ITEM 1. BUSINESS
General
Knoll, Inc. (“Knoll,” the “Company,” “we,” “us,” “our”) is a leading global manufacturer of commercial and residential furniture, accessories, lighting and coverings, including textiles, felt and leather. Our constellation of design-driven brands coupled with our perspectives on space planning allow our clients to create inspired modern interiors. Simply stated, we provide the furnishings to bring the beauty and benefits of modern design to the way people live and work. Our businesses represent a diversified portfolio that responds to evolving trends and performs throughout business cycles, sharing reputations for high-quality and sophistication. To the architects and designers we work with, to our clients in the commercial, education, healthcare, hospitality and government sectors, and to the many consumers we reach, Knoll represents a commitment to innovative solutions and an unmatched heritage of modern design.
How people live and work is constantly being reshaped by changing technology and lifestyle trends. Our founders, Hans and Florence Knoll, believed in the power of design to enhance people’s lives. Since our founding over 80 years ago, Knoll has been featured in creative, inspiring workplace and residential settings, won a place in iconic settings and in museums worldwide and earned numerous design honors and awards. Today, we have an unsurpassed collection of classic products to introduce, and reintroduce, as well as groundbreaking new designs. We leverage strong relationships with contemporary furniture and industrial designers, and a reputation that attracts talented new designers.
We focus on two distinct markets, commercial and residential. We target commercial workplace clients through our direct sales force that is focused on furnishing offices by working with independent dealers, designers, architects, and decorators. We serve residential consumers directly and through “to the trade” specifiers including designers and architects, through our online marketspace, retail shops and showrooms. In the residential market, the fastest growing area of our business, we are expanding further into the digital space through our brand websites, and into consumer and decorator channels worldwide, leveraging our experience with products that cross-over between the office and the home. In commercial workplace, the largest portion of our business, we see strategic opportunities through the expansion of under-penetrated categories and ancillary markets.
We manage our business through our reportable segments: Office and Lifestyle. All unallocated costs are included within Corporate.
The Office segment addresses diverse workplace planning paradigms in domestic and international markets, creating high-quality performing spaces with open plan and private furniture, architectural elements, collaborative and ergonomic seating and modular storage. Product categories include: office systems furniture, seating, storage, tables, desks and KnollExtra® accessories. The Office segment includes DatesWeiser®, known for signature spaces with refined and flexible conference furniture platforms that set a standard of design, quality and technology integration, as well as Fully®, which offers standing desks, high-performance adjustable height desks, ergonomic chairs and accessories principally for individual home offices and small businesses.
The Lifestyle segment includes KnollStudio®, HOLLY HUNT®, KnollTextiles®, Spinneybeck® | Filzfelt®, Edelman® Leather and Muuto®. KnollStudio products, which are distributed primarily in North America, Europe, the Middle East and Asia, include iconic seating, lounge furniture, side, café and dining chairs as well as conference, training, dining and occasional tables, lighting, rugs, textiles, high-quality fabrics, felt, leather and related architectural products. Many of these products cross-over between residential settings and the workplace.
The Corporate function represents unallocated costs related to shared services and general corporate activities including, but not limited to, legal expenses, acquisition expenses, certain finance, human resources, administrative and executive expenses and other expenses that are not directly attributable to an operating segment. Dedicated, direct selling, general and administrative expenses of the segments are included within segment operating profit. As we continue to grow both organically and through acquisitions, the central support of the Corporate function will evolve and grow as well.
For further information regarding our segments see the section below and Note 22 in the accompanying financial statements.
The global outbreak of the coronavirus disease 2019 (“COVID-19”) 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. 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 during 2020 was significantly lower than pre-pandemic levels. In addition, we have experienced 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.
Like us, many of our clients have been significantly impacted by the COVID-19 pandemic. A significant portion of the overall global workforce is, and has been for the majority of 2020, working remotely. COVID-19 continues to cause delays in the ability for companies to bring people back to the office and, when people are able to return, the workplace will likely be different from the workplaces that existed prior to the pandemic. This massive and sudden shift to remote work has had a significant impact on our commercial business and the commercial furniture industry as a whole. The duration, permanency and overall magnitude of these impacts on the workplace are still unknown.
Further, the shifts in “where” and “how” people work have also created opportunities for other parts of our business. Our “work-from-home” and residential businesses have experienced some positive opportunities in 2020. As people spent more time in their homes, and have been limited in travel and other recreational options, we have seen increases in the residential and direct-to-consumer parts of our business. Our previous diversification strategies away from office and into the lifestyle side of our business enabled us to better take advantage of these opportunities.
Strategy
Whether a commercial or residential end user, we solve a variety of needs for each customer. We draw on our constellation of businesses and brands to provide products and designs that meet the needs of our customers. Our offerings range from classic signature pieces to ancillary products like the Rockwell Unscripted® collection by The Rockwell Group, the vast product portfolio of Muuto and the products offered through the digital space of Fully; to dramatic textiles, and Filzfelt architectural products for acoustical control. Our goal for each engagement is to maximize the opportunity from the start. To that end, we deploy strategic programs to better synchronize our office and lifestyle teams and resources to deliver a single compelling customer experience. We continue to invest in technology, from enhancing our e-commerce platforms to technology for our dealer partners to make it easier to do business with Knoll.
Our residential and e-commerce businesses experienced significant growth during 2020, most notably through our e-commerce channels and work-from-home product offerings. As the pandemic caused much of the world economy to adapt to working in remote environments, we believe there has been a paradigm shift in how people will work going forward. Rather than being in an office setting five days a week, there is ample evidence to suggest a more hybrid approach to working, where employees will work both remotely and from an office during the work week. We believe the work-from-home market will continue to grow and be a permanent component of the total market going forward. For this reason, we continue to invest in technology and infrastructure to support our digital and residential businesses.
Our commercially oriented businesses experienced significant decline during 2020 due to the economic environment caused by the pandemic. As a response, we initiated cost reduction initiatives that involved temporary and permanent reductions in our workforce, discretionary spending reductions and other measures. We will continue to exercise discipline in our spending habits, especially in our workplace businesses.
Our growth strategy also focuses on specific international markets where we can significantly build our share, such as Canada, Mexico, Europe, Asia, the Middle East, and selected under-penetrated areas across the globe where there is a concentration of discerning clients.
Office Segment
Maximizing the sales growth and profitability of Office, our largest segment, has been a continuing priority. With respect to growth in our Office segment, a variety of initiatives will contribute to making this growth possible: broadening our Workplace products portfolio; enhancing sales coverage strategically, including a focus on global accounts; and capturing a greater share of our dealers' ancillary sales. At the same time, we aim to increase profitability through operational improvements and investments in our infrastructure. The acquisition of Fully in August 2019 provides the Office segment with a high-quality, cost-effective complement to our portfolio of office solutions, while also broadening our consumer work from home market through an e-commerce platform. Our lean manufacturing initiative, combined with continued modernization of our facilities, is allowing us to progressively deliver on this goal.
The commercial market has shifted dramatically in the last decade and we believe that shift will accelerate as a result of the COVID-19 pandemic. Clients are looking at an entire ecosystem of workplace locations, from office to home, to address hybrid workstyles, and Knoll has the portfolio to support any mode or place of work. Within the office, clients continue to flex the relationship between individual and collaborative, shared spaces. The office itself is continuing to migrate toward becoming a more "we" space than a "me" space, dedicated to collaboration, both in person and with colleagues working remotely. The imperative to create offices that draw workers in will only increase as the flexibility as to where and when one works evolves. This bodes well long-term for a design-driven brand like Knoll with a robust collaborative and ancillary product breadth. Our constellation of businesses positions us well to deliver in the evolving work environment, where people choose how and where they work throughout the day, as the traditional boundaries between residential and workplace products blur, and the importance of a total environment outshines any one particular element.
We are looking beyond traditional office product categories - systems, task seating and storage - to furniture for shared spaces and the in-between spaces where people meet. We believe that our success in our traditional office products gives us an advantage throughout the workplace ecosystem. As we design new products suited to these more flexible or hybrid spaces, we are also responding to demands at different price points with different materials and finishes. Our Rockwell Unscripted™ collection, including architecturally inspired Creative Wall®, brings a sense of theater and play to the workplace, putting people at the center of the work life experience and creating a warm and welcoming place where people want to be. Rockwell Unscripted Creative Wall has been successful in allowing clients to delineate space in the open environment, creating spaces for teams or individuals to focus and work. In 2020, we also introduced an innovative line of meeting tables, Islands Collection by Knoll, that supports the ever-increasing demand for hybrid meeting spaces. Our breadth of height-adjustable tables, including k.TM Stand, k.TM bench, Tone® and Antenna® Telescope® continue to receive national industry recognition for its straightforward and adaptable concept that delivers a clean, compact workstation solution with intuitive adjustments and people centered design.
With the evolution from individual workstations to collaborative spaces and ancillary products, Knoll is not only expanding the breadth of our offerings through our constellation of brands but also strengthening our presence in the marketplace. We are continuing to partner with our dealers to ensure our customers understand that Knoll provides not just systems or workstations and work chairs but rather a complete family of complementary ancillary products. Together, we are meeting the demands of our customers while attempting to capture more of their total spend and elevating the profitability of our engagements.
This approach has served as a catalyst for dealers to invest in their spaces. Their showrooms are becoming extensions of our own, offering not just product showcases but places to find new integrated workplace solutions from all of Knoll. Dealers help people to understand workplace needs and planning capabilities, and Knoll is providing more of the training and education that helps them add value and increase their profits when they sell Knoll.
In January 2020, the Company announced its plan to consolidate its manufacturing footprint in North America, resulting in the closure of the Grand Rapids, Michigan manufacturing facility. The closure was part of an initiative to better optimize the Company’s North American manufacturing operations. In June 2020, the Company completed the sale of that facility.
Our principal Knoll Office product lines, described below, include systems furniture, seating, storage, tables, desks and KnollExtra ergonomic accessories. The Office segment comprised approximately 62.7% of our sales in 2020, 61.2% of our sales in 2019, and 60.1% of our sales in 2018.
Systems Furniture
Our office systems furniture encompasses a range of architect and designer-oriented products at different price levels, with a variety of planning models and product features. Systems furniture comprises integrated panels or table desks, work surfaces and storage units, power and data systems, and lighting. Many of these components can be moved, re-configured and re-used to create flexible, space-efficient work environments, tailored to each organization's business objectives with wide range of laminates, paints, veneers and textiles. Knoll systems can adapt to virtually any office environment, from team spaces to private executive offices. Through product line enhancements for clients to add to their installations, and through integration with other Knoll lines, we maximize the long-term value of their investment in Knoll.
Knoll systems furniture product lines include these panel, spine, technology wall and desk-based planning models:
•Rockwell Unscripted ®
•Antenna® Workspaces, including the new Antenna Power Beam
•AutoStrada®
•Currents®
•Dividends Horizon®
•Reff® Profiles
Seating
We constantly research and assess the general office seating market and offer a range of work chairs that are diverse in scale, aesthetic and performance, and enhances Knoll’s reputation for ergonomics and value. The result is an increasingly innovative, versatile seating collection consistent with the Knoll brand.
Clients evaluate work chairs based on ergonomics, aesthetics, comfort, quality and affordability. We offer market leading, high quality office chairs at a range of price points, performance levels and materials.
Our principal seating product lines include:
•LIFE®
•Generation by Knoll®
•MultiGeneration by Knoll®
•ReGeneration by Knoll®
•Remix™
•Ollo™
Files and Storage
Our files and storage products featuring the Anchor©, Calibre®, Series 2TM and Quoin® product lines, are designed with unique features to maximize storage capabilities and personalization throughout the workplace. Our core files and storage products consist of lateral files, mobile pedestals and other storage units, bookcases and overhead cabinets.
The range of files and storage augments our product offerings, allowing clients to address all of their office furniture needs with us, especially in competitive bid situations where Knoll systems, seating, tables and desks have been specified. The breadth of the product line also enables our dealers to offer stand-alone products to businesses that have smaller storage requirements. Files and storage are available in a wide range of sizes, configurations and colors, which can be integrated with other manufacturers' stand-alone furniture. In addition, some elements of the product line can be configured as freestanding furniture in private offices or open-plan environments.
Our principal storage product lines include:
•Anchor™
•Calibre®
•Series 2™
•Rockwell Unscripted®
•Quoin®
Desks and Tables
We offer collections of adjustable tables as well as meeting, conference, training, dining, stand-alone and table desks.
Our Tone™, Upstart® and Antenna® Simple Tables and Rockwell Unscripted® product lines include adjustable, work, meeting, conference and training tables. Tone, a comprehensive collection of height-adjustable tables compatible with the Dividends Horizon, Antenna Workspaces, and Reff Profiles systems. Tone features a wide range of support and adjustment options that integrate seamlessly with Knoll open plan, private office and activity spaces furniture, or are used independently to create flexible work areas. We also introduced Hipso, a height-adjustable desk targeted to the work-from-home consumer. In addition, we expanded the Reff Profiles product line with a series of meeting tables, and introduced the Islands Collection by Knoll. Our k. bench and k. stand products offer height-adjustable tables, which are easy to specify, assemble and use, offer an expanded price point option for today's office needs.
DatesWeiser
Our Office segment includes DatesWeiser which produces refined and flexible high-end contemporary conference furniture product platforms, including HiGHLiNE®, that feature a broad range of finishes across wood, metal, glass and stone. DatesWeiser's customers tend to be within the elite professional services markets. DatesWeiser's product offerings specialize in solutions to meet the needs of business interiors.
Fully
Our Office segment includes Fully which focuses on a human-centered approach to work with products designed to create a healthy and supportive work environment. Fully, a certified B Corp, offers high-performance adjustable height desks, tables, ergonomic seating and accessories principally for individual home offices and small businesses. Fully is a direct-to-consumer furniture and lifestyle brand that addresses the small business and consumer markets through its e-commerce platform.
KnollExtra®
KnollExtra offers accessories that complement Knoll office furniture products, including technology support accessories, desktop organizational tools, lighting and storage. KnollExtra integrates technology comfortably into the workplace, with flat panel monitor supports and central processing unit holders that deliver adjustability and save space. The Sapper Monitor Arm Collection, designed by renowned industrial designer Richard Sapper, offers a clean, modern solution to technology challenges in the modern workplace; the collection is now in the permanent collection of New York's Museum of Modern Art. KnollExtra also includes marker boards, free-standing and mounted LED lighting and other technology support for the changing workplace.
Lifestyle Segment
The Lifestyle segment includes KnollStudio, HOLLY HUNT, Muuto, KnollTextiles, Spinneybeck | Filzfelt, and Edelman Leather. KnollStudio® products, which are distributed primarily in North America and Europe, include iconic seating, lounge furniture, side, café and dining chairs as well as conference, training, dining and occasional tables. HOLLY HUNT is known for high quality residential furniture, lighting, rugs, textiles and leathers. In addition, HOLLY HUNT also includes Vladimir Kagan Design Group, a renowned collection of modern luxury furnishings. The KnollTextiles, Spinneybeck | FilzFelt, and Edelman Leather businesses provide a wide range of customers with high-quality fabrics, felt, leather and related architectural products. Muuto offers ancillary products and affordable luxury residential furnishings, which includes seating, lounge furniture, dining and occasional tables, lighting and accessories. These offerings allow the Lifestyle segment to provide products for an all-encompassing “resimercial”, high performance workplaces, as well as furnish a range of living spaces from uber to affordable-luxury living spaces.
KnollStudio
Drawing upon Knoll's iconic heritage, KnollStudio elevates residential and commercial environments with inspiring classic and contemporary designs that embody quality and craftsmanship.
For over eighty years, Knoll has worked with celebrated architects and designers from around the world, including Ludwig Mies van der Rohe, Marcel Breuer, Harry Bertoia, Eero Saarinen, Isamu Noguchi, Warren Platner, Frank Gehry, Maya Lin and Richard Schultz, among others. Many of their designs have remained in production since their initial launch, while others have been mined from the archives and re-imagined in recent years for a contemporary audience.
Today, KnollStudio works with today's most innovative thinkers worldwide to bring exceptional modern design to the home and office, collaborating with groundbreaking contemporary designers and architects including David Adjaye, Edward Barber, Mark Krusin, Piero Lissoni, Marc Newson and Jay Osgerby, to create future classics for residential and commercial markets. Signature KnollStudio designs display elevated detailing, artistry and comfort, across price points, and often draw designers and customers into the larger Knoll constellation of brands. Moving forward, KnollStudio has a multi-year strategy to build its classics portfolio by mining its archive and adding new finishes, as well as to grow its contemporary collections for both home and office with innovative designs by the new voices of today.
Our principal KnollStudio product lines include seating, storage, lounge furniture, side, café and dining chairs as well as conference, dining, training and occasional tables. While KnollStudio designs represent different viewpoints and eras, they all embrace a Modernist aesthetic. As a result, designers can integrate our ensemble of products into harmonious and inspiring settings furnished entirely with Knoll products.
With the trend towards residentially-inspired workplaces, KnollStudio products have gained cross-over appeal between residential and workplace. In North America, the workplace ancillary sales team continues to expand its reach, with a focus on corporate projects, hotels and restaurants, as well as government and educational institutions. To grow its residential channel, KnollStudio has expanded its audience in recent years through a to-the-trade showroom in New York City's Decoration & Design building, branded flagship Knoll Home Design Shops in New York City and Los Angeles, as well as the knoll.com website, which reach retail consumers and designers alike. Additionally, the company continues to invest in the Knoll Space retail sales program, which brings consumers the best of Knoll furnishings for their home and home office, through approximately 50 specialty retailers and e-tailers throughout the United States and Canada.
In addition to our presence in North America, KnollStudio is represented by showrooms in Paris, London and Milan and through our exclusive network of retailers throughout Europe and Asia. Our presence in the European market pursues the Company’s objective of offering design, innovation, functional excellence and quality, and extending our reach into all markets through an intensive network of selected dealers.
HOLLY HUNT
For almost 40 years, HOLLY HUNT has been the preeminent leader in the to-the-trade, high-end, luxury home furnishings sector. At HOLLY HUNT we design, produce, represent and showcase the highest caliber custom design pieces for the most exquisite interior properties around the world, including indoor and outdoor furniture, lighting, rugs, wall covering, textiles, leathers, art and accessories. As the foremost to-the-trade provider and distributor of home luxury furnishings, HOLLY HUNT’s strategy continues to optimize the seamless integration of our digital capabilities with our network of brick and mortar showrooms to offer a state-of-the-art, omnichannel specifying and purchasing experience so designers and architects can engage with the brand whenever and however they choose. We continue to evolve our leading product categories and best-in-class client and operational service levels across domestic, international and digital trade channels through the highest quality designs, service and showroom settings. There are currently fourteen HOLLY HUNT-owned showrooms in the United States and London, along with partner showrooms in major markets, and an expanding international presence.
KnollTextiles
KnollTextiles is renowned for enriching spaces with color, pattern and textures. In addition to a direct sales force, KnollTextiles distributes its products through a showroom in New York City's Decoration & Design building, Knoll consumer retail spaces in New York City and Los Angeles and through the knolltextiles.com website. KnollTextiles products appeal to contract, hospitality, education and residential clients and we offer a full range of products in the Modernist tradition from upholstery and drapery to wall coverings and healthcare curtains including some of the industry's most technically advanced materials. Our KT Collection of upholstery marries classic modern design for everyday use, in a range of high-performance patterns and textures. Against the backdrop of the rich and storied work of Florence Knoll, KnollTextiles combines beauty and function, producing fresh perspectives for contemporary interiors.
