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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 March 31, 2011**

** **

**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 o   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 o |   | Accelerated filer x         |
|---------------------------|--------|-----------------------------|
|                      |   |                        |
| 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 May 5, 2011, there were 47,839,590 shares (including 1,589,219 shares of non-voting restricted shares) of the Registrant’s common stock, par value $0.01 per share, outstanding.

 

 

 

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**KNOLL, INC.**

 

**TABLE OF CONTENTS FOR FOR****M 10-Q**

 
| **Item**                                   | ** **                                                                                                | **Page** |
|--------------------------------------------|-----------------------------------------------------------------------------------------------------------|----------|
|                                       |                                                                                                      |
| PART I —   FINANCIAL INFORMATION |                                                                                                      |
|                                       |                                                                                                      |
| 1.                                         | Condensed Consolidated   Financial Statements:                                                            |     |
|                                       | Condensed Consolidated Balance Sheets at   March 31, 2011 and December 31, 2010                 | 3        |
|                                       | Condensed Consolidated Statements of Operations for   the three months ended March 31, 2011 and 2010 | 4        |
|                                       | Condensed Consolidated Statements of Cash Flows for   the three months ended March 31, 2011 and 2010 | 5        |
|                                       | Notes to the Condensed Consolidated Financial   Statements                                                | 6        |
|                                       |                                                                                                      |     |
| 2.                                         | Management’s   Discussion and Analysis of Financial Condition and Results of Operations              | 13       |
|                                       |                                                                                                      |     |
| 3.                                         | Quantitative   and Qualitative Disclosures about Market Risk                                              | 19       |
|                                       |                                                                                                      |     |
| 4.                                         | Controls and   Procedures                                                                                 | 20       |
|                                       |                                                                                                      |     |
| PART II   — OTHER INFORMATION    |                                                                                                      |
|                                       |                                                                                                      |     |
| 1.                                         | Legal Proceedings                                                                                         | 21       |
|                                       |                                                                                                      |     |
| 1A.                                        | Risk Factors                                                                                              | 21       |
|                                       |                                                                                                      |     |
| 2.                                         | Unregistered   Sales of Equity Securities and The Use of Proceeds                                         | 21       |
|                                       |                                                                                                      |     |
| 6.                                         | Exhibits                                                                                                  | 22       |
|                                       |                                                                                                      |     |
| Signatures                                 | 23                                                                                                        |
|                                            |                                                                                                           |          |  |

 

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**PART I - FINANCIAL INFORMATION**

 

**ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**KNOLL, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

** **

***(in thousands, except share and per share data)***

*** ***
| ** **                                                                                                                                                                                                                                                                  | ** ** | **March 31,********2011** | ** ** | **December 31,   2010** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
|                                                                                                                                                                                                                                                                        |       |                           |       |                         |       |
| **ASSETS**                                                                                                                                                                                                                                                                  |       |                           |       |                         |       |
| Current assets:                                                                                                                                                                                                                                                             |       |                           |       |                         |       |
| Cash and cash equivalents                                                                                                                                                                                                                                                   |       | $                              | 4,590      |                         | $          | 26,935 |   |
| Customer receivables, net                                                                                                                                                                                                                                                   |       | 139,155                        |       | 126,780                      |       |
| Inventories                                                                                                                                                                                                                                                                 |       | 92,756                         |       | 85,216                       |       |
| Deferred income taxes                                                                                                                                                                                                                                                       |       | 10,515                         |       | 10,507                       |       |
| Prepaid and other current assets                                                                                                                                                                                                                                            |       | 10,033                         |       | 11,722                       |       |
| Total current assets                                                                                                                                                                                                                                                        |       | 257,049                        |       | 261,160                      |       |
|                                                                                                                                                                                                                                                                        |       |                           |       |                         |       |
| Property, plant, and equipment, net                                                                                                                                                                                                                                         |       | 121,771                        |       | 122,219                      |       |
| Goodwill, net                                                                                                                                                                                                                                                               |       | 76,310                         |       | 76,101                       |       |
| Intangible assets, net                                                                                                                                                                                                                                                      |       | 221,766                        |       | 222,246                      |       |
| Other non-trade receivables                                                                                                                                                                                                                                                 |       | 4,237                          |       | 4,507                        |       |
| Other noncurrent assets                                                                                                                                                                                                                                                     |       | 1,317                          |       | 1,199                        |       |
| Total Assets                                                                                                                                                                                                                                                                |       | $                              | 682,450    |                         | $          | 687,432 |   |
|                                                                                                                                                                                                                                                                        |       |                           |       |                         |       |
| **LIABILITIES AND STOCKHOLDERS’   EQUITY**                                                                                                                                                                                                                             |       |                           |       |                         |       |
| Current liabilities:                                                                                                                                                                                                                                                        |       |                           |       |                         |       |
| Current maturities of long-term debt                                                                                                                                                                                                                                        |       | $                              | 144        |                         | $          | 135 |   |
| Accounts payable                                                                                                                                                                                                                                                            |       | 97,072                         |       | 101,206                      |       |
| Income taxes payable                                                                                                                                                                                                                                                        |       | 5,235                          |       | 5,523                        |       |
| Other current liabilities                                                                                                                                                                                                                                                   |       | 68,147                         |       | 85,054                       |       |
| Total current liabilities                                                                                                                                                                                                                                                   |       | 170,598                        |       | 191,918                      |       |
|                                                                                                                                                                                                                                                                        |       |                           |       |                         |       |
| Long-term debt                                                                                                                                                                                                                                                              |       | 242,000                        |       | 245,000                      |       |
| Deferred income taxes                                                                                                                                                                                                                                                       |       | 54,361                         |       | 53,420                       |       |
| Postretirement benefits other than pensions                                                                                                                                                                                                                                 |       | 25,712                         |       | 25,289                       |       |
| Pension liability                                                                                                                                                                                                                                                           |       | 37,663                         |       | 34,719                       |       |
| International retirement obligation                                                                                                                                                                                                                                         |       | 3,586                          |       | 3,482                        |       |
| Other noncurrent liabilities                                                                                                                                                                                                                                                |       | 6,998                          |       | 7,218                        |       |
| Total liabilities                                                                                                                                                                                                                                                           |       | 540,918                        |       | 561,046                      |       |
| Stockholders’ equity:                                                                                                                                                                                                                                                  |       |                           |       |                         |       |
| Common stock, $0.01 par value; 200,000,000 shares   authorized; 47,815,203 issued and outstanding (net of 13,926,095 treasury   shares) at March 31, 2011 and 46,901,511 shares issued and outstanding   (net of 13,306,995 treasury shares) at December 31, 2010 |       | 478                            |       | 470                          |       |
| Additional paid-in-capital                                                                                                                                                                                                                                                  |       | 16,811                         |       | 14,087                       |       |
| Retained earnings                                                                                                                                                                                                                                                           |       | 121,322                        |       | 114,990                      |       |
| Accumulated other comprehensive income (loss)                                                                                                                                                                                                                               |       | 2,921                          |       | (3,161                       | )          |
| Total stockholders’ equity                                                                                                                                                                                                                                             |       | 141,532                        |       | 126,386                      |       |
| Total Liabilities and Stockholders’ Equity                                                                                                                                                                                                                             |       | $                              | 682,450    |                         | $          | 687,432 |   |

