Tableof Contents

 

 

 

**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**x****      QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended March 31, 2010**

 

**OR**

 

**o****        ****TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from             to            **

 

**Commission File No. ****001-12907**

 

**KNOLL, INC.**

 

| **A  Delaware Corporation** | ** ** | I.R.S. Employer  No. **13-3873847** |
|-----------------------------|------------|------------------------------------------|

 

**1235 Water Street**

**East Greenville, PA 18041**

**Telephone Number (215) 679-7991**

 

Indicate by checkmark whether the Registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes  x    No o

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files). Yes  o   No  o

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,a non-accelerated filer, or a smaller reporting company.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act.

 
| Large accelerated filer o,    |   | Accelerated filer x,        |
|-------------------------------|--------|-----------------------------|
|                          |   |                        |
| Non-accelerated filer o, |   | Smaller reporting company o |

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act.) Yes   ̈   No  x

 

As of May 6, 2010, there were 46,998,617 shares(including 1,363,627 shares of non-voting restricted shares) of the Registrant’scommon stock, par value $0.01 per share, outstanding.

 

 

 

----

Tableof Contents

 

**KNOLL,INC.**

 

**TABLE OF CONTENTS****FOR FORM 10-Q**

 
| **Item**                                 | ** **                                                                                                | **Page** |
|------------------------------------------|-----------------------------------------------------------------------------------------------------------|----------|
|                                     |                                                                                                      |     |
| PART I — FINANCIAL INFORMATION |
|                                     |                                                                                                      |     |
| 1.                                       | Condensed Consolidated Financial Statements:                                                              |     |
|                                     | Condensed Consolidated  Balance Sheets at March 31, 2010 and December 31, 2009                  | 3        |
|                                     | Condensed  Consolidated Statements of Operations for the three months ended  March 31, 2010 and 2009 | 4        |
|                                     | Condensed  Consolidated Statements of Cash Flows for the three months ended  March 31, 2010 and 2009 | 5        |
|                                     | Notes  to the Condensed Consolidated Financial Statements                                                 | 6        |
|                                     |                                                                                                      |     |
| 2.                                       | Management’s Discussion and  Analysis of Financial Condition and Results of Operations               | 14       |
|                                     |                                                                                                      |     |
| 3.                                       | Quantitative and Qualitative  Disclosures about Market Risk                                               | 20       |
|                                     |                                                                                                      |     |
| 4.                                       | Controls and Procedures                                                                                   | 21       |
|                                     |                                                                                                      |     |
| PART II  — OTHER INFORMATION   |
|                                     |                                                                                                      |     |
| 1.                                       | Legal Proceedings                                                                                         | 22       |
|                                     |                                                                                                      |     |
| 1A.                                      | Risk Factors                                                                                              | 22       |
|                                     |                                                                                                      |     |
| 2.                                       | Unregistered  Sales of Equity Securities and Use of Proceeds                                              | 22       |
|                                     |                                                                                                      |     |
| 6.                                       | Exhibits                                                                                                  | 23       |
|                                     |                                                                                                      |     |
| Signatures                               | 24                                                                                                        |

 

2

----

Tableof Contents

 

**PART I- FINANCIAL INFORMATION**

 

**ITEM 1. CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**KNOLL, INC.**

**CONDENSED CONSOLIDATEDBALANCE SHEETS**

 

