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 residential markets, as well as modern outdoor furniture. 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, our direct sales force, our showrooms, and our online presence.
Business Highlights
During the last decade we have diversified our sources of revenue among our varying operating segments. During
2017
, approximately 40% of our sales and 74% of our profits came from outside of our Office segment. We continue to build Knoll with an eye toward what works for our customers and shareholders: a constellation of design-driven brands and people, working together with our clients to create inspired modern interiors combined with our disciplined approach to the management of our business has resulted in the creation of a singular entity.
Over time we believe our diversification efforts and strategy will continue to result in a more profitable and less cyclical enterprise. Knoll brands span commercial and residential applications with high design opportunities, and are heavily influenced by architect and designer specifiers. We are focused on targeting under-penetrated and emerging ancillary categories and markets as well as expanding our reach into residential and decorator channels around the world.
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.
We are committed to building a more efficient and responsive customer centric service culture and technology infrastructure across our organization. Our capital expenditures are reflective of this commitment as we continued to invest in the business through technology infrastructure upgrades, continued investments in our manufacturing facilities focusing on lean initiatives and showroom presence.
Results of Operations
Comparison of Consolidated Results for the Years Ended
December 31, 2017
and
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017 vs. 2016
|
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
|
(Dollar in thousands)
|
Net Sales
|
|
$
|
1,132,892
|
|
|
$
|
1,164,292
|
|
|
$
|
(31,400
|
)
|
|
(2.7
|
)%
|
Gross profit
|
|
414,579
|
|
|
445,976
|
|
|
(31,397
|
)
|
|
(7.0
|
)%
|
Operating profit
|
|
87,969
|
|
|
136,308
|
|
|
(48,339
|
)
|
|
(35.5
|
)%
|
Interest expense
|
|
7,483
|
|
|
5,405
|
|
|
2,078
|
|
|
38.4
|
%
|
Other expense (income), net
|
|
1,894
|
|
|
3,365
|
|
|
(1,471
|
)
|
|
(43.7
|
)%
|
Income tax expense
|
|
(1,600
|
)
|
|
45,424
|
|
|
(47,024
|
)
|
|
(103.5
|
)%
|
Net earnings
|
|
80,192
|
|
|
82,114
|
|
|
(1,922
|
)
|
|
(2.3
|
)%
|
Net earnings attributable to Knoll, Inc. stockholders
|
|
80,163
|
|
|
82,084
|
|
|
(1,921
|
)
|
|
(2.3
|
)%
|
Net earnings per common share attributable to Knoll, Inc. stockholders:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.66
|
|
|
$
|
1.71
|
|
|
$
|
(0.05
|
)
|
|
(2.9
|
)%
|
Diluted
|
|
$
|
1.63
|
|
|
$
|
1.68
|
|
|
$
|
(0.05
|
)
|
|
(3.0
|
)%
|
Statistical Data
|
|
|
|
|
|
|
|
|
Gross profit %
|
|
36.6
|
%
|
|
38.3
|
%
|
|
|
|
|
Operating profit %
|
|
7.8
|
%
|
|
11.7
|
%
|
|
|
|
|
Net Sales
Net sales for the year ended
December 31, 2017
were
$1,132.9 million
,
a decrease
of
$31.4 million
, or
2.7%
, from sales of
$1,164.3 million
for the year ended
December 31, 2016
. The decrease in sales was largely due to a
$48.3 million
decrease in Office sales driven by volume declines in both government and commercial sales, primarily in the first half of the year. The decrease in Office segment sales was partially offset by an increase in Studio segment sales. Studio sales increased $17.6 million, due primarily to growth from HOLLY HUNT® and Knoll Europe, as well as incremental sales from a full year of DatesWeiser acquired in December 2016.
Gross Profit
Gross profit for
2017
was
$414.6 million
,
a decrease
of
$31.4 million
, or
7.0%
, from gross profit of
$446.0 million
in
2016
. As a percentage of sales, gross profit decreased from
38.3%
for
2016
to
36.6%
for
2017
. This decline is due primarily to lower fixed-cost leverage resulting from lower volume in the Office segment, as well as higher commodity inflation.
Operating Profit
Operating profit for
2017
was
$88.0 million
,
a decrease
of
$48.3 million
, or
35.5%
, from operating profit of
$136.3 million
for
2016
. Operating profit as a percentage of sales decreased from
11.7%
in
2016
to
7.8%
in
2017
.
Selling, general, and administrative expenses for
2017
were
$306.0 million
, or
27.0%
of sales, compared to
$309.7 million
, or
26.6%
of sales, for
2016
. In addition to selling, general and administrative expenses, operating expenses for
2017
included an asset impairment of $16.3 million, a pension settlement charge of $2.2 million, restructuring charges of $2.2 million, and acquisition costs of $0.5 million. The decrease in selling, general and administrative expenses was primarily related to lower incentive compensation due to decreased profitability, partially offset by increased sales headcount.
Interest Expense
Interest expense for
2017
was
$7.5 million
,
an increase
of
$2.1 million
from
$5.4 million
for
2016
. The increase in interest expense was due primarily to a higher average outstanding debt balance, and increased interest rates during
2017
. During
2017
and
2016
, the Company's weighted average interest rates were approximately
2.4%
and 2.0%, respectively.
Other Expense, net
Other expense in
2017
was
$1.9 million
compared to
$3.4 million
in
2016
. Other expense in
2017
was related primarily to foreign exchange losses that resulted from the revaluation of intercompany balances between our US and foreign entities in both
2017
and
2016
.
Income Tax (Benefit) Expense
The effective tax rate for
2017
was (2.0%) compared to 35.6% for
2016
. The primary driver of the lower effective tax rate in
2017
was a $26.6 million benefit resulting from the impacts of the Tax Cuts and Jobs Act of 2017 ("Tax Act") being signed into law in December of 2017. Additional factors impacting the rate included the vesting of a large quantity of equity awards during the first quarter of 2017, and the reversal in the third quarter of 2017 of a valuation allowance against certain foreign jurisdiction deferred tax assets. In addition, our effective tax rate is directly affected by the mix of pretax income and the varying effective tax rates in the countries and states in which we operate.
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)
|
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 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 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
. The 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 includes $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 a reduction in 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.
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 addition, HOLLY HUNT® also includes 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.
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.
Comparison of Segment Results for the Years Ended December 31, 2017 and December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017 vs. 2016
|
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
|
(Dollar in thousands)
|
SALES
|
|
|
|
|
|
|
|
|
Office
|
|
$
|
682,936
|
|
|
$
|
731,327
|
|
|
$
|
(48,391
|
)
|
|
(6.6
|
)%
|
Studio
|
|
340,995
|
|
|
323,431
|
|
|
17,564
|
|
|
5.4
|
%
|
Coverings
|
|
108,961
|
|
|
109,534
|
|
|
(573
|
)
|
|
(0.5
|
)%
|
Corporate
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
%
|
Knoll, Inc.
|
|
$
|
1,132,892
|
|
|
$
|
1,164,292
|
|
|
$
|
(31,400
|
)
|
|
(2.7
|
)%
|
OPERATING PROFIT
|
|
|
|
|
|
|
|
|
Office
|
|
$
|
25,894
|
|
|
$
|
73,871
|
|
|
$
|
(47,977
|
)
|
|
(64.9
|
)%
|
Studio
|
|
51,136
|
|
|
53,413
|
|
|
(2,277
|
)
|
|
(4.3
|
)%
|
Coverings
|
|
24,623
|
|
|
25,953
|
|
|
(1,330
|
)
|
|
(5.1
|
)%
|
Corporate
|
|
(13,684
|
)
|
|
(16,929
|
)
|
|
3,245
|
|
|
15.1
|
%
|
Knoll, Inc.
(1)
|
|
$
|
87,969
|
|
|
$
|
136,308
|
|
|
$
|
(48,339
|
)
|
|
(35.5
|
)%
|
_______________________________________________________________________________
(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
2017
were
$682.9 million
,
a decrease
of
$48.4 million
, or
6.6%
, when compared with
2016
. This decrease in the Office segment for the year was due to declines in both government and commercial sales, primarily in the first half of the year. Operating profit for the Office segment in
2017
was
$25.9 million
, a decrease of
$48.0 million
, or
64.9%
, when compared with
2016
. The decrease in operating profit was primarily due to infrequent charges of $21.2 million which includes a $16.3 million asset impairment charge, a $2.2 million pension settlement charge, a $2.2 million restructuring charge and acquisition costs of $0.5 million.
Studio
Net sales for the Studio segment in
2017
were
$341.0 million
,
an increase
of
$17.6 million
, or
5.4%
, when compared with
2016
. The increase in the Studio segment was due primarily to growth from HOLLY HUNT® and Knoll Europe, as well as incremental sales from a full year of DatesWeiser. Operating profit for the Studio segment in
2017
was
$51.1 million
, a decrease of
$2.3 million
, or
4.3%
, when compared with
2016
.
Coverings
Net sales for the Coverings segment in
2017
were
$109.0 million
,
a decrease
of
$0.6 million
, or
0.5%
, when compared with
2016
. Continued year-over-year growth in Spinneybeck
|
FilzFelt sales, particularly in the architectural space, was offset by lower volume at KnollTextiles and Edelman. Operating profit for the Coverings segment in
2017
was
$24.6 million
, a decrease of
$1.3 million
, or
5.1%
, when compared with
2016
.
Corporate
Corporate costs in
2017
were
$13.7 million
, a decrease of
$3.2 million
, or
15.1%
, when compared with
2016
. The decrease was driven primarily by reduced costs associated with employee benefits and incentive compensation expense in
2017
.
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
|
|
|
$
|
35,198
|
|
|
34.8
|
%
|
_______________________________________________________________________________
(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 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
includes 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
includes 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.
Liquidity and Capital Resources
The following table highlights certain key cash flows and capital information pertinent to the discussion that follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
(in thousands)
|
Cash provided by operating activities
|
|
$
|
103,734
|
|
|
$
|
104,295
|
|
|
$
|
88,854
|
|
Capital expenditures, net
|
|
(40,587
|
)
|
|
(40,105
|
)
|
|
(41,901
|
)
|
Purchase of businesses, net of cash acquired
|
|
—
|
|
|
(18,456
|
)
|
|
(93,349
|
)
|
Cash used in investing activities
|
|
(40,587
|
)
|
|
(58,561
|
)
|
|
29,610
|
|
Purchase of common stock for treasury
|
|
(10,950
|
)
|
|
(5,464
|
)
|
|
8,725
|
|
Proceeds from credit facilities
|
|
310,000
|
|
|
377,500
|
|
|
309,000
|
|
Repayment of credit facilities
|
|
(338,000
|
)
|
|
(379,500
|
)
|
|
345,000
|
|
Payment of dividends
|
|
(30,193
|
)
|
|
(29,217
|
)
|
|
24,364
|
|
Proceeds from issuance of common stock
|
|
601
|
|
|
2,847
|
|
|
5,756
|
|
Cash (used in) provided by financing activities
|
|
(74,542
|
)
|
|
38,834
|
|
|
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
2017
, we made annual dividend payments of $0.60 per share, returning
$29.0 million
of cash to our shareholders. In addition to our quarterly dividend payments, we also paid accrued dividends on vested shares of $1.1 million.
