KNL-2015.06.30-10Q
Table of Contents

 

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, 2015
 
OR
o
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 o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x,
Accelerated filer o,
Non-accelerated filer o,
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)  Yes o No x
 
As of July 30, 2015, there were 48,784,675 shares (including 1,034,259 shares of non-voting restricted shares) of the Registrant’s common stock, par value $0.01 per share, outstanding.
 


Table of Contents

KNOLL, INC.
 
TABLE OF CONTENTS FOR FORM 10-Q
 
Item
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
KNOLL, INC.
 
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share and per share data)
 
June 30,
2015
 
December 31,
2014
ASSETS
(Unaudited)
 
 
Current assets:
 

 
 

Cash and cash equivalents
$
10,342

 
$
19,021

Customer receivables, net
104,374

 
114,551

Inventories, net
143,440

 
140,835

Deferred income taxes
15,015

 
15,868

Prepaid and other current assets
24,411

 
21,544

Total current assets
297,582

 
311,819

Property, plant, and equipment, net
164,649

 
165,019

Goodwill
128,379

 
128,918

Intangible assets, net
252,451

 
253,739

Other non-trade receivables
2,950

 
3,278

Other noncurrent assets
5,355

 
6,170

Total Assets
$
851,366

 
$
868,943

LIABILITIES AND EQUITY
 

 
 

Current liabilities:
 

 
 

Current maturities of long-term debt
$
10,000

 
$
10,000

Accounts payable
75,738

 
114,914

Income taxes payable

 
12,895

Other current liabilities
96,283

 
93,965

Total current liabilities
182,021

 
231,774

Long-term debt
264,000

 
248,000

Deferred income taxes
67,987

 
64,203

Postretirement benefits other than pensions
8,808

 
8,765

Pension liability
73,429

 
70,770

Other noncurrent liabilities
26,330

 
32,213

Total Liabilities
622,575

 
655,725

Commitments and contingent liabilities


 


Equity:
 

 
 

Common stock, $0.01 par value; 200,000,000 shares authorized; 64,564,959 shares issued and 48,816,899 shares outstanding (including 1,044,434 non-voting restricted shares and net of 15,748,060 treasury shares) at June 30, 2015 and 64,113,785 shares issued and 48,723,414 shares outstanding (including 1,235,904 non-voting restricted shares and net of 15,390,371 treasury shares) at December 31, 2014
488

 
487

Additional paid-in capital
43,996

 
41,143

Retained earnings
226,924

 
204,063

Accumulated other comprehensive loss
(42,799
)
 
(32,682
)
Total Knoll, Inc. stockholders' equity
228,609

 
213,011

Noncontrolling interests
182

 
207

Total Equity
228,791

 
213,218

Total Liabilities and Equity
$
851,366

 
$
868,943

See accompanying notes to the condensed consolidated financial statements.

3

Table of Contents

KNOLL, INC. 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
(dollars in thousands, except share and per share data)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Net sales
$
268,622

 
$
265,943

 
$
535,120

 
$
495,544

Cost of sales
167,431

 
168,669

 
338,620

 
321,672

Gross profit
101,191

 
97,274

 
196,500

 
173,872

Selling, general, and administrative expenses
72,936

 
74,833

 
145,946

 
139,555

Restructuring charges

 
203

 

 
795

Operating profit
28,255

 
22,238

 
50,554

 
33,522

Interest expense
1,851

 
1,944

 
3,736

 
3,615

Other expense (income), net
200

 
2,700

 
(6,957
)
 
196

Income before income tax expense
26,204

 
17,594

 
53,775

 
29,711

Income tax expense
8,982

 
6,753

 
19,118

 
11,038

Net earnings
17,222

 
10,841

 
34,657

 
18,673

Net losses attributable to noncontrolling interests
(17
)
 
(14
)
 
(25
)
 
(8
)
Net earnings attributable to Knoll, Inc. stockholders
$
17,239


$
10,855

 
$
34,682


$
18,681

 
 
 
 
 
 
 
 
Net earnings per common share attributable to Knoll, Inc. stockholders:
 

 
 

 
 

 
 

   Basic
$
0.36

 
$
0.23

 
$
0.73

 
$
0.40

   Diluted
$
0.36

 
$
0.23

 
$
0.72

 
$
0.39

Dividends per share
$
0.12

 
$
0.12

 
$
0.24

 
$
0.24

Weighted-average number of common shares outstanding:
 

 
 

 
 

 
 

   Basic
47,760,961

 
47,365,780

 
47,705,222

 
47,283,396

   Diluted
48,509,546

 
47,974,559

 
48,445,060

 
48,012,233

 
 
 
 
 
 
 
 
Net earnings
$
17,222

 
$
10,841

 
$
34,657

 
$
18,673

Other comprehensive income (loss):
 

 
 

 
 

 
 

   Foreign currency translation adjustment
118

 
3,730

 
(12,881
)
 
(89
)
   Pension and other post-retirement liability adjustment, net
   of tax
1,382

 
64

 
2,764

 
128

   Total other comprehensive income (loss), net of tax
1,500

 
3,794

 
(10,117
)
 
39

Total comprehensive income
18,722

 
14,635

 
24,540

 
18,712

Comprehensive losses attributable to noncontrolling interests
(17
)
 
(14
)
 
(25
)
 
(8
)
Comprehensive income attributable to Knoll, Inc. stockholders
$
18,739

 
$
14,649

 
$
24,565

 
$
18,720

 
See accompanying notes to the condensed consolidated financial statements.

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Table of Contents

KNOLL, INC. 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)
 
 
Six Months Ended 
 June 30,
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES
 

 
 

Net earnings
$
34,657

 
$
18,673

Adjustments to reconcile net earnings to cash provided by operating activities:
 

 
 

Depreciation
8,776

 
7,850

Amortization expense (including deferred financing fees)
1,951

 
2,176

Unrealized foreign currency gains
(6,818
)
 
(452
)
Stock-based compensation
3,574

 
3,658

Other non-cash items, net
227

 
30

Changes in assets and liabilities, net of acquisition:
 

 
 

Customer receivables
9,248

 
446

Inventories
(5,081
)
 
(10,325
)
Accounts payable
(36,399
)
 
3,174

Current and deferred income taxes
(11,437
)
 
6,291

Prepaid and other current assets
(1,765
)
 
(4,042
)
Other current liabilities
3,192

 
(13,662
)
Other noncurrent assets and liabilities
7,317

 
17,460

Cash provided by operating activities
7,442

 
31,277

CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 

Capital expenditures
(12,340
)
 
(17,741
)
Purchase of business, net of cash acquired

 
(93,349
)
Purchase of licenses
(330
)
 
(315
)
Cash used in investing activities
(12,670
)
 
(111,405
)
CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 

Proceeds from revolving credit facility
170,000

 
608,000

Repayment of revolving credit facility
(154,000
)
 
(515,000
)
Payment of financing fees

 
(1,914
)
Payment of dividends
(11,502
)
 
(11,363
)
Proceeds from the issuance of common stock
4,421

3

2,590

Purchase of common stock for treasury
(6,067
)
 
(6,227
)
Contingent purchase price payment
(5,000
)
 

Excess tax benefit from the exercise of stock options and vesting of equity awards
979

 
210

Cash (used in) provided by financing activities
(1,169
)
 
76,296

Effect of exchange rate changes on cash and cash equivalents
(2,282
)
 
279

Decrease in cash and cash equivalents
(8,679
)
 
(3,553
)
Cash and cash equivalents at beginning of period
19,021

 
12,026

Cash and cash equivalents at end of period
$
10,342

 
$
8,473

 
See accompanying notes to the condensed consolidated financial statements.