***(in thousands, except share and per share data)***

 
| ** **                                                                                                                                                                                                                                                                | ** ** | **March 31,********2010** | ** ** | **December 31,  2009** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                                                                | ** ** | **(Unaudited)**                | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                                                                                                                                | ** ** | ** **                     | ** ** | ** **                  | ** ** |
| Current  assets:                                                                                                                                                                                                                                                          |       |                           |       |                        |       |
| Cash  and cash equivalents                                                                                                                                                                                                                                                |       | $                              | 8,135      |                        | $          | 5,961 |   |
| Customer  receivables, net                                                                                                                                                                                                                                                |       | 107,836                        |       | 113,652                     |       |
| Inventories                                                                                                                                                                                                                                                               |       | 80,796                         |       | 79,964                      |       |
| Deferred  income taxes                                                                                                                                                                                                                                                    |       | 8,644                          |       | 4,994                       |       |
| Prepaid  and other current assets                                                                                                                                                                                                                                         |       | 10,953                         |       | 9,306                       |       |
| Total  current assets                                                                                                                                                                                                                                                     |       | 216,364                        |       | 213,877                     |       |
|                                                                                                                                                                                                                                                                      |       |                           |       |                        |       |
| Property,  plant, and equipment, net                                                                                                                                                                                                                                      |       | 128,653                        |       | 135,045                     |       |
| Goodwill,  net                                                                                                                                                                                                                                                            |       | 75,908                         |       | 75,612                      |       |
| Intangible  assets, net                                                                                                                                                                                                                                                   |       | 223,394                        |       | 223,550                     |       |
| Other  non-trade receivables                                                                                                                                                                                                                                              |       | 5,657                          |       | 5,605                       |       |
| Other  noncurrent assets                                                                                                                                                                                                                                                  |       | 3,024                          |       | 1,931                       |       |
| Total  Assets                                                                                                                                                                                                                                                             |       | $                              | 653,000    |                        | $          | 655,620 |   |
|                                                                                                                                                                                                                                                                      |       |                           |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                             |       |                           |       |                        |       |
| Current  liabilities:                                                                                                                                                                                                                                                     |       |                           |       |                        |       |
| Current  maturities of long-term debt                                                                                                                                                                                                                                     |       | $                              | 134        |                        | $          | 149 |   |
| Accounts  payable                                                                                                                                                                                                                                                         |       | 67,715                         |       | 74,687                      |       |
| Other  current liabilities                                                                                                                                                                                                                                                |       | 78,249                         |       | 78,428                      |       |
| Total  current liabilities                                                                                                                                                                                                                                                |       | 146,098                        |       | 153,264                     |       |
|                                                                                                                                                                                                                                                                      |       |                           |       |                        |       |
| Long-term  debt                                                                                                                                                                                                                                                           |       | 290,141                        |       | 295,156                     |       |
| Deferred  income taxes                                                                                                                                                                                                                                                    |       | 43,180                         |       | 36,997                      |       |
| Postretirement  benefits other than pensions                                                                                                                                                                                                                              |       | 23,786                         |       | 23,435                      |       |
| Pension  liability                                                                                                                                                                                                                                                        |       | 43,690                         |       | 41,046                      |       |
| International  retirement obligation                                                                                                                                                                                                                                      |       | 3,755                          |       | 4,444                       |       |
| Other  noncurrent liabilities                                                                                                                                                                                                                                             |       | 9,745                          |       | 11,716                      |       |
| Total  liabilities                                                                                                                                                                                                                                                        |       | 560,395                        |       | 566,058                     |       |
| Stockholders’  equity:                                                                                                                                                                                                                                               |       |                           |       |                        |       |
| Common  stock, $0.01 par value; 200,000,000 shares authorized; 47,004,737 issued and  outstanding (net of 12,896,332 treasury shares) at March 31, 2010 and  46,934,683 shares issued and outstanding (net of 12,425,927 treasury shares)  at December 31, 2009 |       | 470                            |       | 470                         |       |
| Additional  paid-in-capital                                                                                                                                                                                                                                               |       | 9,325                          |       | 6,736                       |       |
| Retained  earnings                                                                                                                                                                                                                                                        |       | 93,871                         |       | 92,583                      |       |
| Accumulated  other comprehensive loss                                                                                                                                                                                                                                     |       | (11,061                        | )          | (10,227                     | )          |
| Total  stockholders’ equity                                                                                                                                                                                                                                          |       | 92,605                         |       | 89,562                      |       |
| Total  Liabilities and Stockholders’ Equity                                                                                                                                                                                                                          |       | $                              | 653,000    |                        | $          | 655,620 |   |

 

See accompanying notes to thecondensed consolidated financial statements

 

3

----

Tableof Contents

 

