debt
10,000

 
10,000

Less: Deferred financing fees, net
1,451

 
1,617

Long-term debt
$
232,549

 
$
208,383

NOTE 6. CONTINGENT LIABILITIES AND COMMITMENTS
Litigation
The Company is currently involved in matters of litigation, including environmental contingencies, arising in the ordinary course of business. The Company accrues for such matters when expenditures are probable and reasonably estimable. Based upon information presently known, management is of the opinion that such litigation, either individually or in the aggregate, will not have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

8

KNOLL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Warranty
The Company provides for estimated product warranty expenses when related products are sold and are included within other current liabilities. Because warranty estimates are forecasts that are based on the best available information, primarily historical claims experience, future warranty claims may differ from the amounts provided.
Changes in the warranty reserve are as follows (in thousands):
Balance, December 31, 2016
 
$
8,906

Provision for warranty claims
 
1,106

Warranty claims paid
 
(1,464
)
Foreign currency translation adjustment
 
302

Balance, March 31, 2017
 
$
8,850

Warranty expense for the three months ended March 31, 2017 and 2016 was $1.1 million and $1.6 million, respectively.
NOTE 7. EQUITY
The following table shows the change in equity attributable to Knoll, Inc. stockholders and noncontrolling interests during the three months ended March 31, 2017 (in thousands):
 
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Knoll, Inc.
Stockholders' Equity
 
Noncontrolling Interests
 
Total Equity
Balance at December 31, 2016
 
$
491

 
$
55,148

 
$
297,011

 
$
(43,403
)
 
$
309,247

 
$
222

 
$
309,469

Net earnings
 

 

 
15,404

 

 
15,404

 
(8
)
 
15,396

Other comprehensive income
 

 

 

 
343

 
343

 

 
343

Shares issued for consideration:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exercise of stock options (22,500 shares)
 

 
472

 

 

 
472

 

 
472

Shares issued under stock incentive plan (668,899)
 
7

 
(3
)
 

 

 
4

 

 
4

Shares issued to Board of Directors in lieu of cash (1,942 shares)
 

 
50

 

 

 
50

 

 
50

Stock-based compensation
 

 
3,344

 

 

 
3,344

 

 
3,344

Cash dividend ($0.15 per share)
 

 

 
(7,553
)
 

 
(7,553
)
 

 
(7,553
)
Purchase of common stock (410,616 shares)
 
(4
)
 
(10,344
)
 

 

 
(10,348
)
 

 
(10,348
)
Balance at March 31, 2017
 
$
494

 
$
48,667

 
$
304,862

 
$
(43,060
)
 
$
310,963

 
$
214

 
$
311,177

NOTE 8. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table summarizes the changes in accumulated other comprehensive income (loss) by component for the three months ended March 31, 2017 (in thousands):
 
Foreign
Currency
Translation
Adjustment
 
Pension and
Other Post-Employment
Liability
Adjustment
 
Total
Balance, as of December 31, 2016
$
(13,998
)
 
$
(29,405
)
 
$
(43,403
)
Other comprehensive income before reclassifications
480

 

 
480

Amounts reclassified from accumulated other comprehensive income (loss)

 
(137
)
 
(137
)
Net current-period other comprehensive income
480

 
(137
)
 
343

Balance, as of March 31, 2017
$
(13,518
)
 
$
(29,542
)
 
$
(43,060
)

9

KNOLL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


The following reclassifications were made from accumulated other comprehensive income (loss) to the condensed consolidated statements of operations and other comprehensive income (in thousands):
 
Three Months Ended
 
March 31, 2017
 
March 31, 2016
Amortization of pension and other post-employment liability adjustments
 
 
 
Prior service credits (1)
$
(371
)
 
$
280

Actuarial losses (1)
155

 
(61
)
Total before tax
(216
)
 
219

Tax benefit (expense)
79

 
(81
)
Net of tax
$
(137
)
 
$
138

(1) These accumulated other comprehensive income (loss) components are included in the computation of net periodic pension costs. See Note 3 for additional information.
NOTE 9. COMMON STOCK AND EARNINGS PER SHARE
Basic earnings per share excludes the dilutive effect of common shares that could potentially be issued due to the exercise of stock options and unvested restricted stock and restricted stock units, and is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share includes the effect of shares and potential shares and units issued under the stock incentive plans. The following table sets forth the reconciliation from basic to dilutive average common shares (in thousands):
 
Three Months Ended March 31,
 
2017
 
2016
Numerator:
 
 
 
Net earnings attributable to Knoll, Inc. stockholders
$
15,404

 
$
17,400

 
 
 
 
Denominator:
 
 
 
Denominator for basic earnings per shares - weighted-average shares
48,456

 
47,905

Effect of dilutive securities:
 
 
 
Potentially dilutive shares resulting from stock plans
927

 
689

Denominator for diluted earnings per share - weighted-average shares
49,383

 
48,594

Antidilutive equity awards not included in weighted-average common shares—diluted
12

 

 
 
 
 
Net earnings per common share attributable to Knoll, Inc. stockholders:
 

 
 