 

See accompanying notes to the condensed consolidated financial statements

 

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** **

**KNOLL, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 

***(in thousands, except share and per share data)***

 
| ** **                                        | ** ** | **Three Months Ended********March 31,** | ** **    |
|---------------------------------------------------|------------|--------------------------------------------------------|---------------|
| ** **                                        | ** ** | **2011**                                               | ** **    | **2010** | ** ** |
| Sales                                             |       | $                                                      |  220,858 |   | $ |  175,259 |   |
| Cost of sales                                     |       | 152,457                                                |          | 118,598 |   |
| Gross profit                                      |       | 68,401                                                 |          | 56,661 |   |
| Selling, general, and admistrative expenses  |       | 47,016                                                 |          | 43,645 |   |
| Restructuring charges                             |       | 471                                                    |          | 3,608 |   |
| Operating income                                  |       | 20,914                                                 |          | 9,408 |   |
| Interest expense                                  |       | 4,017                                                  |          | 4,153 |   |
| Other expense, net                                |       | 2,328                                                  |          | 1,413 |   |
|                                              |       |                                                   |          |   |   |
| Income before income tax expense                  |       | 14,569                                                 |          | 3,842 |   |
| Income tax expense                                |       | 5,367                                                  |          | 1,627 |   |
| Net Income                                        |       | $                                                      |  9,202   |   | $ |  2,215 |   |
|                                              |       |                                                   |          |   |   |
| Net earnings per share                            |       |                                                   |          |   |   |
| Basic                                             |       | $                                                      |  0.20    |   | $ |  0.05 |   |
| Diluted                                           |       | $                                                      |  0.20    |   | $ |  0.05 |   |
| Dividends per share                               |       | $                                                      |  0.06    |   | $ |  0.02 |   |
| Weighted-average shares outstanding:              |       |                                                   |          |   |   |
| Basic                                             |       | 46,160,748                                             |          | 45,626,903 |   |
| Diluted                                           |       | 46,874,899                                             |          | 45,865,732 |   |

 

See accompanying notes to the condensed consolidated financial statements.

 

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** **

**KNOLL, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

***(dollars in thousands)***

 
| ** **                                                                      | ** ** | **Three Months Ended********March 31,** | ** **  |
|---------------------------------------------------------------------------------|------------|--------------------------------------------------------|-------------|
| ** **                                                                      | ** ** | **2011**                                               | ** **  | **2010** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITES**                     | ** ** | ** **                                             | ** **  | ** ** | ** ** |
| Net income                                                                      |       | $                                                      |  9,202 |   | $ | 2,215 |   |
| Adjustments to reconcile net income to cash provided   by operating activities: |       |                                                   |        |   |   |
| Depreciation                                                                    |       | 4,058                                                  |        | 4,711 |   |
| Amortization of intangible assets                                               |       | 481                                                    |        | 468 |   |
| Loss on disposal of fixed assets                                                |       | 6                                                      |        | 268 |   |
| Write-off of assets due to restructuring                                        |       | —                                                 |        | 2,067 |   |
| Unrealized foreign currency loss                                                |       | 1,415                                                  |        | 1,273 |   |
| Stock based compensation                                                        |       | 2,161                                                  |        | 2,353 |   |
| Other non-cash items                                                            |       | 7                                                      |        | 7 |   |
| Changes in assets and liabilites:                                               |       |                                                   |        |   |   |
| Customer receivables                                                            |       | (11,410                                                | )           | 4,413 |   |
| Inventories                                                                     |       | (6,840                                                 | )           | (1,424 | ) |
| Accounts payable                                                                |       | (5,992                                                 | )           | (5,308 | ) |
| Current and deferred income taxes                                               |       | 552                                                    |        | 93 |   |
| Other current assets                                                            |       | 1,686                                                  |        | (765 | ) |
| Other current liabilities                                                       |       | (15,323                                                | )           | (852 | ) |
| Other noncurrent assets and liabilities                                         |       | 3,149                                                  |        | 2,002 |   |
| Cash (used in) provided by operating activities                                 |       | (16,848                                                | )           | 11,521 |   |
| **CASH FLOWS FROM INVESTING   ACTIVITIES**                                      |       |                                                   |        |   |   |
| Capital expenditures                                                            |       | (1,970                                                 | )           | (1,348 | ) |
| Purchase of intangibles                                                         |       | —                                                 |        | (313 | ) |
| Cash used in investing activites                                                |       | (1,970                                                 | )           | (1,661 | ) |
| **CASH FLOWS FROM FINANCING   ACTIVITIES**                                      |       |                                                   |        |   |   |
| Net repayments from revolving credit facilites,   net                           |       | (3,000                                                 | )           | (5,000 | ) |
| Payment of dividends                                                            |       | (2,772                                                 | )           | (912 | ) |
| Proceeds from the issuance of common stock                                      |       | 11,703                                                 |        | 5,531 |   |
| Purchase of common stock for treasury                                           |       | (12,406                                                | )           | (5,490 | ) |
| Tax benefit from the exercise of stock options                                  |       | 1,274                                                  |        | 195 |   |
| Cash used in financing activities                                               |       | (5,201                                                 | )           | (5,676 | ) |
|                                                                            |       |                                                   |        |   |   |
| Effect of exchange rate changes on cash and cash   equivalents                  |       | 1,674                                                  |        | (2,010 | ) |
|                                                                            |       |                                                   |        |   |   |
| (Decrease) Increase in cash and cash equivalents                                |       | (22,345                                                | )           | 2,174 |   |
|                                                                            |       |                                                   |        |   |   |
| Cash and cash equivalents at beginning of period                                |       | 26,935                                                 |        | 5,961 |   |
|                                                                            |       |                                                   |        |   |   |
| Cash and cash equivalents at end of period                                      |       | $                                                      |  4,590 |   | $ | 8,135 |   |