**KNOLL, INC.**

 

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

***(in thousands, except share and pershare data)***

 
| ** **                                   | ** ** | **Three Months Ended********March 31,** | ** ** |
|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                   | ** ** | **2010**                                     | ** ** | **2009** | ** ** |
| Sales                                        |       | $                                            | 175,259    |   | $ | 212,609 |   |
| Cost  of sales                               |       | 118,598                                      |       | 137,842 |   |
| Gross  profit                                |       | 56,661                                       |       | 74,767 |   |
| Selling,  general, and admistrative expenses |       | 43,645                                       |       | 51,763 |   |
| Restructuring  charges                       |       | 3,608                                        |       | 6,239 |   |
| Operating  Income                            |       | 9,408                                        |       | 16,765 |   |
| Interest  expense                            |       | 4,153                                        |       | 2,771 |   |
| Other  (expense) income, net                 |       | (1,413                                       | )          | 1,324 |   |
| Income  before income tax expense            |       | 3,842                                        |       | 15,318 |   |
| Income  tax expense                          |       | 1,627                                        |       | 5,793 |   |
| Net  Income                                  |       | $                                            | 2,215      |   | $ | 9,525 |   |
|                                         |       |                                         |       |   |   |
| Net  earnings per share                      |       |                                         |       |   |   |
| Basic                                        |       | $                                            | 0.05       |   | $ | 0.21 |   |
| Diluted                                      |       | $                                            | 0.05       |   | $ | 0.21 |   |
| Dividends  per share                         |       | $                                            | 0.02       |   | $ | 0.12 |   |
| Weighted-average  shares outstanding:        |       |                                         |       |   |   |
| Basic                                        |       | 45,626,903                                   |       | 45,301,358 |   |
| Diluted                                      |       | 45,865,732                                   |       | 45,301,358 |   |

 

Seeaccompanying notes to the condensed consolidated financial statements.

 

4

----

Tableof Contents

 

**KNOLL, INC.**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

***(dollars in thousands)***

 
| ** **                                                                     | ** ** | **Three Months Ended********March 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                     | ** ** | **2010**                                     | ** ** | **2009** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITES**                                       |       |                                         |       |   |   |
| Net  income                                                                    |       | $                                            | 2,215      |   | $ | 9,525 |   |
| Adjustments  to reconcile net income to cash provided by operating activities: |       |                                         |       |   |   |
| Depreciation                                                                   |       | 4,711                                        |       | 4,490 |   |
| Amortization  of intangible assets                                             |       | 468                                          |       | 498 |   |
| Loss  on disposal of fixed assets                                              |       | 268                                          |       | 14 |   |
| Asset  impairment                                                              |       | 2,067                                        |       | — |   |
| Unrealized  foreign currency loss                                              |       | 1,273                                        |       | 714 |   |
| Stock  based compensation                                                      |       | 2,353                                        |       | 2,062 |   |
| Other  non-cash items                                                          |       | 7                                            |       | 6 |   |
| Changes  in assets and liabilites:                                             |       |                                         |       |   |   |
| Customer  receivables                                                          |       | 4,413                                        |       | (2,888 | ) |
| Inventories                                                                    |       | (1,424                                       | )          | 2,596 |   |
| Accounts  payable                                                              |       | (5,308                                       | )          | (6,928 | ) |
| Current  and deferred income taxes                                             |       | 93                                           |       | (10,152 | ) |
| Other  current assets                                                          |       | (765                                         | )          | (1,454 | ) |
| Other  current liabilities                                                     |       | (852                                         | )          | (16,609 | ) |
| Other  noncurrent assets and liabilities                                       |       | 2,002                                        |       | 3,286 |   |
| Cash  provided by (used in) operating activities                               |       | 11,521                                       |       | (14,840 | ) |
| **CASH FLOWS FOR INVESTING ACTIVITIES**                                        |       |                                         |       |   |   |
| Capital  expenditures                                                          |       | (1,348                                       | )          | (5,138 | ) |
| Purchase  of intangibles                                                       |       | (313                                         | )          | — |   |
| Cash  used in investing activites                                              |       | (1,661                                       | )          | (5,138 | ) |
| **CASH FLOWS FOR FINANCING ACTIVITIES**                                        |       |                                         |       |   |   |
| Proceeds  from (repayment of) revolving credit facilites, net                  |       | (5,000                                       | )          | 24,000 |   |
| Payment  of dividends                                                          |       | (912                                         | )          | (5,445 | ) |
| Proceeds  from the issuance of common stock                                    |       | 5,531                                        |       | 28 |   |
| Purchase  of common stock for treasury                                         |       | (5,490                                       | )          | (663 | ) |
| Tax  benefit from the exercise of stock options                                |       | 195                                          |       | — |   |
| Cash  (used in) provided by financing activities                               |       | (5,676                                       | )          | 17,920 |   |
|                                                                           |       |                                         |       |   |   |
| Effect  of exchange rate changes on cash and cash equivalents                  |       | (2,010                                       | )          | (548 | ) |
|                                                                           |       |                                         |       |   |   |
| Increase  (decrease) in cash and cash equivalents                              |       | 2,174                                        |       | (2,606 | ) |
|                                                                           |       |                                         |       |   |   |
| Cash  and cash equivalents at beginning of period                              |       | 5,961                                        |       | 14,903 |   |
|                                                                           |       |                                         |       |   |   |
| Cash  and cash equivalents at end of period                                    |       | $                                            | 8,135      |   | $ | 12,297 |   |

