Management's discussion and analysis of financial condition and results of operations provides a discussion of our financial performance and financial condition that should be read in conjunction with the accompanying unaudited condensed consolidated financial statements.

Overview

The third quarter of 2009 proved to be our most challenging quarter since the global recession began. Our margins continued to feel the pressures of decreased demand in the market place and price competition. Net sales for the quarter were $181.3, a decrease of 36.1% from the third quarter of 2008. The decrease in sales occurred across all product categories and geographies. Our largest percentage sales declines occurred in our office systems category and in Europe. Orders continued to decline on a year-over- year basis, however, they appear to be stabilizing sequentially. Diluted earnings per share in the third quarter of 2009 fell 75% to $0.13 per share when compared to $0.52 per share during the same period in the prior year.

For the quarter, gross margin decreased 300 basis points to 33.8% versus the comparable quarter of the prior year. The decrease in gross margin largely resulted from lower absorption of our fixed costs because of the lower sales volumes. Our gross margin is also being impacted by price deterioration in the market place. Operating profit for the third quarter of 2009 was $16.8 million, a decrease of 59.1% from the third quarter of 2008. During the third quarter of 2009, operating profit benefited from a $1.1 million gain on a reduction of our post retirement medical benefit obligations. We continue to aggressively manage our cost structure in order to bring our expenses in line with current volume levels. Operating expenses for the third quarter of 2009 decreased $18.7 million, or 29.6%, when compared to the prior year.

Interest expense during the third quarter of 2009 increased $0.3 million when compared to the prior year. The increase in interest expense is a result of two interest rate swap agreements we entered into during 2008 that went into effect during the second quarter of 2009. For a further discussion of the interest rate swap agreements see Note 5 to the condensed consolidated financial statements included in this quarterly report on Form 10-Q.

This quarter we continued our working capital reduction efforts in order to free up cash for future investments and further debt reductions. During the quarter, we used cash from operations to fund capital expenditures of $1.2 million and reduce our debt outstanding by $28.1 million. We remain in compliance with all our debt covenants. We remain focused on maintaining a strong balance sheet and aggressively freeing up working capital.

While we believe that demand may be stabilizing at these lower levels, leading indicators are not encouraging for near term growth. However, despite this economic environment we are continuing to invest in new products and we see our greatest growth potential outside of the office systems category. The launch of our Generation by Knoll™ chair has been very successful and we began full commercial production this quarter. We believe this chair will be a meaningful contributor to our results in the years ahead and help us gain market share in the seating space.

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.

Results of Operations

Comparison of the Three Months and Nine Months Ended September 30, 2009 and 2008



                                              Three Months Ended                           Nine Months Ended
                                     September 30,          September 30,         September 30,          September 30,
                                         2009                   2008                  2009                   2008
                                                                      (in thousands)
Consolidated Statement of
Operations Data:
Net Sales                           $       181,282        $       283,517       $       596,088        $       843,861
Gross Profit                                 61,273                104,198               206,769                295,608
Restructuring charges                           110                     -                  8,422                  3,432
Operating Income                             16,797                 41,089                52,076                108,089
Interest Expense                              4,054                  3,766                 9,681                 12,663
Other Expense (Income), net                   3,112                 (2,137 )               4,535                 (1,878 )
Income Tax Expense                            3,905                 15,398                14,535                 35,046
Net Income                          $         5,726        $        24,062       $        23,325        $        62,258
Statistical and Other Data:
Sales (Decline) Growth from
Comparable Prior Period                       (36.1 %)                11.6 %               (29.4 %)                 9.0 %
Gross Profit Margin                            33.8 %                 36.8 %                34.7 %                 35.0 %
Backlog                             $       121,741        $       203,077       $       121,741        $       203,077

Sales

Sales for the third quarter of 2009 were $181.3 million, a decrease of $102.2 million, or 36.1%, from sales of $283.5 million for the same period in the prior year. Sales for the nine months ended September 30, 2009 were $596.1 million, a decrease of $247.8 million, or 29.4%, over the first nine months of 2008. This quarter we experienced double digit declines in every product category and geography when compared with the prior year. These declines are occurring across the industry as the Business and Institutional Furniture Manufacturer's Association ("BIFMA") is forecasting a 31.0% decline in sales for 2009.

At September 30, 2009, sales backlog was $121.7 million, a decrease of $81.4 million, from sales backlog of $203.1 million as of September 30, 2008.

