NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Knoll, Inc. (the “Company”) have been prepared with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries and any partially owned subsidiaries that the Company has the ability to control. All significant intercompany balances and transactions have been eliminated in consolidation. Operating results for the three month periods ended
March 31, 2018
are not necessarily indicative of the results that may be expected for the year ended
December 31, 2018
.
The condensed consolidated balance sheet of the Company, as of
December 31, 2017
, has been derived from the Company’s audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended
December 31, 2017
.
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 adopted the standard as of January 1, 2018.
The Company has completed its assessment of the impact of the new standard and adopted the new standard for all open contracts as of January 1, 2018 using the modified retrospective transition method, and applied the guidance to report new disclosures surrounding the Company’s recognition of revenue. The adoption of the new standard did not have a material impact on the financial position of the Company, the results of its operations or its cash flows as of and for the three months ended
March 31, 2018
, and the Company’s internal controls over financial reporting. There was no cumulative effect of adopting the standard at the date of initial application in retained earnings. The Company’s Revenue Recognition accounting policy has been updated for the new standard. Revenue is measured as the amount of consideration the Company expects 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 new standard further requires quantitative and qualitative disclosures about the Company’s contracts with customers which have been included within this Form 10-Q.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842),
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 March 2017, the FASB issued ASU 2017-07,
Compensation-Retirement Benefits (Topic 715)
. The new standard requires the service cost component of net periodic benefit cost to be presented in the same income statement line as other employee compensation costs arising from services rendered during the period and the other components of net periodic benefit cost to be presented separately from the income statement lines that include service cost and outside of any subtotal of operating income. The Company adopted the new standard for the period beginning January 1, 2018, resulting in no change in presentation of the
service cost component of net periodic benefit cost, which has historically been reported in selling, general and administrative expenses along with other employee compensation costs. The retrospective adoption resulted in a change in presentation of the other components of net periodic benefit cost for the year ended December 31, 2017, and interim periods therein, by reclassifying net periodic benefit income of
$2.4 million
for the period ended March 31, 2017 from Selling, general and administrative to Other income, net.
In August 2017, the FASB issued ASU 2017-12,
Derivatives and Hedging (Topic 815)
. The new standard is intended to better align a company’s risk management strategies and financial reporting for hedging relationships. Under the new guidance, more hedging strategies will be eligible for hedge accounting and the application of hedge accounting is simplified. In addition, the new guidance amends presentation and disclosure requirements. The guidance is effective for fiscal years beginning after December 15, 2018 with early adoption permitted, including the interim periods within those years. The Company early adopted the standard as of January 1, 2018. The adoption of the standard did not have a material impact on the Company’s consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02,
Income Statement - Reporting Comprehensive Income
(Topic 220). The new standard will allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (“Tax Act”). The amendments eliminate the stranded tax effects resulting from the Tax Act and will improve the usefulness of information reported to financial statements users. However, because the amendment only relates to the reclassification of the income tax effects of the Tax Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The guidance is effective for fiscal years beginning after December 15, 2018 with early adoption permitted, including the interim periods within those years. The Company adopted the standard effective January 1, 2018 and reclassified
$6.3 million
from accumulated other comprehensive income to retained earnings related to the Company’s minimum pension liability.
In March 2018, the FASB issued ASU 2018-05,
Income Taxes
(Topic 740) which incorporates the provisions of SAB 118 into the accounting standards codification. 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.
NOTE 2. REVENUE
Disaggregation of Revenue
The majority of the Company’s revenue presented as “Sales” in the Condensed Consolidated Statements of Operations and Comprehensive Income is the result of contracts with customers for the sale of the Company’s products. All other sources of revenue are not material to the Company's results of operations. The other sources of revenue include installation revenue and royalty revenue.