Cash provided by operating activities was
$103.7 million
,
$104.3 million
, and
$88.9 million
in
2017
,
2016
and
2015
, respectively. For the year ended December 31,
2017
, cash provided by operating activities consisted primarily of $80.2 million of net income and
$38.0 million
of various non-cash charges, including $26.6 million of depreciation and amortization, a $16.3 million asset impairment charge, and $9.6 million of stock based compensation, offset by
$14.5 million
of unfavorable changes in assets and liabilities primarily driven by $26.6 million benefit in current and deferred income taxes as a result of the 2017 Tax Cut and Jobs Act. 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, 2017
, we used $40.6 million of cash for capital expenditures. During
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 commitment to enhance and modernize our sales, manufacturing and information technology infrastructure. Acquisitions are reflective of our strategy of building our global capabilities as a singular resource for high-design workplaces and homes.
For the year ended
December 31, 2017
, we used cash of $30.2 million to fund dividend payments to shareholders, $10.9 million for share repurchases associated with the repurchase of shares used to offset the cost of employee tax withholdings, and $6.0 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, 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 the earn-out for the HOLLY HUNT acquisition.
As of
December 31, 2017
, we were in compliance with all covenants and conditions in our Existing Credit Facility and are currently in compliance with all covenants and conditions under our Amended Credit Agreement. 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. Future debt payments may be paid out of cash flows from operations, from future refinancing of our debt or from equity issuance.
On January 23, 2018, we amended and extended our Existing Credit Facility, dated May 20, 2014, with a new $750.0 million credit facility maturing on January 23, 2023. 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 Amended Credit Agreement may be repaid at any time, but no later than January 23, 2023.
The Amended Credit Agreement 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 4.25 to 1, an increase from our Existing Credit Facility at
December 31, 2017
of 4.0 to 1, and our consolidated interest coverage ratio must be a minimum of 3.0 to 1. However, because of the financial covenant 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. 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.
Contractual Obligations
The following table summarizes our contractual cash obligations as of
December 31, 2017
(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)
|
|
$
|
11,920
|
|
|
$
|
188,456
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
200,376
|
|
Operating leases
|
|
26,744
|
|
|
37,817
|
|
|
22,487
|
|
|
26,537
|
|
|
113,585
|
|
Purchase commitments
|
|
2,566
|
|
|
131
|
|
|
—
|
|
|
—
|
|
|
2,697
|
|
Pension and other post-employment benefit plan obligations (b)
|
|
231
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
231
|
|
Other liabilities (c)
|
|
1,100
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,100
|
|
Total *
|
|
$
|
42,561
|
|
|
$
|
226,404
|
|
|
$
|
22,487
|
|
|
$
|
26,537
|
|
|
$
|
317,989
|
|
_______________________________________________________________________________
(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, 2017
. 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 Existing Credit Facility. See Notes to Consolidated Financial Statements, Note 21, Subsequent events, for information related to the Amended Credit Agreement entered into in January 2018.
(b) Due to the uncertainty of future cash outflows, contributions to the pension and other post-employment benefit plans subsequent to 2018 have been excluded from the table above.
(c) Other liabilities consists of contingent payouts due to 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 to determine whether a goodwill impairment exists at the reporting unit.
We compare the fair value of each reporting unit to its carrying value and 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, 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 to determine the present value of future cash flows 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 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, 2017, we determined there were no indications of impairment for goodwill or indefinite-lived intangible 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 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.
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.
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
2017
net periodic pension expense by approximately $2.6 million. Likewise, a one-percentage-point increase or decrease in the discount rate would increase or decrease
2017
net periodic pension expense by approximately $0.6 million or $1.2 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.
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,
2017
, as well as the assumed rate for
2018
, a between
5.60 - 7.20%
annual rate of increase in the per capita cost of covered health care benefits was assumed and a
10.10%
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
4.50%
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, 2017
by
$0.01 million
and increase the aggregate of the service and interest cost components of net periodic benefit cost for
2017
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, 2017
by approximately
$0.01 million
and decrease the aggregate of the service and interest cost components of net periodic benefit cost for
2017
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.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation under the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including but not limited to reducing the U.S. federal corporate tax rate from 35% to 21%. The Tax Act requires judgments to be made in interpretation of the provisions of the Tax Act and significant estimates in the related calculations. The Department of Treasury, the Internal Revenue Service, and other standard-setting bodies have not implemented all relevant regulations or issued substantive guidance to-date; therefore, they could interpret or issue guidance on how provisions of the Tax Act will be applied that is different from our current interpretation.
Furthermore, on December 22, 2017, SEC staff issued Staff Accounting Bulletin No. 118,
Income Tax Accounting Implications of the Tax Cuts and Jobs Act
(“SAB 118”) that allows registrants to record provisional amounts during a measurement period, which is not to extend beyond one year. Accordingly, amounts recorded may require further adjustments due to evolving analysis and interpretations of law and regulations, including interpretations of how accounting for income taxes should be applied. Consistent with SAB 118, we were able to make reasonable estimates and we have incorporated provisional amounts for the impact of the Tax Act.
At
December 31, 2017
, our deferred tax liabilities of
$82.7 million
exceeded deferred tax assets of
$28.1 million
by
$54.5 million
. At December 31,
2016
, deferred tax liabilities of
$121.7
million exceeded deferred tax assets of
$44.9
million by $77.0 million. The decrease in deferred tax liabilities is primarily related to the impact of the Tax Act, resulting in a $26.6 million impact on our deferred tax balances in the fourth quarter of 2017.
Our deferred tax assets at
December 31, 2017
and
2016
of
$28.1 million
and
$44.9
million, respectively, are net of valuation allowances of
$4.8 million
and
$6.2
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. 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. We recognize compensation expense using the straight-line method over the vesting period. Compensation expense relating to restricted stock units that are subject to performance conditions is recognized if it is probable that the performance condition will be achieved. 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.
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 our common stock on the date of grant.
The fair value of the market-based restricted stock units is estimated at the date of grant using a Monte Carlo simulation 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
To the Stockholders and the Board of Directors of Knoll, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Knoll, Inc. (the Company) as of
December 31, 2017
and
2016
, 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, 2017
, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at
December 31, 2017
and
2016
, and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2017
, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of
December 31, 2017
, 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 February 27, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company‘s auditor since 1996.
Philadelphia, Pennsylvania
February 27, 2018
KNOLL, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
December 31,
2017
|
|
December 31,
2016
|
ASSETS
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
2,203
|
|
|
$
|
9,854
|
|
Customer receivables, net of allowance for doubtful accounts of $4,039 and $8,059, respectively
|
86,687
|
|
|
84,425
|
|
Inventories
|
144,945
|
|
|
142,072
|
|
Prepaid expenses
|
29,272
|
|
|
27,461
|
|
Other current assets
|
15,163
|
|
|
12,996
|
|
Total current assets
|
278,270
|
|
|
276,808
|
|
Property, plant, and equipment, net
|
200,630
|
|
|
197,084
|
|
Goodwill
|
142,113
|
|
|
141,391
|
|
Intangible assets, net
|
238,581
|
|
|
241,870
|
|
Other noncurrent assets
|
1,447
|
|
|
1,460
|
|
Total Assets
|
$
|
861,041
|
|
|
$
|
858,613
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Current maturities of long-term debt
|
$
|
10,000
|
|
|
$
|
10,000
|
|
Accounts payable
|
108,922
|
|
|
97,518
|
|
Other current liabilities
|
104,158
|
|
|
114,855
|
|
Total current liabilities
|
223,080
|
|
|
222,373
|
|
Long-term debt
|
181,048
|
|
|
208,383
|
|
Deferred income taxes
|
54,671
|
|
|
76,854
|
|
Post-employment benefits other than pensions
|
3,575
|
|
|
5,124
|
|
Pension liability
|
21,671
|
|
|
17,428
|
|
Other noncurrent liabilities
|
18,267
|
|
|
18,982
|
|
Total liabilities
|
502,312
|
|
|
549,144
|
|
Commitments and contingent liabilities
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
Common stock, $0.01 par value; 200,000,000 shares authorized; 65,460,014 shares issued and 49,339,552 shares outstanding (including 841,610 non-voting restricted shares and net of 16,120,462 treasury shares) at December 31, 2017 and 64,741,648 shares issued and 49,096,290 shares outstanding (including 993,962 non-voting restricted shares and net of 15,645,358 treasury shares) at December 31, 2016
|
493
|
|
|
491
|
|
Additional paid-in capital
|
54,455
|
|
|
55,148
|
|
Retained earnings
|
347,304
|
|
|
297,011
|
|
Accumulated other comprehensive loss
|
(43,774
|
)
|
|
(43,403
|
)
|
Total Knoll, Inc. stockholders' equity
|
358,478
|
|
|
309,247
|
|
Noncontrolling interests
|
251
|
|
|
222
|
|
Total equity
|
358,729
|
|
|
309,469
|
|
Total Liabilities and Equity
|
$
|
861,041
|
|
|
$
|
858,613
|
|
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,
|
|
2017
|
