(EDGAR Online via COMTEX) -- ITEM 7. 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 audited consolidated financial statements. Forward-looking Statements This annual report on Form 10-K contains forward-looking statements, principally in the sections entitled "Business," "Risk Factors," "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-K 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," "if," "believe," "plan,", "goals," "estimate," "expect," "forecast," "intend," "may," "could," "should," "will," and other similar expressions. This includes, without limitation, our statements and expectations regarding any current or future recovery in our industry, our plans for reduced capital and operating expenditures and enhanced liquidity measures, our integration of acquired businesses, our supply chain and manufacturing footprint optimization plans, our expectations with respect to the impact of the COVID-19 pandemic and changes in the way companies implement "return to work", "work from home" and remote work strategies, and our expectations with respect to the payment of future dividends and leverage. Although we believe these forward-looking statements are reasonable, they are based upon a number of assumptions concerning future conditions, any or all of which may ultimately prove to be inaccurate. Important factors that could cause actual results to differ materially from the forward-looking statements include, without limitation: the risks described in Item 1A and in Item 7A of this annual report on Form 10-K; the ultimate duration and severity of the COVID-19 pandemic, 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 prices and availability; restrictions on government spending resulting in fewer sales to the U.S. government, one of our largest customers; our debt restrictions on spending; our ability to protect our patents, copyrights and trademarks; our reliance on furniture dealers to produce sales; lawsuits arising from patents, copyrights and trademark infringements; violations of environmental laws and regulations; potential labor disruptions; adequacy of our insurance policies; the availability of future capital and the cost of borrowing; the overall strength and stability of our dealers, suppliers, and customers; access to necessary capital; our ability to successfully integrate acquired businesses; the success of our design and implementation of a new enterprise resource planning system; and currency rate fluctuations. The factors identified above are believed to be important factors but not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any forward-looking statement. Unpredictable or unknown factors could also have material adverse effects on us. All forward-looking statements included in this Form 10-K are expressly qualified in their entirety by the foregoing cautionary statements. Except as required under the Federal securities laws and the rules and regulations of the SEC, we undertake no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise. Overview We design, manufacture, market and sell high-end commercial and residential furniture, accessories, textiles, fine leathers and designer felt for the workplace and residential markets, as well as modern outdoor furniture. We work with clients to create inspired modern interiors. Our design-driven businesses share a reputation for high-quality and sophistication offering a diversified product portfolio that endures throughout evolving trends. Our products are targeted at the middle to upper-end of the market where we reach customers primarily through a broad network of independent dealers and distribution partners, our direct sales force, our showrooms, and our online presence. COVID-19
The global outbreak of the coronavirus disease 2019 ("COVID-19") was declared a pandemic by the World Health Organization and a national emergency by the U.S. Government in March 2020. It has negatively affected the U.S. and global economy, disrupted global supply chains, resulted in significant travel and transport restrictions, including mandated closures and orders to "shelter-in-place," and created significant disruption of the financial markets. The ultimate extent of the impact of the COVID-19 pandemic on our operational and financial performance, including our ability to manufacture and ship product in the expected timeframe, will depend on future developments, including the duration and spread of the pandemic and related actions taken by the U.S. government, state and local government officials, and international governments to prevent disease spread, all of which are uncertain and cannot be predicted. During 2020, we experienced a significant decline in our commercial sales volume as a result of a large portion of the North American and European workforce shifting from working in offices to remote working environments. Our commercial clients have delayed or postponed orders, and new order generation was significantly lower than pre-pandemic levels during 2020. In addition, we have experienced the temporary closures of certain facilities. At many of our facilities, we have been experiencing reduced productivity and increased employee absences. As a result of the COVID-19 pandemic and the measures taken to prevent the spread of the disease or to address its effect, a significant number of our employees are working from home, and we have altered our manufacturing operations to allow for appropriate social distancing, hygiene, cleaning, and disinfecting. In our supply chain, we have experienced isolated instances of suppliers temporarily closing their operations, delaying order fulfillment or limiting their production, and we are utilizing alternative supply arrangements as needed.
