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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 001-12907
KNOLL, INC.
A Delaware Corporation I.R.S. Employer No. 13-3873847
1235 Water Street
East Greenville, PA 18041
Telephone Number (215)679-7991
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
As of August 9, 2002, there were 23,171,029 shares of the Registrant's
common stock, par value $0.01 per share, outstanding.
KNOLL, INC.
TABLE OF CONTENTS FOR FORM 10-Q
Item Page
- ---- ----
PART I -- FINANCIAL INFORMATION
1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets at June 30, 2002
and December 31, 2001...................................... 3
Condensed Consolidated Statements of Operations for the
three months and six months ended June 30, 2002 and 2001... 4
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2002 and 2001.................... 5
Notes to the Condensed Consolidated Financial Statements..... 6
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 10
3. Quantitative and Qualitative Disclosures about Market Risk....... 14
PART II -- OTHER INFORMATION
2. Changes in Securities and Use of Proceeds........................ 15
6. Exhibits and Reports on Form 8-K................................. 15
Signatures........................................................... 16
Exhibit Index........................................................ 17
2
PART I -- FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
- ----------------------------------------------------------------
KNOLL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars In Thousands, Except Per Share Data)
June 30, 2002 December 31, 2001
------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents.......... $ 12,945 $ 32,213
Customer receivables, net.......... 108,694 100,286
Inventories........................ 50,795 60,691
Deferred income taxes.............. 19,351 23,669
Prepaid and other current assets... 8,234 4,436
--------- ---------
Total current assets........... 200,019 221,295
Property, plant and equipment.......... 328,324 315,369
Accumulated depreciation............... (155,589) (140,331)
--------- ---------
Property, plant and
equipment, net............... 172,735 175,038
Goodwill............................... 44,017 43,692
Trademarks............................. 187,831 187,831
Deferred financing fees, net........... 4,737 5,582
Other noncurrent assets................ 5,721 5,565
--------- ---------
Total Assets................... $ 615,060 $ 639,003
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-term
debt............................. $ 57,561 $ 62,558
Accounts payable................... 54,080 59,923
Income taxes payable............... 2,703 4,817
Other current liabilities.......... 71,002 89,977
--------- ---------
Total current liabilities...... 185,346 217,275
Long-term debt......................... 452,506 484,966
Deferred income taxes.................. 28,842 25,656
Other noncurrent liabilities........... 34,947 33,424
--------- ---------
Total liabilities.............. 701,641 761,321
--------- ---------
Stockholders' deficit:
Common stock, $0.01 par value;
100,000,000 shares authorized;
23,172,029 shares issued and
outstanding (net of 34,100
treasury shares) in 2002 and
23,181,829 shares issued and
outstanding (net of 24,300
treasury shares) in 2001......... 232 232
Additional paid-in-capital......... 2,837 3,188
Retained deficit................... (76,368) (108,189)
Accumulated other comprehensive
loss............................. (13,282) (17,549)
--------- ---------
Total stockholders' deficit.... (86,581) (122,318)
--------- ---------
Total Liabilities and
Stockholders' Deficit........ $ 615,060 $ 639,003
========= =========
See accompanying notes.
3
KNOLL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Sales...................... $202,662 $261,102 $400,469 $514,227
Cost of sales.............. 126,666 155,805 250,341 308,198
-------- -------- -------- --------
Gross profit............... 75,996 105,297 150,128 206,029
Selling, general and
administrative expenses.. 42,691 53,237 79,174 103,889
-------- -------- -------- --------
Operating income........... 33,305 52,060 70,954 102,140
Interest expense........... 7,150 10,864 15,273 23,021
Other income (expense),
net...................... (1,970) (1,571) 319 (1,615)
-------- -------- -------- --------
Income before income tax
expense and
extraordinary item....... 24,185 39,625 56,000 77,504
Income tax expense......... 9,779 16,135 23,011 31,902
-------- -------- -------- --------
Income before
extraordinary item....... 14,406 23,490 32,989 45,602
Extraordinary loss on
early extinguishment
of debt, net of tax
benefit.................. 1,168 -- 1,168 --
-------- -------- -------- --------
Net income................. $ 13,238 $ 23,490 $ 31,821 $ 45,602
======== ======== ======== ========
See accompanying notes.
