Knoll, Inc.
Q4 2014 Earnings Call Transcript

Published: 4 Feb 2015

[Operator:]

Welcome to the Knoll, Inc. fourth quarter and full year 2014 conference call. This call is being recorded. This call is also being webcast. Presentation slides accompanying the webcast. In addition, this call may offer statements that are forward-looking. These forward-looking statements are based largely on the company’s expectations and are subject to a number of risks and uncertainties certain of which are beyond the company’s control. Actual results could differ materially from the forward-looking statements as a result of many factors including the factors and risks identified and described in Knoll’s annual report on Form 10K and its other filings with the Securities & Exchange Commission. The call today will also include references to non-GAAP financial measures. Reconciliations of these measures to the most comparable GAAP financial measures are included in the presentation slides that accompanying the webcast. Now let me turn the call over to Andrew Cogan, the CEO of Knoll.

[Andrew B. Cogan:]

Thank you. Good morning everybody. I am very pleased with the progress we made across Knoll this past year as we delivered greater than 20% topline growth and nearly 10% organic growth significantly outpacing our markets, expanded our gross margins by 290 basis points, increased our adjusted operating profits by 55%, and improved our adjusted operating margins as committed from 6.4% to 8.2%. Adjusted earnings per share grew 60% to $1.09 helped by strong accretion from Holly Hunt and leverage after peaking Q1 with the added debt from our Holly Hunt acquisition ended the year below 2.5 to 1. We furthered our strategic ambition to expand our position in the high design high margin residential space with the acquisition of Holly Hunt, but that didn’t distract us from the important work in growing our other businesses organically and delivering on much needed improvement in our office profitability. We had our most award winning NeoCon in recent memory and this month we are completing the roll out and training of all the new award winning products that we shared with our clients back in June. Having attended these sessions, I’m encouraged by the enthusiastic response of our sales team, dealers, and clients. In some of the highest profile projects around the world, clients continue to select Knoll for their offices and homes based on our designs, quality, and the talented sales team that serves architects and designers around the world. I want to thank them, the associates who make our products, and our dealer partners for their continued commitment to Knoll and our clients. Importantly, we know our work isn’t done. We remain committed to our multiyear plan to increase operating margins by 80 to 100 basis points a year as we work our way back towards double digit operating margins in the next two years. We will do this by continuing to drive margin improvement in our office business while being disciplined about incremental SG&A spending across the enterprise. Mid single digit growth in excess of the market combined with better price realization and the favorable benefit of the appreciation of the US dollar relative to the Cad and Euro should help offset headwinds from increased pension costs. Our office business should also begin to benefit from our recently implemented supply chain transformation investments and our warehouse consolidation program. Our new product pipeline is full of exciting innovations that respond to the changing way we are all working and living. It is a very exciting time at Knoll. Looking at the performance of our various segments, we ended the year with a strong fourth quarter driven by significant year-over-year improvement in our office business, sales and profits, and double digit organic growth in our studio segment. In office, we delivered a 39% contribution margin on double digit sales growth. Systems sales grew the fastest from a product perspective. Adjusted operated margins here expanded from 3.1% to 7.3% and operating profits increased 168%. As we shipped out a handful of larger international projects that booked earlier in the year, we had to stretch out our domestic lead times and encourage significant overtime and plant inefficiencies, so the improvement could have been stronger. Still, it was the best office operating margin in several quarters. Leading indicators like mockups and the pool of business continue to expand and our day-to-day dealer driven Knoll Essential sales were strong. In the studio segment, continued strong performance and growth from Holly Hunt combined with further sales gains in Europe and robust performance from both our consumer and contract KnollStudio channels drove double digit growth and a 65% increase in segment profits. We opened our second international Holly Hunt Showroom this quarter in London and we’re already seeing that effort raise the visibility of the brand with international clientele. It is a stunning space and at 3,500 square feet a good test of what we can do with a more succinct presentation. It was a more subdued quarter in coverings as mixed performance amongst the different businesses led to just under 4% top line growth and flat operating margins. Some difficult project comps didn’t help. For the full year, our office business grew just under 10% and we end with backlog up over prior year as we enter 2015. Adjusted operating margins expanded from 2.7% to 4.5% and we remain focused on increasing these further as we demonstrated we could do in the fourth quarter. While given the greater mix of large projects, price was negative, we have seen more small to midsized projects lately and that along with a price increase in February, should help price realization later this year. Government sales increased modestly but government orders declined modestly. Overall we are expecting this vertical to remain consistent with the levels we experienced at 2014 at around 10% of sales. From a vertical standpoint we saw weakness in energy, less than 5% of sales and healthcare, but more than offsetting strength in other verticals like financial services and media. In total, office represented about 62% of our total sales, down from just under 70% in 2013. With the benefit of Holly Hunt sales and double digit organic growth in KnollStudio and Knoll Europe, the studio segment represented approximately 27% of our sales up from 18% a year ago. Adjusted operating margins were stable at just over 12%. In North America all our channels from contract to wholesale to our direct-to-consumer business grew strongly. We almost tripled our direct-to-consumer business online and in our shop in New York City and this part of the business is now solidly profitable. Web visits reached an all-time high. Across Holly Hunt every single product category from furniture to lighting to textiles and leather and art and accessories grew. We enter the year with three new or significantly expanded company owned showrooms up and running and another to follow in early 2015. These additional points of distribution along with continued investments in new products and an innovative service platform should help drive growth again in 2015. For the full year, coverings represented 11% of our sales. Sales grew mid-single digits but still faster in the market. Spinnybeck [indiscernible] strongest performers, but each business grew over prior year. Adjusted operating margins improved a tad to 19.5%. We look forward to better growth from the rest of this segment in 2015. In closing, as I look back on the year just ended, I believe we successfully worked all the levers at our disposal from acquisitions to organic investments and transformations to our supply chain and the start of our One Knoll effort to generate the improved performance we just delivered. You have our teams’ commitment to do our best to do the same in the year ahead. Now, let me turn the call over to Craig to walk you through our results in more detail.