Basic
$
0.32

 
$
0.36

Diluted
$
0.31

 
$
0.36

NOTE 10. INCOME TAXES
The Company’s income tax provision consists of federal, state and foreign income taxes. The tax provisions for the three months ended March 31, 2017 and 2016 were based on the estimated effective tax rates applicable for the full years ending December 31, 2017 and 2016 and includes items specifically related to the interim periods. The Company’s effective tax rate was 27.2% and 37.1% for the three months ended March 31, 2017 and 2016, respectively. The decrease in the Company's effective tax rate for the three months ended March 31, 2017 was due primarily to the adoption of ASU 2016-09 in the third quarter of 2016, which impacted the accounting treatment of excess tax benefits related to vesting of equity awards in the three months ended March 31, 2017. This resulted in the realization of tax benefits as a reduction to income tax expense in the quarter. In addition, the effective tax rate was affected by the geographic mix of pretax income and the varying effective tax rates in the countries and states in which the Company operates.

10

KNOLL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


As of March 31, 2017 and December 31, 2016, the Company had unrecognized tax benefits of approximately $0.9 million, respectively. These unrecognized tax benefit amounts would affect the effective tax rate if recognized. As of March 31, 2017, the Company is subject to U.S. Federal Income Tax examination for the tax years 2007 through 2016, and to non-U.S. income tax examination for the tax years 2010 to 2016. In addition, the Company is subject to state and local income tax examinations for the tax years 2007 through 2016.
NOTE 11. SEGMENT INFORMATION
The Company manages business through its reporting segments: Office, Studio, and Coverings. All unallocated expenses are included within Corporate.
The Office segment includes a complete range of workplace products that address diverse workplace planning paradigms. These products include: systems furniture, seating, storage, tables, desks and KnollExtra® accessories as well as the international sales of North American Office products.
The Studio segment includes KnollStudio®, HOLLY HUNT®, Knoll Europe and DatesWeiser. KnollStudio products, 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 2016, HOLLY HUNT® acquired Vladimir Kagan Design Group, a renowned collection of modern luxury furnishings. Knoll Europe, which markets and sells both KnollStudio and Knoll Office products, manufactures and sells products to customers primarily in Europe. DatesWeiser, known for its sophisticated meeting and conference tables and credenzas, sets a standard for design, quality and technology integration.
The Coverings segment includes KnollTextiles®, Spinneybeck® (including Filzfelt®), and Edelman® Leather. These businesses provide a wide range of customers with high-quality fabrics, felt, leather and related architectural products.
In 2016, the Company revised its segment presentation to segregate Corporate costs. The Company believes this facilitates improved communication as it reports segment results and better aligns with how it views and operates the Company. Corporate costs include unallocated costs relating to shared services and general corporate activities such as legal expenses, acquisition expenses, certain finance, human resources, administrative and executive expenses and other expenses that are not directly attributable to an operating segment. Dedicated, direct selling, general and administrative expenses of the segments continue to be included within segment operating profit. Management regularly reviews the costs included in the Corporate function, and believes disclosing such information provides more visibility and transparency of how the chief operating decision maker reviews the results for the Company.

11

KNOLL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


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 (in thousands):
 
Three Months Ended March 31,
 
2017
 
2016
SALES
 
 
 
Office
$
149,832

 
$
185,356

Studio
79,073

 
71,506

Coverings
27,915

 
27,767

Corporate

 

Knoll, Inc. 
$
256,820

 
$
284,629

INTERSEGMENT SALES (1)
 
 
 
Office
$
274

 
$
581

Studio
1,098

 
1,305

Coverings
1,951

 
2,247

Corporate

 

Knoll, Inc. 
$
3,323

 
$
4,133

OPERATING PROFIT
 
 
 
Office
$
8,776

 
$
19,833

Studio
11,639

 
10,483

Coverings
6,236

 
6,722

Corporate
(3,617
)
 
(5,189
)
Knoll, Inc.(2)
$
23,034

 
$
31,849

_______________________________________________________________________________
(1) Intersegment sales are presented on a cost-plus basis which takes into consideration the effect of transfer prices between legal entities.
(2) The Company does not allocate interest expense or other (income) expense, net to the reportable segments.