 

See accompanying notes to thecondensed consolidated financial statements

 

5

----

Table of Contents

 

**KNOLL,INC.**

 

**NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**MARCH 31,2010**

 

**NOTE 1:  BASIS OF PRESENTATION**

 

The accompanyingunaudited condensed consolidated financial statements of Knoll, Inc. (the “Company”)have been prepared pursuant to the rules and regulations of the UnitedStates Securities and Exchange Commission. Certain information and footnotedisclosures normally included in financial statements prepared in accordancewith U.S. generally accepted accounting principles (“GAAP”) have been condensedor omitted pursuant to such rules and regulations.  The consolidated balance sheet of theCompany, as of December 31, 2009, was derived from the Company’s auditedconsolidated balance sheet as of that date. All other consolidated financial statements contained herein areunaudited and reflect all adjustments which are, in the opinion of management,necessary to summarize fairly the financial position of the Company and theresults of the Company’s operations and cash flows for the periodspresented.  All of these adjustments areof normal recurring nature.  Allintercompany balances and transactions have been eliminated inconsolidation.  These consolidatedfinancial statements should be read in conjunction with the financialstatements and notes thereto included in the Company’s Form 10-K for theyear ended December 31, 2009.

 

**NOTE 2:NEW ACCOUNTING PRONOUNCEMENTS**

 

In June 2009, theFinancial Accounting Standards Board (“FASB”) issued new accounting guidanceentitled, “The *FASB Accounting StandardsCodification**TM** *and the *Hierarchyof Generally Accepted Accounting Principles*—a replacement of FASBStatement No. 162”, which identifies the sources of accounting principlesand the framework for selecting the principles used in the preparation offinancial statements of nongovernmental entities that are presented inconformity with GAAP in the United States. This new guidance establishes the *FASBAccounting Standards Codification**TM** *as the source of authoritative accounting principlesrecognized by the FASB to be applied by nongovernmental entities in thepreparation of financial statements in conformity with GAAP.  This new guidance was effective for most financialstatements issued for interim and annual periods ending after September 15,2009.  The Company has adopted thisguidance as of September 30, 2009. It has impacted how we reference elements of GAAP when preparing ourfinancial statement disclosures.  Thisadoption did not impact the Company’s consolidated financial statements.