5

Table of Contents
KNOLL, INC.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1. BASIS OF PRESENTATION
 
The accompanying unaudited condensed consolidated financial statements of Knoll, Inc. (the “Company”) have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations.  The consolidated balance sheet of the Company, as of December 31, 2014, was derived from the Company’s audited consolidated balance sheet as of that date.  All other condensed consolidated financial statements contained herein are unaudited and reflect all adjustments which are, in the opinion of management, necessary to summarize fairly the financial position of the Company and the results of the Company’s operations and cash flows for the periods presented.  All of these adjustments are of a normal recurring nature. The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries and any partially owned subsidiaries that the Company has the ability to control. All significant intercompany balances and transactions have been eliminated in consolidation.  These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2014.

New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606). The ASU is the result of a convergence project between the FASB and the International Accounting Standards Board to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards. The ASU removes inconsistencies and weaknesses in revenue requirements; provides a more robust framework for addressing revenue issues; improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; provides more useful information to users of financial statements through expanded disclosure requirements; and simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer. This ASU is effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. The Company has not yet selected a transition method and is currently evaluating the impact of the amended guidance on the consolidated financial position, results of operations and related disclosures.

In April 2015, the FASB issued ASU No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30). This ASU simplifies the presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct reduction from the carrying amount of the debt liability, which is consistent with the treatment of debt discounts. The new guidance should be applied on a retrospective basis, and upon transition, an entity is required to comply with the applicable disclosures necessary for a change in accounting principle. This ASU is effective for fiscal years beginning after December 15, 2015, and for interim periods within those fiscal years. The Company does not expect the impact of the adoption of this ASU to have a material impact on its financial position, results of operations and cash flows.

In July 2015, the FASB issued ASU 2015-11, which amends existing guidance for measuring inventories.  This amendment will require the Company to measure inventories recorded using the first-in, first-out method at the lower of cost and net realizable value.  This amendment does not change the methodology for measuring inventories recorded using the last-in, first-out method.  This amendment will be effective for the Company on January 1, 2017.  Early adoption is permitted.  The Company does not expect the impact of the adoption of this ASU to have a material impact on its financial position, results of operations and cash flows.
 


6

Table of Contents
KNOLL, INC.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 


NOTE 2. ACQUISITIONS

On February 3, 2014, the Company acquired Holly Hunt Enterprises, Inc. The acquisition advances the Company's strategy of building its global capability as a resource for high-design workplaces and homes, including the commercial contract, decorator to-the-trade and consumer markets. The aggregate purchase price for the acquisition was $95.0 million, plus certain contingent payouts of up to $16.0 million. Of the $16.0 million of contingent payouts, $5.0 million was paid in the first quarter of 2015. The remaining contingent payouts, if earned based on future performance of the business, are expected to be paid in 2016 and 2017. The purchase price was funded from borrowings under the Company's revolving credit facility. The Company has recorded the acquisition of HOLLY HUNT® using the acquisition method of accounting and has recognized the assets acquired and liabilities assumed at their fair values as of the date of the acquisition. The Company finalized the purchase accounting for the acquisition of HOLLY HUNT during the first quarter of 2015 as no additional adjustments were made from the fair values assigned since December 31, 2014.

The amount of net sales and net earnings that resulted from the acquisition and attributable to Knoll, Inc. stockholders included in the condensed consolidated statements of operations and comprehensive income during the six months ended June 30, 2015 and 2014 were as follows (in thousands):
 
 
June 30, 2015
 
June 30, 2014
Net sales
 
$
57,569

 
$
44,509

Net earnings attributable to Knoll, Inc. stockholders
 
$
2,739

 
$
3,108


The following unaudited pro forma summary financial information presents the operating results of the combined company, assuming the acquisition had occurred as of January 1, 2013 (in thousands): 
 
Six Months Ended June 30, 2014
Pro forma net sales
$
503,365

Pro forma net earnings attributable to Knoll, Inc stockholders
$
19,106


The unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the results that would have been attained had the acquisition occurred on January 1, 2013, nor is it indicative of results of operations for future periods. The pro forma information presented for the six months ended June 30, 2014, include adjustments for acquisition costs, interest expense that would have been incurred to finance the acquisition, amortization and depreciation.

NOTE 3. INVENTORIES

 Information regarding the Company's inventories is as follows (in thousands):
 
June 30,
2015
 
December 31,
2014
Raw materials
$
58,226

 
$
54,376

Work-in-process
7,294

 
7,265

Finished goods
77,920

 
79,194

Total
$
143,440

 
$
140,835

 
Inventory reserves for obsolescence and other estimated losses were $7.8 million and $8.4 million at June 30, 2015 and December 31, 2014, respectively, and have been included in the amounts above.
 

7

Table of Contents
KNOLL, INC.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 


NOTE 4. INCOME TAXES
 
The Company’s income tax provision consists of federal, state and foreign income taxes.  The tax provisions for the three months ended June 30, 2015 and 2014 were based on the estimated effective tax rates applicable for the full years ending December 31, 2015 and 2014, after giving effect to items specifically related to the interim periods.  The Company’s effective tax rate was 34.3% for the three months ended June 30, 2015 and 38.4% for the three months ended June 30, 2014. The Company’s effective tax rate was 35.6% for the six months ended June 30, 2015 and 37.2% for the six months ended June 30, 2014. The decrease in the Company's effective tax rate for the three and six months ended June 30, 2015, was primarily a result of the geographic mix of pretax income and the varying effective tax rates in the countries and states in which the Company operates.
 
As of June 30, 2015 and December 31, 2014, the Company had unrecognized tax benefits of approximately $5.1 million and $4.9 million, respectively.  These unrecognized tax benefit amounts would affect the effective tax rate if recognized.  As of June 30, 2015, the Company is subject to U.S. Federal income tax examinations for the tax years 2011 through 2014, and to non-U.S. income tax examinations for the tax years 2006 through 2014.  In addition, the Company is subject to state and local income tax examinations for the tax years 2010 through 2014.

NOTE 5. CONTINGENT LIABILITIES AND COMMITMENTS
 
Litigation
 
The Company is currently involved in matters of litigation, including environmental contingencies, arising in the ordinary course of business.  The Company accrues for such matters when expenditures are probable and reasonably estimable.  Based upon information presently known, management is of the opinion that such litigation, either individually or in the aggregate, will not have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

Warranty
 
The Company offers a warranty for all of its products.  The specific terms and conditions of those warranties vary depending upon the product.  The Company estimates the costs that may be incurred under its warranties and records a liability in the amount of such costs at the time product revenue is recognized.  Factors that affect the Company’s liability include historical product-failure experience and estimated repair costs for identified matters for each specific product category.  The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.

Changes in the warranty reserve are as follows (in thousands):
 
Balance, as of December 31, 2014
$
8,180

Provision for warranty claims
3,717

Warranty claims paid
(3,476
)
Foreign currency translation adjustment
(68
)
Balance, as of June 30, 2015
$
8,353

 
Warranty expense for the three months ended June 30, 2015 and 2014 was $2.0 million and $1.7 million, respectively. Warranty expense for the six months ended June 30, 2015 and 2014 was $3.7 million and $3.4 million, respectively.
 