12


ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of operations provides an account of our financial performance and financial condition that should be read in conjunction with the accompanying audited consolidated financial statements.
Forward-looking Statements
This quarterly report on Form 10-Q contains forward-looking statements, principally in the sections entitled “Business,” “Risk Factors,” “Management's Discussion and Analysis of Financial Condition and Results of Operations,” and “Quantitative and Qualitative Disclosures About Market Risk.” Statements and financial discussion and analysis contained in this Form 10-Q that are not historical facts are forward-looking statements. These statements discuss goals, intentions and expectations as to future trends, plans, events, results of operations or financial condition, or state other information relating to us, based on our current beliefs as well as assumptions made by us and information currently available to us. Forward-looking statements generally will be accompanied by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “possible,” “potential,” “predict,” “project,” or other similar words, phrases or expressions. This includes, without limitation, our statements and expectations regarding any current or future recovery in our industry and publicly announced plans for increased capital and investment spending to achieve our long-term revenue and profitability growth goals, and our expectations with respect to leverage. Although we believe these forward-looking statements are reasonable, they are based upon a number of assumptions concerning future conditions, any or all of which may ultimately prove to be inaccurate. Important factors that could cause actual results to differ materially from the forward-looking statements include, without limitation: the risks described in Item 1A and Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2016; changes in the financial stability of our clients or the overall economic environment, resulting in decreased corporate spending and service sector employment; changes in relationships with clients; the mix of products sold and of clients purchasing our products; the success of new technology initiatives; changes in business strategies and decisions; competition from our competitors; our ability to recruit and retain an experienced management team; changes in raw material prices and availability; restrictions on government spending resulting in fewer sales to the U.S. government, one of our largest customers; our debt restrictions on spending; our ability to protect our patents, copyrights and trademarks; our reliance on furniture dealers to produce sales; lawsuits arising from allegations of patents, copyrights and trademark infringements; violations of environmental laws and regulations; potential labor disruptions; adequacy of our insurance policies; the availability of future capital and the cost of borrowing; the overall strength and stability of our dealers, suppliers, and customers; access to necessary capital; our ability to successfully integrate acquired businesses; the success of our design and implementation of a new enterprise resource planning system; and currency rate fluctuations. The factors identified above are believed to be important factors (but not necessarily all of the important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement. Unpredictable or unknown factors could also have material adverse effects on us. All forward-looking statements included in this Form 10-Q are expressly qualified in their entirety by the foregoing cautionary statements. Except as required under the Federal securities laws and the rules and regulations of the SEC, we undertake no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise.
Overview
We design, manufacture, market and sell high-end commercial and residential furniture, accessories, textiles, fine leathers and designer felt for the workplace and home. We work with clients to create inspired modern interiors. Our design-driven businesses share a reputation for high-quality and sophistication offering a diversified product portfolio that endures throughout evolving trends. Our products are targeted at the middle to upper-end of the market where we reach customers primarily through a broad network of independent dealers and distribution partners, through our direct sales force, and through our showrooms, as well as our online presence.
Business Highlights
During the last decade we have diversified our sources of revenue among our varying operating segments. We continue to build Knoll with an eye toward what works for our customers and shareholders: a constellation of high-design, high-margin businesses that leverage our historic relationships with architects, designers and decorators.

13


Our efforts to diversify our sources of revenue among our operating segments has not detracted from our continued focus on growing and improving the operating performance of our Office segment. We are looking beyond the traditional office product categories of systems, task seating and storage, to furniture that supports activity areas and the in-between spaces where people meet. We believe that our success in traditional office products gives us an advantage throughout the workplace. Our new Rockwell Unscripted collection encompasses every product category ranging from seating and lounge to architectural walls and storage. It addresses the needs of organizations that seek alternatives to the traditional workspace, and is substantially additive to our current product portfolio. In addition to these initiatives, we aim to increase profitability through operational improvements and investments in our physical and technological infrastructure. Our investments in lean manufacturing, combined with continued modernization of our facilities, is allowing us to progressively deliver on this goal.
We believe that over time our diversification efforts and strategy will continue to result in a more profitable and less cyclical enterprise. The 2016 acquisitions of DatesWeiser and Vladimir Kagan further advance our strategy of building global capability as a singular go-to resource for high-design workplaces and homes. DatesWeiser plays an integral role in the creation of high performance workplaces as its sophisticated meeting and conference tables and credenzas set a standard for design, quality and technology integration. DatesWeiser products will be offered as a compliment of our ‘ancillary’ offerings. Vladimir Kagan's elegant and contemporary designs will be leveraged within our HOLLY HUNT distribution channels to maximize profitability and growth in the future years.
We are committed to building a more efficient and responsive customer centric service culture and technology infrastructure across our organization. Our capital expenditures are reflective of this commitment as we continued to invest in the business through technology infrastructure upgrades, continued investments in our manufacturing facilities focusing on lean initiatives and showroom footprint.
Results of Operations
Comparison of Consolidated Results for the Three Months Ended March 31, 2017 and 2016
 
 
Three Months Ended March 31,
 
2017 vs. 2016
 
 
2017
 
2016
 
$ Change
 
% Change
 
 
(Dollars in thousands, except per share data)
Net Sales
 
$
256,820

 
$
284,629

 
$
(27,809
)
 
(9.8
)%
Gross profit
 
95,674

 
107,764

 
(12,090
)
 
(11.2
)%
Operating profit
 
23,034

 
31,849

 
(8,815
)
 
(27.7
)%
Interest expense
 
1,671

 
1,554

 
117

 
7.5
 %
Other expense (income), net
 
203

 
2,604

 
(2,401
)
 
(92.2
)%
Income tax expense
 
5,764

 
10,280

 
(4,516
)
 
(43.9
)%
Net earnings
 
15,396

 
17,411

 
(2,015
)
 
(11.6
)%
Net earnings attributable to Knoll, Inc. stockholders
 
15,404

 
17,400

 
(1,996
)
 
(11.5
)%
Net earnings per common share attributable to Knoll, Inc. stockholders:
 
 
 
 
 
 
 
 
Basic
 
$
0.32

 
$
0.36

 
$
(0.04
)
 
(11.1
)%
Diluted
 
$
0.31

 
$
0.36

 
$
(0.05
)
 