|
2016
|
|
2015
|
Sales
|
$
|
1,132,892
|
|
|
$
|
1,164,292
|
|
|
$
|
1,104,442
|
|
Cost of sales
|
718,313
|
|
|
718,316
|
|
|
692,310
|
|
Gross profit
|
414,579
|
|
|
445,976
|
|
|
412,132
|
|
Selling, general, and administrative expenses
|
305,992
|
|
|
309,668
|
|
|
299,476
|
|
Restructuring charges
|
2,150
|
|
|
—
|
|
|
896
|
|
Write-off of property, plant, and equipment
|
16,306
|
|
|
—
|
|
|
—
|
|
Intangible asset impairment charge
|
—
|
|
|
—
|
|
|
10,650
|
|
Pension settlement charge
|
2,162
|
|
|
—
|
|
|
—
|
|
Operating profit
|
87,969
|
|
|
136,308
|
|
|
101,110
|
|
Interest expense
|
7,483
|
|
|
5,405
|
|
|
6,865
|
|
Other expense (income), net
|
1,894
|
|
|
3,365
|
|
|
(9,174
|
)
|
Income before income tax expense
|
78,592
|
|
|
127,538
|
|
|
103,419
|
|
Income tax (benefit) expense, net
|
(1,600
|
)
|
|
45,424
|
|
|
37,471
|
|
Net earnings
|
80,192
|
|
|
82,114
|
|
|
65,948
|
|
Net earnings (loss) attributable to noncontrolling interests
|
29
|
|
|
30
|
|
|
(15
|
)
|
Net earnings attributable to Knoll, Inc. stockholders
|
$
|
80,163
|
|
|
$
|
82,084
|
|
|
$
|
65,963
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common share attributable to Knoll, Inc. stockholders:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
1.66
|
|
|
$
|
1.71
|
|
|
$
|
1.38
|
|
Diluted
|
$
|
1.63
|
|
|
$
|
1.68
|
|
|
$
|
1.36
|
|
Weighted-average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
48,422,558
|
|
|
48,093,294
|
|
|
47,746,707
|
|
Diluted
|
49,160,492
|
|
|
48,919,108
|
|
|
48,438,231
|
|
|
|
|
|
|
|
Net earnings
|
$
|
80,192
|
|
|
$
|
82,114
|
|
|
$
|
65,948
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Pension and other post-employment liability adjustment, net of tax
|
(5,239
|
)
|
|
(6,573
|
)
|
|
11,945
|
|
Foreign currency translation adjustment
|
4,868
|
|
|
488
|
|
|
(16,581
|
)
|
Total other comprehensive (loss), net of tax
|
(371
|
)
|
|
(6,085
|
)
|
|
(4,636
|
)
|
Total comprehensive income
|
79,821
|
|
|
76,029
|
|
|
61,312
|
|
Comprehensive income (loss) attributable to noncontrolling interests
|
29
|
|
|
30
|
|
|
(15
|
)
|
Comprehensive income attributable to Knoll, Inc. stockholders
|
$
|
79,792
|
|
|
$
|
75,999
|
|
|
$
|
61,327
|
|
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, 2014
|
|
$
|
487
|
|
|
$
|
41,143
|
|
|
$
|
204,063
|
|
|
$
|
(32,682
|
)
|
|
$
|
213,011
|
|
|
$
|
207
|
|
|
$
|
213,218
|
|
Net earnings
|
|
—
|
|
|
—
|
|
|
65,963
|
|
|
—
|
|
|
65,963
|
|
|
(15
|
)
|
|
65,948
|
|
Other comprehensive loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(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 loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(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
|
|
—
|
|
|
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
|
|
Net earnings
|
|
—
|
|
|
—
|
|
|
80,163
|
|
|
—
|
|
|
80,163
|
|
|
29
|
|
|
80,192
|
|
Other comprehensive loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(371
|
)
|
|
(371
|
)
|
|
—
|
|
|
(371
|
)
|
Shares issued for consideration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
—
|
|
|
472
|
|
|
—
|
|
|
—
|
|
|
472
|
|
|
—
|
|
|
472
|
|
Shares issued under stock incentive plan
|
|
7
|
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
4
|
|
Shares issued to Board of Directors in lieu of cash
|
|
—
|
|
|
125
|
|
|
—
|
|
|
—
|
|
|
125
|
|
|
—
|
|
|
125
|
|
Stock-based compensation
|
|
(1
|
)
|
|
9,659
|
|
|
—
|
|
|
—
|
|
|
9,658
|
|
|
—
|
|
|
9,658
|
|
Cash dividend ($0.60 per share)
|
|
—
|
|
|
—
|
|
|
(29,870
|
)
|
|
—
|
|
|
(29,870
|
)
|
|
—
|
|
|
(29,870
|
)
|
Purchase of common stock
|
|
(4
|
)
|
|
(10,946
|
)
|
|
—
|
|
|
—
|
|
|
(10,950
|
)
|
|
—
|
|
|
(10,950
|
)
|
Balance at December 31, 2017
|
|
$
|
493
|
|
|
$
|
54,455
|
|
|
$
|
347,304
|
|
|
$
|
(43,774
|
)
|
|
$
|
358,478
|
|
|
$
|
251
|
|
|
$
|
358,729
|
|
See accompanying notes to the consolidated financial statements.
KNOLL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
Net earnings
|
$
|
80,192
|
|
|
$
|
82,114
|
|
|
$
|
65,948
|
|
Adjustments to reconcile net earnings to cash provided by operating activities:
|
|
|
|
|
|
Depreciation
|
22,749
|
|
|
19,071
|
|
|
17,364
|
|
Amortization expense (including deferred financing fees)
|
3,954
|
|
|
3,954
|
|
|
3,915
|
|
Provision for deferred taxes
|
(19,634
|
)
|
|
26,016
|
|
|
158
|
|
Inventory obsolescence
|
1,882
|
|
|
2,376
|
|
|
2,656
|
|
Loss on disposal of property, plant and equipment
|
212
|
|
|
5
|
|
|
1,229
|
|
Unrealized foreign currency losses (gains)
|
1,297
|
|
|
827
|
|
|
(8,789
|
)
|
Stock-based compensation
|
9,658
|
|
|
10,469
|
|
|
8,166
|
|
Intangible asset impairment charge
|
—
|
|
|
—
|
|
|
10,650
|
|
Non-cash write-off of property, plant and equipment
|
16,306
|
|
|
—
|
|
|
—
|
|
Bad debt and customer claims
|
1,616
|
|
|
6,303
|
|
|
1,477
|
|
Changes in assets and liabilities, net of effects of acquisitions:
|
|
|
|
|
|
Customer receivables
|
(5,500
|
)
|
|
26,591
|
|
|
(4,292
|
)
|
Inventories
|
(4,045
|
)
|
|
(2,157
|
)
|
|
(4,481
|
)
|
Accounts payable
|
12,120
|
|
|
4,591
|
|
|
(26,253
|
)
|
Current income taxes
|
(7,011
|
)
|
|
(6,871
|
)
|
|
675
|
|
Prepaid and other current assets
|
(3,350
|
)
|
|
(13,815
|
)
|
|
(5,425
|
)
|
Other current liabilities
|
(4,813
|
)
|
|
(3,430
|
)
|
|
22,937
|
|
Other noncurrent assets and liabilities
|
(1,899
|
)
|
|
(51,749
|
)
|
|
2,919
|
|
Cash provided by operating activities
|
103,734
|
|
|
104,295
|
|
|
88,854
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
Capital expenditures
|
(40,587
|
)
|
|
(40,105
|
)
|
|
(29,610
|
)
|
Purchase of businesses, net of cash acquired
|
—
|
|
|
(18,456
|
)
|
|
—
|
|
Cash used in investing activities
|
(40,587
|
)
|
|
(58,561
|
)
|
|
(29,610
|
)
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
Proceeds from credit facility
|
310,000
|
|
|
377,500
|
|
|
309,000
|
|
Repayment of credit facility
|
(338,000
|
)
|
|
(379,500
|
)
|
|
(345,000
|
)
|
Payment of financing fees
|
—
|
|
|
—
|
|
|
(10
|
)
|
Payment of dividends
|
(30,193
|
)
|
|
(29,217
|
)
|
|
(24,364
|
)
|
Proceeds from the issuance of common stock
|
601
|
|
|
2,847
|
|
|
5,756
|
|
Purchase of common stock for treasury
|
(10,950
|
)
|
|
(5,464
|
)
|
|
(8,725
|
)
|
Contingent purchase price payment
|
(6,000
|
)
|
|
(5,000
|
)
|
|
(5,000
|
)
|
Tax benefit from the exercise of stock options and vesting of equity awards
|
—
|
|
|
—
|
|
|
826
|
|
Cash used in financing activities
|
(74,542
|
)
|
|
(38,834
|
)
|
|
(67,517
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
3,744
|
|
|
(1,238
|
)
|
|
(6,556
|
)
|
Net (decrease) increase in cash and cash equivalents
|
(7,651
|
)
|
|
5,662
|
|
|
(14,829
|
)
|
Cash and cash equivalents at beginning of year
|
9,854
|
|
|
4,192
|
|
|
19,021
|
|
Cash and cash equivalents at end of year
|
$
|
2,203
|
|
|
$
|
9,854
|
|
|
$
|
4,192
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
Cash paid for interest
|
$
|
7,605
|
|
|
$
|
5,228
|
|
|
$
|
6,168
|
|
See accompanying notes to the consolidated financial statements.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
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, for both workplace and residential markets, as well as 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, through its showrooms, and 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 GAAP requires management 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.
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 performance obligations under the terms of a contract with our customer are satisfied. This occurs when the control of the goods and services have been transferred to the customer. Accordingly, revenue for sale of goods is typically recognized upon shipment or delivery depending on the shipping terms of the underlying contract. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. The amount of consideration received and revenue recognized varies with changes in returns, rebates, cash sales incentives and other allowances offered to customers based on the company's experience. The Company may receive deposits from customers before revenue is recognized, thus resulting in the recognition of a contract liability (customer deposits). Sales tax, value added tax, and other taxes that are collected concurrent with revenue-producing activities are excluded from revenue.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts for losses associated with accounts receivable balances that are estimated to be uncollectible. 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 and corresponding allowance for doubtful accounts are written off when the Company determines that the likelihood of recovery is remote and the Company no longer intends to expend resources to attempt collection.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method. The Company adjusts for inventory that it believes is impaired or obsolete. Obsolescence occurs as the result of several factors, including 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
|
Software
|
|
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.
Maintenance and repairs are expensed as incurred. Interest on capital projects is capitalized during the construction period.
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 to determine whether a goodwill impairment exists at the reporting unit.
In
2017
, in accordance with ASU 2017-04, the Company conducted the goodwill impairment test using the simplified test. The Company compares 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, an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
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.
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 is recognized in the reporting period in which it has been identified.
Finite-lived intangible 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 costs are expensed as incurred, and are included as a component of selling, general, and administrative expenses. Research and development expenses, were
$19.2 million
for
2017
,
$21.7 million
for
2016
, and
$20.7 million
for
2015
.
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.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
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.
The Tax Cuts and Jobs Act of 2017 (“Tax Act”), as signed by the President of the United States on December 22, 2017, significantly revises U.S. tax law. The law includes significant changes to the U.S. corporate income tax system, including a Federal corporate rate reduction from
35%
to
21%
, limitations on the deductibility of interest expense and executive compensation, and the transition of U.S. international taxation from a worldwide tax system to a territorial tax system. This change may result in a U.S. tax liability on those earnings which have not previously been repatriated to the U.S., with future foreign earnings potentially not subject to U.S. income taxes when repatriated. The Company is assessing the impact of the enacted tax law on its business and its consolidated financial statements and has recorded a provisional tax benefit of
$26.6 million
primarily related to the remeasurement of its deferred tax assets and liabilities for the reduced federal tax rates and impact of the one-time transition tax during the period ending
December 31, 2017
.
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.