4
KNOLL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Six Months Ended
June 30,
------------------------
2002 2001
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................... $ 31,821 $ 45,602
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization............ 15,143 18,348
Extraordinary loss, net of tax benefit... 1,168 --
Other noncash items...................... (501) 2,348
Changes in assets and liabilities:
Customer receivables................. (7,822) 11,123
Inventories.......................... 10,457 7,391
Accounts payable..................... (6,437) (9,687)
Current and deferred income taxes.... 5,903 2,767
Other current assets and
liabilities........................ (20,433) (25,624)
Other noncurrent assets and
liabilities........................ 760 1,534
-------- ---------
Cash provided by operating activities.......... 30,059 53,802
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures........................... (10,307) (8,144)
Proceeds from sale of assets................... 12 57
-------- ---------
Cash used in investing activities.............. (10,295) (8,087)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facilities,
net.......................................... 37,500 192,000
Repayment of long-term debt.................... (75,000) (12,500)
Premium paid for early extinguishment of debt.. (1,813) --
Payment of dividend............................ -- (220,339)
Purchase of common stock....................... (351) (128)
-------- ---------
Cash used in financing activities.............. (39,664) (40,967)
-------- ---------
Effect of exchange rate changes on cash and
cash equivalents............................. 632 (300)
-------- --------
Increase (decrease) in cash and cash
equivalents.................................. (19,268) 4,448
Cash and cash equivalents at beginning
of period.................................... 32,213 22,339
-------- ---------
Cash and cash equivalents at end of period..... $ 12,945 $ 26,787
======== =========
See accompanying notes.
5
KNOLL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Knoll, Inc. (the "Company" or "Knoll") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X and
therefore 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 in accordance with
generally accepted accounting principles are reflected in the condensed
consolidated financial statements. The condensed consolidated balance sheet
as of December 31, 2001 is derived from the Company's 2001 audited balance
sheet. The unaudited condensed consolidated financial statements and notes
thereto should be read in conjunction with the consolidated financial
statements and notes thereto contained in the Company's annual report on
Form 10-K for the year ended December 31, 2001. The results of operations for
the three months and six months ended June 30, 2002 are not necessarily
indicative of the results to be expected for the full year ending December 31,
2002 or other future periods.
2. Goodwill and Other Intangible Assets
In June 2001, the Financial Accounting Standards Board ("FASB") approved
Statements of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS 141"), and No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142").
SFAS 141 requires that all business combinations be accounted for using the
purchase method and requires that intangible assets that meet certain criteria
be recognized apart from goodwill. SFAS 142 prescribes that goodwill and
intangible assets with indefinite useful lives should no longer be amortized
to earnings, but instead should be reviewed for impairment on at least an
annual basis. Intangible assets with finite lives should continue to be
amortized over their estimated useful lives.
The Company adopted SFAS 141 and SFAS 142 on January 1, 2002. The adoption of
these statements did not result in any changes to the classification of the
Company's goodwill and other intangible assets. Effective January 1, 2002,
the Company assigned an indefinite useful life to its trademarks and
discontinued the amortization of both its goodwill and trademarks. The
following table sets forth a reconciliation of reported net income to net
income adjusted to exclude amortization expense recognized for goodwill and
trademarks during the three months and six months ended June 30, 2001:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(In Thousands)
Reported net income........ $13,238 $23,490 $31,821 $45,602
Add back:
Goodwill amortization,
net of tax benefit
of $46 and $92,
respectively........... -- 276 -- 553
Trademark amortization,
net of tax benefit
of $547 and $1,094,
respectively........... -- 827 -- 1,654
------- ------- ------- -------
Adjusted net income........ $13,238 $24,593 $31,821 $47,809
======= ======= ======= =======
6
SFAS 142 requires the Company to perform transitional impairment tests of its
trademarks and goodwill as of January 1, 2002, as well as perform impairment
tests on an annual basis and whenever events or circumstances occur indicating
that the trademarks or goodwill may be impaired. An impairment charge will be
recognized for the Company's trademarks when the estimated fair value of the
trademarks is less than their carrying amount. An impairment charge will be
recognized for the Company's goodwill when the estimated fair value of goodwill
of a reporting unit is less than its carrying amount. Fair value represents
the amount at which an asset could be bought or sold in a current transaction
between willing parties, that is, other than in a forced or liquidation sale.