(13.9
)%
Statistical Data
 
 
 
 
 
 
 
 
Gross profit %
 
37.3
%
 
37.9
%
 
 
 
 
Operating profit %
 
9.0
%
 
11.2
%
 
 
 
 
Net Sales
Net sales for the three months ended March 31, 2017 were $256.8 million, a decrease of $27.8 million, or 9.8%, from sales of $284.6 million for the three months ended March 31, 2016. The decrease in sales was largely due to a $35.5 million decrease in our Office segment sales resulting from a decline in both the quantity and average size of larger project opportunities, in addition to a limited ship week at the end of March to facilitate the first phase of the implementation of a new enterprise resource planning (“ERP”) system. Our Studio segment sales increased 10.6% from the same period in the prior year. This increase was driven by Europe and KnollStudio as well as to a lesser extent incremental sales from DatesWeiser, a designer and manufacturer of contemporary wood conference and meeting room furniture, which was acquired in the fourth quarter of 2016.

14


Gross Profit
Gross profit for the three months ended March 31, 2017 was $95.7 million, a decrease of $12.0 million, or 11.2%, from gross profit of $107.8 million for the three months ended March 31, 2016. As a percentage of sales, gross profit decreased from 37.9% for the three months ended March 31, 2016 to 37.3% for the three months ended March 31, 2017. This decrease was driven mainly by the Office segment, where lower volume had an unfavorable impact on fixed-cost leverage, partially offset by increased sales in the high margin Studio and Coverings segments.
Operating Profit
Operating profit for the three months ended March 31, 2017 was $23.0 million, a decrease of $8.8 million, or 27.7%, from operating profit of $31.8 million for the three months ended March 31, 2016. The decrease in operating profit was driven primarily by the Office segment resulting from lower sales volume partially offset by reduced performance based incentive accruals and lower sales commissions. Operating profit as a percentage of sales decreased from 11.2% in the three months ended March 31, 2016 to 9.0% in the three months ended March 31, 2017.
Selling, general, and administrative expenses for the three months ended March 31, 2017 were $72.6 million, or 28.3% of sales, compared to $75.9 million, or 26.7% of sales, for the three months ended March 31, 2016. The decrease is due primarily to lower incentive accruals from decreased profitability, and lower sales commissions as a result of a reduction in volume in the Office segment partially offset by increased investments in training and costs related to the rollout of the Rockwell Unscripted product line.
Interest Expense
Interest expense for the three months ended March 31, 2017 was $1.7 million, an increase of $0.1 million from interest expense of $1.6 million for the three months ended March 31, 2016. During both the three months ended March 31, 2017 and 2016, our weighted average interest rate was approximately 2.2%.
Other Expense, net
Other expense for the three months ended March 31, 2017 was $0.2 million a decrease of $2.4 million from $2.6 million for the three months ended March 31, 2016. Other expense for the three months ended March 31, 2017 was primarily related to foreign exchange losses. Other expense for the three months ended March 31, 2016 was primarily related to foreign exchanges losses that resulted from the revaluation of intercompany balances between our Canadian and U.S. entities.
Income Tax Expense
Our effective tax rate was 27.2% for the three months ended March 31, 2017, compared to 37.1% for the three months ended March 31, 2016. The change in the tax rate was due primarily to the early adoption of ASU 2016-09 in the third quarter of 2016, which impacted the accounting treatment of the vesting of a large quantity of equity awards. This resulted in the realization of tax benefits recognized as a reduction of income tax expense. In addition, the tax rate was affected by the mix of pretax income and the varying effective tax rates in the countries and states in which we operate.

15


Segment Reporting
We manage our business through our reporting segments: Office, Studio, and Coverings. All unallocated expenses are included within Corporate.
Our Office segment includes a complete range of workplace products that address diverse workplace planning paradigms. These products include: systems furniture, seating, storage, tables, desks and KnollExtra® accessories as well as the international sales of our North American Office products.
Our Studio segment includes KnollStudio®, HOLLY HUNT®, Knoll Europe and DatesWeiser. KnollStudio products, 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 2016, HOLLY HUNT® acquired Vladimir Kagan Design Group, a renowned collection of modern luxury furnishings. Knoll Europe, which distributes both KnollStudio and Knoll Office products, manufactures and sells products to customers primarily in Europe. DatesWeiser, known for its sophisticated meeting and conference tables and credenzas, sets a standard for design, quality and technology integration.
Our Coverings segment includes KnollTextiles®, Spinneybeck® (including Filzfelt®), and Edelman® Leather. These businesses provide a wide range of customers with high-quality fabrics, felt, leather and related architectural products.
In 2016, we revised our segment presentation to segregate Corporate costs. We believe this facilitates improved communication as we report segment results and better aligns with how we view and operate the Company. Corporate costs represent the portion of unallocated expenses relating to shared services and general corporate functions including, but not limited to, legal expenses, acquisition expenses, certain finance, human resources, administrative and executive expenses and other expenses that are not directly attributable to an operating segment. Dedicated, direct selling, general and administrative expenses of the segments continue to be included within segment operating profit. We regularly review the costs included in the Corporate function, and believe disclosing such information provides more visibility and transparency of how our chief operating decision maker reviews the results for the Company.
The comparisons of segment results found below present our segment information with Corporate costs excluded from operating segment results. Prior year amounts have been recast to conform to the current presentation.
Comparison of Segment Results for the Three Months Ended March 31, 2017 and 2016
 
