Overview

The Corporation has two reportable segments: office furniture and hearth products. The Corporation is the second largest office furniture manufacturer in the world and the nation's leading manufacturer and marketer of gas- and wood-burning fireplaces. The Corporation utilizes its split and focus, decentralized business model to deliver value to its customers with its various brands and selling models. The Corporation is focused on growing its existing businesses while seeking out and developing new opportunities for growth.

Net sales for the third quarter of fiscal 2008 decreased 1.7 percent to $663.1 million. The decrease was driven by a decline in the new construction channel of the hearth products business and weakness in the supplies-driven channel of the office furniture business. Gross margins for the quarter decreased from prior year levels due primarily to decreased volume and increased material costs offset partially by increased price realization. Selling and administrative expenses increased due to higher non-volume related freight and distribution costs and the impact of non-operating gains on prior year results.

Critical Accounting Policies

The preparation of the financial statements requires the Corporation to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Corporation continually evaluates its accounting policies and estimates. The Corporation bases its estimates on historical experience and on a variety of other assumptions believed by management to be reasonable in order to make judgments about the carrying value of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. A summary of the more significant accounting policies that require the use of estimates and judgments in preparing the financial statements is provided in the Corporation's Annual Report on Form 10-K for the year ended December 29, 2007. During the first nine months of fiscal 2008, there were no material changes in the accounting policies and assumptions previously disclosed, except for the Corporation's adoption of SFAS No. 157 and the derivative financial instrument activity as described in Note M.

New Accounting Standards

On December 30, 2007, the beginning of its 2008 fiscal year, the Corporation partially adopted SFAS No. 157 "Fair Value Measurements" which provides enhanced guidance for using fair value to measure assets and liabilities. The standard also expands the amount of disclosure regarding the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. The Corporation has not applied the provisions of SFAS No. 157 to goodwill and intangibles in accordance with FASB Staff Position 157-2. The Corporation will adopt this new standard on January 4, 2009, the beginning of its 2009 fiscal year. The Corporation does not expect the adoption to have a material impact on its financial statements.

On December 30, 2007, the beginning of its 2008 fiscal year, the Corporation adopted SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159") which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective of SFAS 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The Corporation's adoption of this Statement did not have a material impact on its financial statements.

In December 2007, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141(Revised), "Business Combinations" ("SFAS No. 141(R)"), replacing SFAS No. 141, "Business Combinations" and SFAS No. 160, "Noncontrolling Interests in Consolidation Financial Statements - An Amendment of ARB No. 51" ("SFAS No. 160"). SFAS No. 141(R) retains the fundamental requirements of SFAS No. 141, broadens its scope by applying the acquisition method to all transactions and other events in which one entity obtains control over one or more other businesses, and requires, among other things, that assets acquired and liabilities assumed be measured at fair value as of the acquisition date, that liabilities related to contingent considerations be recognized at the acquisition date and remeasured at fair value in each subsequent reporting period, that acquisition-related costs be expensed as incurred, and that income be recognized if the fair value of the net assets acquired exceeds the fair value of the consideration transferred. SFAS No. 160 establishes accounting and reporting standards for noncontrolling interests (i.e., minority interests) in a subsidiary, including changes in a parent's ownership interest in a subsidiary and requires among other things, that noncontrolling interests in subsidiaries be classified as a separate component of equity. Except for the presentation and disclosure requirements of SFAS No. 160, which are to be applied retrospectively for all periods presented, SFAS No. 141(R) and SFAS No. 160 are to be applied prospectively in financial statements issued for fiscal years beginning after December 15, 2008. The Corporation does not anticipate any material impact to its financial statements from the adoption of SFAS No. 160.