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 an assurance-type 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.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
Concentration of Credit Risk
The Company's accounts receivables are comprised primarily of amounts due from 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).
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. The Company recognizes compensation expense using the straight-line method over the vesting period. Compensation expense relating to restricted stock units that are subject to performance conditions is recognized if it is probable that the performance condition will be achieved. 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.
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 fair value of the market-based restricted stock units is estimated at the date of grant using a Monte Carlo simulation 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.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
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.
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) and prior service cost (credit) 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
and
2017
, 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. 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
2017
and
2016
by approximately
$1.9 million
and
$2.7 million
, respectively.
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. 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.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
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 are 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.
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.
The standard provides a five step model to be applied to all contracts with customers, with an underlying principle that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The standard is effective for annual reporting periods beginning after December 15, 2017 and interim periods therein.
The Company has completed its assessment of the impact of the new standard and will adopt the new standard effective January 1, 2018, using the modified retrospective transition method. The adoption of the new standard is not expected to have a material impact on the financial position of the Company, the results of its operations and its cash flows and the Company’s internal controls over financial reporting. The new standard further requires quantitative and qualitative disclosures about the Company’s contracts with customers. The Company will report the new disclosures required by the standard within the Form 10-Q for the interim period ending March 31, 2018.
In July 2015, the FASB issued ASU 2015-11 -
Inventory (Topic 330)
, which amends existing guidance for measuring inventories. This amendment will require the Company to measure inventories recorded using the first-in, first-out method at the lower of cost and net realizable value. This amendment does not change the methodology for measuring inventories recorded using the last-in, first-out method. This amendment is effective for fiscal years beginning after December 15, 2016. The Company adopted this standard on January 1, 2017, and the impact on its consolidated financial statements was not material.
In February 2016, the FASB issued guidance codified in ASC 842,
Leases,
which supersedes the guidance in ASC 840, Leases. ASC 842 will be effective for the Company on January 1, 2019, and the Company will adopt the standard using the modified retrospective approach. While the Company continues to evaluate the provisions of ASC 842 to determine how it will be affected, the primary effect of adopting the new standard will be to record assets and obligations for current operating leases. The Company is currently in the process of evaluating the impact of adoption of the ASU on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13 -
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
. ASU 2016-13 replaces the incurred loss impairment methodology for measuring and recognizing credit losses with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This amendment is effective for fiscal years beginning after December 15, 2019. The Company is currently in the process of evaluating the impact of adoption of the ASU on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
. ASU 2017-04 simplifies the accounting for goodwill impairment by removing the second step of the goodwill impairment test that requires a hypothetical purchase price allocation. Under the new guidance, goodwill impairment will be measured and recognized as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill allocated to the reporting unit. The revised guidance does not affect the reporting entity’s ability to first assess qualitative factors by reporting unit to determine whether it is necessary to perform the quantitative goodwill impairment test. The guidance is effective for goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company early adopted ASU 2017-04 in 2017. The adoption did not impact the consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07,
Compensation-Retirement Benefits (Topic 715)
. The new standard improves the presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The new standard will require all components of the Company's net periodic benefit cost (income), with the exception of service cost, currently reported within selling, general and administrative expenses, to be reclassified and reported within other expense. The adoption of the standard will impact the Company's Statement of Operations by retrospectively reclassifying net periodic benefit income of
$7.4 million
and
$5.8 million
in
2017
and
2016
, respectively, from Selling, general and administrative to Other expense (income), net.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
In May 2017, the FASB issued ASU 2017-09,
Compensation-Stock Compensation (Topic 718)
. The new standard provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. Under the new guidance, an entity should account for the effects of a modification unless all of the following are met, (i) the fair value of the modified award is the same as the fair value of the original award, (ii) the vesting conditions of the modified award are the same as the original awards immediately before modification, and (iii) the classification of the modified award as an equity instrument or liability instrument is the same as the classification immediately prior to modification. The guidance is effective for annual periods and interim periods within those beginning after December 15, 2017. Early adoption is permitted for annual and interim periods with a prospective application to an award modified on or after the adoption date. The Company does not believe there will be a material impact to the financial statements as a result of adopting this ASU.
On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”) was signed into law. Subsequently the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) which provides guidance regarding situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. In accordance with the SAB 118, the Company has made a reasonable estimate of the effects on its existing deferred tax balances and the one-time transition tax. The ultimate impact of the Tax Act may differ from this estimate, possibly materially, due to changes in interpretations and assumptions, and guidance that may be issued and actions the Company may take in response to the Tax Act. The Tax Act is highly complex and the Company will continue to assess the impact that various provisions will have on the business and the consolidated financial statements.
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
. 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
, 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 as the financial impact of these acquisitions are not considered material for the year ended December 31, 2016.
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, 2017
and
2016
, 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,
|
|
2017
|
|
2016
|
Raw materials
|
$
|
58,725
|
|
|
$
|
60,217
|
|
Work-in-process
|
6,943
|
|
|
7,186
|
|
Finished goods
|
79,277
|
|
|
74,669
|
|
|
$
|
144,945
|
|
|
$
|
142,072
|
|
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
6. PROPERTY, PLANT, AND EQUIPMENT, NET
Information regarding the Company's property, plant and equipment is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Land
|
$
|
12,489
|
|
|
$
|
11,930
|
|
Leasehold improvements
|
54,995
|
|
|
46,125
|
|
Buildings
|
67,465
|
|
|
63,749
|
|
Office equipment
|
18,193
|
|
|
14,440
|
|
Software
|
40,378
|
|
|
20,910
|
|
Machinery and equipment
|
243,939
|
|
|
232,777
|
|
Construction-in-progress
|
32,481
|
|
|
55,890
|
|
Property, plant and equipment
|
469,940
|
|
|
445,821
|
|
Accumulated depreciation
|
(269,310
|
)
|
|
(248,737
|
)
|
Property, plant, and equipment, net
|
$
|
200,630
|
|
|
$
|
197,084
|
|
During
2017
,
2016
and
2015
, the Company capitalized interest of approximately
$0.8 million
,
$0.7 million
and
$0.3 million
, respectively.
During the fourth quarter of 2017, the Company completed a global design review of the next phases of its enterprise resource planning system implementation. Through this review, the Company identified certain software items that were no longer useful to the future phases of the enterprise resource planning system. As a result, the Company recorded a
$16.3 million
write-off of capitalized software costs, previously included in construction-in-progress.
7. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Information regarding the Company's other intangible assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
Gross
Amount
|
|
Accumulated
Amortization
|
|
Net
Amount
|
|
Gross
Amount
|
|
Accumulated
Amortization
|
|
Net
Amount
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Tradenames
|
$
|
225,600
|
|
|
$
|
—
|
|
|
$
|
225,600
|
|
|
$
|
225,600
|
|
|
$
|
—
|
|
|
$
|
225,600
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Various
|
34,585
|
|
|
(21,604
|
)
|
|
12,981
|
|
|
34,585
|
|
|
(18,315
|
)
|
|
16,270
|
|
Total
|
$
|
260,185
|
|
|
$
|
(21,604
|
)
|
|
$
|
238,581
|
|
|
$
|
260,185
|
|
|
$
|
(18,315
|
)
|
|
$
|
241,870
|
|
Based on the results of the annual impairment test as of October 1, 2017 and 2016, the Company determined there were no indications of impairment for goodwill or indefinite-lived intangible assets. 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 was 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, 2017
The Company's amortization expense related to finite-lived intangible assets was
$3.3 million
,
$3.3 million
, and
$3.2 million
for the years ended December 31,
2017
,
2016
, and
2015
, respectively. The expected amortization expense based on the finite-lived intangible assets as of December 31,
2017
is as follows (in thousands):
|
|
|
|
|
|
Estimated Amortization
|
2018
|
$
|
2,495
|
|
2019
|
2,290
|
|
2020
|
2,216
|
|
2021
|
2,103
|
|
2022
|
1,808
|
|
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, 2016
|
$
|
35,701
|
|
|
$
|
68,731
|
|
|
$
|
36,959
|
|
|
$
|
141,391
|
|
Foreign currency translation adjustment
|
519
|
|
|
—
|
|
|
—
|
|
|
519
|
|
Purchase accounting adjustment
|
—
|
|
|
203
|
|
|
—
|
|
|
203
|
|
Balance as of December 31, 2017
|
$
|
36,220
|
|
|
$
|
68,934
|
|
|
$
|
36,959
|
|
|
$
|
142,113
|
|
8. OTHER CURRENT LIABILITIES
Information regarding the Company's other current liabilities is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Accrued employee compensation
|
$
|
41,144
|
|
|
$
|
46,508
|
|
Customer deposits
|
30,484
|
|
|
