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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 September 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 November 11, 2002, there were 23,169,029 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 September 30, 2002
and December 31, 2001...................................... 3
Condensed Consolidated Statements of Operations for the
three months and nine months ended September 30, 2002
and 2001................................................... 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 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
4. Controls and Procedures.......................................... 15
PART II -- OTHER INFORMATION
2. Changes in Securities and Use of Proceeds........................ 16
5. Other Information................................................ 16
6. Exhibits and Reports on Form 8-K................................. 16
Signatures........................................................... 17
Certifications....................................................... 18
Exhibit Index........................................................ 20
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)
September 30, 2002 December 31, 2001
------------------ -----------------
ASSETS
Current assets:
Cash and cash equivalents........ $ 17,204 $ 32,213
Customer receivables, net........ 93,700 100,286
Inventories...................... 49,972 60,691
Deferred income taxes............ 18,275 23,669
Prepaid and other current
assets......................... 13,212 4,436
--------- ---------
Total current assets......... 192,363 221,295
Property, plant and equipment........ 330,889 315,369
Accumulated depreciation............. (162,559) (140,331)
--------- ---------
Property, plant and
equipment, net............. 168,330 175,038
Goodwill............................. 43,754 43,692
Trademarks........................... 187,831 187,831
Deferred financing fees, net......... 4,384 5,582
Other noncurrent assets.............. 6,234 5,565
--------- ---------
Total Assets................. $ 602,896 $ 639,003
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-term
debt........................... $ 60,074 $ 62,558
Accounts payable................. 52,590 59,923
Income taxes payable............. 4,051 4,817
Other current liabilities........ 67,963 89,977
--------- ---------
Total current liabilities.... 184,678 217,275
Long-term debt....................... 424,961 484,966
Deferred income taxes................ 30,506 25,656
Other noncurrent liabilities......... 35,416 33,424
--------- ---------
Total liabilities............ 675,561 761,321
--------- ---------
Stockholders' deficit:
Common stock, $0.01 par value;
100,000,000 shares authorized;
23,169,029 shares issued and
outstanding (net of 37,100
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....... 2,729 3,188
Retained deficit................. (60,092) (108,189)
Accumulated other comprehensive
loss........................... (15,534) (17,549)
--------- ---------
Total stockholders' deficit.. (72,665) (122,318)
--------- ---------
Total Liabilities and
Stockholders' Deficit...... $ 602,896 $ 639,003
========= =========
See accompanying notes.
3
KNOLL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Sales...................... $187,696 $250,293 $588,165 $764,520
Cost of sales.............. 120,649 150,136 370,990 458,334
-------- -------- -------- --------
Gross profit............... 67,047 100,157 217,175 306,186
Selling, general and
administrative expenses.. 37,560 47,057 116,734 150,946
Restructuring charge....... -- 2,155 -- 2,155
-------- -------- -------- --------
Operating income........... 29,487 50,945 100,441 153,085
Interest expense........... 5,768 9,999 21,041 33,020
Other income (expense),
net...................... 3,731 (2,725) 4,050 (4,340)
-------- -------- -------- --------
Income before income tax
expense and
extraordinary item....... 27,450 38,221 83,450 115,725
Income tax expense......... 11,174 15,856 34,185 47,758
-------- -------- -------- --------
Income before
extraordinary item....... 16,276 22,365 49,265 67,967
Extraordinary loss on
early extinguishment
of debt, net of tax
benefit.................. -- -- 1,168 --
-------- -------- -------- --------
Net income................. $ 16,276 $ 22,365 $ 48,097 $ 67,967
======== ======== ======== ========
See accompanying notes.
4
KNOLL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Nine Months Ended
September 30,
------------------------
2002 2001
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................... $ 48,097 $ 67,967
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization............ 23,067 27,668
Extraordinary loss, net of tax benefit... 1,168 --
Other noncash items...................... (4,048) 5,802
Changes in assets and liabilities:
Customer receivables................. 7,705 11,144
Inventories.......................... 11,235 10,613
Accounts payable..................... (8,113) (22,158)
Current and deferred income taxes.... 10,067 13,486
Other current assets and
liabilities........................ (26,291) (27,765)
Other noncurrent assets and
liabilities........................ 87 2,463
-------- ---------
Cash provided by operating activities.......... 62,974 89,220
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures........................... (14,253) (13,738)
Proceeds from sale of assets................... 36 70
-------- ---------
Cash used in investing activities.............. (14,217) (13,668)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facilities,
net.......................................... 25,000 158,000
Repayment of long-term debt.................... (87,570) (18,750)
Premium paid for early extinguishment of debt.. (1,813) --
Payment of dividend............................ -- (220,339)
Purchase of common stock....................... (459) (282)
-------- ---------
Cash used in financing activities.............. (64,842) (81,371)
-------- ---------
Effect of exchange rate changes on cash and
cash equivalents............................. 1,076 155
-------- --------
Decrease in cash and cash equivalents.......... (15,009) (5,664)
Cash and cash equivalents at beginning
of period.................................... 32,213 22,339
-------- ---------
Cash and cash equivalents at end of period..... $ 17,204 $ 16,675
======== =========
See accompanying notes.