 

See accompanying notes to the condensed consolidated financial statements

 

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**KNOLL, INC.**

 

**NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

** **

**MARCH 31, 2011**

 

**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, 2010, 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 normal recurring nature.  All 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, 2010.

 

**NOTE 2: NEW ACCOUNTING PRONOUNCEMENTS**

 

In December 2010, the FASB issued an amendment related to the accounting for business combinations to address diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. This standard became effective for the Company on January 1, 2011 and may impact the Company’s consolidated financial statements if there are future acquisitions.

 

**NOTE 3: INVENTORIES**

 

Inventories, net consist of:

 
| ** **      | ** ** | **March 31,********2011** | ** ** | **December 31,********2010** | ** ** |
|-----------------|------------|--------------------------------|------------|-----------------------------------|------------|
| ** **      | ** ** | **(in thousands)**        | ** ** |
| Raw Materials   |       | $                              | 43,349     |                              | $          | 41,808 |   |
| Work-in-Process |       | 7,426                          |       | 7,218                             |       |
| Finished Goods  |       | 41,981                         |       | 36,190                            |       |
|            |       | $                              | 92,756     |                              | $          | 85,216 |   |

 

Inventory reserves for obsolescence and other estimated losses were $8.1 million and $8.3 million at March 31, 2011 and December 31, 2010, respectively.

 

**NOTE 4: INCOME TAXES**

 

As of March 31, 2011, the Company had unrecognized tax benefits of approximately $2.4 million.  The entire amount of the unrecognized tax benefits would affect the effective tax rate if recognized.  As of March 31, 2011, the Company is subject to U.S. Federal income tax examinations for the tax years 2007 through 2010, and to non-U.S. income tax examinations for the tax years 2003 through 2010.  In addition, the Company is subject to state and local income tax examinations for the tax years 2003 through 2010.

 

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**KNOLL, INC.**

 

**NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

 

The Company’s income tax provision consists of federal, state and foreign income taxes.  The tax provisions for the three months ended March 31, 2011 and 2010 were based on the estimated effective tax rates applicable for the full years ending December 31, 2011 and 2010, after giving effect to items specifically related to the interim periods.  The Company’s effective tax rate was 36.8% for the three months ended March 31, 2011 and 42.3% for the three months ended March 31, 2010.  The Company’s effective tax rate is affected by the mix of pretax income and the different effective tax rates of the tax jurisdictions in which it operates.  The difference in the Company’s effective tax rate for the first quarter of 2011 and the first quarter of 2010 is primarily a result of these different tax rates.

 

**NOTE 5:  DERIVATIVE FINANCIAL INSTRUMENTS**

 

The Company uses derivative financial instruments, to reduce its exposure to adverse fluctuations in interest rates.

 

On May 21, 2008, the Company entered into four interest rate swap agreements for purposes of managing its risk in interest rate fluctuations. These agreements each hedge a notional amount of $150.0 million of the Company’s borrowings under its revolving credit facility. Two of the agreements were effective June 9, 2009 and expired on June 9, 2010. On these two agreements, the Company paid a fixed rate of 3.51% and received a variable rate of interest equal to three-month London Interbank Offered Rate (LIBOR), as determined on the last day of each quarterly settlement period. The other two agreements were effective on June 9, 2010 and expire on June 9, 2011. The Company pays a fixed rate of 4.10% on these two agreements and receives a variable rate of interest equal to three-month LIBOR as determined on the last day of each quarterly settlement period.

 

The Company has elected to apply hedge accounting to these swap agreements.  Changes in the fair values of the effective portion of the interest rate swap agreements are recorded as a component of accumulated other comprehensive income (loss) in the equity section of the balance sheet.  The net amount paid or received upon quarterly settlements is recorded as an adjustment to interest expense, with a corresponding reduction in accumulated other comprehensive income (loss).

 

The effect of derivative instruments on the condensed consolidated statement of income for the three months ended March 31, 2011 and March 31, 2010 were as follows (in thousands):

 
| **Derivatives in   Cash Flow Hedge Relationship** | ** ** | **Before - Tax Gain   (Loss)   Recognized in   OCI on Derivative   (Effective Portion)** | ** ** | **Locations of Loss   Reclassified from   AOCI into Income   (Effective Portion)** | ** **       | **Before - Tax Loss   Reclassified from   AOCI into Income   (Effective Portion)** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------------|-----------------------------------------------------------------------------------------------------------------------|------------|
| **March 31, 2011**                                               |       |                                                                                                                        |       |                                                                                                             |             |                                                                                                                  |       |
| Interest rate swap contracts                                          |       | $                                                                                                                           | (41        | )                                                                                                                | Interest Expense |                                                                                                                  | $          | (2,322 | ) |
| Total                                                                 |       | $                                                                                                                           | (41        | )                                                                                                                |             |                                                                                                                  | $          | (2,322 | ) |
| **March 31, 2010**                                               |       |                                                                                                                        |       |                                                                                                             |             |                                                                                                                  |       |
| Interest rate swap contracts                                          |       | $                                                                                                                           | (1,810     | )                                                                                                                | Interest Expense |                                                                                                                  | $          | (2,439 | ) |
| Total                                                                 |       | $                                                                                                                           | (1,810     | )                                                                                                                |             |                                                                                                                  | $          | (2,439 | ) |

 

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**KNOLL, INC.**

 

**NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

 

The fair value of the Company’s derivative instruments included in current liabilities is $2.3 million (of which $0.4 million is not designated as a hedging instrument) at March 31, 2011.  The fair value of the Company’s derivative instruments included in current liabilities was $5.1 million (of which $0.9 million is not designated as a hedging instrument) at December 31, 2010.