8

Table of Contents
KNOLL, INC.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 


NOTE 6. INDEBTEDNESS
Information regarding the Company's indebtedness is as follows (in thousands):
 
June 30,
2015
 
December 31,
2014
Balance of revolving credit facility
$
84,000

 
$
63,000

Balance of term loan
190,000

 
195,000

Total long-term debt
274,000

 
258,000

Less: Current maturities of long-term debt
10,000

 
10,000

Long-term debt
$
264,000

 
$
248,000


 
NOTE 7. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
 
The following table summarizes the changes in accumulated other comprehensive income (loss) by component for the six months ended June 30, 2015 (in thousands):
 
 
Foreign
Currency
Translation
Adjustment
 
Pension and
Other Post-Retirement
Liability
Adjustment
 
Total
Balance, as of December 31, 2014
$
2,095

 
$
(34,777
)
 
$
(32,682
)
Other comprehensive income (loss) before reclassifications
(12,881
)
 

 
(12,881
)
Amounts reclassified from accumulated other comprehensive income (loss)

 
2,764

 
2,764

Net current-period other comprehensive income (loss)
(12,881
)
 
2,764

 
(10,117
)
Balance, as of June 30, 2015
$
(10,786
)
 
$
(32,013
)
 
$
(42,799
)

The following reclassifications were made from accumulated other comprehensive income (loss) to the condensed consolidated statements of operations and other comprehensive income for the three months ended (in thousands):

 
June 30, 2015
 
June 30, 2014
Amortization of pension and other post-retirement liability adjustments

 
 
Prior Service Costs (1)
$
(72
)
 
$
(558
)
Actuarial Losses (1)
2,258

 
656

Total Before Tax
2,186

 
98

Tax Benefit
(804
)
 
(34
)
Net of Tax
$
1,382

 
$
64


(1) These accumulated other comprehensive income (loss) components are included in the computation of net periodic pension costs. See Note 8 for additional information.

The following reclassifications were made from accumulated other comprehensive income (loss) to the condensed consolidated statements of operations and other comprehensive income for the six months ended (in thousands):

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Table of Contents
KNOLL, INC.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 


NOTE 7. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (continued)
 
June 30, 2015
 
June 30, 2014
Amortization of pension and other post-retirement liability adjustments
 
 
 
Prior Service Costs (1)
$
(144
)
 
$
(1,116
)
Actuarial Losses (1)
4,516

 
1,312

Total Before Tax
4,372

 
196

Tax Benefit
(1,608
)
 
(69
)
Net of Tax
$
2,764

 
$
127


(1) These accumulated other comprehensive income (loss) components are included in the computation of net periodic pension costs. See Note 8 for additional information.

NOTE 8. PENSIONS AND OTHER POST-RETIREMENT BENEFITS
 
The following tables summarize the costs of the Company’s employee pension and other post-retirement benefit plans for the periods indicated (in thousands):

 
Pension Benefits
 
Other Benefits
 
Three months ended
 
Three months ended
 
June 30,
 
June 30,
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Service cost
$
1,887

 
$
1,734

 
$
4

 
$
6

Interest cost
3,114

 
3,335

 
80

 
91

Expected return on plan assets
(3,655
)
 
(3,936
)
 

 

Amortization of prior service cost

 
3

 
(72
)
 
(561
)
Recognized actuarial loss
2,166

 
502

 
92

 
154

Net periodic benefit cost
$
3,512

 
$
1,638

 
$
104

 
$
(310
)

For the three months ended June 30, 2015, $2.0 million of pension expense was incurred in cost of sales and $1.5 million was incurred in selling, general, and administrative expenses. For the three months ended June 30, 2014, $0.9 million of pension expense was incurred in cost of sales and $0.7 million was incurred in selling, general, and administrative expenses.

 
Pension Benefits
 
Other Benefits
 
Six months ended
 
Six months ended
 
June 30,
 
June 30,
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Service cost
$
3,774

 
$
3,468

 
$
8

 
$
12

Interest cost
6,228

 
6,670

 
160

 
182

Expected return on plan assets
(7,310
)
 
(7,872
)
 

 

Amortization of prior service cost

 
6

 
(144
)
 
(1,122
)
Recognized actuarial loss
4,332

 
1,004

 
184

 
308

Net periodic benefit cost
$
7,024

 
$
3,276

 
$
208

 
$
(620
)

For the six months ended June 30, 2015, $4.0 million of pension expense was incurred in cost of sales and $3.0 million was incurred in selling, general, and administrative expenses. For the six months ended June 30, 2014, $1.9 million of pension expense was incurred in cost of sales and $1.4 million was incurred in selling, general, and administrative expenses.
 

10

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KNOLL, INC.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 


NOTE 9. COMMON STOCK AND EARNINGS PER SHARE
Basic earnings per share attributable to Knoll, Inc. stockholders excludes the dilutive effect of (i) common shares that could potentially be issued due to the exercise of stock options, and (ii) unvested restricted stock and restricted stock units and is computed by dividing net earnings attributable to Knoll, Inc. stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share attributable to Knoll, Inc. stockholders includes the effect of shares and potential shares issued under the stock incentive plans. The following table sets forth the reconciliation from basic to diluted weighted-average number of common shares outstanding:
 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
 
(in thousands)
Weighted-average number of common shares outstanding - basic
47,761

 
47,366

 
47,705

 
47,283

Potentially dilutive shares resulting from stock plans
749

 
609

 
740

 
729

Weighted-average number of common shares outstanding - diluted
48,510

 
47,975

 
48,445

 
48,012

Antidilutive equity awards number of shares not included in the weighted-average common shares - diluted

 
138

 

 
158


Common stock activity for the six months ended June 30, 2015 and 2014 included the repurchase of 287,689 shares for $6.1 million and 379,051 shares for $6.2 million, respectively.  Common stock activity for the six months ended June 30, 2015 also included the exercise of 302,750 stock options for $4.4 million and the vesting of 281,581 restricted shares.  Common stock activity for the six months ended June 30, 2014 included the exercise of 195,807 stock options for $2.6 million and the vesting of 496,191 restricted shares. During the three and six months ended June 30, 2015, the Company granted 998 and 272,424, respectively, equity-based awards to certain employees and the Company's Board of Directors. The vesting of these awards is subject to certain service, performance or market conditions.

NOTE 10. EQUITY
 
The following table shows the change in equity attributable to Knoll, Inc. stockholders and noncontrolling interests during the six months ended June 30, 2015 (in thousands):
 
Equity Attributable to Knoll Inc., Stockholders
 
Noncontrolling Interests
 
Total
   Balance, as of December 31, 2014
$
213,011

 
$
207

 
$
213,218

    Total comprehensive income:
 
 
 
 
 
Net earnings (losses) attributable to Knoll, Inc. stockholders and noncontrolling interests
34,682

 
(25
)
 
34,657

Other comprehensive income
(10,117
)
 

 
(10,117
)
   Other changes in equity:
 
 
 
 
 
   Purchase of common stock for treasury
(6,067
)
 

 
(6,067
)
   Cash dividends declared
(11,874
)
 

 
(11,874
)
   Proceeds from the issuance of common stock
4,421

 

 
4,421

   Stock-based compensation
3,574

 

 
3,574

   Excess tax benefit from the exercise of stock options and vesting of
   equity awards
979

 

 
979

   Balance, as of June 30, 2015
$
228,609

 
$
182

 
$
228,791



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Table of Contents
KNOLL, INC.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 


NOTE 11. FAIR VALUE OF FINANCIAL INSTRUMENTS
 
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company uses the following valuation techniques to measure fair value for its financial assets and financial liabilities:
 
·                  Level 1: Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.
·                  Level 2: Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.
·                  Level 3: Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.

The fair value of the Company's cash and cash equivalents, accounts receivable and accounts payable approximate carrying value due to their short maturities.

The fair value of the Company’s long-term debt approximates its carrying value, as it is variable rate debt and the terms are comparable to market terms as of the balance sheet dates, and is classified as Level 2. 