5
KNOLL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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
accounting principles generally accepted in the United States ("U.S.") 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 accounting principles generally accepted
in the U.S. 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 accounting principles generally
accepted in the U.S. 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 nine
months ended September 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 nine months ended September 30, 2001:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(In Thousands)
Reported net income........ $16,276 $22,365 $48,097 $67,967
Add back:
Goodwill amortization,
net of tax benefit
of $46 and $138,
respectively........... -- 268 -- 821
Trademark amortization,
net of tax benefit
of $547 and $1,641,
respectively........... -- 828 -- 2,482
------- ------- ------- -------
Adjusted net income........ $16,276 $23,461 $48,097 $71,270
======= ======= ======= =======
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 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
quarter ended June 30, 2002. An independent appraiser performed the first
step of the goodwill impairment test, as prescribed by SFAS 142, to identify
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
September 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:
September 30, 2002 December 31, 2001
------------------ -----------------
(In Thousands)
Gross carrying amount.......... $ 8,337 $ 8,546
Accumulated amortization....... (3,953) (2,964)
------- -------
Net amount..................... $ 4,384 $ 5,582
======= =======
The Company recorded expense of $0.4 million in each of the three-month periods
ended September 30, 2002 and 2001 and $1.1 million in each of the nine-month
periods ended September 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 $0.4 million for the remaining three 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 quarter ended June 30, 2002 as
a result of the redemption.
7
4. Derivative Instruments
The Company's interest rate collar agreements have an aggregate notional
principal amount of $200.0 million, related weighted-average maximum and
minimum interest rates of 10.0% and 5.12%, respectively, and a termination
date of February 2004. 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 the interest rate swap agreements, the Company receives a fixed rate of
interest of 5.12% and pays 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 interest rate
swap 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 September 30, 2002 was a net
loss of $4.5 million, of which $6.1 million was recorded as a current asset,
$7.2 million was recorded as a current liability and $3.4 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 Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(In Thousands)
Interest expense........... $ 657 $ 865 $3,834 $ 865
Other income (expense)..... 1,784 (4,685) 4,021 (7,812)
------ ------- ------ -------
Aggregate net gain (loss).. $1,127 $(5,550) $ 187 $(8,677)
====== ======= ====== =======
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. Restructuring
In September 2001, the Company adopted a restructuring plan to eliminate
certain salaried positions in its workforce in North America. In connection
with the adoption of the plan, the Company recorded a restructuring charge of
$2.2 million for severance and other termination benefits.
8
7. Inventories
September 30, 2002 December 31, 2001
------------------ -----------------
(In Thousands)
Raw materials.................. $28,006 $34,044
Work in process................ 7,165 8,190
Finished goods................. 14,801 18,457
------- -------
Inventories..................... $49,972 $60,691
======= =======
8. Comprehensive Income
For the three months ended September 30, 2002 and 2001, comprehensive income
amounted to $14.0 million and $20.4 million, respectively. Comprehensive
income for the nine months ended September 30, 2002 and 2001 was $50.1 million
and $64.5 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.
9. 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 nine months of 2002, demand for new office furniture remained
weak and pricing within the United States ("U.S.") office furniture industry
continued to be extremely competitive. The Business and Institutional
Furniture Manufacturer's Association ("BIFMA"), the U.S. office furniture
trade association, estimates U.S. office furniture industry revenues for the
first nine months of 2002 were down 21.9% compared to the first nine months of
2001.
The near-term outlook for the U.S. contract office furniture industry remains
bleak. Macroeconomic conditions, including white-collar employment levels,
business confidence and corporate profitability and cash flows, that are
believed to influence industry revenues continue to show little or no sign of
improvement. Lack of improvement in these industry drivers, as well as the
prevailing economic and geopolitical uncertainty, are causing companies to
defer capital spending. BIFMA currently forecasts revenues for the year 2002
will decline 20.3% from 2001, bringing the industry back to sales levels not
experienced since 1994.
The Company continues to aggressively manage its cost structure in light of
current economic conditions and uncertainty, but at the same time continues to
pursue and invest in a focused set of 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 the development of new products
and other sales and marketing efforts aimed at gaining market share.