During the first quarter ended March 31, 2002, the Company completed the
impairment test of its trademarks as of January 1, 2002. The fair value of
the trademarks was estimated by an independent appraiser using a discounted
cash flow method. No impairment of the trademarks was determined to exist at
January 1, 2002.
The Company completed its transitional goodwill impairment test during the
second quarter ended June 30, 2002. An independent appraiser performed the
first step of the goodwill impairment test, as prescribed by SFAS 142, to
screen for potential impairment. This first step included estimating the fair
value of the reporting unit to which the Company's goodwill is attributable
and comparing that fair value to the carrying amount of the reporting unit.
Fair value was estimated using discounted cash flows and comparable company
market multiples. Step one yielded a fair value that exceeded the carrying
amount of the reporting unit. As a result, goodwill was considered not
impaired as of January 1, 2002, no impairment charge was necessary and the
Company was not required to perform the second step of the impairment test
prescribed by SFAS 142.
The increase in the carrying amount of goodwill from December 31, 2001 to
June 30, 2002 was attributable to fluctuations in foreign currency exchange
rates.
The Company continues to amortize its deferred financing fees over the life
of the respective debt. The gross carrying amount and related accumulated
amortization of these fees were as follows:
June 30, 2002 December 31, 2001
------------- -----------------
(In Thousands)
Gross carrying amount.......... $ 8,337 $ 8,546
Accumulated amortization....... (3,600) (2,964)
------- -------
Net amount..................... $ 4,737 $ 5,582
======= =======
The Company recorded expense of $0.4 million in each of the three-month
periods ended June 30, 2002 and 2001 and $0.7 million in each of the six-month
periods ended June 30, 2002 and 2001 in connection with amortizing its
deferred financing fees. This amortization expense was recorded as a component
of interest expense. The Company estimates that it will record amortization
expense of $0.7 million for the remaining six months of 2002, $1.4 million in
each of 2003 and 2004, $1.2 million in 2005 and less than $0.1 million in 2006.
3. Partial Redemption of Senior Subordinated Notes
On April 30, 2002, the Company redeemed $50.0 million aggregate principal
amount of its 10.875% Senior Subordinated Notes due 2006 ("Senior Subordinated
Notes") for a total redemption price of $52.5 million, including a redemption
premium of $1.8 million and accrued interest thereon of $0.7 million. The
Company funded the redemption with borrowings under its senior revolving
credit facility and cash on hand. The Company recorded an extraordinary loss
on the early extinguishment of debt of $1.9 million pretax ($1.2 million
after-tax), consisting of the $1.8 million premium and the write-off of
$0.1 million of unamortized financing fees, during the three months ended
June 30, 2002 as a result of the redemption.
7
4. Derivative Instruments
In May 2002, the Company entered into two interest rate swap agreements that
effectively convert the fixed-rate floor on the Company's interest rate collar
agreements to a floating rate of interest. Under these agreements, the
Company will receive a fixed rate of interest of 5.12% and pay a variable rate
of interest equal to the three-month London Interbank Offered Rate ("LIBOR"),
as determined on the last day of each quarterly settlement period, plus 1.35%
on an aggregate notional principal amount of $200.0 million. The termination
date of the agreements is February 2004. The Company has classified these
interest rate swap agreements as risk management instruments not eligible for
hedge accounting.
The aggregate fair value of the Company's interest rate collar and swap
agreements from the Company's perspective as of June 30, 2002 was a net loss
of $6.3 million, of which $2.7 million was recorded as a current asset,
$6.1 million was recorded as a current liability and $2.9 million was recorded
as a noncurrent liability in the Company's unaudited condensed consolidated
balance sheet. The aggregate fair value of the Company's interest rate collar
agreements from the Company's perspective as of December 31, 2001 was a net
loss of $8.4 million, of which $5.9 million was recorded as a current
liability and $2.5 million was recorded as a noncurrent liability.