 
Three Months Ended March 31,
 
2017 vs. 2016
 
 
2017
 
2016
 
$ Change
 
% Change
 
 
(Dollars in thousands)
SALES
 
 
 
 
 
 
 
 
Office
 
$
149,832

 
$
185,356

 
$
(35,524
)
 
(19.2
)%
Studio
 
79,073

 
71,506

 
7,567

 
10.6
 %
Coverings
 
27,915

 
27,767

 
148

 
0.5
 %
Corporate
 

 

 

 
 %
Knoll, Inc. 
 
$
256,820

 
$
284,629

 
$
(27,809
)
 
(9.8
)%
OPERATING PROFIT
 
 
 
 
 
 
 
 
Office
 
$
8,776

 
$
19,833

 
$
(11,057
)
 
(55.8
)%
Studio
 
11,639

 
10,483

 
1,156

 
11.0
 %
Coverings
 
6,236

 
6,722

 
(486
)
 
(7.2
)%
Corporate
 
(3,617
)
 
(5,189
)
 
1,572

 
(30.3
)%
Knoll, Inc. (1)
 
$
23,034

 
$
31,849

 
$
(8,815
)
 
(27.7
)%
_______________________________________________________________________________
(1) The Company does not allocate interest expense or other expense (income), net to the reportable segments.

16


Office
Net sales for the Office segment for the three months ended March 31, 2017 were $149.8 million, a decrease of $35.5 million, or 19.2%, when compared with the three months ended March 31, 2016. The decrease in the Office segment was a result of a decline in both the quantity and average size of larger project opportunities, in addition to a limited ship week at the end of March to facilitate the first phase of the implementation of a new ERP system. Operating profit for the Office segment in the three months ended March 31, 2017 was $8.8 million, a decrease of $11.1 million, or 55.8%, when compared with the three months ended March 31, 2016. The decrease in operating profit for the Office segment was due primarily to lower sales volume partially offset by reduced performance based incentive accruals and lower sales commissions.
Studio
Net sales for the Studio segment for the three months ended March 31, 2017 were $79.1 million, an increase of $7.6 million, or 10.6%, when compared with the three months ended March 31, 2016. This increase was driven by Europe and KnollStudio as well as to a lesser extent incremental sales from DatesWeiser, a designer and manufacturer of contemporary wood conference and meeting room furniture, which we acquired in the fourth quarter of 2016. Operating profit for the Studio segment in the three months ended March 31, 2017 was $11.6 million, an increase of $1.2 million, or 11.0%, when compared with the three months ended March 31, 2016. The increase in operating profit was driven by increased volume, net price realization, partially offset by foreign exchange.
Coverings
Net sales for the Coverings segment for the three months ended March 31, 2017 were $27.9 million, an increase of $0.1 million, or 0.5%, when compared with the three months ended March 31, 2016. Continued year-over-year growth in Spinneybeck | FilzFelt sales was offset by weakness at KnollTextiles and Edelman. Operating profit for the Coverings segment in the three months ended March 31, 2017 was $6.2 million, a decrease of $0.5 million, or 7.2%, when compared with the three months ended March 31, 2016.
Corporate
Corporate costs for the three months ended March 31, 2017 were $3.6 million, a decrease of $1.6 million, or 30.3%, when compared with the three months ended March 31, 2016. The decrease was driven primarily by reduced costs associated with employee benefits and incentive compensation, partially offset by an increase in stock based compensation expense.
Liquidity and Capital Resources
The following table highlights certain key cash flows and capital information pertinent to the discussion that follows:
 
Three Months Ended March 31,
 
2017
 
2016
 
(in thousands)
Cash provided by operating activities
$
3,825

 
$
21,256

Capital expenditures, net
(10,650
)
 
(7,017
)
Purchase of common stock for treasury
(10,348
)
 
(1,902
)
Proceeds from credit facilities
130,000

 
99,500

Repayment of credit facilities
(106,000
)
 
(99,500
)
Payment of dividends
(8,427
)
 
(7,196
)
Contingent purchase price payment
(6,000
)
 
(5,000
)
Cash used in financing activities
(249
)
 
(13,699
)
We have historically funded our business through cash generated from operations, supplemented by debt borrowings. Available cash is primarily used for our working capital needs, ongoing operations, capital expenditures, the payment of quarterly dividends, and the repurchase of shares. Our investment in capital expenditures is related primarily to improving our operating efficiency, innovation and modernization, showroom refreshes and technology infrastructure. During the first quarter of 2017, we made quarterly dividend payments of $0.15 per share, returning $7.3 million of cash to our shareholders. In addition to our quarterly dividend payments, we also paid accrued dividends on vested shares of $1.1 million.