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 nine months ended
September 30, 2001 included a pretax charge of $1.7 million ($1.1 million
after-tax) and $5.1 million ($3.3 million after-tax), respectively, for the
amortization of goodwill and trademarks. Excluding these charges, the
Company's net income would have been $23.5 million and $71.3 million for the
three months and nine months ended September 30, 2001, respectively.
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.
10
During the 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
quarter ended June 30, 2002. An independent appraiser performed the first
step of the goodwill impairment test, as prescribed by SFAS 142, to identify
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 Third Quarter and Nine Months Ended September 30, 2002 to
Third Quarter and Nine Months Ended September 30, 2001
Sales. Sales for the third quarter of 2002 were $187.7 million, a decrease
of 25.0%, or $62.6 million, from sales of $250.3 million for the third
quarter of 2001. Sales for the nine months ended September 30, 2002 were
$588.2 million, a decrease of 23.1%, or $176.3 million, from sales of
$764.5 million for the same period of 2001. The Company's sales in the third
quarter and nine months of 2002 were down primarily as a result of decreased
volume attributable to the sluggishness and uncertainty in the U.S. economy.
The decreases in the Company's sales for the third quarter and nine 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.
The volume decreases for the third quarter and nine months were spread across
all of the Company's product categories, with office systems accounting for
the largest decrease. Office systems are the largest component of the
Company's sales, as well as of overall industry sales. Based on the most
recent product category data released by BIFMA, it appears that the office
systems category in general is declining at a greater rate than the industry
as a whole.
Gross Profit and Operating Income. Throughout 2001 and the first nine 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.
As a percentage of sales, gross profit was 35.7% and 36.9% for the third
quarter and nine months ended September 30, 2002, respectively, and 40.0% for
both the third quarter and nine months ended September 30, 2001. Operating
income as a percentage of sales was 15.7% and 17.1% for the third quarter and
nine months ended September 30, 2002, respectively, and 20.4% and 20.0% for
the third quarter and nine months ended September 30, 2001, respectively.
Excluding the goodwill and trademark amortization expense of $1.7 million and
$5.1 million recorded in the third quarter and nine months of 2001,
respectively, and the restructuring charge of $2.2 million for severance
and other termination benefits recorded in the third quarter of 2001 upon
adoption of the restructuring plan discussed
11
above, the Company's operating income as a percentage of sales was 21.9% and
21.0%, for the third quarter and nine months of 2001, 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 third quarter and nine months ended September 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 a contingency loss
recorded as a result of a bankruptcy filing by a third party that processed
payment of the Company's freight bills. The estimated contingency loss
recorded during the nine months ended September 30, 2002 was $2.0 million, of
which $0.5 million was recorded during the third quarter of 2002.
The Company's steel suppliers started to implement price increases during the
quarter ended June 30, 2002 primarily in response to the imposition of tariffs
by the U.S. government on some imported steel products. There was no
appreciable impact of steel price increases on the Company's results of
operations for the third quarter or nine months of 2002. The Company expects
steel inflation to have an adverse effect on its results of operations for the
remainder of 2002 and 2003. However, such negative impact is not expected to
be material.
Interest Expense. The Company's interest expense for the third quarter and
nine months ended September 30, 2002 decreased $4.2 million and $12.0 million,
respectively, compared to that of the same periods of 2001. Such decreases
were primarily a result of lower outstanding variable-rate debt balances,
significantly lower interest rates on the Company's variable-rate debt and the
redemption of $50.0 million aggregate principal amount of the Company's Senior
Subordinated Notes on April 30, 2002 (see Note 3 to the unaudited condensed
consolidated financial statements) offset, for the nine-month period, by the
negative impact of the Company's interest rate protection agreements. Interest
rates incurred for borrowings under the Company's senior credit facilities
during the third quarter and nine months of 2002 were more favorable primarily
as a result of continued lower short-term borrowing rates.
Interest expense reflects the following amounts related to the Company's
interest rate protection agreements: net expense of $0.7 million, consisting
of $1.7 million of payments under the interest rate collars and $1.0 million
of receipts under the interest rate swaps, for the third quarter of 2002; net
expense of $3.8 million, consisting of $4.8 million of payments under the
interest rate collars and $1.0 million of receipts under the interest rate
swaps, for the nine months ended September 30, 2002; and net expense of
$0.9 million under the interest rate collars for both the third quarter and
nine months ended September 30, 2001.
