Gross profit

The Company's gross profit as a percentage of net sales decreased slightly in 1999 to 36.1% from 36.4% in 1998, after increasing in 1998 and 1997. These improvements reflect increased overhead absorption through increased sales and the impact of a cost reduction program, initiated in 1996, designed to improve raw materials sourcing, contain costs and rationalize facilities. In the first two years of the cost reduction program, the Company was able to reap significant benefits by improving raw materials sourcing, leveraging the net sales growth by simultaneously containing costs and beginning to streamline manufacturing processes by culling low volume surface materials, such as laminates, fabrics and paints. In 1998 and 1999, however, efforts to reduce costs and improve efficiencies began to require upfront commitment of expenses and capital, replacement of various manufacturing equipment, changes in significant processes and consolidation of certain facilities. At the same time, the Company has been in the midst of launching the largest new product portfolio in its history, experiencing expected disruptions and various inefficiencies. As a result, the benefits to be realized by most of the cost reduction efforts made in 1998 and 1999 are expected to occur in future periods, in some cases simply as time passes, but in others only as the Company's Steel operations experience unit sales growth. During the three-year period, pricing has not had a significant impact on gross margins; however, the Company continues to experience pressure on its discounts, especially as the industry softened during the current year.

In prior years, the Company reported identifiable costs associated with furniture distribution process changes, the restructuring and disposition of a non-furniture related manufacturing facility, certain manufacturing equipment write-offs and other matters, which aggregated $18.3 million for 1998 and $4.5 million for 1997. Management believes that costs similar to 1998 have been incurred during 1999, including the impacts of launching new products and the consolidation of the Company's chair plants.