- Q3 sales grew 8.8% versus prior year
- Muuto acquisition continues to deliver torrid top and bottom-line growth
- After the acquisition of Fully, leverage continues to sequentially decline
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 third quarter ended September 30, 2019.
“We delivered another strong quarter of top and bottom line growth led by further share gain in the workplace from both organic investments and past acquisitions like Muuto that have strengthened our position in the fastest growing ancillary areas of the office,” noted Knoll Chairman and CEO, Andrew Cogan. “The combination of favorable mix from the growth of our high margin Lifestyle businesses coupled with progress on our lean initiatives and continuous improvement work in our Office segment resulted in the best gross margin performance in over 5 years and the strongest adjusted EBITDA margins since the fourth quarter of 2016.”
Net sales were $356.5 million for the third quarter of 2019, an increase of 8.8%, from the third quarter of 2018. Net sales for the Office segment were $219.1 million during the third quarter of 2019, an increase of $18.5 million, or 9.2%, compared to the third quarter of 2018. The increase was driven primarily by investments in expanding our height adjustable table offerings and improved office system products, continued growth in conference room solutions and the addition of Fully, a recently completed acquisition. Net sales for the Lifestyle segment were $137.4 million during the third quarter of 2019, an increase of $10.3 million, or 8.2%, compared with the third quarter of 2018. Sales growth was led by strong growth at Muuto and increased crossover sales in commercial workplace settings.
Gross margin for the third quarter of 2019 was 39.4%, an increase of 190 basis points compared to 37.5% in the prior year. The increase in gross margin was primarily the result of increased volume, continuous improvement initiatives and price realization, partially offset by year-over-year material inflation and tariffs.
Operating expenses were $103.7 million for the third quarter of 2019, or 29.1% of net sales, compared to $89.9 million, or 27.4% of net sales, for the third quarter of 2018. Operating expenses in the third quarter of 2019 included acquisition related amortization of acquired intangible assets of $2.1 million and customary acquisition related expenses of $0.3 million. Operating expenses in the third quarter of 2019 also included debt refinancing fees of $0.5 million and restructuring charges of $0.1 million. Excluding these items, adjusted operating expenses were $100.7 million for the third quarter of 2019, or 28.3% of net sales, compared to $85.9 million, or 26.2% of net sales in the third quarter of 2018. The increase in adjusted operating expenses was related primarily to higher commissions and selling expenses from increased volume, and strategic investments in information technology infrastructure, showrooms, and marketing and product development initiatives.
During the third quarter of 2019, interest expense was $5.5 million, an increase of $0.5 million compared to the third quarter of 2018. In spite of the $35.0 million incremental debt to fund the Fully acquisition, the Company reduced leverage from 2.42x in the second quarter of 2019 to 2.33x in the third quarter of 2019. In the third quarter, the Company completed an amendment and extension of its credit facility. The maturity date was extended to August 2024, and reduced the pricing of borrowings under its term loan and revolving credit facility, as well as unused capacity. All other terms remained consistent. In connection with the amendment and extension, the Company recognized a $0.4 million loss on extinguishment of debt.
Other expense was $7.3 million during third quarter of 2019 compared to other expense of $0.4 million in the prior year. During the third quarter of 2019, the Company initiated payouts for the termination of the Company’s pension plan for bargaining unit employees. The termination resulted in a settlement charge of $8.4 million as a result of the purchase of annuities to liquidate the plan. In addition, the Company incurred a settlement charge of $1.4 million in connection with cash payments of lump sum elections. The Company intends to finalize the termination of the bargaining unit plan and expects to realize additional pension settlement charges during the fourth quarter of 2019. Pension settlement charges of $0.6 million in the third quarter of 2018 resulted from cash payments of lump sum elections. Excluding pension settlement charges, other income increased $2.3 million compared to the third quarter of 2018, due primarily to foreign exchange gains driven by the appreciation of the US dollar against the Danish Krone.
Net earnings for the third quarter of 2019 were $17.5 million, or $0.35 per diluted share, compared to $20.3 million, or $0.41 per diluted share, for the third quarter of 2018. Excluding the impact of acquisition related expenses, debt refinancing fees, restructuring charges and pension settlement charges, adjusted net earnings for the third quarter of 2019 were $27.4 million, or $0.55 per adjusted diluted share, compared to $23.7 million, or $0.48 per adjusted diluted share for the third quarter of 2018.
The effective tax rate was 25.4% for the third quarter of 2019, compared to 26.1% for the third quarter of 2018. 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.
Capital expenditures for the third quarter of 2019 totaled $10.5 million compared to $5.3 million in the prior year. The Company paid a quarterly dividend of $8.4 million, or $0.17 per share in the third quarter of 2019 compared to a quarterly dividend of $7.3 million, or $0.15 per share in the third quarter of 2018.
The full text of Knoll’s 3Q19 earnings release, including all tables, and a replay of the company’s Oct . 24 conference call webcast, including presentation slides, may be accessed via the Investor Relations section of Knoll’s website. In addition, an audio replay of the conference call will be available through October 31, 2019 by dialing (855) 859-2056. International replay: (404) 537-3406 (Conference ID: 846 1775).
About Knoll
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, lighting, 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.