The following table sets forth the gains and losses recorded for the Company's
interest rate collar and swap agreements and the line items in which such
amounts are reflected in the Company's unaudited condensed consolidated
statements of operations:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(In Thousands)
Interest expense........... $ 1,622 $ -- $3,177 $ --
Other income (expense)..... 53 (85) 2,237 (3,127)
------- ---- ------ -------
Aggregate net loss......... $(1,569) $(85) $ (940) $(3,127)
======= ==== ====== =======
5. Dividend
On January 5, 2001, the Company paid a special cash dividend of $9.50 per
share of common stock, or $220.3 million in the aggregate, to stockholders of
record as of the close of business on December 20, 2000. The Company's Board
of Directors had declared this dividend on December 20, 2000. The payment of
the dividend was funded with borrowings under the Company's senior revolving
credit facility.
6. Inventories
June 30, 2002 December 31, 2001
------------- -----------------
(In Thousands)
Raw materials.................. $27,765 $34,044
Work in process................ 8,196 8,190
Finished goods................. 14,834 18,457
------- -------
Inventories..................... $50,795 $60,691
======= =======
8
7. Comprehensive Income
For the three months ended June 30, 2002 and 2001, comprehensive income
amounted to $18.2 million and $25.2 million, respectively. Comprehensive
income for the six months ended June 30, 2002 and 2001 was $36.1 million and
$44.1 million, respectively. Comprehensive income is comprised of net income
and foreign currency translation adjustments, which are reflected in
accumulated other comprehensive loss in the Company's unaudited condensed
consolidated balance sheets, for the periods noted.
8. Recently Issued Accounting Pronouncement
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" ("SFAS 145"). The Company will
adopt the provisions of SFAS 145 related to the rescission of FASB Statement
No. 4, "Reporting Gains and Losses from Extinguishment of Debt" and the
rescission of an amendment of that statement, FASB Statement No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements," effective
January 1, 2003. Upon adoption of these provisions, losses that the Company
recorded as an extraordinary item in connection with the early extinguishment
of debt prior to the date of adoption will be reclassified to be reflected in
results of continuing operations. The provisions related to the amendment of
FASB Statement No. 13, "Accounting for Leases," are effective for transactions
occurring after May 15, 2002.
9
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations
---------------------
The following discussion should be read in conjunction with the accompanying
unaudited condensed consolidated financial statements and notes thereto and
in conjunction with the Company's annual report on Form 10-K for the year
ended December 31, 2001.
Overview
During the first six months of 2002, demand for new office furniture remained
weak as corporate profits remained under pressure and white-collar employment
levels decreased from December 2001 levels. Additionally, pricing within the
United States ("U.S.") office furniture industry continued to be extremely
competitive. The Business and Institutional Furniture Manufacturer's
Association, the U.S. office furniture trade association, estimates U.S.
office furniture industry revenues for the first six months of 2002 were down
25.4% compared to the first six months of 2001.
The near-term outlook for the U.S. office furniture industry remains bleak.
Historically, after a recessionary period the office furniture industry has
not experienced growth until several months after corporations demonstrate and
sustain improved earnings.
The Company continues to aggressively manage its cost structure in light of
current economic conditions and uncertainty, but at the same time continues to
focus on initiatives that it believes will enable Knoll to be well positioned
to meet the needs of its customers as economic conditions improve. Such
initiatives include investing in the development of new products and other
sales and marketing initiatives designed to gain market share. At NeoCon(R)
2002, a contract furniture trade show held annually in Chicago in June, the
Company introduced a number of new products, most notably Life(TM), a
high-performance, environmentally friendly work chair.
Union Negotiations
The Company's employees at its Grand Rapids, Michigan plant are unionized
under the Carpenters and Joiners of America-Local 1615. The collective
bargaining agreement with this union expires at midnight on August 25, 2002.
The Company is currently in the process of negotiating a new agreement with
the union. While the Company is hopeful that it will enter into a new
collective bargaining agreement with the union, the Company can not assure
that it will be successful in negotiating a new agreement on a timely basis
or that a work stoppage will not occur at the Company's Grand Rapids plant.
There could be a material adverse impact on the Company if a work stoppage
would occur for a significant period of time.
Critical Accounting Policies
Following are critical accounting policies that the Company implemented during
2002. Refer to the Company's annual report on Form 10-K for the year ended
December 31, 2001 for discussion of other critical accounting policies that
affect the Company's financial statements.
