Knoll Reports Second Quarter Results
- Strong work from home results and channel diversification help to mitigate workplace declines
- Implemented $50M of annualized operating expense reductions
- $164 million preferred stock issuance closed on July 21, 2020, enhancing liquidity and reducing debt
Knoll, Inc. (NYSE: KNL), a leading designer and manufacturer of furnishings, textiles and fine leathers for the workplace and home, today announced results for the second quarter ended June 30, 2020.
Second Quarter Highlights Versus Prior Year
Net Sales decreased 25.4% to $274.1M
GAAP Gross Margin decreased 340 bps to 34.9%
Adjusted Gross Margin decreased 310 bps to 35.2%
GAAP Net Earnings decreased $31.2M to ($9.6M) or (3.5)% of net sales
Adjusted EBITDA decreased $22.8M to $25.6M or 9.3% of net sales
GAAP Diluted EPS decreased $0.64 to ($0.20)
Adjusted Diluted EPS decreased $0.29 to $0.19
To Our Fellow Shareholders:
The second quarter of 2020 was unlike any quarter we have ever experienced. It was a true test of our people, culture, agility and strategy. In that context, we are pleased to report solidly profitable adjusted second quarter results as well as the progress we have made responding to the Covid-19 pandemic and its impact on our communities, our people and our clients.
Our Covid Game Plan
From the start of the pandemic, our focus was four-fold.
- First, keep our people around the world as safe as possible while maintaining as much of our operational capabilities as government mandates and safe working practices would allow.
- Second, protect our financial position, maximizing liquidity and scaling the business to ensure we remained profitable and cash flow positive.
- Third, lean into the marketplace challenges in front of us with the thought leadership and product support to help our workplace clients retrofit and reimagine their offices for return to work and work from home.
- And fourth, leverage our brand reputation, broad product offering, multichannel platform and marketing capabilities in the residential space – in short, taking advantage of the pivot to work from home and the increased focus on residential life resulting from our working, schooling and exercising where we live.
We believe that those businesses with a brand reputation like Knoll, founded on the belief that good design transcends rigid boundaries of where we live and work – backed up by a broad and growing range of products and price points, with multiple physical and digital paths to market and lean agile cost structures – will be the ultimate victors during this unique time.
It is also an interesting moment where more fluid and affordable contemporary live-work brands like Muuto and Fully can thrive. For the past three years, as we rode the wave of resimercialization of the workplace in North America, we focused, with great success, on driving Muuto through our contract dealer channel. Earlier this month, we expanded Muuto’s reach through our own direct-to-consumer e-commerce channel at knoll.com, pairing the brand’s crossover designs with an expanded range of Knoll products for the home office as well as living and dining spaces with free shipping in 1-3 days. Both Fully’s position and the Knoll + Muuto initiative also enable us to take these brands’ direct-to-consumer ergonomic offerings to our corporate clients, providing their employees with online access to the right furniture for working from home. However the future plays out, we think we are uniquely positioned to succeed with our range of brands and price points.
Keeping Our People Safe While Maintaining Our Operational Capabilities
Today, across our manufacturing and distribution operations, we are 100% operational. What started with supply chain challenges in China eventually became plant shutdowns in Italy and then disruptions in North America. While our principal North American plants remained open, our HOLLY HUNT operations in Texas and Illinois were the most affected this quarter, as was DatesWeiser in Buffalo. Today, all of these facilities are back online, and we are working through a decent backlog in these businesses. Perhaps most impressive was our operations team’s terrific work in completing the closure and sale of our Grand Rapids, MI facility while moving the operations to our plants in Muskegon, MI and East Greenville, PA during the pandemic. By implementing safe working practices, including masks, social distancing and temperature checks, we have been able, with a few exceptions, to keep our manufacturing associates safe and well.
Our showrooms globally were also mostly closed during the second quarter. Our sales teams made extensive use of web conferencing, supporting clients, the design community and dealers with virtual rendering tools and material samples from our warehouses. Today, most of our principal showrooms and our Knoll Home Design shop in New York are back open, in many cases by appointment only. Our sales teams are also in the process of transitioning back to our offices where allowed by government mandates. The good news is that we can now accommodate client visits around the world, and we have seen a nice improvement in orders activity and mock-ups consistent with these reopenings.
Maximizing Liquidity and Scaling Knoll to Ensure We Remain Profitable and Cash Flow Positive
We took immediate action at the start of the pandemic to maximize our liquidity and protect our free cash flow. These steps included aggressive use of furloughs where we were unable to operate, salary freezes, suspension of 401k contributions and ultimately the elimination of approximately 400 positions across Knoll. Together with reductions in T&E and other programmatic spending, we reduced our run rate costs by approximately $50 million. Additionally, to maximize liquidity, we reduced our dividend by 76%, lowered planned CAPEX by approximately $20 million, worked with our landlords to defer rent payments and offered our dealers enhanced credit terms to maximize receivables. We also took advantage of CARES Act provisions, including payroll tax deferrals and the Employee Retention Credit, and Canada Emergency Wage Subsidies.