17


Cash provided by operating activities was $3.8 million for the three months ended March 31, 2017 compared to cash provided by operating activities of $21.3 million for the three months ended March 31, 2016. For the three months ended March 31, 2017, cash provided by operating activities consisted primarily of $25.1 million from net income and various non-cash charges, including $6.1 million of depreciation and amortization and $3.3 million of stock based compensation, partially offset by $21.2 million of unfavorable changes in assets and liabilities driven primarily by incentive compensation payments, increased inventory and a reduction of benefits liabilities. For the three months ended March 31, 2016, cash provided by operating activities consisted of $27.1 million from net income and various non-cash charges, including $5.5 million of depreciation and amortization and $2.1 million of stock based compensation, partially offset by $5.8 million of unfavorable changes in assets and liabilities.
During the three months ended March 31, 2017 and 2016, we used $10.7 million and $7.0 million of cash for capital expenditures, respectively. The capital expenditures are reflective of our continued commitment to enhance and modernize our sales, manufacturing and information technology infrastructure.
During the three months ended March 31, 2017, we used cash of $10.3 million for the purchase of common stock to satisfy employee tax withholding requirements related to the vesting of restricted shares, and $6.0 million of a contingent purchase price payment related to an earn-out for the HOLLY HUNT acquisition in 2014. The Company also used $8.4 million of cash to pay dividends, of which $1.1 million was for accrued dividends on vested shares in addition to quarterly dividend payments of $0.15 per share, returning $7.3 million of cash to our shareholders. For the three months ended March 31, 2016, we used $7.2 million of cash to fund dividend payments to shareholders, $5.0 million for the HOLLY HUNT contingent purchase price payment, and $1.9 million for share repurchases.
We use our credit facility in the ordinary course of business to fund our working capital needs and, at times, make significant borrowings and repayments under the facility depending on our cash needs and availability at such time. Borrowings under the credit facility may be repaid at any time, but no later than May 2019. See Note 12 of the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016 for further information regarding this facility. The combination of increased debt levels and a reduction of EBITDA caused leverage to increase from 1.37 at December 31, 2016 to 1.53 at March 31, 2017. The calculation of our leverage ratio under our credit facility includes the use of adjusted EBITDA, a non-GAAP financial measure. For details on the leverage ratio calculations, see “Reconciliation of Non-GAAP Financial Measures” below.
Our credit facility requires that we comply with two financial covenants, consolidated leverage ratio, defined as the ratio of total indebtedness to consolidated EBITDA (as defined in our credit agreement) and consolidated interest coverage ratio, defined as the ratio of our consolidated EBITDA (as defined in our credit agreement) to our consolidated interest expense. Our consolidated leverage ratio cannot exceed 4.0 to 1, and our consolidated interest coverage ratio must be a minimum of 3.0 to 1. We are also required to comply with various other affirmative and negative covenants including, without limitation, covenants that prevent or restrict our ability to pay dividends, engage in certain mergers or acquisitions, make certain investments or loans, incur future indebtedness, engage in sale-leaseback transactions, alter our capital structure or line of business, prepay subordinated indebtedness, engage in certain transactions with affiliates and sell stock or assets.
We are currently in compliance with all of the covenants and conditions under our credit facility. We believe that existing cash balances and internally generated cash flows, together with borrowings available under our credit facility, will be sufficient to fund working capital needs, capital spending requirements, debt service requirements and dividend payments for at least the next twelve months. However, because of the financial covenants mentioned above, our capacity under our credit facility could be reduced if our trailing consolidated EBITDA (as defined by our credit agreement) declines due to deteriorating market conditions or poor performance. Future debt payments may be paid out of cash flows from operations, from future refinancing of our debt or from equity issuances. Our ability to make scheduled payments of principal, pay interest on or to refinance our indebtedness, satisfy our other debt obligations and to pay dividends to stockholders will depend upon our future operating performance, which is affected by general economic, financial, competitive, legislative, regulatory, business and other factors beyond our control.
Reconciliation of Non-GAAP Financial Measures
This quarterly report on Form 10-Q contains certain non-GAAP financial measures. A “non-GAAP financial measure” is a numerical measure of a company's financial performance that excludes or includes amounts so as to be different than the most directly comparable measure calculated and presented in accordance with U.S. generally accepted accounting principles (“GAAP”) in the statements of income, balance sheets, or statements of cash flow of the company. These non-GAAP financial measures are presented because management uses this information to monitor and evaluate financial results and trends. Therefore, management believes this information is also useful for investors. Pursuant to applicable reporting requirements, the company has provided reconciliations below of non-GAAP financial measures to the most directly comparable GAAP measure.

18


The non-GAAP financial measures presented within this quarterly report on Form 10-Q are Last Twelve Months (“LTM”) Adjusted EBITDA. These non-GAAP measures are not indicators of our financial performance under GAAP and should not be considered as an alternative to the applicable GAAP measure. These non-GAAP measures have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. In addition, in evaluating these non-GAAP measures, you should be aware that in the future we may incur expenses similar to the adjustments in this presentation. Our presentation of these non-GAAP measures should not be construed as an inference that our future results will be unaffected by unusual or infrequent items. We compensate for these limitations by providing equal prominence of our GAAP results and using non-GAAP measures only as supplemental presentations.
The following table reconciles net earnings to adjusted EBITDA and computes our bank leverage calculations for the periods shown. The bank leverage calculation is in accordance with our Second Amended and Restated Credit Agreement dated May 20, 2014.
 