Goodwill and Other Intangible Assets
In June 2001, the FASB approved SFAS 141 and SFAS 142. SFAS 141 requires that
all business combinations be accounted for using the purchase method and
requires that intangible assets that meet certain criteria be recognized apart
from goodwill. SFAS 142 prescribes that goodwill and intangible assets with
indefinite useful lives should no longer be amortized to earnings, but instead
should be reviewed for impairment on at least an annual basis. Intangible
assets with finite lives should continue to be amortized over their estimated
useful lives.
The Company adopted SFAS 141 and SFAS 142 on January 1, 2002. The adoption of
these statements did not result in any changes to the classification of the
Company's goodwill and other intangible assets. Effective January 1, 2002,
the Company assigned an indefinite useful life to its trademarks and
discontinued the amortization of both its goodwill and trademarks. The
Company's results of operations for the three months and six months ended
June 30, 2001 included a pretax charge of $1.7 million ($1.1 million after-tax)
and $3.4 million ($2.2 million after-tax), respectively, for the amortization
of goodwill and trademarks. Excluding these charges, the Company's net income
would have been $24.6 million and $47.8 million for the three months and six
months ended June 30, 2001, respectively.
10
SFAS 142 requires the Company to perform transitional impairment tests of its
trademarks and goodwill as of January 1, 2002, as well as perform impairment
tests on an annual basis and whenever events or circumstances occur indicating
that the trademarks or goodwill may be impaired. An impairment charge will be
recognized for the Company's trademarks when the estimated fair value of the
trademarks is less than their carrying amount. An impairment charge will be
recognized for the Company's goodwill when the estimated fair value of
goodwill of a reporting unit is less than its carrying amount. Fair value
represents the amount at which an asset could be bought or sold in a current
transaction between willing parties, that is, other than in a forced or
liquidation sale.
During the first quarter ended March 31, 2002, the Company completed the
impairment test of its trademarks as of January 1, 2002. The fair value of
the trademarks was estimated by an independent appraiser using a discounted
cash flow method. No impairment of the trademarks was determined to exist at
January 1, 2002.
The Company completed its transitional goodwill impairment test during the
second quarter ended June 30, 2002. An independent appraiser performed the
first step of the goodwill impairment test, as prescribed by SFAS 142, to
screen for potential impairment. This first step included estimating the fair
value of the reporting unit to which the Company's goodwill is attributable
and comparing that fair value to the carrying amount of the reporting unit.
Fair value was estimated using discounted cash flows and comparable company
market multiples. Step one yielded a fair value that exceeded the carrying
amount of the reporting unit. As a result, goodwill was considered not
impaired as of January 1, 2002, no impairment charge was necessary and the
Company was not required to perform the second step of the impairment test
prescribed by SFAS 142.
Interest Rate Swap Agreements
The Company accounts for its interest rate swap agreements in accordance with
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended ("SFAS 133"). The
Company's interest rate swap agreements are classified as risk management
instruments not eligible for hedge accounting. In accordance with SFAS 133,
the Company records the fair value of these agreements on its balance sheet
and recognizes changes in their fair value in earnings in the period the value
of the contract changes. The fair value of the interest rate swap agreements
represents the present value of expected future payments, as estimated by the
counterparty, who is a dealer in these instruments, and is based upon a number
of factors, including current interest rates and expectations of future
interest rates. Changes in valuation assumptions and estimates used by the
counterparty could cause a material effect on the Company's results of
operations or financial position.
Results of Operations
Comparison of Second Quarter and Six Months Ended June 30, 2002 to Second
Quarter and Six Months Ended June 30, 2001
Sales. Sales for the second quarter of 2002 were $202.7 million, a decrease
of 22.4%, or $58.4 million, from sales of $261.1 million for the second
quarter of 2001. Sales for the six months ended June 30, 2002 were $400.5
million, a decrease of 22.1%, or $113.7 million, from sales of $514.2 million
for the same period of 2001. The Company's sales in the second quarter and
six months of 2002 were down primarily as a result of decreased volume
attributable to the sluggishness in the U.S. economy. The decreases in the
Company's sales for the second quarter and six months of 2002 were also due,
to a lesser extent, to lower net sales prices for the Company's products
resulting from extremely competitive pricing pressures that have been and
continue to be experienced in the industry in connection with current economic
conditions.
Gross Profit and Operating Income. Throughout 2001 and the first six months
of 2002, the Company took steps intended to prevent significant deterioration
of profits as a percentage of sales in anticipation of lower sales volumes.