In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133." SFAS 161 expands disclosures for derivative instruments by requiring entities to disclose the fair value of derivative instruments and their gains or losses in tabular format. SFAS 161 also requires disclosure of information about credit risk-related contingent features in derivative agreements, counterparty credit risk, and strategies, and objectives for using derivative instruments. SFAS 161 will become effective for fiscal years beginning after November 15, 2008. The Corporation will adopt this new accounting standard on January 4, 2009, the beginning of its fiscal year. The Corporation does not expect the adoption to have a material impact on its financial statements.

Results of Operations

The following table presents certain key highlights from the results of
operations for the periods indicated:

                                  Three Months Ended                              Nine Months Ended
                         Sep. 27,       Sep. 29,       Percent       Sep. 27,                            Percent
(In thousands)             2008           2007         Change          2008          Sep. 29, 2007       Change
Net sales               $  663,141     $  674,628          -1.7 %   $ 1,839,638     $     1,901,988          -3.3 %
Cost of sales              438,423        434,385           0.9       1,221,439           1,239,408          -1.4
Gross profit               224,718        240,243          -6.5         618,199             662,580          -6.7
Selling &
administrative
expenses                   189,577        176,904           7.2         544,805             517,277           5.3
Restructuring &
impairment charges           1,497          4,264         -64.9           4,344               4,856         -10.5
Operating income            33,644         59,075         -43.0          69,050             140,447         -50.8
Interest expense, net        4,037          4,489         -10.1          11,635              13,103         -11.2
Earnings from
continuing operations
 before income taxes
and minority
 interest                   29,607         54,586         -45.8          57,415             127,344         -54.9
Income taxes                10,107         19,342         -47.7          20,382              45,109         -54.8
Minority interest in
earnings of a
 subsidiary                     11            (63 )      -117.5              98                (116 )      -184.5
Income from
continuing operations   $   19,489     $   35,307         -44.8 %   $    36,935     $        82,351         -55.1 %

Consolidated net sales for the third quarter decreased 1.7 percent or $11.5 million compared to the same quarter last year. Acquisitions contributed $30.9 million or 4.6 percentage points of sales. Organic sales growth was down due primarily to the decline in the new construction channel of the hearth products business and weakness in the supplies-driven channel of the office furniture business.

Gross margins for the third quarter decreased to 33.9 percent compared to 35.6 percent for the same quarter last year. The reduction in gross margin was due to decreased volume and increased material costs offset partially by increased price realization.

Total selling and administrative expenses, including restructuring charges, as a percent of sales increased to 28.8 percent compared to 26.9 percent for the same quarter last year. The increase was driven by higher freight and distribution costs and the impact of $5 million of non-operating gains on prior years' results. These were partially offset by lower volume-related spending, incentive-based compensation, and restructuring costs as well as cost containment initiatives.

The Corporation continued its facility shutdown, facility ramp-up, closure of two distribution centers and consolidation and start-up of a new distribution center that was announced in 2007. Third quarter 2008 included $1.5 million of restructuring charges in connection with this project compared to $4.3 million in the prior year quarter.

Income from continuing operations decreased 44.8 percent and income from continuing operations per diluted share decreased 42.1 percent compared to the same quarter in 2007. Interest expense decreased $0.6 million during the quarter due to lower average interest rates partially offset by increased borrowings. Income from continuing operations per share was positively impacted $0.02 per share as a result of the Corporation's share repurchase program.

The effective tax rate for third quarter fiscal 2008 was 34.1 percent compared to 35.4 percent in third quarter 2007 due to a reduction in state taxes. The Corporation anticipates the annualized tax rate for fiscal 2008 to be approximately 33.4 percent due to the reinstatement of the research tax credit in fourth quarter fiscal 2008.