Spinneybeck | FilzFelt
Spinneybeck | FilzFelt has expanded from being exclusively a supplier of raw material to a provider of leather, felt, plaster, cork and wood finished products that enhance the architectural and acoustic experience of commercial, education and hospitality settings. The same trends that have been transforming Knoll Office workspaces have created new opportunities for architectural and acoustic products that offer flexible space division and sound control. Spinneybeck and FilzFelt have evolved, respectively, from an upholstery leather company and 100% wool felt provider to a comprehensive natural materials resource. This approach provides specifiers and clients with architectural and
acoustic solutions that leverage the opportunity for more large-scale orders. Our full Spinneybeck | Filzfelt assortment includes upholstery and wall coverings, modular acoustic wall tiles and panels, ceiling baffles and screens.
Edelman Leather
Our Lifestyle segment includes Edelman Leather which offers beautiful, natural leathers for the global design community. Edelman is a "to-the-trade" supplier and goes to market by leveraging seven branded showrooms and sales representation around the world. Edelman successfully expanded beyond leather coverings, and now offers architectural products for floor and wall application, as well as a collection of accent pieces including area rugs, and small furnishings (mirror, ottomans, and tables). Edelman also has distribution reach into hospitality, contract furnishing, and aviation market segments.
Muuto
The acquisition of Muuto in January 2018 added a resimercial, design-driven provider of affordable luxury furniture, lighting and accessories for the workplace and home to our Lifestyle segment. Muuto is rooted in Scandinavian design traditions characterized by enduring aesthetics, functionality, craftsmanship and an honest expression. Muuto products pair seamlessly with the range of modern Knoll designs, offering an expanded breadth and depth of affordable luxury products with forward-looking ideas to reflect today's work and lifestyles, and particular appeal to a younger generation of architects, designers and clients seeking a homier, more relaxed aesthetic.
Muuto's principal furniture product lines include:
•Outline Series
•Nerd Series
•The Dots Series
•Fiber Chairs
•Visu Chairs
The Lifestyle segment represented approximately 37.3% of our sales in 2020, 38.8% of our sales in 2019, and 39.9% of our sales in 2018.
Product Design and Development
Our design philosophy and modern perspective reflects a historical commitment to partnering with preeminent industrial designers and architects to commercialize products that meet evolving workplace and residential needs. By combining designers' creative vision with our commitment to innovative materials and technologically advanced processes, we continue to cultivate brand loyalty among target clients. Our enviable history of nurturing the design process fosters strong, lasting relationships that attract the world's leading designers. In addition, these collaborations are consistent with our commitment to a lean organization and incentive-based compensation, by utilizing a variable royalty-based fee as opposed to the fixed costs typically associated with a larger in-house design staff.
Our broad range of workplace research, which explores the connection between workspace design and human behavior, health and performance, and the quality of the user experience, drives our workplace product development initiatives. Recent research initiatives include a study of new ways to think about the post Covid-19 pandemic workplace, referred to as "The Thriving Workplace".
In addition, our Office and Lifestyle segments product development relies upon a New Product Commercialization Process to ensure quality and consistency of our methodology, reducing product development cycle time without sacrificing quality objectives. We use Pro/ENGINEER® solids modeling tools and rapid prototyping technology to compress development cycles and to improve responsiveness to special requests for customized solutions. Working closely with the designers during the early phases of development provides critical focus to yield the most viable products, balancing innovative modern design with practical function. Cross-functional teams are employed for all major development efforts with dedicated leaders who facilitate a seamless flow into manufacturing while aggressively managing cost and schedule opportunities. Increasingly, total environmental impact is factored into product material and manufacturing process decisions.
Sales and Distribution
We generate workplace sales with our direct sales force and through a network of independent dealers, who jointly market and sell our products. We generally rely on these independent dealers to also provide a variety of important specification, installation and after-market services to our clients. Our dealers generally operate under short-term (one to three year), non-exclusive agreements. Our residential sales products are sold by our own internal sales force through a network of retail shops and showrooms, as well as through a network of independent retailers and e-commerce platforms.
Our workplace clients are typically Fortune 1000 companies, governmental agencies and other medium-to-large sized organizations in a variety of industries including financial, legal, technology, entertainment, accounting, education, government, healthcare and hospitality. Our direct sales force and independent dealers in North America work in close partnership with clients and design professionals to specify distinctive work environments. Our direct sales representatives, in conjunction with the independent dealers, sell to and call directly on key clients. Our independent dealers also call on many other medium and small sized clients to provide seamless sales support and client service.
We have aligned our sales force to target strategic areas of opportunity to include global accounts, healthcare, higher education, government and others. We have also placed sales representatives and technical specialists into certain dealerships to support programs such as Knoll Essentials, which is described below. Additionally, we have provided specification tools to our dealers and sellers that enable them to share with our clients real time visual simulations and renderings from our complete product offerings.
In addition to coordinating sales efforts with the sales representatives, our dealers generally handle project management, installation and maintenance for client accounts after the initial product selection and sale. Although many of these dealerships also carry products of other manufacturers, they have agreed not to act as dealers for our principal direct competitors. We have not experienced significant dealer turnover. Our dealers' substantial commitment to understanding our product lines, and their strong relationships with us, serve to discourage dealers from changing vendor affiliations. We are not significantly dependent on any one dealer, the largest of which accounted for approximately 6.4%, 6.5%, and 4.8%, of our total North American sales in 2020, 2019, and 2018, respectively.
As part of our commitment to building relationships with our dealers, we offer the Knoll Essentials program. Knoll Essentials is a catalog program developed in response to dealer requests for a consolidated, user-friendly selling tool for day-to-day systems, seating, storage, and accessory products. The Knoll Essentials program includes dealer incentives to sell our products. We also employ a dedicated team of dealer sales representatives to work with our dealerships.
Sales to U.S. and state and local government agencies, respectively, aggregated approximately 5.5% and 6.4%, respectively, of our consolidated sales in 2020. The U.S. government typically can terminate or modify any of its contracts with us either for its convenience or if we default by failing to perform under the terms of the applicable contract.
Our residential sales are sold through a global network of showrooms, e-commerce websites, retail stores and independent dealers. Our clients range from “to the trade” professionals, such as interior designers, to individual consumers. With the acquisition of Fully in August 2019, we significantly expanded our e-commerce presence. Certain of our Knoll and Muuto seating and accessory products are sold through fully.com as a compliment to the height-adjustable desk, storage, seating and other work-from-home and small business offerings from Fully. During 2020, we launched our "ready-to-ship" Knoll + Muuto Work from Home e-commerce portfolio at knoll.com, including work from home, living and dining furniture as well as lighting and accessories, bringing the trademark design, comfort and performance of both brands to consumers. We intend to continue to invest in the development of our digital platforms.
Our products and knowledgeable sales force have generated strong brand recognition and loyalty among architects, designers and corporate facility managers, all of whom are key decision-makers in the furniture purchasing process. Our strong relationships with architects and design professionals help us stay abreast of key workplace and residential furniture trends and position us to better meet the changing needs of clients.
Manufacturing and Operations
Our global supply chain manufactures and assembles products to specific customer orders and operates all facilities under a philosophy of continuous improvement and lean manufacturing. Our Office and Lifestyle segments are supported by operational and administrative facilities in Canada, the United States and Europe. Our Office segment, with the exception of Fully, produces the majority of its saleable products in our manufacturing facilities based in the United States, Canada and Europe, with the remaining components and products being produced by third party contract manufacturers. The Lifestyle segment and Fully use various third parties to manufacture a large portion, or all, of its saleable products and components.
We continue to look for ways to ensure that our manufacturing capabilities match our supply chain strategy providing the most value for Knoll. The root of our continuous improvement efforts lies in the philosophy of lean manufacturing that drives operations. As part of this philosophy, we partner with suppliers who can facilitate efficient and often just-in-time deliveries, allowing us to manage our raw materials inventory. We also utilize “Kaizen” work groups in the plants to develop best practices to minimize scrap, time and material waste at all stages of the manufacturing process. The involvement of employees at all levels ensures an organizational commitment to lean and efficient manufacturing operations. These projects improve customer responsiveness, quality and significantly improve productivity.
In January 2020, we announced that we would consolidate our manufacturing footprint in North America, resulting in the closure of our Grand Rapids, Michigan manufacturing facility. We elected to undergo this restructuring in order to reduce our structural costs and better optimize our North American manufacturing footprint and supply chain. During 2020, substantially all manufacturing activities performed in our Grand Rapids, Michigan facility were migrated to our other North American facilities. See Note 15, Restructuring and Other Cost Reduction Initiatives, of Notes to the Consolidated Financial Statements for further information.
Raw Materials and Suppliers
In addition to the continued focus on enhancing the efficiency of the manufacturing operations, we also seek to reduce costs through our global sourcing effort. We have capitalized on raw material and component cost savings available through lower cost global suppliers. This broader view of potential sources of supply has enhanced our leverage with domestic supply sources, and we have been able to reduce cycle times by extracting improvements from all levels throughout the supply chain.
The purchasing function in North America is centralized at the East Greenville, Pennsylvania facility for Office, KnollStudio North America, and Textiles. This centralization, and the close relationships with our primary suppliers, has enhanced our ability to realize purchasing economies of scale and implement “just-in-time” inventory practices. Steel, lumber, paper, paint, plastics, laminates, particleboard, veneers, glass, fabrics, leathers, upholstery filling material, aluminum extrusions and castings are used in our manufacturing process. The purchasing function for Office and KnollStudio Europe is based in Italy; Muuto is based in Denmark; Holly Hunt is based in Illinois; Edelman is based in Connecticut; Fully is based in Oregon; Spinneybeck and DatesWeiser are based in New York.
Both domestic and overseas suppliers of these materials are selected based upon a variety of factors, with the price and quality of the materials and the supplier's ability to meet delivery requirements being primary factors in such selection. We do not generally enter into long-term supply contracts and, as a result, we can be vulnerable to fluctuations in the prices for these materials. No supplier is the only available source for a particular component or raw material. However, because of the specialization involved with some of our components, it can take a significant amount of time, money and effort to move to an alternate source.
Backlog
As of December 31, 2020 and 2019, the company's backlog of unfilled orders was $192.9 million and $249.6 million, respectively. We expect that substantially all the orders comprising the backlog at December 31, 2020, will be filled during the next fiscal year. Many orders received by the Company are reflected in the backlog for only a short period while other orders specify delayed shipments and are carried in our backlog for up to one year. Accordingly, the amount of the backlog at any particular time does not necessarily indicate the level of net sales for a particular succeeding period.
Competition
The markets in which we compete are highly competitive. In the commercial sector we compete on the basis of (i) product design, including performance, ergonomic and aesthetic features; (ii) product quality and durability; (iii) relationships with clients, architects and designers; (iv) strength of dealer and distributor network; (v) on-time delivery and service performance; (vi) commitment to environmental standards by offering products that help clients achieve LEED® (Leadership in Energy and Environmental Design) certified facilities and minimize environmental impact; and (vii) price. We estimate that our share of the North American workplace market in 2020 and 2019 was 7.8% and 7.8%, respectively.
Some of our workplace competitors, especially those in North America, are larger and have significantly greater financial, marketing, manufacturing and technical resources than us. Our most significant competitors in primary markets are Herman Miller, Inc., Steelcase, Inc., Haworth, Inc. and, to a lesser extent, Teknion Corporation and Allsteel, Inc., an operating unit of HNI Corporation. These competitors have a substantial volume of furniture installed at businesses throughout North America, providing a continual source of demand for further products and enhancements. Moreover, the products of these competitors have strong acceptance in the marketplace. For Muuto, we also compete against smaller open-line brands that can be sold through our own dealers. Despite our competitors' strength in the marketplace, we believe that we have been able to compete successfully in the markets to date.
Competition in the residential sector is much more fragmented than in the workplace market. Our Lifestyle businesses serve the mid-to high-end of the market, but compete against many companies, none of which has a dominant market share.
Patents and Trademarks
We consider securing and protecting our intellectual property rights to be important to the business. We own approximately 62 active U.S. utility patents on various components used in our products and systems and approximately 192 active U.S. design patents. We also own approximately 416 patents and design rights in various foreign countries. The scope and duration of our patent protection varies throughout the world by jurisdiction and by individual product. In particular, patents for individual products extend for varying periods of time according to the date a patent application is filed, the date a patent is granted and the term of patent protection available in the jurisdiction granting the patent (generally 20 years from the date of filing in the U.S., for example). We believe that the duration of the applicable patents we are granted is adequate relative to the expected lives of our products. We own approximately 114 trademark registrations in the U.S., including registrations to the following trademarks, as well as related stylized depictions of the Knoll word mark: Knoll®, KnollExtra®, Knoll Luxe®, KnollStudio®, KnollTextiles®, Good Design Is Good Business®, Antenna®, Calibre®, Currents®, Dividends®, Edelman® Leather, Modern Always®, Pixel®, Reff®, Sapper XYZ®, Spinneybeck® Leather, Toboggan®, Generation by Knoll®, Regeneration by Knoll®, MultiGeneration by Knoll®, Remix®, Rockwell Unscripted®, HighLine®, HOLLY HUNT®, GREAT OUTDOORS A HOLLY HUNT COLLECTION®, VLADIMIR KAGAN®, MUUTO® and FULLY®.
We also own approximately 304 trademarks and copyrights registered in foreign countries. The scope and duration of our trademark protection varies throughout the world, with some countries protecting trademarks only as long as the mark is used, and others requiring registration of the mark and the payment of registration.
In October 2004, we received registered trademark protection in the United States for five iconic furniture designs by Ludwig Mies van der Rohe-the Barcelona Chair, the Barcelona Stool, the Barcelona Couch, the Barcelona Table and the Flat Bar Brno Chair. In 2019, we received similar registered trademark protection for the iconic Eero Saarinen design for the Womb Chair. This protection recognizes the renown of these designs and reflects our commitment to ensuring that when architects, furniture retailers, businesses and individuals purchase one of these Ludwig Mies van der Rohe or Eero Saarinen designs, they are acquiring the authentic product, manufactured in accordance with the designer's historic specifications. Barcelona® is a registered trademark in the U.S., Canada and European Community owned by Knoll, Inc. Womb® is registered trademark in the U.S. and Canada owned by Knoll, Inc.
Environmental Matters
We believe that we are substantially in compliance with all applicable laws and regulations for the protection of the environment and the health and safety of our employees based upon existing facts presently known to us. Compliance with federal, state, local and foreign environmental laws and regulations relating to the discharge of substances into the environment, the disposal of hazardous wastes and other related activities has had and will continue to have an impact on our operations, but has, since 1990, been accomplished without having a material adverse effect on our operations. There can be no assurance that such laws and regulations will not change in the future or that we will not incur significant costs as a result of such laws and regulations. We have trained staff responsible for monitoring compliance with environmental, health and safety requirements. Our goal is to reduce and, wherever possible, eliminate the creation of hazardous waste in our manufacturing processes. While it is difficult to estimate the timing and ultimate costs to be incurred due to uncertainties about the status of laws, regulations and technology, based on information currently known to management, we do not expect environmental costs or contingencies to have a material adverse effect on our consolidated financial position, results of operations, competitive position, or cash flows. The operation of manufacturing plants entails risks in these areas, however, and we cannot be certain that we will not incur material costs or liabilities in the future which could adversely affect our operations.
We have been identified as a potentially responsible party pursuant to the Comprehensive Environmental Response Compensation and Liability Act, or “CERCLA,” for remediation costs associated with waste disposal sites previously used by us. CERCLA can impose liability for costs to investigate and remediate contamination without regard to fault or the legality of disposal and, under certain circumstances, liability may be joint and several resulting in one responsible party being held responsible for the entire obligation. Liability may also include damages for harm to natural resources. 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.
Human Capital Management
We are a constellation of design-focused businesses with talented associates who are passionate about our products, brands and customers. We realize that, along with our brands and products, our people are our most important assets. Accordingly, we are focused on attracting and retaining the most talented group of associates to help deliver our strategy and create value for our stakeholders.
Diversity and Inclusion
At Knoll, our differences contribute to our success. We are committed to diversity, equity and inclusion and creating opportunities for people who come from diverse cultural and ethnic backgrounds, gender identities, people with disabilities, and building on our leadership in LGBTQ+ equality. We believe that embracing diverse perspectives contributes to an inclusive workplace and strengthens the communities where we live and work. Knoll supports a continuous dialogue that promotes teamwork and differences.
We continue to build diversity, equity, and inclusion into our culture by focusing on:
•An ongoing commitment to educate ourselves and build a cultural competency
•Recruiting, retaining, and promoting diverse talent with action plans to drive better results in this area
•Accountability to establish appropriate metrics to hold ourselves accountable to our objectives
We made significant progress in our initiatives in 2020. We created and launched our Knoll, Inc. Diversity & Inclusion Council; an Employee Resource Group sponsored by our Chairman and Chief Executive Officer, President and COO Knoll Workplace and our SVP Human Resources. This Council of 15 members represents locations, functions and business segments across the organization and has identified initiatives in each of the 3 areas listed above. We are particularly proud of our establishment of the Knoll Diversity Advancement Design Scholarship for Black Students to support diversity advancements in our industry. We look forward to the first group of 5 scholarships being awarded this spring. Our Chairman and CEO also joined more than 1,300 CEOs who have pledged to take action to advance diversity and inclusion in the workplace through the CEO Action for Diversity and InclusionTM Pledge. Our work with Habitat for Humanity got under way this year as well which we believe aligns to our organizational values in many ways and notably supports making progress towards diversity equity and inclusion in our communities. This commitment to Habitat is one that supports giving by offering our consumers an ability to donate during the checkout process where their contribution is then matched dollar for dollar up to an annual commitment of $100,000. We have also committed to support four home builds in our communities per year both financially and through the help of our company volunteers.
Talent Development
We are committed to providing the development opportunities associates need to ensure Knoll has the talent to move forward. Our company-wide mentor program is available to all associates who wish to grow in their careers and build their internal networks. Regular talent and critical position reviews highlight associates to target for leadership development as we seek to build our internal talent pipeline. Our Knoll Leadership Program runs every other year for a new group of high potentials. Additionally, we provide a broader group of leaders with opportunities to grow through experiential learning as well as management fundamentals classes. All leadership development is rooted in the competencies and values laid out in our Leadership Success Profile. Learning resources and asynchronous options are available through our company intranet to further support development and create development opportunities for all associates.
Compensation
Our policy is to competitively compensate all employees for their contributions to Knoll, Inc. and to appropriately reward and motivate employees to deliver our business goals. We do this, in part, by closely monitoring and benchmarking compensation matters and working to ensure that our programs provide our associates with the right features to provide for their families and prepare for retirement. We provide competitive health and welfare benefits and retirement savings plans (401k), with matching employer contributions and profit sharing features. Retention of our talent is exceedingly important and drives how we design our programs. We closely monitor turnover statistics annually. Our voluntary turnover inclusive of retirements only averages 8%.
Health and Safety
Knoll’s health and safety programs are designed using the ISO 45001 global standards to address associate engagement, risk reduction, and measurable continuous improvement. Our programs strive to comply with all federal, state, provincial and local safety regulations, codes and standards. Knoll requires each of its locations to perform regular safety compliance audits to ensure proper safety policies, program procedures, industrial hygiene and training are in place. In addition, Knoll utilizes leading indicators to assess the health and safety performance of its operations, including near miss reporting, risk reduction, and behavior-based safety observations. Knoll recognizes that improvement of these leading indicators has led to a drastic reduction in workplace injury and severity. Lagging indicators include the OSHA Total Recordable Case Incident Rate ("TCIR") and the Day Away Case Rate ("DACR") based upon the number of incidents per 100 employees (or per 200,000 work hours). In 2020, Knoll Office had a TCIR of 0.65, a DACR of 0.05; a decrease of 26% and 83% from 2019, respectively. Our East Greenville, PA site is recognized by the U.S. Occupational Safety & Health Administration’s Voluntary Protection Program (VPP) for its low injury rates, employee engagement and training programs. We are proud of this recognition, as out of approximately 8 million workplaces in the U.S., only approximately 1,300 have earned VPP Star recognition.