Such steps included reducing hourly headcount in North America as dictated by
volume, adopting a restructuring plan in September 2001 to eliminate certain
salaried positions in North America and aggressively managing certain other
discretionary and factory costs. These initiatives helped mitigate the
deterioration of the Company's profits as a percentage of sales in the second
quarter and six months ended June 30, 2002.
As a percentage of sales, gross profit was 37.5% for the second quarter and
six months ended June 30, 2002, 40.3% for the second quarter of 2001 and 40.1%
for the six months ended June 30, 2001. Operating income as a percentage of
sales was 16.4% and 17.7% for the second quarter and six months ended June 30,
2002, respectively, and 19.9% for both the second quarter and six months ended
June 30, 2001. Excluding the goodwill and trademark
11
amortization expense of $1.7 million and $3.4 million recorded in the second
quarter and six months of 2001, respectively, the Company's operating income
as a percentage of sales was 20.6% and 20.5%, respectively. The decreases in
the gross profit and operating income percentages from 2001 to 2002 were due
primarily to the lower sales volume allowing less absorption of fixed overhead
costs in the second quarter and six months ended June 30, 2002 compared to the
same periods of 2001 as well as lower net sales prices for the Company's
products in 2002 resulting from competitive pricing within the industry. The
decreases in the Company's operating income as a percentage of sales from
2001 to 2002 were also due, in part, to an estimated contingency loss of
$1.5 million recorded in the second quarter of 2002 as a result of a bankruptcy
filing by a third party that processed payment of the Company's freight bills.
The Company's steel suppliers recently started to implement price increases
primarily in response to the imposition of tariffs by the U.S. government on
some imported steel products. While there was no appreciable impact of steel
price increases on the Company's results of operations for the first six
months of 2002, the Company expects its steel costs to increase in the
second half of 2002. The Company is currently unable to reasonably quantify
the amount of such increase and the effect on its results of operations for
the second half of 2002.
Interest Expense. The Company's interest expense for the second quarter and
six months ended June 30, 2002 decreased $3.7 million and $7.7 million,
respectively, compared to that of the same periods of 2001. Such decreases
were primarily a result of lower outstanding debt balances as well as
significantly lower interest rates on the Company's variable-rate debt during
the second quarter and six months of 2002 compared to the same periods of 2001
partially offset by net settlement payments of $1.6 million and $3.2 million
incurred under the Company's interest rate collar agreements during the second
quarter and six months of 2002, respectively. Interest rates incurred for
borrowings under the Company's senior credit facilities during the second
quarter and six months of 2002 were more favorable primarily as a result of
continued lower short-term borrowing rates. The Company's interest expense
for the second quarter and six months of 2002 was also impacted favorably, to
a lesser extent, by the redemption of a portion of the Company's Senior
Subordinated Notes on April 30, 2002. See below for further discussion of the
redemption.
Other Income (Expense), Net. Other income (expense) included noncash gains
related to the Company's interest rate collar and swap agreements of
$0.1 million and $2.2 million for the second quarter and six months ended
June 30, 2002, respectively. For the second quarter and six months ended
June 30, 2001, other income (expense) included noncash losses of $0.1 million
and $3.1 million, respectively, related to the Company's interest rate collar
agreements. These noncash items were a result of the change in the fair value
of the interest rate collar and swap agreements during the periods noted. See
Note 4 to the unaudited condensed consolidated financial statements for
further discussion.
Income Tax Expense. The Company's effective tax rate is directly affected by
changes in consolidated pretax income and the mix of pretax income and varying
effective tax rates attributable to the countries in which it operates. The
mix of pretax income was primarily responsible for the change in the effective
tax rate to 40.4% for the second quarter of 2002 from 40.7% for the second
quarter of 2001 and to 41.1% for the six months ended June 30, 2002 from 41.2%
for the same period of 2001.
Extraordinary Item. On April 30, 2002, the Company redeemed $50.0 million
aggregate principal amount of its Senior Subordinated Notes for a total
redemption price of $52.5 million, including a redemption premium of
$1.8 million and accrued interest thereon of $0.7 million. The Company
recorded an extraordinary loss on the early extinguishment of debt of
$1.9 million pretax ($1.2 million after-tax), consisting of the $1.8 million
premium and the write-off of $0.1 million of unamortized financing fees,
during the second quarter of 2002 as a result of the redemption.