 

Assuming interest rates stay at current levels, in the remaining three months, the Company anticipates that approximately $1.9 million will be reclassified from other comprehensive income (loss), to interest expense in connection with the remaining quarterly settlement of the above-referenced swap agreements.

 

The Company will continue to review its exposure to interest rate fluctuations and evaluate whether it should manage such exposure through derivative transactions.  See note 12 of the condensed consolidated financial statements for additional information regarding the fair value of the interest rate swaps.

 

**NOTE 6: CONTINGENT LIABILITIES AND COMMITMENTS**

 

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 consolidated financial position, results of operations, or cash flows.

 

At March 31, 2011, the Company employed a total of 3,024 people.  Approximately 13.7% of the employees are represented by unions.  The Grand Rapids, Michigan plant is the only unionized plant within the U.S and has an agreement with the Carpenters Union, Local 1615, of the United Brotherhood of Carpenters and Joiners of America, Affiliate of the Carpenters Industrial Council (the “Union”), covering approximately 225 hourly employees. The Collective Bargaining Agreement expires August 29, 2011.  Certain workers in the facilities in Italy are also represented by unions.

 

The Company offers a warranty for all of its products.  The specific terms and conditions of those warranties vary depending upon the product sold.  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 reserves for periods indicated are as follows:

 

 
| ** **                     | ** ** | **Three months ended** | ** ** |
|--------------------------------|------------|----------------------------------|------------|
| ** **                     | ** ** | **March 31,********2011**   | ** ** | **March 31,********2010** | ** ** |
| ** **                     | ** ** | **(in thousands)**          | ** ** |
| Balance at beginning of period |       | $                                | 8,090      |   | $ | 9,773 |   |
| Provision for warranty claims  |       | 1,657                            |       | 746 |   |
| Warranty claims paid           |       | (1,631                           | )          | (1,421 | ) |
| Exchange rate impact           |       | 29                               |       | (7 | ) |
|                           |       |                             |       |   |   |
| Balance at end of period       |       | $                                | 8,145      |   | $ | 9,091 |   |

 

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**KNOLL, INC.**

 

**NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

 

**NOTE 7: PENSIONS AND OTHER POSTRETIREMENT BENEFITS**

 

The following tables summarize the costs of the Company’s employee pension and post-retirement plans for the periods indicated.

 
| ** **                         | ** ** | **Pension Benefits**        | ** ** | **Other Benefits**          | ** ** |
|------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                         | ** ** | **Three months ended** | ** ** | **Three months ended** | ** ** |
| ** **                         | ** ** | **March 31,********2011**   | ** ** | **March 31,********2010**   | ** ** | **March 31,********2011** | ** ** | **March 31,********2010** | ** ** |
| ** **                         | ** ** | **(in thousands)**          | ** ** |
| Service cost                       |       | $                                | 2,628      |                             | $          | 2,600 |   | $ | 119 |   | $ | 113 |   |
| Interest cost                      |       | 2,799                            |       | 2,703                            |       | 320 |   | 370 |   |
| Expected return on plan assets     |       | (3,249                           | )          | (2,918                           | )          | — |   | — |   |
| Amortization of prior service cost |       | 9                                |       | 15                               |       | (303 | ) | (301 | ) |
| Recognized actuarial loss          |       | 283                              |       | 265                              |       | 166 |   | 138 |   |
|                               |       |                             |       |                             |       |   |   |   |   |
| Net periodic benefit cost          |       | $                                | 2,470      |                             | $          | 2,665 |   | $ | 302 |   | $ | 320 |   |

 

**NOTE 8: ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)**

 

Other comprehensive income (loss) consists of net earnings, plus other comprehensive income which includes pension liability adjustments, foreign currency translation adjustments, and unrealized gains (losses) on derivatives.  Other comprehensive income was approximately $15.3 million and $1.4 million for the three months ended March 31, 2011 and March 31, 2010, respectively.  The following presents the components of “Accumulated Other Comprehensive Income (Loss)” for the period indicated, net of tax (in thousands).

 
| ** **                                    | ** ** | **Beginning** | ** ** | **Before-Tax** | ** ** | ** ** | ** ** | **Net-of-Tax** | ** ** | **Ending**  | ** ** |
|-----------------------------------------------|------------|---------------|------------|----------------|------------|------------|------------|----------------|------------|-------------|------------|
| **Three months ended:**             | ** ** | **Balance**   | ** ** | **Amount**     | ** ** | **Tax**    | ** ** | **Amount**     | ** ** | **Balance** | ** ** |
| **March 31, 2011**                       |       |          |       |           |       |       |       |           |       |        |       |
| Pension Adjustment                            |       | $             | (22,161    | )              | $          | —     |       | $              | —     |        | $          | — |   | $ | (22,161 | ) |
| Foreign currency translation adjustment       |       | 21,622        |       | 4,639          |       | —     |       | 4,639          |       | 26,261      |       |
| Unrealized gain (loss) on derivatives         |       | (2,622        | )          | 2,281          |       | (838       | )          | 1,443          |       | (1,179      | )          |
| Accumulated other comprehensive income (loss) |       | $             | (3,161     | )              | $          | 6,920      |       | $              | (838       | )           | $          | 6,082 |   | $ | 2,921 |   |