COVID-19 Pandemic Response
In addition to our standard health and safety programs, this year we quickly responded to support our associates and to keep them safe and healthy during the COVID-19 pandemic. We took the following actions:
•We made COVID safety our first priority. Contact tracing, temperature checks, mask requirements, social distancing, signage and accommodations at each site per state and or local ordinances were implemented to ensure the safest work sites possible. We have managed through this time with very minimal positive cases and we've been overly cautious in our actions to limit exposure in the workplace.
•We supported flexibility in every way possible. We encouraged flexible schedules, shift changes as needed and a positive work-life balance. We have pivoted to meet the changing needs of our associates and our businesses.
•We provided resources. We have provided a constant stream of health, safety and wellness resources and reminders to our associates to help them manage the changes of our current “normal”. We encouraged open dialogue between associates and their Managers to assist people with solutions for their unique challenges. We coordinated commuter stipends for urban commuters and helped to create and communicate work from home furniture offerings at a generous discount to support our remote workforce.
•We escalated our communications processes. We updated associates frequently and consistently. Email, a new company Intranet, flyers, video monitor communications in the plants, a new online collaborative network group to support working parents, and company-wide town hall meetings have been used to keep associates up to date.
•We paid our associate bonus program four months early and our associates working in the plants received an additional amount specifically to thank them for their dedication during this challenging time.
Employee Data
As of December 31, 2020, we employed a total of 3,082 people, consisting of 1,588 hourly and 1,494 salaried employees. Certain employees in our Italian facilities are represented by unions.
Available Information
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are made available free of charge through the “Investor Relations” section of our website at www.knoll.com, as soon as practicable after such material is electronically filed with or furnished to the U.S. Securities and Exchange Commission.
ITEM 1A.
ITEM 1A. RISK FACTORS
RISK FACTORS
Risks Related to our Business
The COVID-19 pandemic has adversely affected and is expected to continue to pose risks to our business, results of operations, financial condition and cash flows, and other epidemics or outbreaks of infectious diseases may have a similar impact on us, as well as our customers and suppliers.
We face risks related to outbreaks of infectious diseases, including the ongoing COVID-19 pandemic. COVID-19 spread across the globe during 2020 and continues to impact economic activity worldwide. The COVID-19 pandemic and measures implemented to prevent its spread or address its effects have caused disruption and volatility in the global capital markets, and have resulted in a global slowdown in economic activity. In response to COVID-19, national and local governments around the world have instituted certain measures, including travel bans, prohibitions on group events and gatherings, shutdowns of certain businesses, curfews, shelter-in-place orders and recommendations to practice social distancing. Although our production facilities have remained substantially operational, these measures have resulted in attenuating activity, including required temporary closures of certain of our facilities and the closure of many showrooms and our retail locations. The duration of these measures is unknown, may be extended and additional measures may be imposed.
Our clients and potential clients have also been significantly impacted by the COVID-19 pandemic. A significant portion of the overall global workforce is working remotely. COVID-19 continues to cause delays in the ability for companies to bring people back to the office and, when people are able to return, the office will likely be different from the offices that existed prior to the pandemic. This massive and sudden shift to remote work has had a significant impact on our office business and the contract office furniture industry as a whole. The duration, permanency and overall magnitude of these impacts are still unknown.
Effects of COVID-19 and other similar outbreaks on the company include, but are not limited to, the following:
•Reduced consumer and investor confidence, instability in the credit and financial markets, volatile corporate operating results, and reduced business and consumer spending, which may adversely affect our results of operations by reducing our sales, margins and/or net income as a result of a slowdown in customer orders or order cancellations. In addition, volatility in the financial markets could increase the cost of capital and/or limit its availability.
•Actions from government mandates to corporate decisions that impact the ability of or decision to occupy offices could have the effect of dampening demand for our office/workplace products.
•Economic uncertainty as a result of COVID-19 and other similar outbreaks could make it difficult for our dealers, customers, suppliers and the Company to accurately forecast and plan future business activities.
•The potential to weaken the financial position of some of our customers. If circumstances surrounding our customers’ financial capabilities were to deteriorate, write-downs or write-offs of our customer receivables could negatively affect our operating results and, if large, could have a material adverse effect on our business, financial condition, results of operations and cash flow.
•Subsequent disruptions in our operations and our supply chain could occur.
To the extent the COVID-19 pandemic or other similar outbreaks adversely affects our business, results of operations, financial condition and cash flows, it may also heighten many of the other risks described in this section. The ultimate impact of COVID-19 on our business, results of operations, financial condition and cash flows is dependent on future developments, including the severity and duration of the pandemic and the related impact on the global economy, which are uncertain and cannot be predicted at this time.
Our efforts to diversify our sources of revenue may not be effective and may expose us to new risks.
Historically, the majority of our revenues were derived from the sales of office systems in North America. We have pursued a strategy to diversify our sources of revenue and reduce our dependence on North American office system sales by, for example, growing our seating, international, ancillary and lifestyle businesses. While we believe that this strategy enables us to better maintain and grow our sales and profitability during cyclical ups and downs in the industry, there can be no assurance that this diversification strategy will be effective in achieving these goals. Our diversification strategy involves the continued expansion of our lifestyle businesses, and business growth internationally, which may expose us to business risks that we have not experienced. We also may incur significant costs in pursuing our diversification strategy, and those costs may not be fully offset by increased revenues associated with new business lines.
Our product sales are tied to corporate spending and service-sector employment, which are outside of our control. Our sales and/or growth in sales would be adversely affected by a recessionary economy characterized by decreased corporate spending and service-sector employment.
Our sales are significantly impacted by the level of corporate spending primarily in North America, which, in turn, is a function of the general economic environment. In a recessionary economy, business confidence, service-sector employment, corporate cash flows and residential and non-residential commercial construction decrease, which typically leads to a decrease in demand for furniture and our other products. In addition, a recessionary economy may also result in saturation of the market by “just new” used office systems, leading to a decrease in demand for new office environments. Sales of office systems, which have historically accounted for almost half of our revenues, represent longer term and higher cost investments for our clients. As a result, sales of office systems are more severely impacted by decreases in corporate spending than sales of seating, ancillary products, coverings, studio products, and demand for office systems typically takes longer to respond to an economic recovery.
Geopolitical uncertainties, terrorist attacks, acts of war, international public health emergencies, natural disasters, increases in energy and other costs or combinations of such and other factors that are outside of our control could at any time have a significant effect on the economy, and, therefore, our business. The occurrence of any of these or similar events in the future could result in downward pressure on the economy, which we would expect to cause demand for our products to decline and competitive pricing pressures to increase.
Weakness in the economy or uncertainty in the financial markets may adversely affect our results of operations and financial condition, as well as the financial soundness of our customers and suppliers.
Weakness in the economy or uncertainty in the financial markets may inhibit our ability to access capital and could be restricted at a time when we would like, or need, to access financial markets. In addition, interest rate fluctuations, financial market volatility or credit market disruptions may negatively affect our customers' and our suppliers' abilities to obtain credit to finance their businesses on acceptable terms. As a result, our customers' needs and abilities to purchase our products or services may decrease, and our suppliers may increase their prices, reduce their output or change their terms of sale. If our customers' or suppliers' operating and financial performance deteriorates, or if they are unable to make scheduled payments or obtain credit, our customers may not be able to pay, or may delay payment of, accounts receivable owed to us, and our suppliers may restrict credit or impose different payment terms on us. Any inability of customers to pay us for our products and services, or any demands by suppliers for different payment terms, may adversely affect our earnings and cash flow.
We may have difficulty increasing or maintaining our prices as a result of price competition, which could lower our profit margins. Our competitors may develop new product designs that give them an advantage over us in making future sales.
We compete with our competitors on the basis of, among other things, price and product design. Since our competitors offer products that are similar to ours, we face significant price competition from our competitors, particularly in the Office segment. This price competition impacts our ability to implement price increases or, in some cases, maintain prices, which could lower our profit margins.
Additionally, our competitors may develop new product designs that achieve a high level of customer acceptance, which could give them a competitive advantage over us in making future sales.
Our efforts to introduce new products that meet customer and workplace requirements may not be successful, which could limit our sales growth or cause our sales to decline.
To keep pace with workplace trends, such as changes in workplace design and increases in the use of technology, and with evolving regulatory and industry requirements, including environmental, health, safety and similar standards for the workplace and for product performance, we must periodically introduce new products. The introduction of new products requires the coordination of the design, manufacturing and marketing of such products, which may be affected by factors beyond our control. The design and engineering of certain of our new products can take up to a year or more and further time may be required to achieve client acceptance. In addition, we may face difficulties in introducing new products if we cannot successfully align ourselves with independent architects and designers who are able to design, in a timely manner, high-quality products consistent with our image. Accordingly, the launch of any particular product may be later or less successful than originally anticipated by us. Difficulties or delays in introducing new products or lack of customer acceptance of new products could limit our sales growth or cause our sales to decline.
We may not be able to manage our business effectively if we are unable to retain our experienced management team or recruit other key personnel.
The success of our business is highly dependent upon our ability to attract and retain qualified employees and upon the ability of our senior management and other key employees to implement our business strategy. We believe there are only a limited number of qualified executives in the industry in which we compete. The loss of the services of key members of our management team could harm our efforts to successfully implement our business strategy.
We are dependent on the pricing and availability of raw materials and components, and price increases and unavailability of raw materials and components could lower sales, increase our cost of goods sold and reduce our profits and margins.
We require substantial amounts of raw materials, which we purchase from outside sources. Steel, plastics, wood-related materials, and leather are the main raw materials used in our products. The prices and availability of raw materials are subject to change or curtailment due to, among other things, the supply of, and demand for, such raw materials, changes in laws or regulations, including duties and tariffs, suppliers' allocations to other purchasers, interruptions in production by raw materials or component parts suppliers, changes in currency exchange rates and worldwide price levels. We can be significantly impacted by price increases in these raw materials.
Although no supplier is the only available source for a particular component or raw material, some of our products and components are extremely specialized and, therefore, it can take a significant amount of time and money to move from one supply source to another. Any failure to obtain raw materials and components on a timely basis, or any significant delays or interruptions in the supply of raw materials or components, could prevent us from being able to produce products ordered by our clients in a timely fashion, which could have a negative impact on our reputation and our dealership network, and could cause our sales to decline.
We rely upon independent furniture dealers, and a loss of a significant number of dealers could affect our business, financial condition and results of operations.
We rely on a network of independent dealers for the joint marketing of our products to small and mid-sized accounts, and to assist us in the marketing of our products to large accounts, particularly in the Office segment. We also rely upon these dealers to provide a variety of important specification, installation and after-market services to our clients. Our dealers operate, generally, under short-term, non-exclusive agreements. There is nothing to prevent our dealers from terminating their relationships with us at the end of contract terms. In addition, individual dealers may not continue to be viable and profitable and may suffer from the lack of available credit. While we are not significantly dependent on any single dealer, our largest dealer accounted for 6.4% of our North American sales in 2020; if dealers go out of business or are restructured, we may suffer losses as they may not be able to pay us for products previously delivered to them. The loss of a dealer relationship could also negatively affect our ability to maintain market share in the affected geographic market and to compete for and service clients in that market until a new dealer relationship is established. Establishing a viable dealer in a market can take a significant amount of time and resources. The loss or termination of a significant dealer or a significant number of dealer relationships could cause significant difficulties for us in marketing and distributing our products, resulting in a decline in our sales.
Currently, one of our largest clients is the U.S. government, a relationship that is subject to uncertain future funding levels and federal procurement laws and requires restrictive contract terms; any of these factors could curtail current or future business.
For the year ended December 31, 2020, we derived approximately 5.5% and 6.4% of our revenue from sales to U.S. and state and local government agencies, respectively. Our ability to compete successfully for and retain business with the U.S. government is highly dependent on cost-effective performance and compliance with complex procurement laws. Historically, federal procurement laws required government agencies to purchase furniture products from Federal Prison Industries, Incorporated. If these or similar laws were re-instituted, it would make it more difficult for us to sell our furniture to agencies and departments of the U.S. government.
In addition, the U.S. government typically can terminate or modify its contracts with us either for its convenience or if we default by failing to perform under the terms of the applicable contract. A termination arising out of our default could expose us to liability and impede our ability to compete in the future for contracts and orders. Furthermore, if we were found to have committed fraud or certain criminal offenses, we could be suspended or debarred from all further government contracting.
Given the significance of our governmental business, we are sensitive to decreases in governmental spending. Federal, state and local government budgets have experienced deficits recently and are under significant pressure to reduce spending. These spending pressures have resulted in, and may continue to result in, decreased furniture spending, which has negatively impacted (and may continue to negatively impact) our governmental sales.
If we fail to protect the integrity and security of our information technology systems and confidential information, it could adversely affect our business.
We rely upon information technology networks and systems to process, transmit and store electronic information, and to manage numerous aspects of our business and provide information to management. We also receive certain customer-specific data, including credit card information, in connection with orders placed through our various businesses, including our e-commerce websites and our retail stores. The secure operation of these information technology systems, and the processing and maintenance of this information, is critical to our business operations and strategy. These systems are vulnerable to, among other things, damage and interruption from power loss or natural disasters, computer system and network failures, loss of telecommunications services, physical and electronic loss of data, security breaches, hackers and employee misuse. We have, and may in the future, face unauthorized attempts by hackers seeking to harm us or, as a result of industrial espionage, to penetrate our network security and gain access to our systems, steal intellectual or other proprietary data, including design, sales or personally identifiable information, introduce malicious software or interrupt our internal systems, manufacturing or distribution. Though we attempt to prevent and detect these incidents, we may not be successful. Any disruption of our information technology systems, or access to or disclosure of information stored in or transmitted by our systems, could result in legal claims and damages, loss of intellectual property or other proprietary information (including customer data), disrupt operations, result in competitive disadvantage and damage our reputation, which could adversely affect our business and results of operations.
In addition, states and the federal government are increasingly enacting laws and regulations to protect consumers against identity theft. Also, as our business expands globally, we are subject to data privacy and other similar laws in various foreign jurisdictions. If we are the target of a cybersecurity attack resulting in unauthorized disclosure of our customer data, we may be required to undertake costly notification procedures. Compliance with these laws will likely increase the costs of doing business. Further, if we fail to implement appropriate safeguards or to detect and provide prompt notice of unauthorized access as required by some of these laws, we could be subject to potential claims for damages and other remedies, which could harm our business.
We are in the process of implementing a new enterprise resource planning system, and problems with the design or implementation of this system could interfere with our business and operations.
We are engaged in a multi-year implementation of a new global enterprise resource planning system (ERP). The ERP is designed to accurately maintain the company's books and records and provide information to the company's management team important to the operation of the business. The company's ERP has required, and will continue to require, the investment of significant human and financial resources. We may not be able to successfully implement the ERP without experiencing delays, increased costs and other difficulties. If we are unable to successfully design and implement the new ERP system as planned, our financial positions, results of operations and cash flows could be negatively impacted.
We operate with leverage, and a significant amount of cash will be required to service our indebtedness. Restrictions imposed by the terms of our indebtedness may limit our operating and financial flexibility.
As of December 31, 2020, we had total consolidated outstanding debt of approximately $318.3 million under our credit facility, inclusive of outstanding letters of credit of $5.1 million. If we were to borrow the maximum available to us under our Credit Facility, as constrained by the applicable leverage ratio covenant, we would have total consolidated outstanding debt of approximately $469.5 million.
The high level of our indebtedness could have important consequences to holders of our common stock, given that:
•a substantial portion of our cash flow from operations must be dedicated to fund scheduled payments of principal and debt service and will not be available for other purposes;
•our ability to obtain additional debt financing in the future for working capital, capital expenditures, research and development or acquisitions may be limited by the terms of our credit facility; and
•the terms of our credit facility also impose other operating and financial restrictions on us, which could limit our flexibility in reacting to changes in our industry or in economic conditions generally.
Our credit agreement prevents us and our subsidiaries from incurring any additional indebtedness other than (i) borrowings under our existing credit facility; (ii) certain types of indebtedness that may be incurred subject to aggregate dollar limitations identified in the credit facility, including, without limitation, purchase money indebtedness and capital lease obligations, indebtedness incurred in connection with a permitted acquisition, and loans obtained through an expansion of the facility, all of which cannot exceed $250.0 million at any time, and (iii) other types of indebtedness that are not limited to specific dollar limitations, such as indebtedness incurred in the ordinary course of business and unsecured, subordinated indebtedness. The aggregate amount of indebtedness that we may incur pursuant to these exceptions is further limited by the financial covenants in our credit facility and, therefore, will depend on our future results of operations and cannot be determined at this time. As a result of the financial covenants, our capacity under our credit facility could be reduced if our trailing consolidated EBITDA (as defined by our credit agreement) declines due to deteriorating market conditions or poor performance. Furthermore, although we may incur unlimited amounts of certain types of indebtedness, subject to compliance with these financial covenants, the amount of indebtedness that we may be able to incur will depend on the terms on which such types of debt financing are available to us, if available at all.
As a result of the foregoing, we may be prevented from engaging in transactions that might further our growth strategy or otherwise be considered beneficial to us. A breach of any of the covenants in our credit facility could result in a default thereunder. If payments to the lenders under our credit facility were to be accelerated, our assets could be insufficient to repay in full the indebtedness under our credit facility and our other liabilities. Any such acceleration could also result in a foreclosure on all or substantially all of our subsidiaries' assets, which would have a negative impact on the value of our common stock and jeopardize our ability to continue as a going concern.
The credit agreement is described in more detail in "Liquidity and Capital Resources" included in Item 7 and in Note 13, Indebtedness, to the Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K, included elsewhere herein.
We may require additional capital in the future, which may not be available or may be available only on unfavorable terms.
Our capital requirements depend on many factors, including capital improvements, tooling, information technology upgrades and new product development. To the extent that our existing capital is insufficient to meet these requirements and cover any losses, we may need to raise additional funds through financings or curtail our growth and reduce our assets. Any equity or debt financing, if available at all, may be on terms that are not favorable to us. Equity financings could result in dilution to our stockholders, and the securities may have rights, preferences and privileges that are senior to those of our common stock. If our need for capital arises because of significant losses, the occurrence of these losses may make it more difficult for us to raise the necessary capital.
We are affected by the cost of energy and increases in energy prices could reduce our margins and profits.
The profitability of our operations is sensitive to the cost of energy through our transportation costs, the cost of petroleum-based materials, like plastics, and the cost of operating our manufacturing facilities. Energy costs have been volatile in recent years due to changes in global supply and demand. Although we have been successful in countering energy price increases, primarily through our global sourcing initiatives and continuous improvement programs, we have not been able to offset these costs entirely.
An inability to protect our intellectual property could have a significant impact on our business.
We attempt to protect our intellectual property rights, both in the United States and in foreign countries, through a combination of patent, trademark, copyright and trade secret laws, as well as licensing agreements and third-party nondisclosure and assignment agreements. Because of the differences in foreign trademark, copyright, patent and other laws concerning proprietary rights, our intellectual property rights do not generally receive the same degree of protection in foreign countries as they do in the United States. In some parts of the world, we have limited protections, if any, for our intellectual property. Our ability to compete effectively with our competitors depends, to a significant extent, on our ability to maintain the proprietary nature of our intellectual property. The degree of protection offered by the claims of the various patents, copyrights, trademarks and service marks may not be broad enough to provide significant proprietary protection or competitive advantages to us, and patents, copyrights, trademarks or service marks may not be issued on our pending or contemplated applications. In addition, not all of our products are covered by patents or similar intellectual property protections. It is also possible that our patents, copyrights, trademarks and service marks may be challenged, invalidated, canceled, narrowed or circumvented.