Liquidity and Capital Resources
During the six months ended June 30, 2002, the Company generated cash flow
from operations of $30.1 million. Cash provided by operations resulted
primarily from earnings before noncash and extraordinary items offset by cash
used for working capital purposes. A substantial portion of cash used for
working capital purposes related to the payment, in the first quarter of 2002,
of December 31, 2001 accruals of employee costs associated with year 2001
performance.
12
The cash flow provided by operations in addition to $37.5 million of net
borrowings under the senior revolving credit facility and a portion of the
December 31, 2001 cash balance were used during the six months of 2002 to
fund capital expenditures of $10.3 million, repay $25.0 million of debt under
the term loan facility and fund the redemption of a portion of the Company's
Senior Subordinated Notes. The Company redeemed $50.0 million aggregate
principal amount of its Senior Subordinated Notes for a total redemption price
of $52.5 million, including a redemption premium of $1.8 million and accrued
interest thereon of $0.7 million, on April 30, 2002.
The Company's debt instruments contain certain covenants that, among other
things, limit the Company's ability to incur additional indebtedness, pay
dividends and purchase Company stock as well as require the Company to
maintain certain financial ratios. As of June 30, 2002, the Company had an
aggregate of $125.4 million available for borrowing under its U.S. and
European revolving credit facilities. The Company believes that existing cash
balances and internally generated cash flows, together with borrowings
available under its revolving credit facilities, will be sufficient to fund
normal working capital needs, capital spending requirements and debt service
requirements for at least the next twelve months.
Statement Regarding Forward-Looking Disclosure
Certain portions of this Form 10-Q, including "Management's Discussion and
Analysis of Financial Condition and Results of Operations," contain various
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended, that represent the Company's expectations or beliefs
concerning future events. Forward-looking statements relate to future
operations, strategies, financial results or other developments and are not
based on historical information. In particular, statements using verbs such
as "anticipates," "believes," "estimates," "expects" or words of similar
meaning generally involve forward-looking statements. Although the Company
believes the expectations reflected in these forward-looking statements are
based upon reasonable assumptions, no assurance can be given that Knoll will
attain these expectations or that any deviations will not be material. Readers
of this Form 10-Q are cautioned not to unduly rely on any forward-looking
statements.
The Company cautions that its forward-looking statements are further qualified
by important factors that could cause actual results to differ materially from
those in the forward-looking statements. Such factors include, without
limitation, the impact and duration of the sluggishness in the North American
economy generally and in the high-technology industry; continuation or further
deterioration of depressed industry revenues driven by a variety of
macroeconomic factors, including white-collar employment levels, business
confidence and corporate profitability and cash flows, as well as by a variety
of industry factors such as corporate reengineering and restructuring,
technology demands, ergonomic, health and safety concerns and corporate
relocations; the ability of the Company to successfully negotiate a new
collective bargaining agreement with its unionized employees prior to the
expiration of the currently existing agreement at midnight on August 25, 2002;
competitive pricing within the contract office furniture industry; the
Company's indebtedness, which requires the Company to meet certain financial
covenants and requires a significant portion of the Company's cash flow from
operations to be dedicated to debt service, making such cash flow unavailable
for other purposes, and which could limit the Company's flexibility in
reacting to changes in its industry or economic conditions generally; the
highly competitive nature of the market in which the Company competes,
including the timely introduction of new products, pricing changes by the
Company's competitors and growth rates of the office systems category;
increases in raw material prices, such as steel; risks associated with the
Company's marketing and sales strategies, including the risk that the Company's
introduction of new products will not achieve the same degree of success
achieved historically by the Company's products; the Company's dependence on
key personnel; the ability of the Company to maintain its relationships with
its dealers; the Company's reliance on its patents and other intellectual
property; environmental laws and regulations, including those that may be
enacted in the future, that affect the ownership and operation of the Company's
manufacturing plants; risks relating to potential labor disruptions; and
fluctuations in foreign currency exchange rates. Except as otherwise required
by the federal securities laws, the Company disclaims any obligation or
undertaking to disseminate any updates or revisions to any forward-looking
statement contained in this Form 10-Q to reflect any change in its expectations
with regard thereto or any change in events, conditions or circumstances on
which any such statement is based.