The Company’s net sales by product category were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2018
|
|
2017
|
Office Segment
|
|
|
|
Office Systems
|
$
|
103,354
|
|
|
$
|
100,228
|
|
Seating
|
29,957
|
|
|
25,662
|
|
Files and Storage
|
22,078
|
|
|
18,535
|
|
Ancillary
|
19,145
|
|
|
8,071
|
|
Other
|
7,084
|
|
|
5,502
|
|
Total Office Segment
|
$
|
181,618
|
|
|
$
|
157,998
|
|
Lifestyle Segment
|
|
|
|
Studio
|
87,567
|
|
|
70,907
|
|
Coverings
|
27,374
|
|
|
27,915
|
|
Total Lifestyle Segment
|
$
|
114,941
|
|
|
$
|
98,822
|
|
Total Sales
|
$
|
296,559
|
|
|
$
|
256,820
|
|
Contract Balances
The Company has contract assets consisting of Customer Receivables in the Condensed Consolidated Balance Sheets which represent the amount of consideration the Company expects to be entitled to in exchange for the goods or services rendered to its customers.
The Company generally receives deposits from customers before revenue is recognized, thus resulting in the recognition of a contract liability (Customer deposits) presented as a component of Other Current Liabilities in the Condensed Consolidated Balance Sheets. Significant changes in the Customer deposits balances during the three months ended
March 31, 2018
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2018
|
|
Revenue recognized that was included in the contract liability balance at the beginning of the period ended March 31, 2018
|
|
Increases due to cash received, excluding amounts recognized as revenue during the period ended March 31, 2018
|
|
Balance as of March 31, 2018
|
$
|
30,484
|
|
|
$
|
(6,485
|
)
|
|
$
|
10,256
|
|
|
$
|
34,255
|
|
Increases to customer deposits as a result of business combinations during the three months ended
March 31, 2018
balance were
$1.5 million
.
Performance Obligations
The Company recognizes revenue when performance obligations under the terms of a contract with its 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 generally 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 Company does not disclose the value of unsatisfied (or potentially unsatisfied) performance obligations for contracts with an original length of one year or less.
Amounts billed to customers for shipping and handling activities to fulfill the Company’s promise to transfer the goods are included in Sales, and costs incurred by the Company for the delivery of goods are classified as Cost of sales in the Condensed Consolidated Statements of Operations and Comprehensive Income. Sales, value add, and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue. The Company generally offers assurance-type warranties for its products. The specific terms and conditions of those warranties vary depending upon the product. 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 warranty liability include historical product-failure experience and estimated repair costs for identified matters. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.
Practical Expedients Elected
Incremental Costs of Obtaining a Contract - The Company has elected the practical expedient permitted in ASC 340-40-25-4, which permits an entity to recognize incremental costs to obtain a contract as an expense when incurred if the amortization period will be less than one year.
Significant Financing Component - The Company has elected the practical expedient permitted in ASC 606-10-32-18, which allows an entity to not adjust the promised amount of consideration for the effects of a significant financing component if a contract has a duration of one year or less. As the Company’s contracts are typically less than one year in length, consideration will not be adjusted. The Company’s contracts include a standard payment term of 30 days, consequently there is no significant financing component within contracts.
NOTE 3. ACQUISITION
On January 25, 2018, the Company acquired
one hundred percent (
100%
) of the shares of Muuto Holding ApS and MIE4 Holding 5 ApS, which collectively hold substantially all the business operations of Muuto ApS (“Muuto”). Muuto’s affordable luxury products span commercial and residential applications, adding scale and diversity to the Company’s business. The aggregate purchase price for the acquisition was
$303.7 million
, net of
$7.5 million
of cash acquired and subject to certain customary adjustments. The Company recorded the acquisition of Muuto using the acquisition method of accounting and recognized the assets acquired and liabilities assumed at their estimated fair values as of the date of acquisition. The results of operations of Muuto have been included in the Company’s Lifestyle segment beginning January 25, 2018. The Company funded the acquisition with borrowings from the Amended Credit Agreement as well as cash on hand. See Note 10 for information on the Company’s borrowings. The Company recorded acquisition costs in its Consolidated Statement of Operations and Comprehensive Income, within selling, general, and administrative expenses during the three months ended
March 31, 2018
of
$1.0 million
.