Financial Instruments
 
Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The following table represents the financial assets and liabilities, measured at fair value on a recurring basis and the basis for that measurement (in thousands):
 
Fair value as of June 30, 2015
 
Fair value as of December 31, 2014
 Liabilities:
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Contingent purchase price payment
$

 
$

 
$
11,000

 
$
11,000

 
$

 
$

 
$
16,000

 
$
16,000


Pursuant to the agreement governing the acquisition of HOLLY HUNT, the Company may be required to make annual contingent purchase price payments. The payouts are based upon HOLLY HUNT reaching an annual net sales target, for each year over the next two calendar years, and are paid out by February 15 of the following calendar year. The Company classifies this as a Level 3 measurement and is required to remeasure this liability at fair value on a recurring basis. The fair value of such contingent purchase price payments was determined at the time of acquisition based upon net sales projections for HOLLY HUNT for 2014, 2015, and 2016. The Company paid $5.0 million during the first quarter of 2015, as a result of HOLLY HUNT achieving the 2014 net sales projections. Excluding the initial recognition of the liability for the contingent purchase price payments and payments made to reduce the liability, any changes in the fair value would be included within selling, general and administrative expenses.

There were no additional assets and/or liabilities recorded at fair value on a recurring basis as of June 30, 2015 or December 31, 2014.



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Table of Contents
KNOLL, INC.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 


NOTE 12. SEGMENT INFORMATION
 
The Company reports its segment results based on the following reportable segments: (i) Office; (ii) Studio; and (iii) Coverings. The Office segment serves corporate, government, healthcare, retail and other customers in the United States and Canada providing a portfolio of office furnishing solutions including systems, seating, storage, and KnollExtra® ergonomic accessories, and other products. The Studio segment includes KnollStudio®, Knoll Europe which sells primarily KnollStudio products, Richard Schultz® Design and HOLLY HUNT.  The KnollStudio portfolio includes a range of lounge seating; side, cafe and dining chairs; barstools; and conference, dining and occasional tables. HOLLY HUNT produces and showcases custom made product including indoor and outdoor furniture, lighting, rugs, textiles and leathers. The Coverings segment includes, KnollTextiles®, Spinneybeck® and Edelman Leather® . These businesses serve a wide range of customers offering high-quality textiles, felt, and leather.

The following information below categorizes certain financial information into the above-noted segments for the three and six months ended June 30, 2015 and 2014:
 
 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
NET SALES
 

 
 

 
 

 
 

Office
$
160,877

 
$
159,100

 
$
328,600

 
$
305,183

Studio
77,863

 
76,454

 
148,057

 
132,451

Coverings
29,882

 
30,389

 
58,463

 
57,910

Total
$
268,622

 
$
265,943

 
$
535,120

 
$
495,544

 
 
 
 
 
 
 
 
INTERSEGMENT SALES (1)
 

 
 

 
 

 
 

Office
$
415

 
$
511

 
$
901

 
$
984

Studio
1,706

 
1,524

 
3,086

 
2,834

Coverings
1,317

 
2,798

 
3,242

 
5,413

Total
$
3,438

 
$
4,833

 
$
7,229

 
$
9,231

 
 
 
 
 
 
 
 
OPERATING PROFIT (2)
 

 
 

 
 

 
 

Office (3)
$
9,099

 
$
6,402

 
$
16,345

 
$
6,873

Studio
12,079

 
9,506

 
21,031

 
15,048

Coverings
7,077

 
6,330

 
13,178

 
11,601

Total
$
28,255

 
$
22,238

 
$
50,554

 
$
33,522

 
(1) Intersegment sales represent sales between Knoll, Inc. segments; these intersegment sales are eliminated in consolidation.
(2)  The Company does not allocate interest expense or other (income) expense, net to the reportable segments.
(3) Office operating profit includes $0.2 million and $0.8 million of restructuring expenses incurred during the three and six months ended June 30, 2014, respectively.

13. RESTRUCTURING CHARGES
During 2014, the Company approved certain restructuring actions. These actions primarily included reductions in headcount in the Office and Coverings segments, the exiting of certain showrooms within our Coverings segment, and charges related to improvements to better utilize the Company's manufacturing capacity. The Company does not expect any additional charges related to these restructuring actions in the future, and the Company anticipates that the remaining liability will be paid in the next twelve months.


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Table of Contents
KNOLL, INC.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 


13. RESTRUCTURING CHARGES (continued)
Below is a summary of the changes in the restructuring liability during 2015 (in thousands):
 
Office
Segment
 
Studio
Segment
 
Coverings
Segment
 
Total
Balance, as of December 31, 2014
$
1,046

 
$

 
$
16

 
$
1,062

Payments
(305
)
 

 
(16
)
 
(321
)
Balance, as of June 30, 2015
$
741

 
$

 
$

 
$
741



14

Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Management’s discussion and analysis of financial condition and results of operations provides an account of our financial performance and financial condition that should be read in conjunction with the accompanying unaudited condensed consolidated financial statements.
 
Forward-looking Statements
 
This Quarterly report on Form 10-Q contains forward-looking statements, principally in the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Quantitative and Qualitative Disclosures About Market Risk.” Statements and financial discussion and analysis contained in this Form 10-Q that are not historical facts are forward-looking statements. These statements discuss goals, intentions and expectations as to future trends, plans, events, results of operations or financial condition, or state other information relating to us, based on our current beliefs as well as assumptions made by us and information currently available to us. Forward-looking statements generally will be accompanied by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “possible,” “potential,” “predict,” “project,” or other similar words, phrases or expressions. This includes, without limitation, our statements and expectations regarding any current or future recovery in our industry and publicly announced plans for increased capital and investment spending to achieve our long-term revenue and profitability growth goals, and our expectations with respect to leverage.  Although we believe these forward-looking statements are reasonable, they are based upon a number of assumptions concerning future conditions, any or all of which may ultimately prove to be inaccurate. Important factors that could cause actual results to differ materially from the forward-looking statements include, without limitation: the risks described in Item 1A and Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2014; changes in the financial stability of our clients or the overall economic environment, resulting in decreased corporate spending and service sector employment; changes in relationships with clients; the mix of products sold and of clients purchasing our products; the success of new technology initiatives; changes in business strategies and decisions; competition from our competitors; our ability to recruit and retain an experienced management team; changes in raw material and commodity prices and availability; restrictions on government spending resulting in fewer sales to the U.S. government, one of our largest customers; our debt restrictions on spending; our ability to protect our patents, copyrights and trademarks; our reliance on furniture dealers to produce sales; lawsuits arising from patents, copyrights and trademark infringements; violations of environmental laws and regulations; potential labor disruptions; adequacy of our insurance policies; the availability of future capital; the overall strength and stability of our dealers, suppliers, and customers; access to necessary capital; our ability to successfully integrate acquired businesses; the success of our design and implementation of a new enterprise resource planning system; and currency rate fluctuations. The factors identified above are believed to be important factors (but not necessarily all of the important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement. Unpredictable or unknown factors could also have material adverse effects on us. All forward-looking statements included in this Form 10-Q are expressly qualified in their entirety by the foregoing cautionary statements. Except as required under the Federal securities laws and rules and regulations of the SEC, we undertake no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise.
 
Critical Accounting Policies
 
The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires us to make estimates and assumptions that affect the reported amounts and disclosures in the condensed consolidated financial statements.  Actual results may differ from such estimates. On an ongoing basis, we review our accounting policies and procedures.  A more detailed review of our critical accounting policies is contained in our Annual Report on Form 10-K for the year ended December 31, 2014.




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Table of Contents

Overview
 
We design, manufacture, market and sell furnishings and accessories, textiles, fine leathers, and felt, for the workplace and home. Our commitment to innovation and modern design has yielded a comprehensive portfolio of products and a brand recognized for high quality and a sophisticated image. Our products are targeted at the middle to upper end of the market and are sold primarily in North America and Europe through a direct sales force and a broad network of independent dealers, showrooms, and retailers.