 

 

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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 is computed by dividing net income by the weighted-average number of common shares outstanding for the period (excluding unvested restricted shares).  Diluted earnings per share reflects the additional dilution for all shares and potential shares issued under the stock incentive plans (including unvested restricted shares).

 
| ** **                                                                        | ** ** | **Three months ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                        | ** ** | **March 31,********2011**   | ** ** | **March 31,********2010** | ** ** |
| Weighted average shares of common stock   outstanding—basic                  |       | 46,161                           |       | 45,627 |   |
| Potentially dilutive shares resulting from stock   plans                          |       | 714                              |       | 239 |   |
|                                                                              |       |                             |       |   |   |
| Weighted average common shares—diluted                                       |       | 46,875                           |       | 45,866 |   |
|                                                                              |       |                             |       |   |   |
| Antidilutive options not included in the weighted   average common shares-diluted |       | —                           |       | 2,874 |   |

 

Common stock activity for the three months ended March 31, 2011 and 2010 included the repurchase of approximately 616,100 shares for $12.4 million and 458,405 shares for $5.5 million, respectively.  Common stock activity for the first three months of 2011 also included the exercise of 769,686 options for $11.7 million and the vesting of 28,305 restricted shares.  Common stock activity for the first three months of 2010 also included the exercise of 512,980 options for $5.5 million and the vesting of 19,817 restricted shares.

 

**NOTE 10: RESTRUCTURING CHARGES**

 

On March 18, 2010, the Company announced a restructuring plan to better align its manufacturing footprint with demand while further focusing the particular manufacturing activities of each of its North American production facilities. The Company elected to undergo this restructuring in order to better utilize its manufacturing capacity, eliminate duplication of capabilities and reduce associated costs. The Company based its accounting and disclosures on the applicable accounting guidance. As a result, charges to operations were made in the periods in which restructuring plan liabilities were incurred.

 

In connection with the plan, the Company incurred approximately $0.5 million of restructuring charges during the first quarter 2011. These restructuring charges included $0.1 million of employee termination costs and $0.4 million of costs associated with facility realignment. During the first quarter of 2010 the Company incurred $3.6 million of restructuring charges.  These restructuring charges included $1.3 million of employee termination costs as well as $2.3 million of costs associated with the write off of fixed-assets.  To date the Company has recorded restructuring charges totaling $8.0 million related to the plan. The Company estimates that the remaining charges related to the plan will not be significant.

 

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**KNOLL, INC.**

 

**NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

 

Below is the summary of the changes in the restructuring liability during the first quarter 2011:

 
| Reserve balance as of December 31, 2010     |   | $      |  1,629 |   |
|--------------------------------------------------|--------|--------|-------------|--------|
| Additions                                        |   | 471    |        |
| Payments                                         |   | (1,160 | )           |
| Ending Reserve balance as of March 31, 2011 |   | $      |  940   |   |

 

 

**NOTE 11: FAIR VALUE OF FINANCIAL INSTRUMENTS**

 

The following methods and assumptions are used to estimate the fair value of each class of financial instruments for which it is practicable to estimate:

 

*Cash and Cash Equivalents*

 

The fair value of the Company’s cash and cash equivalents approximates the carrying value of the Company’s cash and cash equivalents, due to the short maturity of the cash equivalents.

 

*Long-term Debt*

 

The fair value of the Company’s $242.0 million revolving credit facility approximates its carrying value, as it is variable-rate debt.

 

*Interest Rate Swap Contracts*

 

The fair value of the Company’s interest rate swap contracts is measured as the present value of all expected future cash flows based on the LIBOR-based swap yield curve as of the date of the valuation, subject to a credit adjustment to the LIBOR-based yield curve’s implied discount rates.  The fair value of the Company’s interest rate swap agreements approximates its carrying values.

 

**NOTE 12. FAIR VALUE MEASUREMENTS**

 

Accounting Standards Codification 820, “Fair Value Measurements and Disclosures,” establishes a hierarchy that prioritizes fair value measurements based on types of inputs used for the various valuation techniques (market approach, income approach, and cost approach). The levels of the hierarchy are described below:

 

· Level 1:    Observable inputs such as quoted prices in active markets for identical assets or liabilities

 

· Level 2:    Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active

 

· Level 3:    Unobservable inputs that reflect the reporting entity’s own assumptions

 

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**KNOLL, INC.**

 

**NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

 

The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of assets and liabilities and their placement within the fair value hierarchy. The following table sets forth the assets and liabilities measured at fair value on a recurring basis, by input level, in the consolidated balance sheet at March 31, 2011 (in thousands):

 
| ** **          | ** ** | **Quoted Prices in   Active Markets for   Identical Assets or   Liabilities (Level1)** | ** ** | **Significant Other   Observable Inputs   (Level 2)** | ** ** | **Significant   Unobservable Inputs   (Level 3)** | ** ** | **Total** | ** ** |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|-----------|------------|
| Liabilities:        |       |                                                                                                                      |       |                                                                 |       |                                                        |       |      |       |
| Interest rate swaps |       | $                                                                                                                         | —     |                                                                 | $          | 2,341                                                       |       | $         | —     |   | $ | 2,341 |   |
| Total               |       | $                                                                                                                         | —     |                                                                 | $          | 2,341                                                       |       | $         | —     |   | $ | 2,341 |   |

 

The interest rate swaps are included in current liabilities within the consolidated balance sheet at March 31, 2011.

