ITEM 7. 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 annual report on Form 10-K 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-K 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 in Item 7A of this annual report on Form 10-K; 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 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-K 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 and performs throughout business cycles. 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. During 2016, over 37% of our sales and 45% of our profits came from outside our Office segment. 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 that combined with our disciplined approach to the management of our business has resulted in the creation of a singular entity.
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 probability and growth in the future years.
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 supply chain transformation initiative, combined with continued modernization of our facilities, is allowing us to progressively deliver on this goal.
We are committed to building a more efficient and responsive customer centric service culture and technology infrastructure across our organization. Our 2016 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 Years Ended
December 31, 2016
and
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016 vs. 2015
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
|
(Dollar in thousands)
|
Net Sales
|
|
$
|
1,164,292
|
|
|
$
|
1,104,442
|
|
|
$
|
59,850
|
|
|
5.4
|
%
|
Gross profit
|
|
445,976
|
|
|
412,132
|
|
|
33,844
|
|
|
8.2
|
%
|
Operating profit
|
|
136,308
|
|
|
101,110
|
|
|
35,198
|
|
|
34.8
|
%
|
Interest expense
|
|
5,405
|
|
|
6,865
|
|
|
(1,460
|
)
|
|
(21.3
|
)%
|
Other expense (income), net
|
|
3,365
|
|
|
(9,174
|
)
|
|
12,539
|
|
|
(136.7
|
)%
|
Income tax expense
|
|
45,424
|
|
|
37,471
|
|
|
7,953
|
|
|
21.2
|
%
|
Net earnings
|
|
82,114
|
|
|
65,948
|
|
|
16,166
|
|
|
24.5
|
%
|
Net earnings attributable to Knoll, Inc. stockholders
|
|
82,084
|
|
|
65,963
|
|
|
16,121
|
|
|
24.4
|
%
|
Net earnings per common share attributable to Knoll, Inc. stockholders:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.71
|
|
|
$
|
1.38
|
|
|
$
|
0.33
|
|
|
23.9
|
%
|
Diluted
|
|
$
|
1.68
|
|
|
$
|
1.36
|
|
|
$
|
0.32
|
|
|
23.5
|
%
|
Statistical Data
|
|
|
|
|
|
|
|
|
Gross profit %
|
|
38.3
|
%
|
|
37.3
|
%
|
|
|
|
|
Operating profit %
|
|
11.7
|
%
|
|
9.2
|
%
|
|
|
|
|
Net Sales
Net sales for the year ended
December 31, 2016
were
$1,164.3 million
,
an increase
of
$59.9 million
, or
5.4%
, from sales of
$1,104.4 million
for the year ended
December 31, 2015
. The increase in sales was largely due to a $44.4 million increase in Office sales driven by continued growth in our core systems portfolio as well as an increase in complimentary products. While Coverings segment sales were slightly down compared to the prior year, Studio segment sales increased $19.6 million, led by KnollStudio in North America and Europe.
Gross Profit
Gross profit for
2016
was
$446.0 million
,
an increase
of
$33.8 million
, or
8.2%
, from gross profit of
$412.1 million
in
2015
. Gross profit for 2015 includes a charge of $0.9 million due to the discontinuation of one of our seating products. As a percentage of sales, gross profit increased from
37.3%
for
2015
to
38.3%
for
2016
. This improvement was driven mainly by the Office and Studio segments, where operating efficiencies and improved fixed-cost leverage from higher volumes were favorable.
Operating Profit
Operating profit for
2016
was
$136.3 million
,
an increase
of
$35.2 million
, or
34.8%
, from operating profit of
$101.1 million
for
2015
. Operating profit as a percentage of sales increased from
9.2%
in
2015
to
11.7%
in
2016
. Operating profit for 2015 included $11.5 million of restructuring and impairment charges.
Selling, general, and administrative expenses for
2016
were
$309.7 million
, or
26.6%
of sales, compared to
$299.5 million
, or
27.1%
of sales, for
2015
. Operating expenses for 2015 include an Edelman tradename impairment of $10.7 million, as well as restructuring charges of $0.9 million. The increase in operating expenses was primarily related to expanded sales, marketing and product development investments as well as additional headcount.
Interest Expense
Interest expense for
2016
was
$5.4 million
,
a decrease
of
$1.5 million
from interest expense of
$6.9 million
for
2015
. The decrease in interest expense was due primarily to reductions in our outstanding debt. During 2016 and 2015, the Company's weighted average interest rates were approximately
2.0%
and 2.1%, respectively.
Other Expense (Income), net
Other expense in 2016 was
$3.4 million
compared to other income of
$9.2 million
in 2015. Other expense in 2016 was related primarily to foreign exchange losses that resulted from the revaluation of intercompany balances between our Canadian and US entities. Other income in 2015 was due primarily to foreign exchange gains on intercompany balances.
Income Tax Expense
Our effective tax rate was 35.6% for 2016, compared to 36.2% for
2015
. 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.
Comparison of Consolidated Results for the Years Ended
December 31, 2015
and
December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2015 vs. 2014
|
|
|
2015
|
|
2014
|
|
$ Change
|
|
% Change
|
|
|
(Dollar in thousands)
|
Sales
|
|
$
|
1,104,442
|
|
|
$
|
1,050,294
|
|
|
$
|
54,148
|
|
|
5.2
|
%
|
Gross profit
|
|
412,132
|
|
|
371,685
|
|
|
40,447
|
|
|
10.9
|
%
|
Operating profit
|
|
101,110
|
|
|
76,843
|
|
|
24,267
|
|
|
31.6
|
%
|
Interest expense
|
|
6,865
|
|
|
7,378
|
|
|
(513
|
)
|
|
(7.0
|
)%
|
Other income, net
|
|
(9,174
|
)
|
|
(6,285
|
)
|
|
(2,889
|
)
|
|
46.0
|
%
|
Income tax expense
|
|
37,471
|
|
|
29,165
|
|
|
8,306
|
|
|
28.5
|
%
|
Net earnings
|
|
65,948
|
|
|
46,585
|
|
|
19,363
|
|
|
41.6
|
%
|
Net earnings attributable to Knoll, Inc. stockholders
|
|
65,963
|
|
|
46,596
|
|
|
19,367
|
|
|
41.6
|
%
|
Net earnings per common share attributable to Knoll, Inc. stockholders:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.38
|
|
|
$
|
0.98
|
|
|
$
|
0.40
|
|
|
40.8
|
%
|
Diluted
|
|
$
|
1.36
|
|
|
$
|
0.97
|
|
|
$
|
0.39
|
|
|
40.2
|
%
|
Statistical Data
|
|
|
|
|
|
|
|
|
Gross profit %
|
|
37.3
|
%
|
|
35.4
|
%
|
|
|
|
|
Operating profit %
|
|
9.2
|
%
|
|
7.3
|
%
|
|
|
|
|
Net Sales
Net sales for the year ended December 31, 2015 were $1,104.4 million, an increase of $54.1 million, or 5.2%, from sales of $1,050.3 million for the year ended December 31, 2014. The increase in sales was largely due to a $30.7 million increase in Office sales where we experienced growth in our complimentary products to which we have been aggressively investing. In 2015, our Studio segment sales also increased, due primarily to strong sales growth of $11.8 million and $7.8 million related to the full year effect of the HOLLY HUNT acquisition.
Gross Profit
Gross profit for 2015 was $412.1 million, an increase of $40.4 million, or 10.9%, from gross profit of $371.7 million in 2014. Gross profit for 2015 includes a charge of $0.9 million due to the discontinuation of one of our seating products. As a percentage of sales, gross profit increased from 35.4% for 2014 to 37.3% for 2015. The increase in gross profit as a percent of sales during the year was driven by foreign exchange benefits, operational improvements as well as the mix of business and net price realization.
Operating Profit
Operating profit for 2015 was $101.1 million, an increase of $24.3 million, or 31.6%, from operating profit of $76.8 million for 2014. Operating profit as a percentage of sales increased from 7.3% in 2014 to 9.2% in 2015. Operating profit for 2015 includes $11.5 million of charges related to a non-cash Edelman tradename impairment of $10.7 million as well as restructuring charges of $0.9 million that was intended to streamline our corporate structure and improve future profitability. Operating profit for 2014 includes the pension settlement and other post-employment benefit curtailment of $6.5 million, acquisition expenses of $0.7 million, restructuring charges of $1.5 million and a charge of $0.5 million associated with the remeasurement of the FilzFelt earn-out liability.
Selling, general, and administrative expenses for 2015 were $299.5 million, or 27.1% of sales, compared to $286.8 million, or 27.3% of sales, for 2014. The increase in operating expenses was related to higher commissions from increased sales volume as well as higher incentive compensation and profit sharing resulting from increased profitability.
Interest Expense
Interest expense for 2015 was $6.9 million, a decrease of $0.5 million from interest expense of $7.4 million for 2014. The decrease in interest expense was due primarily to a reduction in outstanding debt. During 2015 and 2014, the Company's weighted average interest rates were approximately 2.1% and 2.3%, respectively.
Other Income, net
Other income in 2015 and 2014 was $9.2 million and $6.3 million, respectively, which primarily consisted of foreign exchange gains.
Income Tax Expense
Our effective tax rate was 36.2% for 2015, compared to 38.5% for 2014. The decrease in the effective tax rate was due to the allowance of certain research and development tax credits recognized in 2015 as well as the mix of pretax income and the varying effective tax rates in the states and countries in which we operate, as that mix directly affects our consolidated effective tax rate.
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 determined it appropriate to revise 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.
See Note 20 of our consolidated financial statements contained in this annual report on Form 10-K for further information regarding the business segments.
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 Years Ended December 31, 2016 and December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016 vs. 2015
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
|
(Dollar in thousands)
|
SALES
|
|
|
|
|
|
|
|
|
Office
|
|
$
|
731,327
|
|
|
$
|
686,943
|
|
|
$
|
44,384
|
|
|
6.5
|
%
|
Studio
|
|
323,431
|
|
|
303,838
|
|
|
19,593
|
|
|
6.4
|
%
|
Coverings
|
|
109,534
|
|
|
113,661
|
|
|
(4,127
|
)
|
|
(3.6
|
)%
|
Corporate
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
%
|
Knoll, Inc.
|
|
$
|
1,164,292
|
|
|
$
|
1,104,442
|
|
|
$
|
59,850
|
|
|
5.4
|
%
|
OPERATING PROFIT
|
|
|
|
|
|
|
|
|
Office
|
|
$
|
73,871
|
|
|
$
|
55,823
|
|
|
$
|
18,048
|
|
|
32.3
|
%
|
Studio
|
|
53,413
|
|
|
47,952
|
|
|
5,461
|
|
|
11.4
|
%
|
Coverings
|
|
25,953
|
|
|
17,273
|
|
|
8,680
|
|
|
50.3
|
%
|
Corporate
|
|
(16,929
|
)
|
|
(19,938
|
)
|
|
3,009
|
|
|
15.1
|
%
|
Knoll, Inc.
(1)
|
|
$
|
136,308
|
|
|
$
|
101,110
|
|
|
$
|
32,189
|
|
|
31.8
|
%
|
_______________________________________________________________________________
(1) The Company does not allocate interest expense or other (income) expense, net to the reportable segments.
Office
Net sales for the Office segment in
2016
were
$731.3 million
,
an increase
of
$44.4 million
, or
6.5%
, when compared with
2015
. This increase in the Office segment for the year was led by continued growth in our core systems portfolio, as well as increases in complementary products. Operating profit for the Office segment in
2016
was
$73.9 million
, an increase of
$18.0 million
, or
32.3%
, when compared with
2015
. The increase in operating profit was driven by continuous improvement efficiencies and leveraging our fixed cost structure from higher volume. Operating profit for the Office segment in 2015 includes a $0.9 million seating product discontinuation charge and $0.5 million of restructuring charges.
Studio
Net sales for the Studio segment in
2016
were
$323.4 million
,
an increase
of
$19.6 million
, or
6.4%
, when compared with
2015
. The increase in the Studio segment was driven by higher sales at KnollStudio in North America and by our European business unit. Operating profit for the Studio segment in
2016
was
$53.4 million
, an increase of
$5.5 million
, or
11.4%
, when compared with
2015
. The increase in operating profit was driven by increased sales volume and net price realization. Operating profit for the Studio segment in 2015 included a $0.4 million restructuring charge.
Coverings
Net sales for the Coverings segment in
2016
were
$109.5 million
,
a decrease
of
$4.1 million
, or
3.6%
, when compared with
2015
. Continued year-over-year growth in Spinneybeck
|
FilzFelt sales was offset by lower volume at KnollTextiles and Edelman. Operating profit for the Coverings segment in
2016
was
$26.0 million
, an increase of
$8.7 million
, or
50.3%
, when compared with
2015
. Operating profit for the Coverings segment in 2015 included a $10.7 intangible asset impairment charge.
Corporate
Corporate costs in 2016 were
$16.9 million
, a decrease of
$3.0 million
, or
15.1%
, when compared with 2015. The decrease was driven primarily by the full year pension benefits recognized in 2016 as a result of our 2015 pension curtailment actions, partially offset by higher salary expense related to additional headcount.
Comparison of Segment Results for the Years Ended
December 31, 2015
and
December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2015 vs. 2014
|
|
|
2015
|
|
2014
|
|
$ Change
|
|
% Change
|
|
|
(Dollar in thousands)
|
SALES
|
|
|
|
|
|
|
|
|
Office
|
|
$
|
686,943
|
|
|
$
|
656,228
|
|
|
$
|
30,715
|
|
|
4.7
|
%
|
Studio
|
|
303,838
|
|
|
279,167
|
|
|
24,671
|
|
|
8.8
|
%
|
Coverings
|
|
113,661
|
|
|
114,899
|
|
|
(1,238
|
)
|
|
(1.1
|
)%
|
Corporate
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
%
|
Knoll, Inc.
|
|
$
|
1,104,442
|
|
|
$
|
1,050,294
|
|
|
$
|
54,148
|
|
|
5.2
|
%
|
OPERATING PROFIT
|
|
|
|
|
|
|
|
|
Office
|
|
$
|
55,823
|
|
|
$
|
38,116
|
|
|
$
|
17,707
|
|
|
46.5
|
%
|
Studio
|
|
47,952
|
|
|
37,834
|
|
|
10,118
|
|
|
26.7
|
%
|
Coverings
|
|
17,273
|
|
|
23,816
|
|
|
(6,543
|
)
|
|
(27.5
|
)%
|
Corporate
|
|
(19,938
|
)
|
|
(22,923
|
)
|
|
2,985
|
|
|
13.0
|
%
|
Knoll, Inc.
(1)
|
|
$
|
101,110
|
|
|
$
|
76,843
|
|
|
$
|
21,282
|
|
|
27.7
|
%
|
_______________________________________________________________________________
(1) The Company does not allocate interest expense or other (income) expense, net to the reportable segments.
Office
Net sales for the Office segment in 2015 were
$686.9 million
, an increase of
$30.7 million
, or 4.7%, when compared with 2014. This increase in the Office segment for the year was the result of growth experienced across all of our product categories. The most predominant growth was experienced in complimentary products where we have been aggressively investing. Operating profit for the Office segment in 2015 was
$55.8 million
, an increase of
$17.7 million
, or
46.5%
, when compared with 2014. The increase in operating profit was driven by more efficiency and continued work in our plants and a more profitable mix of product revenue. Operating profit for the Office segment in 2015 includes a $0.9 million seating product discontinuation charge and the $0.5 million restructuring charges. Operating profit for the Office segment in 2014 includes a restructuring charges of $2.1 million.
Studio
Net sales for the Studio segment in 2015 were $303.8 million, an increase of $24.7 million, or 8.8%, when compared with 2014. This increase in net sales was driven by strong sales growth in HOLLY HUNT, one additional month of HOLLY HUNT sales included in 2015 as well as additional sales growth in our North American Studio business. Operating profit for the Studio segment in 2015 was
$48.0 million
, an increase of
$10.1 million
, or
26.7%
, when compared with 2014. The increase in operating profit was driven by foreign exchange benefits, increased sales volume and net price realization. Operating profit for the Studio segment in 2015 includes a $0.4 million restructuring charge. Operating profit for the Studio segment in 2014 includes a restructuring benefit of $0.9 million.
Coverings
Net sales for the Coverings segment in 2015 were $113.7 million, a decrease of $1.2 million, or 1.1%, when compared with 2014. For the full year 2015, Spinneybeck
|
FilzFelt and KnollTextiles all grew, while Edelman was negatively impacted by weakness in the private aviation market. Operating profit for the Coverings segment in 2015 was
$17.3 million
, a decrease of
$6.5 million
, or
27.5%
, when compared with 2014. Operating profit for the Coverings segment in 2015 includes a $10.7 intangible asset impairment charge. Operating profit for the Coverings segment in 2014 includes $0.3 million of restructuring charges.
Corporate
Corporate costs in 2015 were
$19.9 million
, a decrease of
$3.0 million
, or
13.0%
, when compared with 2014. The decrease was driven primarily by a $6.1 million settlement charge recognized in 2014 related to pension and OBEP curtailments that did not reoccur in 2015, partially offset by increased stock compensation expense and higher incentive compensation expenses.