 
3/31/2016
 
6/30/2016
 
9/30/2016
 
12/31/2016
 
3/31/2017
 
 
($ in millions)
Debt Levels (1)
 
$
233.7

 
$
221.7

 
$
206.7

 
$
231.8

 
$
249.8

LTM Net Earnings
 
65.8

 
69.3

 
74.1

 
82.1

 
80.1

LTM Adjustments
 
 
 
 
 
 
 
 
 
 
Interest
 
6.2

 
6.2

 
5

 
4.7

 
4.9

Taxes
 
37.8

 
39.3

 
39.6

 
45.4

 
40.9

Depreciation and Amortization
 
21.3

 
21.3

 
22.5

 
23

 
23.5

Non-cash items and Other (2)
 
21.9

 
22.4

 
23.8

 
13.4

 
13.3

LTM Adjusted EBITDA
 
$
153.0

 
$
158.5

 
$
165.0

 
$
168.6

 
$
162.7

Bank Leverage Calculation (3)
 
1.53

 
1.40

 
1.25

 
1.37

 
1.53

 
 
 
 
 
 
 
 
 
 
 
(1) Outstanding debt levels include outstanding letters of credit and guarantee obligations. Excess cash over $15.0 million reduces outstanding debt per the terms of our credit facility, a copy of which was filed with the Securities and Exchange Commission on May 21, 2014.
 
 
 
(2) Non-cash items and Other includes, but is not limited to, an intangible asset impairment charge, stock-based compensation expenses, unrealized gains and losses on foreign exchange, and restructuring charges.
 
 
 
(3) Debt divided by LTM Adjusted EBITDA, as calculated in accordance with our credit facility.
Environmental Matters
Our past and present business operations and the past and present ownership and operation of manufacturing plants on real property are subject to extensive and changing federal, state, local and foreign environmental laws and regulations, including those relating to discharges to air, water and land, the handling and disposal of solid and hazardous waste and the cleanup of properties affected by hazardous substances. As a result, we are involved from time-to-time in administrative and judicial proceedings and inquiries relating to environmental matters and could become subject to fines or penalties related thereto. We cannot predict what environmental legislation or regulations will be enacted in the future, how existing or future laws or regulations will be administered or interpreted or what environmental conditions may be found to exist. Compliance with more stringent laws or regulations, or stricter interpretation of existing laws, may require additional expenditures by us, some of which may be material. We have been identified as a potentially responsible party pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”) for remediation costs associated with waste disposal sites that we previously used. The remediation costs and our allocated share at some of these CERCLA sites are unknown. We may also be subject to claims for personal injury or contribution relating to CERCLA sites. We reserve amounts for such matters when expenditures are probable and reasonably estimable.
Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special-purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange-traded contracts. As a result, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

19


Critical Accounting Policies
The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires us to make estimates and assumptions that affect the reported amounts and disclosures in the condensed consolidated financial statements.  Actual results may differ from such estimates. On an ongoing basis, we review our accounting policies and procedures.  A more detailed review of our critical accounting policies is contained in our Annual Report on Form 10-K for the year ended December 31, 2016.

20


ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We provided a discussion of our market risk in Part II, Item 7A, of our Annual Report on Form 10-K for the year ended December 31, 2016. There have been no substantive changes in our market risk described in our Annual Report on Form 10-K except for the items noted below. During the normal course of business, we are routinely subjected to market risk associated with interest rate movements and foreign currency exchange rate movements. Interest rate risk arises from our debt obligations and foreign currency exchange rate risk arises from our non-U.S. operations and purchases of inventory from foreign suppliers.
We also have risk in our exposure to certain materials and transportation costs. Steel, leather, wood products and plastics are all used in our products. For the three months ended March 31, 2017, we estimated that materials inflation was approximately $0.9 million and transportation deflation was less than $0.1 million. During the three months ended March 31, 2016, we estimated that materials deflation was approximately $0.6 million and transportation inflation was less than $0.1 million, respectively. We continue to work to offset price increases in raw materials and transportation through our global sourcing initiatives, cost improvements and price increases to our products.
Interest Rate Risk
We have variable rate debt obligations that are denominated in U.S. dollars. A change in interest rates will impact the interest costs incurred and cash paid on the variable rate debt. During both the three months ended March 31, 2017 and 2016, our weighted average interest rates were approximately 2.2%.
Foreign Currency Exchange Rate Risk
We manufacture our products in the United States, Canada and Italy, and sell our products primarily in those markets as well as in other countries. Our foreign sales and certain expenses are transacted in foreign currencies. Our production costs, profit margins and competitive position are affected by the strength of the currencies in countries where we manufacture or purchase goods relative to the strength of the currencies in countries where our products are sold. Additionally, as our reporting currency is the U.S. dollar, our financial position is affected by the strength of the currencies in countries where we have operations relative to the strength of the U.S. dollar. The principal foreign currencies in which we conduct business are the Canadian dollar and the Euro. Approximately 13.3% and 10.8% of our revenues in the three months ended March 31, 2017 and 2016, respectively, and 28.0% and 26.8% of our cost of goods sold in the three months ended March 31, 2017 and 2016, respectively, were denominated in currencies other than the U.S. dollar. Foreign currency exchange rate fluctuations resulted in $0.2 million and $2.6 million of translation losses for the three months ended March 31, 2017 and 2016, respectively.