[Craig B. Spray:]

Fourth quarter sales increased 24.3% or 11.9% on an organic basis. All segments provided year-over-year sales growth. The office segment was up 13.1% as sales of office systems and storage improved from a year ago. In the studio segment, sales were up 83% versus prior year or 12.8% on an organic basis. While the incremental Holly Hunt sales drove the total studio increase, both Europe and North America studio contributed to the year-over-year improvement. The coverings segment driven by ongoing strong performance of Spinneybeck and Filzfelt was up 3.7%. Gross profit as a percentage of sales improved 370 basis points over a year ago to 35.9%. This improvement was primarily driven by the richer mix of business due to the addition of Holly Hunt, foreign exchange benefits on the weakening Canadian dollar, and improved fixed cost absorption on the higher volume. Sequentially, gross profit margin is up slightly in comparison to the third quarter of 2014. Total operating expenses were $10.5 million higher than a year ago which includes charges related to a pension settlement and curtailment, restructuring, and an adjustment of an earn out liability associated with our Filzfelt acquisition. The pension charges were a result of a voluntary payout that was offered to pension plan participants. The settlement is intended to reduce the volatility of future expense and cash requirements associated with our defined benefit plans. While these postretirement benefit changes resulted in a $6.5 million charge in the fourth quarter of 2014, it reduced our pension liability by approximately $37 million. After this liability reduction, our 2015 pension expense will be up by approximately $8.9 million as a result of a historically low discount rate and actuarial assumptions included in a mandated mortality table update. Operating expense for the fourth quarter of 2014 also included restructuring charges of $0.7 million related to office product discontinuations and the exit of two underperforming textile showrooms. The incremental earn out liability associated with the Filzfelt acquisition is a result of achieved and forecasted Filzfelt sales that were higher than expected when acquired in 2011. Note that prior year operating expenses include a restructuring charge of $5.1 million and an intangible asset impairment charge of $8.9 million. 2014 operating expenses also increased due to the planned and previously communicated investments in our strategic initiatives including new showrooms, product development, and the implementation of our new ERP system. Increased incentive compensation related to higher sales and profits and the annualization of operating expenses associated with Holly Hunt, also had an incremental impact on operating expenses. For the quarter, adjusted operating margin was 9.7%, 280 basis points better than a year ago. This year-over-year operating margin improvement was driven by a mix of business, foreign exchange benefits, and improved fixed costs on higher sales. North America office adjusted operating margin improved 420 basis points from 3.1% to 7.3%. Interest expense was $1.9 million, approximate $0.4 million higher than a year ago primarily due to outstanding debt as a result of purchasing Holly Hunt in the first quarter of 2014. Through a combination of EBITDA improvement and debt pay down, our leverage ratio has improved from 3.21 as of the first quarter of 2014 to 2.41 as of yearend. Other income was $3.2 million, up $1 million from fourth quarter of 2013 driven by foreign exchange gains due to the devaluation of the Canadian dollar. Additionally, we recorded a $0.6 million gain in the fourth quarter of 2014 as a result of the sale of our equity product line. Net income for the fourth quarter of 2014 was $12.3 million, up from $0.7 million for the same period of 2013. For the full year of 2014 net income was $46.6 million in comparison to $23.2 million for 2013. As noted in the earnings release, financial statements have been adjusted to reflect the correction of immaterial errors in prior periods related to income taxes and other items. These immaterial errors identified as a result of our year end process related to our income tax provision for intercompany transactions between our Canadian subsidiary and US entity. We will be correcting these immaterial errors in our Form 10K which will be filed by March 2, 2015. The correction of these errors increase net income by $0.1 million for the fourth quarter of 2013 while full year 2013 remained flat. Adjusted earnings per share was $0.35 for the quarter up $0.14 from a year ago. For the full year, adjusted earnings per share was $1.09 up from $0.68 per share a year ago. From a cash perspective cash flow from operations primarily increased due to incremental net income. Capital expenditures for 2014 were $41.6 million. We expect cap ex to start to normalize in 2015 to a range of $30 million to $35 million. Cash provided by financing activities was $57.3 million which includes the additional debt incurred in the first quarter 2014 to fund the acquisition of Holly Hunt offset by dividend payments and stock repurchases of $22.7 million and $9 million respectively. We will now take questions.

[Operator:]

[Operator Instructions] Your first question comes from Budd Bugatch of Raymond James & Associates.

[Budd Bugatch:]

Good morning Andrew, good morning Craig, congratulations on the quarter and the year. A couple of questions on, just if you could on gross margin, I know you referred to Holly Hunt and Canadian dollar and increased utilization, could you maybe give us a little more color on that? Maybe put some numbers to some of those improvements?

[Craig B. Spray:]

In terms of the gross margin improvement of 370 basis points, about half of that is the mix effect of Holly Hunt, a little bit actually slightly more than half and then we have fx as the next big chunk, and then a little bit of good news due to volume. We have price and discount that are somewhat offsetting each other in this quarter so really those are the only three drivers that are really contributing, but in that order certainly Holly Hunt, then fx, then a little bit of volume.

[Budd Bugatch:]

Of the other 45% is fx two-thirds of that approximately and then the volume the balance?

[Craig B. Spray:]

I think that’s very close, correct.

[Andrew B. Cogan:]

I would also add to Craig’s comment, that we were very pleased with the gross margin improvement in the office business in the fourth quarter, which went from if you look at the segment data, from 26% to 27.4% so there was nice improvement there in that particular segment.

[Budd Bugatch:]

The gross margin in office is up 140 basis points? Is that about right?

[Andrew B. Cogan:]

In the fourth quarter, correct.

[Budd Bugatch:]

Yeah, that’s great. Let’s – congratulations on two of the segments and all of the segments for revenue gains, Andrew as I recall part of the investment was for more feet on the street in coverings to kind of start to grow that business. We’re two years into that, I thought this was about the time we would see that and maybe start to monetize some of that and come to the bottom line, am I mistaken?

[Andrew B. Cogan:]

I think the good news Budd, is I think we are monetizing that investment. When you look at the coverings performance for the full year, I think our operating profits improve by $1.5 million and our sales improved by about 5.4%. I think we are growing faster in the market. When you break up the coverings performance Spinneybeck and Filzfelt have been very, very strong performers and we’re very pleased how they’re doing and the growth there has been well over double digits, so that part of coverings is doing very, very well. Edelman also grew, it grew at a lower rate but it has significant margin improvement. We improved our operating profit margins in Edelman by over 200 basis points, so I think good improvement there. Textiles has been the biggest laggard and what I would point out there is some of the segment data you’re looking at was we did the restructuring of two textile showrooms where we added some residentially fully focused showrooms, those did not pan out as we thought and then with the acquisition of Holly Hunt we’ve actually been able to fold those products into our Holly Hunt showrooms which is now distributing the KnollLux Products. We found that a more effective go to market strategy so that’s really the only change I’d say and I think that will help that part of the business do better going forward.

[Budd Bugatch:]

A couple of other quick questions, hopefully quick questions going forward, currency impact if we assume rates as they are today or at the end of the year on 2015, what’s that issue look like for next year?

[Craig B. Spray:]

Clearly, with a third of our cost structure sitting up in Canada on the North America office side, it’s very helpful for us when the dollar appreciates vis-à-vis the Canadian currency. We’re looking at today $10 million to $15 million of good news due to fx. Now, recall we also have the pension bad guy that will offset some of that, but today that’s where we’re at and that moves around so fast you have to kind of pick your hour you want to talk about it.

[Budd Bugatch:]

That’s all in office, right? The impact in the fourth quarter was all in office?

[Andrew B. Cogan:]

Also Budd, we have - some of that is in euros because remember, our studio, our textiles, a lot of Holly Hunt’s costs come out of Europe so we’re getting some favorability there as well on the euro side. Now, we have the offsetting impact of lower sales in Europe and lower profits and we translate those back, but the net-net is we also are beneficiaries of a strong dollar relative to the euro on our leather, textiles, and KnollStudio costs. We get it in every segment.

[Budd Bugatch:]

Two other quick questions, and I'll cede the floor, just defined benefit plan, you’re going to have an $8.9 million increase expense this year. What are you going to do or is there anything to be done on the defined benefit plan longer term to kind of cap that, because obviously with low interest rates that’s a huge challenge.

[Andrew B. Cogan:]

We have taken a series of measures since 2011 of partially freezing it, now buying out people that had vested but weren’t fully retired yet and it is something that we need to continue to actively look at.

[Budd Bugatch:]

Let me confirm one other thing, did you pay down about $8 million worth of debt in the quarter? Is that what I read from the third to fourth quarter? Is that the way to read that?

[Craig B. Spray:]

I don’t have the numbers in front of me, let me pull it up here.

[Budd Bugatch:]

Maybe the question can come this way, we didn’t have a full balance sheet, or income statement, or cash flow statement in the release, when will they be available?

[Craig B. Spray:]

The income statement I believe has been posted, or is being posted. The balance sheet and the cash flow statement will come out as part of our K filings on or before March 2nd.

[Budd Bugatch:]

We’ve got to wait about a month for the balance sheet and cash flow?

[Craig B. Spray:]

The previous question, we went from $283.7 million down to $275.5 year end.

[Budd Bugatch:]

That’s about $8 million, right?

[Craig B. Spray:]

That’s about $8.5 million, correct.

[Budd Bugatch:]

The balance sheet and the cash flow statement won’t be available for three or four weeks?

[Craig B. Spray:]

We intend to have it posted prior to that but it will be certainly no later than that.

[Operator:]

Your next question comes from Josh Borstein – Longbow Research.

[Josh Borstein:]

Just on the overtime inefficiencies leading to domestic lead times that you mentioned, could you put any numbers around that? If those problems are ongoing, if so when they should go away?

[Andrew B. Cogan:]

I think the lead time issues have already been improving. Our lead times peaked in the middle of December. Remember, it was a combination of obviously very strong shipments in the fourth quarter as you saw as well as you get into Thanksgiving and the holidays in December, you really start to lose a handful of production days and we tend to lose those days when demand is the highest and our best way to measure that is through lead times. The good news is our lead times have already been moving down and we think within the next couple of weeks they’ll get back into our absolutely normal range. The inefficiencies we experienced in the fourth quarter are also rapidly mitigating themselves as we move through January into February. I would expect in February, not to have any inefficiencies as a result of any of that stuff.

[Josh Borstein:]

What do you think the hit was in 4Q here from that?

[Andrew B. Cogan:]

I don’t have a specific number, but you could easily say it was 50 to 100 basis points of gross margin in the office segment. Even with that, we had nice gross margin improvement.

[Josh Borstein:]

Right, that’s the point I was trying to get at, it could have been you’re saying 50 to 100 basis points even better?

[Andrew B. Cogan:]

Correct.

[Josh Borstein:]

Could you give us an update on where you are with the supply chain transformation? I understand you put some new equipment in place during the quarter. If you can comment on that progress especially in relation to your internal expectations?

[Andrew B. Cogan:]

The warehouse consolidation we did earlier in the year, that’s going. We went from six distribution centers on the east coast down to one, that’s moving along very well and efficiently. The laminate transformation which is really kind of implementing a very lean one piece flow in our operation where we make all our laminate work except for [indiscernible] in Pennsylvania, has also gone very well. That really kind of got fully implemented really in the November/December timeframe of 2014. We’re now kind of working through the kinks of it, getting it up to its capacity and potential. We think the potential there is it almost triples our capacity with a half to a third the number of people. It’s a step level change in the process but I think realistically through the first quarter we’ll be working out the bugs in that process and we should start to see the benefit in the back half of this year.

[Josh Borstein:]

I think you kind of answered my question, but is there a particular timeframe when you expect to see a more meaningful step up in gross margin from all these initiatives?

[Andrew B. Cogan:]

I think in the back half of ’15 the combination of the better price realization, more smaller projects, the fx which we are starting to get now and then the supply chain transformation and potentially some other commodity favorability should all come together in the back half of the year.

[Josh Borstein:]

The $75 million quarterly run rate we see most of the year in SG&A, is that a good quarterly run rate to use in 2015 as well?

[Andrew B. Cogan:]

I think plus or minus, that’s pretty good.

[Josh Borstein:]

Then just last, a question on order rates just qualitatively could you say where they were relative to shipments and where some of the strengths and weaknesses were?

[Andrew B. Cogan:]

I thin in general we’re very pleased with the backlog we ended 2014 that we started 2015 with. We just completed a pretty thorough review of every one of our office regions. It was a multiday process and I have to say I was very encouraged with their outlook for the year, it’s solidly single digit growth on top of our near double digit growth last year with some potentially upside projects on top of that. I was encouraged with our sales teams’ outlook.

[Josh Borstein:]

Was the order growth rate in 4Q similar to what you saw in terms of shipments in office?

[Andrew B. Cogan:]

I don’t have that in front of me but I can tell you we’re pleased where the backlog ended the year, so we have a nice backlog to start 2015.

[Josh Borstein:]

Just last one, were there any noticeable differences throughout the quarter? Just kind of wondering how things exited the quarter?

[Andrew B. Cogan:]

For us we started the quarter exceptionally strong. We had a huge October and I think a little bit of that was probably some of the longer lead times we were beginning to publish where people put orders in sooner to guarantee production rates. I think that kind of caused some movement within the months in the quarter.

[Operator:]

Your next question comes from Matthew S. McCall – BB&T Capital Markets.

[Matthew S. McCall:]

I’m trying to make sure I have all the components here. I think you said 80 to 100 basis points of EBIT margin expansion annually is the target, but it seems like there are a few extra puts and takes, you’ve got the pension, you’ve got the fx, but then you’ve got several of the items you just talked about that will help, it sounds like, the back half. Maybe just talk about office, you did 7% in Q4 with some pressure that cost you probably 50 to 100 basis points, so is 7.5% to 8% kind of the new baseline on which we should build?

[Andrew B. Cogan:]

I think the way I would look at it is a little bit more what the full year margin was. Office improved their margins from 2.7% in ’13 to 4.5% in ’14. Our belief is we can pick up another 200 basis points in the office margin area this year, so going from 4.5% to 6.5%, that would be consistent with Knoll, Inc. picking up the 80 to 120 basis points that I talked about. Office again, you have the seasonality, you have better absorption in the third and fourth than you do in the first and second so again, I would say over the course of the year 200 basis points of improvement is a realistic expectation, but I think the fourth quarter was nice because I think it really demonstrated that business is capable of running ultimately in the upper single digit operating margins and there’s no reason why our office operating business shouldn’t be in the high single digits. But again, it’s going to be a journey to get there. We’re on that journey. I think we demonstrated really solid contribution margin in the fourth quarter as well as the potential of that business in terms of margin. It was one quarter, it wasn’t the full year but I think it was encouraging and as we make the improvements that we’ve been talking about I feel pretty good we can continue to generate year-over-year sizeable operating margin improvements in the office business.

[Matthew S. McCall:]

You talked about some of the benefits that will hit in the back half of this year. Can you talk about the components of the next steps higher as we approach – are we going to send 200 basis points annual in office and if so, what are the other steps to get there? New machinery, the supply chain initiatives, but how do we think about the timing and the components of what drives the timing?

[Andrew B. Cogan:]

I think there are a lot of moving parts. I think the big equipment moves are really nearing their completion now. This [wood] transformation was the biggest one. There are some other footprint options that were looking at that longer term are out there but right now the focus is on stabilizing and completing the implementation of the manufacturing transformations that we’ve done so we’re focused on that. I really think it’s going to be a combination of some continued volume growth, better absorption in the fixed costs, the benefits of the supply chain transformation, fewer inefficiencies as a result of the supply chain transformation which I mentioned were about 50 to 100 basis points in the fourth quarter. I think those will be the key drivers. The other thing that’s going to help within the office business is the changing mix of products. If you look at the new introductions that we’re working on, and we’re now launching our remix chair, that’s a higher margin than our average business. If you look at all the adjustable table offerings that we brought to market, that’s higher margin. If you look at where our product development efforts are focused, I also believe that mix within the office business continues to move more positively. There’s no one 100 basis point magic bullet but it’s a collection of all these initiatives which I think should really help.

[Matthew S. McCall:]

I think there was a question about the growth in coverings, but the margins yes flat over year but a little lower than I’m kind of used to seeing them come in. What’s the right way to look? I know they’re mostly variable costs business, but what’s the right way to look at the margin profile of coverings and then studio with Holly Hunt?

[Andrew B. Cogan:]

I think coverings is a 19% to 20% operating margin business. Remember, if you look at the full year, coverings operating margins were 19.6% versus 19.3% a year ago so we got some improvement there. The fourth quarter was down, but again that was the restructuring charges within the segment that I think had the biggest deleterious effect on the margin. Coverings will very much benefit from a stronger US dollar relative to a euro so I feel very good that we can kind of stay in that 18% to 20% range and averaging about 19% and the euro will help do that. I think coverings – again, we have some parts of the covering business that are growing double digits and we have other parts that are growing low single digits. It’s a blend there so I think again, that’s a business we can do better from a growth standpoint, but it’s doing better than the market right now. I don’t see any margin change in that profile. On studio, while Holly Hunt has double digit operating margins they’re a little bit lower than our overall studio operating margins so they’ve had the effect of bringing actually the total segment down a little bit, but we’re still talking about – we still even with the mix impact of that, we improved from 12% to 12.2% and I believe in the fourth quarter we were 12.6%. Again, I think 12% operating margins 12% to 13%, 11% to 13%, in that range is very comfortable. The formula for Knoll to get 80 to 100 basis points, or 120 basis points of margin improvement a year is to hold studio and coverings segment margins about where they are. Again, both of them will get fx benefit but the office margin s higher. Again, I think you even seen the fourth quarter, when we get office to 7.5%, look what it does to Inc. operating margins. For the whole thing we were at 9.7%, so that is the key, office is the key to the margin improvement story here at Knoll.

[Matthew S. McCall:]

Then the last one I had, you said, “Leading indicators are continuing to expand day-to-day strong,” then you said that you expect to grow – I wrote down, “Mid single growth in excess of the market.” Is that mid-single digit growth on top of the market or mid-single growth which is in excess of the market?

[Andrew B. Cogan:]

It’s the latter, mid-single growth which I believe will be in excess of the market. I mean listen, there are a handful of large projects out there that if they break our way, could have a meaningful impact on that, but I think if you need it all out and you take all our people’s best guesses right now, you look at the data we look at, you look at our three month forecasts, I think it suggests mid-single digit growth is certainly in the cards.

[Operator:]

[Operator Instructions] Your next question comes from Todd A. Schwartzman – Sidoti & Company, Inc.

[Todd A. Schwartzman:]

Could you maybe talk a little bit about the health of the systems category, what some of the drivers were during the quarter? Was it pent up demand, maybe new products, or just general replacement cycle or some other factors?

[Andrew B. Cogan:]

I think the systems category for us performed very strongly. I think our unique competitive advantage there is not one solution but the breadth of solutions and we’ve been really focusing on training our sales people to work in a consultative manner with our clients, with our architect and design partners to help unearth the right solutions for our clients. At Knoll, all paths don’t lead to the same product solution, they lead to many different types of product solutions that deal with the variety of the ways companies are working and/or the variety of ways within the workplace companies are working. I think we’ve got a very, very strong portfolio and then meaningful competitive advantages in each of the product lines we have. Again, the growth in the fourth quarter was driven by a couple of very large international projects that were quite helpful where they were doing new buildings and very large projects and we had a couple of those in North America as well so I think that was the help. I do know that there were fewer large $1 million plus orders year-over-year and I think as we look at 2015 there are a handful of super big projects but in general it’s going to be a lot more midsized projects which actually should be helpful from a pricing standpoint.

[Todd A. Schwartzman:]

I get that, but for fourth quarter, the category itself of systems, was the growth significantly greater than the full segment’s 13%?

[Andrew B. Cogan:]

Yes.

[Todd A. Schwartzman:]

In terms of future uses of cash, I know you had mentioned earlier that you’ve worked all levers at your disposal in 2014, are there other Holly Hunts out there size wise, quality wise?

[Andrew B. Cogan:]

We’re always looking. At any given time we’ve got a handful of opportunities we’re accessing. I would just say that we’re incredibly selective both in terms of the types of brand and products. Holly is the best of the best. We believe that kind of is consistent with what we’re doing. That is a business that strong works with the trade, with architects and designers that are very cost effective model to go to market as opposed to a direct-to-consumer market. We were able to buy Holly had a value that made it very accretive and I believe we’ve got over $0.11 of appreciation from Holly Hunt this past year. We’re focused on a brand synergy, on a go-to-market synergy, a design quality synergy and then a value that allows us to deliver benefit to our shareholders. If we can get it through all of those filters, we have more than enough balance sheet to execute those. But if something we’re looking at doesn’t fall through one of those filters, it’s not something we’re going to pursue. I think we have a very disciplined acquisition strategy and in lieu of that we pay a good dividend. As the business evolves through the course of the year I would say that’s probably the next lever we would look at in terms of how best to deliver return to our shareholders.

[Todd A. Schwartzman:]

Some additional minimal perhaps debt reduction in the cards?

[Andrew B. Cogan:]

Yes, I think we’ll continue to pay down debt.

[Operator:]

Your next question comes from Budd Bugatch – Raymond James & Associates.

[Budd Bugatch:]

I guess a couple of follow up questions if I could. Cash flow from operations, did I hear you give that? If you did, I missed it.

[Craig B. Spray:]

I did. I believe it’s in our release as well. I can pull that up for you here. Are you looking for the quarter or are you looking for full year?

[Budd Bugatch:]

Either way. I can take it either way.

[Andrew B. Cogan:]

While Craig is looking for that, did you have another question?

[Budd Bugatch:]

Yes, I did. The restructuring, can you talk a little bit about what you did on that and what you have to do yet, and maybe what the financial impact might be?

[Andrew B. Cogan:]

I don’t think there’s any large restructuring to come. This was, as it related to a couple of textile showrooms as I mentioned. I think that was the single biggest element in the restructuring where we tried something, it didn’t work. We folded our cards, cut our losses, and moved those products and that distribution into Holly Hunt. That was the bulk of the restructuring.

[Budd Bugatch:]

It was pretty much all in coverings?

[Andrew B. Cogan:]

I believe the bulk of the restructuring was in coverings, yes.

[Budd Bugatch:]

I know a category you have worked on in office for a while has been seating and that did not get called out as increased if I heard you correctly.

[Andrew B. Cogan:]

That is correct.

[Budd Bugatch:]

Last year it did grow a little bit but it looks like for the overall company [indiscernible], I expect that includes some of the studio products as well.