31,216
|
|
Warranty
|
9,174
|
|
|
8,906
|
|
Contingent consideration
|
1,100
|
|
|
7,100
|
|
Other
|
22,256
|
|
|
21,125
|
|
Other current liabilities
|
$
|
104,158
|
|
|
$
|
114,855
|
|
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
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, 2017
and
2016
were
$5.9 million
and
$5.2 million
, respectively. Total rent expense for
2017
,
2016
, and
2015
was
$28.9 million
,
$29.8 million
, and
$28.6 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
|
2018
|
$
|
26,744
|
|
2019
|
20,849
|
|
2020
|
16,968
|
|
2021
|
11,959
|
|
2022
|
10,528
|
|
Subsequent years
|
26,537
|
|
Total minimum lease payments
|
$
|
113,585
|
|
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 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
2017
, the Company did not make any contributions to the union or nonunion pension plans. 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, 2017
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
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Change in projected benefit obligation:
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of the period
|
$
|
280,193
|
|
|
$
|
273,809
|
|
|
$
|
5,736
|
|
|
$
|
6,294
|
|
Service cost
|
700
|
|
|
1,870
|
|
|
—
|
|
|
—
|
|
Interest cost
|
9,455
|
|
|
9,662
|
|
|
173
|
|
|
196
|
|
Plan amendments
|
—
|
|
|
—
|
|
|
(1,317
|
)
|
|
(998
|
)
|
Participant contributions
|
—
|
|
|
—
|
|
|
206
|
|
|
206
|
|
Actuarial (gain) loss
|
27,925
|
|
|
7,207
|
|
|
(284
|
)
|
|
1,076
|
|
Benefits paid
|
(19,586
|
)
|
|
(11,943
|
)
|
|
(708
|
)
|
|
(1,038
|
)
|
(Gain) related to settlement
|
(472
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Administrative expenses paid
|
(2,649
|
)
|
|
(412
|
)
|
|
—
|
|
|
—
|
|
Projected benefit obligation at end of the period
|
$
|
295,566
|
|
|
$
|
280,193
|
|
|
$
|
3,806
|
|
|
$
|
5,736
|
|
Accumulated benefit obligation at end of the period
|
$
|
295,566
|
|
|
$
|
280,193
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of the period
|
$
|
263,027
|
|
|
$
|
210,556
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Actual return on plan assets
|
33,103
|
|
|
11,662
|
|
|
—
|
|
|
—
|
|
Employer contributions
|
—
|
|
|
53,164
|
|
|
502
|
|
|
832
|
|
Participant contributions
|
—
|
|
|
—
|
|
|
206
|
|
|
206
|
|
Actual expenses paid
|
(2,649
|
)
|
|
(412
|
)
|
|
—
|
|
|
—
|
|
Benefits paid
|
(19,586
|
)
|
|
(11,943
|
)
|
|
(708
|
)
|
|
(1,038
|
)
|
Fair value of plan assets at the end of period
|
$
|
273,895
|
|
|
$
|
263,027
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Funded status
|
$
|
(21,671
|
)
|
|
$
|
(17,166
|
)
|
|
$
|
(3,806
|
)
|
|
$
|
(5,736
|
)
|
Assumptions used in computing the benefit obligation as of
December 31, 2017
and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Discount rate
|
3.70 - 3.77%
|
|
|
4.16 - 4.25%
|
|
|
2.48 - 3.66%
|
|
2.35 - 4.20%
|
Expected return on plan assets
|
7.10
|
%
|
|
7.10
|
%
|
|
N/A
|
|
N/A
|
Rate of compensation increase
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
N/A
|
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
The following table presents the fair value of the Company's pension plan investments as of
December 31, 2017
and
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Equity Securities
|
|
|
|
|
|
|
|
U.S. equity securities
|
$
|
—
|
|
|
$
|
75,944
|
|
|
$
|
—
|
|
|
$
|
75,944
|
|
Non-U.S. equity securities
|
—
|
|
|
37,042
|
|
|
—
|
|
|
37,042
|
|
Debt Securities
|
|
|
|
|
|
|
|
Fixed income funds and cash investment funds
|
123,867
|
|
|
37,042
|
|
|
—
|
|
|
160,909
|
|
December 31, 2017
|
$
|
123,867
|
|
|
$
|
150,028
|
|
|
$
|
—
|
|
|
$
|
273,895
|
|
|
|
|
|
|
|
|
|
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
|
|
See Note 2 of the consolidated financial statements for the description of the levels of the fair value hierarchy.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
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
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Amounts recognized in the consolidated balance sheets consist of:
|
|
|
|
|
|
|
|
Current liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(231
|
)
|
|
$
|
(612
|
)
|
Noncurrent liabilities
|
(21,671
|
)
|
|
(17,166
|
)
|
|
(3,575
|
)
|
|
(5,124
|
)
|
Net amount recognized
|
$
|
(21,671
|
)
|
|
$
|
(17,166
|
)
|
|
$
|
(3,806
|
)
|
|
$
|
(5,736
|
)
|
Amounts recognized in accumulated other comprehensive income (loss) before taxes:
|
|
|
|
|
|
|
|
Net actuarial loss (gain)
|
$
|
60,256
|
|
|
$
|
50,327
|
|
|
$
|
1,015
|
|
|
$
|
1,302
|
|
Prior service cost (credit)
|
—
|
|
|
—
|
|
|
(3,310
|
)
|
|
(3,477
|
)
|
Net amount recognized
|
$
|
60,256
|
|
|
$
|
50,327
|
|
|
$
|
(2,295
|
)
|
|
$
|
(2,175
|
)
|
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
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net actuarial loss (gain)
|
$
|
12,794
|
|
|
$
|
10,326
|
|
|
$
|
(227
|
)
|
|
$
|
581
|
|
Prior service (credit)
|
—
|
|
|
—
|
|
|
(1,400
|
)
|
|
(998
|
)
|
Amortization of:
|
|
|
|
|
|
|
|
Prior service credit
|
—
|
|
|
—
|
|
|
1,485
|
|
|
1,120
|
|
Actuarial (loss) gain
|
(704
|
)
|
|
(492
|
)
|
|
(3
|
)
|
|
248
|
|
Loss recognized related to settlement
|
(2,162
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Total recognized in OCI
|
$
|
9,928
|
|
|
$
|
9,834
|
|
|
$
|
(145
|
)
|
|
$
|
951
|
|
The net actuarial losses of
$12.8 million
and
$10.3 million
for the pension plans in
2017
and
2016
, respectively, were mainly due to decreases in discount rates over the course of both
2017
and
2016
.
The following table sets forth the estimated net actuarial loss and prior service credit for the Company's pension and OPEB plans included in accumulated other comprehensive income and expected to be recognized in net periodic pension cost during the fiscal year ended December 31, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
2018
|
|
2018
|
Prior service credit
|
—
|
|
|
730
|
|
Actuarial (loss) gain
|
(1,465
|
)
|
|
71
|
|
Total recognized in OCI
|
$
|
(1,465
|
)
|
|
$
|
801
|
|
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
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
|
|
2017
|
|
2016
|
|
2015
|
|
2017
|
|
2016
|
|
2015
|
Service cost
|
$
|
700
|
|
|
$
|
1,870
|
|
|
$
|
7,457
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5
|
|
Interest cost
|
9,455
|
|
|
9,662
|
|
|
12,350
|
|
|
173
|
|
|
196
|
|
|
289
|
|
Expected return on plan assets
|
(18,444
|
)
|
|
(14,782
|
)
|
|
(14,455
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of prior service cost (credit)
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,485
|
)
|
|
(1,120
|
)
|
|
(852
|
)
|
Recognized actuarial loss (gain)
|
704
|
|
|
492
|
|
|
6,311
|
|
|
3
|
|
|
(248
|
)
|
|
(144
|
)
|
Settlement and curtailment related expense
(1)
|
2,162
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net periodic benefit (income) cost
|
$
|
(5,423
|
)
|
|
$
|
(2,758
|
)
|
|
$
|
11,663
|
|
|
$
|
(1,309
|
)
|
|
$
|
(1,172
|
)
|
|
$
|
(702
|
)
|
_______________________________________________________________________________
(1) The pension settlement charge was related to cash payments from lump sum elections made by employees affected by the restructuring activities in the second quarter of 2017.
Assumptions used to determine net periodic benefit cost for the years ended
December 31, 2017
,
2016
, and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
2017
|
|
2016
|
|
2015
|
|
2017
|
|
2016
|
|
2015
|
Discount rate
|
3.80 - 4.25%
|
|
|
4.55 - 4.65%
|
|
|
4.18 - 4.54%
|
|
|
2.35 - 4.20%
|
|
2.30 - 4.51%
|
|
1.69 - 4.20%
|
Expected return on plan assets
|
7.10
|
%
|
|
7.10
|
%
|
|
7.10
|
%
|
|
N/A
|
|
N/A
|
|
N/A
|
Rate of compensation increase
|
N/A
|
|
|
N/A
|
|
|
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, 2017
, as well as the assumed rate for 2018 the following rates were assumed to affect the per capita costs of the following covered benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation
|
|
Net periodic benefit cost
|
|
2017
|
|
2025 and thereafter
|
|
2017
|
|
2023 - 2024
|
Healthcare
|
5.60 - 7.20%
|
|
|
4.50
|
%
|
|
5.80 - 6.20%
|
|
|
4.50
|
%
|
Prescription drug
|
10.10
|
%
|
|
4.50
|
%
|
|
11.10
|
%
|
|
4.50
|
%
|
The effect on benefit obligation of increasing/decreasing the healthcare cost trend rate and aggregate service and interest cost components by 1% is shown as follows for
2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
Accumulated Post-employment Benefit Obligation
|
|
Aggregate service and interest cost components
|
Increase
|
$
|
9
|
|
|
$
|
1
|
|
Decrease
|
8
|
|
|
1
|
|
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
The Company's pension plans' weighted-average asset allocations as of December 31,
2017
and
2016
, by asset category were as follows:
|
|
|
|
|
|
|
|
Plan Assets at
December 31,
|
|
2017
|
|
2016
|
Asset Category:
|
|
|
|
Temporary investment funds
|
1
|
%
|
|
1
|
%
|
Equity investment funds
|
41
|
%
|
|
53
|
%
|
Fixed income funds
|
58
|
%
|
|
46
|
%
|
Total
|
100
|
%
|
|
100
|
%
|
The Company's pension plans' investment policy includes an asset mix based on the Company's risk posture. The investment policy follows a glide path approach that shifts a higher portfolio weighting to fixed income as the funded status increases. The investment policy states a target allocation based on the plans’ funded status of approximately
46%
equity funds and
54%
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
$0.2 million
to its OPEB plans in
2018
. Currently, no contributions are expected in 2018 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
|
2018
|
$
|
18,944
|
|
|
$
|
231
|
|
2019
|
19,012
|
|
|
235
|
|
2020
|
19,416
|
|
|
234
|
|
2021
|
19,460
|
|
|
241
|
|
2022
|
19,468
|
|
|
240
|
|
2023 - 2027
|
89,456
|
|
|
1,243
|
|
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
$5.5 million
for
2017
,
$9.8 million
for
2016
and
$5.6 million
for
2015
. 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
2017
,
2016
, and
2015
was
$1.0 million
,
$1.0 million
, and
$1.0 million
, respectively.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial Instruments
The fair values of the Company’s cash and cash equivalents approximate carrying value due to their short maturities and are classified as Level 1.
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, 2017
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, 2017
|
|
Fair Value as of December 31, 2016
|
Liabilities:
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Contingent purchase price payment - Holly Hunt
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,000
|
|
|
$
|
6,000
|
|
Contingent purchase price payment - DatesWeiser
|
—
|
|
|
—
|
|
|
1,100
|
|
|
1,100
|
|
|
—
|
|
|
—
|
|
|
1,100
|
|
|
1,100
|
|
Total
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,100
|
|
|
$
|
1,100
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,100
|
|
|
$
|
7,100
|
|
Pursuant to the agreement governing the acquisition of HOLLY HUNT®, the Company was required to make annual contingent purchase price payments. The payouts were based upon HOLLY HUNT® reaching an annual net sales target, for each year through 2016, and were paid out on or around February 20 of the following calendar year. The Company classified this as a Level 3 measurement and was required to remeasure this liability at fair value on a recurring basis. The fair value of such contingent purchase price payments, totaling
$16.0 million
, was determined at the time of acquisition based upon net sales projections for HOLLY HUNT® for 2014, 2015, and 2016. The Company paid the remaining
$6.0 million
contingent purchase price in 2017, as a result of HOLLY HUNT® achieving the 2016 net sales targets.