While we were confident that these actions would have a meaningfully positive impact on our financial position, on June 23, 2020 we also announced an agreement to issue $164.0 million of convertible preferred stock to a subsidiary of Investindustrial VII L.P. This preferred stock carries a 4.5% dividend and an initial conversion price of $16.75, a 45% premium to our then thirty-trading day volume-weighted average price. With this additional capital, we have over $350.0 million in liquidity and our leverage ratio on a pro forma basis, utilizing the proceeds of this investment to reduce debt, would have been approximately 1.94:1 at the end of the second quarter, well below our 4.0:1 covenant that runs through the August 2024 expiration of our credit facility. This transaction closed on July 21, 2020, positioning us with a fortress balance sheet such that we are confident that we will continue to have the resources to execute our strategic plan in the face of an uncertain macroeconomic environment.
Helping Our Clients Retrofit and Reimagine Their Offices for Return to Work and WFH
We believe that the death-of-the-office story has been told many times over the years, and yet the workplace has always and always will play a pivotal role in how businesses organize their activities. Post 9/11 we were told that no one would work in skyscrapers again. Over the past few years, the common wisdom has been that we would operate out of co-working spaces – and today, we hear that we are going to be working from home forever.
Simply put, there is no alternative that can replace the mix of culture, connectivity, creativity and community that the office enables. We think Lucy Kellaway’s recent commentary in the Financial Times captures the importance of the office perfectly. She writes: “The most important thing – which should make the office less an employer’s white elephant than its biggest bargain – is that it gives work its meaning…meaning comes largely from physical proximity to your colleagues.” Without an office, she continues, “it is hard to know how a company could ever create any sort of culture or any fellow feeling – let alone loyalty.”
And we all know now from personal experience the limits of working from home, including the social isolation, breakdown of any work/life boundaries, physical discomfort and the exacerbation of social inequality. It’s no wonder many of the surveys we have seen show the vast majority of office workers crave a return to the workplace.
The workplace in a Covid-19 environment will no doubt be different, but it will still be there. Over the past three months our workplace sales, marketing, design and product development teams have quickly pivoted to engage with and support our clients, dealers and the architecture and design community, virtually leveraging investments we have made in digital visualization technologies and rapid product development.
- First, we have helped clients pivot to work from home solutions for their employees by offering special access to Fully’s height adjustable tables, ergonomic chairs and accessories.
- Second, we have engaged with clients to retrofit their workplaces with screens and other products to support safe return to work tools and layouts.
- And we have offered thought leadership through innovative multi-day virtual events like our online Knoll Design Days that connected with over 17,000 unique visitors, well in excess of the number of folks who visit our Chicago Fulton Market space around our annual industry trade show.
- Finally, we are helping clients reimagine what the workplace of tomorrow will look like, integrating workplace strategies ranging from work from home to satellite offices and co-working spaces to headquarters. This includes utilizing a mix of physical furnishings like our Rockwell Unscripted soft architecture, which creates open ceiling and socially distant and healthy meeting spaces in combination with digital tools for remote workers, creating what we are calling the “phygital” workplace. The one thing we do know is that change has always created demand for our products in the long-term, and we see this time as being no different – with the opportunity to furnish more typologies of spaces than ever before.
Leveraging Our Brands and Omnichannel Capabilities to Support Work from Home and Investments in Domestic Spaces
For the past few years, the home has increasingly influenced workplace design. Now the workplace is influencing the home as our bodies suffer from the lack of ergonomic furnishings we have grown accustomed to in our offices. Like never before, these previously disparate realms are coming closer together. Our history and brands bridge and inform both worlds in a way that is singularly unparalleled. A case in point is the explosive growth we have seen in our e-commerce business led by last year’s acquisition of Fully. In the second quarter, Fully saw a more than 200% jump in traffic to its Fully.com web site and a 148% increase in e-commerce orders as consumers moved quickly to set up ergonomic home offices with height adjustable desks and chairs. Encouragingly, traffic and dollar growth has remained strong through the quarter and we see real legs here as work from home increasingly is part of the workplace mix.
As we noted, on July 6 we launched a dramatic enhancement to our own Knoll.com website, complementing our brick and mortar showrooms and New York and LA shops with free 1-3 day delivery of a broad range of height adjustable desks, ergonomic chairs and accessories plus the North American online premier of Muuto, making this brand now directly accessible in 1-3 days. Combined with in-stock KnollStudio offerings, we can help consumers with their home offices at good, better and best price points and also furnish living, dining and outdoor parts of the home as well.