For the first nine months of fiscal 2008, consolidated net sales decreased $62.4 million, or 3.3 percent, to $1.8 billion compared to $1.9 billion in the same period of fiscal 2007. Acquisitions added $87.6 million or 4.6 percentage points of sales. Gross margins decreased to 33.6 percent compared to 34.8 percent for the same period last year. Income from continuing operations was $36.9 million for the first nine months of fiscal 2008 compared to $82.4 million in the same period of fiscal 2007, a decrease of 55.1 percent. Earnings per share from continuing operations decreased 52.3 percent to $0.83 per diluted share compared to $1.74 per diluted share for the same period last year. Earnings per share were positively impacted $0.05 as a result of the Corporation's share repurchase program.

Office Furniture

Third quarter sales for the office furniture segment increased 0.3 percent or $1.9 million to $560.7 million from $558.8 million for the same quarter last year due to acquisitions contributing $17.8 million or 3.2 percentage points of sales. Organic sales decreased due to lower sales in the supplies-driven channel. Operating profit prior to unallocated corporate expenses decreased $18.6 million to $39.5 million as a result of lower organic volume, increased non-volume related freight costs and increased investments in selling initiatives and product development offset partially by lower restructuring costs, price increases, lower incentive-based compensation expense and cost reduction initiatives.

Net sales for the first nine months of fiscal 2008 decreased 1.2 percent or $19.0 million to $1.5 billion compared to $1.6 billion in the same period of fiscal 2007. Operating profit decreased 37.6 percent or $53.4 million to $88.4 million.

Hearth Products

Third quarter net sales for the hearth products segment decreased 11.5 percent or $13.4 million to $102.5 million from $115.8 million for the same quarter last year. The Corporation's acquisition completed during 2007 contributed $13.1 million or 11.3 percentage points. Excluding acquisitions, sales declined 22.8 percent driven by a 35.7 percent decrease in new construction channel revenue. The Corporation continued to be negatively impacted by housing market conditions. The hearth products segment did experience strong demand for alternative fuel/biomass products during the quarter driven by high energy costs. Operating profit prior to unallocated corporate expenses decreased $4.9 million to $3.7 million due to lower volume and a larger mix of lower margin remodel/retrofit business.

Net sales for the first nine months of fiscal 2008 decreased 12.7 percent or $43.3 million to $298.4 million compared to $341.8 million in the same period of fiscal 2007. Operating profit decreased $23.7 million to $2.4 million.

Liquidity and Capital Resources

As of September 27, 2008, cash and short-term investments were $36.8 million compared to $43.8 million at 2007 fiscal year-end. Cash flow from operations for the first nine months of fiscal 2008 was $104.6 million compared to $178.3 million in fiscal 2007 due to lower net income and less favorable working capital reductions in the current year. Cash flow and working capital management continue to be a major focus of management. The Corporation believes it has sufficient liquidity to manage its operations and as of September 27, 2008 maintained additional borrowing capacity of $126 million, net of amounts designated for letters of credit, through a $300 million revolving bank credit agreement.

Capital expenditures for the first nine months of fiscal 2008 were $54.6 million compared to $41.7 million in the same period of fiscal 2007 and were primarily for tooling and equipment for new products and facility consolidation and renovation. For the full year 2008, capital expenditures are expected to be approximately $70 million due to new product development and related tooling and other infrastructure efficiencies.

The Corporation completed the acquisition of HBF during the first quarter ended March 29, 2008 for a purchase price of approximately $75 million, however, the funding of the transaction did not occur until March 31, 2008. During the first nine months of fiscal 2008, net borrowings under the Corporation's revolving credit facility increased $22 million and the Corporation entered into a $50 million three-year team loan to fund the acquisition and capital expenditures. As of September 27, 2008, $150 million of the revolving credit facility was outstanding with $30 million classified as short-term as the Corporation expects to repay that portion of the borrowings within the next twelve months.

The Corporation's Board of Directors (the "Board") declared a regular quarterly cash dividend of $0.215 per share on the Corporation's common stock on August 5, 2008, to shareholders of record at the close of business on August 15, 2008. It was paid on August 29, 2008. This was the 214th consecutive quarterly dividend paid by the Corporation.