In the past, certain of our products have been copied and sold by others. We try to enforce our intellectual property rights, but we have to make choices about where and how we pursue enforcement and where we seek and maintain intellectual property protection. In many cases, the cost of enforcing our rights is substantial, and we may determine that the costs of enforcement outweigh the potential benefits. If we are unable to maintain the proprietary nature of our intellectual property with respect to our significant current or proposed products, our competitors may be able to sell copies of our products, which could adversely affect our ability to sell our original products and could also result in competitive pricing pressures, which may negatively affect our profitability.
If third parties claim that we infringe upon their intellectual property rights, we may incur liabilities and costs and may have to redesign or discontinue an infringing product.
We face the risk of claims that we have infringed upon third parties' intellectual property rights. Companies operating in our industry routinely seek patent protection for their product designs, and many of our principal competitors have large patent portfolios. Prior to launching major new products in our key markets, we normally evaluate existing intellectual property rights. However, our competitors may have filed for patent protection which is not, at the time of our evaluation, a matter of public knowledge. Our efforts to identify and avoid infringing upon third parties' intellectual property rights may not be successful. Any claims of patent or other intellectual property infringement, even those without merit, could (i) be expensive and time consuming to defend; (ii) cause us to cease making, licensing or using products that incorporate the challenged intellectual property; (iii) require us to redesign, reengineer, or rebrand our products or packaging, if feasible; or (iv) require us to enter into royalty or licensing agreements in order to obtain the right to use a third party's intellectual property.
We could be required to incur substantial costs to comply with environmental requirements. Violations of, and liabilities under, environmental laws and regulations may increase our costs or require us to change our business practices.
Our past and present ownership and operation of manufacturing plants 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, or CERCLA, for remediation costs associated with waste disposal sites previously used by us. In general, CERCLA can impose liability for costs to investigate and remediate contamination without regard to fault or the legality of disposal and, under certain circumstances, liability may be joint and several, resulting in one party being held responsible for the entire obligation. Liability may also include damages for harm to natural resources. 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.
Product defects could adversely affect our results of operations.
Our customers may encounter product defects that could potentially arise in the course of our development of new products or due to manufacturing problems. If product defects do arise, we could incur product warranty costs, product liability costs and costs associated with recalling and repairing defective products. While we maintain a reserve for our product warranty costs based on estimates of the costs that may be incurred under the warranties on all of our products, our actual warranty costs may exceed this reserve, resulting in a need to increase the amounts accrued for warranty costs. We also maintain product liability and other insurance coverage that we believe to be generally in accordance with industry practices, but our insurance coverage does not extend to field visits to repair, retrofit or replace defective products, or to product recalls. As a result, our insurance coverage may not be adequate to protect us fully against substantial claims and costs that may arise from product defects, particularly if we have a large number of defective products that we must repair, retrofit, replace or recall. Sales of our products could be adversely affected by excessive warranty claims, product recalls and adverse perceptions of product quality. As a result of these factors, product defects could have a material adverse effect on our results of operations.
We may be vulnerable to the effects of currency exchange rate fluctuations, which could increase our expenses.
We primarily sell our products and report our financial results in U.S. dollars, but we generate some of our revenues and pay some of our expenses, including interest on euro denominated debt, in other currencies. Paying our expenses in other currencies can result in a significant increase or decrease in the amount of those expenses in U.S. dollar terms, which affects our profits.
In the future, any foreign currency appreciation relative to the U.S. dollar would increase our expenses that are denominated in that currency. 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, the Euro, and the Danish Krone. Approximately 25.6% of our revenues in 2020 and 30.3% of our cost of goods sold in 2020 were denominated in currencies other than the U.S. dollar. From time to time, we review our foreign currency exposure and evaluate whether we should hedge our exposure.
Pension costs or funding requirements could increase at a higher-than-anticipated rate.
We administer a defined benefit pension plan, which holds significant amounts of equity securities. Changes in interest rates or other plan assumptions or in the market value of plan assets could affect the funded status of our pension plan. This could cause volatility in our benefits costs which could increase future funding requirements of our pension plan and have a negative impact on our results of operations, financial condition and cash flows. Our future funding obligations also are affected by the Pension Protection Act of 2006 (“PPA”), which established certain required funding targets. Volatility in the economic environment and/or a decline in the equity markets could cause the value of investment assets held by our pension plan to decline. As a result, we could be required to increase the amount of our cash contributions to our pension plan in order to meet the funding level requirements of the PPA.
We may not be able to successfully integrate acquired businesses, which may result in an inability to realize the anticipated benefits of our acquisitions.
One of our key operating strategies is to selectively pursue acquisitions. We have made a number of acquisitions in the past and we expect that a portion of our future growth may come from such transactions. We evaluate potential acquisitions on an ongoing basis. However, we may not be able to identify suitable acquisition candidates at prices we consider attractive. Further, our ability to successfully integrate acquired businesses could be negatively impaired because of difficulties, costs and delays that may include:
•Negative impacts on employee morale and performance as a result of job changes and reassignments;
•Unforeseen difficulties, costs or complications in integrating the companies' operations, which could lead to us not achieving the synergies we anticipate;
•Unanticipated incompatibility of systems and operating methods;
•Resolving possible inconsistencies in standards, controls, procedures and policies, business cultures and compensation structures;
•The diversion of management's attention from ongoing business concerns and other strategic opportunities;
•Unforeseen difficulties in operating acquired business in parallel with similar businesses that we operated previously;
•Unforeseen difficulties in operating businesses we have not operated before;
•Unanticipated difficulty of integrating multiple acquired businesses simultaneously;
•The retention of key employees and management of acquired businesses;
•The coordination of geographically separate organizations;
•The coordination and consolidation of ongoing and future research and development efforts; and
•Possible tax costs or inefficiencies associated with integrating the operations of a combined company.
In connection with any acquisition that we make, there may be liabilities that we fail to discover or that we inadequately assess. Acquired entities may not operate profitably or result in improved operating performance. Additionally, we may not realize anticipated synergies. If our acquisitions perform poorly, our business and financial results could be adversely affected.
Tax matters, including the changes in corporate tax rates, disagreements with taxing authorities and imposing of new taxes could impact our results of operations and financial condition.
Our effective tax rates, and tax payments, could be affected by numerous factors, including but not limited to entry into new geographies, changes to our existing business and operations, acquisitions, changes in our stock price, changes in our deferred tax assets and liabilities and the related valuation, and changes in relevant tax, accounting, and other laws, regulations, administrative practices, principles, and interpretations.
We need to comply with new, evolving or revised tax laws and regulations. The enactment of or increases in tariffs, or other changes in application or interpretation of The Tax Cuts and Jobs Act of 2017, or on specific products that we sell or with which our products compete, may have an adverse effect on our business or on results of operations.
The implementation of tariffs and export controls on our products may have a material impact on our business.
Our global business operations and supply chain could be disrupted by any additional tariffs imposed on our products. In 2019, the U.S. Trade Representative imposed additional duties, ranging from 15% to 25% on a variety of goods imported from China. As a result of operational changes, the tariffs did not have, nor do we expect the increase in these tariffs to have, a significant impact on our business, supply chain, operations or financial results. However, if the United States increases the amount of these tariffs or adds additional items to the list of products subject to tariff, tariffs could materially adversely affect our business, financial results and operations.
Risks Related to Our Common Stock
Our corporate documents and Delaware law contain provisions that could discourage, delay or prevent a change in control of our company.
Provisions in our amended and restated certificate of incorporation and bylaws may discourage, delay or prevent a merger or acquisition involving us that our stockholders may consider favorable. For example, our amended and restated certificate of incorporation authorizes our board of directors to issue up to 10,000,000 shares of “blank check” preferred stock. We issued 164,000 shares of Series A Preferred Stock under this authority in July 2020. Without stockholder approval, the board of directors has the authority to attach special rights, including voting and dividend rights, to this preferred stock. With these rights, preferred stockholders could make it more difficult for a third party to acquire us. In addition, our amended and restated certificate of incorporation provides for a staggered board of directors, whereby directors serve for three-year terms, with approximately one-third of the directors coming up for reelection each year. Having a staggered board will make it more difficult for a third party to obtain control of our board of directors through a proxy contest, which may be a necessary step in an acquisition of us that is not favored by our board of directors.
We are also subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law. Under these provisions, if anyone becomes an “interested stockholder,” we may not enter into a “business combination” with that person for three years without special approval, which could discourage a third party from making a takeover offer and could delay or prevent a change of control. For purposes of Section 203, “interested stockholder” means, generally, someone owning 15% or more of our outstanding voting stock or an affiliate of ours that owned 15% or more of our outstanding voting stock during the past three years, subject to certain exceptions as described in Section 203, including pre-approval by our board of directors. Our recent sale of 164,000 shares of Series A Preferred Stock to Furniture Investments S.à.r.l., which is majority owned by Investindustrial VII LP, was pre-approved by our board of directors under Section 203. Upon any change in control, the lenders under our credit facility would have the right to require us to repay all of our outstanding obligations under the facility.
Our stock price may be volatile, and your investment in our common stock could suffer a decline in value.
There has been significant volatility in the market price and trading volume of equity securities, which may be unrelated to the financial performance of the companies issuing the securities. These broad market fluctuations may negatively affect the market price of our common stock. You may not be able to resell your shares at or above the price at which you purchased them due to fluctuations in the market price of our common stock caused by changes in our operating performance or prospects and other factors. Some specific factors that may have a significant effect on our common stock market price include:
•actual or anticipated fluctuations in our operating results or future prospects, including actual or perceived fluctuations in the demand for our products;
•our announcements or our competitors' announcements of new products;
•the public's reaction to our press releases, our other public announcements and our filings with the SEC;
•strategic actions by us or our competitors, such as acquisitions, joint ventures, strategic investments, or restructurings;
•new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
•changes in accounting standards, policies, guidance, interpretations or principles;
•changes in our growth rates or our competitors' growth rates;
•our inability to raise additional capital;
•conditions of our industry as a result of changes in financial markets or general economic conditions, including those resulting from war, incidents of terrorism and responses to such events;
•global pandemics like the COVID-19 pandemic;
•trading volumes in Knoll common stock;
•sales of common stock by us or members of our management team; and
•changes in stock market analyst recommendations or earnings estimates regarding our common stock, other comparable companies or our industry generally.
Our corporate documents provide, subject to certain exceptions, that the Court of Chancery of the State of Delaware is the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our Amended and Restated Bylaws provide that the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a breach of fiduciary duty, any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our amended and restated certificate of incorporation or our Amended and Restated Bylaws, or any action asserting a claim against us that is governed by the internal affairs doctrine. This provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find this provision in our Amended and Restated Bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business and financial condition.
Issuance of our common stock in connection with the conversion of our outstanding convertible preferred stock (which ranks senior to our common stock) would cause substantial dilution that may not be reflected in the trading price of our common stock
In June 2020, we sold 164,000 shares of Series A Preferred Stock to Furniture Investments S.à r.l., which is majority owned by Investindustrial VII LP. The Series A Preferred Stock is convertible at any time into shares of our common stock at an initial conversion price of $16.75 per share, subject to certain anti-dilution adjustments. At any time after July 21, 2022, we may elect to convert all or a portion of the Series A Preferred Stock into our common stock if the volume weighted average price of our shares of common stock exceeds $29.3125 (subject to certain adjustments) for at least 20 trading days in any period of 30 consecutive trading days. Further, holders of Series A Preferred Stock are entitled to a cumulative dividend at a rate of 4.5% per annum, which is paid quarterly in arrears, and we may elect, in our sole discretion, to pay dividends on the Series A Preferred Stock in cash or as a dividend in-kind (additional shares of Series A Preferred Stock having value equal to the amount of accrued dividends) until June 30, 2022, after which we must pay the dividends in cash. As a result, upon a conversion of the Series A Preferred Stock, large amounts of our common stock would be issued, which would cause substantial dilution to holders of our common stock that may not be reflected in the trading price of our common stock. The Series A Preferred Stock ranks senior to our common stock with respect to dividend rights and rights on the distribution of our assets upon any liquidation, dissolution or winding up of our affairs.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2.
ITEM 2. PROPERTIES
We operate over 4.2 million square feet of facilities, including manufacturing plants, warehouses and sales offices. Of these facilities, we own approximately 1.9 million square feet and lease approximately 2.3 million square feet. The location, square footage, and use of the facilities as of December 31, 2020 are shown below.
We believe that our plants and other facilities are sufficient for our needs for the foreseeable future.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are subject to litigation or other legal proceedings arising in the ordinary course of business. Based upon information currently known to us, we believe the outcome of such proceedings will not have, individually or in the aggregate, a material adverse effect on our business, financial condition or results of operations.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock has been listed on the New York Stock Exchange (“NYSE”) since December 14, 2004, the date of our initial public offering, under the symbol “KNL.” As of December 31, 2020, there were approximately 353 stockholders of record of our common stock.
Performance Graph
The following line graph compares the cumulative total stockholder return on our common stock with the cumulative total return of the Standard & Poor's 500 Stock Index and with the cumulative total return of a peer group of companies selected by us for the period commencing on December 31, 2016 and ending on December 31, 2020. Our share price at the beginning of the measurement period is $18.80 per share. The graph and table assume that $100 was invested on December 31, 2016 in each of our common stock, the stock of our peer group, and the S&P 500 Index, and that all dividends were reinvested. Our peer group is made up of five publicly-held companies, Herman Miller, Inc., Steelcase, Inc., HNI Corp, Kimball International Inc., and Interface Inc.. The stock performance on the graph below does not necessarily indicate future price performance.
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* The performance graph and the related chart should not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934 or incorporated by reference into any of our filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, unless we specifically incorporate the performance graph by reference therein.
Issuer Purchases of Equity Securities
The following is a summary of share repurchase activity during the three months ended December 31, 2020.
On August 17, 2005, our board of directors approved a stock repurchase program (the “Options Proceeds Program”), whereby they 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.
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.
During the three months ended December 31, 2020, the Company repurchased 21,419 shares of its common stock, all of which represent repurchase of shares in exchange for the Company's settlement of employee payroll tax obligations related to equity award settlements, as summarized in the table below:
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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 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.
ITEM 7.
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
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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. 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 materials and transportation costs. Steel, leather, wood products and plastics are all used in our products. For the year ended December 31, 2020, we estimated that materials deflation was approximately $1.7 million and transportation inflation was approximately $2.1 million. During 2019, we estimated that materials and transportation inflation were approximately $5.0 million and $2.1 million, respectively. We continue to work to offset price increases in raw materials and transportation through our global sourcing initiatives, cost improvements and price increases for our products.
Interest Rate Risk
We have variable rate debt obligations that are denominated in U.S. dollars. A change in interest rates will impact the interest costs incurred and cash paid on the variable rate debt.
At December 31, 2020, we had $313.2 million in principal of variable rate debt. We have entered into an interest rate swap agreement which fixes the interest rate for an initial notional amount of $200 million of our variable rate debt which decreases over time by $50 million increments, matures in January 2023 and effectively fixes our interest rate at 2.63%. Our remaining variable rate debt of $113.2 million is subject to changes in underlying interest rates, and, accordingly, our interest payments will fluctuate. During 2020, a 1% change in interest rates would result in a change in interest expense of approximately $1.1 million per year. As the notional amount of the swap decreases, each $50 million decrease in the notional amount would be exposed to interest rate fluctuations, and a one percent change in interest rates would change interest expense by an additional $0.5 million.
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 our reporting currency is 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, Danish Krone and the Euro. Approximately 25.6% and 17.6% of our revenues in 2020 and 2019, respectively, and 30.3% and 27.0% of our cost of goods sold in 2020 and 2019, respectively, were denominated in currencies other than the U.S. Dollar. Assuming a hypothetical adverse (weakening of the U.S. Dollar) and favorable (strengthening of the U.S. Dollar) change of 10% on the average foreign currency exchange rate for 2020, earnings before income taxes would have decreased or increased approximately $1.8 million. Foreign currency exchange rate fluctuations resulted in transaction losses of $1.8 million and $1.5 million for 2020 and 2019, respectively.
From time to time, we enter into foreign currency hedges to manage our exposure to foreign exchange rates. The terms of these contracts are typically less than a year. Changes in the fair value of such contracts are reported in earnings in the period the value of the contract changes. The net gain or loss upon settlement and the change in fair value of outstanding contracts is recorded as a component of other expense (income).
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Knoll, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Knoll, Inc. (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 1, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Defined Benefit Pension Obligation
Description of the MatterAt December 31, 2020, the Company’s projected benefit obligation related to its defined benefit plan was $206.4 million and exceeded the fair value of pension plan assets of $182.2 million, resulting in an unfunded defined benefit pension obligation of $24.2 million. As explained in Note 2 to the consolidated financial statements, the measurement of the Company’s projected benefit obligation is dependent, in part, on the selection of certain actuarial assumptions.
Auditing the projected benefit obligation was complex and required the involvement of actuarial specialists due to the highly judgmental nature of the assumptions (e.g., discount rates and mortality rates) used in the Company’s measurement process. These assumptions had a significant effect on the projected benefit obligation.
How We Addressed the Matter in Our AuditWe obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s valuation of the projected benefit obligation. For example, we tested the Company's controls over management’s review of the significant assumptions utilized in the valuation, including the discount rates and mortality rates.
To test the projected benefit obligation, we performed audit procedures that included, among others, evaluating the methodology used, the significant actuarial assumptions described above, and the underlying data used by the Company. We compared the actuarial assumptions used by management to historical trends and evaluated the change in the projected benefit obligation from the prior year due to the change in interest cost, actuarial gains and losses, benefit payments, settlements and other activities. In addition, we involved our actuarial specialists to assist in evaluating management’s methodology for selecting the appropriate discount rates that reflect the maturity and duration of the expected benefit payments and applying those discount rates to the benefit payments used to measure the projected benefit obligation. As part of this assessment, we compared the projected benefit obligation cash flows to those in the prior year and compared the current-year benefits paid to the prior-year projected cash flows. To evaluate the mortality rates, we assessed whether the information is consistent with publicly available information, and whether any adjustments for entity-specific factors were applied. We also tested the completeness and accuracy of the underlying data, including the participant data used in the actuarial calculations.
Valuation of Goodwill and Other Indefinite-Lived Intangible Assets
Description of the Matter
At December 31, 2020, the Company’s goodwill and other indefinite-lived intangible assets were $349.8 million and $278.4 million, respectively. As discussed in Note 2 to the consolidated financial statements, goodwill and other indefinite-lived intangible assets are either qualitatively tested and, when considered necessary, quantitatively tested, for impairment at least annually. The Company’s goodwill is tested for impairment at the reporting unit level.
Auditing management’s annual quantitative goodwill and other indefinite-lived intangible assets impairment tests was complex and involved a high degree of subjectivity due to the significant estimation required in determining the fair value of the reporting units and the other indefinite-lived intangible assets. In particular, the fair value estimates were sensitive to significant assumptions such as discount rates, revenue growth rates, profit margins, royalty rates, and terminal growth rates, which are forward-looking and could be affected by future economic and market conditions.
How We Addressed the Matter in Our AuditWe obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s quantitative goodwill and other indefinite-lived intangible assets annual impairment tests. For example, we tested controls over management’s review of the valuation models, the significant assumptions described above, and the completeness and accuracy of the data used in the valuations.
To test the estimated fair value of the Company’s reporting units and other indefinite-lived intangible assets, we performed audit procedures that included, among others, assessing fair value methodologies and testing the significant assumptions discussed above and the completeness and accuracy of the underlying data used by the Company in its analyses. For example, we compared the significant assumptions used by management to current industry, market and economic trends, to historical results of the Company's business and other guideline companies within the same industry and to other relevant factors. We assessed the historical accuracy of management’s estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the reporting units and other indefinite-lived intangible assets that would result from changes in the assumptions. We also involved internal valuation specialists to assist in our evaluation of the significant assumptions and methodologies used by the Company.
/s/ Ernst & Young LLP
We have served as the Company's auditor since 1996.