21


ITEM 4.    CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures.    We, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 as of the end of the period covered by this report (March 31, 2017) ("Disclosure Controls"). Based upon the Disclosure Controls evaluation, our principal executive officer and principal financial officer have concluded that the Disclosure Controls are effective in reaching a reasonable level of assurance that (i) information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and (ii) information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in internal control over financial reporting.  There have been no changes in our internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


22

KNOLL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For the three months ended March 31, 2017, there have been no new material legal proceedings or material changes in the legal proceedings disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.
ITEM 1A. RISK FACTORS
For the three months ended March 31, 2017, there have been no material changes in the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.
ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND THE USE OF PROCEEDS
Repurchases of Equity Securities
The following is a summary of share repurchase activity during the three months ended March 31, 2017.
On August 17, 2005, our board of directors approved a stock repurchase program (the “Options Proceeds Program”), whereby they authorized us to purchase shares of our common stock in the open market using the cash proceeds received by us upon exercise of outstanding options.
On February 2, 2006, our board of directors approved an additional stock repurchase program, pursuant to which we are authorized to purchase up to $50.0 million of our common stock in the open market, through privately negotiated transactions, or otherwise. On February 4, 2008, our board of directors expanded this previously authorized $50.0 million stock repurchase program by an additional $50.0 million.
Period
Total
Number of
Shares
Purchased
 
 
 
Average
Price Paid
Per Share
 
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
 
Maximum Dollar Value
of Shares that May Yet
be Purchased Under the
Plans or Programs
(1)
January 1, 2017 - January 31, 2017
14,641

 

 
$
27.83

 
14,641

(3) 
$
32,352,413

February 1, 2017 - February 28, 2017
395,975

 
(2) 
 
$
24.56

 

 
$
32,352,413

March 1, 2017 - March 31, 2017

 

 
$

 

 
$
32,352,413

Total
410,616

 
 
 
 

 
14,641

 
 

_______________________________________________________________________________
(1) There is no limit on the number or value of shares that may be purchased by us under the Options Proceeds Program. Under our $50.0 million stock repurchase program, which was expanded by an additional $50.0 million in February 2008, we are only authorized to spend an aggregate of $100.0 million on stock repurchases. Amounts in this column represent the amounts that remain available under the $100.0 million stock repurchase program as of the end of the period indicated. There is no scheduled expiration date for the Option Proceeds Program or the $100.0 million stock repurchase program, but our Board of Directors may terminate either program in the future.
(2) In February 2017, 359,937 shares of outstanding restricted stock and 389,161 restricted stock units vested. Concurrently with the vesting, 395,975 shares were forfeited by the holders of the shares to cover applicable taxes paid on the holders' behalf by the Company.
(3) These shares were purchased under the Options Proceeds Program.

23


ITEM 6.  EXHIBITS
Exhibit
Number
 
Description
 
 
 
10.1
 
Form of Restricted Share Agreement under the 2013 Stock Incentive Plan.
10.2
 
Form of Performance-Based Stock Unit Agreement under the 2013 Stock Incentive Plan.
31.1
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
31.2
 
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
32.1
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
 
Certification of Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101
 
The following materials from the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2017 formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016, (ii) Condensed Consolidated Statements of Operations and Other Comprehensive Income for the three months ended March 31, 2017 and 2016, (iii) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016, and (iv) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text.*

* The Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

24


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
KNOLL, INC.
 
 
(Registrant)
 
 
 
 
 
 
Date:
May 10, 2017
 
 
By:
/s/ Andrew B. Cogan
 
 
 
Andrew B. Cogan
 
 
 
Chief Executive Officer
 
 
 
 
Date:
May 10, 2017
 
 
By:
/s/ Craig B. Spray
 
 
 
Craig B. Spray
 
 
 
Chief Financial Officer
 
 
 
(Chief Accounting Officer)



25
Wikinvest © 2006, 2007, 2008, 2009, 2010, 2011, 2012. Use of this site is subject to express Terms of Service, Privacy Policy, and Disclaimer. By continuing past this page, you agree to abide by these terms. Any information provided by Wikinvest, including but not limited to company data, competitors, business analysis, market share, sales revenues and other operating metrics, earnings call analysis, conference call transcripts, industry information, or price targets should not be construed as research, trading tips or recommendations, or investment advice and is provided with no warrants as to its accuracy. Stock market data, including US and International equity symbols, stock quotes, share prices, earnings ratios, and other fundamental data is provided by data partners. Stock market quotes delayed at least 15 minutes for NASDAQ, 20 mins for NYSE and AMEX. Market data by Xignite. See data providers for more details. Company names, products, services and branding cited herein may be trademarks or registered trademarks of their respective owners. The use of trademarks or service marks of another is not a representation that the other is affiliated with, sponsors, is sponsored by, endorses, or is endorsed by Wikinvest.
Powered by MediaWiki