Reconciliation of Non-GAAP Financial Measures
This annual report on Form 10-K 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.
The non-GAAP financial measures presented within this item 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/2015
|
|
3/31/2016
|
|
6/30/2016
|
|
9/30/2016
|
|
12/31/2016
|
|
|
($ in millions)
|
Debt Levels
(1)
|
|
$
|
238.7
|
|
|
$
|
233.7
|
|
|
$
|
221.7
|
|
|
$
|
206.7
|
|
|
$
|
231.8
|
|
LTM Net Earnings
|
|
66.0
|
|
|
65.8
|
|
|
69.3
|
|
|
74.1
|
|
|
82.1
|
|
LTM Adjustments
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
6.1
|
|
|
6.2
|
|
|
6.2
|
|
|
5.0
|
|
|
4.7
|
|
Taxes
|
|
37.5
|
|
|
37.8
|
|
|
39.3
|
|
|
39.6
|
|
|
45.4
|
|
Depreciation and Amortization
|
|
21.3
|
|
|
21.3
|
|
|
21.3
|
|
|
22.5
|
|
|
23.0
|
|
Non-cash items and Other
(2)
|
|
12.5
|
|
|
21.9
|
|
|
22.4
|
|
|
23.8
|
|
|
13.4
|
|
LTM Adjusted EBITDA
|
|
$
|
143.4
|
|
|
$
|
153.0
|
|
|
$
|
158.5
|
|
|
$
|
165.0
|
|
|
$
|
168.6
|
|
Bank Leverage Calculation
(3)
|
|
1.67
|
|
|
1.53
|
|
|
1.40
|
|
|
1.25
|
|
|
1.37
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
Liquidity and Capital Resources
The following table highlights certain key cash flows and capital information pertinent to the discussion that follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
(in thousands)
|
Cash provided by operating activities
|
|
$
|
104,295
|
|
|
$
|
88,854
|
|
|
$
|
88,227
|
|
Capital expenditures, net
|
|
(40,105
|
)
|
|
(29,610
|
)
|
|
(41,901
|
)
|
Purchase of businesses, net of cash acquired
|
|
(18,456
|
)
|
|
—
|
|
|
(93,349
|
)
|
Cash used in investing activities
|
|
(58,561
|
)
|
|
(29,610
|
)
|
|
(135,250
|
)
|
Purchase of common stock for treasury
|
|
(5,464
|
)
|
|
(8,725
|
)
|
|
(8,974
|
)
|
Proceeds from credit facilities
|
|
377,500
|
|
|
309,000
|
|
|
789,000
|
|
Repayment of credit facilities
|
|
(379,500
|
)
|
|
(345,000
|
)
|
|
(704,000
|
)
|
Payment of dividends
|
|
(29,217
|
)
|
|
(24,364
|
)
|
|
(22,742
|
)
|
Proceeds from issuance of common stock
|
|
2,847
|
|
|
5,756
|
|
|
4,914
|
|
Cash (used in) provided by financing activities
|
|
(38,834
|
)
|
|
(67,517
|
)
|
|
57,265
|
|
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 shows our commitment to improving our operating efficiency, innovation and modernization, showroom investment, new product tooling, manufacturing equipment and technology infrastructure. During 2016, we made annual dividend payments of $0.60 per share, returning
$29.2 million
of cash to our shareholders.
Cash provided by operating activities was
$104.3 million
,
$88.9 million
, and
$88.2 million
in
2016
,
2015
and
2014
, respectively. For the year ended December 31,
2016
, cash provided by operating activities consisted primarily of $82.1 million of net income and $69.0 million of various non-cash charges, including $26.0 million of deferred taxes driven by discretionary pension funding, $23.0 million of depreciation and amortization, and $10.5 million of stock based compensation, offset by $46.8 million of unfavorable changes in assets and liabilities primarily driven by our discretionary pension plan contribution during the year of $53.2 million. For the year ended December 31,
2015
, cash provided by operating activities consisted of net income of $65.9 million and $36.8 million of various non-cash charges, which included $21.3 million of depreciation and amortization and $8.2 million of stock based compensation expense, offset by $13.9 million of unfavorable changes in assets and liabilities. For the year ended December 31, 2014, cash provided by operating activities consisted of $46.6 million of net income and $26.4 million of various non-cash charges, which included $20.0 million of depreciation and amortization and $8.1 million of stock based compensation expense, offset by $15.3 million of unfavorable changes in assets and liabilities.
For the year ended December 31, 2016, we used $40.1 million and $18.5 million of cash for capital expenditures and the purchase of businesses, respectively. The capital expenditures are reflective of our continued commitment to enhance and modernize our sales, manufacturing and information technology infrastructure. The acquisitions are reflective of our strategy of building our global capabilities as a singular resource for high-design workplaces and homes. During 2015 and 2014, we invested $29.6 million and $41.9 million in capital expenditures, respectively. The capital expenditures are mainly attributed to our technology infrastructure upgrades, site capacity expansion and supply chain improvements, the opening of new showrooms, and new product development.
For the year ended December 31, 2016, we used cash of $29.2 million to fund dividend payments to shareholders, $5.5 million for share repurchases associated with the repurchase of shares used to offset the cost of employee tax withholdings, and $5.0 million of a contingent purchase price payment related to an earn-out for the HOLLY HUNT acquisition in 2014. For the year ended December 31, 2015 we used cash to make $36.0 million of net debt repayments and fund dividend payments $24.4 million. For the year ended December 31, 2014, cash was provided by $85.0 million of net borrowings related to the renegotiation of the Company’s credit facility, offset by $22.7 million of cash used for dividend payments.
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 this Form 10-K for further information regarding this facility. Despite our recent acquisitions, pension plan contributions and continuing investment in the business, we were able to reduce our outstanding debt from $219.7 million in 2015 to $218.4 million in 2016. The combination of lowered debt levels and increased EBITDA drove leverage from 1.67 to 1.37. 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” above.
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.
Contractual Obligations
The following table summarizes our contractual cash obligations as of December 31,
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
Less than
1 year
|
|
1 to 3
years
|
|
3 to 5
years
|
|
More than
5 years
|
|
Total
|
Long-term debt (a)
|
|
$
|
11,404
|
|
|
$
|
211,523
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
222,927
|
|
Operating leases
|
|
24,797
|
|
|
38,837
|
|
|
22,729
|
|
|
23,683
|
|
|
110,046
|
|
Purchase commitments
|
|
2,457
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,457
|
|
Pension and other post-employment benefit plan obligations (b)
|
|
612
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
612
|
|
Other liabilities (c)
|
|
7,100
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,100
|
|
Total *
|
|
$
|
46,370
|
|
|
$
|
250,360
|
|
|
$
|
22,729
|
|
|
$
|
23,683
|
|
|
$
|
343,142
|
|
_______________________________________________________________________________
(a) Contractual obligations for long-term debt and short-term borrowings include principal and interest payments. Interest payments have been computed based on an estimated variable interest as of December 31, 2016. The estimated variable interest rate is based on the company's expected consolidated leverage ratio and the forecasted LIBOR rate for each period presented. The computation of interest, as included in the above table, is based on our Amended and Restated Credit Agreement, dated May 20, 2014.
(b) Due to the uncertainty of future cash outflows, contributions to the pension and other post-employment benefit plans subsequent to 2017 have been excluded from the table above.
(c) Other liabilities consists of contingent payouts due to HOLLY HUNT and DatesWeiser, which is based on the future performance of the businesses.
* Due to the uncertainty of future cash outflows, uncertain tax positions have been excluded from the table above.
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 currently 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.
Critical Accounting Policies
The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the U.S. (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results may differ from such estimates. We believe that the critical accounting policies that follow are those policies that require the most judgment, estimation and assumption in preparing our consolidated financial statements.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our clients and dealers to make required payments. The allowance is determined through an analysis of the aging of accounts receivable and assessments of risk that are based on historical trends. We evaluate the past-due status of our trade receivables based on contractual terms of sale. If the financial condition of our customers were to deteriorate, additional allowances may be required. Accounts receivable are charged against the allowance for doubtful accounts when we determine that the likelihood of recovery is remote, and we no longer intend to expend resources to attempt collection.
Inventory
Inventories are valued at the lower of cost or market. Cost is determined using the first-in, first-out method. We reserve inventory that, in our judgment, is impaired or obsolete. Obsolescence may be caused by the discontinuance of a product line, changes in product material specifications, replacement products in the marketplace and other competitive influences.
Goodwill and Intangible Assets
We record the excess of purchase price over the fair value of the tangible and identifiable intangible assets acquired as goodwill. Goodwill and intangible assets with indefinite lives are tested for impairment at least annually, as of October 1, and whenever events or circumstances occur indicating that a possible impairment may have been incurred. Intangible assets with finite lives are amortized over their useful lives.
We assess whether goodwill impairment exists using both the qualitative and quantitative assessments. The qualitative assessment involves determining whether events or circumstances exist that indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If based on this qualitative assessment we determine it is not more likely than not that the fair value of a reporting unit is less than its carrying amount or if we elect not to perform a qualitative assessment, a quantitative assessment is performed using a two-step approach to determine whether a goodwill impairment exists at the reporting unit.
In the first step, we compare the fair value of each reporting unit to its carrying value. If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired and no further testing is required. If the fair value of the reporting unit is less than the carrying value, we must perform the second step of the impairment test to measure the amount of impairment loss, if any. In the second step, the reporting unit's fair value is allocated to all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical analysis that calculates the implied fair value of goodwill in the same manner as if the reporting unit was being acquired in a business combination. If the implied fair value of the reporting unit's goodwill is less than the carrying value, the difference is recorded as an impairment loss.
We estimate the fair value of its reporting units using a combination of the fair values derived from both the income approach and the market approach. Under the income approach, we calculate the fair value of a reporting unit based on the present value of estimated future cash flows. Cash flow projections are based on our estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rate used is based on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the business's ability to execute on the projected cash flows. The market approach estimates fair value based on market multiples of revenue and earnings derived from comparable publicly-traded companies with similar operating and investment characteristics as the reporting unit.
We assess whether indefinite-lived intangible assets impairment exists using both the qualitative and quantitative assessments. The qualitative assessment involves determining whether events or circumstances exist that indicate it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. If based on this qualitative assessment, we determine it is not more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount or if we elect not to perform a qualitative assessment, a quantitative assessment is performed to determine whether an indefinite-lived intangible asset impairment exists. We test the indefinite-lived intangible assets for impairment by comparing the carrying value to the fair value based on current revenue projections of the related operations, under the relief from royalty method. Any excess of the carrying value over the amount of fair value is recognized as an impairment. Any such impairment would be recognized in full in the reporting period in which it has been identified.
Based on the results of the annual impairment test as of October 1, 2016, we determined there were no indications of impairment for goodwill or indefinite-lived intangible assets. As a result of our annual impairment test during 2016, the fair values of each of our reporting units significantly exceeded the carrying values with the exception of our Edelman reporting unit. The goodwill balance at Edelman was $32.1 million at December 31, 2016. The estimated fair value of the Edelman reporting unit exceeded the carrying value as of October 1, 2016 by approximately 4%. Due to the impairment charge recorded in 2015, the fair value of the Edelman trade name approximates its carrying value.
Deferred Financing Fees
Financing fees that are incurred by the Company in connection with the issuance of debt are deferred and amortized to interest expense over the life of the underlying indebtedness. Deferred financing fees are presented in the Company's consolidated balance sheets as a direct reduction from long-term debt.
Business Combinations
The purchase price of an acquired company is allocated between tangible and intangible assets acquired and liabilities assumed from the acquired business based on their estimated fair values with the residual of the purchase price recorded as goodwill. The results of operations of the acquired businesses are included in our operating results from the dates of acquisition.
Warranty
We generally offer a warranty for our products. The specific terms and conditions of those warranties vary depending upon the product. We estimate the costs that may be incurred under our warranties and record a liability in the amount of such costs at the time product revenue is recognized. Factors that affect our warranty liability include historical product-failure experience and estimated repair costs for identified matters. We periodically assess the adequacy of our recorded warranty liabilities and adjust the amounts as necessary.
Employee Benefits
We are partially self-insured for our employee health benefits. We accrue for employee health benefit obligations based on an actuarial valuation. The actuarial valuation is based upon historical claims as well as a number of assumptions, including rates of inflation for medical costs, and benefit plan changes. Actual results could be materially different from the estimates used.
Pension and Other Post-Employment Benefits
We sponsor two defined benefit pension plans and two other post-employment benefit plans (“OPEB”). Several statistical and other factors, which attempt to anticipate future events, are used in calculating the expense and liability related to the plans. Key factors include assumptions about the expected rates of return on plan assets, discount rates, and health care cost trend rates. We consider market and regulatory conditions, including changes in investment returns and interest rates, in making these assumptions.
During 2015, we approved amendments, effective December 31, 2015, to both the union and nonunion U.S. defined benefit pension plans. We also amended our remaining post-employment medical plan, effective May 1, 2015. The amendments eliminated the accrual of future benefits for all participants in the defined benefit pension plans and closed entry to new retirees into the post-employment medical plan. These amendments resulted in a curtailment gain of approximately
$7.1 million
. As the plans had unrealized losses in excess of the reduction of the projected benefit obligation at the date of amendment, the gain was recorded as a reduction of the projected benefit obligation and a corresponding reduction of unrealized losses within accumulated other comprehensive loss.
We determine the expected long-term rate of return on plan assets based on aggregating the expected rates of return for each component of the plan's asset mix. We use historic plan asset returns combined with current market conditions to estimate the rate of return. The expected rate of return on plan assets is a long-term assumption and generally does not change annually. The discount rate reflects the market rate for high-quality fixed income debt instruments as of our annual measurement date and is subject to change each year. Holding all other assumptions constant, a one-percentage-point increase or decrease in the assumed rate of return on plan assets would decrease or increase 2016 net periodic pension expense by approximately $2.1 million. Likewise, a one-percentage-point increase or decrease in the discount rate would increase or decrease 2016 net periodic pension expense by approximately $0.7 million or $0.4 million, respectively.
Unrecognized actuarial gains and losses are recognized over the expected remaining lifetime of the plan participants. Unrecognized actuarial gains and losses arise from several factors, including experience and assumption changes with respect to the obligations and from the difference between expected returns and actual returns on plan assets. These unrecognized gains and losses are systematically recognized as a change in future net periodic pension expense in accordance with the appropriate accounting guidance relating to defined benefit pension and OPEB plans.
As of December 31, 2015, we changed the method used to estimate the interest cost component of net periodic benefit cost for pension and other post-employment benefits. This change resulted in a decrease in the interest cost component for 2016, compared to the previous method. Historically, we estimated the interest cost component utilizing a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. We have elected to utilize a full yield curve approach in the estimation of this component by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. We have made this change to provide a more precise measurement of interest cost by improving the correlation between projected benefit cash flows to the corresponding spot yield curve rates. This change did not affect the measurement of the total benefit obligation at the annual measurement date, as the change in interest cost is completely offset by deferred actuarial (gains)/losses that will arise at the next annual measurement date.
Key assumptions that we use in determining the amount of the obligation and expense recorded for OPEB, under the appropriate accounting guidance, include the assumed discount rate and the assumed rate of increases in future health care costs. In estimating the health care cost trend rate, we consider actual health care cost experience, future benefit structures, industry trends and advice from our actuaries. We assume that the relative increase in health care costs will generally trend downward over the next several years, reflecting assumed increases in efficiency and cost-containment initiatives in the health care system. For purposes of measuring the benefit obligation associated with the Company's OPEB plans as of December 31,
2016
, as well as the assumed rate for
2017
, a between
5.80%
to
6.20%
annual rate of increase in the per capita cost of covered health care benefits was assumed and a
11.10%
annual rate of increase in the per capita cost of covered prescription drug benefits was assumed. The rate was then assumed to decrease to an ultimate rate of
4.5%
for 2025 and thereafter for the medical plan and prescription drug plan and thereafter for the benefit obligation. Increasing the assumed health care cost trend by one-percentage-point in each year would increase the benefit obligation as of
December 31, 2016
by
$0.1
million and increase the aggregate of the service and interest cost components of net periodic benefit cost for
2016
by a minimal amount. Decreasing the assumed health care cost trend rate by one percentage point in each year would decrease the benefit obligation as of
December 31, 2016
by approximately
$0.1
million and decrease the aggregate of the service and interest cost components of net periodic benefit cost for
2016
by a minimal amount.
In accordance with the appropriate accounting guidance, we recognize in our consolidated balance sheet the funded status (i.e., the difference between the fair value of plan assets and the projected benefit obligation) of our defined benefit pension and OPEB plans. To record the unfunded status of our plans, we recorded an additional liability and an adjustment to accumulated other comprehensive income, net of tax.
The actuarial assumptions we use in determining our pension and OPEB retirement benefits may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates, or longer or shorter life spans of participants. While we believe that the assumptions used are appropriate, differences in actual experience or changes in assumptions may materially affect our financial position or results of operations.