Philadelphia, Pennsylvania
March 1, 2021
KNOLL, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in millions, except per share data)
See accompanying notes to the consolidated financial statements.
KNOLL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in millions, except per share data)
See accompanying notes to the consolidated financial statements.
KNOLL, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(dollars in millions, except per share data)
(1)Impact of the Tax Cuts and Jobs Act ("TCJA") of 2017 on AOCL
(2)The Company exercised its payable in kind ("PIK") option in connection with all dividends paid to the holders of the Series A Preferred Stock during 2020.
See accompanying notes to the consolidated financial statements.
KNOLL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
See accompanying notes to the consolidated financial statements.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
Description of the Business
Knoll, Inc. and its subsidiaries (the “Company” or “Knoll”) are engaged in the design, manufacture, marketing and sale of high-end furniture products and accessories for workplace and residential markets. The Company is also engaged in the sale of fine leather, textiles, and felt, focusing on the middle to high-end segments of the market. The Company primarily operates in the United States (“U.S.”), Canada and Europe, and sells its products through a broad network of independent dealers and distribution partners, a direct sales force, its showrooms, and its e-commerce platforms.
Basis of Presentation
The Company follows accounting standards set by the Financial Accounting Standards Board (“FASB”). The FASB establishes accounting principles generally accepted in the United States (“GAAP”). Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants, which the Company is required to follow. References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification (“ASC”), which serves as a single source of authoritative non-SEC accounting and reporting standards to be applied by non-governmental entities. Certain prior period amounts in the Consolidated Statements of Cash Flows, as well as in the notes, have been reclassified to conform to the current year presentation.
During the fourth quarter of 2019, the Company aligned the consolidation of certain of its foreign subsidiaries in the consolidated financial statements, which previously included results on a one-month reporting lag. The Company believes that this change in accounting principle was preferable, as all of the its subsidiaries are now reported based on the same period-end, which improves overall financial reporting to investors by providing the most current information available. In accordance with applicable accounting literature, the elimination of a one-month reporting lag of a subsidiary is treated as a change in accounting principle and requires retrospective application. The Company has determined that the effect of this change is not material to the financial statements for all periods presented and therefore, the Company has not presented retrospective application of this change. The net impact of the elimination of the reporting lag of $0.6 million of loss for the month of December 2019 has been included within "Other income, net" on the Consolidated Statements of Operations and Comprehensive Income in the fourth quarter of 2019.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of the Company and its wholly-owned subsidiaries and any partially-owned subsidiaries that the Company has the ability to control. Significant intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. These estimates and assumptions take into account historical and forward looking factors that the Company believes are reasonable, including, but not limited to, the potential impacts arising from the coronavirus pandemic of 2019 (“COVID-19”) and public and private sector policies and initiatives aimed at reducing its transmission. As the extent and duration of the impacts of COVID-19 remain unclear, the Company’s estimates and assumptions may evolve as conditions change. Actual results may differ from such estimates.
Examples of significant estimates include the allowance for credit losses, the recoverability of property, plant and equipment, the incremental borrowing rate for lease liabilities, the recoverability of intangible assets and other long-lived assets, fair value measurements, including those related to financial instruments, goodwill and intangible assets, valuation allowances on tax assets, pension and postretirement benefit obligations, contingencies and the identification and valuation of assets acquired and liabilities assumed in connection with business combinations.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and highly-liquid investments with maturities of three months or less at the date of purchase.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
Revenue Recognition
In accordance with ASC 606, Revenue from Contracts with Customers, the Company determines revenue recognition by applying the following steps: (i) identify the contract with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations and (v) recognize revenue as the performance obligations are satisfied.
The Company recognizes revenue when performance obligations under the terms of a contract with a customer are satisfied. The Company's primary performance obligation to its customers is the delivery of products. Control of the products sold typically transfers to the customer upon shipment or delivery, depending on the shipping terms of the underlying contract.
Each customer contract sets forth the transaction price for the products and services purchased under that arrangement. Some customer arrangements include variable consideration, such as volume rebates, some of which depend upon the customers meeting specified performance criteria, such as a purchasing level over a period of time. The Company uses judgment to estimate the most likely amount of variable consideration at each reporting date. When estimating variable consideration, the Company applies judgment when considering the probability of whether a reversal of revenue could occur and only recognize revenue subject to this constraint.
The Company uses historical customer return data as a basis of estimation for customer returns and records the reduction of sales at the time revenue is recognized. Customer returns have historically not been significant. The Company may receive deposits from customers before revenue is recognized, thus resulting in the recognition of a contract liability (customer deposits).
Amounts billed to customers for shipping and handling of products are included in sales and the related costs incurred by the Company for shipping and handling are included in cost of sales. The Company applies a policy election to account for shipping and handling as an activity to fulfill the promise to transfer the product to the customer.
The Company applies an accounting policy election to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from a customer.
The Company has elected the practical expedient permitted in ASC 340-40-25-4, which permits an entity to recognize incremental costs to obtain a contract as an expense when incurred if the amortization period will be less than one year.
The Company has elected the practical expedient permitted in ASC 606-10-32-18, which allows an entity to not adjust the promised amount of consideration for the effects of a significant financing component if a contract has a duration of one year or less. As the Company’s contracts are typically less than one year in length, consideration will not be adjusted. The Company’s contracts generally include a standard payment term of 30 days, consequently there is no significant financing component within its contracts.
Allowance for Doubtful Accounts
Accounts receivable are recorded net of an allowance for expected credit losses. The Company maintains an allowance for credit losses for the expected failure or inability of its customers to make required payments. The Company recognizes the allowance for expected credit losses at inception and reassesses quarterly based on management’s expectation of the asset’s collectability. The allowance is based on multiple factors including historical experience with bad debts, the credit quality of the customer base, the aging of such receivables and current macroeconomic conditions, as well as management’s expectations of conditions in the future. The Company’s allowance for uncollectible accounts receivable is based on management’s assessment of the collectability of assets pooled together with similar risk characteristics.
Management analyzes receivables based on the credit quality indicators and shared risk characteristics of dealers and other customers. Management stratifies the dealer population generally by the level of their purchase activity, mainly recurring purchasers compared to non-recurring purchasers, as well as the financial strength of the dealer. Management also stratifies receivables based on government and corporate purchasers with common risk characteristics. Management considers multiple factors, including payment history, frequency of purchases and financial strength of the purchaser to determine the reserve needed.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
Inventories
Inventories are stated at the lower of cost or net realizable value and include material, labor and overhead. Cost is determined using the first-in, first-out method. The Company adjusts for inventory that it believes is impaired or obsolete. Obsolescence occurs as the result of several factors, including the discontinuance of a product line, changes in product material specifications, replacement products in the marketplace and other competitive influences.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The useful lives are as follows:
(1)Leasehold improvements are amortized over the shorter of the economic life of the asset or the remaining lease term.
Maintenance and repairs are expensed as incurred. Interest on significant capital projects is capitalized during the construction period.
The Company reviews the carrying values of its property and equipment for possible impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable based on undiscounted estimated cash flows expected to result from its use and eventual disposition. The factors considered by the Company in performing this assessment include current operating results, business trends affecting the use of certain assets and other economic factors. In assessing the recoverability of the carrying value of property and equipment, the Company must make assumptions regarding future cash flows and other factors. If these estimates or the related assumptions change in the future, the Company may be required to record an impairment loss for these assets.
Goodwill and Intangible Assets
Goodwill and intangible assets with indefinite lives are tested for impairment at least annually, as of October 1, and more frequently whenever events or circumstances occur indicating that a possible impairment may have been incurred. Intangible assets with finite lives are amortized over their estimated useful lives.
Goodwill
The Company evaluates goodwill for impairment by way of qualitative and quantitative assessments. A qualitative assessment involves determining whether events or circumstances exist that indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If, based on this qualitative assessment, the Company determines it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or if the Company elects not to perform a qualitative assessment, a quantitative assessment is performed by determining the fair value of the Company's reporting units.
The Company estimates the fair value of its reporting units using a combination of the fair values derived from both the income approach and the market approach. Under the income approach, the Company calculates the fair value of a reporting unit based on the present value of estimated future cash flows. Cash flow projections are based on management's estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rate is based on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the businesses ability to execute on the projected cash flows. The market approach estimates fair value based on market multiples of revenue and earnings derived from comparable publicly-traded companies with similar operating and investment characteristics as the reporting unit.
If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired and no further testing is required. If the fair value of the reporting unit is less than the carrying value, an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
When performing a qualitative assessment, the Company assesses numerous factors to determine whether it is more likely than not that the fair value of the reporting units are less than their respective carrying values. The Company considers factors that would impact the reporting unit fair values as estimated by the market and income approaches compared to the last quantitative assessment. The Company reviews current projections of cash flows and compares the current projections to the projections included in the most recent quantitative assessment and considers whether any new significant competitors have entered the marketplace in the industry and if consumer demand for the industry’s products remains relatively constant, is growing or declining. Also, the Company considers if economic factors during the year significantly affected the discount rates that should be used for the valuation of the reporting units. The Company would conclude if events occurring since the last quantitative assessment have a significant impact on the fair value of each of the reporting units.
Intangible Assets Other than Goodwill
The Company assesses whether impairment of its indefinite-lived intangible assets, comprised of tradenames, exists using both the qualitative and quantitative assessments. The qualitative assessment involves determining whether events or circumstances exist that indicate it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. If based on this qualitative assessment, the Company determines it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount or if the Company elects not to perform a qualitative assessment, a quantitative assessment is performed to determine whether an indefinite-lived intangible asset impairment exists.
The Company tests its indefinite-lived intangible assets for impairment by comparing the carrying values of the applicable tradenames to their estimated fair values. The estimated fair values are based on an income approach using the so-called "relief from royalty method", which assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to exploit the benefits of the tradename asset. The cash flow projections used in this process involve several significant assumptions, including (i) current revenue projections of the related business operations, (ii) estimated royalty rates, (iii) after-tax benefit expected from ownership of the tradenames, and (iv) discount rates used to derive the estimated fair values. Any excess of carrying value over the respective estimated fair value is recognized as an impairment in the reporting period in which it's been identified.
Finite-lived intangible assets such as customer relationships, non-compete agreements, and licenses are amortized over their estimated useful lives. The Company reviews the carrying values of these assets for possible impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable based on estimated undiscounted cash flows expected to result from its use and eventual disposition. The Company regularly evaluates the reasonableness of the useful lives of these assets.
Leases
The Company accounts for leases in accordance with ASC Topic 842, Leases, (“ASC 842”). The Company determines if an arrangement is a lease at contract inception. A lease exists when a contract conveys to the customer the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. The definition of a lease embodies two conditions: (1) there is an identified asset in the contract that is land or a depreciable asset (i.e., property, plant, and equipment), and (2) the customer has the right to control the use of the identified asset. The Company determines whether the contracts are considered an operating or finance lease. The Company does not currently have finance leases.
Operating leases are included in right-of-use (“ROU”) lease assets, current portion lease liability, and lease liabilities on the Consolidated Balance Sheets when the lease term exceeds one year. The lease liabilities are initially measured at the present value of the unpaid lease payments at the lease commencement date.
Key estimates and judgments include how the Company determines (1) the discount rate it uses to discount the unpaid lease payments to present value, (2) lease term and (3) lease payments.
(1)ASC 842 requires a lessee to discount its unpaid lease payments using the interest rate implicit in the lease or, if that rate cannot be readily determined, its incremental borrowing rate. As the majority of the Company’s leases do not provide an implicit rate, the Company uses the incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company’s incremental borrowing rate for a lease is the rate of interest it would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. The Company uses the implicit rate when readily determinable.
(2)The lease term for all of the Company’s leases includes the non-cancellable period of the lease plus any additional periods covered by a Company option to extend (or not to terminate) the lease that the Company is reasonably certain to exercise.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
(3)Lease payments included in the measurement of the lease liability comprise the following: fixed payments (including in-substance fixed payments), less any lease incentives paid or payable to the lessee, variable payments that depend on an index or rate, amounts expected to be payable under a residual value guarantee and the exercise price of the Company option to purchase the underlying asset if the Company is reasonably certain to exercise.
The ROU asset is initially measured at cost, which comprises the initial measurement of the lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred, less any lease incentives received.
For operating leases, the ROU asset is subsequently measured throughout the lease term at the amount of the remeasured lease liability, adjusted for the remaining balance of any lease incentives received, any cumulative prepaid or accrued rent if the lease payments are uneven throughout the lease term and any unamortized initial direct costs. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
Variable lease payments associated with the Company’s leases are recognized when the event, activity, or circumstance in the lease agreement on which those payments are assessed occurs. Variable lease payments are presented as operating expenses in the Company’s Consolidated Statement of Operations and Comprehensive Income in the same line item as expense arising from fixed lease payments for operating leases.
ROU assets for operating leases are subject to the long-lived assets impairment guidance in ASC Subtopic 360-10, Property, Plant, and Equipment.
The Company monitors for events or changes in circumstances that require a reassessment of a lease. When a reassessment results in the remeasurement of a lease liability, a corresponding adjustment is made to the carrying amount of the corresponding ROU asset unless doing so would reduce the carrying amount of the ROU asset to an amount less than zero. In that case, the amount of the adjustment that would result in a negative ROU asset balance is recorded in profit or loss.
The Company has lease agreements which include lease and non-lease components, which are accounted for separately using a relative stand-alone price basis.
On January 1, 2019 the Company adopted ASC 842 using a modified retrospective transition method and elected the optional transition method as defined within Accounting Standards Update ("ASU") 2018-11. As a result, the Company was not required to adjust its comparative period financial information for effects of the standard or make the new required lease disclosures for periods before the date of adoption (i.e. January 1, 2019). The Company has elected to adopt the package of transition practical expedients and, therefore, has not reassessed (1) whether existing or expired contracts contain a lease, (2) lease classification for existing or expired leases or (3) the accounting for initial direct costs that were previously capitalized. The Company did not elect the practical expedient to use hindsight for leases existing at the adoption date.
The Company has elected not to recognize ROU assets and lease liabilities for all short-term leases that have a lease term of 12 months or less. The Company recognizes the lease payments associated with its short-term leases as an expense on a straight-line basis over the lease term. Variable lease payments associated with these leases are recognized and presented in the same manner as for all other Company leases.
Additionally, the Company applies a portfolio approach to determine the discount rate (i.e. incremental borrowing rate for leases with similar characteristics). The Company applies the incremental borrowing rate generally based on the transactional currency of the lease and the lease term.
Business Combinations
The purchase price of an acquired company is allocated between tangible and intangible assets acquired and liabilities assumed from the acquired business based on their estimated fair values, with the residual of the purchase price recorded as goodwill. The results of operations of the acquired business are included in the Company's operating results from the date of acquisition.
Deferred Financing Fees
Financing fees that are incurred by the Company in connection with the issuance of debt are deferred and amortized to interest expense over the life of the underlying indebtedness. Deferred financing fees are presented in the Company's consolidated balance sheets as a direct reduction from long-term debt.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
Research and Development Costs
Research and development costs are expensed as incurred, and are included as a component of selling, general, and administrative expenses. Research and development expenses were $14.2 million for 2020, $16.4 million for 2019, and $20.1 million for 2018.
Income Taxes
The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are determined and recognized based on the differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases using the tax rates expected to be in effect when the temporary differences are expected to reverse. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not some portion or all of the related tax benefit will not be realized. The need to establish valuation allowances against deferred tax assets is assessed quarterly. The Company's valuation allowances are primarily attributable to net operating loss ("NOL") carryforwards in certain foreign tax jurisdictions where the Company has incurred historical tax losses from operations and has determined that it is more likely than not these deferred tax assets will not be realized. The primary factors used to assess the likelihood of realization are reversals of taxable temporary timing differences, forecasts of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets.
The Company evaluates tax positions to determine whether the benefits of tax positions are more likely than not to be sustained upon audit based on the technical merits of the tax position. For tax positions that are more likely than not to be sustained upon audit, the Company recognizes the largest amount of the benefit that is greater than 50% likely of being realized upon ultimate settlement. For tax positions that are not more likely than not to be sustained upon audit, the Company does not recognize any portion of the benefit. If the more likely than not threshold is not met in the period for which a tax position is taken, the Company may subsequently recognize the benefit of that tax position if the tax matter is effectively settled, the statute of limitations expires, or if the more likely than not threshold is met in a subsequent period.
The Company recognizes income tax-related interest and penalties in income tax expense and accrues for interest and penalties in other noncurrent liabilities.
Fair Value of Financial Instruments
GAAP establishes a three-level hierarchy that ranks the quality and reliability of information used in developing fair value estimates. The three levels of the fair value hierarchy, with Level 1 having the highest priority and Level 3 having the lowest, are summarized as follows:
Level 1 Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.
Level 3 Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company and its subsidiaries use, as appropriate, a market approach (generally, data from market transactions), an income approach (generally, present value techniques and option-pricing models), and/or a cost approach (generally, replacement cost) to measure the fair value of an asset or liability. These valuation approaches incorporate inputs such as observable, independent market data and/or unobservable data that management believes are predicated on the assumptions market participants would use to price an asset or liability. These inputs may incorporate, as applicable, certain risks such as nonperformance risk, which includes credit risk.
Derivative Instrument
The Company utilizes a derivative instrument to mitigate its exposure to interest rate volatility. The Company does not hold or issue derivative financial instruments for trading or speculative purposes. The Company recognizes its derivative instrument as either an asset or liability on the Consolidated Balance Sheets and measures it at estimated fair value. Changes in the fair value of that instrument are deferred in shareholders' equity as a component of Accumulated Other Comprehensive Loss ("AOCL"), as the derivative instrument, which is a cash flow hedge, qualifies for hedge accounting. Derivatives qualify for hedge accounting if they are designated as hedge instruments and if the hedge is highly effective in achieving offsetting changes in the cash flows of the asset or liability hedged. Hedge effectiveness is assessed on a regular basis. For all periods
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
presented herein, gains or losses deferred in AOCL are recognized in the results of operations in the same period in which the hedged items are recognized and on the same financial statement line item as the hedged items.
Commitments and Contingencies
The Company establishes reserves for the estimated cost of environmental, legal and other contingencies when such expenditures are probable and reasonably estimable. A significant amount of judgment is required to estimate and quantify the ultimate exposure in these matters. The Company engages outside experts as deemed necessary or appropriate to assist in the evaluation of exposure. From time to time, as information becomes available regarding changes in circumstances for ongoing issues as well as information regarding emerging issues, the potential liability is reassessed and reserve balances are adjusted as necessary. Revisions to the estimates of potential liability, and actual expenditures related to commitments and contingencies, could have a material impact on the results of operations or financial position.
Warranty
The Company generally offers an assurance-type warranty for 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 warranty liability include historical product-failure experience and estimated repair costs for identified matters. The Company regularly assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.
Concentration of Credit Risk
The Company's customer receivables are comprised primarily of amounts due from independent dealers and direct customers. The Company monitors and manages the credit risk associated with the individual dealers and direct customers. The independent dealers are responsible for assessing and assuming the credit risk of their customers and may require their customers to provide deposits or other credit enhancement measures. Historically, the Company has had a concentration of federal and local government receivables; however, they carry minimal credit risk.
Foreign Currency Translation
Results of foreign operations are translated into U.S. dollars using average exchange rates during the year, while assets and liabilities are translated into U.S. dollars using the exchange rates as of the balance sheet dates. The resulting translation adjustments are recorded in AOCL.
Transaction gains and losses resulting from exchange rate changes on transactions denominated in currencies other than the functional currency of the applicable subsidiary are included in the consolidated statements of operations, within other income, net, in the year in which the gain or loss occurs.
Stock-Based Compensation
The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The Company recognizes compensation expense using the straight-line method over the vesting period. Compensation expense relating to restricted stock units subject to performance conditions is recognized if it is probable that the performance condition will be achieved. Forfeitures are recognized when they occur. Stock-based compensation for all types of awards is included in selling, general and administrative expenses in the Consolidated Statements of Operations.