13
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- -------------------------------------------------------------------
During the normal course of business, the Company is routinely subjected to
market risk associated with interest rate movements and foreign currency
exchange rate movements. Interest rate risk arises from the Company's debt
obligations and related interest rate collar and swap agreements. Foreign
currency exchange rate risk arises from the Company's foreign operations
and purchases of inventory from foreign suppliers. There have been no
material changes in the Company's financial instruments or its exposure to
market risk since December 31, 2001 except as described below.
The Company's fixed-rate debt was $58.1 million at June 30, 2002, a decrease
of $50.0 million from December 31, 2001, while its variable-rate debt was
$452.0 million at June 30, 2002, an increase of $12.5 million from
December 31, 2001. The Company's fixed-rate debt decreased as a result of the
redemption of $50.0 million aggregate principal amount of its Senior
Subordinated Notes on April 30, 2002. The increase in variable-rate debt is
related to net borrowings of $37.5 million under the senior revolving credit
facility to partially fund the redemption of a portion of the Senior
Subordinated Notes offset by the repayment of $25.0 million under the term
loan facility.
In May 2002, the Company entered into two interest rate swap agreements that
effectively convert the fixed-rate floor on the Company's interest rate collar
agreements to a floating rate of interest. Under these agreements, the
Company will receive a fixed rate of interest of 5.12% and pay a variable rate
of interest equal to the three-month LIBOR, as determined on the last day of
each quarterly settlement period, plus 1.35% on an aggregate notional
principal amount of $200.0 million. The termination date of the agreements is
February 2004.
The aggregate fair value of the Company's interest rate collar and swap
agreements from the Company's perspective as of June 30, 2002 was a net loss
of $6.3 million, of which $2.7 million was recorded as a current asset,
$6.1 million was recorded as a current liability and $2.9 million was recorded
as a noncurrent liability in the Company's unaudited condensed consolidated
balance sheet. The aggregate fair value of the Company's interest rate collar
agreements from the Company's perspective as of December 31, 2001 was a net
loss of $8.4 million, of which $5.9 million was recorded as a current liability
and $2.5 million was recorded as a noncurrent liability.
The following table sets forth the gains and losses recorded for the Company's
interest rate collar and swap agreements and the line items in which such
amounts are reflected in the Company's unaudited condensed consolidated
statements of operations:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(In Thousands)
Interest expense........... $ 1,622 $ -- $3,177 $ --
Other income (expense)..... 53 (85) 2,237 (3,127)
------- ---- ------ -------
Aggregate net loss......... $(1,569) $(85) $ (940) $(3,127)
======= ==== ====== =======
14
PART II -- OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
- --------------------------------------------------
Restrictions on Dividends
The credit agreement governing the Company's senior credit facilities and the
indenture relating to the Company's Senior Subordinated Notes contain certain
covenants that, among other things, limit the Company's ability to purchase
Knoll stock and pay dividends to its stockholders. On December 20, 2000, the
Company's Board of Directors declared a special cash dividend of $9.50 per
share of common stock (approximately $220.3 million in the aggregate), which
was paid on January 5, 2001 to stockholders of record as of the close of
business on December 20, 2000. Such dividend was in compliance with the
covenants contained in the aforementioned debt agreements, as amended. Prior
to December 20, 2000, the Company had never declared any dividends on its
common stock. Any future determination to pay dividends will depend on the
Company's results of operations, financial condition, capital requirements,
contractual restrictions and other factors deemed relevant by the Board of
Directors.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
a. Exhibits:
99.1 Chief Executive Officer Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
99.2 Chief Financial Officer Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
b. Current Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the three months
ended June 30, 2002.
15
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KNOLL, INC.
Date: August 14, 2002 By: /s/ Andrew B. Cogan
-------------------------------
Andrew B. Cogan
Chief Executive Officer
Date: August 14, 2002 By: /s/ Barry L. McCabe
-------------------------------
Barry L. McCabe
Senior Vice President and
Chief Financial Officer
16
EXHIBIT INDEX
-------------
Exhibit
Number Description Page
- --------- ----------------------------------------------------- --------
99.1 Chief Executive Officer Certification Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Chief Financial Officer Certification Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
17