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 fair value measurement is based on significant inputs that are unobservable in the market and thus represents a Level 3 measurement. The Company is required to remeasure this liability at fair value on a recurring basis. The fair value of such contingent purchase price payments, totaling
$1.1 million
, was determined at the time of acquisition based upon net sales projections for DatesWeiser for 2017, 2018, 2019 and 2020 and a discount rate of
10%
. Excluding the initial recognition of the liability for the contingent purchase price payments and payments made to reduce the liability, any changes in the fair value will be included within selling, general and administrative expenses. The maximum amount of possible future contingent payments under the agreement as of
December 31, 2017
are
$3.0 million
.
There were no additional assets and/or liabilities recorded at fair value on a recurring basis as of
December 31, 2017
or
2016
.
Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis
There were no assets and/or liabilities remeasured to fair value on a nonrecurring basis as of
December 31, 2017
or
2016
and for the years then ended.
12. INDEBTEDNESS
The Company's long-term debt is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Balance of revolving credit facility
|
$
|
27,000
|
|
|
$
|
45,000
|
|
Balance of term loan
|
165,000
|
|
|
175,000
|
|
Total long-term debt
|
192,000
|
|
|
220,000
|
|
Less: Current maturities of long-term debt
|
10,000
|
|
|
10,000
|
|
Less: Deferred financing fees, net
|
952
|
|
|
1,617
|
|
Long-term debt
|
$
|
181,048
|
|
|
$
|
208,383
|
|
At
December 31, 2017
and 2016, the Company's interest rates were approximately
2.4%
and
2.0%
, respectively.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
Credit Facilities
The following revolving credit facilities were in place at
December 31, 2017
and
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
Expiration Date
|
|
Capacity
|
|
Borrowed
|
|
Letter of Credit
|
|
Unused capacity
|
|
Borrowed
|
|
Letter of Credit
|
|
Unused capacity
|
Revolving credit facility
|
May 20, 2019
|
|
$
|
300,000
|
|
|
$
|
27,000
|
|
|
$
|
5,367
|
|
|
$
|
267,633
|
|
|
$
|
45,000
|
|
|
$
|
5,766
|
|
|
$
|
249,234
|
|
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, consisting of a revolving commitment (revolving credit facility) in the amount of
$300.0 million
and a term loan commitment in the amount of
$200.0 million
(“Existing Credit Facility”). The Existing Credit Facility also included 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 Existing 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 Existing Credit Facility), 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 Existing Credit Facility 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 Existing Credit Facility covenants at
December 31, 2017
.
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.
Deferred Financing Fees
Deferred financing fees, net of accumulated amortization, totaled
$1.0 million
and
$1.6 million
as of
December 31, 2017
and
2016
, 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, 2017
,
2016
and
2015
, respectively.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
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, 2017
, the Company employed a total of
3,402
people. Approximately
9.0%
of the total number of employees are represented by unions globally. The Grand Rapids, Michigan Plant is the only unionized plant within North America 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
203
hourly employees or
6%
of the labor force. The Collective Bargaining Agreement expires April 2018. Approximately
104
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Balance, beginning of the year
|
$
|
8,906
|
|
|
$
|
8,513
|
|
|
$
|
8,180
|
|
Provision for warranty claims
|
7,099
|
|
|
6,792
|
|
|
7,249
|
|
Warranty claims paid
|
(6,735
|
)
|
|
(6,272
|
)
|
|
(6,801
|
)
|
Foreign currency translation adjustment
|
(96
|
)
|
|
(127
|
)
|
|
(115
|
)
|
Balance, end of the year
|
$
|
9,174
|
|
|
$
|
8,906
|
|
|
$
|
8,513
|
|
14. STOCK PLANS
As of
December 31, 2017
, 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. The following table summarizes the Company approved plans, the number of shares authorized to be issued and the number of shares available to be issued as of
December 31, 2017
:
|
|
|
|
|
|
|
|
Authorized for issue
|
|
Available for issue
|
2010 Stock Incentive Plan
|
2,000,000
|
|
|
29,157
|
|
2013 Stock Incentive Plan
|
2,000,000
|
|
|
1,007,793
|
|
Total available for issuance
|
|
|
1,036,950
|
|
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.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
Restricted Shares and Restricted Stock Units
The Company awards restricted shares and restricted stock units to employees, as well as non-employee directors, under various plans. The restrictions on these awards generally lapse between
three
and
four
years from the date of the awards. The Company records expense for restricted shares and restricted stock units awards in an amount equal to the fair market value of the underlying awards on the grant date of the award, over the period the awards lapse. The following table shows the details for each of the
2015
,
2016
and
2017
restricted shares and restricted stock units grants:
|
|
|
|
|
|
|
|
|
|
|
|
Grant Date
|
Number of restricted shares and restricted stock units
|
|
Weighted-Average Grant Date Fair Value
|
|
Vesting
|
|
Vesting Period
|
2015 grants
|
146,000
|
|
|
$
|
21.64
|
|
|
Cliff - Subject to service conditions
|
|
Three Years
|
|
22,360
|
|
|
$
|
21.31
|
|
|
Graded - Subject to service conditions
|
|
Three Years
|
|
73,000
|
|
|
$
|
21.64
|
|
|
Cliff - Subject to service and performance conditions
|
|
Three Years
|
|
73,000
|
|
|
$
|
14.62
|
|
|
Cliff - Subject to service and market conditions
|
|
Three Years
|
Total 2015 grants
|
314,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 grants
|
283,000
|
|
|
$
|
18.69
|
|
|
Cliff - Subject to service conditions
|
|
Three Years
|
|
30,632
|
|
|
$
|
18.28
|
|
|
Graded - Subject to service conditions
|
|
Three Years
|
|
163,509
|
|
|
$
|
18.81
|
|
|
Cliff - Subject to service and performance conditions
|
|
Three Years
|
|
109,000
|
|
|
$
|
12.65
|
|
|
Cliff - Subject to service and market conditions
|
|
Three Years
|
Total 2016 grants
|
586,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 grants
|
277,250
|
|
|
$
|
22.80
|
|
|
Cliff - Subject to service conditions
|
|
Three - Four Years
|
|
24,488
|
|
|
$
|
22.87
|
|
|
Graded - Subject to service conditions
|
|
Three Years
|
|
147,938
|
|
|
$
|
22.77
|
|
|
Cliff - Subject to service and performance conditions
|
|
Three Years
|
|
98,625
|
|
|
$
|
15.86
|
|
|
Cliff - Subject to service and market conditions
|
|
Three Years
|
Total 2017 grants
|
548,301
|
|
|
|
|
|
|
|
The following table summarizes the Company's restricted stock activity during the year:
|
|
|
|
|
|
|
|
|
Restricted
Stock
|
|
Weighted-Average Grant Date
Fair Value
|
Outstanding at December 31, 2016
|
993,962
|
|
|
$
|
18.00
|
|
Granted
|
301,738
|
|
|
22.80
|
|
Forfeited
|
(61,480
|
)
|
|
20.88
|
|
Vested
|
(392,610
|
)
|
|
16.07
|
|
Outstanding at December 31, 2017
|
841,610
|
|
|
$
|
20.41
|
|
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
The following table summarizes the Company's restricted stock units activity during the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
Stock Units
|
|
Weighted-Average Grant Date
Fair Value
|
|
Restricted
Stock Units Performance Based
|
|
Weighted-Average Grant Date
Fair Value
|
|
Restricted
Stock Units Market Based
|
|
Weighted-Average Grant Date
Fair Value
|
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
|
|
Granted
|
—
|
|
|
—
|
|
|
147,938
|
|
|
22.77
|
|
|
98,625
|
|
|
15.86
|
|
Forfeited
|
—
|
|
|
—
|
|
|
(39,347
|
)
|
|
21.03
|
|
|
(28,657
|
)
|
|
13.83
|
|
Vested
|
(15,000
|
)
|
|
14.04
|
|
|
(316,210
|
)
|
|
17.70
|
|
|
(95,869
|
)
|
|
8.97
|
|
Outstanding at December 31, 2017
|
15,000
|
|
|
$
|
14.04
|
|
|
327,486
|
|
|
$
|
20.44
|
|
|
236,708
|
|
|
$
|
14.40
|
|
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, 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
|
|
Exercised
|
(22,500
|
)
|
|
$
|
20.97
|
|
|
|
|
$
|
147,760
|
|
Expired
|
(45,000
|
)
|
|
$
|
23.47
|
|
|
|
|
$
|
—
|
|
Outstanding at December 31, 2017
|
—
|
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
Exercisable at December 31, 2017
|
—
|
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
A summary of the status of the Company's non-vested options as of
December 31, 2017
and
2016
, and changes during the year ended
December 31, 2017
, is presented below.
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
Weighted-
Average
Grant-Date
Fair Value
|
Non-vested at December 31, 2016
|
4,000
|
|
|
$
|
6.26
|
|
Vested
|
(4,000
|
)
|
|
$
|
6.26
|
|
Non-vested at December 31, 2017
|
—
|
|
|
$
|
—
|
|
The total fair value of options vested during
2017
,
2016
and
2015
were less than
$0.1 million
, respectively.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
Total Awards
Compensation costs related to stock-based compensation for the years ended December 31,
2017
,
2016
, and
2015
totaled
$9.6 million
pre-tax (
$6.1 million
after-tax),
$10.5 million
pre-tax (
$6.8 million
after-tax), and
$8.3 million
pre-tax (
$5.3 million
after-tax), respectively, and are included within selling, general, and administrative expenses.
At
December 31, 2017
, the total compensation cost related to non-vested awards not yet recognized equaled
$12.2 million
for restricted stock awards and restricted stock units, with
zero
costs related to non-vested stock options. The weighted-average remaining period over which the cost is to be recognized is
1.5
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, 2017
,
2016
or
2015
.