The fair value of restricted stock and restricted stock units, excluding market-based restricted stock units, is based upon the closing market price of the Company's common stock on the date of grant.
The fair value of market-based restricted stock units is estimated at the date of grant using a Monte Carlo simulation model, which requires management to make certain assumptions based on both historical and current data. These awards vest based upon the performance of the Company's stock price relative to a peer group. The assumptions included in the model include, but are not limited to, risk-free interest rate, expected volatility of the Company's and the peer group's stock prices, and dividend yield. The risk-free rate is based upon the applicable U.S. Treasury Note rate. Expected volatility is estimated based on the historical volatility of the Company's and peer group's stock prices. The dividend yield is based on the Company's historical data.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
Pension and Other Post-Employment Benefits
The Company had sponsored two defined benefit pension plans, one of which was terminated during 2019, and four other post-employment benefit plans ("OPEB"), one of which was terminated during 2019. Several statistical and other factors, which attempt to anticipate future events, are used in calculating the expense and liability related to the plans. Key factors include assumptions about the expected rates of return on plan assets, discount rates, mortality rates and health care cost trend rates. The Company considers market and regulatory conditions, including changes in investment returns and interest rates, in making these assumptions.
The Company determines the expected long-term rate of return on plan assets based on aggregating the expected rates of return for each component of the plan's asset mix. The Company uses historic plan asset returns combined with current market conditions to estimate the rate of return. The expected rate of return on plan assets is a long-term assumption. The discount rate reflects the market rate for high-quality fixed income debt instruments as of the Company's annual measurement date and is subject to change each year.
Unrecognized actuarial gains and losses are recognized over the expected remaining lifetime of the plan participants. Unrecognized actuarial gains and losses arise from several factors, including experience and assumption changes with respect to the obligations of the pension and OPEB plans, and from the difference between expected returns and actual returns on plan assets. These unrecognized gains and losses are systematically recognized as a change in future net periodic pension expense in accordance with the appropriate accounting guidance relating to defined benefit pension and OPEB plans.
Key assumptions used in determining the amount of the obligation and expense recorded for the OPEB plans include the assumed discount rate and the assumed rate of increases in future health care costs. In estimating the health care cost trend rate, the Company considers actual health care cost experience, future benefit structures, industry trends and advice from its actuaries. The Company assumes that the relative increase in health care costs will generally trend downward over the next several years, reflecting assumed increases in efficiency and cost-containment initiatives in the health care system.
In accordance with the appropriate accounting guidance, the Company has recognized the funded status (i.e., the difference between the fair value of plan assets and the projected benefit obligation) of the defined benefit pension and OPEB plans in the consolidated balance sheets. To record the unfunded status of the plans, the Company recorded an additional liability and an adjustment to accumulated other comprehensive loss, net of tax. Other changes in the benefit obligation including net actuarial loss (gain) and prior service cost (credit) are recognized in other comprehensive income.
The actuarial assumptions the Company used in determining the pension and OPEB retirement benefits may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates, or longer or shorter life spans of participants. While the Company believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions could materially affect the financial position or results of operations.
Segment Information
The Company has two reportable segments: Office and Lifestyle. The Office reportable segment is comprised of the operations of the Office operating segment. The Lifestyle reportable segment is an aggregation of the Lifestyle, Europe Studio, and Muuto operating segments. All unallocated expenses are included within Corporate.
The Office reportable segment includes a complete range of workplace products that address diverse workplace planning paradigms. These products include: systems furniture, seating, storage, tables, desks and KnollExtra® accessories as well as the international sales of North American Office products. The Office segment includes DatesWeiser and Fully. DatesWeiser, known for its sophisticated meeting and conference tables and credenzas, sets a standard of design, quality and technology integration. Fully is an e-commerce furniture brand selling height-adjustable desks, ergonomic chairs and accessories principally for individual home offices and small businesses.
The Lifestyle reportable segment aggregates three operating segments: Lifestyle, Europe Studio and Muuto. The Lifestyle reportable segment products, which are distributed in North America and Europe, include iconic seating, lounge furniture, side, café and dining chairs as well as conference, training, dining and occasional tables, lighting, rugs, textiles, high-quality fabrics, felt, leather and related architectural products.
Corporate costs include unallocated costs relating to shared services and general corporate activities such as legal expenses, acquisition expenses, certain finance, human resources, administrative and executive expenses and other expenses that are not directly attributable to an operating segment. Dedicated, direct selling, general and administrative expenses of the segments are included within segment operating profit. Management regularly reviews the costs included in the Corporate function and believes disclosing such information provides more visibility and transparency of how the chief operating decision maker reviews the results for the Company.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
Accounting Standards Adopted
In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides practical expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply to contracts and hedging relationships that reference the London Interbank Offered Rate (“LIBOR”) or other reference rate expected to be discontinued due to reference rate reform. The amendments in this ASU are effective immediately and may be applied to impacted contracts and hedges prospectively through December 31, 2022. The adoption of the ASU had no impact on the Company’s consolidated financial statements for the period ended December 31, 2020.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), which amends the disclosure requirements for recurring and nonrecurring fair value measurements by removing, modifying and adding certain disclosures. The Company adopted ASU 2018-13 as of January 1, 2020. The adoption of this ASU did not have a significant impact on the Company’s consolidated financial statements or disclosures.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 replaces the incurred loss impairment methodology for measuring and recognizing credit losses with a methodology that reflects expected credit losses, which requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The Company adopted ASU 2016-13 as of January 1, 2020. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
3. REVENUE
Disaggregation of Revenue
The Company’s revenue presented as “Sales” in the Consolidated Statements of Operations and Comprehensive Income is derived from contracts with customers for the sale of the Company’s products.
The Company’s sales by product category were as follows (in millions):
Contract Balances
The Company’s contract assets consist of customer receivables which are included on the Consolidated Balance Sheets. These amounts represent the amount of consideration the Company expects to be entitled to in exchange for the goods delivered to its customers.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
When the Company receives deposits, the recognition of revenue is deferred and results in the recognition of a contract liability (Customer deposits) which is included in Other current liabilities on the Consolidated Balance Sheets. Subsequent recognition of revenue and discharge of the contract liability typically occurs within a year of a deposit receipt, as the Company’s standard contract is less than one year. As of December 31, 2020 and 2019, the contract liability related to customer deposits was $33.8 million and $32.5 million, respectively. The Company recognized revenues that were included in the contract liability at the beginning of 2020 and 2019 of $31.9 million and $31.1 million, respectively.
Allowance for Doubtful Accounts
The following table summarizes the changes in the allowance for doubtful accounts for the periods presented (in millions):
4. ACQUISITIONS
Fully
On August 20, 2019, the Company acquired FHI LLC (“Fully”), a Portland, Oregon-based e-commerce furniture brand with products targeting the home office and small business markets. The acquisition provides the Company access to new markets for current products, while simultaneously allowing it to leverage its existing distribution channels to expand its product offerings to include Fully’s portfolio of high-performance adjustable height desks, ergonomic chairs and accessories.
The aggregate purchase price consisted of cash paid at closing of $30.9 million, net of cash acquired of $4.1 million, plus additional earn-out consideration should Fully achieve certain revenue and earnings targets associated with separate short-term and long-term earn-out periods of two and four years, respectively (together, the “Earn-Out Consideration”). The estimated fair value of the Earn-Out Consideration was $2.0 million as of the acquisition date (see Note 11 for further discussion). The acquisition was funded from cash on hand and borrowings under the Company’s Revolver. The Company recognized the assets acquired and liabilities assumed at their estimated fair values as of the acquisition date. The excess of the purchase price over the net tangible and identifiable intangible assets was recorded to goodwill. Fully's operating results are reported in the Office segment and have been included in the consolidated results of operations from the acquisition date.
Pro forma financial information has not been presented for the Fully acquisition as the impact to the Company's Consolidated Financial Statements was not material.
The following table summarizes the final estimates of the fair value and useful lives of the intangible assets acquired as of the August 20, 2019 Fully acquisition date (dollars in millions):
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
Muuto
On January 25, 2018, the Company acquired one hundred percent (100%) of the shares of Muuto Holding ApS and MIE4 Holding 5 ApS, which collectively held all the business operations of Muuto ApS (“Muuto”). Muuto’s affordable luxury products span commercial and residential applications, adding scale and diversity to the Company’s business. The aggregate purchase price for the acquisition was $307.7 million, net of $7.6 million of cash acquired. The Company recognized the assets acquired and liabilities assumed at their estimated fair values as of the date of acquisition. The results of operations of Muuto have been included in the Company’s Lifestyle segment beginning January 25, 2018. The Company funded the acquisition with proceeds from debt issued under the Third Amended and Restated Credit Agreement, as well as cash on hand (see Note 13). The Company recorded acquisition and certain other costs incurred in connection with the acquisition totaling $5.1 million within selling, general, and administrative expenses in its Consolidated Statement of Operations and Comprehensive Income for the year ended December 31, 2018.
The following table summarizes the fair values assigned to the assets acquired and liabilities assumed of Muuto and the resulting goodwill as of the January 25, 2018 acquisition date (in millions):
The excess of the purchase price over the net tangible and intangible assets is recorded to goodwill and primarily reflects the assembled workforce and expected synergies. Goodwill is not deductible for tax purposes.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
The following table summarizes the final estimates of the fair value and useful lives of the intangible assets acquired as of the January 25, 2018 Muuto acquisition date (dollars in millions):
The following table presents unaudited pro forma information for the period presented as if the acquisition of Muuto had occurred as of January 1, 2017 (in millions):
The unaudited pro forma financial information has been presented for illustrative purposes only and is not necessarily indicative of results of operations that would have been achieved had the acquisition taken place on the date indicated, or of results that may occur in the future. The pro forma financial information presented above has been derived from the historical consolidated financial statements of the Company and from the historical consolidated financial statements of Muuto.
The pro forma financial information presented above include adjustments for: (1) incremental amortization expense related to fair value adjustments to identifiable intangible assets, (2) incremental interest expense for outstanding borrowings to reflect the terms of the amended Credit Agreement, (3) nonrecurring items, (4) the tax effect of the above adjustments.
The pro forma information presented for the year ended December 31, 2018 excludes expenses for future payments that are considered compensation for post combination service of $3.2 million, loss on debt extinguishment of $1.4 million, acquisition costs of $1.9 million, and acquisition-related inventory step-up valuation adjustment of $0.9 million, and includes incremental interest expense of $0.1 million and incremental amortization of intangibles of $0.8 million. The income tax impact of these adjustments for the year ended December 31, 2018 was $1.3 million.
5. INVENTORIES
Inventories consisted of the following as of the dates presented (in millions):
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
6. PROPERTY, PLANT, AND EQUIPMENT, NET
Property, plant and equipment, net consisted of the following as of the dates presented (in millions):
Depreciation expense on property, plant and equipment was $32.2 million, $29.6 million and $25.5 million for the years ended December 31, 2020, 2019 and 2018, respectively. During 2020, 2019 and 2018, the Company capitalized interest of approximately $0.5 million, $0.5 million and $0.8 million, respectively.
7. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Goodwill
During the fourth quarter of 2020, the Company performed its annual assessment of impairment to goodwill allocated to its reporting units. The Company has four reporting units: Office, Lifestyle, Muuto and Europe Studio. No goodwill is allocated to Europe Studio. Given the significant impact the COVID-19 pandemic had on the Company's market capitalization, profitability and demand for certain components of its product portfolio, the Company elected to perform quantitative impairment tests of goodwill on all three of the reporting units to which goodwill is allocated.
A considerable amount of management judgement and assumptions are required in performing these impairments tests, particularly as it relates to future cash flow streams derived from revenue and after-tax operating income projections through the terminal year, as well as the discount and long-term growth rates used to value those cash flow streams and develop the terminal values. While the Company believes the judgements and assumptions to be reasonable, different assumptions could change the estimated fair values per reporting unit, resulting in different outcomes from those reached in connection with the impairment tests noted above.
Based on the results of the tests performed, there was no indication of impairment to the goodwill allocated to any of the reporting units, as the estimated fair value exceeded the respective carrying amount in each case, as summarized in the table below:
The Company is unable to predict future impacts of the COVID-19 pandemic, how long conditions related to the pandemic will persist, what additional restrictions might be placed on the private sector by federal, state and local governments in the U.S. and abroad, when herd immunity will be reached in the applicable geographies in which the Company operates or sells its products or what the future of the workplace will really look like over the relevant timeframe. Any action on the part of government (at all levels, in all geographies) that requires or encourages people to stay home, continue the practice of social distancing or avoid large indoor gatherings is likely to have some negative impact on demand for certain components of the Company's product portfolio. The Company will continue to monitor changes in the macro
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
environment and test more frequently if those changes indicate that goodwill might be impaired.
The following table summarizes the changes in the carrying amount of goodwill by reportable segment for the years ended December 31, 2020 and 2019 (in millions):
The Company did not record any goodwill impairment charges during 2020, 2019 or 2018.
Intangible Assets
The components of intangible assets, net are as follows (in millions):
During the fourth quarter of 2020, the Company performed its annual assessment of impairment to its tradename intangible assets with indefinite lives. In connection therewith, the Company elected to perform quantitative valuations of its principal indefinite-lived tradenames, including Knoll, Holly Hunt and Muuto.
Based on the results of the tests performed, there was no indication of impairment to any of the tradenames noted above, as the estimated fair value exceeded the respective carrying amount in each case, as summarized in the table below:
Pursuant to additional quantitative tests performed on the balance of the indefinite-lived intangibles, the Company determined that the DatesWeiser tradename was impaired, as its estimated fair value was less than its carrying amount of $2.3 million. Using the relief-from-royalty method, under which assumed royalty and discount rates of 1.5% and 13.0%, respectively, were employed, the Company concluded that the DatesWeiser tradename had an estimated fair value of $0.9 million, to which it was written down. The resultant non-cash impairment charge of $1.4 million, included in Loss on fair value measurements on the Consolidated Statements of Operations and Comprehensive Income, is reflected in the Office Segment operating results for 2020 (see Note 22).
The decline in the fair value of the DatesWeiser tradename was primarily attributable to certain negative trends within the Office Segment's traditional markets brought about by the COVID-19 pandemic. DatesWeiser's product portfolio, comprised of high-end conference furniture deployed on-premise, experienced significant order and revenue declines during the second half of 2020. The negative trends noted above, which remain largely in place as of the end of 2020, also prompted the Company to reclassify the DatesWeiser tradename to finite-lived, which will be amortized over its newly estimated useful life of seven years.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
During the fourth quarter of 2019, the Company performed its annual assessment of impairment to its tradename intangible assets with indefinite lives. The Company determined that the Edelman Leather tradename was fully impaired. Accordingly, the Edelman tradename was written-off completely, resulting in a non-cash impairment charge of $6.5 million, included in Loss on fair value measurements on the Consolidated Statements of Operations and Comprehensive Income. Edelman is reflected in the Lifestyle Segment operating results for 2019 (see Note 22). The decline in the fair value of the Edelman tradename was primarily attributable to weaker than expected revenue during the latter part of 2019, a corresponding reduction in future revenue expectations and a reduction in the royalty rate used for valuation purposes. The revenue reductions were primarily a result of lower sales of luxury products, an aging of Edelman showrooms, and the inability to replace private aviation customers with a comparable revenue stream.
There were no impairments of indefinite-lived intangible assets during 2018.
Amortization expense related to finite-lived intangible assets was $11.1 million, $8.9 million, and $8.9 million for the years ended December 31, 2020, 2019, and 2018, respectively. As of December 31, 2020, the estimated aggregate amortization expense for each of the five succeeding fiscal years is as follows (in millions):
8. OTHER CURRENT LIABILITIES
Other current liabilities are comprised of the following (in millions):
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
9. LEASES
The Company has commitments under operating leases for certain machinery and equipment, as well as manufacturing, warehousing, showroom and other facilities used in its operations. The Company has no finance leases. Excluding short-term leases, the Company’s leases have initial terms ranging from 1 to 16 years, most of which include options the Company may exercise to extend or renew the lease for 1 to 6 years, and some of which include options to terminate the leases with notification periods of up to 1 year. Certain lease agreements contain provisions for future rent increases. Payments due under lease contracts are fixed.
Lease cost recognized in the consolidated statements of operations for 2020 and 2019 is summarized as follows (in millions):
The Company recognized rent expense of $32.1 million for the year ended December 31, 2018.
Other lease information as of and for the years ended December 31, includes (dollars in millions):
As of December 31, 2020, maturities of the Company's operating lease liabilities are as follows (in millions):
As of December 31, 2020, the Company has entered into operating leases that have not yet commenced, for which it will recognize ROU assets and lease liabilities of approximately $37.9 million. These leases will commence in 2021 with lease terms of 3 years to 11 years.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
10. PENSION AND OTHER POST-EMPLOYMENT BENEFITS
The Company had two domestic defined benefit pension plans and four plans providing for other post-employment benefits, including two medical and two life insurance coverage plans. One of the pension plans and one each of the medical and life insurance coverage plans covered eligible U.S. nonunion employees while the other pension plan and one each of the medical and life insurance coverage plans covered eligible U.S. union employees. The Company uses a December 31 measurement date for all of these plans.
Prior to 2017, the Company froze all of the defined benefit plans thereby eliminating the accrual of future benefits and closed entry to new participants. During 2019, the union pension plan paid lump sum distributions to certain participants and purchased annuities from an insurance company to cover the benefits available to employees who did not elect a lump sum payment, and the Company terminated the plan. The remaining balance of union pension plan assets of $2.0 million was transferred to the Company's U.S. retirement savings plan. There were no assets or liabilities of the union pension plan remaining at December 31, 2019. Also during 2019, the Company terminated the medical OPEB plan for nonunion employees.
The following table sets forth a reconciliation of the related benefit obligation and plan assets related to the benefits provided by the Company (in millions):
Significant changes in the pension projected benefit obligation for the year ended 2020 include a $17.2 million actuarial loss attributable to the change in discount rate from 3.34% to 2.68%, a $4.4 million actuarial loss attributable to lump sum conversion assumption changes, and a $1.7 million actuarial gain due to the update to the generational mortality projection scale to reflect the most recently published scale adjusted for a ‘Slow Recovery’ improvement scale due to COVID-19.
Similarly, significant changes in the pension projected benefit obligation for the year ended 2019 include a $32.0 million actuarial loss attributable to the decrease in discount rate, an $8.2 million actuarial loss attributable to lump sum
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
conversion assumption changes, and a $0.6 million actuarial gain due to the update to the generational mortality projection scale to reflect the most recently published.
Assumptions used in computing the benefit obligation as of December 31, 2020 and 2019 were as follows:
The following table presents the fair value of the Company's pension plan investments as of December 31, 2020 and 2019 (in millions):
Short-term investments are primarily held in registered short-term investment vehicles which are valued using a market approach based on quoted market prices of similar instruments.
U.S. government securities and corporate bonds are primarily valued using a market approach with inputs that include broker quotes, benchmark yields, base spreads and reported observable trades for identical or comparable instruments.
Investments in comingled, common investment trust funds are carried at net asset value ("NAV") as a practical expedient to estimate fair value. The NAV is the total value of the fund divided by the number of shares outstanding. Adjustments to NAV, if any, are determined based on evaluation of data provided by fund managers, including valuation of the underlying investments derived using inputs such as cost, operating results, discounted future cash flows and market-based comparable data. In accordance with ASC 820-10, investments that are measured at NAV practical expedient are not classified in the fair value hierarchy; however, their fair value amounts are presented in these tables to permit reconciliation of the fair value hierarchy to the total plan assets disclosed in this footnote. Termination of investing in the common collective trust requires a 30-day notice period.
