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 2009 decreased 31.5 percent to $454.0 million as compared to the third quarter of the prior year. The decrease was driven by large declines in both segments due to adverse market conditions. Gross margins for the quarter increased from prior year levels due primarily to increased price realization, lower material costs and cost reduction initiatives offset partially by decreased volume. Selling and administrative expenses decreased due to cost control initiatives, lower volume related costs and improved distribution efficiencies offset partially by increased restructuring and transition costs.

The Corporation continues to take actions to reset its cost structure due to challenging market conditions and pursuant to its ongoing business simplification and cost reduction strategies. The Corporation announced the decision to shutdown an office furniture manufacturing facility and recorded $4.1 million of restructuring and transition costs in the third quarter in connection with this shutdown as well as previously announced shutdowns. In addition, $1.8 million of charges related to the restructuring of hearth operations were recorded during the third quarter.

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 January 3, 2009. During the first nine months of fiscal 2009, there were no material changes in the accounting policies and assumptions previously disclosed.

New Accounting Standards

For information pertaining to the Corporation's adoption of new accounting standards and any resulting impact to the Corporation's financial statements, please refer to the first paragraph of Note L. Fair Value Measurements and the entirety of Note N. New Accounting Standards of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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
                         Oct. 3,      Sep. 27,       Percent         Oct. 3,        Sep. 27,        Percent
(In thousands)            2009          2008          Change          2009            2008           Change
Net sales               $ 453,956     $ 663,141          -31.5     $ 1,242,612     $ 1,839,638          -32.5
Cost of sales             287,352       438,423          -34.5         821,792       1,221,439          -32.7
Gross profit              166,604       224,718          -25.9         420,820         618,199          -31.9
Selling &
administrative
expenses                  129,897       189,577          -31.5         390,920         544,805          -28.2
Restructuring &
impairment charges          4,440         1,497          196.6          13,403           4,344          208.5
Operating income
(loss)                     32,267        33,644           -4.1          16,497          69,050          -76.1
Interest expense, net       3,116         4,037          -22.8           9,103          11,635          -21.8
Earnings (loss)
before income taxes        29,151        29,607           -1.5           7,394          57,415          -87.1
Income taxes               11,441        10,107           13.2           2,944          20,382          -85.6
Less: Net income
attributable to the
noncontrolling
interest                       96            11          772.7             119              98           21.4
Net income (loss)
attributable to
Parent Company          $  17,614     $  19,489           -9.6     $     4,331     $    36,935          -88.3

Consolidated net sales for the third quarter of 2009 decreased 31.5 percent or $209.2 million compared to the same quarter last year due to challenging market conditions in both the office furniture and hearth products segments.

Gross margins for the third quarter of 2009 increased to 36.7 percent compared to 33.9 percent for the same quarter last year. The improvement in gross margin was due to increased price realization, lower material costs and cost reduction initiatives offset partially by decreased volume. Third quarter 2009 included $1.6 million of accelerated depreciation and transition costs related to the shutdown and consolidation of office furniture manufacturing facilities and hearth restructuring.

As a result of challenging market conditions and the Corporation's ongoing business simplification and cost reduction strategies, management made the decision to close an office furniture manufacturing facility located in Owensboro, Kentucky and consolidate production into existing office furniture manufacturing facilities. In connection with the closure of the Owensboro facility the Corporation recorded $0.5 million of severance costs for approximately 30 non-bargaining unit members and $1.7 million of costs to withdraw from the multi-employer pension plan during the quarter ended October 3, 2009. The Corporation anticipates the closure and consolidation of this facility will be substantially complete by the end of the second quarter of 2010. In connection with the closure of two office furniture facilities announced earlier this year, the Corporation recorded $2.0 million of charges during the third quarter which included $0.8 million of accelerated depreciation and $0.2 million of other transition costs recorded in cost of sales, $0.8 million of costs recorded as restructuring costs and $0.2 million of other transition costs recorded in selling and administrative expense. The Corporation anticipates the closure and consolidation of these two facilities will be substantially complete by the end of 2009. The Corporation made the decision to consolidate significant production from its hearth product Mount Pleasant, Iowa plant to other

Total selling and administrative expenses, including restructuring charges, as a percent of sales increased to 29.6 percent compared to 28.8 percent for the same quarter last year due to lower volume. Actual selling and administrative expenses decreased $56.7 million as a result of cost control initiatives, lower volume related expenses, improved distribution efficiencies and a gain of $0.3 million on the sale of a building. Third quarter 2009 included $4.4 million of restructuring charges compared to $1.5 million in 2008.

Net income attributable to parent company for the third quarter of 2009 was $17.6 million or $0.39 per diluted share compared to net income of $19.5 million or $0.44 per diluted share in third quarter 2008. Net interest expense decreased $0.9 million during the quarter as compared to third quarter 2008 due to reduced borrowing.

The provision for income taxes in the third quarter of fiscal 2009 reflects an actual effective tax rate of 39.2 percent, compared to an estimated annual tax rate of 34.1 percent for the third quarter of fiscal 2008 and actual tax rate for the full year 2008 of 34.2 percent. A discrete calculation was used to report the third quarter tax provision rather than an estimated annual tax rate as uncertainty in the full year outlook produces significant variability in the estimated annual effective tax rate.