 

The following table sets forth the assets and liabilities measured at fair value on a recurring basis, by input level, in the condensed consolidated balance sheet at December 31, 2010 (in thousands):

 
| ** **          | ** ** | **Quoted Prices in   Active Markets for   Identical Assets or   Liabilities (Level)** | ** ** | **Significant Other   Observable Inputs   (Level 2)** | ** ** | **Significant   Unobservable Inputs   (Level 3)** | ** ** | **Total** | ** ** |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|-----------|------------|
| Liabilities:        |       |                                                                                                                     |       |                                                                 |       |                                                        |       |      |       |
| Interest rate swaps |       | $                                                                                                                        | —     |                                                                 | $          | 5,138                                                       |       | $         | —     |   | $ | 5,138 |   |
| Total               |       | $                                                                                                                        | —     |                                                                 | $          | 5,138                                                       |       | $         | —     |   | $ | 5,138 |   |

 

The fair value of the interest rate swaps are based on observable prices as quoted for receiving the variable three month London Inter-bank Offered Rates (“LIBOR”) and paying fixed interest rates and, therefore, were classified as level 2.

 

The interest rate swaps are included in current liabilities within the condensed consolidated balance sheet at December 31, 2010.

 

**NOTE 13. SUBSEQUENT EVENTS**

 

The Company evaluated all subsequent events through the date that the condensed consolidated financial statements were issued.  No material subsequent events have occurred since March 31, 2011 that required recognition or disclosure in the condensed consolidated financial statements.

 

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**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 our projections and estimates with respect to our planned restructuring activities.** **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 in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2010; 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 environment 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; 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 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.

 

**Overview**

 

During the first quarter of 2011, we reported strong growth in both revenues and profits.  Net sales were up 26.0% from $175.3 million during the first quarter of 2010 to $220.9 million during the first quarter of 2011.  Sales increased double digits across all of our product categories with the strongest growth occurring in office systems.  This growth in office systems is very encouraging as we head into the second quarter of 2011 because traditionally this category is the last to recover from a downturn in the industry.  Seating also continues to grow at a double digit pace as sales for the Generation by Knoll***®*** chair continue to increase.  Geographically, during the first quarter of 2011 sales in North America and internationally increased when compared with the prior year.  Backlog of unfilled orders at March 31, 2011 was $171.9 million, an increase of $33.0 million, or 23.8%, compared to unfilled orders of $138.9 million at March 31, 2010.  During the quarter, earnings per share increased from $0.05 per share during the first quarter of 2010 to $0.20 per share during the first quarter of 2011.

 

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For the first quarter of 2011, gross margin decreased 130 basis points to 31.0% versus the comparable quarter of the prior year. The decrease in gross margin largely resulted from price deterioration, transportation inflation, and raw material inflation.  Unfavorable movements in foreign exchange on the Canadian dollar also negatively affected our gross margin.  Price deterioration, transportation and raw material inflation and foreign exchange pressures are expected to continue during the second quarter of 2011.  However, we expect our recently announced price increases to offset some of these pressures and positively impact our gross margin heading into the second quarter of 2011.

 

Operating profit for the first quarter of 2011 was $20.9 million, an increase of 122.3% from the first quarter of 2010.  Operating expenses for the first quarter of 2011 increased $3.4 million, or 7.7%, when compared to the prior year.  The increase in operating expenses was in large part due to increased sales commissions and incentive compensation associated with our higher sales volumes.  During the first quarter of 2011, we recorded $0.5 million of restructuring charges related to the plan we announced in 2010 to better align our manufacturing footprint.

 

Interest expense during the first quarter of 2011 decreased $0.1 million when compared to the prior year as a result of our lower outstanding debt.  Our remaining two interest rate swap agreements expire June 9, 2011 and, assuming rates stay at current levels, should result in lower interest expense for the remaining quarters of 2011.  For a further discussion of the interest rate swap agreements, see Note 5 to the condensed consolidated financial statements included in this quarterly report on Form 10-Q.   During the first quarter of 2011, we recorded a $1.0 million expense related to an unfavorable judicial ruling in Europe.  This matter involves a dispute with a former employee dating back to 2001.   We believe we have significant grounds to appeal this decision and intend to assert them.

 

This quarter we paid down an additional $3.0 million of our outstanding debt to bring our total outstanding debt to $242.0 million.  We also invested approximately $1.9 million in capital expenditures and paid a quarterly dividend of $0.06 per share.

 

We are encouraged by our first quarter 2011 performance and, as economic conditions improve and our new products gain momentum, we are optimistic about the remainder of 2011.  However, challenges with price deterioration, transportation inflation, and raw material inflation will present hurdles for us during the year.

 

**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 of certain assets, liabilities, revenues and expenses and the disclosure of certain contingent assets and liabilities.  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, 2010.

 

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**Results of Operations**

 

***Comparison of Three Months Ended March 31, 2011 to Three Months Ended March 31, 2010***

 
| ** **                                                      | ** ** | **Three Months   Ended** | ** ** | **Three Months   Ended** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| ** **                                                      | ** ** | **March 31, 2011**  | ** ** | **March 31, 2010**  | ** ** |
| **Consolidated Statement of   Operations Data (in thousands):** | ** ** | ** **                    | ** ** | ** **                    | ** ** |
| Sales                                                           |       | $                             | 220,858    |                          | $          | 175,259 |   |
| Gross Profit                                                    |       | 68,401                        |       | 56,661                        |       |
| Restructuring Charges                                           |       | 471                           |       | 3,608                         |       |
| Operating Income                                                |       | 20,914                        |       | 9,408                         |       |
| Interest Expense                                                |       | 4,017                         |       | 4,153                         |       |
| Other Expense, net                                              |       | 2,328                         |       | 1,413                         |       |
| Income Tax Expense                                              |       | 5,367                         |       | 1,627                         |       |
| Net Income                                                      |       | $                             | 9,202      |                          | $          | 2,215 |   |
| ** **                                                      | ** ** | ** **                    | ** ** | ** **                    | ** ** |
| **Statistical and Other Data:**                                 | ** ** | ** **                    | ** ** | ** **                    | ** ** |
| Sales Growth From   Comparable Prior Year                       |       | 26.0                          | %          | (17.5                         | )%         |
| Gross Profit Margin                                             |       | 31.0                          | %          | 32.3                          | %          |
| Backlog                                                         |       | $                             | 171,941    |                          | $          | 138,946 |   |

 

***Sales***

 

Sales for the first quarter of 2011 were $220.9 million, an increase of $45.6 million, or 26.0%, from sales of $175.3 million for the same period in the prior year.  The increase in sales over the prior year period reflected double digit growth across all product categories.  Although sales activity in the industry has improved, competitive pricing in the marketplace continues to impact our sales as customers demand higher discounts on the products we sell.