For the nine months ended September 27, 2008, the Corporation repurchased 1,004,700 shares of its common stock at a cost of approximately $28.6 million, or an average price of $28.42 per share. As of September 27, 2008, approximately $163.6 million of the Board's current repurchase authorization remained unspent.

Off-Balance Sheet Arrangements

The Corporation does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on the Corporation's financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Contractual Obligations

Contractual obligations associated with ongoing business and financing activities will result in cash payments in future periods. A table summarizing the amounts and estimated timing of these future cash payments was provided in the Corporation's Annual Report on Form 10-K for the year ended December 29, 2007. During the first nine months of fiscal 2008 there were no material changes outside the ordinary course of business in the Corporation's contractual obligations or the estimated timing of the future cash payments.

Commitments and Contingencies

The Corporation is involved in various kinds of disputes and legal proceedings that have arisen in the course of its business, including pending litigation, environmental remediation, taxes and other claims. It is the Corporation's opinion, after consultation with legal counsel, that additional liabilities, if any, resulting from these matters are not expected to have a material adverse effect on the Corporation's financial condition, although such matters could have a material effect on the Corporation's quarterly or annual operating results and cash flows when resolved in a future period.

Looking Ahead

Management expects the weak and deteriorating economic environment to negatively impact the office furniture segment for the remainder of 2008. The supplies-driven channel of the office furniture segment is expected to experience substantial weakness. Management also anticipates that the project portion of the office furniture business will soften some with the economy as organizations reduce or defer capital spending. The Corporation will work to offset the market softness and high fuel and material costs by implementing price increases, eliminating waste, attacking structural cost and streamlining its businesses.

Management anticipates a mixed demand environment in the hearth products segment with continued declines in the new home construction channel offset by strong sales of alternative energy products during the fourth quarter of 2008. The Corporation expects to continue tightly managing its costs and improving its competitive position.

The Corporation continues to focus on creating long-term shareholder value by growing its businesses through investment in building brands, product solutions, and selling models, enhancing its strong member-owner culture and remaining focused on its long-standing continuous improvement programs to build best total cost and a lean enterprise.

Forward-Looking Statements

Statements in this report that are not strictly historical, including statements as to plans, outlook, objectives, and future financial performance, are "forward-looking" statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Words, such as "anticipate," "believe," "could," "confident," "estimate," "expect," "forecast," "hope," "intend," "likely," "may," "plan," "possible," "potential," "predict," "project," "should," "will," and variations of such words, and similar expressions identify forward-looking statements. Forward-looking statements involve known and unknown risks, which may cause the Corporation's actual results in the future to differ materially from expected results. These risks include, without limitation: the Corporation's ability to realize financial benefits from its (a) price increases, (b) cost containment and business simplification initiatives for the entire Corporation, (c) investments in strategic acquisitions, new products and brand building, (d) investments in distribution and rapid continuous improvement, (e) repurchases of common stock, (f) ability to maintain its effective tax rate, and (g) consolidation and logistical realignment initiatives; uncertainty related to the availability of cash to fund operations and future growth; lower than expected demand for the Corporation's products due to uncertain political and economic conditions, including, with respect to the Corporation's hearth products, the protracted decline in the housing market; lower industry growth than expected; major disruptions at our key facilities or in the supply of any key

raw materials, components or finished goods; uncertainty related to disruptions of business by terrorism, military action, acts of God or other Force Majeure events; competitive pricing pressure from foreign and domestic competitors; higher than expected costs and lower than expected supplies of materials (including steel and petroleum based materials); higher than expected costs for energy and fuel; changes in the mix of products sold and of customers purchasing; restrictions imposed by the terms of the Corporation's revolving credit facility, term loan credit agreement and note purchase agreement; currency fluctuations and other factors described in the Corporation's annual and quarterly reports filed with the Securities and Exchange Commission on Forms 10-K and 10-Q. The Corporation undertakes no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable law.