For the first nine months of 2009, consolidated net sales decreased $0.6 billion, or 32.5 percent, to $1.2 billion compared to $1.8 billion for the same period in the prior year. Acquisitions added $10.2 million or 0.6 percentage points of sales. Gross margins increased to 33.9 percent compared to 33.6 percent for the same period last year. Operating income was $16.5 million for the first nine months of 2009 compared to $69.1 million for the first nine months of 2008. Earnings per share decreased to $0.10 per diluted share compared to $0.83 per diluted share for the same period last year.

Office Furniture

Third quarter sales for the office furniture segment decreased 32.2 percent or $180.7 million to $379.9 million from $560.7 million for the same quarter last year driven by substantial weakness in both the supplies-driven and contract channels of the office furniture industry. Operating profit prior to unallocated corporate expenses for the quarter decreased $1.4 million to $38.1 million when compared to the same period last year as a result of lower volume and increased restructuring and transition costs partially offset by price realization, lower input costs, distribution efficiencies and cost control initiatives. Third quarter 2009 included $4.1 million of restructuring and transition costs including accelerated depreciation compared to $1.1 million of restructuring costs in third quarter 2008.

Hearth Products

Third quarter net sales for the hearth products segment decreased 27.7 percent or $28.4 million to $74.0 million from $102.5 million for the same quarter last year driven by significant declines in both the new construction and remodel-retrofit channels. Operating profit prior to unallocated corporate expenses for the quarter decreased $1.9 million to $1.8 million when compared to third quarter 2008 due to lower volume and higher restructuring expenses partially offset by cost reduction initiatives, lower incentive based compensation costs and a non-operating gain related to the sale of a building.

Net sales for the first nine months of 2009 decreased 32.7 percent or $97.6 million to $200.9 million compared to $298.4 million for the same period in 2008. Operating profit decreased $21.1 million to a $18.7 million loss over the first nine months of 2009.

Liquidity and Capital Resources

Cash Flow - Operating Activities
Cash generated from operating activities for the first nine months of 2009 totaled $135.9 million compared to $104.6 million generated in the first nine months of 2008. Improved working capital performance resulted in a $66.6 million source of cash in the current fiscal year compared to $4.2 million in the prior year.

Cash Flow - Investing Activities
Capital expenditures including capitalized software for the first nine months of fiscal 2009 were $10.9 million compared to $54.6 million in the same period of fiscal 2008 and were primarily for tooling and equipment for new products. For the full year 2009, capital expenditures are expected to be approximately $20 million primarily for new product development and related tooling. The Corporation sold $21 million of long-term investments during the first nine months and used the proceeds to repay debt.

Cash Flow - Financing Activities
During the first nine months of fiscal 2009, net borrowings under the Corporation's revolving credit facility decreased $57.5 million. As of October 3, 2009, $50 million of the revolving credit facility was outstanding and all classified as long-term. The Corporation paid off its $47.5 million term loan during the first nine months of 2009. Included in current liabilities is $2.3 million outstanding under the Corporation's industrial revenue bonds as of October 3, 2009. The Corporation expects to repay that portion of the bonds within the next twelve months.

The credit agreement governing the Corporation's revolving credit facility contains a number of covenants, including covenants requiring maintenance of the following financial ratios as of the end of any fiscal quarter:

· a consolidated leverage ratio of not greater than 3.0 to 1.0, based upon the ratio of (a) the quarter-end consolidated funded indebtedness (as defined in the respective credit agreement) to (b) consolidated EBITDA for the last four fiscal quarters.

The note purchase agreement pertaining to the Corporation's Senior Notes also contains a number of covenants, including a covenant requiring maintenance of consolidated debt to consolidated EBITDA (as defined in the note purchase agreement) of not greater than 3.5 to 1.0, based upon the ratio of (a) the quarter-end consolidated funded indebtedness (as defined in the note purchase agreement) to (b) consolidated EBITDA for the last four fiscal quarters.

The revolving credit facility and Senior Notes are the primary sources of committed funding from which the Corporation finances its planned capital expenditures, strategic initiatives such as repurchases of common stock and certain working capital needs. Non-compliance with the various financial covenant ratios could prevent the Corporation from being able to access further borrowings under the revolving credit facility, require immediate repayment of all amounts outstanding with respect to the revolving credit facility and Senior Notes and increase the cost of borrowing.

The most restrictive of the financial covenants is the consolidated leverage ratio requirement of 3.0 to 1.0 included in the credit agreement governing the revolving credit facility. Under that credit agreement, adjusted EBITDA is defined as consolidated net income before interest expense, income taxes and depreciation and amortization of intangibles, as well as non-cash, nonrecurring charges and all non-cash items increasing net income. At October 3, 2009, the Corporation was well below this ratio and was in compliance with all of the covenants and other restrictions in the credit agreements and note purchase agreement. The Corporation currently expects to remain in compliance over the next twelve months. If the Corporation's actual results over the next twelve months are lower than current projections, the margin by which the Corporation is below the consolidated leverage ratio will decrease. However, even if a 20 percent decline in expected results over the next twelve months were to occur, the Corporation would remain in compliance with the covenant.

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 19, 2009, to shareholders of record at the close of business on August 31, 2009. It was paid on September 8, 2009.

The Corporation did not repurchase any shares of common stock during the third quarter of 2009. 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 October 3, 2009, 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 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 January 3, 2009. During the first nine months of fiscal 2009, 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 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

Although management sees signs of stabilization in many of the Corporation's markets, management expects weak demand to continue across its businesses during the remainder of 2009. The Corporation continues to reset its cost structure to market conditions while investing in new products, selling initiatives and operational improvements.

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," "would" 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,