Gross Profit and Operating Income

Gross profit for the third quarter of 2009 was $61.3 million, a decrease of $42.9 million, or 41.2%, from gross profit of $104.2 million for third quarter of 2008. Gross profit for the nine months ended September 30, 2009 was $206.8 million, a decrease of $88.8 million, or 30.0%, from gross profit of $295.6 million for the same period in the prior year. Operating income for the third quarter of 2009 was $16.8 million, a decrease of $24.3 million, or 59.1%, from operating income of $41.1 million for the third quarter of 2008. Operating income for the nine months ended September 30, 2009 was $52.1 million, a decrease of $56.0 million, or 51.8%, from operating income of $108.1 million for the same period in 2008. As a percentage of sales, gross profit decreased to 33.8% for the third quarter of 2009 from 36.8% for the third quarter of 2008. The decrease in gross profit for the quarter is largely due to unfavorable fixed cost absorption in our facilities due to the lower sales volume as well as price deterioration. For the nine months ended September 30, 2009, gross profit as a percentage of sales decreased to 34.7% from 35.0% in 2008. Operating income as a percentage of sales decreased to 9.3% in the third quarter of 2009 from 14.5% over the same period in 2008. For the nine months ended September 30, 2009, operating income as a percentage of sales decreased to 8.7% from 12.8% in 2008. Operating income for the nine months ended, September 30, 2009 and 2008, includes restructuring charges of $8.4 million and $3.4 million, respectively.

Operating expenses for the third quarter of 2009 were $44.4 million, or 24.5% of sales, compared to $63.1 million, or 22.3% of sales, for the third quarter 2008. Operating expenses for the nine months ended September 30, 2009 were $146.3 million, or 24.5% of sales, compared to $184.1 million, or 21.8% of sales, for the same period in 2008. During the third quarter and nine months ended September 30, 2009 the decrease in operating expenses was in large part due to decreased spending in conjunction with our lower sales volumes. We also are benefiting from previously implemented cost reduction measures.

Interest Expense

Interest expense for the three months and nine months ended September 30, 2009 was $4.1 million and $9.7 million, respectively, an increase of $0.3 million and a decrease of $3.0 million, respectively, from the same periods in 2008. The increase in interest expense for the three months ended September 30, 2009 is due to two interest rate swap agreements that went into effect during the second quarter of 2009. For the nine month period ended September 30, 2009, interest expense decreased $3.0 million due to lower average borrowing rates when compared with the prior year. For the three and nine months period ended September 30, 2009, additional interest expense of $2.3 million and $2.8 million was incurred as a result of the interest rate swap agreements. See Note 5 of the condensed consolidated financial statements for further information regarding the interest rate swaps. Taking into account the effect of the interest rate swap payments, the weighted average interest rate for the third quarter of 2009 was 4.4%. The weighted average interest rate for the same period in 2008 was 3.9%.

Other Expense (Income), net

Other expense for the third quarter of 2009 was $3.1 million which included $3.2 million of foreign exchange losses on currency offset by $0.1 million of miscellaneous income. Other income for the third quarter of 2008 was $2.1 million which included $2.0 million of foreign exchange gains and $0.1 million of miscellaneous income.

Income Tax Expense

The mix of pretax income and the varying effective tax rates in the countries in which we operate directly affects our consolidated effective tax rate. The effective tax rate was 40.5% for the third quarter of 2009, as compared to 39.0% for the same period in 2008. The effective tax rate for the nine months ended September 30, 2009 was 38.4% and 36.0% for the same period in 2008. The increase in the effective tax rate is primarily due to the utilization of a net operating loss carryforward in one of our foreign subsidiaries of approximately $1.4 million recognized in the second quarter of 2008. The Company's effective tax rate is affected by the mix of pretax income and the different effective tax rates of the tax jurisdictions in which it operates.

Liquidity and Capital Resources

The following table highlights certain key cash flows and capital information
pertinent to the discussion that follows:



                                                      Nine Months Ended
                                              September 30,        September 30,
                                                  2009                 2008
                                                        (in thousands)
    Cash provided by operating activities    $        42,462      $        97,537
    Capital expenditures                             (11,489 )             (9,803 )
    Net cash used in investing activities            (12,247 )             (9,803 )
    Purchase of common stock                            (778 )            (34,282 )
    Net repayment of debt                            (27,121 )            (26,129 )
    Payment of dividend                               (7,293 )            (16,952 )
    Net proceeds from issuance of stock                   84                1,697
    Net cash used for financing activities           (35,108 )            (75,471 )

Historically, we have carried significant amounts of debt, and cash generated by operating activities has been used to fund working capital and capital expenditures, repurchase shares, pay dividends, and make scheduled payments of principal and interest under our credit facility. Our capital expenditures are typically for new product tooling and manufacturing equipment. These capital expenditures support new products and continuous improvements in our manufacturing processes.

Net cash provided by operations for the first nine months of 2009 was $42.5 million of which $49.2 million was provided from net income plus non-cash amortizations and stock based compensation, offset by a use of cash of $6.7 million of unfavorable changes primarily in working capital in accounts payable, deferred income taxes and other current liabilities.

For the nine month period ended September 30, 2009, we used available cash, including the $42.5 million of net cash from operating activities, to fund $11.5 million in capital expenditures, invest $0.8 million in intangible assets connected to future product offerings, repurchase $0.8 million of common stock for treasury, fund dividend payments to shareholders totaling $7.3 million, pay down debt of $27.1 million, and fund working capital.