 

During the first quarter of 2011, sales to the U.S. government continued to represent a large portion, 21.9%, of our overall sales.

 

***Gross Profit and Operating Income***

 

Gross profit for the first quarter of 2011 was $68.4 million, an increase of $11.7 million, or 20.6%, from gross profit of $56.7 million for the first quarter ended March 31, 2010.  Operating income for the first quarter of 2011 was $20.9 million, an increase of $11.5 million, or 122.3%, from operating income of $9.4 million for the first quarter of 2010.  Operating income for the first quarter of 2011 includes restructuring charges of $0.5 million compared to restructuring charges of $3.6 million in the first quarter of 2010.  As a percentage of sales, gross profit decreased to 31.0% for the first quarter of 2011 from 32.3% for the first quarter of 2010. Operating income as a percentage of sales increased to 9.5% in the first quarter of 2011 from 5.4% over the same period of 2010.

 

The decrease in gross profit margin from the first quarter of 2010 largely resulted from pricing pressures, transportation inflation, raw material inflation, and foreign exchange pressures.  Projects that were booked at significant discounts during 2010 shipped in 2011impacting our gross margin performance in the first quarter.  We hope the improved market conditions and our recently enacted price increases will alleviate some of these price pressures in 2011, especially as we face significant challenges with respect to raw material and transportation inflation and foreign exchange headwinds.

 

Operating expenses for the first quarter of 2011 were $47.0 million, or 21.3% of sales, compared to $43.6 million, or 24.9% of sales, for the first quarter of 2010.  The increase in operating expense dollars during the first quarter of 2011 was largely due to increased spending in conjunction with our higher sales volumes.  Increased sales and incentive compensation accounted for approximately $2.7 million of the increase in operating expenses from the first quarter of 2010.

 

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***Interest Expense***

 

Interest expense for the quarter ended March 31, 2011 was $4.0 million, a decrease of $0.1 million from the same period in 2010.  The decrease in interest expense for the three months ended March 31, 2011 was due to our lower outstanding debt.  We currently have two interest rate swap agreements in place that were effective June 9, 2010 and expire June 9, 2011. See Note 5 of the condensed consolidated financial statements included in this quarterly report on Form 10-Q for further information regarding the interest rate swaps. Taking into account the effect of the interest rate swap agreements, the weighted average interest rate for the first quarter of 2011 was 5.7%. The weighted average interest rate for the same period in 2010 was 5.0%.

 

***Other Expense, net***

 

Other expense for the first quarter of 2011 was $2.3 million compared to $1.4 million for the first quarter of 2010.  During the first quarter of 2011, other expense included $1.8 million of foreign exchange losses, and $1.0 million of expense related to a negative judicial ruling, offset by $0.5 million of miscellaneous income.  Other expense for the first quarter of 2010 included $1.5 million of foreign exchange losses offset by $0.1 million of miscellaneous income.

 

***Income Tax Expense***

 

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.  The effective tax rate was 36.8% for the quarter ended March 31, 2011, as compared to 42.3% for the same period last year.

 

**Liquidity and Capital Resources**

 

The following table highlights certain key cash flows and capital information pertinent to the discussion that follows:

 
| ** **                                             | ** ** | **March 31,   2011** | ** ** | **March 31,   2010** | ** ** |
|--------------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                                             | ** ** | **(in thousands)**   | ** ** |
| Cash (used in) provided by operating activities        |       | $                         | (16,848    | )                         | $          | 11,521 |   |
| Capital expenditures                                   |       | (1,970                    | )          | (1,348                    | )          |
| Cash used in investing activities                      |       | (1,970                    | )          | (1,661                    | )          |
| Purchase of common stock for treasury                  |       | (12,406                   | )          | (5,490                    | )          |
| Net repayments from revolving credit facilities,   net |       | (3,000                    | )          | (5,000                    | )          |
| Payment of dividends                                   |       | (2,772                    | )          | (912                      | )          |
| Proceeds from issuance of common stock                 |       | 11,703                    |       | 5,531                     |       |
| Cash used in financing activities                      |       | (5,201                    | )          | (5,676                    | )          |
|                                                        |            |                           |            |                           |            |  |  |

 

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 under our credit facility.  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, we are currently evaluating a new enterprise resource planning system with implementation expected to begin in 2011. Costs associated with this system implementation will increase capital spending over the next few years.

 

Net cash used in operations was $16.8 million, of which $17.3 million was provided by net income plus non-cash amortizations and stock-based compensation, offset by $34.1 million of unfavorable changes in assets and liabilities.  During the first quarter of 2010, cash provided by operating activities was $11.5 million, of which $11.3 million was provided by net income plus non-cash amortizations and stock-based compensation, offset by $0.2 million of unfavorable changes in assets and liabilities.

 

For the first quarter of 2011, we used available cash, and option proceeds, to repay $3.0 million of our outstanding debt, repurchase $12.4 million of common stock for treasury, fund $2.0 million in capital expenditures, fund a dividend payment to shareholders totaling $2.8 million and fund working capital.  For the first quarter of 2010, we 

 

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used available cash, including the $11.5 million of net cash provided by operating activities and $5.5 million provided from option proceeds, to repay $5.0 million of our outstanding debt, repurchase $5.5 million of common stock for treasury, fund $1.3 million in capital expenditures, fund a dividend payment to shareholders totaling $0.9 million and fund working capital.

 

Cash used in investing activities was $2.0 million for the first quarter of 2011 and $1.7 million for the same period in 2010.  Fluctuations in cash used in investing activities are primarily attributable to the levels of capital expenditures.

 

We use our existing secured $500.0 million revolving 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. This facility matures in June 2013 and provides us with the option to increase the size of the facility by up to an additional $200.0 million, subject to the satisfaction of certain terms and conditions.  As of March 31, 2011 there was $242.0 million outstanding under the facility, compared to $245.0 million outstanding under the facility as of December 31, 2010.  Borrowings under the revolving credit facility may be repaid at any time, but no later than June 2013.

 

Our revolving 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) for a period of four fiscal quarters, cannot exceed 4 to 1, and our consolidated interest coverage ratio, defined as the ratio of our consolidated EBITDA (as defined in our credit agreement) for a period of four fiscal quarters to our consolidated interest expense, must be a minimum of 3 to 1.  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 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.

 

We are currently in compliance with all of the covenants and conditions under our credit facility. We believe that existing cash balances and internally generated cash flows, together with borrowings available under our revolving credit facility, will be sufficient to fund normal working capital needs, capital spending requirements, debt service requirements and dividend payments for at least the next twelve months. However, because of the financial covenants mentioned above, our capacity under our revolving credit facility could be reduced if our trailing consolidated EBITDA (as defined by our credit agreement) would decline.  Future principal debt payments may be paid out of cash flows from operations, from future refinancing of our debt or from equity issuances. However, our ability to make scheduled payments of principal, to pay interest on or to refinance our indebtedness, to satisfy our other debt obligations and to pay dividends to stockholders will depend upon our future operating performance, which will be affected by general economic, financial, competitive, legislative, regulatory, business and other factors beyond our control.

 

**Contractual Obligations**

 

Contractual obligations associated with our ongoing business will result in cash payments in future periods.  A table summarizing the amounts and timing of these future cash payments was provided in the Company’s Form 10-K filing for the fiscal year ended December 31, 2010.

 

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**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 arise if we had engaged in these relationships.

 

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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, 2010. During the first three months of 2011, 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, 2010.

 

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 related interest rate hedge agreements.  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 material and transportation costs. Steel, leather, wood products and plastics are all used in the manufacture of our products. During the first quarter of 2011, we were impacted by higher steel and petroleum prices.  Material and transportation inflation was each approximately $1.4 million during the first quarter of 2011.  We continue to work to offset these 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.

 

We use 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.  In May of 2008, we entered into four interest rate swap agreements in order to manage our interest rate risk.  Each agreement hedges a notional amount of $150.0 million of our $500.0 million revolving credit facility.  Two of the agreements were effective from June 9, 2009 through June 9, 2010 and the other two are effective June 9, 2010 through June 9, 2011.  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. See Note 5 of the condensed consolidated financial statements for further information regarding the interest rate swap agreements.

 

Taking into account payments on the above noted interest rate swap agreements, our weighted average rate of interest for the first quarter of 2011 was 5.7%. Our weighted average rate of interest for the same period of 2010 was 5.0%.

 

***Foreign Currency Exchange Rate Risk***

 

We manufacture our products in the United States, Canada and Italy, and sell our products primarily in those markets as well as in other European countries.  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 12.6% of our revenues for the first quarter 2011 and 15.6% in the same period for 2010, and 32.6% of our cost of goods sold for the first quarter of 2011 and 32.7% in the same period of 2010, were denominated in currencies other than the U.S. dollar.  Foreign currency exchange rate fluctuations resulted in a $1.8 million loss in the first quarter of 2011 and a $1.5 million loss in 2010.

 

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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 (March 31, 2011) (“Disclosure Controls”). Based upon the Disclosure Controls evaluation, our principal executive officer and principal financial officer have concluded that the Disclosure Controls are effective in reaching a reasonable level of assurance that (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.

 

*Changes in internal control over financial reporting.* Our principal executive officer and principal financial officer also conducted an evaluation of our internal control over financial reporting (“Internal Control”) to determine whether any changes in Internal Control occurred during the quarter ended March 31, 2011 that have materially affected or which are reasonably likely to materially affect Internal Control.  Based on that evaluation, there has been no such change during the quarter ended March 31, 2011.

 

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**PART II — OTHER INFORMATION**

** **

**ITEM 1.  LEGAL PROCEEDINGS**

 

During the first quarter of 2011, 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, 2010.

 

**ITEM 1A.  RISK FACTORS**

 

During the first quarter of 2011, there were no material changes in the risk factors disclosed in our Annual Report on Form 10-K report for the year ended December 31, 2010.

 

**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 March 31, 2010.

 

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)** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| January 1, 2011 – January 31, 2011   |       | 47,971                                             |       | 16.93                                             |       | 47,971                                                                                                                         | (2)        | 32,352,413                                                                                                                                            |       |
| February 1, 2011 – February 28, 2011 |       | 480,034                                            |       | 20.42                                             |       | 480,034                                                                                                                        | (2)        | 32,352,413                                                                                                                                            |       |
| March 1, 2011 – March 31, 2011       |       | 88,095                                             |       | 20.35                                             |       | 88,095                                                                                                                         | (2)        | 32,352,413                                                                                                                                            |       |
| Total                                               |       | 616,100                                            |       |                                              |       | 616,100                                                                                                                        |       |                                                                                                                                                  |       |

 

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| (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 only 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 $100.0 million stock repurchase program, but   our board of directors may terminate either program in the future. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | These   shares were purchased under the Options Proceeds Program.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

 

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**ITEM 6.  EXHIBITS**

 
| **Exhibit   Number** | ** ** | **Description**                                                                                                                                                                                                                                     |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                |
| 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. |

 

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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: May 10, 2011 |       |
|                    | By:        | /s/ Andrew B. Cogan |   |
| ** **              | ** ** | **Andrew B. Cogan** |   |
|                    |       | Chief Executive Officer |   |
|                    |       |   |   |
|                    |       |
| Date: May 10, 2011 |       |
|                    | By:        | /s/ Barry L. McCabe |   |
| ** **              | ** ** | **Barry L. McCabe** |   |
|                    |       | Chief Financial Officer |   |
|                    |       | (Chief Accounting Officer and Controller) |   |

 

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