See Note 2 of the consolidated financial statements for the description of the levels of the fair value hierarchy.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
The following table sets forth the consolidated balance sheets presentation for components relating to the Company's pension and OPEB plans (in millions):
The following table sets forth changes in the benefit obligation before income taxes recognized in other comprehensive income for the Company's pension and OPEB plans (in millions):
The following table sets forth the components of the net periodic benefit cost (income) of the Company's pension and OPEB plans (in millions):
(1)The Pension settlement charge for 2020 is related to cash payments for lump sum elections. The pension settlement charge for 2019 is comprised of two components. First, the Union Pension Plan terminated in 2019. As a result of the plan termination the plan settled all participant benefits, which triggered a settlement charge of $14.5 million in 2019. Second, the Nonunion Plan executed a lump sum window for both retirees and terminated vested participants. The lump sums paid to Nonunion participants caused a settlement charge of $6.6 million in 2019. The pension settlement charge for 2018 related to the purchase of annuities for certain plan retirees as well as cash payments for lump sum elections.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
Assumptions used to determine net periodic benefit cost for the years ended December 31, 2020, 2019, and 2018 were as follows:
The expected long-term rate of return on assets is based on management's expectations of long-term average rates of return to be earned on the investment portfolio. In establishing this assumption, management considers historical and expected returns for the asset classes in which the plan assets are invested.
For purposes of measuring the benefit obligation associated with the Company's OPEB plans as of December 31, 2020, as well as the assumed rate for 2020, the following rates were assumed to affect the per capita costs of the following covered benefits:
The Company's pension plans' weighted-average asset allocations by asset category as of December 31, 2020 and 2019, were as follows:
The Company's nonunion pension plan investment policy includes an asset mix based on the Company's risk posture. The investment policy follows a glide path approach that shifts a higher portfolio weighting to assets with interest rate sensitive characteristics, similar to those used for liability measurement, as the funded status increases. The investment policy states a target allocation based on the plan's funded status of approximately 54% return seeking investments (growth assets) and 46% liability hedging investments (fixed income). Inclusion of the fixed income assets is to hedge risk associated with the plan's liabilities along with providing potential growth through income. These assets should primarily invest in fixed income instruments of the U.S. Treasury and government agencies and investment-grade corporate bonds. The return seeking investments (growth assets) can consist of broadly diversified domestic equity, international equity, fixed income, alternative investments, commodities, and real estate assets. The purpose of these assets is to provide the opportunity for capital appreciation, income, and the ability to diversify investments. A mix of mutual funds, exchange traded funds, and separate accounts are used as the plan's investment vehicles with clearly stated investment objectives and guidelines, as well as offer competitive long-term results.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
The Company expects to contribute $0.3 million to its OPEB plans in 2021. Currently, no contributions are expected in 2021 for the Company's nonunion pension plan. Estimated future benefit payments under the pension and OPEB plans are as follows (in millions):
The Company also sponsors 401(k) retirement savings plans for all U.S. associates. Under the 401(k) retirement savings plans, participants may defer a portion of their earnings up to the annual contribution limits established by the Internal Revenue Service, and the Company matches a portion of the participant's deferral up to a maximum of 3% of the participant's salary. The Company also may make profit-sharing contributions based on the Company's financial performance. The Company's total expense under the 401(k) plans for U.S. employees was $1.6 million for 2020, $4.3 million for 2019 and $3.9 million for 2018. During 2020, the Company suspended employer 401(k) match contributions, which resulted in a reduction of expense. Employees of the Canadian, Belgium, Denmark and United Kingdom operations also participate in defined contribution pension plans sponsored by the Company. The Company's expense related to these plans for 2020, 2019, and 2018 was $1.2 million, $1.8 million, and $1.7 million, respectively.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of the Company’s cash and cash equivalents, classified as Level 1 within the fair value hierarchy, approximate carrying value due to their short maturities.
The fair value of the Company’s long-term debt, classified as Level 2 within the fair value hierarchy, approximates its carrying value, as it is variable rate debt and the terms are comparable to market terms as of the balance sheet dates.
Recurring Fair Value Measurements
The Company measures certain financial liabilities at fair value on a recurring basis. The following table summarizes the valuation of those liabilities as of the dates presented (in millions):
(1)In connection with the acquisition of Fully in August 2019, the Company is contingently liable to make additional payments in the form of consideration based upon the achievement of certain performance targets. The maximum amount of contingent consideration that could be earned through 2023 is $15.0 million.
Interest Rate Swap
The fair value of the interest rate swap is based on observable prices as quoted for receiving the variable one-month London Interbank Offered Rates (LIBOR) and paying fixed interest rates and therefore is classified as Level 2 within the fair value hierarchy.
Contingent Consideration Obligation
The fair value measurement of the Company’s contingent consideration obligations is based on significant, unobservable inputs for which little or no market data exists, and thus represents a Level 3 measurement. The contingent consideration obligations are revalued each reporting period, with changes in fair value recognized in the consolidated statements of operations. The valuation inputs utilized to estimate the fair value of the contingent consideration obligations as of December 31, 2020, included a discount rate of 2.5%, Fully's net sales and earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the year ended December 31, 2020, and projections related to Fully's net sales and EBITDA for each of the calendar years 2021 through 2023.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
For the year ended December 31, 2020, the $12.5 million change in the fair value of the Company’s contingent consideration obligations was primarily due to changes in expectations related to the achievement of the applicable performance targets. The emergent and seemingly durable shift to a significant “Work-from-home” (“WFH”) paradigm, catalyzed in large measure by restrictions placed on business operations and movement generally by state and local governments throughout 2020, aligns well with Fully’s WFH product portfolio and e-commerce capabilities. As of December 31, 2020, $1.2 million of the contingent consideration obligation is classified as current and is included in Other current liabilities, while the remaining $13.3 million is included in Other non-current liabilities on the consolidated balance sheets.
There were no additional assets and/or liabilities recorded at fair value on a recurring basis as of December 31, 2020 or 2019.
Assets Measured at Fair Value on a Nonrecurring Basis
The following table presents the impairment losses on assets that were measured at estimated fair value on a nonrecurring basis (in millions):
(1)See Note 7 for additional information on impairments to tradenames.
(2)The estimated fair values of the impaired assets were based on significant inputs that were not observable in the market and are considered to be Level 3 inputs (see Note 2).
Other than the fair value measurements applied to the DatesWeiser and Edelman tradenames, the Company did not have any non-recurring fair value measurements during 2020, 2019 or 2018.
12. DERIVATIVE INSTRUMENTS
The Company is exposed to certain market risks, including the effect of changes in interest rates on future payments to be made on its variable rate debt. The Company utilizes a derivative instrument to mitigate its financial exposure to interest rate volatility. The derivative instrument, which is placed with a financial institution that the Company believes to be of acceptable credit risk, takes the form of an interest rate swap. The Company does not use derivatives for speculative trading purposes.
Cash flow hedge
In January 2018, the Company entered into an interest rate swap contract, which is designated as a cash flow hedge of the forecasted interest payments associated with a portion of the Company's variable rate debt. The interest rate swap hedges one-month LIBOR, which effectively converts a portion of the variable rate debt to a fixed interest rate. The interest rate swap was effective as of December 31, 2018, matures January 23, 2023 and carries a fixed rate of 2.63%. As of December 31, 2020, the interest rate swap has a notional amount of $200.0 million, which decreases over time by $50 million increments as follows:
The following table summarizes the fair value of the Company’s derivative instrument, as well as the location of this instrument on the Consolidated Balance Sheets as of the dates presented (in millions):
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
The fair value of the swap recorded in Accumulated Other Comprehensive Loss ("AOCL") may be recognized in the Consolidated Statement of Operations if certain terms of the agreement change, are modified or if the loan is extinguished. As of December 31, 2020, there was no hedge ineffectiveness associated with the Company’s interest rate swap and no portion of the cash flow hedge is excluded from the assessment of effectiveness. The Company reclassified $5.1 million from AOCL to interest expense within the Consolidated Statement of Operations during the year ended December 31, 2020. Based on the forward interest rate curve in place as of December 31, 2020, the Company expects to reclassify an additional $5.1 million of unrealized losses related to its cash flow hedge from AOCL into earnings over the next twelve months.
13. INDEBTEDNESS
The following table summarizes the Company's long-term debt as of the dates presented (in millions):
Credit Facility
On August 21, 2020, the Company entered into the Second Amendment to the Third Amended and Restated Credit Agreement (the "Credit Agreement Amendment"), dated as of January 23, 2018, as previously amended by the First Amendment to the Third Amended and Restated Credit Agreement, dated as of August 26, 2019 (together, as amended, the "Credit Agreement"). The Credit Agreement Amendment, among other things, relaxed certain requirements or constraints under which affirmative covenants related to net leverage ratios are determined. In connection with the closing of the Credit Agreement Amendment, a covenant was added requiring the Company to make partial prepayments of term-loan principal in the amount of $50.0 million, all of which were made during the third quarter of 2020.
Borrowings under the revolving credit facility (the "Revolver") and the term loan facilities bear interest, at the Company’s election, at either (i) the Eurocurrency Rate (as defined in the Credit Agreement), plus a spread based on the Company’s leverage ratio or (ii) the Base Rate (as defined in the Credit Agreement), which is a fluctuating rate equal to the highest of (a) the prime rate announced from time-to-time by Bank of America, (b) the Federal Reserve System’s federal funds rate, plus 0.50% and (c) the Eurocurrency Rate, plus 1.00%.
Indebtedness incurred under the credit facility is secured by substantially all of the Company’s tangible and intangible assets, including, without limitation, the Company’s intellectual property. The Company’s direct and indirect wholly-owned domestic subsidiaries have also guaranteed the obligations of the Company and the foreign borrowers under the Credit Agreement and pledged substantially all of their tangible and intangible assets as security for their obligations under such guarantee. Certain of the Company’s wholly-owned foreign subsidiaries have guaranteed the obligations of the foreign borrowers under the Credit Agreement and pledged certain of their assets as security for their obligations under such guarantee.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
Repayments under the Credit Agreement can be accelerated by the lenders upon the occurrence of certain events of default, including, without limitation, a failure to pay any principal, interest or other amounts in respect of loans when due, breach by the Company (or its subsidiaries) of any of the covenants or representations contained in the Credit Agreement or related loan documents, failure of the Company (or its material subsidiaries) to pay any amounts owed with respect to other significant indebtedness of the Company or such subsidiary, or a bankruptcy event with respect to the Company or any of its material subsidiaries.
The Credit Agreement requires the Company to comply with various affirmative and negative covenants, including, without limitation (i) covenants to maintain a minimum specified interest coverage ratio and maximum specified net leverage ratio (or under certain circumstances, a maximum specified net secured leverage ratio), and (ii) covenants that prevent or restrict the Company’s ability to pay dividends, engage in certain mergers or acquisitions, make certain investments or loans, incur future indebtedness, engage in sale-leaseback transactions, alter its capital structure or line of business, prepay subordinated indebtedness, engage in certain transactions with affiliates and sell stock or assets. At December 31, 2020, the Company was in compliance with all covenants applicable to its credit facility.
Revolver
The commitments and available borrowing capacity under the Revolver were as follows as of the dates presented:
(1)The Company's actual borrowing availability under the Revolver as of December 31, 2020 is constrained by certain financial covenants.
At December 31, 2020, borrowings under the Revolver include $61.0 million at a weighted-average LIBOR rate of 1.65%. At December 31, 2019, borrowings under the Revolver included $10.0 million at a base rate of 5.25% and $128.5 million at a weighted-average LIBOR rate of 3.27%. As of December 31, 2020 and 2019, letters of credit issued under the Revolver incurred interest at the rate of 1.50%, while commitment fees on the undrawn portion of the Revolver were charged at the rate of 0.225%.
Borrowings under the Revolver may be repaid at any time, but no later than at maturity in August 2024. The Company retains the right to terminate or reduce the size of the Revolver at any time.
Term Loan Facilities
As of December 31, 2020, the U.S term loan ("USTL") and multi-currency term loans ("MCTL") incurred interest at the rate of 1.65% and 1.50%, respectively. As of December 31, 2019, the USTL and MCTL incurred interest at the rate of 3.30% and 1.50%, respectively. The Eurocurrency rates used for the U.S. dollar-denominated term loan and the Euro-denominated term loans are one-month LIBOR and one-month or three-month Euribor, respectively. Prior to the execution of the Credit Agreement Amendment, amortization of term loan principal on both the USTL and the MCTL was required in equal quarterly installments at the rate of 5% per annum, as applied to the size of each facility as provided for in the Third Amended and Restated Credit Agreement, with the remaining balance due upon maturity. Pursuant to the Credit Agreement Amendment and the pro rata application of the partial prepayments of term-loan principal in the amount of $50.0 million during the third quarter of 2020, quarterly principal amortization payments on the USTL and the MCTL are required in the approximate fixed amounts of $2.8 million and €0.7 million, respectively. The remaining balance is still due upon maturity.
Third Amended and Restated Credit Agreement
On January 23, 2018, the Company amended its existing credit facility at the time, dated as of May 20, 2014 (the “Second Amended and Restated Credit Agreement”), whereby the existing credit agreement was amended and restated in its entirety (as amended and restated, the "Third Amended and Restated Credit Agreement"), by and among the Company and certain foreign subsidiaries of the Company, as borrowers, and certain domestic and foreign subsidiaries of the Company, as guarantors.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
The Third Amended and Restated Credit Agreement provided for a $750.0 million credit facility that was scheduled to mature in five years, consisting of a revolving commitment in the amount of $400.0 million, which may be made available in U.S. dollars, Euro, British Pound and other foreign currencies, a U.S. term loan commitment in the amount of $250.0 million and a multi-currency term loan commitment in the amount of €81.7 million. The Third Amended and Restated Credit Agreement also includes an option to increase the size of the Revolver or incur incremental term loans by an amount equal to the greater of $250.0 million or 90% of the EBITDA of the Company and its subsidiaries for the four fiscal quarters prior to such increase or additional loan, subject to the satisfaction of certain terms and conditions. Proceeds from the debt issued under the Third Amended and Restated Credit Agreement were used, among other things, to (1) fund the Muuto acquisition and, (2) refinance certain indebtedness.
Maturities
As of December 31, 2020, the Company's contractual maturities of its debt are as follows (in millions):
Deferred Financing Fees
Amortization expense related to deferred financing fees, recognized as a component of interest expense in the consolidated statements of operations, was $0.9 million, $1.0 million and $1.1 million for the years ended December 31, 2020, 2019 and 2018, respectively.
In connection with the Credit Agreement Amendment executed in the third quarter of 2020, the Company incurred $0.3 million of debt issuance costs, which were capitalized and are being amortized through August 2024. The Company recorded a loss on extinguishment of debt of approximately $0.2 million related to the write-down of the balance of the unamortized costs associated with the partial prepayments of term-loan principal noted above.
During 2019 and 2018, the Company recorded losses on extinguishment of debt of approximately $0.4 million and $1.4 million, respectively, related to amendments to its Credit Agreement.
14. COMMITMENTS AND CONTINGENT LIABILITIES
Litigation
The Company is currently involved in matters of litigation and legal proceedings, 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 financial position, results of operations, or cash flows.
Warranty
The Company provides for estimated product warranty expenses, which are included in other current liabilities, when related products are sold. Because warranty estimates are forecasts that are based on the best available information, primarily historical claims experience, future warranty claims may differ from the amounts provided.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
Changes in the warranty reserve are as follows (in millions):
15. RESTRUCTURING AND OTHER COST REDUCTION INITIATIVES
In January 2020, the Company announced its plan to consolidate its manufacturing footprint in North America, resulting in the closure of the Grand Rapids, Michigan manufacturing facility (“Grand Rapids”). The closure was part of an initiative to optimize the Company’s North American manufacturing operations. In June 2020, the Company sold its Grand Rapids land and building assets for $12.9 million and received cash proceeds of approximately $12.2 million, net of transaction costs and customary closing adjustments. The Company recognized a gain on sale of approximately $1.2 million, which is netted against Restructuring charges on the accompanying Consolidated Statement of Operations. Concurrent with the sale, the Company entered into a lease agreement under which the Company arranged to lease back certain zoned premises within the facility for various terms, none of which extend beyond August 2021, and the majority of which expired as of December 31, 2020.
As of December 31, 2020, all production has been migrated from Grand Rapids to the Company’s other North American facilities. Other restructuring actions the Company initiated during 2020 relate to supply chain optimization, which are expected to be completed by the end of 2021. The Company’s existing manufacturing operations in East Greenville, Pennsylvania; Muskegon, Michigan; and Toronto, Ontario (Canada) are not otherwise impacted by the restructuring plan.
In addition to the restructuring actions noted above, under which approximately 70 positions were eliminated on a net basis, the Company has executed certain other cost reduction initiatives in May and October in response to the current economic environment from COVID-19 resulting in the elimination of approximately 500 positions. Further, management approved plans to close five of its North American Office showrooms. In connection with these facilities-related actions, the Company estimates that it will incur an additional $7.6 million of cash charges, $5.0 million of which is attributable to the showroom closures, and $2.6 million of which is attributable to supply chain optimization. The Company expects the plan to be fully executed by the end of 2021.
Between the restructuring actions and other initiatives noted above, the Company expects to incur total charges of approximately $36.7 million, comprised of severance and other one-time termination benefits, facilities-related charges and other associated costs. The Company anticipates making cash payments totaling approximately $31.2 million, approximately $6.0 million of which will be paid subsequent to 2020.
During the period ended December 31, 2020, the Company recognized restructuring charges of $28.5 million, attributable to the Office and Lifestyle segments in the amounts of $20.3 million and $0.8 million, respectively, and to Corporate in the amount of $7.4 million. The restructuring charges have been recognized between operating expenses and Cost of sales in the amounts of $27.1 million and $1.4 million, respectively, on the accompanying Consolidated Statement of Operations. The restructuring charge of $1.4 million included in Cost of sales represents non-cash items related to abandoned equipment and inventory write-downs, which is not reflected in the table below.
Changes in restructuring and exit activity-related obligations during the year ended December 31, 2020 are summarized as follows:
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
The restructuring reserve is classified as current and is included in Other current liabilities on the Consolidated Balance Sheets.
16. STOCK-BASED COMPENSATION
The Company sponsors several stock compensation plans (collectively, the "Stock Compensation Plans") under which awards denominated or payable in shares, units or options to purchase shares of Knoll common stock may be granted to officers, certain other employees, directors and consultants of the Company. As of December 31, 2020, there were approximately 0.9 million shares authorized and available for issuance pursuant to the Stock Compensation Plans. Equity awards are granted under the Stock Compensation Plans based upon terms and conditions established by the Compensation Committee of the Company's Board of Directors (the "Committee").
For the years ended December 31, 2020, 2019, and 2018, the Company recognized tax benefits related to stock-based compensation costs of $3.4 million, $2.8 million and $2.3 million, respectively.
As of December 31, 2020, unrecognized compensation cost related to all unvested equity awards was $18.1 million, the vast majority of which relates to unvested restricted shares and restricted stock units. This expense is expected to be recognized over a weighted-average period of 1.9 years.
Restricted Shares
Restricted shares generally vest at the end of the three or four-year period following the grant date. Stock-based compensation cost is measured at grant date based on the fair value of the underlying awards on the grant date. Grantees of restricted shares are entitled to participate in dividends declared on the Company's outstanding common stock, the accumulated balance of which is paid or payable upon the vesting date of the underlying restricted shares.
The following table summarizes activity during 2020 with respect to restricted shares (shares in thousands):
The fair value of restricted shares that vested during 2020, 2019 and 2018 was $4.8 million, $5.0 million, $7.4 million, respectively.
Restricted Stock Units
All of the Company's outstanding restricted stock units ("RSUs") are contingently issuable, as they are subject to either certain performance-based conditions ("PBRSUs") or a market-based condition related to relative total shareholder return ("MBRSUs"). The Committee determines the time period over which RSUs vest, as well as the vesting schedule per award, which is generally at the end of the three or four-year period following the grant date. PBRSUs have payouts that range from 0% to 150% of the target award. MBRSUs either payout at 100% or not at all. All RSUs settle in shares and are entitled to participate in dividends declared on the Company's outstanding common stock, the accumulated balance of which is paid or payable upon the vesting of the underlying RSUs. To the extent that performance or market conditions are not fully attained, the underlying RSUs are forfeited.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
During the third quarter of 2020, the Company amended the terms of certain PBRSUs granted in 2019 by (i) extending the performance period by one calendar year to December 31, 2023, and (ii) reducing the applicable cumulative performance target by approximately 30%. There was no incremental cost recognized at the modification date as a result of these amendments.
The estimated fair values of MBRSUs are initially determined on the grant date using a Monte Carlo simulation model. The Company's assumptions used as inputs into the valuation process are based on the expected life, which matches the applicable vesting period.
The following weighted-average assumptions were used as inputs into the valuation of the MBRSUs granted during the fiscal years indicated:
The following table summarizes activity during 2020 with respect to RSUs (units in thousands):
(1)The weighted-average grant date fair values of PBRSUs forfeited in 2020 and outstanding as of December 31, 2020, reflect the modifications noted above.
The fair value of RSUs that vested and settled in shares during 2020, 2019 and 2018 was $4.9 million, $1.9 million, and $1.4 million, respectively.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
Stock Options
Stock options are granted with an exercise price equal to the market value of Knoll's common stock on the date of grant and have a maximum contractual term of ten years. The fair value of each option is initially measured on the grant date using the Black-Scholes option pricing model. The expected life is estimated based on the vesting period and expiration date of the award. Expected volatility is estimated based on the historical volatility of the Company's stock price over a period of time matching the expected life. The dividend yield is based on the Company's historical dividend record. The risk-free rate is based on the applicable U.S. Treasury Note rate.
The following table summarizes activity during 2020 with respect to stock options (shares in thousands):
The weighted-average grant-date fair value of options granted during the years ended December 31, 2019 and 2018 was $4.65 and $4.01 per option, respectively. There were no options granted in 2020. No options were exercised during 2020, 2019 or 2018. The total grant-date fair value of options that vested during 2019 was less than $0.1 million. There were no options that vested in 2020 or 2018.
17. STOCKHOLDERS' EQUITY
Common Stock
The following table presents the change in the number of shares of common stock outstanding during the years ended December 2020, 2019, and 2018 (table in thousands and is inclusive of non-voting restricted shares):
Treasury Stock (in thousands)
As of December 31, 2020 and 2019, the Company held 16,813 and 16,521 treasury shares, respectively. The Company records repurchases of its common stock for treasury at cost.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
Accumulated Other Comprehensive Income (Loss)
The following table summarizes the changes in AOCL by component during the years presented (in millions):
The following pension and OPEB reclassifications were made from AOCL into earnings during the periods presented (in millions):
(1)These accumulated other comprehensive income (loss) components are included in the computation of net periodic pension costs. See Note 10 for additional information.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
18. PREFERRED STOCK
On July 21 2020, the Company closed on an Investment Agreement (the “Investment Agreement”) entered into on June 22, 2020, with Furniture Investments Acquisitions S.C.S., a common limited partnership (société en commandite simple) (the “Buyer”), relating to the issuance and sale to the Buyer of 164,000 shares of the Company’s Series A Convertible Preferred Stock, par value $1.00 per share (the “Series A Preferred Stock”), for an aggregate purchase price of $164.0 million (the “Issuance”). The Issuance resulted in net cash proceeds of $161.8 million after transaction costs.
The Series A Preferred Stock will rank senior to the Company’s common stock, par value $0.01 per share (the “Common Stock”), with respect to dividend rights and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company. The Series A Preferred Stock will have a liquidation preference of $1,000 per share. Holders of the Series A Preferred Stock will be entitled to a cumulative dividend at the rate of 4.5% per annum, payable quarterly in arrears. The Company may elect, at its sole discretion, to pay dividends in cash or as a dividend in-kind with additional shares of Series A Preferred Stock having value equal to the amount of accrued dividends until the two years anniversary of the Closing Date, after which the Company must pay dividends in cash.
The Series A Preferred Stock will be convertible at the option of the holders thereof at any time into shares of Common Stock at a fixed conversion price of $16.75 per share of Series A Preferred Stock, subject to certain anti-dilution adjustments. At any time after the two-year anniversary of the Closing Date, if the volume weighted-average price of the Common Stock exceeds $29.3125 per share (subject to adjustment in certain cases) for at least 20 trading days in any period of 30 consecutive trading days, the Company may elect to convert all or a portion of the Series A Preferred Stock into shares of Common Stock.
Holders of the Series A Preferred Stock will be entitled to vote as a single class with the holders of the Common Stock on an as-converted basis. Holders of the Series A Preferred Stock will be entitled to a separate class vote with respect to, among other things, amendments to the Company’s organizational documents that have an adverse effect on the rights, preferences, privileges or voting power of the Series A Preferred Stock, authorizations or issuances by the Company of securities that are senior to, or equal in priority with, the Series A Preferred Stock and increases or decreases in the number of authorized shares or issuances of shares of Series A Preferred Stock after the Closing Date.
At any time on or after the sixth anniversary of the Closing Date, the Company may redeem, in whole or, from time to time, in part, the shares of Series A Preferred Stock for a redemption price equal to: (i) the sum of (x) the liquidation preference thereof, plus (y) all accrued and unpaid dividends, multiplied by (ii) (A) 110% if the redemption occurs at any time on or after the sixth anniversary of the Closing Date and prior to the seventh anniversary of the Closing Date, (B) 105% if the redemption occurs at any time on or after the seventh anniversary of the Closing Date and prior to the eighth anniversary of the Closing Date, and (C) 100% if the redemption occurs at any time on or after the eighth anniversary of the Closing Date.
Upon certain change of control events involving the Company, the holders of the Series A Preferred Stock may either (i) convert their shares of Series A Preferred Stock into Common Stock at the then-current conversion price or (ii) cause the Company to redeem their shares of Series A Preferred Stock. Additionally, upon certain change of control events involving the Company, the Company may elect to redeem the Series A Preferred Stock. If the holders of the Series A Preferred Stock elect to have their shares of Series A Preferred Stock redeemed, or if the Company elects to redeem the Series A Preferred Stock, in each case, in connection with a change of control, the redemption price per share will be an amount in cash equal to 100% of the sum of the liquidation preference thereof and all accrued but unpaid dividends, plus a premium if such change of control occurs on or before the seventh anniversary of the Closing Date, plus, (i) if the redemption date is prior to the sixth anniversary of the Closing Date, all dividends that would have accrued on such share from the change of control redemption date to the sixth anniversary of the Closing Date, or (ii) if the redemption date is on or after the sixth anniversary of the Closing Date and prior to the seventh anniversary of the Closing Date, all dividends that would have accrued on such share from the change of control redemption date to the seventh anniversary of the Closing Date. As the redemption feature is not solely within the control of the Company, the Series A Preferred Stock does not qualify as permanent equity and has been classified as mezzanine, or temporary, equity.
If the Company proposes to issue equity securities of any kind, then, until the earlier of (i) the first date on which the 50% Beneficial Ownership Requirement as described in the investment agreement is no longer satisfied and (ii) the irrevocable waiver by the Buyer of its designation rights, subject to certain exceptions, the Company will be required to offer the Buyer the opportunity to purchase a portion of such proposed issuance equal to (i) the number of shares of Series A Preferred Stock, on an as-converted basis, and/or shares of Common Stock issued upon conversion of such Series A Preferred Stock then beneficially owned by the Buyer, divided by (ii) the total number of shares of Common Stock and Series A Preferred Stock then outstanding, on an as-converted basis.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
Registration Rights
The Buyer and its affiliates will have certain customary registration rights with respect to shares of Common Stock held by the Buyer, including any Common Stock issued upon any future conversion of the Series A Preferred Stock, pursuant to the terms of a Registration Rights Agreement.
The following table presents a roll-forward of the Company's preferred stock for the periods presented (in millions, except shares, which are in thousands):
19. EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing net earnings available to common stockholders by the weighted-average number of common shares outstanding for the period. The Company’s Series A Preferred Stock shares are considered participating securities, as these securities have non-forfeitable rights to participating dividends (as defined in the Investment Agreement) if and to the extent that the Company pays any participating dividends, and thus require the two-class method of computing EPS. Under the two-class method, all earnings (distributed and undistributed) are allocated between the common shares and the participating securities. For the year ended December 31, 2020, there were no undistributed earnings allocated to the participating securities.
Diluted EPS is similarly computed, but includes the weighted-average dilutive effect, if any, of all outstanding potentially dilutive securities. Diluted EPS is calculated under the treasury stock method for equity awards issued under the Company’s stock compensation plans, and under both the two-class and if-converted methods for the Series A Preferred Stock, with the more dilutive amount reported. Potentially dilutive securities having an anti-dilutive effect are excluded from the calculation.
The following table sets forth the computation of basic and diluted EPS for the periods presented (in millions):
(1)For the year ended December 31, 2020, an aggregate of 0.3 million potentially dilutive securities representing options to purchase common stock and unvested shares of restricted stock, and common shares issuable upon assumed conversion of the Series A Preferred Stock totaling 4.4 million shares had the effect of being anti-dilutive and were excluded from the computation of diluted EPS. For the year ended December 31, 2018, less than 0.1 million of potentially dilutive securities representing options to purchase common stock were excluded from the computation of diluted EPS on account of being anti-dilutive. There were no exclusions for the year ended December 31, 2019.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
20. INCOME TAXES
The source of earnings before income taxes consisted of the following (in millions):
Income tax expense (benefit) is comprised of the following (in millions):
On March 27, 2020, the U.S. federal government enacted tax legislation under the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") in response to the economic impacts of the spread of COVID-19. The CARES Act provides, among other things, relief to corporate taxpayers by permitting additional carryback allowances for net operating losses ("NOLs") generated in tax years 2018 through 2020, and additional depreciation deductions related to qualified improvement property. The CARES Act also provides for changes to the limitations on interest expense deductibility for tax years beginning in 2019 and 2020.
The following table sets forth a reconciliation of the U.S. statutory federal income tax rate to the Company's effective income tax (benefit) rate for the following annual periods:
(1)Includes the tax effects of income tax rate differentials, deductions and credits applicable to the operations of the Company's foreign subsidiaries.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
(2)During 2018, the Company reversed a provisional amount recorded in December 2017 (the month in which the Tax Cuts and Jobs Act was enacted) related to withholding taxes on the repatriation of certain foreign earnings, effectively resulting in a tax benefit of $1.7 million.
(3)Primarily reflects the benefit derived from carrying back the domestic NOL generated in 2020 to the 2015 tax year.
(4)Primarily reflects the tax effects of certain nondeductible items (not separately stated above).
The following table sets forth the tax effects of temporary differences that give rise to the Company's deferred tax assets and liabilities (in millions):
As of December 31, 2020, to the extent the Company’s earnings attributable to its foreign subsidiaries are not considered permanently reinvested, a deferred tax liability for the tax consequences of remitting the accumulated earnings has been provided in the financial statements.
As of December 31, 2020, the Company had NOL carryforwards of approximately $18.3 million between the United Kingdom and Germany. These NOL carryforwards do not expire. The Company regularly evaluates positive and negative evidence as it relates to realizability of deferred tax assets in each jurisdiction. The Company continues to carry a valuation allowance against the deferred tax asset associated with the NOL carryforwards from operations in Germany due to the uncertainty of its realization, either in whole or in part. As of December 31, 2020, the Company recorded a deferred tax asset of $1.2 million for U.S. state and local NOLs, net of the federal effect. The state NOL deferred tax asset relates to multiple jurisdictions and the NOLs expire in various years beginning in 2023.
The following table summarizes the activity related to the Company's deferred tax asset valuation allowance and the changes therein during the periods presented (in millions):
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
(1)During 2020 and 2019, the valuation allowance related to the NOL carryforward from operations in Germany was partially released.
(2)Primarily foreign exchange impact
The following table presents a reconciliation of the total amounts of unrecognized tax benefits at the beginning and end of the periods presented (in millions):
All of the unrecognized tax benefits as of December 31, 2020, if recognized, would affect the Company's effective tax rate. The amounts of income tax-related interest and penalties recognized in the Consolidated Statements of Operations were not significant for the years ended December 31, 2020 and 2019, and 2018.
As of December 31, 2020, the Company is subject to U.S. Federal Income Tax examination for the tax years 2017 through 2020, and to non-U.S. income tax examination for the tax years 2013 to 2020. In addition, the Company is subject to state and local income tax examinations for the tax years 2016 through 2020.
21. OTHER INCOME, NET
The components of other income, net are as follows (in millions):
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
22. SEGMENT AND GEOGRAPHIC REGION INFORMATION
The tables below present the Company’s segment information (in millions):
(1)Intersegment sales are presented on a cost-plus basis which takes into consideration the effect of transfer prices between legal entities.
(2)Reflects pension settlement charges of $4.8 million, $21.0 million, and $5.7 million during 2020, 2019, and 2018, respectively; restructuring charges of $20.3 million, $0.8 million, and $2.6 million during 2020, 2019, and 2018, respectively; a $12.4 million loss on fair value remeasurement of contingent consideration and a $1.4 million intangible asset impairment charge during 2020.
(3)Lifestyle and Corporate results for 2020 reflect restructuring charges of $0.8 million and $7.4 million, respectively. Lifestyle results for 2019 reflect a $6.5 million intangible asset impairment charge. Lifestyle and Corporate results for 2018 reflect charges of $0.6 million and $1.3 million, respectively, related to the acquisition of Muuto.
(4)The Company does not allocate interest expense or other (income) expense, net to the reportable segments.
(5)The amounts reported above do not account for the change in accrued capital costs during the years ended December 31, 2020, 2019 or 2018.
Many of the Company's facilities manufacture products for both reportable segments. Therefore, it is impractical to disclose asset information on a segment basis.
KNOLL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
The Company markets its products in the United States and internationally, with its principal international markets being Canada and Europe. The table below contains information about the geographical areas in which the Company operates. Sales are attributed to the geographic areas based on the origin of sale, and property, plant, and equipment, net is based on the geographic area in which the asset resides (in millions):
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None
ITEM 9A.
ITEM 9A. 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 (December 31, 2020) ("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.
INTERNAL CONTROL OVER FINANCIAL REPORTING
Management's annual report on internal control over financial reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended, for the Company. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes without limitation, maintaining records that in reasonable detail accurately and fairly reflect our transactions, providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements, providing reasonable assurance that receipts and expenditures of company assets are made in accordance with management authorization, and providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected.
Our management assessed the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on our assessment, management concluded that the Company's internal control over financial reporting was effective as of December 31, 2020.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2020 has been audited by Ernst & Young LLP, the Company’s independent registered public accounting firm, as stated in their report included in Item 8, “Financial Statements and Supplementary Data.”
Changes in Internal Control Over Financial Reporting. During the period covered by this report, there has been no change in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Knoll, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Knoll, Inc.’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Knoll, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the 2020 consolidated financial statements of the Company and our report dated March 1, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s annual report on internal control over financial reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
March 1, 2021
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 relating to directors, director nominees and executive officers of the registrant is incorporated by reference from the information under the captions “Board of Directors,” “Election of Directors,” “Executive Officers,” “Board Meetings and Committees,” and “Code of Ethics,” contained in our Proxy Statement for our 2021 Annual Meeting of Stockholders (the “Proxy Statement”).
The information relating to the identification of the audit committee, audit committee financial expert and director nomination procedures of the registrant is incorporated by reference from the information under the caption “Board Meetings and Committees” contained in our Proxy Statement.
Our Board of Directors has adopted a code of ethics for all employees. This code is made available free of charge on our website at www.knoll.com. For further information see subsection “Code of Ethics” in our Proxy Statement.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is hereby incorporated by reference from the information under the caption “Executive Compensation” contained in our Proxy Statement.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Securities Authorized for Issuance Under Equity Compensation Plans
(1)Represents performance-based restricted shares awarded in connection with the Fully acquisition, the shares of which were granted and approved by the Company's Board of Directors in reliance on the inducement award exemption under NYSE's Listed Company Manual Rule 303A.08.
If there is an expiration, termination, or cancellation of any benefit granted under the plans without the issuance of shares, the shares subject to or reserved for that benefit may again be used for new stock options, rights, or awards of any type authorized under the plans.
All other information required by Item 12 is hereby incorporated by reference from the information under the caption “Security Ownership of Certain Beneficial Owners and Management” contained in our Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 is hereby incorporated by reference from the information under the captions “Transactions with Related Persons” and “Director Independence” contained in our Proxy Statement.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 14 is hereby incorporated by reference from the information under the caption “Independent Registered Public Accounting Firm” contained in our Proxy Statement.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)Documents filed as part of this Form 10-K:
(1) CONSOLIDATED FINANCIAL STATEMENTS (ITEM 8)
•Consolidated Balance Sheets as of December 31, 2020 and 2019
•Consolidated Statements of Operations and Comprehensive Income for the Years Ended December 31, 2020, 2019 and 2018
•Consolidated Statements of Equity for the Years Ended December 31, 2020, 2019 and 2018
•Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 and 2018
•Notes to the Consolidated Financial Statements
•Report of Independent Registered Public Accounting Firm
(2) FINANCIAL STATEMENT SCHEDULES
•All schedules for which provision is made in the applicable regulation of the Commission have either been presented in the Company's financial statements or are not required under the related instructions or are inapplicable and therefore have been omitted.
(3) EXHIBITS
Exhibit
Number Description
2.1 (b)Share Purchase Agreement, dated as of December 10, 2017, among Knoll Denmark ApS, Maj Invest Equity 4 K/S, B Holding 2005 ApS, KB ApS, Unos ApS and AK Cleemann Holding APS.
2.2 (g)Securities Purchase Agreement, dated February 3, 2014, among Knoll, Inc., Holly Hunt Enterprises, Inc., HHMI LLC, the Shareholders of Holly Hunt Enterprises, Inc. and the Members of HHMI LLC.
3.1 (a)Amended and Restated Certificate of Incorporation of Knoll, Inc.
3.2 (i)Amended and Restated By-Laws of Knoll, Inc.
3.3 (u)Certificate of Designations of Series A Convertible Preferred Stock, Par Value $1.00, of Knoll, Inc.
4.1 (m)Form of Stock Certificate.
4.2 (s)Description of the Registrant's Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934
10.1 (b)Third Amended and Restated Credit Agreement, dated as of January 23, 2018, by and among Knoll, Inc., certain of the domestic subsidiaries of Knoll, Inc., Bank of America, N.A., as Administrative Agent, Swing Line Lender and an L/C Issuer, Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Joint Lead Arranger and Sole Bookrunner, and certain other lenders and the other lenders party thereto.
10.2 (q)First Amendment to Third Amended and Restated Credit Agreement, dated as of August 26, 2019, among Knoll, Inc., certain subsidiaries of Knoll, Inc., as borrowers, certain foreign and domestic subsidiaries of Knoll, Inc., as guarantors, Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, and each of the lenders party thereto.
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* Management Contract or Compensatory Plan or Arrangement required to be identified by Item 15(a) (3) of Form 10-K.
** Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections
ITEM 16. FORM 10-K SUMMARY
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on this 1st day of March 2021.
KNOLL, INC.
By:/s/ ANDREW B. COGAN
Andrew B. Cogan
Chairman and Chief Executive Officer
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KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature appears below constitutes and appoints Andrew B. Cogan and Charles W. Rayfield, and each of them, his true and lawful attorneys-in-fact and agents with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Form 10-K, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed by the following persons on behalf of the Registrant and in the capacities and on the date indicated.