The amount of sales and net earnings that resulted from the acquisition and attributable to Knoll, Inc. stockholders included in the Condensed Consolidated Statements of Operations and Comprehensive Income during the three months ended
March 31, 2018
were as follows (in thousands):
|
|
|
|
|
|
Sales
|
|
$
|
15,186
|
|
Net loss attributable to Knoll, Inc. stockholders
|
|
$
|
(154
|
)
|
The following table summarizes the preliminary fair values assigned to the assets acquired and liabilities assumed as of the January 25, 2018 acquisition date (in thousands):
|
|
|
|
|
|
Cash
|
|
$
|
7,506
|
|
Customer receivables
|
|
8,717
|
|
Inventory
|
|
14,675
|
|
Other current assets
|
|
447
|
|
Property, plant, and equipment, net
|
|
1,250
|
|
Intangible assets
|
|
131,300
|
|
Other non-current assets
|
|
292
|
|
Accounts payable
|
|
3,374
|
|
Other current liabilities
|
|
12,244
|
|
Deferred income taxes
|
|
29,744
|
|
Other noncurrent liabilities
|
|
1,637
|
|
Fair value of acquired identifiable assets and liabilities
|
|
$
|
117,188
|
|
|
|
|
Purchase price
|
|
$
|
311,254
|
|
Less: Fair value of acquired identifiable assets and liabilities
|
|
117,188
|
|
Goodwill
|
|
$
|
194,066
|
|
The following table summarizes the estimated fair value of Muuto’s identifiable intangible assets and their estimated useful lives (in thousands):
|
|
|
|
|
|
|
|
Fair Value as of January 25, 2018
|
|
Estimated Useful Life
|
Indefinite-lived intangible assets:
|
|
|
|
Trade name
|
$
|
65,000
|
|
|
Indefinite
|
Finite-lived intangible assets:
|
|
|
|
Wholesale customer relationships
|
33,000
|
|
|
15
|
Contract customer relationships
|
22,000
|
|
|
9
|
Copyrights & designs
|
10,000
|
|
|
7
|
Non-competition agreements
|
1,300
|
|
|
3
|
|
$
|
131,300
|
|
|
|
The preliminary purchase price of Muuto has been allocated to the Company’s tangible and identifiable intangible assets acquired and liabilities assumed, based on their estimated acquisition date fair values. The excess of the purchase price over the net tangible and intangible assets is recorded to goodwill. Goodwill is not deductible for tax purposes. The preliminary allocation of purchase price is based upon a valuation undertaken by the Company with the assistance of an independent third party valuation service and is subject to change during the measurement period. The initial accounting for the acquisition of Muuto is incomplete pending final valuation of the tangible and identifiable intangible assets acquired and liabilities assumed.
Unaudited pro forma information for the Company for the three month periods ended
March 31, 2018
and
2017
as if the acquisition had occurred January 1, 2017 is as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31, 2018
|
|
March 31, 2017
|
Pro forma sales
|
$
|
300,707
|
|
|
$
|
272,520
|
|
Pro forma net earnings attributable to Knoll, Inc. stockholders
|
$
|
17,626
|
|
|
$
|
15,911
|
|
The unaudited pro forma financial information has been presented for illustrative purposes only and is not necessarily indicative of results of operations that would have been achieved had the acquisition taken place on the date indicated, or the future consolidated results of operations of the Company. The pro forma financial information presented above has been derived from the historical condensed consolidated financial statements of the Company and from the historical consolidated financial statements of Muuto.
The pro forma financial information presented above includes adjustment for: (1) incremental amortization expense related to fair value adjustments to identifiable intangible assets, (2) incremental interest expense for outstanding borrowings to reflect the terms of the Amended Credit Agreement, (3) nonrecurring items and (4) the tax effect of the above adjustments.
Nonrecurring adjustments related to acquisition costs and loss on debt extinguishment of
$2.4 million
were recorded during the three month period of
March 31, 2018
were recorded in the Condensed Consolidated Statements of Operations. A pro forma adjustment was made to incorporate the effect of nonrecurring costs related to loss on debt extinguishment of
$1.7 million
during the period of
March 31, 2017
. Adjustments were made in the calculation of pro forma amounts to remove the effect of these nonrecurring items and related income taxes. The pro forma financial information does not include adjustments for potential future cost savings.