Other Income (Expense), Net. Other income (expense) included noncash gains
related to the Company's interest rate collar and swap agreements of
$1.8 million and $4.0 million for the third quarter and nine months ended
September 30, 2002, respectively. For the third quarter and nine months
ended September 30, 2001, other income (expense) included noncash losses of
$4.7 million and $7.8 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 decrease in the
effective tax rate to 40.7% for the third quarter of 2002 from 41.5% for the
third quarter of 2001 and the decrease to 41.0% for the nine months ended
September 30, 2002 from 41.3% 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 nine months ended September 30, 2002 as a result of the redemption.
12
Liquidity and Capital Resources
During the nine months ended September 30, 2002, the Company generated cash
flow from operations of $63.0 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.
The cash flow provided by operations, in addition to $25.0 million of net
borrowings under the senior revolving credit facility and a portion of the
December 31, 2001 cash balance, were used during the nine months of 2002 to
fund capital expenditures of $14.3 million, repay $37.5 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 September 30, 2002, the Company had
an aggregate of $138.3 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 ("Exchange Act"), 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 economic and geopolitical
uncertainty, as well as the continued sluggishness in the North American
economy generally and the more dramatic downturn 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; 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 industry or economic conditions generally; the
ability of the Company's dealers to maintain financial viability; 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
13
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.
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 $58.0 million at September 30, 2002, a
decrease of $50.0 million from December 31, 2001, while its variable-rate debt
was $427.0 million at September 30, 2002, a decrease of $12.5 million from
December 31, 2001. The Company's fixed-rate debt decreased primarily as a
result of the redemption of $50.0 million aggregate principal amount of its
Senior Subordinated Notes on April 30, 2002. The decrease in variable-rate
debt is related to net borrowings of $25.0 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 $37.5 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 receives a fixed rate of interest of 5.12% and pays 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 September 30, 2002 was a net
loss of $4.5 million, of which $6.1 million was recorded as a current asset,
$7.2 million was recorded as a current liability and $3.4 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 Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(In Thousands)
Interest expense........... $ 657 $ 865 $3,834 $ 865
Other income (expense)..... 1,784 (4,685) 4,021 (7,812)
------ ------- ------ -------
Aggregate net gain (loss).. $1,127 $(5,550) $ 187 $(8,677)
====== ======= ====== =======
14
Item 4. Controls and Procedures
- --------------------------------
a. Evaluation of disclosure controls and procedures.
The Company's Chief Executive Officer and Chief Financial Officer, after
evaluating the effectiveness of the Company's disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) as of
a date within ninety days before the filing date of this quarterly report
on Form 10-Q (the "Evaluation Date"), have concluded that as of the
Evaluation Date, the Company's disclosure controls and procedures were
adequate and effective to ensure that material information relating to the
Company would be made known to them by others within the Company,
particularly during the period in which this quarterly report on Form 10-Q
was being prepared.
b. Changes in internal controls.
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent
to the date of the most recent evaluation, nor were there any significant
deficiencies or material weaknesses in such internal controls requiring
corrective actions. As a result, no corrective actions were undertaken.
15
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 5. Other Information
- --------------------------
The Company reached an agreement with the Carpenters and Joiners of America-
Local 1615 on a new four-year collective bargaining agreement covering hourly
employees at the Company's Grand Rapids, Michigan plant, its only unionized
facility in the U.S. The differences between the terms of the new agreement
and the terms of the old agreement, which expired at midnight on August 25,
2002, are not expected to have a material effect on the Company's results of
operations. The new collective bargaining agreement will expire on August 27,
2006.
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 September 30, 2002.
16
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: November 14, 2002 By: /s/ Andrew B. Cogan
-------------------------------
Andrew B. Cogan
Chief Executive Officer
Date: November 14, 2002 By: /s/ Barry L. McCabe
-------------------------------
Barry L. McCabe
Senior Vice President and
Chief Financial Officer
17
CERTIFICATIONS
--------------
I, Andrew B. Cogan, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Knoll, Inc.;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this quarterly report;
(4) The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant
and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
(5) The Registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
audit committee of the Registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrant's
ability to record, process, summarize and report financial data
and have identified for the Registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
(6) The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 14, 2002 /s/ Andrew B. Cogan
------------------------------
Andrew B. Cogan
Chief Executive Officer
18
I, Barry L. McCabe, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Knoll, Inc.;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this quarterly report;
(4) The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant
and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
(5) The Registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
audit committee of the Registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrant's
ability to record, process, summarize and report financial data
and have identified for the Registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
(6) The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 14, 2002 /s/ Barry L. McCabe
------------------------------
Barry L. McCabe
Senior Vice President and
Chief Financial Officer
19
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.
20