Furthermore, we are also well positioned with residential furnishings moving up consumers’ discretionary ladder with HOLLY HUNT and KnollStudio. In fact, today with work from home e-commerce representing approximately 10% of our sales and our high design residential brands representing another 15%, we are as diversified as we have ever been.
The benefits of all these initiatives are clearly visible in our second quarter financial results where our revenue declined less than the industry and we remained solidly profitable on an adjusted basis. On the top line, sales of $274.1 million were down 25% versus the prior year as early quarter weakness, driven by the shutdown in Italy and at HOLLY HUNT were partially mitigated by the explosive growth in our Fully e-commerce work from home division and our own Knoll.com sales platform. Office segment sales declined by 19%, or 29% organically, bolstered by the inclusion of the full quarter of Fully’s work from home e-commerce sales. Lifestyle sales declined 35% as near total shutdowns in Europe and at HOLLY HUNT impacted our ability to manufacture and deliver product. From an end market standpoint, Residential sales, which represented approximately 25% of this quarter’s sales, including Fully, were a highlight only declining 3% compared to a 30% decline in Workplace activity.
As anticipated, we experienced negative deleveraging of 47% on the gross margin line, as we were impacted by absolute closures in some locations, and 24% on the adjusted EBITDA line as stringent operating expense controls kept us in the range of our 20-30% deleveraging expectations. This helped us keep adjusted EBITDA margins just under 10%, and leverage at 2.93:1 compared to our 4.0:1 covenant. Adjusted EPS of $0.19 was solid given the magnitude of the disruption we experienced due to Covid-19.
After brutal incoming orders declines in April and May, we saw a nice sequential and across the board improvement in June in terms of both a reduction in the rate of decline and an improvement in absolute orders dollars. This also validated trends we saw develop in the quarter where the contract office business has understandably been the weakest performer with orders declining at a rate of 30% plus. Our residential business has steadily improved as stay in place orders were lifted and individuals focused on improving their home environments, declining in the mid-single to low teens, and then e-commerce performing the best as work from home online demand has popped, growing 130%.
We expect these trends to remain in place for the balance of the year. Looking ahead, this suggests a back half sales decline of approximately 20% over prior year for Knoll, Inc., thanks to our strong residential and work from home mix and channel diversification, continuing to outperform contract furniture data.
Commitment to Diversity
Let us close by commenting on our commitment to diversity and inclusion and creating opportunities for associates of color at Knoll, building on our leadership in LGBTQ equality. Modernism in design was born as a means toward social good, and Knoll was founded on the principal that modern design could make a difference in improving the quality of the way we live and work. By extension, good design is agnostic about the color of one’s skin, responding to the universal desire for utility, joy and beauty. With so many suffering, we are taking this moment at Knoll to recommit ourselves to leveraging the power of design to build a fairer world and a Knoll that is more reflective of the communities where we live and work. We look forward to working with our Knoll Diversity and Inclusion Council to make meaningful progress here in the months ahead.
Across our constellation, Knoll associates are demonstrating their commitment to teamwork and client service, many in ingenious and new ways. We deeply appreciate how hard everyone at Knoll is working and want to thank them for all they are doing. Be safe and thank you for your continued ownership and interest in Knoll.
Andrew B. Cogan
Chairman and CEO
Charles W. Rayfield
Senior Vice President and CFO
The full text of Knoll’s 2Q20 earnings release, including all tables, and a replay of the company’s Jul. 23 conference call, may be accessed via the company’s Investor Relations website, knoll.gcs-web.com. A telephone replay of the Q&A conference call will be available through July 30, 2020 by dialing (855) 859-2056 or (404) 537-3406 and entering passcode 7987923.
Knoll, Inc. is a constellation of design-driven brands and people, working together with our clients to create inspired modern interiors. Our internationally recognized portfolio includes furniture, textiles, leathers, accessories, and architectural and acoustical elements. Our brands — Knoll Office, KnollStudio, KnollTextiles, KnollExtra, Spinneybeck | FilzFelt, Edelman Leather, HOLLY HUNT, DatesWeiser, Muuto, and Fully — reflect our commitment to modern design that meets the diverse requirements of high performance workplaces and luxury interiors. A recipient of the National Design Award for Corporate and Institutional Achievement from the Smithsonian`s Cooper-Hewitt, National Design Museum, Knoll, Inc. is aligned with the U.S. Green Building Council and the Canadian Green Building Council and can help organizations achieve the Leadership in Energy and Environmental Design (LEED) workplace certification. Our products can also help clients comply with the International Living Future Institute to achieve Living Building Challenge Certification, and with the International WELL Building Institute to attain WELL Building Certification. Knoll, Inc. is the founding sponsor of the World Monuments Fund Modernism at Risk program.