NOTE 4. INVENTORIES
Information regarding the Company’s inventories is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
Raw materials
|
$
|
62,745
|
|
|
$
|
58,725
|
|
Work-in-process
|
7,520
|
|
|
6,943
|
|
Finished goods
|
97,708
|
|
|
79,277
|
|
|
$
|
167,973
|
|
|
$
|
144,945
|
|
NOTE 5. PENSION AND OTHER POST-EMPLOYMENT BENEFITS
The following tables set forth the components of the net periodic benefit income for the Company’s pension and other post-employment benefit plans (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
Three Months Ended March 31,
|
|
Three Months Ended March 31,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Service cost
|
$
|
235
|
|
|
$
|
175
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
2,504
|
|
|
2,390
|
|
|
30
|
|
|
43
|
|
Expected return on plan assets
|
(4,606
|
)
|
|
(4,615
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service credit
|
—
|
|
|
—
|
|
|
(182
|
)
|
|
(371
|
)
|
Recognized actuarial loss (gain)
|
366
|
|
|
154
|
|
|
(18
|
)
|
|
1
|
|
Net periodic benefit income
|
$
|
(1,501
|
)
|
|
$
|
(1,896
|
)
|
|
$
|
(170
|
)
|
|
$
|
(327
|
)
|
NOTE 6. 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.
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The following table represents the assets and liabilities, measured at fair value on a recurring basis and the basis for that measurement (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of March 31, 2018
|
|
Fair Value as of December 31, 2017
|
Liabilities:
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Interest rate swap
|
$
|
—
|
|
|
$
|
175
|
|
|
$
|
—
|
|
|
$
|
175
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Contingent purchase price payment - DatesWeiser
|
—
|
|
|
—
|
|
|
1,100
|
|
|
1,100
|
|
|
—
|
|
|
—
|
|
|
1,100
|
|
|
1,100
|
|
Total
|
$
|
—
|
|
|
$
|
175
|
|
|
$
|
1,100
|
|
|
$
|
1,275
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,100
|
|
|
$
|
1,100
|
|
Interest Rate Swap
The Company’s interest rate swap has a maturity of
five
years and is with a counterparty with a credit rating of A- according to S&P and Fitch. The fair value of interest rate swap agreement is based on observable prices as quoted for receiving the variable one month London Interbank Offered Rates or LIBOR and paying fixed interest rates and therefore, were classified as Level 2.
Contingent Payment
Pursuant to the agreement governing the acquisition of DatesWeiser, the Company may be required to make annual contingent purchase price payments. The payouts are based upon DatesWeiser reaching an annual net sales target, for each year through 2020. The Company classifies this as a Level 3 measurement and is required to remeasure this liability at fair value on a recurring basis. The fair value of such contingent purchase price payments, totaling
$1.1 million
, was determined at the time of acquisition based upon net sales projections for DatesWeiser for 2017, 2018, 2019 and 2020. Excluding the initial recognition of the liability for the contingent purchase price payments and payments made to reduce the liability, any changes in the fair value will be included within selling, general and administrative expenses.
There were no additional assets and/or liabilities recorded at fair value on a recurring basis as of
March 31, 2018
or
December 31, 2017
.
NOTE 7. DERIVATIVE INSTRUMENTS
The Company is exposed to interest rate risks related to its business operations. To reduce the interest rate risk the Company uses derivative instruments, including interest rate swaps contracts. The Company does not use derivatives for speculative trading purposes.
Cash flow hedge
To offset the variability of cash flows in interest payments associated with a portion of the Company’s variable rate debt, the Company entered into an interest rate swap contract in January 2018 which is designated as a cash flow hedge. The interest rate swap hedges US LIBOR based debt which effectively converts variable-rate debt to a fixed interest rate. As of
March 31, 2018
the Company’s interest rate swap agreement had a notional amount of
$300.0 million
that hedges certain long-term debt obligations. The contract has a rate of
2.63%
.