During the second quarter of 2015, net sales increased by 1.0%, or 3.0% on a constant currency basis. Consolidated net sales and operating profits were $268.6 million and $28.3 million, respectively, during the second quarter of 2015 in comparison to $265.9 million and $22.2 million, respectively, for the second quarter of 2014. Net earnings increased from $10.8 million a year ago to $17.2 million for the second quarter of 2015. Diluted earnings per share increased from $0.23 per share to $0.36 per share.


We ended the quarter with $10.3 million of cash and cash equivalents compared to $14.7 million as of the first quarter of 2015 and $8.5 million a year ago. Changes in accounts receivable, inventory, and accounts payable from the first quarter of 2015 provided approximately $12.0 million of liquidity during the second quarter of 2015. As a result of the positive change in working capital and net earnings achievement in the quarter, cash provided by operations was $33.5 million compared to $18.4 million for the second quarter of 2014. During the quarter, we invested $7.5 million in capital expenditures and reduced our debt outstanding from $300.0 million as of the first quarter of 2015 to $274.0 million as of the second quarter of 2015. As a result of lower debt outstanding and increased EBITDA, our leverage ratio improved from 2.55 as of the first quarter of 2015 to 2.22 as of the second quarter of 2015.

Constant currency sales is a non-GAAP financial measure and is reconciled to GAAP net sales in the below section, Reconciliation of Non-GAAP Financial Measures.


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Table of Contents

Results of Operations
 
Comparison of Three and Six Months ended June 30, 2015 and 2014
 
 
Three Months Ended
 
Six Months Ended
 
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
 
(in thousands)
Condensed Consolidated Statement of Operations Data:
 
 
 
 
 
 
 
Net sales
$
268,622

 
$
265,943

 
$
535,120

 
$
495,544

Gross profit
101,191

 
97,274

 
196,500

 
173,872

Operating profit
28,255

 
22,238

 
50,554

 
33,522

Interest expense
1,851

 
1,944

 
3,736

 
3,615

Other (income) expense, net
200

 
2,700

 
(6,957
)
 
196

Income tax expense
8,982

 
6,753

 
19,118

 
11,038

Net earnings
17,222

 
10,841

 
34,657

 
18,673

 
 
 
 
 
 
 
 
Statistical and Other Data:
 

 
 

 
 

 
 

Sales growth from comparable prior year
1.0
%
 
24.1
%
 
8.0
%
 
19.4
%
Gross profit margin
37.7
%
 
36.6
%
 
36.7
%
 
35.1
%
Operating profit margin
10.5
%
 
8.4
%
 
9.4
%
 
6.8
%
 
Net Sales
 
Net sales for the second quarter of 2015 were $268.6 million, an increase of $2.7 million, or 1.0%, from net sales of $265.9 million for the same period in the prior year. Net sales for the six months ended June 30, 2015 were $535.1 million, an increase of $39.6 million, or 8.0%, from net sales of $495.5 million for the same period in the prior year. On a constant currency basis, net sales increased 3.0% and 9.9% for the three and six months ended June 30, 2015. The increase in sales during the three and six months ended June 30, 2015 was largely the result of improved systems sales in our Office segment and strong sales growth by our North America Studio and Holly Hunt businesses. When comparing net sales for the six months ended June 30, 2015 to June 30, 2014, net sales for the six months ended June 30, 2015 included one additional month of sales for our Holly Hunt business. During the six months ended June 30, 2015 and 2014, approximately 9.2% and 12.0%, respectively, of our sales were to U.S., state, and local governmental agencies.
 
Gross Profit and Operating Profit
 
Gross profit for the second quarter of 2015 was $101.2 million, an increase of $3.9 million or 4.0%, from gross profit of $97.3 million for the same period in the prior year. Gross profit for the six months ended June 30, 2015 was $196.5 million, an increase of $22.6 million, or 13.0%, from gross profit of $173.9 million for the same period in the prior year. As a percentage of net sales, gross profit increased from 36.6% for the second quarter of 2014 to 37.7% for the second quarter of 2015. As a percentage of net sales, gross profit increased from 35.1% for the six months ended June 30, 2014 to 36.7% for the six months ended ended June 30, 2015. The increase in gross margin during the three and six months ended June 30, 2015 mainly resulted from benefits achieved from net price realization and foreign exchange savings across our segments.

Operating expenses for the three months ended June 30, 2015 were $72.9 million, or 27.1% of net sales, compared to $75.0 million, or 28.2% of net sales, for the second quarter of 2014. Operating expenses for the second quarter of 2014 included $0.2 million of restructuring charges. Operating expenses for the six months ended June 30, 2015 were $145.9 million in comparison to $139.6 million for the second quarter of 2014. For the three and six months ended June 30, 2015, when compared to the same periods from a year ago, additional operating expenses were incurred and primarily associated with our Holly Hunt business. These operating expenses included additional showroom expenses, which were offset by foreign exchange savings, lower incentive accruals, and other cost containment efforts for the three months ended June 30, 2015.


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Table of Contents

Operating profit for the second quarter of 2015 was $28.3 million, an increase of $6.1 million, or 27.5%, from operating profit of $22.2 million for the same period in the prior year. Operating profit for the six months ended June 30, 2015 was $50.6 million, an increase of $17.1 million, or 51.0%, from operating profit of $33.5 million for the same period in the prior year. Operating profit as a percentage of net sales increased from 8.4% in the second quarter of 2014 to 10.5% for the same period of 2015. Operating profit as a percentage of net sales increased from 6.8% for the six months ended June 30, 2014 to 9.4% in the same period for 2015. All segments experienced an increase in operating profit for the three and six months ended June 30, 2015.

Interest Expense
 
Interest expense for the second quarter of 2015 and 2014 was $1.9 million.  Interest expense for six months ended June 30, 2015 was $3.7 million, an increase of $0.1 million from $3.6 million for the same period in the prior year. The average interest rate for the three and six months ended June 30, 2015 was 2.1%, compared to 2.3% for the three and six months ended June 30, 2014.
  
Other (Income) Expense, net
 
Other (income) expense for the second quarter of 2015 was $0.2 million, which included $0.4 million of foreign exchange losses. Other (income) expense for the second quarter of 2014 was $2.7 million, which included $2.4 million of foreign exchange losses and $0.3 million of expense related to the write-off of deferred financing fees. Other (income) expense for the six months ended June 30, 2015 was ($7.0) million, which primarily consisted of foreign exchange gains. Other (income) expense for the six months ended June 30, 2014 was $0.2 million, which related to net a foreign exchange gain of $0.1 million and expense of $0.3 million associated with the write-off of deferred financing fees.
 
Income Tax Expense
 
The effective tax rate was 34.3% for the second quarter of 2015, as compared to 38.4% for the same period in 2014.  The effective tax rate was 35.6% for the six months ended June 30, 2015, as compared to 37.2% for the same period in 2014. The mix of pretax income and the varying effective tax rates in the countries in which we operate directly affects our consolidated effective tax rate.