Our efforts to diversify our sources of revenue among our operating segments has not detracted from our continued focus on improving the operating performance of our Office segment. We announced a restructuring plan in January 2020 involving a reduction of our fixed cost footprint that will occur over the next two years and will yield significant savings on an annualized basis as we near the end of 2021. A significant component of the plan involved the closure and sale of our Grand Rapids, Michigan facility, which was completed at the end of the second quarter of 2020. Additionally, we executed further reductions in force of approximately 20% of our global workforce. The lean initiatives that were executed over the past several years, as well as the cost cutting initiatives described above, have helped to temper the margin impacts from reduced sales volume because of the current economic environment.
infrastructure upgrades, continued investments in our manufacturing facilities focusing on lean initiatives and showroom presence.
2020 and December 31, 2019 Year Ended December 31, 2020 vs. 2019 2020 2019 $ Change % Change (Dollar in millions) Net Sales $ 1,236.4 $ 1,428.1 $ (191.7) (13.4) % Gross profit 442.7 549.0 (106.3) (19.4) % Selling, general, and administrative expenses 375.4 411.9 (36.5) (8.9) % Restructuring charges 25.9 0.8 25.1 3,023.9 % Loss on fair value measurements 13.8 6.5 7.3 111.8 % Operating profit 27.6 129.8 (102.2) (78.7) % Pension settlement charges 4.8 21.0 (16.2) (77.1) % Interest expense, net 17.4 21.7 (4.3) (20.2) % Other expense (income), net (1.5) (3.8) 2.3 (61.6) % Income tax expense (benefit) (0.8) 23.4 (24.2) (103.0) % Net earnings 7.7 67.5 (59.8) (88.7) % Net earnings attributable to Knoll, Inc. stockholders 4.4 67.5 (63.1) (93.5) % Net earnings per common share attributable to Knoll, Inc. stockholders: Basic $ 0.09 $ 1.38 $ (1.29) (93.5) % Diluted $ 0.09 $ 1.36 $ (1.27) (93.4) % Statistical Data Gross profit % 35.8 % 38.4 % Operating profit % 2.2 % 9.1 %
Operating expenses were $415.1 million for the year ended 2020, or 33.6% of net sales, compared to $419.2 million, or 29.4% of net sales, for the year ended 2019. The decrease in operating expenses was related primarily to a reduction of Selling, general and administrative expenses due to reduced employment costs including workforce reduction actions, lower volume-based compensation, and lower benefit costs, combined with reduced discretionary spending partially offset by the inclusion of Fully, restructuring charges associated with the Company's closure of its Grand Rapids, Michigan manufacturing plant and consolidation of operations into its remaining North American manufacturing plants. Operating expenses also included a $12.4 million contingent consideration remeasurement charge related to Fully and a $1.4 million of intangible asset impairment in 2020, and $6.5 million of intangible asset impairment in 2019.
Comparison of Consolidated Results for the Years Ended December 31, 2019 and December 31, 2018
Year Ended December 31, 2019 vs. 2018 2019 2018 $ Change % Change (Dollar in millions) Sales $ 1,428.1 $ 1,302.3 $ 125.8 9.7 % Gross profit 549.0 481.5 67.5 14.0 % Selling, general, and administrative expenses 411.9 363.7 48.2 13.3 % Restructuring charges 0.8 2.6 (1.8) (68.3) % Intangible asset impairment charge 6.5 - 6.5 100.0 % Operating profit 129.8 115.2 14.6 12.6 % Pension settlement charge 21.0 5.7 15.3 265.8 % Interest expense 21.7 20.9 0.8 4.0 % Other income, net (3.8) (9.6) 5.8 (60.0) % Income tax expense 23.4 24.9 (1.5) (5.9) % Net earnings 67.5 73.3 (5.8) (8.0) % Net earnings attributable to Knoll, Inc. stockholders 67.5 73.3 (5.8) (8.0) % Net earnings per common share attributable to Knoll, Inc. stockholders: Basic $ 1.38 $ 1.51 $ (0.13) (8.6) % Diluted $ 1.36 $ 1.49 $ (0.13) (8.7) % Statistical Data Gross profit % 38.4 % 37.0 % Operating profit % 9.1 % 8.8 % A discussion of our financial performance for the year ended December 31, 2019 compared to the year ended December 31, 2018 can be found under the same captions in Item 7 of the Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 21, 2020. Segment Reporting The Company manages our business through our reportable segments: Office and Lifestyle. All unallocated expenses are included within Corporate. The Office . . .
Mar 01, 2021
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