The following table illustrates the location and fair value of the Company’s interest rate swap at
March 31, 2018
and
December 31, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Derivatives
|
|
2018
|
|
2017
|
|
Balance Sheet Location
|
|
Fair Value
|
|
Balance Sheet Location
|
|
Fair Value
|
Derivatives designated as hedging instruments under ASC 815
|
|
Interest rate swap
|
Other liabilities
|
|
$
|
175
|
|
|
Other liabilities
|
|
$
|
—
|
|
Total derivatives designated as hedging instruments under ASC 815
|
|
|
$
|
175
|
|
|
|
|
$
|
—
|
|
As of
March 31, 2018
there was no hedge ineffectiveness associated with the Company’s interest rate swap and no portion of our cash flow hedge is excluded from the assessment of effectiveness. The Company will defer any effective portion of the cash flow hedge to accumulated other comprehensive income and will reclassify into earnings when the transaction occurs. The interest rate swap had no effect on the Statement of Operations for the three months ended
March 31, 2018
. The Company does not expect any material reclassifications from accumulated other comprehensive income into earnings over the next 12 months.
NOTE 8. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Information regarding the Company's other intangible assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
|
Gross
Amount
|
|
Accumulated
Amortization
|
|
Net
Amount
|
|
Gross
Amount
|
|
Accumulated
Amortization
|
|
Net
Amount
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Tradenames
|
$
|
290,600
|
|
|
$
|
—
|
|
|
$
|
290,600
|
|
|
$
|
225,600
|
|
|
$
|
—
|
|
|
$
|
225,600
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
77,497
|
|
|
(12,922
|
)
|
|
64,575
|
|
|
22,497
|
|
|
(11,575
|
)
|
|
10,922
|
|
Copyrights & design
|
10,000
|
|
|
(265
|
)
|
|
9,735
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Various
|
13,388
|
|
|
(10,348
|
)
|
|
3,040
|
|
|
12,088
|
|
|
(10,029
|
)
|
|
2,059
|
|
Total
|
$
|
391,485
|
|
|
$
|
(23,535
|
)
|
|
$
|
367,950
|
|
|
$
|
260,185
|
|
|
$
|
(21,604
|
)
|
|
$
|
238,581
|
|
The Company's amortization expense, which is recorded on a straight line basis, related to finite-lived intangible assets was
$1.9 million
and
$0.8 million
for the three months ended
March 31, 2018
and 2017, respectively. The expected amortization expense based on the finite-lived intangible assets as of
March 31, 2018
is as follows (in thousands):
|
|
|
|
|
|
Estimated Amortization
|
Remainder of 2018
|
$
|
7,076
|
|
2019
|
8,792
|
|
2020
|
8,718
|
|
2021
|
8,172
|
|
2022
|
$
|
7,877
|
|
The changes in the carrying amount of goodwill by reportable segment are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
Segment
|
|
Lifestyle Segment
|
|
Total
|
Balance as of December 31, 2017
|
$
|
36,220
|
|
|
$
|
105,893
|
|
|
$
|
142,113
|
|
Foreign currency translation adjustment
|
(203
|
)
|
|
1,159
|
|
|
956
|
|
Goodwill acquired
|
—
|
|
|
194,066
|
|
|
194,066
|
|
Balance as of March 31, 2018
|
$
|
36,017
|
|
|
$
|
301,118
|
|
|
$
|
337,135
|
|
NOTE 9. OTHER CURRENT LIABILITIES
Information regarding the Company’s other current liabilities is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
Accrued employee compensation
|
$
|
35,492
|
|
|
$
|
41,144
|
|
Customer deposits
|
34,255
|
|
|
30,484
|
|
Warranty
|
9,793
|
|
|
9,174
|
|
Contingent payout
|
1,100
|
|
|
1,100
|
|
Other
|
30,373
|
|
|
22,256
|
|
Other current liabilities
|
$
|
111,013
|
|
|
$
|
104,158
|
|
NOTE 10. INDEBTEDNESS
The Company’s long-term debt is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
Balance of revolving credit facility
|
$
|
177,000
|
|
|
$
|
27,000
|
|
Balance of term loan
|
350,458
|
|
|
165,000
|
|
Total long-term debt
|
527,458
|
|
|
192,000
|
|
Less: current maturities of long-term debt
|
17,535
|
|
|
10,000
|
|
Less: deferred financing fees, net
|
4,771
|
|
|
952
|
|
Long-term debt
|
$
|
505,152
|
|
|
$
|
181,048
|
|
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 the Third Amended and Restated Credit Agreement, among the Company and certain foreign subsidiaries of the Company, as borrowers, and certain domestic and foreign subsidiaries of the Company, as guarantors, (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, 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
or
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 were used to (1) consummate the Muuto acquisition and, (2) refinance certain indebtedness and will also be used, among other things, for general corporate and operational 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.