Business Segment Analysis

The below table categorizes certain financial information into our Office, Studio, and Coverings segments for the three and six months ended June 30, 2015 and 2014:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
NET SALES
 

 
 

 
 

 
 

Office
$
160,877

 
$
159,100

 
$
328,600

 
$
305,183

Studio
77,863

 
76,454

 
148,057

 
132,451

Coverings
29,882

 
30,389

 
58,463

 
57,910

Total
$
268,622

 
$
265,943

 
$
535,120

 
$
495,544

 
 
 
 
 
 
 
 
OPERATING PROFIT (1)
 

 
 

 
 

 
 

Office (2)
$
9,099

 
$
6,402

 
$
16,345

 
$
6,873

Studio
12,079

 
9,506

 
21,031

 
15,048

Coverings
7,077

 
6,330

 
13,178

 
11,601

Total
$
28,255

 
$
22,238

 
$
50,554

 
$
33,522

 
(1) The Company does not allocate interest expense or other (income) expense, net to the reportable segments.
(2) Office operating profit includes $0.2 million and $0.8 million of restructuring expenses incurred during the three and six months ended June 30, 2014, respectively.


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Table of Contents

 Office:
 
Net sales for the Office segment for the second quarter of 2015 were $160.9 million, an increase of $1.8 million, or 1.1%, when compared with the same period in 2014.  Net sales for the Office segment for the six months ended June 30, 2015 were $328.6 million, an increase of $23.4 million, or 7.7%, when compared with the same period in 2014. On a constant currency basis, net sales for the Office segment increased 1.9% and 8.4% for the three and six months ended June 30, 2015. Increased sales in the Office segment for the three and six months ended June 30, 2015 were the result of improved systems sales sales year-over-year.

Operating profit for the second quarter of 2015 for the Office segment was $9.1 million, an increase of $2.7 million, or 42.2%, when compared with the same period in 2014. Operating profit for the six months ended June 30, 2015 for the Office segment was $16.3 million, an increase of $9.4 million, or 136.2%, when compared with the same period in 2014. The increase in operating profit in the Office segment for both the three and six months ended June 30, 2015 was attributable to increased sales, improved pricing, and foreign exchange benefits. As a percentage of net sales, the Office segment operating profit for the three and six months ended June 30, 2015 was 5.7% and 5.0%, respectively. As a percentage of net sales, the Office segment operating profit for the three and six months ended June 30, 2014 was 4.0% and 2.3%, respectively.
 
Studio:
 
Net sales for the Studio segment for the second quarter of 2015 were $77.9 million, an increase of $1.4 million, or 1.8%, when compared with the same period in 2014. Net sales for the Studio segment for the six months ended June 30, 2015 were $148.1 million, an increase of $15.6 million, or 11.8%, when compared with the same period in 2014. On a constant currency basis, net sales for the Studio segment increased 6.8% and 17.1% for the three and six months ended June 30, 2015. The increase in sales in the Studio segment was mainly the result strong sales growth in North America and Holly Hunt. Additionally, when comparing net sales for the six months ended June 30, 2015 to June 30, 2014, net sales for the six months ended June 30, 2015 included one additional month of sales for our Holly Hunt business.
 
Operating profit for the second quarter of 2015 for the Studio segment was $12.1 million, an increase of $2.6 million, or 27.4%, when compared with the same period in 2014. Operating profit for the six months ended June 30, 2015 for the Studio segment was $21.0 million, an increase of $6.0 million, or 40.0%, when compared with the same period in 2014. As a percentage of net sales, the Studio segment operating profit was 15.5% for the second quarter ended June 30, 2015, up from 12.4% for the second quarter ended June 30, 2014.  As a percentage of net sales, the Studio segment operating profit was 14.2% for the six months ended June 30, 2015, up from 11.3% for the same period in the prior year. The increase in operating profit for the three and six months ended June 30, 2015 in the Studio segment was mainly the result of net price realization and foreign currency savings.

Coverings:
 
Net sales for the second quarter of 2015 for the Coverings segment were $29.9 million, an decrease of $0.5 million, or 1.6%, when compared with the same period in 2014.  Net sales for the six months ended June 30, 2015 for the Coverings segment were $58.5 million, an increase of $0.6 million, or 1.0%, when compared with the same period in 2014. On a constant currency basis, net sales decreased 0.7% and increased 1.9% for the three and six months ended June 30, 2015. When comparing the three months ended June 30, 2015 to the three months ended June 30, 2014, our Textiles business provided net sales improvement; however, these increased sales were offset by lower sales in our leather businesses. For the six months ended June 30, 2015, the increase in sales achieved by both our Spinneybeck and Textiles businesses provided for year-over-year net sales improvement.
 
Operating profit for the second quarter of 2015 for the Coverings segment was $7.1 million, an increase of $0.8 million, or 12.7%, when compared with the same period of 2014. Operating profit for the six months ended June 30, 2015 for the Coverings segment was $13.2 million, an increase of $1.6 million, or 13.8%, when compared with the same period in 2014. The increase in operating profit in the Coverings segment during the three and six months ended June 30, 2015 was the result of improved operating performance from our Textiles and Spinneybeck businesses.  As a percentage of net sales, the Coverings segment operating profit was 23.7% for the second quarter ended June 30, 2015 compared to 20.7% for the second quarter ended June 30, 2014. As a percentage of net sales, the Coverings segment operating profit was 22.6% for the six months ended June 30, 2015 compared to 20.0% for the same period in the prior year.
 

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Table of Contents

Liquidity and Capital Resources
 
The following table highlights certain key cash flows and capital information pertinent to the discussion that follows:
 
 
Six Months Ended
 
June 30,
2015
 
June 30,
2014
 
(in thousands)
Cash provided by operating activities
$
7,442

 
$
31,277

Capital expenditures
(12,340
)
 
(17,741
)
Purchase of a business, net of cash acquired

 
(93,349
)
Cash used in investing activities
(12,670
)
 
(111,405
)
Proceeds from revolving credit facility
170,000

 
608,000

Repayment of revolving credit facility
(154,000
)
 
(515,000
)
Payment of dividends
(11,502
)
 
(11,363
)
Proceeds from the issuance of common stock
4,421

 
2,590

Purchase of common stock for treasury
(6,067
)
 
(6,227
)
Contingent purchase price payment
(5,000
)
 

Cash (used in) provided by financing activities
(1,169
)
 
76,296

 
Historically, we have carried significant amounts of debt, and cash generated by operating activities has been used to fund working capital, capital expenditures, repurchase shares, pay quarterly dividends, and make payments of principal and interest on our indebtedness.  Our capital expenditures are typically for new product tooling and manufacturing equipment.  These capital expenditures support new products and continuous improvements in our manufacturing processes. In addition, continued expenditures related to our technology infrastructure upgrades with the implementation of a new enterprise resource planning system increased capital spending during the first half of 2015. Moreover, in February 2013, we announced a three-year plan of strategic investments and initiatives intended to enable us to achieve our longer-term revenue and profitability goals. These investments will increase capital spending in 2015 when compared with periods prior to the launch of this program.
 
Year-to-date net cash provided by operations was $7.4 million, of which $42.5 million was provided by net earnings plus non-cash items, offset by $35.1 million of unfavorable changes in operating assets and liabilities.  For the six months ended June 2014, net cash provided by operations was $31.3 million, of which $31.9 million was provided by net income plus non-cash items, offset by $0.6 million of unfavorable changes in assets and liabilities.
 
For the six months ended June 30, 2015, we used available cash, including $7.4 million of net cash from operating activities, to fund $12.3 million in capital expenditures, make dividend payments to shareholders totaling $11.5 million, and fund working capital. Total cash used in investing and financing activities was $12.7 million and $1.2 million, respectively, for the six months ended June 30, 2015. For the six months ended June 30, 2014, we used available cash, including $31.3 million of net cash from operating activities, to fund $17.7 million in capital expenditures, fund dividend payments to shareholders totaling $11.4 million, repurchase $6.2 million of common stock for treasury, and fund working capital. Total cash used in investing and financing activities was $111.4 million and $76.3 million, respectively, for the six months ended June 30, 2014.
 
