Here's an initial public offering that
looks like a momentum play.
, which filed with the
Securities and Exchange Commission
earlier this month for an IPO, is on a roll. The East Greenville, Pa.-based company is boosting sales, churning out profits and expanding its market share.
In addition, its market continues to look strong. An indication of that came Monday when competitor
reported strong earnings for its third quarter ended March 1. It earned $13.5 million, or 56 cents a share, up 13% from $11.9 million, or 47 cents a share, a year earlier.
"There are some positive things happening that are benefiting larger office-furniture companies," says Walter Morris, an analyst who follows the industry for
Robert W. Baird
in Milwaukee. "These include a shift to open office systems, which the big players dominate. They also include market-share gains by big players, of which Knoll is certainly one.
"Finally, I think there's some catch-up spending in office furniture. There was underspending back in the first half of the 1990s tied to the personal computer spending boom and job cutbacks." It hasn't yet been determined whether Robert W. Baird will be a member of the syndicate selling Knoll stock.
Knoll hasn't yet said how many shares it will offer, though the offering's size could total $184 million. The company said it has filed for listing on the
New York Stock Exchange
and will trade under the symbol KNL. The offering is planned for mid- to late April.
Credit Suisse First Boston
are leading the underwriting.
Knoll plans to use proceeds from the offering to redeem the Series A preferred shares held by the initial investors, which includes senior management and
Warburg Pincus Ventures
, to redeem debt and for general corporate purposes, according to the prospectus.
As interested investors will no doubt discover, Knoll's story is impressive.
The company was formed in 1989 and 1990 when
acquired three companies, including Knoll International, and merged them with its own furniture business. But Westinghouse continued to run the company as four businesses, which bred inefficiencies. In addition, management failed to track profits by products and many products were money losers. So the more of these products Knoll sold the more money it lost.
In December 1993, Westinghouse moved Burton Staniar from its
Group W Broadcasting
unit to Knoll. Staniar and his management team slashed costs and products and modified and improved almost every product line, the prospectus says. The sales force was rewarded for profitable sales growth instead of simply additional sales.
As a result, sales climbed 16% to $651.8 million last year from $562.9 million in 1994. Operating income swung to a positive $55.2 million in 1995 from a negative $49.5 million in 1994. On a pro-forma basis (that is, as if Knoll were public), it then rose to $78.5 million last year from $49 million in 1995. The backlog climbed 33% to $94.1 million at Dec. 31 from $70.8 million at Dec. 31, 1995.
Westinghouse sold the company in early 1996 for a higher-than-expected $565 million. It was acquired by Warburg Pincus Ventures, a unit of
E.M. Warburg Pincus
, a unit of
, and members of management.
Now, the company wants to increase its sales and market share, in part through emphasizing seating, tables, desks and storage furnishings. Knoll is weak in these sectors. For instance, its market share in seating was 2.1% and in tables it was 1.8% last year. By comparison, the company controlled 11.2% of the office systems market.
Knoll also plans to beef up its sales force and target more smaller and medium-size businesses. And Knoll will use its rich heritage to enhance its image by expanding its KnollStudio line, which includes pieces by major architects and designers. Knoll already is known for its quality furniture, which features clean and modern lines. In fact, Knoll notes in its prospectus that it has more than 30 pieces in New York's
Museum of Modern Art
To be sure, there are potential pitfalls.
Knoll faces stiff competition from the likes of Herman Miller,
. Knoll also says that its new products simply may not sell as well as its current lineup.
Perhaps most significantly, Knoll's high level of debt -- an estimated $290.8 million after the stock offering -- means that "a substantial portion of the company's cash flow from operations must be dedicated to fund scheduled payments of principal and debt service and will not be available for other purposes," the prospectus says.
But with Knoll performing well, the company should generate enough cash to cover its payments and build its market share.