Interest on the 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.
The aggregate maturities of long-term debt are as follows:
|
|
|
|
|
|
|
|
Future minimum debt payments
|
2018
|
|
$
|
13,151
|
|
2019
|
|
17,535
|
|
2020
|
|
17,535
|
|
2021
|
|
17,535
|
|
2022
|
|
17,535
|
|
Thereafter
|
|
444,167
|
|
Total
|
|
$
|
527,458
|
|
Deferred Financing Fees
In conjunction with the issuance of the Amended Credit Agreement, the Company incurred
$4.5 million
in debt issuance costs, which are being deferred and amortized over the term of the Amended Credit Agreement. In conjunction with terminating the Company’s Existing Credit Agreement,
$0.4 million
in unamortized debt issuance costs and
$1.0 million
of third party fees related to debt extinguishment were written-off as a loss on extinguishment of debt during the three months ended
March 31, 2018
. The remaining unamortized fees are being amortized over the term of the Amended Credit Agreement.
NOTE 11. CONTINGENT LIABILITIES AND COMMITMENTS
Litigation
The Company is currently involved in matters of litigation, including environmental contingencies, arising in the ordinary course of business. The Company accrues for such matters when expenditures are probable and reasonably estimable. Based upon information presently known, management is of the opinion that such litigation, either individually or in the aggregate, will not have a material adverse effect on the Company’s financial position, results of operations, or cash flows.
Warranty
The Company provides for estimated product warranty expenses when related products are sold and are included within other current liabilities. Because warranty estimates are forecasts that are based on the best available information, primarily historical claims experience, future warranty claims may differ from the amounts provided.
Changes in the warranty reserve are as follows (in thousands):
|
|
|
|
|
|
Balance, December 31, 2017
|
|
$
|
9,174
|
|
Provision for warranty claims
|
|
1,921
|
|
Warranties acquired through business combinations
|
|
611
|
|
Warranty claims paid
|
|
(1,942
|
)
|
Foreign currency translation adjustment
|
|
29
|
|
Balance, March 31, 2018
|
|
$
|
9,793
|
|
Warranty expense for the
three months ended
March 31, 2018
and
2017
was
$1.9 million
and
$1.1 million
, respectively.
NOTE 12. EQUITY
The following table shows the change in equity attributable to Knoll, Inc. stockholders and noncontrolling interests during the
three months ended
March 31, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
Additional
Paid-In
Capital
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Total
Knoll, Inc.
Stockholders' Equity
|
|
Noncontrolling Interests
|
|
Total Equity
|
Balance at December 31, 2017
|
|
$
|
493
|
|
|
$
|
54,455
|
|
|
$
|
347,304
|
|
|
$
|
(43,774
|
)
|
|
$
|
358,478
|
|
|
$
|
251
|
|
|
$
|
358,729
|
|
Adoption of ASU 2018-02
|
|
—
|
|
|
—
|
|
|
6,250
|
|
|
(6,250
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Net earnings
|
|
—
|
|
|
—
|
|
|
15,259
|
|
|
—
|
|
|
15,259
|
|
|
8
|
|
|
15,267
|
|
Other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(765
|
)
|
|
(765
|
)
|
|
—
|
|
|
(765
|
)
|
Shares issued for consideration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued under stock incentive plan (261,167 shares)
|
|
3
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
Shares issued to Board of Directors in lieu of cash (1,238 shares)
|
|
—
|
|
|
25
|
|
|
—
|
|
|
—
|
|
|
25
|
|
|
—
|
|
|
25
|
|
Stock-based compensation, net of forfeitures
|
|
—
|
|
|
2,426
|
|
|
—
|
|
|
—
|
|
|
2,426
|
|
|
—
|
|
|
2,426
|
|
Cash dividend ($0.15 per share)
|
|
—
|
|
|
—
|
|
|
(7,338
|
)
|
|
—
|
|
|
(7,338
|
)
|
|
—
|
|
|
(7,338
|
)
|
Purchase of common stock (95,412 shares)
|
|
(1
|
)
|
|
(1,951
|
)
|
|
—
|
|
|
—
|
|
|
(1,952
|
)
|
|
—
|
|
|
(1,952
|
)
|
Balance at March 31, 2018
|
|
$
|
495
|
|
|
$
|
54,954
|
|
|
$
|
361,475
|
|
|
$
|
(50,789
|
)
|
|
$
|
366,135
|
|
|
$
|
259
|
|
|
$
|
366,394
|
|
NOTE 13. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table summarizes the changes in accumulated other comprehensive income (loss) by component for the
three months ended
March 31, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on Interest Rate Swaps
|
|
Foreign
Currency
Translation
Adjustment
|
|
Pension and
Other Post-Employment
Liability
Adjustment
|
|
Total
|
Balance, as of December 31, 2017
|
$
|
—
|
|
|
$
|
(5,487
|
)
|
|
$
|
(38,287
|
)
|
|
$
|
(43,774
|
)
|
Adoption of ASU 2018-02
|
—
|
|
|
—
|
|
|
(6,250
|
)
|
|
(6,250
|
)
|
Other comprehensive income before reclassifications
|
(130
|
)
|
|
(846
|
)
|
|
—
|
|
|
(976
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
—
|
|
|
211
|
|
|
211
|
|
Net current-period other comprehensive income
|
(130
|
)
|
|
(846
|
)
|
|
211
|
|
|
(765
|
)
|
Balance, as of March 31, 2018
|
$
|
(130
|
)
|
|
$
|
(6,333
|
)
|
|
$
|
(44,326
|
)
|
|
$
|
(50,789
|
)
|
The following reclassifications were made from accumulated other comprehensive income (loss) to the condensed consolidated statements of operations and other comprehensive income (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31, 2018
|
|
March 31, 2017
|
Amortization of pension and other post-employment liability adjustments
|
|
|
|
Prior service credits
(1)
|
$
|
(182
|
)
|
|
$
|
(371
|
)
|
Actuarial losses
(1)
|
348
|
|
|
155
|
|
Total before tax
|
166
|
|
|
(216
|
)
|
Tax (benefit) expense
|
(45
|
)
|
|
79
|
|
Net of tax
|
$
|
211
|
|
|
$
|
(137
|
)
|
(1) These accumulated other comprehensive income (loss) components are included in the computation of net periodic pension costs, and are included in Other income, net within the Condensed Consolidated Statements of Operations and Comprehensive Income. See Note 5 for additional information.
NOTE 14. 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 vesting of unvested restricted stock and restricted stock units, and is computed by dividing net earnings available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock. At
March 31, 2018
and
2017
, the Company had 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):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2018
|
|
2017
|
Numerator:
|
|
|
|
Net earnings attributable to Knoll, Inc. stockholders
|
$
|
15,259
|
|
|
$
|
15,404
|
|
|
|
|
|
Denominator:
|
|
|
|
Denominator for basic earnings per shares - weighted-average shares
|
48,557
|
|
|
48,456
|
|
Effect of dilutive securities:
|
|
|
|
Potentially dilutive shares resulting from stock plans
|
648
|
|
|
927
|
|
Denominator for diluted earnings per share - weighted-average shares
|
49,205
|
|
|
49,383
|
|
Antidilutive equity awards not included in weighted-average common shares—diluted
|
1
|
|
|
12
|
|
|
|
|
|
Net earnings per common share attributable to Knoll, Inc. stockholders:
|
|
|
|
|
|
Basic
|
$
|
0.31
|
|
|
$
|
0.32
|
|
Diluted
|
$
|
0.31
|
|
|
$
|
0.31
|
|
NOTE 15. INCOME TAXES
The Company’s income tax provision consists of federal, state and foreign income taxes. The tax provisions for the
three months ended
March 31, 2018
and
2017
were based on the estimated effective tax rates applicable for the full years ending
December 31, 2018
and
2017
and includes items specifically related to the interim periods. The Company’s effective tax rate was
27.1%
and
27.2%
for the
three months ended
March 31, 2018
and
2017
, respectively. The decrease in the Company’s effective tax rate for the three months ended
March 31, 2018
was due to the Tax Act legislation offset by the vesting of equity awards when compared to the three months ended
March 31, 2017
. The Company’s geographic mix of pretax income and the varying effective tax rates in the countries and states in which the Company operates also impacts its effective tax rate.
As of both
March 31, 2018
and
December 31, 2017
, the Company had unrecognized tax benefits of approximately
$0.9 million
, respectively. These unrecognized tax benefit amounts would affect the effective tax rate if recognized. As of
March 31, 2018
, 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 through 2017. In addition, the Company is subject to state and local income tax examinations for the tax years 2007 through 2017.
NOTE 16. SEGMENT INFORMATION
The Company manages its business through its reportable segments:
Office and Lifestyle.
The Office segment includes a complete range of workplace products that address diverse workplace planning paradigms in North America and Europe. These products include: systems furniture, seating, storage, tables, desks and KnollExtra® accessories as well as the international sales of our Office products.
The Lifestyle segment includes KnollStudio®, HOLLY HUNT®, DatesWeiser, Muuto, KnollTextiles®, Spinneybeck® (including Filzfelt®), and Edelman® Leather. KnollStudio products, which are distributed in North America and Europe, include iconic seating, lounge furniture, side, cafe and dining chairs as well as conference, training and dining and occasional tables. HOLLY HUNT® is known for high quality residential furniture, lighting, rugs, textiles and leathers. In addition, HOLLY HUNT® also includes Vladimir Kagan Design Group, a renowned collection of modern luxury furnishings. DatesWeiser, known for its sophisticated meeting and conference tables and credenzas, sets a standard for design, quality and technology integration. The KnollTextiles®, Spinneybeck® (including Filzfelt®), and Edelman® Leather businesses provide a wide range of customers with high-quality fabrics, felt, leather and related architectural products. The acquisition of Muuto rounds out the Lifestyle segment with its ancillary products and affordable luxury furnishings to make the Lifestyle segment an all encompassing “resimercial”, high performance workplace, from uber-luxury living spaces to affordable luxury residential living.
In 2018, the Company revised its segment presentation by aggregating the former Studio and Coverings segments with Muuto. Additionally, the Office segment now includes our office business in Europe which was historically reported in Studio. The Company believes this revised presentation better aligns the segments with how management views and operates the Company. As a result of this change in segment reporting, the Company retrospectively revised prior period results, by segment, to conform to current period presentation.
Corporate costs include unallocated costs relating to shared services and general corporate activities such as legal expenses, acquisition expenses, certain finance, human resources, administrative and executive expenses and other expenses that are not directly attributable to an operating segment. Dedicated, direct selling, general and administrative expenses, of the segments 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.
The tables below present the Company’s segment information with Corporate costs excluded from reporting segment results. Prior year amounts have been recast to conform to the current presentation (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2018
|
|
2017
|
SALES
|
|
|
|
Office
|
$
|
181,618
|
|
|
$
|
157,998
|
|
Lifestyle
|
114,941
|
|
|
98,822
|
|
Knoll, Inc.
|
$
|
296,559
|
|
|
$
|
256,820
|
|
INTERSEGMENT SALES
(1)
|
|
|
|
Office
|
$
|
512
|
|
|
$
|
274
|
|
Lifestyle
|
2,354
|
|
|
2,307
|
|
Knoll, Inc.
|
$
|
2,866
|
|
|
$
|
2,581
|
|
OPERATING PROFIT
|
|
|
|
|
Office
(2)
|
$
|
8,866
|
|
|
$
|
8,828
|
|
Lifestyle
|
20,176
|
|
|
18,411
|
|
Corporate
(3)
|
(6,582
|
)
|
|
(6,603
|
)
|
Knoll, Inc.
(4)
|
$
|
22,460
|
|
|
$
|
20,636
|
|
_______________________________________________________________________________
(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 restructuring charges of
$0.5 million
during the three months ended
March 31, 2018
within the Office segment related to an organizational realignment that will result in greater operating efficiency and control.
(3) Knoll recorded acquisition costs of
$1.0 million
related to the acquisition of Muuto within the Corporate segment during the three months ended
March 31, 2018
.
(4) The Company does not allocate interest expense or other income, net to the reportable segments.