ITEM 2: 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 unaudited condensed consolidated financial statements.

Overview

Our 2009 first quarter results prove that we have begun to feel the impact of the global recession. Net sales were down 20.6% from $267.8 million during the first quarter of 2008 to $212.6 million during the first quarter of 2009. The decrease in sales was felt across all product categories and geographies. We experienced double digit declines in all product categories when compared to the prior year. Backlog of unfilled orders fell $40.6 million to $163.8 million, or 19.9%, compared to unfilled orders of $204.4 million at March 31, 2008. Earnings per share was $0.21, a decrease of 41.7%, when compared to $0.36 earnings per share in the prior year.

All of the current macroeconomic factors indicate that we will experience further declines throughout 2009. Our industry trade group, The Business and Institutional Furniture Manufacturer's Association ("BIFMA"), is forecasting a sales decline of 19.3% for 2009. As a result of these factors and our declining sales we took further actions during the quarter to reduce our costs. For the quarter ended March 31, 2009, we incurred $6.2 million of pre-tax restructuring charges. We currently estimate that we will incur another $2.0 million to $4.0 million of pre-tax restructuring charges during the second quarter of 2009 as we try to appropriately set our cost structure for expected levels of demand.

On a positive note, gross margin for the first quarter of 2009 increased to 35.2% from 33.7% a year ago. The increase in gross margin can be mainly attributed to gains on foreign exchange translations and continuous improvements in our factories.

Operating expenses for the first quarter were $51.8 million, or 24.3% of sales, compared to $58.4 million, or 21.8% of sales, a year ago. The decrease in operating expenses during the quarter was in large part due to lower incentive and sales compensation in conjunction with our lower sales volumes. In addition, operating expenses across many of our departments are down as we attempt to control our costs during this decline in the industry.

Looking at the balance sheet our debt increased by $24.0 million during the quarter. Our cash requirements in the first quarter are generally higher as we pay accrued performance related compensation to our associates reducing our accrued liabilities. Inventories are down $3.7 million because of the lower sales volumes and accounts receivable were up slightly by $2.4 million. At March 31, 2009, we had $12.3 million of cash on hand.

For the three months ended March 31, 2009, cash used in operations was $14.8 million which included $17.3 million of net income and non-cash expenses, less $32.1 million of unfavorable changes in working capital. The $32.1 million unfavorable change is largely the result of current tax and accrued 2008 performance related compensation payments. During the quarter, we also invested $5.1 million in capital expenditures and paid a quarterly dividend of $5.4 million.

Going forward we will continue to focus on controlling our costs and maintaining a strong balance sheet. We will be working hard to reduce our working capital requirements in accounts receivable and inventory as well as closely monitoring capital expenditures.

Critical Accounting Policies

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires us to make estimates and assumptions that affect the reported amounts of certain assets, liabilities, revenues and expenses and the disclosure of certain contingent assets and liabilities. Actual results may differ from such estimates. On an ongoing basis, we review our accounting policies and procedures. A more detailed review of our critical accounting policies is contained in our Annual Report on Form 10-K for the year ended December 31, 2008.

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