Common Stock
The following table demonstrates the change in the number of shares of common stock outstanding during the years ended December
2017
,
2016
, and
2015
(excludes non-voting restricted shares).
|
|
|
|
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 surrendered 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 surrendered 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
|
|
Purchase of common stock
|
(17,445
|
)
|
Shares issued under stock incentive plan, net of awards surrendered to pay applicable taxes
|
385,037
|
|
Exercise of stock options
|
22,500
|
|
Shares issued to Board of Directors in lieu of cash
|
5,522
|
|
Shares outstanding as of December 31, 2017
|
48,497,942
|
|
Treasury Stock
As of
December 31, 2017
and
2016
, the Company held
16,120,462
and
15,645,358
treasury shares, respectively. The Company records repurchases of its common stock for treasury at cost.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
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, 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
|
)
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
Pension and other post-employment liability adjustment
|
$
|
(29,405
|
)
|
|
$
|
(9,783
|
)
|
|
$
|
4,544
|
|
|
$
|
(5,239
|
)
|
|
$
|
(34,644
|
)
|
Foreign currency translation adjustment
|
(13,998
|
)
|
|
4,868
|
|
|
—
|
|
|
4,868
|
|
|
(9,130
|
)
|
Accumulated other comprehensive income (loss)
|
$
|
(43,403
|
)
|
|
$
|
(4,915
|
)
|
|
$
|
4,544
|
|
|
$
|
(371
|
)
|
|
$
|
(43,774
|
)
|
The following reclassifications were made from accumulated other comprehensive income (loss) to the statements of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
|
2015
|
Amortization of pension and other post-employment liability adjustments
|
|
|
|
|
|
Prior service credits
(1)
|
$
|
1,485
|
|
|
$
|
1,120
|
|
|
$
|
852
|
|
Actuarial losses
(1)
|
(707
|
)
|
|
(244
|
)
|
|
(6,167
|
)
|
Loss recognized during settlement
|
(2,162
|
)
|
|
—
|
|
|
—
|
|
Total before tax
|
(1,384
|
)
|
|
876
|
|
|
(5,315
|
)
|
Tax (benefit) expense
|
(548
|
)
|
|
312
|
|
|
(1,929
|
)
|
Net of tax
|
$
|
(836
|
)
|
|
$
|
564
|
|
|
$
|
(3,386
|
)
|
(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, 2017
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 EPS reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock. At
December 31, 2017
,
2016
and
2015
, the Company had outstanding stock options, restricted stock, and restricted stock units, which could potentially dilute basic earnings per share in the future. The following table sets forth the reconciliation from basic to dilutive average common shares (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Numerator:
|
|
|
|
|
|
Net earnings attributable to Knoll, Inc. stockholders
|
$
|
80,163
|
|
|
$
|
82,084
|
|
|
$
|
65,963
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
Denominator for basic earnings per shares - weighted-average shares
|
48,423
|
|
|
48,093
|
|
|
47,747
|
|
Effect of dilutive securities:
|
|
|
|
|
|
Potentially dilutive shares resulting from stock plans
|
737
|
|
|
826
|
|
|
691
|
|
Denominator for diluted earnings per share - weighted-average shares
|
49,160
|
|
|
48,919
|
|
|
48,438
|
|
Antidilutive equity awards not included in weighted-average common shares—diluted
|
—
|
|
|
—
|
|
|
4
|
|
|
|
|
|
|
|
Net earnings per common share attributable to Knoll, Inc. stockholders:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
1.66
|
|
|
$
|
1.71
|
|
|
$
|
1.38
|
|
Diluted
|
$
|
1.63
|
|
|
$
|
1.68
|
|
|
$
|
1.36
|
|
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
17. INCOME TAXES
Income before income tax expense consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
U.S. operations
|
$
|
62,609
|
|
|
$
|
107,803
|
|
|
$
|
77,996
|
|
Foreign operations
|
15,983
|
|
|
19,735
|
|
|
25,423
|
|
Total
|
$
|
78,592
|
|
|
$
|
127,538
|
|
|
$
|
103,419
|
|
Income tax (benefit) expense is comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Current:
|
|
|
|
|
|
Federal
|
$
|
11,712
|
|
|
$
|
11,980
|
|
|
$
|
24,988
|
|
State
|
2,404
|
|
|
2,840
|
|
|
6,101
|
|
Foreign
|
3,918
|
|
|
4,588
|
|
|
6,224
|
|
Total current
|
18,034
|
|
|
19,408
|
|
|
37,313
|
|
Deferred:
|
|
|
|
|
|
Federal
|
(20,595
|
)
|
|
23,814
|
|
|
(1,098
|
)
|
State
|
2,541
|
|
|
2,347
|
|
|
505
|
|
Foreign
|
(1,580
|
)
|
|
(145
|
)
|
|
751
|
|
Total deferred
|
(19,634
|
)
|
|
26,016
|
|
|
158
|
|
Income tax (benefit) expense
|
$
|
(1,600
|
)
|
|
$
|
45,424
|
|
|
$
|
37,471
|
|
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,
2017
|
|
December 31,
2016
|
Deferred tax assets
|
|
|
|
Accounts receivable, principally due to allowance for doubtful accounts
|
$
|
858
|
|
|
$
|
2,985
|
|
Inventories
|
5,939
|
|
|
8,294
|
|
Net operating loss carryforwards
|
7,460
|
|
|
6,664
|
|
Accrued pension
|
5,591
|
|
|
7,637
|
|
Stock-based compensation
|
2,972
|
|
|
6,493
|
|
Compensation-related accruals
|
3,063
|
|
|
4,928
|
|
Warranty
|
1,779
|
|
|
3,222
|
|
Obligation for post-employment benefits other than pension
|
1,312
|
|
|
2,267
|
|
Accrued liabilities and other items
|
3,886
|
|
|
8,537
|
|
Gross deferred tax assets
|
32,860
|
|
|
51,027
|
|
Valuation allowance
|
(4,789
|
)
|
|
(6,161
|
)
|
Net deferred tax assets
|
28,071
|
|
|
44,866
|
|
Deferred tax liabilities:
|
|
|
|
Intangibles
|
(58,701
|
)
|
|
(86,961
|
)
|
Plant and equipment
|
(24,041
|
)
|
|
(34,759
|
)
|
Gross deferred tax liabilities
|
(82,742
|
)
|
|
(121,720
|
)
|
Net deferred tax liabilities
|
$
|
(54,671
|
)
|
|
$
|
(76,854
|
)
|
Income taxes paid, net of refunds received, by the Company during
2017
,
2016
, and
2015
, totaled
$22.4 million
,
$27.4 million
, and
$40.8 million
, respectively.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
As of December 31,
2017
, the Company had net operating loss carryforwards totaling approximately
$30.0 million
in the United Kingdom, Germany and Brazil. The net operating loss carryforwards may be carried forward indefinitely. The Company regularly evaluates positive and negative evidence as it relates to realizability of deferred tax assets in each jurisdiction. As a result of this analysis, the Company determined that the valuation allowance related to United Kingdom net operating losses should be reversed in the current period as a history of positive earnings and anticipated future earnings supports the realization of the deferred tax asset. The result of this reversal was an income tax benefit of
$2.6 million
. The Company still provides a valuation allowance against Germany and Brazil 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:
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Federal statutory tax rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
Increase (decrease) in the tax rate resulting from:
|
|
|
|
|
|
State taxes, net of federal effect
|
5.2
|
%
|
|
3.3
|
%
|
|
4.4
|
%
|
Effect of tax rates of other countries
|
(1.8
|
)%
|
|
(1.4
|
)%
|
|
(2.4
|
)%
|
Section 199 deduction
|
(0.7
|
)%
|
|
(0.8
|
)%
|
|
(0.9
|
)%
|
Change in contingency reserve
|
—
|
%
|
|
(0.2
|
)%
|
|
(0.2
|
)%
|
Limitation on deduction of officer’s compensation
|
1.3
|
%
|
|
0.6
|
%
|
|
0.5
|
%
|
Tax Act
|
(33.9
|
)%
|
|
—
|
%
|
|
—
|
%
|
Valuation Allowance Release
|
(3.3
|
)%
|
|
—
|
%
|
|
—
|
%
|
Other
|
(3.8
|
)%
|
|
(0.9
|
)%
|
|
(0.2
|
)%
|
Effective tax rate
|
(2.0
|
)%
|
|
35.6
|
%
|
|
36.2
|
%
|
On December 22, 2017, the Tax Cuts and Jobs Acts (“Tax Act”) was enacted into law. The new tax legislation represents a fundamental and dramatic shift in U.S. taxation. The new legislation contains several key tax provisions that will impact the Company, including the reduction of the corporate income tax rate from
35%
to
21%
effective January 1, 2018. The new legislation also includes a variety of other changes, such as a one-time transition tax on unrepatriated accumulated foreign earnings, a limitation on the tax deductibility of interest expense, repeal of the Section 199 domestic production activities deduction, acceleration of business asset expensing, and reduction in the amount of executive pay that could qualify as a tax deduction, among others. ASC 740 requires the Company to recognize the effect of the tax law changes in the period of enactment.
At
December 31, 2017
the Company had not completed the accounting for the tax effects of enactment of the Tax Act; however, as described below the Company made a reasonable estimate of the effects on existing deferred tax balances and the one-time transition tax. The Company recorded an estimated benefit as a result of the new legislation of
$26.6 million
in the fourth quarter of 2017. The revaluation of deferred tax assets and liabilities at the lower corporate rate of 21% resulted in a benefit of
$28.3 million
, offset by a one-time transition tax on unrepatriated accumulated foreign earnings of
$0.2 million
and a withholding tax on distribution of those earnings in the amount of
$1.5 million
. The ultimate impact of the Tax Act may differ from this estimate, possibly materially, due to changes in interpretations and assumptions, and guidance that may be issued and actions taken in response to the Tax Act. The Tax Act is highly complex and the Company continues to assess the impact that various provisions will have on the business. However, the SEC staff has issued SAB 118 which will allow the Company to record provisional amounts during a one year remeasurement period. The Company will continue to assess the impact of the recently enacted tax law on our business and our consolidated financial statements.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
The following table summarizes the activity related to the Company's unrecognized tax benefits during
2017
,
2016
, and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Balance, beginning of the year
|
$
|
875
|
|
|
$
|
4,407
|
|
|
$
|
4,922
|
|
Additions for tax position related to the current year
|
125
|
|
|
125
|
|
|
125
|
|
Additions for tax position related to the prior year
|
—
|
|
|
56
|
|
|
134
|
|
Decreases for tax position related to the prior year
|
—
|
|
|
(250
|
)
|
|
(774
|
)
|
Prior year reductions:
|
|
|
|
|
|
Lapse of statute of limitations
|
(125
|
)
|
|
(125
|
)
|
|
—
|
|
Settlements
|
—
|
|
|
(3,338
|
)
|
|
—
|
|
Balance, end of the year
|
$
|
875
|
|
|
$
|
875
|
|
|
$
|
4,407
|
|
All of the unrecognized tax benefits as of
December 31, 2017
, if recognized, would affect the Company's effective tax rate. During
2017
,
2016
, and
2015
, respectively, the Company recognized
zero
,
$0.1 million
and
$0.1 million
of interest and penalties. The Company has paid all accrued interest and penalties recognized prior to
December 31, 2017
, therefore the Company has
no
accruals for the payment of interest and penalties as of
December 31, 2017
and
2016
.
As of December 31,
2017
, the Company is subject to U.S. Federal Income Tax examination for the tax years 2007 through 2017, and to non-U.S. income tax examination for the tax years 2010 to 2017. In addition, the Company is subject to state and local income tax examinations for the tax years 2007 through 2017.