For the nine month period ended September 30, 2008, we used available cash, including the $97.5 million of net cash from operating activities, and $1.7 million of proceeds from the issuance of common stock, to fund $9.8 million in capital expenditures, repurchase $34.3 million of common stock for treasury, fund dividend payments to shareholders totaling $17.0 million, pay down debt of $26.1 million, and fund working capital.

Cash used in investing activities was $12.2 million for the nine month period ended September 30, 2009 and $9.8 million for the same period in 2008. Fluctuations in cash used in investing activities are primarily attributable to the levels of capital expenditures.

We use our existing secured $500 million revolving credit facility in the ordinary course of business to fund our working capital needs, and at times make significant borrowings and repayments under the facility depending on our cash needs and availability at such time. This facility matures in June 2013 and provides us with the option to increase the size of the facility by up to an additional $200 million, subject to the satisfaction of certain terms and conditions. As of September 30, 2009, there was approximately $310 million outstanding under the facility, compared to $342 million outstanding under the facility as of September 30, 2008. Borrowings under the revolving credit facility may be repaid at any time, but no later than June 2013.

Our revolving credit facility requires that we comply with two financial covenants: our consolidated leverage ratio, defined as the ratio of total indebtedness to consolidated EBITDA (as defined in our credit agreement) for a period of four fiscal quarters, cannot exceed 4 to 1, and our consolidated interest coverage ratio, defined as the ratio of our consolidated EBITDA (as defined in our credit agreement) for a period of four fiscal quarters to our consolidated interest expense, must be a minimum of 3 to 1. We are also required to comply with various other affirmative and negative covenants, including without limitation, covenants that prevent or restrict our ability to pay dividends, engage in certain mergers or acquisitions, make certain investments or loans, incur future indebtedness, make significant capital expenditures, engage in sale-leaseback transactions, alter our capital structure or line of business, prepay subordinated indebtedness, engage in certain transactions with affiliates and sell stock or assets.

We are currently in compliance with all of the covenants and conditions under our credit facility. We believe that existing cash balances and internally generated cash flows, together with borrowings available under our revolving credit facility, will be sufficient to fund normal working capital needs, capital spending requirements, debt service requirements and dividend payments for at least the next twelve months. However, because of the financial covenants mentioned above, our capacity under our revolving credit facility could be reduced if our trailing consolidated EBITDA (as defined by our credit agreement) continues to decline due to deteriorating market conditions. Future principal debt payments may be paid out of cash flows from operations, from future refinancing of our debt or from equity issuances. However, our ability to make scheduled payments of principal, to pay interest on or to refinance our indebtedness, to satisfy our other debt obligations and to pay dividends to stockholders will depend upon our future operating performance, which will be affected by general economic, financial, competitive, legislative, regulatory, business and other factors beyond our control.

Contractual Obligations

Contractual obligations associated with our ongoing business will result in cash payments in future periods. A table summarizing the amounts and timing of these future cash payments was provided in the Company's Form 10-K filing for the year ended December 31, 2008.

Environmental Matters

Our past and present business operations and the past and present ownership and operation of manufacturing plants on real property 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 ("CERCLA") for remediation costs associated with waste disposal sites that we previously used. 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.

Off-Balance Sheet Arrangements

We do not currently have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. As a result, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

Forward-looking Statements

This Quarterly report on Form 10-Q contains forward-looking statements, principally in the sections entitled "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-Q 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," "believe," "could," "estimate," "expect," "forecast," "intend," "may," "possible," "potential," "predict," "project," or other similar words, phrases or expressions. 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 of our Annual Report on Form 10-K for the year ended December 31, 2008; changes in the financial stability of our clients or the overall economic environment, resulting in decreased corporate spending and service sector employment; changes in relationships with clients; the mix of products sold and of clients purchasing our products; the success of new technology initiatives; changes in business strategies and decisions; competition from our competitors; our ability to recruit and retain an experienced management team; changes in raw material prices and availability; restrictions on government spending resulting in fewer sales to the U.S. government, one of our largest customers; our debt restrictions on spending; our ability to protect our patents, copyrights and trademarks; our reliance on furniture dealers to produce sales; lawsuits arising from patents, copyrights and trademark infringements; violations of environment laws and regulations; potential labor disruptions; adequacy of our insurance policies; the availability of future capital; the overall strength and stability of our dealers, suppliers, and customers; access to necessary capital; and currency rate fluctuations. The factors identified above are believed to be important factors (but not necessarily all of the important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement. Unpredictable or unknown factors could also have material adverse effects on us. All forward-looking statements included in this Form 10-Q are expressly qualified in their entirety by the foregoing cautionary statements. Except as required under the Federal securities laws and rules regulations of the SEC, we undertake no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise.