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Raymond James Briefs On Knoll
2.5.10 | St. Petersburg, FL | Investment
analyst Budd Bugatch of Raymond James &
Associates reaffirmed his company's "Outperform" rating
on Knoll following its Feb. 4 earnings release and
conference call discussing its 4Q09 results.
KNL: Margin Drives 4Q08 [sic] Beat; Backlog +25.7% Sequentially
Analyst(s): Budd Bugatch
>Before Thursday's market open, Knoll reported 4Q09 GAAP EPS of $0.09. Excluding $3.5 million of pretax restructuring charges, adjusted EPS was $0.14, better than our $0.10 estimate (also consensus). Total sales were $183.9 million, down 33.4% year-over-year, but modestly better than our $182.3 million estimate and the $183 million consensus.
>The quality of earnings was high. Excluding restructuring, operating income was $15 million (8.1% of sales) compared with our $11.4 million (6.3% of sales) forecast. On a GAAP basis, operating EPS was in-line with our model, as higher sales and gross margin were offset by higher SG&A, due primarily to higher restructuring charges.
>Ending backlog was $153 million, down 24.1% year-over-year, though up 25.7% compared with $121.7 million at the end of 3Q09. By our calculation, 4Q09 implied orders were $215 million, down 22% year-over-year (versus -43% in 3Q09) and 27% higher sequentially. Prior-year hurdles will ease considerably in 1Q10.
>CEO Cogan noted broad-based volume declines across all product lines and geographies (with more pronounced weakness in office systems and North America), though also suggesting that new products (including the Generation chair) made a positive contribution to backlog growth.
>Knoll continues to manage its financial position well. The company generated $52.9 million of operating cash flow in 2009 ($10.4 million in 4Q09) and reduced debt by $42 million and $15 million during 2009 and 4Q09, respectively. Knoll's leverage ratio at year end was ~2.9x, well below its 4.0x covenant guardrail.
>Despite severe volume declines, Knoll continues to effectively manage costs and cash flow, delivering industry-leading profitability. We will have additional commentary following management's 10:00 a.m. (ET) conference call.
Raymond James Brief 2.4.10
KNL: Raising Estimates and Target Price Following 4Q09 Beat
Analyst(s): Budd Bugatch
>We reaffirm our Outperform rating on Knoll while increasing estimates and raising our 12-month target price from $11.00 to $14.50 following the company's better-than-expected 4Q09 EPS release and management's conference call. Our $14.50 target price represents approximately 14x our 2011 EPS estimate of $1.03 (a discount to Knoll's historical median forward P/E of 16.0x) and approximates the midpoint of our EVA/FCF-derived calculated intrinsic value.
>The primary macroeconomic drivers of office furniture demand (corporate profits, business confidence, white collar employment, office construction) remain mixed. However, the combination of stabilizing demand and easing prior year comparisons has driven a moderation in the rate of year-over-year decline for the industry, setting the stage for a return to growth in mid-to-late 2010.
>Each of the publicly traded office furniture companies has been forced to "play defense," cutting costs and preserving cash due to the severity of the industry decline. That said, we think Knoll, in particular, deserves high marks for continuing to "play offense" -- remaining committed to new product innovation and developing the compelling Generation chair. On the conference call, management disclosed that Generation is ramping at twice the rate of its earlier-introduced Life chair; and the company believes it will drive increased penetration in seating as well as market share opportunities in other categories.
>Knoll is the industry leader in terms of profitability. Impressively, management delivered an impressive 9.7% normalized operating margin in 2009 despite a 30.4% sales decline. Moreover, it continues to generate positive cash flow, which it has used to systematically reduce debt. With shares now trading at 0.6x sales versus the historical median of 0.9x, and given the company's significant operating leverage to higher sales, we believe investors should accumulate shares now.
>As detailed in an earlier note, Knoll reported 4Q09 adjusted EPS of $0.14, ahead of our $0.10 estimate (also consensus). Total sales declined 33.4%. While weakness was broad-based, the company's complimentary products (including seating) reported the smallest percentage decline, followed by Specialty, and then Systems, which tend to be more late-cycle.
>We are increasing our 2010 EPS estimate from $0.61 to $0.67. This assumes a 3.4% sales decline (down in 1H10; up in 2H10), modest gross margin contraction (due to lower volume, higher commodity costs, and competitive pricing), and operating expenses of $189.4 million. 2011E EPS goes from $0.94 to $1.03.