We use our credit facility in the ordinary course of business to fund our working capital needs and, at times, make significant borrowings and repayments under the facility depending on our cash needs and availability at such time.  As of June 30, 2015 and December 31, 2014, there was $274.0 million and $258.0 million, respectively, outstanding under the credit facility.  Borrowings under the credit facility may be repaid at any time, but no later than May 2019.

Our credit facility requires that we comply with two financial covenants: our consolidated leverage ratio, defined as the ratio of total indebtedness to consolidated EBITDA (as defined in our credit agreement) and our consolidated interest coverage ratio, defined as the ratio of our consolidated EBITDA (as defined in our credit agreement) to our consolidated interest expense. Our leverage ratio cannot exceed 4.0 to 1.0 under our credit facility agreement. Our consolidated interest coverage ratio cannot be less than 3.0 to 1.0 as of the end of any fiscal quarter. We are also required to comply with various other affirmative and negative covenants including, without limitation, covenants that prevent or restrict our ability to pay dividends, engage in certain mergers or acquisitions, make certain investments or loans, incur future

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indebtedness, make significant capital expenditures, engage in sale-leaseback transactions, alter our capital structure or line of business, prepay subordinated indebtedness, engage in certain transactions with affiliates and sell stock or assets. Our leverage ratio was 2.22 and 2.41 for the periods ending June 30, 2015 and December 31, 2014, respectively.

Environmental Matters
 
Our past and present business operations and the past and present ownership and operation of manufacturing plants on real property are subject to extensive and changing federal, state, local and foreign environmental laws and regulations, including those relating to discharges to air, water and land, the handling and disposal of solid and hazardous waste and the cleanup of properties affected by hazardous substances.  As a result, we are involved from time-to-time in administrative and judicial proceedings and inquiries relating to environmental matters and could become subject to fines or penalties related thereto.  We cannot predict what environmental legislation or regulations will be enacted in the future, how existing or future laws or regulations will be administered or interpreted or what environmental conditions may be found to exist.  Compliance with more stringent laws or regulations, or stricter interpretation of existing laws, may require additional expenditures by us, some of which may be material.  We have been identified as a potentially responsible party pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”) for remediation costs associated with waste disposal sites that we previously used.  The remediation costs and our allocated share at some of these CERCLA sites are unknown. We may also be subject to claims for personal injury or contribution relating to CERCLA sites.  We reserve amounts for such matters when expenditures are probable and reasonably estimable.

Off-Balance Sheet Arrangements
 
We do not currently have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special-purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange-traded contracts.  As a result, we are not materially exposed to any financing, liquidity, market or credit risk that could have arisen if we had engaged in these relationships.

Reconciliation of Non-GAAP Financial Measures

This item contains certain non-GAAP financial measures. A "non-GAAP financial measure" is defined as a numerical measure of a company's financial performance that excludes or includes amounts so as to be different than the most directly comparable measure calculated and presented in accordance with U.S. generally accepted accounting principles ("GAAP") in the statements of income, balance sheets, or statements of cash flow of the company. Pursuant to applicable reporting requirements, the company has provided reconciliations of non-GAAP financial measures to the most directly comparable GAAP measure. The reconciliation of net sales to net sales, adjusted and the reconciliation of net earnings to adjusted EBITDA are provided below.


The non-GAAP financial measures presented within this item are net sales, adjusted (constant currency sales) and adjusted EBITDA. These non-GAAP measures are not indicators of our financial performance under GAAP and should not be considered as an alternative to the applicable GAAP measure. These non-GAAP measures have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. In addition, in evaluating these non-GAAP measures, you should be aware that in the future we may incur expenses similar to the adjustments in this presentation. Our presentation of these non-GAAP measures should not be construed as an inference that our future results will be unaffected by unusual or infrequent items. We compensate for these limitations by providing equal prominence of our GAAP results and using non-GAAP measures only supplementally. These non-GAAP financial measures, net sales, adjusted and adjusted EBITDA, are presented because management uses this information to monitor and evaluate financial results and trends. Therefore, management believes this information is also useful for investors.


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The following tables reconcile net sales, adjusted to GAAP net sales for the periods indicated.
 
Office
 
Studio
 
Coverings
 
Knoll, Inc.
Q2 2015 Net Sales
$
160.9

 
$
77.8

 
$
29.9

 
$
268.6

Currency translation effects (1)
1.2

 
3.8

 
0.3

 
5.3

Q2 2015 Net Sales, Adjusted
162.1

 
81.6

 
30.2

 
273.9

Q2 2014 Net Sales
159.1

 
76.4

 
30.4

 
265.9

Adjusted Growth / (Decline) $
$
3.0

 
$
5.2

 
$
(0.2
)
 
$
8.0

Adjusted Growth / (Decline) %
1.9
%
 
6.8
%
 
(0.7
)%
 
3.0
%

 
Office
 
Studio
 
Coverings
 
Knoll, Inc.
YTD Q2 2015 Net Sales (2)
$
328.6

 
$
148.1

 
$
58.5

 
$
535.1

Currency translation effects (1)
2.2

 
7.0

 
0.5

 
9.7

YTD Q2 2015 Net Sales, Adjusted
330.8

 
155.1

 
59.0

 
544.8

YTD Q2 2014 Net Sales (2)
305.2

 
132.5

 
57.9

 
495.5

Adjusted Growth / (Decline) $
$
25.6

 
$
22.6

 
$
1.1

 
$
49.3

Adjusted Growth / (Decline) %
8.4
%
 
17.1
%
 
1.9
%
 
9.9
%
(1) - Currency translation effects represent the estimated net impact of translating current period sales using the average exchange rates applicable to the comparable prior year period.
(2) - Results do not add due to rounding.

The following table reconciles net earnings to adjusted EBITDA and computes our bank leverage calculation as of June 30, 2015, March 31, 2015, and December 31, 2014. The bank leverage calculation is in accordance with our Second Amended and Restated Credit Agreement dated May 20, 2014.
 
June 30, 2015
 
March 31, 2015
 
December 31, 2014
 
 
(in millions)
 
Debt Levels (1)
$
290.7

 
$
316.7

 
$
275.5

 
LTM Net Earnings
62.6

 
56.2

 
46.6

 
LTM Adjustments
 
 
 
 
 
 
Interest
6.8

 
6.9

 
6.7

 
Taxes
37.2

 
35.0

 
29.2

 
Depreciation and Amortization
21.1

 
20.6

 
20.0

 
Non-cash items and Other (2)
3.3

 
5.7

 
11.9

 
LTM Adjusted EBITDA
$
131.0

 
$
124.4

 
$
114.4

(3) 
Bank Leverage Calculation (4)
2.22

 
2.55

 
2.41

 

(1) - Outstanding debt levels include outstanding letters of credit and guarantee obligations. Excess cash over $15.0
million reduces outstanding debt per the terms of our credit facility, a copy of which was filed with the Securities and
Exchange Commission on May 21, 2014.
(2) - Non-cash items include, but are not limited to, a pension settlement and other postretirement benefit curtailment, stock-based compensation expenses, unrealized gains and losses on foreign exchange, and restructuring charges.
(3) - Includes an annualized pro forma EBITDA for HOLLY HUNT, which was acquired on February 3, 2014.
(4) - Debt divided by LTM (Last Twelve Months) adjusted EBITDA, as calculated in accordance with our credit facility.


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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
We provided a discussion of our market risk in Part II, Item 7A, of our Annual Report on Form 10-K for the year ended December 31, 2014. During the first six months of 2015, there was no substantive change in our market risk except for the items noted below. This discussion should be read in conjunction with Part II, Item 7A, of our Annual Report on Form 10-K for the year ended December 31, 2014.
 
During the normal course of business, we are routinely subjected to market risk associated with interest rate movements and foreign currency exchange rate movements. Interest rate risk arises from our debt obligations and foreign currency exchange rate risk arises from our non-U.S. operations and purchases of inventory from foreign suppliers.
 
We also have risk in our exposure to certain materials and transportation costs.  Steel, leather, textiles, wood products, and plastics are all used in the manufacture of our products. During the six months ended June 30, 2015, we experienced an increase in material and transportation costs when compared with the same period in the prior year. We continue to work to offset price changes in raw materials and transportation through our global sourcing initiatives, cost improvements, and price increases to our products.
 
Interest Rate Risk
 
We have variable rate debt obligations that are denominated in U.S. dollars.  A change in interest rates impacts the interest incurred and cash paid on our variable rate debt obligations.
 
In the past, we have used interest rate swap agreements for other-than-trading purposes in order to manage our exposure to fluctuations in interest rates on our variable rate debt. Fluctuations in LIBOR affect both our net financial instrument position and the amount of cash to be paid or received by us, if any, under these agreements. Our annualized average rate of interest for the six months ended June 30, 2015 was 2.1%. Our annualized average rate of interest for the same period of 2014 was 2.3%.

Foreign Currency Exchange Rate Risk
 
We manufacture our products in the United States, Canada and Italy, and source and sell our products worldwide.  Our foreign sales and certain expenses are transacted in foreign currencies.  Our production costs, profit margins, and competitive position are affected by the strength of the currencies in countries where we manufacture or purchase goods relative to the strength of the currencies in countries where our products are sold.  Additionally, as we report currency in the U.S. dollar, our financial position is affected by the strength of the currencies in countries where we have operations relative to the strength of the U.S. dollar.  The principal foreign currencies in which we conduct business are the Canadian dollar and the Euro. Approximately 11.5% of our revenues for the first six months of 2015 and 12.2% in the same period for 2014, and 27.1% of our cost of goods sold for the first six months of 2015 and 31.0% in the same period of 2014, were denominated in currencies other than the U.S. dollar.  For the six months ended June 30, 2015 and 2014, other (income) expense included foreign exchange gains of $7.0 million and $0.1 million, respectively.
 
From time to time, we enter into foreign currency forward exchange contracts and foreign currency option contracts for other than trading purposes in order to manage our exposure to foreign exchange rates.  The terms of these contracts are generally less than a year.  Changes in the fair value of such contracts are reported in earnings in the period the value of the contract changes.  The net gain or loss upon settlement and the change in fair value of outstanding contracts is recorded as a component of other expense (income), net. 


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ITEM 4.  CONTROLS AND PROCEDURES
 
Evaluation of disclosure controls and procedures. We, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 as of the end of the period covered by this report (June 30, 2015) (“Disclosure Controls”). Disclosure controls and procedures include, without limitation, (i) information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on the below discussed material weakness in internal controls over financial reporting related to accounting for income taxes, management has concluded that our disclosure controls were not effective at a reasonable level of assurance as of June 30, 2015.

Changes in internal control over financial reporting. As previously disclosed in Item 9A of the 2014 Form 10-K, management had then concluded that there was a material weakness in internal controls over financial reporting related to accounting for income taxes. Remedial actions have been taken to improve internal controls over accounting for income taxes, including dedicating additional internal and external personnel resources with the appropriate level of proficiency to identify, evaluate, and review complex tax accounting matters; organizational structure changes, which better integrate the tax accounting and finance functions; enhancement of our processes and procedures for determining, documenting and calculating our income tax provision; and increasing the level of certain tax review activities during the financial statement close process.

When all remedial actions have been implemented and in operation for a sufficient period of time, these actions will be tested to determine whether the applicable controls are operating effectively. Management is focused on the remediation of the material weakness related to controls over the accounting for income taxes and expects the remediation efforts to be completed within the current fiscal year. However, there are no assurances that we will successfully remediate this material weakness within the anticipated timeframe.

Therefore, management concluded that, as of June 30, 2015, there was a material weakness over financial reporting related to accounting for income taxes. Notwithstanding the identified material weakness, management believes the condensed consolidated financial statements included in this Form 10-Q fairly represent in all material respects our financial condition, results of operations and cash flows at and for the periods presented in accordance with U.S. GAAP. As such, except as noted in the preceding paragraphs, there has been no change in our internal control over financial reporting that occurred during the most recent quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

 ITEM 1. LEGAL PROCEEDINGS
 
During the first six months of 2015, there have been no new material legal proceedings or material changes in the legal proceedings disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014.

ITEM 1A. RISK FACTORS
 
During the first six months of 2015, there were no material changes in the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND THE USE OF PROCEEDS
 
Repurchases of Equity Securities
 
The following is a summary of share repurchase activity during the three months ended June 30, 2015.
 
On August 17, 2005, our board of directors approved a stock repurchase program (the “Options Proceeds Program”), whereby it authorized us to purchase shares of our common stock in the open market using the cash proceeds received by us upon exercise of outstanding options to purchase shares of our common stock.
 
On February 2, 2006, our board of directors approved an additional stock repurchase program, pursuant to which we are authorized to purchase up to $50.0 million of our common stock in the open market, through privately negotiated transactions, or otherwise.  On February 4, 2008, our board of directors expanded this previously authorized $50.0 million stock repurchase program by an additional $50.0 million.
 
Period
 
Total Number
of Shares
Purchased
 
Average Price
paid per Share
 
Total Number of
Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
 
Maximum
Dollar Value of
Shares that
May Yet Be
Purchased
Under the
Plans or
Programs (1)
April 1, 2015 - April 30, 2015
 

 
$

 

 
$
32,352,413

May 1, 2015 - May 31, 2015
 

 
$

 

 
$
32,352,413

June 1, 2015 - June 30, 2015
 

 
$

 

 
$
32,352,413

Total
 

 
 

 

 
 

 

(1)         There is no limit on the number or value of shares that may be purchased by us under the Options Proceeds Program.  Under our $50.0 million stock repurchase program, which was expanded by an additional $50.0 million in February of 2008, we are authorized to spend an aggregate of $100.0 million on stock repurchases.  Amounts in this column represent the amounts that remain available under the $100.0 million stock repurchase program as of the end of the period indicated.  There is no scheduled expiration date for the Option Proceeds Program or the stock repurchase program, but our board of directors may terminate either program in the future.
 



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ITEM 6.  EXHIBITS
 
Exhibit
Number
 
Description
 
 
 
10.1
 
Amendment No. 6 to Employment Agreement, dated as of June 24, 2015, between Knoll, Inc. and Andrew B. Cogan
10.2
 
Joseph T. Coppola Offer Letter, dated May 4, 2015
10.3
 
Summary of Craig B. Spray 2015 Compensation
10.4
 
Summary of Benjamin A. Pardo 2015 Compensation
10.5
 
Summary of Pamela J. Ahrens 2015 Compensation
31.1
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
31.2
 
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
32.1
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
 
Certification of Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101
 
The following materials from the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2015 formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014, (ii) Condensed Consolidated Statements of Operations and Other Comprehensive Income for the three and six months ended June 30, 2015 and 2014, (iii) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014, and (iv) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text.*

* The Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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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.
 
 
(Registrant)
 
 
 
 
 
Date: August 3, 2015
 
By:
/s/ Andrew B. Cogan
 
 
Andrew B. Cogan
 
 
Chief Executive Officer
 
 
 
Date: August 3, 2015
 
By:
/s/ Craig B. Spray
 
 
Craig B. Spray
 
 
Chief Financial Officer
 
 
(Chief Accounting Officer)

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