Commitments and Contingencies
We establish reserves for the estimated cost of environmental and legal contingencies when such expenditures are probable and reasonably estimable. A significant amount of judgment is required to estimate and quantify our ultimate exposure in these matters. We engage outside experts as deemed necessary or appropriate to assist in the evaluation of exposure. From time to time, as information becomes available regarding changes in circumstances for ongoing issues as well as information regarding emerging issues, our potential liability is reassessed and reserve balances are adjusted as necessary. Revisions to our estimates of potential liability, and actual expenditures related to commitments and contingencies, could have a material impact on our results of operations or financial position.
Taxes
We account for income taxes in accordance with the appropriate accounting guidance relating to income taxes, which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between book and tax bases of recorded assets and liabilities. The appropriate accounting guidance also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be recognized.
At December 31,
2016
, our deferred tax liabilities of
$121.7 million
exceeded deferred tax assets of
$44.9 million
by
$77.0 million
. At December 31,
2015
, deferred tax liabilities of
$114.5
million exceeded deferred tax assets of
$59.1
million by $55.4 million. Our deferred tax assets at
December 31, 2016
and
2015
of
$44.9 million
and
$59.1
million, respectively, are net of valuation allowances of
$6.2 million
and
$6.3
million, respectively. We have recorded the valuation allowance primarily for net operating loss carryforwards in foreign tax jurisdictions where we have incurred historical tax losses from operations or acquired tax losses through acquisition, and have determined that it is more likely than not that these deferred tax assets will not be realized.
We evaluate on an ongoing basis the realizability of our deferred tax assets and adjust the amount of the allowance, if necessary. The factors used to assess the likelihood of realization include our forecast of future taxable income and our assessment of available tax planning strategies that could be implemented to realize the net deferred tax assets.
We account for uncertain tax positions in accordance with the applicable accounting guidance relating to uncertainty in income taxes. Accordingly, we report a liability for unrecognized tax benefits resulting from uncertain tax positions taken, or expected to be taken, in an income tax return. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
Derivative Financial Instruments
From time to time, we enter into foreign currency forward exchange contracts and foreign currency option contracts to manage our exposure to foreign exchange rates associated with short-term operating receivables of a Canadian subsidiary that are payable by the U.S. operations. The terms of these contracts are less than a year.
We do not hold or issue derivative financial instruments for trading or speculative purposes. We recognize derivatives as either assets or liabilities in the accompanying consolidated balance sheet and measures those instruments at fair value. Changes in the fair value of such contracts are reported in earnings as a component of “Other (income) expense, net.”
Stock-Based Compensation
We measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. Forfeitures are recognized when they occur.
Stock Options
The fair value of stock options is estimated at the date of grant using the Black-Scholes option pricing model, which requires management to make certain assumptions of future expectations based on historical and current data. The assumptions include the expected term of the options, risk-free interest rate, expected volatility, and dividend yield. The expected term represents the expected amount of time that options granted are expected to be outstanding, based on historical and forecasted exercise behavior. The risk-free rate is based on the rate at grant date of zero-coupon U.S. Treasury Notes with a term equal to the expected term of the option. Expected volatility is estimated based on the historical volatility of our stock price. Our dividend yield is based on historical data. We recognize compensation expense using the straight-line method over the vesting period.
Restricted Stock and Restricted Stock Units
The fair value of restricted stock and restricted stock units, excluding market-based restricted stock units that are discussed below, is based upon the closing market price of our common stock on the date of grant. We recognize compensation expense using the straight-line method over the vesting period.
The fair value of the market-based restricted stock units is estimated at the date of grant using a lattice pricing model, which requires management to make certain assumptions based on both historical and current data. These awards vest based upon the performance of our stock price relative to a peer group. The assumptions included in the model include, but are not limited to, risk-free interest rate, expected volatility of our and the peer group's stock prices, and dividend yield. The risk-free rate is based upon the applicable U.S. Treasury Note rate. Expected volatility is estimated based on the historical volatility of our stock prices. The dividend yield is based on our historical data.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Knoll, Inc.
We have audited the accompanying consolidated balance sheets of Knoll, Inc. as of December 31, 2016 and 2015, and the related consolidated statements of operations and comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2016. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Knoll, Inc. at December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Knoll, Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 1, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
March 1, 2017
KNOLL, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
December 31,
2015
|
ASSETS
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
9,854
|
|
|
$
|
4,192
|
|
Customer receivables, net of allowance for doubtful accounts of $8,059 and $7,919, respectively
|
84,425
|
|
|
116,532
|
|
Inventories, net
|
142,072
|
|
|
140,798
|
|
Deferred income taxes
|
—
|
|
|
20,485
|
|
Prepaid expenses
|
27,461
|
|
|
14,798
|
|
Other current assets
|
12,996
|
|
|
11,967
|
|
Total current assets
|
276,808
|
|
|
308,772
|
|
Property, plant, and equipment, net
|
197,084
|
|
|
172,142
|
|
Goodwill
|
141,391
|
|
|
127,671
|
|
Intangible assets, net
|
241,870
|
|
|
240,169
|
|
Other non-trade receivables
|
26
|
|
|
2,254
|
|
Other noncurrent assets
|
1,434
|
|
|
2,795
|
|
Total Assets
|
$
|
858,613
|
|
|
$
|
853,803
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Current maturities of long-term debt
|
$
|
10,000
|
|
|
$
|
10,000
|
|
Accounts payable
|
97,518
|
|
|
89,552
|
|
Income taxes payable
|
81
|
|
|
1,580
|
|
Other current liabilities
|
114,774
|
|
|
114,908
|
|
Total current liabilities
|
222,373
|
|
|
216,040
|
|
Long-term debt
|
208,383
|
|
|
209,718
|
|
Deferred income taxes
|
76,854
|
|
|
75,959
|
|
Post-employment benefits other than pensions
|
5,124
|
|
|
6,294
|
|
Pension liability
|
17,428
|
|
|
63,441
|
|
Other noncurrent liabilities
|
18,982
|
|
|
26,877
|
|
Total liabilities
|
549,144
|
|
|
598,329
|
|
Commitments and contingent liabilities
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
Common stock, $0.01 par value; 200,000,000 shares authorized; 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 and 64,603,344 shares issued and 48,822,013 shares outstanding (including 993,934 non-voting restricted shares and net of 15,781,331 treasury shares) at December 31, 2015
|
491
|
|
|
488
|
|
Additional paid-in capital
|
55,148
|
|
|
47,165
|
|
Retained earnings
|
297,011
|
|
|
244,947
|
|
Accumulated other comprehensive loss
|
(43,403
|
)
|
|
(37,318
|
)
|
Total Knoll, Inc. stockholders' equity
|
309,247
|
|
|
255,282
|
|
Noncontrolling interests
|
222
|
|
|
192
|
|
Total equity
|
309,469
|
|
|
255,474
|
|
Total Liabilities and Equity
|
$
|
858,613
|
|
|
$
|
853,803
|
|
See accompanying notes to the consolidated financial statements.
KNOLL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(dollars in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Sales
|
$
|
1,164,292
|
|
|
$
|
1,104,442
|
|
|
$
|
1,050,294
|
|
Cost of sales
|
718,316
|
|
|
692,310
|
|
|
678,609
|
|
Gross profit
|
445,976
|
|
|
412,132
|
|
|
371,685
|
|
Selling, general, and administrative expenses
|
309,668
|
|
|
299,476
|
|
|
286,801
|
|
Restructuring and other charges
|
—
|
|
|
896
|
|
|
1,532
|
|
Intangible asset impairment charges
|
—
|
|
|
10,650
|
|
|
—
|
|
Pension settlement and OPEB curtailment
|
—
|
|
|
—
|
|
|
6,509
|
|
Operating profit
|
136,308
|
|
|
101,110
|
|
|
76,843
|
|
Interest expense
|
5,405
|
|
|
6,865
|
|
|
7,378
|
|
Other expense (income), net
|
3,365
|
|
|
(9,174
|
)
|
|
(6,285
|
)
|
Income before income tax expense
|
127,538
|
|
|
103,419
|
|
|
75,750
|
|
Income tax expense
|
45,424
|
|
|
37,471
|
|
|
29,165
|
|
Net earnings
|
82,114
|
|
|
65,948
|
|
|
46,585
|
|
Net earnings (loss) attributable to noncontrolling interests
|
30
|
|
|
(15
|
)
|
|
(11
|
)
|
Net earnings attributable to Knoll, Inc. stockholders
|
$
|
82,084
|
|
|
$
|
65,963
|
|
|
$
|
46,596
|
|
|
|
|
|
|
|
Net earnings per common share attributable to Knoll, Inc. stockholders:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
1.71
|
|
|
$
|
1.38
|
|
|
$
|
0.98
|
|
Diluted
|
$
|
1.68
|
|
|
$
|
1.36
|
|
|
$
|
0.97
|
|
Weighted-average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
48,093,294
|
|
|
47,746,707
|
|
|
47,346,532
|
|
Diluted
|
48,919,108
|
|
|
48,438,231
|
|
|
48,068,249
|
|
|
|
|
|
|
|
Net earnings
|
$
|
82,114
|
|
|
$
|
65,948
|
|
|
$
|
46,585
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Pension and other post-employment liability adjustment, net of tax
|
(6,573
|
)
|
|
11,945
|
|
|
(25,548
|
)
|
Foreign currency translation adjustment
|
488
|
|
|
(16,581
|
)
|
|
(12,271
|
)
|
Total other comprehensive (loss), net of tax
|
(6,085
|
)
|
|
(4,636
|
)
|
|
(37,819
|
)
|
Total comprehensive income
|
76,029
|
|
|
61,312
|
|
|
8,766
|
|
Comprehensive income (loss) attributable to noncontrolling interests
|
30
|
|
|
(15
|
)
|
|
(11
|
)
|
Comprehensive income attributable to Knoll, Inc. stockholders
|
$
|
75,999
|
|
|
$
|
61,327
|
|
|
$
|
8,777
|
|
See accompanying notes to the consolidated financial statements.
KNOLL, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2013
|
|
$
|
483
|
|
|
$
|
37,258
|
|
|
$
|
180,949
|
|
|
$
|
5,137
|
|
|
$
|
223,827
|
|
|
$
|
—
|
|
|
$
|
223,827
|
|
Noncontrolling interests acquired in acquisition
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
218
|
|
|
218
|
|
Net earnings
|
|
—
|
|
|
—
|
|
|
46,596
|
|
|
—
|
|
|
46,596
|
|
|
(11
|
)
|
|
46,585
|
|
Other comprehensive loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(37,819
|
)
|
|
(37,819
|
)
|
|
—
|
|
|
(37,819
|
)
|
Shares issued for consideration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
4
|
|
|
4,854
|
|
|
—
|
|
|
—
|
|
|
4,858
|
|
|
—
|
|
|
4,858
|
|
Income tax effect from the exercise of stock options and vesting of equity awards
|
|
—
|
|
|
(119
|
)
|
|
—
|
|
|
—
|
|
|
(119
|
)
|
|
—
|
|
|
(119
|
)
|
Shares issued under stock incentive plan
|
|
6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
—
|
|
|
6
|
|
Shares issued to Board of Directors in lieu of cash
|
|
—
|
|
|
56
|
|
|
—
|
|
|
—
|
|
|
56
|
|
|
—
|
|
|
56
|
|
Stock-based compensation
|
|
—
|
|
|
8,062
|
|
|
—
|
|
|
—
|
|
|
8,062
|
|
|
—
|
|
|
8,062
|
|
Cash dividend ($0.48 per share)
|
|
—
|
|
|
—
|
|
|
(23,482
|
)
|
|
—
|
|
|
(23,482
|
)
|
|
—
|
|
|
(23,482
|
)
|
Purchase of common stock
|
|
(6
|
)
|
|
(8,968
|
)
|
|
—
|
|
|
—
|
|
|
(8,974
|
)
|
|
—
|
|
|
(8,974
|
)
|
Balance at December 31, 2014
|
|
$
|
487
|
|
|
$
|
41,143
|
|
|
$
|
204,063
|
|
|
$
|
(32,682
|
)
|
|
$
|
213,011
|
|
|
$
|
207
|
|
|
$
|
213,218
|
|
Net earnings
|
|
—
|
|
|
—
|
|
|
65,963
|
|
|
—
|
|
|
65,963
|
|
|
(15
|
)
|
|
65,948
|
|
Other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,636
|
)
|
|
(4,636
|
)
|
|
—
|
|
|
(4,636
|
)
|
Shares issued for consideration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
4
|
|
|
5,652
|
|
|
—
|
|
|
—
|
|
|
5,656
|
|
|
—
|
|
|
5,656
|
|
Income tax effect from the exercise of stock options and vesting of equity awards
|
|
—
|
|
|
826
|
|
|
—
|
|
|
—
|
|
|
826
|
|
|
—
|
|
|
826
|
|
Shares issued under stock incentive plan
|
|
1
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Shares issued to Board of Directors in lieu of cash
|
|
—
|
|
|
100
|
|
|
—
|
|
|
—
|
|
|
100
|
|
|
—
|
|
|
100
|
|
Stock-based compensation
|
|
—
|
|
|
8,166
|
|
|
—
|
|
|
—
|
|
|
8,166
|
|
|
—
|
|
|
8,166
|
|
Cash dividend ($0.51 per share)
|
|
—
|
|
|
—
|
|
|
(25,079
|
)
|
|
—
|
|
|
(25,079
|
)
|
|
—
|
|
|
(25,079
|
)
|
Purchase of common stock
|
|
(4
|
)
|
|
(8,721
|
)
|
|
—
|
|
|
—
|
|
|
(8,725
|
)
|
|
—
|
|
|
(8,725
|
)
|
Balance at December 31, 2015
|
|
$
|
488
|
|
|
$
|
47,165
|
|
|
$
|
244,947
|
|
|
$
|
(37,318
|
)
|
|
$
|
255,282
|
|
|
$
|
192
|
|
|
$
|
255,474
|
|
Net earnings
|
|
—
|
|
|
—
|
|
|
82,084
|
|
|
—
|
|
|
82,084
|
|
|
30
|
|
|
82,114
|
|
Other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6,085
|
)
|
|
(6,085
|
)
|
|
—
|
|
|
(6,085
|
)
|
Shares issued for consideration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
2
|
|
|
2,770
|
|
|
—
|
|
|
—
|
|
|
2,772
|
|
|
—
|
|
|
2,772
|
|
Shares issued under stock incentive plan
|
|
3
|
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Shares issued to Board of Directors in lieu of cash
|
|
—
|
|
|
75
|
|
|
—
|
|
|
—
|
|
|
75
|
|
|
—
|
|
|
75
|
|
Stock-based compensation
(1)
|
|
—
|
|
|
10,603
|
|
|
(134
|
)
|
|
—
|
|
|
10,469
|
|
|
—
|
|
|
10,469
|
|
Cash dividend ($0.60 per share)
|
|
—
|
|
|
—
|
|
|
(29,886
|
)
|
|
—
|
|
|
(29,886
|
)
|
|
—
|
|
|
(29,886
|
)
|
Purchase of common stock
|
|
(2
|
)
|
|
(5,462
|
)
|
|
—
|
|
|
—
|
|
|
(5,464
|
)
|
|
—
|
|
|
(5,464
|
)
|
Balance at December 31, 2016
|
|
$
|
491
|
|
|
$
|
55,148
|
|
|
$
|
297,011
|
|
|
$
|
(43,403
|
)
|
|
$
|
309,247
|
|
|
$
|
222
|
|
|
$
|
309,469
|
|
(1) The $0.1 million adjustment in retained earnings represents the ASU 2016-09 adjustment for cumulative estimated forfeiture expense. See Note 2 for additional information.
See accompanying notes to the consolidated financial statements.
KNOLL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
Net earnings
|
$
|
82,114
|
|
|
$
|
65,948
|
|
|
$
|
46,585
|
|
Adjustments to reconcile net earnings to cash provided by operating activities:
|
|
|
|
|
|
Depreciation
|
19,071
|
|
|
17,364
|
|
|
16,327
|
|
Amortization expense (including deferred financing fees)
|
3,954
|
|
|
3,915
|
|
|
3,715
|
|
Provision for deferred taxes
|
26,016
|
|
|
158
|
|
|
(269
|
)
|
Write-off of deferred financing fees
|
—
|
|
|
—
|
|
|
347
|
|
Inventory obsolescence
|
2,376
|
|
|
2,656
|
|
|
1,761
|
|
Loss on disposal of property, plant and equipment
|
5
|
|
|
1,229
|
|
|
464
|
|
Unrealized foreign currency losses (gains)
|
827
|
|
|
(8,789
|
)
|
|
(6,640
|
)
|
Stock-based compensation
|
10,469
|
|
|
8,166
|
|
|
8,062
|
|
Intangible asset impairment charge
|
—
|
|
|
10,650
|
|
|
—
|
|
Bad debt and customer credits
|
6,303
|
|
|
1,477
|
|
|
2,590
|
|
Changes in assets and liabilities, net of effects of acquisitions:
|
|
|
|
|
|
Customer receivables
|
26,591
|
|
|
(4,292
|
)
|
|
(13,814
|
)
|
Inventories
|
(2,157
|
)
|
|
(4,481
|
)
|
|
(23,063
|
)
|
Accounts payable
|
4,591
|
|
|
(26,253
|
)
|
|
23,002
|
|
Current income taxes
|
(6,871
|
)
|
|
675
|
|
|
(5,528
|
)
|
Prepaid and other current assets
|
(13,815
|
)
|
|
(5,425
|
)
|
|
(3,601
|
)
|
Other current liabilities
|
(3,430
|
)
|
|
22,937
|
|
|
(6,969
|
)
|
Other noncurrent assets and liabilities
|
(51,749
|
)
|
|
2,919
|
|
|
45,258
|
|
Cash provided by operating activities
|
104,295
|
|
|
88,854
|
|
|
88,227
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
Capital expenditures, net
|
(40,105
|
)
|
|
(29,610
|
)
|
|
(41,901
|
)
|
Purchase of businesses, net of cash acquired
|
(18,456
|
)
|
|
—
|
|
|
(93,349
|
)
|
Cash used in investing activities
|
(58,561
|
)
|
|
(29,610
|
)
|
|
(135,250
|
)
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
Proceeds from credit facility
|
377,500
|
|
|
309,000
|
|
|
789,000
|
|
Repayment of credit facility
|
(379,500
|
)
|
|
(345,000
|
)
|
|
(704,000
|
)
|
Payment of financing fees
|
—
|
|
|
(10
|
)
|
|
(1,938
|
)
|
Payment of dividends
|
(29,217
|
)
|
|
(24,364
|
)
|
|
(22,742
|
)
|
Proceeds from the issuance of common stock
|
2,847
|
|
|
5,756
|
|
|
4,914
|
|
Purchase of common stock for treasury
|
(5,464
|
)
|
|
(8,725
|
)
|
|
(8,974
|
)
|
Contingent purchase price payment
|
(5,000
|
)
|
|
(5,000
|
)
|
|
—
|
|
Tax benefit from the exercise of stock options and vesting of equity awards
|
—
|
|
|
826
|
|
|
1,005
|
|
Cash (used in) provided by financing activities
|
(38,834
|
)
|
|
(67,517
|
)
|
|
57,265
|
|
Effect of exchange rate changes on cash and cash equivalents
|
(1,238
|
)
|
|
(6,556
|
)
|
|
(3,247
|
)
|
Net increase (decrease) in cash and cash equivalents
|
5,662
|
|
|
(14,829
|
)
|
|
6,995
|
|
Cash and cash equivalents at beginning of year
|
4,192
|
|
|
19,021
|
|
|
12,026
|
|
Cash and cash equivalents at end of year
|
$
|
9,854
|
|
|
$
|
4,192
|
|
|
$
|
19,021
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
Cash paid for interest
|
$
|
5,228
|
|
|
$
|
6,168
|
|
|
$
|
6,879
|
|
Cash paid for income taxes
|
$
|
23,699
|
|
|
$
|
40,781
|
|
|
$
|
18,646
|
|
See accompanying notes to the consolidated financial statements.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
Description of the Business
Knoll, Inc. and its subsidiaries (the “Company” or “Knoll”) are engaged in the design, manufacture, market and sale of high-end furniture products and accessories, and modern outdoor furniture. The Company is also engaged in the sale of fine leather, textiles, and felt, focusing on the middle to high-end segments of the market. The Company primarily operates in the United States (“U.S.”), Canada and Europe, and sells its products primarily through a broad network of independent dealers and distribution partners, through a direct sales force, and through its showrooms, as well as online.
Basis of Presentation
The Company follows accounting standards set by the Financial Accounting Standards Board (“FASB”). The FASB establishes accounting principles generally accepted in the United States (“GAAP”). Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants, which the Company is required to follow. References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification (“ASC”), which serves as a single source of authoritative non-SEC accounting and reporting standards to be applied by non-governmental entities. All amounts are presented in U.S. dollars, unless otherwise noted.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiaries and any partially owned subsidiaries that the Company has the ability to control. Significant intercompany transactions and balances have been eliminated in consolidation.
The results of the Company's European subsidiaries are included in the consolidated financial statements, and are presented on a
one
-month lag to allow for the timely preparation of consolidated financial information. The effect of this lag in presentation is not material to the consolidated financial statements.
Use of Estimates
The preparation of the consolidated financial statements in conformity with United States GAAP requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Examples include, but are not limited to, revenue recognition; income tax exposures; the carrying value of goodwill and property, plant, and equipment; bad debts; customer receivable allowances; inventory obsolescence and product warranties. Actual results may differ from such estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and highly liquid investments with maturities of
three
months or less at the date of purchase.
Revenue Recognition
The Company recognizes revenue when the earnings process is complete. This occurs when risk and title transfers, collectability is reasonably assured, and pricing is fixed and determinable. Accordingly, revenue is recognized when risk and title are transferred to the client, which primarily occurs at the time of shipment. Taxes on revenue producing transactions are not included in sales. Based on historical experience, accruals are made at the time of sale to estimate for sales returns and other allowances.
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The allowance is determined through an analysis of the aging of accounts receivable and assessments of risk that are based on historical trends. The Company evaluates the past-due status of its customer receivables based on the contractual terms of sale. If the financial condition of the Company's customers were to deteriorate, additional allowances may be required. Accounts receivable are charged against the allowance for doubtful accounts when the Company determines that the likelihood of recovery is remote, and the Company no longer intends to expend resources to attempt collection.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. The Company reserves for inventory that, in its judgment, is impaired or obsolete. Obsolescence may be caused by the discontinuance of a product line, changes in product material specifications, replacement products in the marketplace and other competitive influences.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The useful lives are as follows:
|
|
|
|
Category
|
|
Useful Life (in years)
|
Leasehold improvements
(1)
|
|
Various
|
Buildings
|
|
45-60
|
Office equipment
|
|
3-10
|
Machinery and equipment
|
|
4-12
|
(1) Useful lives for leasehold improvements are amortized over the shorter of the economic lives or the term of the lease.
The Company reviews the carrying values of its property and equipment for possible impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable based on undiscounted estimated cash flows expected to result from its use and eventual disposition. The factors considered by the Company in performing this assessment include current operating results, business trends affecting the use of certain assets and other economic factors. In assessing the recoverability of the carrying value of property and equipment, the Company must make assumptions regarding future cash flows and other factors. If these estimates or the related assumptions change in the future, the Company may be required to record an impairment loss for these assets.
Goodwill and Intangible Assets
The Company records the excess of purchase price over the fair value of the tangible and identifiable intangible assets acquired as goodwill. Goodwill and intangible assets with indefinite lives are tested for impairment at least annually, as of October 1, and whenever events or circumstances occur indicating that a possible impairment may have been incurred. Intangible assets with finite lives are amortized over their useful lives.
The Company assesses whether goodwill impairment exists using both the qualitative and quantitative assessments. The qualitative assessment involves determining whether events or circumstances exist that indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If based on this qualitative assessment the Company determines it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or if the Company elects not to perform a qualitative assessment, a quantitative assessment is performed using a two-step approach to determine whether a goodwill impairment exists at the reporting unit.
In the first step, the Company compares the estimated fair value of each reporting unit to its carrying value. If the estimated fair value of the reporting unit exceeds its carrying value, goodwill is not impaired and no further testing is required. If the estimated fair value of the reporting unit is less than the carrying value, the Company must perform the second step of the impairment test to measure the amount of impairment loss, if any. In the second step, the reporting unit's estimated fair value is allocated to all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical analysis that calculates the implied fair value of goodwill in the same manner as if the reporting unit was being acquired in a business combination. If the implied fair value of the reporting unit's goodwill is less than the carrying value, the difference is recorded as an impairment loss.
The Company estimates the fair value of its reporting units using a combination of the fair values derived from both the income approach and the market approach. Under the income approach, the Company calculates the fair value of a reporting unit based on the present value of estimated future cash flows. Cash flow projections are based on management's estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rate used is based on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the business's ability to execute on the projected cash flows. The market approach estimates fair value based on market multiples of revenue and earnings derived from comparable publicly-traded companies with similar operating and investment characteristics as the reporting unit.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
The Company assesses whether indefinite-lived intangible assets impairment exists using both the qualitative and quantitative assessments. The qualitative assessment involves determining whether events or circumstances exist that indicate it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. If based on this qualitative assessment, the Company determines it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount or if the Company elects not to perform a qualitative assessment, a quantitative assessment is performed to determine whether an indefinite-lived intangible asset impairment exists. The Company tests the indefinite-lived intangible assets for impairment by comparing the carrying value to the fair value based on current revenue projections of the related operations, under the relief from royalty method. Any excess of the carrying value over the amount of fair value is recognized as an impairment. Any such impairment would be recognized in the reporting period in which it has been identified.
Finite-lived assets such as customer relationships, non-compete agreements, and licenses are amortized over their estimated useful lives. The Company reviews the carrying values of these assets for possible impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable based on undiscounted estimated cash flows expected to result from its use and eventual disposition. The Company continually evaluates the reasonableness of the useful lives of these assets.
Business Combinations
The purchase price of an acquired company is allocated between tangible and intangible assets acquired and liabilities assumed from the acquired business based on their estimated fair values, with the residual of the purchase price recorded as goodwill. The results of operations of the acquired business are included in the Company's operating results from the date of acquisition.
Deferred Financing Fees
Financing fees that are incurred by the Company in connection with the issuance of debt are deferred and amortized to interest expense over the life of the underlying indebtedness. Deferred financing fees are presented in the Company's consolidated balance sheets as a direct reduction from long-term debt.
Shipping and Handling
Amounts billed to clients for shipping and handling of products are classified as sales. Costs incurred by the Company for shipping and handling are classified as cost of sales.
Research and Development Costs
Research and development expenses are expensed as incurred, and are included as a component of selling, general, and administrative expenses. Research and development expenses, were
$21.7 million
for
2016
,
$20.7 million
for
2015
, and
$19.2 million
for
2014
.
Income Taxes
The Company accounts for income taxes using the asset and liability approach, which requires deferred tax assets and liabilities be recognized using enacted tax rates to measure the effect of temporary differences between book and tax bases on recorded assets and liabilities. Valuation allowances are recorded to reduce deferred tax assets, if it is more likely than not some portion or all of the deferred tax assets will not be recognized. The need to establish valuation allowances against deferred tax assets is assessed quarterly. The Company maintained a valuation allowance primarily for net operating loss carryforwards in foreign tax jurisdictions where the Company has incurred historical tax losses from operations or acquired tax losses through acquisitions, and has determined that it is more likely than not these deferred tax assets will not be recognized. The primary factors used to assess the likelihood of realization are forecasts of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets.
The Company evaluates tax positions to determine whether the benefits of tax positions are more likely than not to be sustained upon audit based on the technical merits of the tax position. For tax positions that are more likely than not to be sustained upon audit, the Company recognizes the largest amount of the benefit that is greater than 50% likely of being realized upon ultimate settlement. For tax positions that are not more likely than not to be sustained upon audit, the Company does not recognize any portion of the benefit. If the more likely than not threshold is not met in the period for which a tax position is taken, the Company may subsequently recognize the benefit of that tax position if the tax matter is effectively settled, the statute of limitations expires, or if the more likely than not threshold is met in a subsequent period.
The Company recognizes tax-related interest and penalties in income tax expense and accrues for interest and penalties in other noncurrent liabilities.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
Fair Value of Financial Instruments
The Company uses the following valuation techniques to measure fair value for its financial assets and financial liabilities:
|
|
|
|
Level 1
|
|
Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.
|
|
|
Level 2
|
|
Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.
|
|
|
Level 3
|
|
Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.
|
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company and its subsidiaries use, as appropriate, a market approach (generally, data from market transactions), an income approach (generally, present value techniques and option-pricing models), and/or a cost approach (generally, replacement cost) to measure the fair value of an asset or liability. These valuation approaches incorporate inputs such as observable, independent market data and/or unobservable data that management believes are predicated on the assumptions market participants would use to price an asset or liability. These inputs may incorporate, as applicable, certain risks such as nonperformance risk, which includes credit risk.
Derivative Financial Instruments
From time to time, the Company enters into foreign currency hedges to manage its exposure to foreign exchange rates associated with short-term operating receivables of a Canadian subsidiary that are payable by the U.S. operations. The terms of these contracts are typically less than one year.
The Company does not hold or issue derivative financial instruments for trading or speculative purposes. The Company recognizes derivatives as either assets or liabilities in the accompanying consolidated balance sheet and measures those instruments at fair value. Changes in the fair value of such contracts are reported in earnings as a component of “Other income, net.”
Commitments and Contingencies
The Company establishes reserves for the estimated cost of environmental, legal and other contingencies when such expenditures are probable and reasonably estimable. A significant amount of judgment is required to estimate and quantify the ultimate exposure in these matters. The Company engages outside experts as deemed necessary or appropriate to assist in the evaluation of exposure. From time to time, as information becomes available regarding changes in circumstances for ongoing issues as well as information regarding emerging issues, the potential liability is reassessed and reserve balances are adjusted as necessary. Revisions to the estimates of potential liability, and actual expenditures related to commitments and contingencies, could have a material impact on the results of operations or financial position.
Warranty
The Company generally offers a warranty for its products. The specific terms and conditions of those warranties vary depending upon the product sold. The Company estimates the costs that may be incurred under its warranties and records a liability in the amount of such costs at the time product revenue is recognized. Factors that affect the Company's warranty liability include historical product-failure experience and estimated repair costs for identified matters. The Company regularly assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.
Concentration of Credit Risk
The Company's accounts receivables are comprised primarily of independent dealers and direct customers. The Company monitors and manages the credit risk associated with the individual dealers and direct customers. The independent dealers are responsible for assessing and assuming the credit risk of their customers, and may require their customers to provide deposits or other credit enhancement measures. Historically the Company has had a concentration of federal and local government receivables; however, they carry minimal credit risk.
Foreign Currency Translation
Results of foreign operations are translated into U.S. dollars using average exchange rates during the year, while assets and liabilities are translated into U.S. dollars using the exchange rates as of the balance sheet dates. The resulting translation adjustments are recorded in accumulated other comprehensive income (loss).
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
Transaction gains and losses resulting from exchange rate changes on transactions denominated in currencies other than the functional currency of the applicable subsidiary are included in the consolidated statements of operations, within other (income) expense, net, in the year in which the change occurs.
Stock-Based Compensation
The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. Forfeitures are recognized when they occur.
Stock Options
The fair value of stock options is estimated at the date of grant using the Black-Scholes option pricing model, which requires management to make certain assumptions of future expectations based on historical and current data. The assumptions include the expected term of the options, risk-free interest rate, expected volatility, and dividend yield. The expected term represents the expected amount of time that options granted are expected to be outstanding, based on historical and forecasted exercise behavior. The risk-free rate is based on the rate at grant date of zero-coupon U.S. Treasury Notes with a term equal to the expected term of the option. Expected volatility is estimated based on the historical volatility of the Company's stock price. The Company's dividend yield is based on historical data. The Company recognizes compensation expense using the straight-line method over the vesting period.
Restricted Stock and Restricted Stock Units
The fair value of restricted stock and restricted stock units, excluding market-based restricted stock units, is based upon the closing market price of the Company's common stock on the date of grant. The Company recognizes compensation expense using the straight-line method over the vesting period.
The fair value of the market-based restricted stock units is estimated at the date of grant using a lattice pricing model, which requires management to make certain assumptions based on both historical and current data. These awards vest based upon the performance of the Company's stock price relative to a peer group. The assumptions included in the model include, but are not limited to, risk-free interest rate, expected volatility of the Company's and the peer group's stock prices, and dividend yield. The risk-free rate is based upon the applicable U.S. Treasury Note rate. Expected volatility is estimated based on the historical volatility of the companies' stock prices. The dividend yield is based on the Company's historical data.
Pension and Other Post-Employment Benefits
The Company sponsors two defined benefit pension plans and two other post-employment benefit plans ("OPEB"). Several statistical and other factors, which attempt to anticipate future events, are used in calculating the expense and liability related to the plans. Key factors include assumptions about the expected rates of return on plan assets, discount rates, and health care cost trend rates. The Company considers market and regulatory conditions, including changes in investment returns and interest rates, in making these assumptions.
The Company determines the expected long-term rate of return on plan assets based on aggregating the expected rates of return for each component of the plan's asset mix. The Company uses historic plan asset returns combined with current market conditions to estimate the rate of return. The expected rate of return on plan assets is a long-term assumption and generally does not change annually. The discount rate reflects the market rate for high-quality fixed income debt instruments as of the Company's annual measurement date and is subject to change each year.
Unrecognized actuarial gains and losses are recognized over the expected remaining lifetime of the plan participants. Unrecognized actuarial gains and losses arise from several factors, including experience and assumption changes with respect to the obligations of the pension and OPEB plans, and from the difference between expected returns and actual returns on plan assets. These unrecognized gains and losses are systematically recognized as a change in future net periodic pension expense in accordance with the appropriate accounting guidance relating to defined benefit pension and OPEB plans.
Key assumptions used in determining the amount of the obligation and expense recorded for the OPEB plans include the assumed discount rate and the assumed rate of increases in future health care costs. In estimating the health care cost trend rate, the Company considers actual health care cost experience, future benefit structures, industry trends and advice from its actuaries. The Company assumes that the relative increase in health care costs will generally trend downward over the next several years, reflecting assumed increases in efficiency and cost-containment initiatives in the health care system.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
In accordance with the appropriate accounting guidance, the Company has recognized the funded status (i.e., the difference between the fair value of plan assets and the projected benefit obligation) of the defined benefit pension and OPEB plans in the consolidated balance sheets. To record the unfunded status of the plans, the Company recorded an additional liability and an adjustment to accumulated other comprehensive loss, net of tax. Other changes in the benefit obligation including net actuarial loss (gain), prior service cost (credit) or curtailment (gain) loss are recognized in other comprehensive income.
The actuarial assumptions the Company used in determining the pension and OPEB retirement benefits may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates, or longer or shorter life spans of participants. While the Company believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may materially affect the financial position or results of operations.
As of December 31, 2015, the Company changed the method it uses to estimate the interest cost component of net periodic benefit cost for pension and other post-employment benefits. This change resulted in a decrease in the interest cost component for 2016, compared to the previous method. Historically, the Company estimated the interest cost component utilizing a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. The Company has elected to utilize a full yield curve approach in the estimation of this component by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. The Company has made this change to provide a more precise measurement of interest cost by improving the correlation between projected benefit cash flows to the corresponding spot yield curve rates. This change did not affect the measurement of the total benefit obligation at the annual measurement date, as the change in interest cost is completely offset by deferred actuarial (gains)/losses that will arise at the next annual measurement date. As this change is treated as a change in estimate inseparable from a change in accounting principle, historical measurements of interest cost are not affected. This change in estimate reduced the Company's annual net periodic benefit expense in 2016 by approximately
$2.7 million
.
Segment Information
Accounting Standards Codification 280,
Segment Reporting
, defines that a segment for reporting purposes is based on the financial performance measures that are regularly reviewed by the “Chief Operating Decision Maker” to assess segment performance and to make decisions about a public entity's allocation of resources. Based on this guidance, the Company reports its segment results based on 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 our 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 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.
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 determined it appropriate to revise 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 represent the accumulation of unallocated costs relating to shared services and general corporate activities 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. 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.
Reclassifications
Certain amounts in the prior years' consolidated financial statements have been reclassified to conform to the current-year presentation.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 believes the impact to the financial statements will be immaterial.
In April 2015, the FASB issued ASU No. 2015-03 -
Interest—Imputation of Interest (Subtopic 835-30)
. This ASU simplifies the presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct reduction from the carrying amount of the debt liability, which is consistent with the treatment of debt discounts. The new guidance should be applied on a retrospective basis, and upon transition, an entity is required to comply with the applicable disclosures necessary for a change in accounting principle. This ASU is effective for fiscal years beginning after December 15, 2015, and for interim periods within those fiscal years. The Company reclassified deferred financing fees of
$1.6 million
and
$2.3 million
from other noncurrent assets to long-term debt as of December 31, 2016 and 2015, respectively.
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 will be effective for fiscal years beginning after December 15, 2016. Early adoption is permitted. The Company does not expect the impact of the adoption of this ASU to have a material impact on its consolidated financial position, results of operations and cash flows.
In November 2015, the FASB issued ASU No. 2015-17,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
. The amendments in this ASU require that deferred tax liabilities and assets be classified as one net noncurrent deferred tax asset or liability by jurisdiction in a classified statement of financial position. The amendments in this ASU are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. The amendments in this ASU may be applied either prospectively or retrospectively. The Company elected to early adopt this standard on a prospective basis as of December 31, 2016. As a result, at December 31, 2016, the Company reclassified
$18.5 million
of current deferred tax assets to long term deferred tax liabilities.
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. Footnote 9 provides details on the Company’s current lease arrangements. 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 March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
, which amends Accounting Standards Codification Topic 718,
Compensation – Stock Compensation
. ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years and early adoption is permitted. The Company early adopted this standard during the year ended December 31, 2016. As a result of the adoption of this standard,
•
excess tax benefits of
$0.5 million
were recorded through income tax expense for the year ended December 31, 2016;
•
excess tax benefits were combined with current income taxes within operating cash flows adopted on a prospective basis;
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
•
the Company elected to change its policy from estimating forfeitures to recognizing forfeitures when they occur and as a result approximately
$0.1 million
of cumulative estimated forfeiture expense was recorded to retained earnings as of January 1, 2016;
•
cash paid by the Company when directly withholding shares to satisfy an employee's statutory tax obligations continued to be classified as a financing activity and are included within the purchase of common stock for treasury line item; and
•
there was no impact on prior periods due to adopting the guidance on a prospective basis.
In January 2017, the FASB issued ASU 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
. ASU 2017-04 simplifying the accounting for goodwill impairment that removes 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, with early adoption.
3. ACQUISITIONS
On September 9, 2016, Holly Hunt Enterprises, Inc. (“HOLLY HUNT
®
”) completed the acquisition of Vladimir Kagan Design Group (“Vladimir Kagan”), known for its elegant, mid-century and contemporary designs. The aggregate purchase price for the acquisition was
$8.5 million
, subject to working capital adjustments. The purchase price was funded from borrowings under the Company's revolving credit facility. The Company recorded the acquisition of Vladimir Kagan using the acquisition method of accounting and recognized the assets acquired and liabilities assumed at their fair values as of the date of the acquisition. The results of operations of Vladimir Kagan
have been included in the Company's Studio segment beginning September 9, 2016.
On December 1, 2016, the Company completed the acquisition of DatesWeiser Furniture Corporation (“DatesWeiser”), a designer and manufacturer of contemporary wood conference and meeting room furniture. The aggregate purchase price for the acquisition was
$11.0 million
, subject to working capital adjustments, plus certain contingent payouts of up to
$4.0 million
in the aggregate based on the future performance of the business. The purchase price was funded from borrowings under the Company's revolving credit facility. The Company recorded the acquisition of DatesWeiser using the acquisition method of accounting and recognized the assets acquired and liabilities assumed at their fair values as of the date of the acquisition. The results of operations of DatesWeiser
have been included in the Company's Studio segment beginning December 1, 2016.
The results of Vladimir Kagan and DatesWeiser in 2016, as well as pro forma financial information, have not been presented separately as the financial impact of these acquisitions are not considered material for the year ended December 31, 2016.
On February 3, 2014, the Company acquired HOLLY HUNT
®
. The acquisition advances the Company's strategy of building its global capability as a resource for high-design workplaces and homes, including the commercial contract, decorator to-the-trade and consumer markets. The aggregate purchase price for the acquisition was
$95.0 million
, plus certain contingent payouts of up to
$16.0 million
in the aggregate based on the future performance of the business. The purchase price was funded from borrowings under the Company's revolving credit facility. The Company recorded the acquisition of HOLLY HUNT using the acquisition method of accounting and recognized the assets acquired and liabilities assumed at their fair values as of the date of the acquisition. The Company finalized the purchase accounting for the acquisition of HOLLY HUNT during the first quarter of 2015 as no additional adjustments were made from the fair values assigned since December 31, 2014. The results of operations of HOLLY HUNT
have been included in the Company's Studio segment beginning February 3, 2014.
The amount of sales and net earnings that resulted from the acquisition of HOLLY HUNT and attributable to Knoll, Inc. stockholders included in the consolidated statements of operations and comprehensive income during the twelve months ended December 31, 2014 were as follows (in thousands):
|
|
|
|
|
|
Year Ended December 31, 2014
|
Sales
|
$
|
102,572
|
|
Net earnings attributable to Knoll, Inc. stockholders
|
$
|
6,291
|
|
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
The Company recorded acquisition costs in its consolidated statements of operations and comprehensive income, within selling, general, and administrative expenses during the year ended December 31, 2014 as follows (in thousands):
|
|
|
|
|
|
Year Ended December 31, 2014
|
Accounting and legal fees
|
$
|
435
|
|
Other
|
275
|
|
Total
|
$
|
710
|
|
The following unaudited pro forma summary financial information presents the operating results of the combined company, assuming the acquisition had occurred as of January 1, 2013 (in thousands):
|
|
|
|
|
|
Year Ended December 31, 2014
|
Pro forma sales
|
$
|
1,058,115
|
|
Pro forma net earnings attributable to Knoll, Inc. stockholders
|
$
|
47,079
|
|
The unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the results that would have been attained had the acquisition occurred on January 1, 2013, nor is it indicative of results of operations for future periods. The pro forma information presented includes adjustments for acquisition costs, interest expense that would have been incurred to finance the acquisition, amortization and depreciation.
The results of this acquisition have been included in the Company's results of operations as of the acquisition date. This acquisition strengthened the Company's portfolio of products that can be offered.
4. RESTRICTED CASH
Included in the Company's consolidated balance sheets in cash and cash equivalents is restricted cash of
$0.1 million
as of December 31,
2016
and
2015
, respectively. This restricted cash primarily represents a bond held in the United Kingdom in order to defer the payment of duties on imports into the United Kingdom.
5. INVENTORIES
Information regarding the Company's inventories is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Raw materials
|
$
|
60,217
|
|
|
$
|
58,412
|
|
Work-in-process
|
7,186
|
|
|
7,470
|
|
Finished goods
|
74,669
|
|
|
74,916
|
|
|
$
|
142,072
|
|
|
$
|
140,798
|
|
Inventory reserves for obsolescence and other estimated losses were $
9.5 million
and
$8.3 million
at
December 31, 2016
and
2015
, respectively, and have been included in the amounts above.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
6. PROPERTY, PLANT, AND EQUIPMENT, NET
Information regarding the Company's property, plant and equipment is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Land
|
$
|
11,930
|
|
|
$
|
11,826
|
|
Leasehold improvements
|
46,125
|
|
|
41,897
|
|
Buildings
|
63,749
|
|
|
63,122
|
|
Office equipment
|
35,350
|
|
|
28,596
|
|
Machinery and equipment
|
232,777
|
|
|
226,198
|
|
Construction-in-progress
|
55,890
|
|
|
32,967
|
|
Property, plant and equipment
|
445,821
|
|
|
404,606
|
|
Accumulated depreciation
|
(248,737
|
)
|
|
(232,464
|
)
|
Property, plant, and equipment, net
|
$
|
197,084
|
|
|
$
|
172,142
|
|
During
2016
,
2015
and 2014, the Company capitalized interest of approximately
$0.7 million
,
$0.3 million
and
$0.4 million
, respectively.
7. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Information regarding the Company's other intangible assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Gross
Amount
|
|
Accumulated
Amortization
|
|
Net
Amount
|
|
Gross
Amount
|
|
Accumulated
Amortization
|
|
Net
Amount
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Tradenames
|
$
|
225,600
|
|
|
$
|
—
|
|
|
$
|
225,600
|
|
|
$
|
220,650
|
|
|
$
|
—
|
|
|
$
|
220,650
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Various
|
34,585
|
|
|
(18,315
|
)
|
|
16,270
|
|
|
34,545
|
|
|
(15,026
|
)
|
|
19,519
|
|
Total
|
$
|
260,185
|
|
|
$
|
(18,315
|
)
|
|
$
|
241,870
|
|
|
$
|
255,195
|
|
|
$
|
(15,026
|
)
|
|
$
|
240,169
|
|
The Company completed the annual test of impairment for goodwill and tradenames (indefinite-lived intangible assets) as of October 1, 2016. The Company estimated the fair value of its reporting units using a combination of the fair values derived from both the income approach and the market approach.The Company estimated the fair value of the tradenames using a relief from royalty method under the income approach. Based on the results of the annual impairment test as of October 1, 2016, the Company determined there were no indications of impairment for goodwill or indefinite-lived intangible assets.
The Company also completed the annual test of impairment for tradenames (indefinite-lived intangible assets) as of October 1, 2015. The Company estimated the fair value of the tradenames using a relief from royalty method under the income approach. The key assumptions for this method are revenue projections, royalty rates based on a consideration of market rates, and a discount rate (based on the weighted-average cost of capital). Based on the results of the annual impairment test as of October 1, 2015, the Company determined that the Edelman Leather tradename was impaired as the estimated fair value of the Edelman Leather tradename was less than its respective carrying amount. The decline in the fair value of the Edelman Leather tradename was primarily the result of weaker than expected revenue performance in 2015 and a corresponding reduction of future revenue expectations. These revenue reductions were primarily a result of lower sales to private aviation customers. The fair value of the Edelman Leather tradename is estimated to be
$6.5 million
, resulting in a non-cash pre-tax impairment charge of
$10.7 million
during the fourth quarter of 2015. The impairment charge was separately disclosed in the consolidated statements of operations. These fair value measurements fell within Level 3 of the fair value hierarchy as described in Note 2. A significant decline in expected revenue or a change in the discount rate may result in future impairment charges. Edelman Leather is included within the Company’s Coverings Segment.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
The Company's amortization expense related to finite-lived intangible assets was
$3.3 million
,
$3.2 million
, and
$3.1 million
for the years ended December 31,
2016
,
2015
, and
2014
, respectively. The expected amortization expense based on the finite-lived intangible assets as of December 31,
2016
is as follows (in thousands):
|
|
|
|
|
|
Estimated Amortization
|
2017
|
$
|
3,523
|
|
2018
|
2,697
|
|
2019
|
2,465
|
|
2020
|
2,368
|
|
2021
|
2,235
|
|
The changes in the carrying amount of goodwill by reportable segment are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
Segment
|
|
Studio
Segment
|
|
Coverings
Segment
|
|
Total
|
Balance as of December 31, 2015
|
$
|
35,499
|
|
|
$
|
55,213
|
|
|
$
|
36,959
|
|
|
$
|
127,671
|
|
Foreign currency translation adjustment
|
202
|
|
|
103
|
|
|
—
|
|
|
305
|
|
Goodwill acquired in acquisitions
|
—
|
|
|
13,415
|
|
|
—
|
|
|
13,415
|
|
Balance as of December 31, 2016
|
$
|
35,701
|
|
|
$
|
68,731
|
|
|
$
|
36,959
|
|
|
$
|
141,391
|
|
8. OTHER CURRENT LIABILITIES
Information regarding the Company's other current liabilities is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Accrued employee compensation
|
$
|
46,508
|
|
|
$
|
44,011
|
|
Customer deposits
|
31,216
|
|
|
36,906
|
|
Warranty
|
8,906
|
|
|
8,513
|
|
Contingent payout
|
7,100
|
|
|
5,000
|
|
Other
|
21,044
|
|
|
20,478
|
|
Other current liabilities
|
$
|
114,774
|
|
|
$
|
114,908
|
|
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
9. LEASES
The Company has commitments under operating leases for certain machinery and equipment as well as manufacturing, warehousing, showroom and other facilities used in its operations. Some of the leases contain renewal provisions and generally require the Company to pay certain operating expenses, including utilities, insurance and taxes, which are subject to escalation. At times the Company enters into lease agreements which contain a provision for cash abatements related to certain leasehold improvements. These abatements are recognized on a straight-line basis as a reduction to rent expense over the lease term. The unamortized portions as of
December 31, 2016
and
2015
were
$5.2 million
and
$15.8 million
, respectively. Total rent expense for
2016
,
2015
, and
2014
was
$29.8 million
,
$28.6 million
, and
$28.8 million
, respectively. Future minimum rental payments required, excluding maintenance and other miscellaneous charges, under those operating leases are as follows (in thousands):
|
|
|
|
|
|
Future Minimum
Rental Payments
|
2017
|
$
|
24,797
|
|
2018
|
22,267
|
|
2019
|
16,570
|
|
2020
|
13,472
|
|
2021
|
9,257
|
|
Subsequent years
|
23,683
|
|
Total minimum lease payments
|
$
|
110,046
|
|
10. PENSION AND OTHER POST-EMPLOYMENT BENEFITS
The Company has
two
domestic defined benefit pension plans and
two
plans providing for other post-employment benefits, including medical and life insurance coverage.
One
of the pension plans and
one
of the OPEB plans cover eligible U.S. nonunion employees while the other pension plan and OPEB plan cover eligible U.S. union employees. The Company uses a December 31 measurement date for all of these plans.
During 2014, the Company offered a one-time lump sum payment option to terminated vested participants in exchange for the right to receive future pension payments. As a result, the Company settled
$30.2 million
of benefit obligations and recorded a
$6.1 million
settlement charge during the year ended December 31, 2014.
During 2015, the Company approved amendments, effective December 31, 2015, to both the union and nonunion U.S. defined benefit pension plans. The Company also amended its remaining post-employment medical plan, effective May 1, 2015. The amendments eliminated the accrual of future benefits for all participants in the defined benefit pension plans and closed entry to new retirees into the post-employment medical plan. These amendments resulted in a curtailment gain of approximately
$7.1 million
. As the plans had unrealized losses in excess of the reduction of the projected benefit obligation at the date of amendment, the gain was recorded as a reduction of the projected benefit obligation and a corresponding reduction of unrealized losses within accumulated other comprehensive loss.
During 2016, the Company contributed
$9.0 million
and
$43.0 million
in discretionary contributions to the union and nonunion pension plans, respectively.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
The following table sets forth a reconciliation of the related benefit obligation and plan assets related to the benefits provided by the Company (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Change in projected benefit obligation:
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of the period
|
$
|
273,809
|
|
|
$
|
296,416
|
|
|
$
|
6,294
|
|
|
$
|
9,804
|
|
Service cost
|
1,870
|
|
|
7,457
|
|
|
—
|
|
|
5
|
|
Interest cost
|
9,662
|
|
|
12,350
|
|
|
196
|
|
|
289
|
|
Plan amendments
|
—
|
|
|
—
|
|
|
(998
|
)
|
|
(1,684
|
)
|
Participant contributions
|
—
|
|
|
—
|
|
|
206
|
|
|
281
|
|
Actuarial (gain) loss
|
7,207
|
|
|
(21,134
|
)
|
|
1,076
|
|
|
(1,182
|
)
|
Benefits paid
|
(11,943
|
)
|
|
(15,867
|
)
|
|
(1,038
|
)
|
|
(1,219
|
)
|
Liability (gain) related to curtailment
|
—
|
|
|
(5,413
|
)
|
|
—
|
|
|
—
|
|
Administrative expenses paid
|
(412
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Projected benefit obligation at end of the period
|
$
|
280,193
|
|
|
$
|
273,809
|
|
|
$
|
5,736
|
|
|
$
|
6,294
|
|
Accumulated benefit obligation at end of the period
|
$
|
280,193
|
|
|
$
|
273,388
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of the period
|
$
|
210,556
|
|
|
$
|
225,862
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Actual return on plan assets
|
11,662
|
|
|
(50
|
)
|
|
—
|
|
|
—
|
|
Employer contributions
|
53,164
|
|
|
611
|
|
|
832
|
|
|
938
|
|
Participant contributions
|
—
|
|
|
—
|
|
|
206
|
|
|
281
|
|
Actual expenses paid
|
(412
|
)
|
|
|
|
|
|
|
Benefits paid
|
(11,943
|
)
|
|
(15,867
|
)
|
|
(1,038
|
)
|
|
(1,219
|
)
|
Benefits paid related to settlement
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Fair value of plan assets at the end of period
|
$
|
263,027
|
|
|
$
|
210,556
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Funded status
|
$
|
(17,166
|
)
|
|
$
|
(63,253
|
)
|
|
$
|
(5,736
|
)
|
|
$
|
(6,294
|
)
|
Assumptions used in computing the benefit obligation as of December 31,
2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Discount rate
|
4.16 - 4.25%
|
|
|
4.55 - 4.65%
|
|
|
2.35 - 4.20%
|
|
2.30 - 4.51%
|
Expected return on plan assets
|
7.10
|
%
|
|
7.10
|
%
|
|
N/A
|
|
N/A
|
Rate of compensation increase
|
N/A
|
|
|
2.50
|
%
|
|
N/A
|
|
N/A
|
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
The following table presents the fair value of the Company's pension plan investments as of December 31,
2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Equity Securities
|
|
|
|
|
|
|
|
U.S. equity securities
|
$
|
103,649
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
103,649
|
|
Non-U.S. equity securities
|
36,936
|
|
|
—
|
|
|
—
|
|
|
36,936
|
|
Debt Securities
|
|
|
|
|
|
|
|
Fixed income funds and cash investment funds
|
122,442
|
|
|
—
|
|
|
—
|
|
|
122,442
|
|
December 31, 2016
|
$
|
263,027
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
263,027
|
|
|
|
|
|
|
|
|
|
Equity Securities
|
|
|
|
|
|
|
|
U.S. equity securities
|
$
|
110,705
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
110,705
|
|
Non-U.S. equity securities
|
20,866
|
|
|
—
|
|
|
—
|
|
|
20,866
|
|
Debt Securities
|
|
|
|
|
|
|
|
Fixed income funds and cash investment funds
|
78,985
|
|
|
—
|
|
|
—
|
|
|
78,985
|
|
December 31, 2015
|
$
|
210,556
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
210,556
|
|
See Note 2 of the consolidated financial statements for the description of the levels of the fair value hierarchy.
The following table sets forth the consolidated balance sheets presentation for components relating to the Company's pension and OPEB plans (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
(in thousands)
|
Amounts recognized in the consolidated balance sheets consist of:
|
|
|
|
|
|
|
|
Current liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(612
|
)
|
|
$
|
(818
|
)
|
Noncurrent liabilities
|
(17,166
|
)
|
|
(63,253
|
)
|
|
(5,124
|
)
|
|
(5,476
|
)
|
Net amount recognized
|
$
|
(17,166
|
)
|
|
$
|
(63,253
|
)
|
|
$
|
(5,736
|
)
|
|
$
|
(6,294
|
)
|
Amounts recognized in accumulated other comprehensive income (loss) before taxes:
|
|
|
|
|
|
|
|
Net actuarial loss (gain)
|
$
|
50,327
|
|
|
$
|
40,493
|
|
|
$
|
1,302
|
|
|
$
|
474
|
|
Prior service cost (credit)
|
—
|
|
|
—
|
|
|
(3,477
|
)
|
|
(3,600
|
)
|
Net amount recognized
|
$
|
50,327
|
|
|
$
|
40,493
|
|
|
$
|
(2,175
|
)
|
|
$
|
(3,126
|
)
|
The following table sets forth other changes in the benefit obligation recognized in other comprehensive income for the Company's pension and OPEB plans (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Net actuarial loss (gain)
|
$
|
10,326
|
|
|
$
|
(6,629
|
)
|
|
$
|
581
|
|
|
$
|
(687
|
)
|
Prior service cost/(credit)
|
—
|
|
|
—
|
|
|
(998
|
)
|
|
(1,684
|
)
|
Curtailment (gain)/loss
|
—
|
|
|
(5,413
|
)
|
|
—
|
|
|
—
|
|
Amortization of:
|
|
|
|
|
|
|
|
Prior service credit
|
—
|
|
|
—
|
|
|
1,120
|
|
|
852
|
|
Actuarial (loss) gain
|
(492
|
)
|
|
(6,311
|
)
|
|
248
|
|
|
144
|
|
Total recognized in OCI
|
$
|
9,834
|
|
|
$
|
(18,353
|
)
|
|
$
|
951
|
|
|
$
|
(1,375
|
)
|
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
The net actuarial loss of
$10.3 million
for the pension plans in 2016 was mainly due to decreases in discount rates over the course of 2016. The net actuarial gain of
$6.6 million
in 2015 was mainly due to improved discount rates over the course of 2015 and the mortality improvement scale was updated to MP-2015, still using the RP- 2014 base table.
The estimated net actuarial loss for the defined benefit pension plans included in accumulated other comprehensive income and expected to be recognized in net periodic pension cost during the fiscal year ended December 31, 2017 is
$0.6 million
.
The following table sets forth the components of the net periodic benefit cost for the Company's pension and OPEB plans (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
Service cost
|
$
|
1,870
|
|
|
$
|
7,457
|
|
|
$
|
6,937
|
|
|
$
|
—
|
|
|
$
|
5
|
|
|
$
|
23
|
|
Interest cost
|
9,662
|
|
|
12,350
|
|
|
13,341
|
|
|
196
|
|
|
289
|
|
|
385
|
|
Expected return on plan assets
|
(14,782
|
)
|
|
(14,455
|
)
|
|
(15,743
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of prior service cost (credit)
|
—
|
|
|
—
|
|
|
10
|
|
|
(1,120
|
)
|
|
(852
|
)
|
|
(2,029
|
)
|
Recognized actuarial loss (gain)
|
492
|
|
|
6,311
|
|
|
2,006
|
|
|
(248
|
)
|
|
(144
|
)
|
|
534
|
|
Settlement and curtailment related expense
|
—
|
|
|
—
|
|
|
6,060
|
|
|
—
|
|
|
—
|
|
|
449
|
|
Net periodic benefit (income) cost
|
$
|
(2,758
|
)
|
|
$
|
11,663
|
|
|
$
|
12,611
|
|
|
$
|
(1,172
|
)
|
|
$
|
(702
|
)
|
|
$
|
(638
|
)
|
For the year ended December 31, 2016,
$1.5 million
and
$1.3 million
of pension income was recorded in cost of sales and selling, general, and administrative expenses, respectively. For the years ended December 31, 2015 and 2014,
$6.5 million
and
$7.3 million
of pension expense was recorded in cost of sales and
$5.2 million
and
$5.3 million
was recorded in selling, general, and administrative expenses, respectively.
Assumptions used to determine net periodic benefit cost for the years ended December 31,
2016
,
2015
, and
2014
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
Discount rate
|
4.55 - 4.65%
|
|
|
4.18 - 4.54%
|
|
|
5.10 - 5.18%
|
|
|
2.30 - 4.51%
|
|
1.69 - 4.20%
|
|
2.69 - 5.05%
|
Expected return on plan assets
|
7.10
|
%
|
|
7.10
|
%
|
|
7.10
|
%
|
|
N/A
|
|
N/A
|
|
N/A
|
Rate of compensation increase
|
N/A
|
|
|
2.50
|
%
|
|
2.50
|
%
|
|
N/A
|
|
N/A
|
|
N/A
|
The expected long-term rate of return on assets is based on management's expectations of long-term average rates of return to be earned on the investment portfolio. In establishing this assumption, management considers historical and expected returns for the asset classes in which the plan assets are invested.
For purposes of measuring the benefit obligation associated with the Company's OPEB plans as of December 31,
2016
, as well as the assumed rate for
2017
, an annual rate increase of
5.80%
to
6.20%
in the per capita cost of covered health care benefits was assumed and a
11.1%
annual rate of increase in the per capita cost of covered prescription drug benefits was assumed. The rates were then assumed to decrease to an ultimate rate of
4.5%
for 2025 and thereafter. For purposes of measuring the net periodic benefit cost for
2016
associated with the Company's OPEB plans, a
6.0%
to
6.5%
annual rate of increase in the per capita cost of covered medical benefits was assumed and a
12.00%
annual rate of increase in the per capita cost of covered prescription drug benefits was assumed. The rate was then assumed to decrease to an ultimate rate of
4.5%
for 2023 and 2024 for both the medical plan and prescription drug plan and thereafter. Increasing the assumed health care cost trend rate by
1.0%
would increase the benefit obligation as of December 31,
2016
by
$75,000
and increase the aggregate of the service and interest cost components of net periodic benefit cost for
2016
by
$2,400
. Decreasing the assumed health care cost trend rate by
1.0%
would decrease the benefit obligation as of December 31,
2016
by
$70,000
and decrease the aggregate of the service and interest cost components of net periodic benefit cost for
2016
by
$2,000
.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
The Company's pension plans' weighted-average asset allocations as of December 31,
2016
and
2015
, by asset category were as follows:
|
|
|
|
|
|
|
|
Plan Assets at
December 31,
|
|
2016
|
|
2015
|
Asset Category:
|
|
|
|
Temporary investment funds
|
1
|
%
|
|
1
|
%
|
Equity investment funds
|
53
|
%
|
|
63
|
%
|
Fixed income funds
|
46
|
%
|
|
36
|
%
|
Total
|
100
|
%
|
|
100
|
%
|
The Company's pension plans' investment policy includes an asset mix based on the Company's risk posture. The investment policy states a target allocation based on the plans’ funded status of
54%
equity funds and
46%
fixed income funds. Inclusion of the fixed income assets is to hedge risk associated with the plans’ liabilities along with providing potential growth through income. These assets should primarily invest in fixed income instruments of the U.S. Treasury and government agencies and investment-grade corporate bonds. The equity fund investments can consist of broadly diversified domestic equity, international equity, fixed income (return seeking), alternative investments, commodities, and real estate assets. The purpose of these assets is to provide the opportunity for capital appreciation, income, and the ability to diversify investments. A mix of mutual funds, ETF’s, and separate accounts are used as the plans' investment vehicles with clearly stated investment objectives and guidelines, as well as offer competitive long-term results.
The Company expects to contribute
$0.6 million
to its OPEB plans in
2017
. Currently,
No
contributions are expected in 2017 for the Company's pension plans. Estimated future benefit payments under the pension and OPEB plans are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
2017
|
$
|
17,593
|
|
|
$
|
612
|
|
2018
|
17,381
|
|
|
569
|
|
2019
|
17,022
|
|
|
519
|
|
2020
|
18,003
|
|
|
469
|
|
2021
|
18,025
|
|
|
438
|
|
2022 - 2026
|
89,404
|
|
|
1,812
|
|
The Company also sponsors 401K retirement savings plans for all U.S. associates. Under the 401K retirement savings plans, participants may defer a portion of their earnings up to the annual contribution limits established by the Internal Revenue Service. The Company's total expense under the 401K plans for U.S. employees was
$9.8 million
for
2016
,
$5.6 million
for
2015
and
$2.5 million
for 2014. Employees of the Canadian, Belgium and United Kingdom operations also participate in defined contribution pension plans sponsored by the Company. The Company's expense related to these plans for
2016
,
2015
, and
2014
was
$1.0 million
,
$1.0 million
, and
$1.2 million
, respectively.
11. 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.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
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 December 31, 2016
|
|
Fair Value as of December 31, 2015
|
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
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11,000
|
|
|
$
|
11,000
|
|
Contingent purchase price payment - DatesWeiser
|
—
|
|
|
—
|
|
|
1,100
|
|
|
1,100
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,100
|
|
|
$
|
7,100
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11,000
|
|
|
$
|
11,000
|
|
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 was determined at the time of acquisition based upon net sales projections for HOLLY HUNT® for 2014, 2015, and 2016. The Company paid
$5.0 million
of the contingent purchase price in 2016, as a result of HOLLY HUNT® achieving the 2015 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 would 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 would 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 December 31, 2016 or 2015.
Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis
The following table represents non-recurring fair value amounts (as measured at the time of adjustment) for those assets remeasured to fair value on a nonrecurring basis during 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of October 1, 2015
|
Description
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Edelman Leather tradename
|
—
|
|
|
—
|
|
|
$
|
6,500
|
|
|
$
|
6,500
|
|
Based on the results of the 2015 annual impairment test, the Company determined that the Edelman tradename was impaired that year. The Company estimated the fair value of the indefinite-life intangible asset using the relief-from-royalty method under the income approach as of October 1, 2015. The Company used a royalty rate of
2.5%
based on comparable market rates and a discount rate of
12.0%
. Refer to Note 7 for more details regarding the impairment testing.
There were no additional assets and/or liabilities remeasured to fair value on a nonrecurring basis as of December 31, 2016 or 2015 and for the years then ended.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
12. INDEBTEDNESS
The Company's long-term debt is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Balance of revolving credit facility
|
$
|
45,000
|
|
|
$
|
37,000
|
|
Balance of term loan
|
175,000
|
|
|
185,000
|
|
Total long-term debt
|
220,000
|
|
|
222,000
|
|
Less: Current maturities of long-term debt
|
10,000
|
|
|
10,000
|
|
Less: Deferred financing fees, net
|
1,617
|
|
|
2,282
|
|
Long-term debt
|
$
|
208,383
|
|
|
$
|
209,718
|
|
At December 31, 2016 and 2015, the Company's interest rates were approximately
2.0%
and
1.9%
, respectively.
Credit Facilities
On May 20, 2014, the Company amended and restated its existing credit facility, dated February 3, 2012, with a new
$500.0 million
credit facility maturing on May 20, 2019, consisting of a revolving commitment in the amount of
$300.0 million
and a term loan commitment in the amount of
$200.0 million
(“Amended Credit Agreement”). The Amended Credit Agreement also includes an option to increase the size of the revolving credit facility or incur incremental term loans by up to an additional
$200.0 million
, subject to the satisfaction of certain terms and conditions.
Borrowings under the revolving credit facility may be repaid at any time, but no later than the maturity date on May 20, 2019. Obligations under the credit facility are secured by a first priority security interest in (i) the capital stock of certain present and future subsidiaries (with limitations on foreign subsidiaries) and (ii) all present and future property and assets of the Company (with various limitations and exceptions). The Company retains the right to terminate or reduce the size of the revolving credit facility at any time. Borrowings under the term loan facility are due in equal quarterly installments of
$2.5 million
, with the remaining borrowings due on the maturity date.
Interest on revolving credit and term loans will accrue, at the Company’s election, at (i) the Eurocurrency Rate (as defined in the Amended Credit Agreement), plus additional percentage points based on the Company’s leverage ratio or (ii) the Base Rate (a rate based on the higher of (a) the prime rate announced from time-to-time by Bank of America, N.A., (b) the Federal Reserve System’s federal funds rate, plus
.50%
or (c) the Eurocurrency Rate plus
1.00%
; Base Rate is defined in detail in the Amended Credit Agreement), plus additional percentage points based on the Company’s leverage ratio.