18. OTHER EXPENSE (INCOME), NET
The components of other expense (income), net are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Foreign exchange losses (gains)
|
$
|
1,781
|
|
|
$
|
3,725
|
|
|
$
|
(9,130
|
)
|
Other, net
|
113
|
|
|
(360
|
)
|
|
(44
|
)
|
Other expense (income), net
|
$
|
1,894
|
|
|
$
|
3,365
|
|
|
$
|
(9,174
|
)
|
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
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,
2017
and
2016
. 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
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
256,820
|
|
|
$
|
268,694
|
|
|
$
|
291,256
|
|
|
$
|
316,122
|
|
|
$
|
1,132,892
|
|
|
|
Gross profit
|
95,674
|
|
|
99,958
|
|
|
106,610
|
|
|
112,337
|
|
|
414,579
|
|
|
|
Net earnings
|
15,396
|
|
|
12,956
|
|
|
19,161
|
|
|
32,679
|
|
|
80,192
|
|
|
(1) (2) (3)
|
Net earnings attributable to Knoll, Inc. stockholders
|
15,404
|
|
|
12,934
|
|
|
19,132
|
|
|
32,693
|
|
|
80,163
|
|
|
(1) (2) (3)
|
Earnings per share—Basic
|
$
|
0.32
|
|
|
$
|
0.27
|
|
|
$
|
0.39
|
|
|
$
|
0.67
|
|
|
$
|
1.66
|
|
|
(1) (2) (3)
|
Earnings per share—Diluted
|
$
|
0.31
|
|
|
$
|
0.26
|
|
|
$
|
0.39
|
|
|
$
|
0.67
|
|
|
$
|
1.63
|
|
|
(1) (2) (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
Net earnings attributable to Knoll, Inc. stockholders
|
17,400
|
|
|
21,635
|
|
|
21,607
|
|
|
21,442
|
|
|
82,084
|
|
|
|
Earnings per share—Basic
|
$
|
0.36
|
|
|
$
|
0.45
|
|
|
$
|
0.45
|
|
|
$
|
0.45
|
|
|
$
|
1.71
|
|
|
|
Earnings per share—Diluted
|
$
|
0.36
|
|
|
$
|
0.44
|
|
|
$
|
0.44
|
|
|
$
|
0.44
|
|
|
$
|
1.68
|
|
|
|
_______________________________________________________________________________
(1) During the fourth quarter of 2017, the Company recorded pension settlement charges of
$2.2 million
and a
$16.3 million
write-off of property, plant, and equipment.
(2) During the second quarter of 2017, Knoll recorded restructuring charges of
$2.2 million
related to headcount rationalization and modernization of equipment in the Office Segment. Knoll does not expect to incur additional payments due to restructuring.
(3) The fourth quarter of 2017 results include the impact of the Tax Cuts and Jobs Acts. See Note 17.
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. HOLLY HUNT® includes the 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.
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 are 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.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
The tables below present the Company’s segment information (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
SALES
|
|
|
|
|
|
Office
|
$
|
682,936
|
|
|
$
|
731,327
|
|
|
$
|
686,943
|
|
Studio
|
340,995
|
|
|
323,431
|
|
|
303,838
|
|
Coverings
|
108,961
|
|
|
109,534
|
|
|
113,661
|
|
Corporate
|
—
|
|
|
—
|
|
|
—
|
|
Knoll, Inc.
|
$
|
1,132,892
|
|
|
$
|
1,164,292
|
|
|
$
|
1,104,442
|
|
INTERSEGMENT SALES
(1)
|
|
|
|
|
|
Office
|
$
|
1,331
|
|
|
$
|
1,877
|
|
|
$
|
1,640
|
|
Studio
|
5,572
|
|
|
5,788
|
|
|
6,184
|
|
Coverings
|
5,369
|
|
|
8,350
|
|
|
8,358
|
|
Corporate
|
—
|
|
|
—
|
|
|
—
|
|
Knoll, Inc.
|
$
|
12,272
|
|
|
$
|
16,015
|
|
|
$
|
16,182
|
|
DEPRECIATION AND AMORTIZATION
|
|
|
|
|
|
|
|
Office
|
$
|
19,177
|
|
|
$
|
16,284
|
|
|
$
|
14,945
|
|
Studio
|
6,776
|
|
|
5,936
|
|
|
5,565
|
|
Coverings
|
750
|
|
|
805
|
|
|
769
|
|
Corporate
|
—
|
|
|
—
|
|
|
—
|
|
Knoll, Inc.
|
$
|
26,703
|
|
|
$
|
23,025
|
|
|
$
|
21,279
|
|
OPERATING PROFIT
|
|
|
|
|
|
|
|
Office
(2)
|
$
|
25,894
|
|
|
$
|
73,871
|
|
|
$
|
55,823
|
|
Studio
|
51,136
|
|
|
53,413
|
|
|
47,952
|
|
Coverings
|
24,623
|
|
|
25,953
|
|
|
17,273
|
|
Corporate
|
(13,684
|
)
|
|
(16,929
|
)
|
|
(19,938
|
)
|
Knoll, Inc.
(3)
|
$
|
87,969
|
|
|
$
|
136,308
|
|
|
$
|
101,110
|
|
CAPITAL EXPENDITURES
|
|
|
|
|
|
|
|
|
Office
|
$
|
32,413
|
|
|
$
|
35,072
|
|
|
$
|
27,058
|
|
Studio
|
7,061
|
|
|
6,819
|
|
|
4,241
|
|
Coverings
|
203
|
|
|
804
|
|
|
648
|
|
Corporate
|
—
|
|
|
—
|
|
|
—
|
|
Knoll, Inc.
|
$
|
39,677
|
|
|
$
|
42,695
|
|
|
$
|
31,947
|
|
_______________________________________________________________________________
(1) Intersegment sales are presented on a cost-plus basis which takes into consideration the effect of transfer prices between legal entities.
(2) Knoll recorded a
$16.3 million
write-off of property, plant, and equipment, a
$2.2 million
pension settlement charge and a
$2.2 million
restructuring charge within the Office segment during 2017.
(3) 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, 2017
The Company's net sales by product category were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Office Systems
|
$
|
390,396
|
|
|
$
|
461,743
|
|
|
$
|
432,655
|
|
Seating
|
109,051
|
|
|
114,135
|
|
|
117,799
|
|
Files and Storage
|
90,328
|
|
|
85,696
|
|
|
86,099
|
|
Studio
|
340,995
|
|
|
323,431
|
|
|
303,838
|
|
Coverings
|
108,961
|
|
|
109,534
|
|
|
113,661
|
|
Other
|
93,161
|
|
|
69,753
|
|
|
50,390
|
|
Total
|
$
|
1,132,892
|
|
|
$
|
1,164,292
|
|
|
$
|
1,104,442
|
|
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
|
2017
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
977,669
|
|
|
$
|
52,894
|
|
|
$
|
100,233
|
|
|
$
|
2,096
|
|
|
$
|
1,132,892
|
|
Property, plant, and equipment, net
|
157,805
|
|
|
29,307
|
|
|
13,518
|
|
|
—
|
|
|
200,630
|
|
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
|
|
21. SUBSEQUENT EVENTS
Indebtedness
On January 23, 2018, the Company completed an amendment to its existing credit facility, dated May 20, 2014 (the “Existing Credit Agreement”), whereby the Existing Credit Agreement was amended and restated in its entirety by that certain Third Amended and Restated Credit Agreement, dated as of January 22, 2018, among the Company and certain foreign subsidiaries of the Company, as borrowers, certain domestic and foreign subsidiaries of the Company, as guarantors, Bank of America, N.A., as Administrative Agent, Swing Line Lender, and an L/C Issuer, Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Joint Lead Arranger and Sole Bookrunner, and certain lenders and other parties thereto (the “Amended Credit Agreement”).
The Amended Credit Agreement provides for a
$750.0 million
credit facility that matures in
five years
, consisting of a revolving commitment in the amount of
$400.0 million
, which may be available in U.S. dollars, Euro, British Pound and other foreign currencies to be agreed, a U.S. term loan commitment in the amount of
$250.0 million
and a multicurrency term loan commitment in the amount of
€81.7 million
. 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 the greater of
$250.0 million
and
90%
of the EBITDA of the Company and its subsidiaries for the four fiscal quarters prior to such increase or additional loan, subject to the satisfaction of certain terms and conditions. The proceeds of the credit facility will be used to, among other things (1) consummate the Muuto Acquisition (as defined below), (2) refinance certain indebtedness and (3) for general corporate purposes. Borrowings under the credit facility may be repaid at any time, but no later than the maturity date on January 23, 2023. The Company retains the right to terminate or reduce the size of the revolving credit facility at any time. Borrowings under the term loan facilities amortize in equal quarterly installments equaling
5%
per annum, with the remaining borrowings due on the maturity date.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
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 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 (or under certain circumstances, a maximum specified net secured 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.
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.
The indebtedness incurred under the Amended Credit Agreement is secured by substantially all of the Company’s tangible and intangible assets, including, without limitation, the Company’s intellectual property. The Company’s direct and indirect wholly-owned domestic subsidiaries have also guaranteed the obligations of the Company and the foreign borrowers under the Amended Credit Agreement and pledged substantially all of their tangible and intangible assets as security for their obligations under such guarantee. Certain of the Company’s wholly-owned foreign subsidiaries have guaranteed the obligations of the foreign borrowers under the Amended Credit Agreement and pledged certain of their assets as security for their obligations under such guarantee.
In January 2018, the Company entered into an interest rate swap, effective December 31, 2018, on
$300.0 million
notional amount of its new credit facility to a fixed rate of
2.63%
, plus LIBOR. The swap is designed to reduce the Company's exposure to variable interest rate risk under the Amended Credit Agreement.
Acquisitions
On January 25, 2018, Knoll Denmark ApS (“Knoll Denmark”), a wholly owned subsidiary of the Company, completed the acquisition of one hundred percent (
100%
) of the shares of Muuto Holding ApS and MIE4 Holding 5 ApS (“Muuto” or the “Muuto Acquisition”), which collectively hold substantially all of the business operations of Muuto, pursuant to a share purchase agreement, dated as of December 10, 2017, among Knoll Denmark and the owners of Muuto Holding ApS and MIE4 Holding 5 ApS. The purchase price for the shares was approximately
$300.0 million
, less certain customary adjustments. The Company will record the Muuto Acquisition using the acquisition method of accounting and recognize the assets acquired and liabilities assumed at their fair values as of the date of acquisition.
The Company recorded acquisition costs in its consolidated statement of operations and comprehensive income, within selling, general, and administrative expenses during the year ended
December 31, 2017
as follows (in thousands):
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
Accounting and legal fees
|
|
$
|
439
|
|
Other
|
|
104
|
|
Total
|
|
$
|
543
|
|
Due to the limited time since the date of the acquisition, the initial disclosure for this business combination is incomplete as of the date of this filing. As such, it is impracticable for the Company to make certain business combination disclosures at this time. The Company will provide this information in its Quarterly Report on Form 10-Q for the quarter ending March 31, 2018.