[Andrew B. Cogan:]

When we talk about seating we’re really talking about office seating within the business so if I just look at that piece of it – if you look at the category data, actually seating was I think, one of the worse performing categories last year and I don’t believe we performed worse than the category so I think we gained share with the category but it didn’t gain share within the category. But the category underperformed the overall market. Seating has not performed to the extent that we had probably initially hoped. Generation is going very, very strong but we’ve seen some degradation of older products in that portfolio, particularly in the upholstered space. I think with remix we have a generation potential blockbuster product that really gives clients the best of both worlds. It’s an upholstered chair in the front and it’s a high performance elastomer [ph] chair on the back. Based on the customer reaction we’ve seen I’m very optimistic that we have a home run in remix that won’t cannibalize anything that we have because we don’t have any really solid upholstered chairs and it has versions that are appropriate in conference rooms, and meeting rooms. I think it will be a meaningful addition to our line. Then I would just add we have a handful of other products in the seating pipeline which really innovate and break away from the seating type [indiscernible] that are out there today. We’re really excited about the pipeline of seating both immediately with remix that will impact 2015 and beyond with some things that we’ll start to share with clients towards the end of 2015.

[Budd Bugatch:]

Is remix already in the backlog or do you have orders on remix?

[Andrew B. Cogan:]

Remix is just – it will become available for order entry later this month. We’re rolling it out to our dealers, we’re training our people on it literally as we speak and so I think the first remix sales will really be Q2.

[Budd Bugatch:]

I know you talked about pension expense, what’s the status of the pension plans now? What are the assets and what are the liabilities?

[Craig B. Spray:]

We’ll have the actual numbers in the K, but we’re about 80% funded if that’s what your question is.

[Budd Bugatch:]

So, you’re 20% underfunded is the other way to look at that?

[Craig B. Spray:]

We’re within the quarter.

[Budd Bugatch:]

Did you get that CFO number?

[Craig B. Spray:]

Yes, I have that. It’s $23.8 million in Q4 and if you want the full year that’s $88.5 million and that’s the cash from operations.

[Operator:]

Your next question comes from Josh Borstein – Longbow Research.

[Josh Borstein:]

The increase that you’re seeing in small to medium sized projects, is that a signal to you about anything with respect to the economy or a leading indicator of anything in particular?

[Andrew B. Cogan:]

No.

[Josh Borstein:]

Just last, the COO who recently resigned can you discuss if that’s a signal of Knoll looking to go in a different direction or what that might mean for the company and what the succession plans are going forward?

[Andrew B. Cogan:]

No. I think it’s just Lynn did a lot of good things here at Knoll, we really appreciate everything she did for us. I think it was she has her ambitions and I think we wish her absolutely nothing but the best in everything. In terms of the direction to go that we will be moving forward on, I’ve now spent almost a month in the role of President of our office business. I’m really enjoying it, I’m really excited about the team we have in place, and the initiatives that we’re working on. Our focus right now is really bringing in a chief operating officer who can work with me across the businesses, really focused on our operational capability, because as I answered some of the questions about where the margin opportunity is, it’s really on the gross margin within the office business and I think we have the opportunity to bring a very strong leader in with that kind of operations background to become part of the team. That’s what we are searching for.

[Operator:]

Your next question comes from Matthew S. McCall – BB&T Capital Markets.

[Matthew S. McCall:]

Just one clarification, when you said $75 million plus or minus on SG&A, is that inclusive of the impact of pension?

[Craig B. Spray:]

Correct.

[Operator:]

There are no further questions in queue at this time. I would now like to turn the call back over to Andrew Cogan.

[Andrew B. Cogan:]

Thank you every one again for your questions and interest on the call. We’re very proud of the progress we made on the top and bottom line in 2014. We realize we have a lot of work ahead of us to continue to drive that, but we are committed to achieve the margin goals that we’ve set out and are very excited about the pipeline of initiatives and actions to help us get there. We look forward to staying in touch as we move forward through 2015. Thank you everybody. Good day.

[Operator:]

Ladies and gentlemen this concludes today’s presentation. Thank you for your participation. You may now disconnect. Have a great day.