The Company is required to pay an annual commitment fee equal to a rate per annum calculated as the product of the applicable rate based upon the Company's leverage ratio as set forth in the credit agreement, times the unused portion of the revolving credit facility. In addition, the Company is required to pay a letter of credit fee equal to the applicable rate based upon the Company's leverage ratio as set forth in the credit agreement times the daily maximum amount available to be drawn under such letter of credit. The commitment and letter of credit fees are payable in arrears on the last business day of each quarter.
The Amended Credit Agreement requires the Company to comply with various affirmative and negative covenants, including without limitation (i) covenants to maintain a minimum specified interest coverage ratio and maximum specified net leverage ratio, and (ii) covenants that prevent or restrict the Company’s ability to pay dividends, engage in certain mergers or acquisitions, make certain investments or loans, incur future indebtedness, engage in sale-leaseback transactions, alter its capital structure or line of business, prepay subordinated indebtedness, engage in certain transactions with affiliates and sell stock or assets. The Company was in compliance with the Amended Credit Agreement covenants at
December 31, 2016
.
Repayments under the Amended Credit Agreement can be accelerated by the lenders upon the occurrence of certain events of default, including, without limitation, a failure to pay any principal, interest or other amounts in respect of loans when due, breach by the Company (or its subsidiaries) of any of the covenants or representations contained in the Amended Credit Agreement or related loan documents, failure of the Company (or its material subsidiaries) to pay any amounts owed with respect to other significant indebtedness of the Company or such subsidiary, or a bankruptcy event with respect to the Company or any of its material subsidiaries.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
Deferred Financing Fees
In connection with the refinancing of the Company's previous credit facility during 2014, the Company wrote off
$0.3 million
of unamortized deferred financing fees associated with the previous credit facility and incurred
$1.9 million
in new financing fees that will be amortized as a component of interest expense over the life of the new facility through May 2019. Deferred financing fees, net of accumulated amortization, totaled
$1.6 million
and
$2.3 million
as of December 31,
2016
and
2015
, respectively. Amortization expense related to the deferred financing fees, included in interest expense, was
$0.7 million
for each of the years ended
December 31, 2016
, 2015 and 2014, respectively.
Other Borrowings
The Company also has several revolving credit agreements with various European financial institutions. These credit agreements provide credit primarily for overdraft and working capital purposes. As of December 31,
2016
, total credit available under such agreements was approximately
$10.2 million
, and the Company had
no
outstanding borrowings under the European credit facilities as of December 31, 2016 or 2015. There is currently no expiration date on these agreements. The interest rates on borrowings are variable and are based on the monetary market rate that is linked to each country's prime rate.
13. COMMITMENTS AND CONTINGENCIES
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.
Collective Bargaining
At
December 31, 2016
, the Company employed a total of
3,471
people. Approximately
11.0%
of the total number of employees are represented by unions globally. The Grand Rapids, Michigan Plant is the only unionized plant within the U.S. and has an agreement with the Carpenters Union, Local 1615, of the United Brotherhood of Carpenters and Joiners of America, Affiliate of the Carpenters Industrial Council, covering approximately
200
hourly employees. The Collective Bargaining Agreement expires April 2018. Approximately
82
workers in Italy are also represented by state-sponsored unions. The union contracts under which these Italian workers are represented expire in 2018.
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Balance, beginning of the year
|
$
|
8,513
|
|
|
$
|
8,180
|
|
|
$
|
8,214
|
|
Provision for warranty claims
|
6,792
|
|
|
7,249
|
|
|
6,664
|
|
Warranty claims paid
|
(6,272
|
)
|
|
(6,801
|
)
|
|
(6,631
|
)
|
Foreign currency translation adjustment
|
(127
|
)
|
|
(115
|
)
|
|
(67
|
)
|
Balance, end of the year
|
$
|
8,906
|
|
|
$
|
8,513
|
|
|
$
|
8,180
|
|
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
14. STOCK PLANS
As of December 31, 2016, the Company sponsors
three
stock incentive plans under which awards denominated or payable in shares, units or options to purchase shares of Knoll common stock may be granted to officers, certain other employees, directors and consultants of the Company. In May 2007, the Company approved the 2007 Stock Incentive Plan which authorized the issuance of
2,000,000
shares of common stock; as of December 31, 2016,
7,306
shares remained available for issuance under this plan. In May 2010, the Company approved the 2010 Stock Incentive Plan which authorized the issuance of
2,000,000
shares of common stock; as of December 31, 2016,
26,496
shares remained available for issuance under this plan. In May 2013, the Company approved the 2013 Stock Incentive Plan which authorized the issuance of
2,000,000
shares of common stock; as of December 31, 2016,
1,460,089
shares remained available for issuance under this plan. As of December 31, 2016, an aggregate of
1,493,891
total shares remained available for issuance under these plans.
A Committee of the Board of Directors currently consisting of the Compensation Committee of the Company's Board of Directors, has sole discretion concerning administration of the plans including selection of individuals to receive awards, types of awards, the terms and conditions of the awards and the time at which awards will be granted.
Restricted Shares and Restricted Stock Units
During 2014, the Company granted
1,106,919
of restricted shares and restricted stock units to certain key employees and the Company's Board of Directors.
462,773
of these awards were granted at the weighted-average fair value of
$15.43
per restricted share at the date of grant. The majority of these awards cliff vest on the third anniversary of the grant date.
200,000
of these awards were granted at the weighted-average fair value of
$18.72
per restricted share and cliff vest on the fourth anniversary of the grant date.
331,896
of these awards were granted at the weighted-average fair value of
$17.34
per restricted stock unit. These awards vest based upon the Company achieving certain cumulative operating performance target goals over the next three years.
112,250
of these awards were granted at the weighted-average fair value of
$8.24
per restricted stock unit. These awards vest based upon the performance of the Company's stock price relative to a peer group over the next three years.
During 2015, the Company granted
314,360
of restricted shares and restricted stock units to certain key employees and the Company's Board of Directors.
168,360
of these awards were granted at the weighted-average fair value of
$21.59
per restricted share at the date of grant. The majority of these awards cliff vest on the third anniversary of the grant date.
73,000
of these awards were granted at the weighted-average fair value of
$21.64
per restricted stock unit. These awards vest based upon the Company achieving certain cumulative operating performance target goals over the next three years.
73,000
of these awards were granted at the weighted-average fair value of
$12.14
per restricted stock unit. These awards vest based upon the performance of the Company's stock price relative to a peer group over the next three years.
During 2016, the Company granted
586,141
of restricted shares and restricted stock units to certain key employees and the Company's Board of Directors.
313,632
of these awards were granted at the weighted-average fair value of
$18.65
per restricted share at the date of grant. The majority of these awards cliff vest on the third anniversary of the grant date.
163,509
of these awards were granted at the weighted-average fair value of
$18.81
per restricted stock unit. These awards vest based upon the Company achieving certain cumulative operating performance target goals over the next three years.
109,000
of these awards were granted at the weighted-average fair value of
$13.02
per restricted stock unit. These awards vest based upon the performance of the Company's stock price relative to a peer group over the next three years.
The following table summarizes the Company's restricted stock activity during the year:
|
|
|
|
|
|
|
|
|
Restricted
Stock
|
|
Weighted-Average
Fair Value
|
Outstanding at December 31, 2015
|
993,934
|
|
|
$
|
17.34
|
|
Granted
|
313,632
|
|
|
18.65
|
|
Forfeited
|
(15,103
|
)
|
|
17.73
|
|
Vested
|
(298,501
|
)
|
|
16.51
|
|
Outstanding at December 31, 2016
|
993,962
|
|
|
$
|
18.00
|
|
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
The following table summarizes the Company's restricted stock units activity during the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
Stock Units
|
|
Weighted-Average
Fair Value
|
|
Restricted
Stock Units Performance Based
|
|
Weighted-Average
Fair Value
|
|
Restricted
Stock Units Market Based
|
|
Weighted-Average
Fair Value
|
Outstanding at December 31, 2013
|
95,000
|
|
|
$
|
14.04
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
—
|
|
|
—
|
|
|
331,896
|
|
|
17.34
|
|
|
112,250
|
|
|
8.24
|
|
Forfeited
|
—
|
|
|
—
|
|
|
(8,813
|
)
|
|
15.19
|
|
|
(8,813
|
)
|
|
8.14
|
|
Vested
|
(15,000
|
)
|
|
14.04
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Outstanding at December 31, 2014
|
80,000
|
|
|
$
|
14.04
|
|
|
323,083
|
|
|
$
|
17.36
|
|
|
103,437
|
|
|
$
|
8.18
|
|
Granted
|
—
|
|
|
—
|
|
|
73,000
|
|
|
21.64
|
|
|
73,000
|
|
|
12.14
|
|
Forfeited
|
—
|
|
|
—
|
|
|
(15,625
|
)
|
|
15.92
|
|
|
(15,625
|
)
|
|
8.93
|
|
Vested
|
(35,000
|
)
|
|
14.04
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Outstanding at December 31, 2015
|
45,000
|
|
|
$
|
14.04
|
|
|
380,458
|
|
|
$
|
18.28
|
|
|
160,812
|
|
|
$
|
10.12
|
|
Granted
|
—
|
|
|
—
|
|
|
163,509
|
|
|
18.81
|
|
|
109,000
|
|
|
13.02
|
|
Forfeited
|
—
|
|
|
—
|
|
|
(8,862
|
)
|
|
17.93
|
|
|
(7,203
|
)
|
|
11.42
|
|
Vested
|
(15,000
|
)
|
|
14.04
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Outstanding at December 31, 2016
|
30,000
|
|
|
$
|
14.04
|
|
|
535,105
|
|
|
$
|
18.45
|
|
|
262,609
|
|
|
$
|
11.96
|
|
Stock Options
The following table summarizes the Company's stock option activity for the preceding three years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
Weighted-Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Life (years)
|
|
Aggregate
Intrinsic Value
|
Outstanding at December 31, 2013
|
1,023,389
|
|
|
$
|
14.48
|
|
|
2.71
|
|
$
|
4,625,520
|
|
Exercised
|
(375,718
|
)
|
|
$
|
12.93
|
|
|
|
|
$
|
2,237,704
|
|
Outstanding at December 31, 2014
|
647,671
|
|
|
$
|
15.37
|
|
|
2.16
|
|
$
|
4,016,809
|
|
Exercised
|
(377,671
|
)
|
|
$
|
14.98
|
|
|
|
|
$
|
2,496,218
|
|
Outstanding at December 31, 2015
|
270,000
|
|
|
$
|
15.93
|
|
|
1.44
|
|
$
|
1,203,600
|
|
Exercised
|
(202,500
|
)
|
|
$
|
13.69
|
|
|
|
|
$
|
1,597,398
|
|
Outstanding at December 31, 2016
|
67,500
|
|
|
$
|
22.64
|
|
|
0.68
|
|
$
|
357,225
|
|
Exercisable at December 31, 2016
|
63,500
|
|
|
$
|
23.06
|
|
|
0.40
|
|
$
|
309,425
|
|
The following table summarizes information regarding stock options outstanding and exercisable at December 31,
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
Ranges of Exercise Prices
|
Number of
Options
|
|
Weighted-
Average
Remaining
Contractual
Life (years)
|
|
Weighted-
Average
Exercise
Price
|
|
Number of
Options
|
|
Weighted-
Average
Exercise
Price
|
$15.98
|
7,500
|
|
|
5.19
|
|
$
|
15.98
|
|
|
3,500
|
|
|
$
|
15.98
|
|
$23.47
|
60,000
|
|
|
0.12
|
|
$
|
23.47
|
|
|
60,000
|
|
|
$
|
23.47
|
|
$15.98 - $23.47
|
67,500
|
|
|
0.68
|
|
$
|
22.64
|
|
|
63,500
|
|
|
$
|
23.06
|
|
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
A summary of the status of the Company's non-vested options as of December 31,
2016
and 2015, and changes during the year ended December 31,
2016
, is presented below.
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
Weighted-
Average
Grant-Date
Fair Value
|
Non-vested at December 31, 2015
|
8,000
|
|
|
$
|
6.26
|
|
Vested
|
(4,000
|
)
|
|
$
|
6.26
|
|
Non-vested at December 31, 2016
|
4,000
|
|
|
$
|
6.26
|
|
The total fair value of options vested during 2016, 2015 and 2014 were less than
$0.1 million
, respectively.
Total Awards
Compensation costs related to stock-based compensation for the years ended December 31, 2016, 2015, and 2014 totaled
$10.5 million
pre-tax (
$6.8 million
after-tax),
$8.3 million
pre-tax (
$5.3 million
after-tax), and
$7.8 million
pre-tax (
$4.8 million
after-tax), respectively, and are included within selling, general, and administrative expenses.
At December 31, 2016, the total compensation cost related to non-vested awards not yet recognized equaled
$13.0 million
for restricted stock awards and restricted stock units, with minimal costs related to non-vested stock options. The weighted-average remaining period over which the cost is to be recognized is
1.4
years.
15. STOCKHOLDERS' EQUITY
Preferred Stock
The Company's Certificate of Incorporation authorizes the issuance of
10,000,000
shares of preferred stock with a par value of
$1.00
per share. Subject to applicable laws, the Board of Directors is authorized to provide for the issuance of preferred shares in one or more series, for such consideration and with designations, powers, preferences and relative, participating, optional or other special rights and the qualifications, limitations or restrictions thereof, as shall be determined by the Board of Directors. There was
no
preferred stock outstanding as of December 31, 2016, 2015 or 2014.
Common Stock
The following table demonstrates the change in the number of shares of common stock outstanding during the years ended December 2016, 2015, and 2014 (excludes non-voting restricted shares).
|
|
|
|
Shares outstanding as of December 31, 2013
|
47,059,458
|
|
Purchase of common stock
|
(270,467
|
)
|
Shares issued under stock incentive plan, net of awards surrender to pay applicable taxes
|
319,773
|
|
Exercise of stock options
|
375,718
|
|
Shares issued to Board of Directors in lieu of cash
|
3,028
|
|
Shares outstanding as of December 31, 2014
|
47,487,510
|
|
Purchase of common stock
|
(260,088
|
)
|
Shares issued under stock incentive plan, net of awards surrender to pay applicable taxes
|
218,458
|
|
Exercise of stock options
|
377,671
|
|
Shares issued to Board of Directors in lieu of cash
|
4,528
|
|
Shares outstanding as of December 31, 2015
|
47,828,079
|
|
Purchase of common stock
|
(123,577
|
)
|
Shares issued under stock incentive plan, net of awards surrender to pay applicable taxes
|
192,050
|
|
Exercise of stock options
|
202,500
|
|
Shares issued to Board of Directors in lieu of cash
|
3,276
|
|
Shares outstanding as of December 31, 2016
|
48,102,328
|
|
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
Treasury Stock
As of December 31, 2016 and 2015, the Company held
15,645,358
and
15,781,331
treasury shares, respectively. The Company records repurchases of its common stock for treasury at cost.
Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss) are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
Balance
|
|
Before-Tax
Amount
|
|
Tax Benefit
(Expense)
|
|
Net-of-Tax
Amount
|
|
Ending
Balance
|
December 31, 2014
|
|
|
|
|
|
|
|
|
|
Pension and other post-employment liability adjustment
|
$
|
(9,229
|
)
|
|
$
|
(41,906
|
)
|
|
$
|
16,358
|
|
|
$
|
(25,548
|
)
|
|
$
|
(34,777
|
)
|
Foreign currency translation adjustment
|
14,366
|
|
|
(12,271
|
)
|
|
—
|
|
|
(12,271
|
)
|
|
2,095
|
|
Accumulated other comprehensive income (loss)
|
$
|
5,137
|
|
|
$
|
(54,177
|
)
|
|
$
|
16,358
|
|
|
$
|
(37,819
|
)
|
|
$
|
(32,682
|
)
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
Pension and other post-employment liability adjustment
|
$
|
(34,777
|
)
|
|
$
|
19,728
|
|
|
$
|
(7,783
|
)
|
|
$
|
11,945
|
|
|
$
|
(22,832
|
)
|
Foreign currency translation adjustment
|
2,095
|
|
|
(16,581
|
)
|
|
—
|
|
|
(16,581
|
)
|
|
(14,486
|
)
|
Accumulated other comprehensive income (loss)
|
$
|
(32,682
|
)
|
|
$
|
3,147
|
|
|
$
|
(7,783
|
)
|
|
$
|
(4,636
|
)
|
|
$
|
(37,318
|
)
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
Pension and other post-employment liability adjustment
|
$
|
(22,832
|
)
|
|
$
|
(10,785
|
)
|
|
$
|
4,212
|
|
|
$
|
(6,573
|
)
|
|
$
|
(29,405
|
)
|
Foreign currency translation adjustment
|
(14,486
|
)
|
|
488
|
|
|
—
|
|
|
488
|
|
|
(13,998
|
)
|
Accumulated other comprehensive income (loss)
|
$
|
(37,318
|
)
|
|
$
|
(10,297
|
)
|
|
$
|
4,212
|
|
|
$
|
(6,085
|
)
|
|
$
|
(43,403
|
)
|
The following reclassifications were made from accumulated other comprehensive income (loss) to the statements of operations are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
|
2014
|
Amortization of pension and other post-employment liability adjustments
|
|
|
|
|
|
Prior service credits
(1)
|
$
|
1,120
|
|
|
$
|
852
|
|
|
$
|
2,019
|
|
Actuarial losses
(1)
|
(244
|
)
|
|
(6,167
|
)
|
|
(2,540
|
)
|
Loss recognized during settlement
|
—
|
|
|
—
|
|
|
(6,509
|
)
|
Total before tax
|
876
|
|
|
(5,315
|
)
|
|
(7,030
|
)
|
Tax expense (benefit)
|
312
|
|
|
(1,929
|
)
|
|
(2,714
|
)
|
Net of tax
|
$
|
564
|
|
|
$
|
(3,386
|
)
|
|
$
|
(4,316
|
)
|
(1) These accumulated other comprehensive income (loss) components are included in the computation of net periodic pension costs. See Note 10 for additional information.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
16. 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Numerator:
|
|
|
|
|
|
Net earnings attributable to Knoll, Inc. stockholders
|
$
|
82,084
|
|
|
$
|
65,963
|
|
|
$
|
46,596
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
Denominator for basic earnings per shares - weighted-average shares
|
48,093
|
|
|
47,747
|
|
|
47,347
|
|
Effect of dilutive securities:
|
|
|
|
|
|
Potentially dilutive shares resulting from stock plans
|
826
|
|
|
691
|
|
|
721
|
|
Denominator for diluted earnings per share - weighted-average shares
|
48,919
|
|
|
48,438
|
|
|
48,068
|
|
Antidilutive equity awards not included in weighted-average common shares—diluted
|
—
|
|
|
4
|
|
|
144
|
|
|
|
|
|
|
|
Net earnings per common share attributable to Knoll, Inc. stockholders:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
1.71
|
|
|
$
|
1.38
|
|
|
$
|
0.98
|
|
Diluted
|
$
|
1.68
|
|
|
$
|
1.36
|
|
|
$
|
0.97
|
|
17. INCOME TAXES
Income before income tax expense consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
U.S. operations
|
$
|
107,803
|
|
|
$
|
77,996
|
|
|
$
|
61,353
|
|
Foreign operations
|
19,735
|
|
|
25,423
|
|
|
14,397
|
|
Total
|
$
|
127,538
|
|
|
$
|
103,419
|
|
|
$
|
75,750
|
|
Income tax expense is comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Current:
|
|
|
|
|
|
Federal
|
$
|
11,980
|
|
|
$
|
24,988
|
|
|
$
|
20,154
|
|
State
|
2,840
|
|
|
6,101
|
|
|
4,472
|
|
Foreign
|
4,588
|
|
|
6,224
|
|
|
4,808
|
|
Total current
|
19,408
|
|
|
37,313
|
|
|
29,434
|
|
Deferred:
|
|
|
|
|
|
Federal
|
23,814
|
|
|
(1,098
|
)
|
|
(1,315
|
)
|
State
|
2,347
|
|
|
505
|
|
|
753
|
|
Foreign
|
(145
|
)
|
|
751
|
|
|
293
|
|
Total deferred
|
26,016
|
|
|
158
|
|
|
(269
|
)
|
Income tax expense
|
$
|
45,424
|
|
|
$
|
37,471
|
|
|
$
|
29,165
|
|
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
The following table sets forth the tax effects of temporary differences that give rise to the deferred tax assets and liabilities (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
December 31,
2015
|
Deferred tax assets
|
|
|
|
Accounts receivable, principally due to allowance for doubtful accounts
|
$
|
2,985
|
|
|
$
|
2,949
|
|
Inventories
|
8,294
|
|
|
4,707
|
|
Net operating loss carryforwards
|
6,664
|
|
|
7,260
|
|
Accrued pension
|
7,637
|
|
|
25,939
|
|
Stock-based compensation
|
6,493
|
|
|
5,813
|
|
Compensation-related accruals
|
4,928
|
|
|
5,131
|
|
Warranty
|
3,222
|
|
|
3,245
|
|
Obligation for post-employment benefits other than pension
|
2,267
|
|
|
2,131
|
|
Accrued liabilities and other items
|
8,537
|
|
|
8,195
|
|
Gross deferred tax assets
|
51,027
|
|
|
65,370
|
|
Valuation allowance
|
(6,161
|
)
|
|
(6,317
|
)
|
Net deferred tax assets
|
44,866
|
|
|
59,053
|
|
Deferred tax liabilities:
|
|
|
|
Intangibles
|
86,961
|
|
|
84,931
|
|
Plant and equipment
|
34,759
|
|
|
29,596
|
|
Gross deferred tax liabilities
|
121,720
|
|
|
114,527
|
|
Net deferred tax liabilities
|
$
|
(76,854
|
)
|
|
$
|
(55,474
|
)
|
Income taxes paid, net of refunds received, by the Company during
2016
,
2015
, and
2014
, totaled
$27.4 million
,
$40.8 million
, and
$18.6 million
, respectively.
As of December 31,
2016
, the Company had net operating loss carryforwards totaling approximately
$26.7 million
in Brazil, the United Kingdom, and Germany. The net operating loss carryforwards may be carried forward indefinitely. The Company provides a valuation allowance against certain net foreign deferred tax assets (principally the net operating loss carryforwards) due to the uncertainty that they can be realized.
The following table sets forth a reconciliation of the statutory federal income tax rate to the effective income tax rate:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Federal statutory tax rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
Increase (decrease) in the tax rate resulting from:
|
|
|
|
|
|
State taxes, net of federal effect
|
3.3
|
%
|
|
4.4
|
%
|
|
3.5
|
%
|
Effect of tax rates of other countries
|
(1.4
|
)%
|
|
(2.4
|
)%
|
|
(0.4
|
)%
|
Section 199 deduction
|
(0.8
|
)%
|
|
(0.9
|
)%
|
|
(1.2
|
)%
|
Change in contingency reserve
|
(0.2
|
)%
|
|
(0.2
|
)%
|
|
0.7
|
%
|
Limitation on deduction of officer’s compensation
|
0.6
|
%
|
|
0.5
|
%
|
|
1.5
|
%
|
Other
|
(0.9
|
)%
|
|
(0.2
|
)%
|
|
(0.6
|
)%
|
Effective tax rate
|
35.6
|
%
|
|
36.2
|
%
|
|
38.5
|
%
|
As of December 31, 2016, there is
$129.0 million
of cumulative earnings overseas. Approximately
$12.4 million
has been subject to tax under the U.S. Subpart F of Section 954 provisions. Accordingly,
$116.6 million
of earnings have not been subject to U.S. tax and are reinvested indefinitely. It is not practical to estimate the amount of U.S. tax that would result upon the eventual repatriation of such earnings.
As of December 31,
2016
and
2015
, the Company had unrecognized tax benefits of approximately
$0.9 million
and
$4.4 million
, respectively. The entire amount of the unrecognized tax benefits would reduce the effective tax rate if recognized.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
The following table summarizes the activity related to the Company's unrecognized tax benefits during
2016
,
2015
, and
2014
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Balance, beginning of the year
|
$
|
4,407
|
|
|
$
|
4,922
|
|
|
$
|
4,611
|
|
Additions for tax position related to the current year
|
125
|
|
|
125
|
|
|
125
|
|
Additions for tax position related to the prior year
|
56
|
|
|
134
|
|
|
350
|
|
Decreases for tax position related to the prior year
|
(250
|
)
|
|
(774
|
)
|
|
—
|
|
Prior year reductions:
|
|
|
|
|
|
Lapse of statute of limitations
|
(125
|
)
|
|
—
|
|
|
(164
|
)
|
Settlements
|
(3,338
|
)
|
|
—
|
|
|
—
|
|
Balance, end of the year
|
$
|
875
|
|
|
$
|
4,407
|
|
|
$
|
4,922
|
|
During 2016, 2015, and 2014, respectively, the Company recognized approximately
$0.1 million
,
$0.1 million
and
$0.2 million
of interest and penalties. The Company has paid all accrued interest and penalties recognized prior to December 31, 2016, therefore the Company has
no
accruals for the payment of interest and penalties as of December 31, 2016. The Company accrued approximately
$0.5 million
for the payment of interest and penalties as of December 31, 2015.
As of December 31,
2016
, 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.
18. OTHER EXPENSE (INCOME), NET
The components of other expense (income), net are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Foreign exchange losses (gains)
|
$
|
3,725
|
|
|
$
|
(9,130
|
)
|
|
$
|
(5,801
|
)
|
Other, net
|
(360
|
)
|
|
(44
|
)
|
|
(484
|
)
|
Other expense (income), net
|
$
|
3,365
|
|
|
$
|
(9,174
|
)
|
|
$
|
(6,285
|
)
|
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
19. QUARTERLY RESULTS (UNAUDITED)
The following tables contain selected unaudited Consolidated Statements of Operations and Comprehensive Income data for each quarter for the years ended December 31,
2016
and
2015
. The operating results for any quarter are not necessarily indicative of results for any future period. The quarterly results are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Fiscal
Year
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
284,629
|
|
|
$
|
294,700
|
|
|
$
|
292,097
|
|
|
$
|
292,866
|
|
|
$
|
1,164,292
|
|
|
|
Gross profit
|
107,764
|
|
|
114,064
|
|
|
112,801
|
|
|
111,347
|
|
|
445,976
|
|
|
|
Net earnings
|
17,411
|
|
|
21,641
|
|
|
21,618
|
|
|
21,444
|
|
|
82,114
|
|
|
(1)
|
Net earnings attributable to Knoll, Inc. stockholders
|
17,400
|
|
|
21,635
|
|
|
21,607
|
|
|
21,442
|
|
|
82,084
|
|
|
(1)
|
Earnings per share—Basic
|
$
|
0.36
|
|
|
$
|
0.45
|
|
|
$
|
0.45
|
|
|
$
|
0.45
|
|
|
$
|
1.71
|
|
|
(1)
|
Earnings per share—Diluted
|
$
|
0.36
|
|
|
$
|
0.44
|
|
|
$
|
0.44
|
|
|
$
|
0.44
|
|
|
$
|
1.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
266,498
|
|
|
$
|
268,622
|
|
|
$
|
263,588
|
|
|
$
|
305,734
|
|
|
$
|
1,104,442
|
|
|
|
Gross profit
|
95,309
|
|
|
101,191
|
|
|
101,207
|
|
|
114,425
|
|
|
412,132
|
|
|
|
Net earnings
|
17,435
|
|
|
17,222
|
|
|
17,861
|
|
|
13,430
|
|
|
65,948
|
|
|
(2)
|
Net earnings attributable to Knoll, Inc. stockholders
|
17,443
|
|
|
17,239
|
|
|
17,833
|
|
|
13,448
|
|
|
65,963
|
|
|
(2)
|
Earnings per share—Basic
|
$
|
0.37
|
|
|
$
|
0.36
|
|
|
$
|
0.37
|
|
|
$
|
0.28
|
|
|
$
|
1.38
|
|
|
|
Earnings per share—Diluted
|
$
|
0.36
|
|
|
$
|
0.36
|
|
|
$
|
0.37
|
|
|
$
|
0.28
|
|
|
$
|
1.36
|
|
|
|
_______________________________________________________________________________
(1) During 2016, the Company adopted ASU 2016-09. As a result of this adoption,
$0.1 million
and
$0.4 million
of income tax benefits were recognized in the three months ended March 31, 2016 and June 30, 2016, respectively. These retroactive income tax adjustments are reflected as a reduction of income tax expense which increased basic earnings per share by
$0.01
in the three months ended June 30, 2016. No other basic or diluted earnings per share amounts were affected. See Note 2 for additional information.
(2) During 2015, the Company recorded
$0.9 million
of pre-tax restructuring charges. These charges of
$0.4 million
and
$0.5 million
were incurred in the third and fourth quarters of 2015, respectively. Additionally, during the fourth quarter of 2015, the Company recorded an intangible asset impairment charge of
$10.7 million
.
20. SEGMENT AND GEOGRAPHIC REGION 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 determined it appropriate to revise 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 represent the accumulation of unallocated costs relating to shared services and general corporate activities 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.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
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.
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
SALES
|
|
|
|
|
|
Office
|
$
|
731,327
|
|
|
$
|
686,943
|
|
|
$
|
656,228
|
|
Studio
|
323,431
|
|
|
303,838
|
|
|
279,167
|
|
Coverings
|
109,534
|
|
|
113,661
|
|
|
114,899
|
|
Corporate
|
—
|
|
|
—
|
|
|
—
|
|
Knoll, Inc.
|
$
|
1,164,292
|
|
|
$
|
1,104,442
|
|
|
$
|
1,050,294
|
|
INTERSEGMENT SALES
(1)
|
|
|
|
|
|
Office
|
$
|
1,877
|
|
|
$
|
1,640
|
|
|
$
|
2,776
|
|
Studio
|
5,788
|
|
|
6,184
|
|
|
5,918
|
|
Coverings
|
8,350
|
|
|
8,358
|
|
|
10,576
|
|
Corporate
|
—
|
|
|
—
|
|
|
—
|
|
Knoll, Inc.
|
$
|
16,015
|
|
|
$
|
16,182
|
|
|
$
|
19,270
|
|
DEPRECIATION AND AMORTIZATION
|
|
|
|
|
|
|
|
Office
|
$
|
16,284
|
|
|
$
|
14,945
|
|
|
$
|
13,747
|
|
Studio
|
5,936
|
|
|
5,565
|
|
|
5,313
|
|
Coverings
|
805
|
|
|
769
|
|
|
982
|
|
Corporate
|
—
|
|
|
—
|
|
|
—
|
|
Knoll, Inc.
|
$
|
23,025
|
|
|
$
|
21,279
|
|
|
$
|
20,042
|
|
OPERATING PROFIT
|
|
|
|
|
|
|
|
Office
|
$
|
73,871
|
|
|
$
|
55,823
|
|
|
$
|
38,116
|
|
Studio
|
53,413
|
|
|
47,952
|
|
|
37,834
|
|
Coverings
|
25,953
|
|
|
17,273
|
|
|
23,816
|
|
Corporate
|
(16,929
|
)
|
|
(19,938
|
)
|
|
(22,923
|
)
|
Knoll, Inc.
(2)
|
$
|
136,308
|
|
|
$
|
101,110
|
|
|
$
|
76,843
|
|
CAPITAL EXPENDITURES
|
|
|
|
|
|
|
|
|
Office
|
$
|
35,072
|
|
|
$
|
27,058
|
|
|
$
|
33,541
|
|
Studio
|
6,819
|
|
|
4,241
|
|
|
8,075
|
|
Coverings
|
804
|
|
|
648
|
|
|
285
|
|
Corporate
|
—
|
|
|
—
|
|
|
—
|
|
Knoll, Inc.
|
$
|
42,695
|
|
|
$
|
31,947
|
|
|
$
|
41,901
|
|
_______________________________________________________________________________
(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.
Many of the Company's facilities manufacture products for all
three
reporting segments. Therefore, it is impractical to disclose asset information on a segment basis.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
The Company's net sales by product category were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Office Systems
|
$
|
461,743
|
|
|
$
|
432,655
|
|
|
$
|
429,503
|
|
Seating
|
114,135
|
|
|
117,799
|
|
|
108,635
|
|
Files and Storage
|
85,696
|
|
|
86,099
|
|
|
84,297
|
|
Studio
|
323,431
|
|
|
303,838
|
|
|
279,167
|
|
Coverings
|
109,534
|
|
|
113,661
|
|
|
114,899
|
|
Other
|
69,753
|
|
|
50,390
|
|
|
33,793
|
|
Total
|
$
|
1,164,292
|
|
|
$
|
1,104,442
|
|
|
$
|
1,050,294
|
|
The Company markets its products in the United States and internationally, with its principal international markets being Canada and Europe. The table below contains information about the geographical areas in which the Company operates. Sales are attributed to the geographic areas based on the origin of sale, and property, plant, and equipment, net is based on the geographic area in which the asset resides (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
Canada
|
|
Europe
|
|
Mexico
|
|
Consolidated
|
2016
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
1,031,920
|
|
|
$
|
36,813
|
|
|
$
|
93,420
|
|
|
$
|
2,139
|
|
|
$
|
1,164,292
|
|
Property, plant, and equipment, net
|
157,856
|
|
|
26,452
|
|
|
12,776
|
|
|
—
|
|
|
197,084
|
|
2015
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
979,221
|
|
|
$
|
36,163
|
|
|
$
|
89,058
|
|
|
$
|
—
|
|
|
$
|
1,104,442
|
|
Property, plant, and equipment, net
|
137,863
|
|
|
20,919
|
|
|
13,360
|
|
|
—
|
|
|
172,142
|
|
2014
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
928,733
|
|
|
$
|
32,811
|
|
|
$
|
88,750
|
|
|
$
|
—
|
|
|
$
|
1,050,294
|
|
Property, plant, and equipment, net
|
123,821
|
|
|
25,669
|
|
|
15,529
|
|
|
—
|
|
|
165,019
|
|