KNL: Margin Drives 4Q08 [sic] Beat; Backlog +25.7% Sequentially
Analyst(s): Budd Bugatch
>Before Thursday's market open, Knoll reported 4Q09 GAAP EPS of $0.09. Excluding $3.5 million of pretax restructuring charges, adjusted EPS was $0.14, better than our $0.10 estimate (also consensus). Total sales were $183.9 million, down 33.4% year-over-year, but modestly better than our $182.3 million estimate and the $183 million consensus.
>The quality of earnings was high. Excluding restructuring, operating income was $15 million (8.1% of sales) compared with our $11.4 million (6.3% of sales) forecast. On a GAAP basis, operating EPS was in-line with our model, as higher sales and gross margin were offset by higher SG&A, due primarily to higher restructuring charges.
>Ending backlog was $153 million, down 24.1% year-over-year, though up 25.7% compared with $121.7 million at the end of 3Q09. By our calculation, 4Q09 implied orders were $215 million, down 22% year-over-year (versus -43% in 3Q09) and 27% higher sequentially. Prior-year hurdles will ease considerably in 1Q10.
>CEO Cogan noted broad-based volume declines across all product lines and geographies (with more pronounced weakness in office systems and North America), though also suggesting that new products (including the Generation chair) made a positive contribution to backlog growth.
>Knoll continues to manage its financial position well. The company generated $52.9 million of operating cash flow in 2009 ($10.4 million in 4Q09) and reduced debt by $42 million and $15 million during 2009 and 4Q09, respectively. Knoll's leverage ratio at year end was ~2.9x, well below its 4.0x covenant guardrail.
>Despite severe volume declines, Knoll continues to effectively manage costs and cash flow, delivering industry-leading profitability. We will have additional commentary following management's 10:00 a.m. (ET) conference call.
Raymond James Brief 2.4.10
KNL: Raising Estimates and Target Price Following 4Q09 Beat
Analyst(s): Budd Bugatch
>We reaffirm our Outperform rating on Knoll while increasing estimates and raising our 12-month target price from $11.00 to $14.50 following the company's better-than-expected 4Q09 EPS release and management's conference call. Our $14.50 target price represents approximately 14x our 2011 EPS estimate of $1.03 (a discount to Knoll's historical median forward P/E of 16.0x) and approximates the midpoint of our EVA/FCF-derived calculated intrinsic value.
>The primary macroeconomic drivers of office furniture demand (corporate profits, business confidence, white collar employment, office construction) remain mixed. However, the combination of stabilizing demand and easing prior year comparisons has driven a moderation in the rate of year-over-year decline for the industry, setting the stage for a return to growth in mid-to-late 2010.
>Each of the publicly traded office furniture companies has been forced to "play defense," cutting costs and preserving cash due to the severity of the industry decline. That said, we think Knoll, in particular, deserves high marks for continuing to "play offense" -- remaining committed to new product innovation and developing the compelling Generation chair. On the conference call, management disclosed that Generation is ramping at twice the rate of its earlier-introduced Life chair; and the company believes it will drive increased penetration in seating as well as market share opportunities in other categories.
>Knoll is the industry leader in terms of profitability. Impressively, management delivered an impressive 9.7% normalized operating margin in 2009 despite a 30.4% sales decline. Moreover, it continues to generate positive cash flow, which it has used to systematically reduce debt. With shares now trading at 0.6x sales versus the historical median of 0.9x, and given the company's significant operating leverage to higher sales, we believe investors should accumulate shares now.
>As detailed in an earlier note, Knoll reported 4Q09 adjusted EPS of $0.14, ahead of our $0.10 estimate (also consensus). Total sales declined 33.4%. While weakness was broad-based, the company's complimentary products (including seating) reported the smallest percentage decline, followed by Specialty, and then Systems, which tend to be more late-cycle.
>We are increasing our 2010 EPS estimate from $0.61 to $0.67. This assumes a 3.4% sales decline (down in 1H10; up in 2H10), modest gross margin contraction (due to lower volume, higher commodity costs, and competitive pricing), and operating expenses of $189.4 million. 2011E EPS goes from $0.94 to $1.03.
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