 

In May 2009, theFASB issued new accounting guidance on subsequent events which establishesgeneral standards of accounting for and disclosure of events that occur afterthe balance sheet date but before financial statements are issued or areavailable to be issued.  In addition,under this new accounting guidance, an entity is required to disclose the datethrough which subsequent events have been evaluated, as well as whether thatdate is the date the financial statements were issued or the date the financialstatements were available to be issued. It does not apply to subsequent eventsor transactions that are within the scope of other applicable GAAP that providedifferent guidance on the accounting treatment for subsequent events ortransactions.  This new guidance waseffective for interim or annual financial periods ending after June 15,2009, and is applied prospectively.  TheCompany adopted this new guidance as of June 30, 2009, as required.  The adoption did not have a material impacton the Company’s consolidated financial statements.

 

6

----

Tableof Contents

 

**KNOLL,INC.**

 

**NOTES TOTHE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

 

**NOTE 3:INVENTORIES**

 

Inventories, net consistof:

 
| ** **      | ** ** | **March 31,********2010** | ** ** | **December 31,********2009** | ** ** |
|-----------------|------------|--------------------------------|------------|-----------------------------------|------------|
| ** **      | ** ** | **(in thousands)**             | ** ** |
| Raw Materials   |       | $                              | 38,070     |                              | $          | 39,112 |   |
| Work-in-Process |       | 6,342                          |       | 6,447                             |       |
| Finished Goods  |       | 36,384                         |       | 34,405                            |       |
|            |       |                           |       |                              |       |
|            |       | $                              | 80,796     |                              | $          | 79,964 |   |

 

Inventory reserves forobsolescence and other estimated losses were $8.6 million and $8.4 million at March 31,2010 and December 31, 2009, respectively.

 

**NOTE 4:INCOME TAXES**

 

As of March 31,2010, the Company had unrecognized tax benefits of approximately $2.2million.  The entire amount of theunrecognized tax benefits would affect the effective tax rate if recognized.  As of March 31, 2010, the Company issubject to U.S. Federal income tax examinations for the tax years 2006 through2009, and to non-U.S. income tax examinations for the tax years 2002 through2009.  In addition, the Company issubject to state and local income tax examinations for the tax years 2002through 2009.

 

The Company’s income taxprovision consists of federal, state and foreign income taxes.  The tax provisions for the three months endedMarch 31, 2010 and 2009 were based on the estimated effective tax ratesapplicable for the full years ending December 31, 2010 and 2009, aftergiving effect to items specifically related to the interim periods.  The Company’s effective tax rate was 42.3%for the three months ended March 31, 2010 and 37.8% for the three monthsended March 31, 2009.  The Company’seffective tax rate is affected by the mix of pretax income and the differenteffective tax rates of the tax jurisdictions in which it operates.

 

**NOTE 5:  DERIVATIVE FINANCIAL INSTRUMENTS**

 

The Company usesderivative financial instruments, to reduce its exposure to adversefluctuations in foreign currency exchange and interest rates.

 

On May 21,2008, the Company entered into four interest rate swap agreements for purposesof managing its risk in interest rate fluctuations.  These agreements each hedge a notional amountof $150.0 million of the Company’s borrowings under the revolving creditfacility.  Two of the agreements wereeffective June 9, 2009 and expire on June 9, 2010.  On these two agreements, the Company pays afixed rate of 3.51% and receives a variable rate of interest equal tothree-month London Interbank Offered Rate (LIBOR), as determined on the lastday of each quarterly settlement period. The other two agreements are effective on June 9, 2010 and expireon June 9, 2011.  The Company pays afixed rate of 4.10% on these two agreements and receives a variable rate ofinterest equal to three-month LIBOR.

 

The Company haselected to apply hedge accounting to these swap agreements.  Changes in the fair value of these interestrate swap agreements are recorded as a component of accumulated othercomprehensive income (loss) in the equity section of the balance sheet.  The net amount paid or received uponquarterly settlements is recorded as an adjustment to interest expense, with acorresponding reduction in other comprehensive income (loss).

 

7

----

Tableof Contents

 

**KNOLL,INC.**

 

**NOTES TOTHE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

 

The effect of derivativeinstruments on the condensed consolidated statement of income for the threemonths ended March 31, 2010 was as follows (in thousands):

 
| **Derivatives  in********Cash Flow Hedge  Relationship** | ** ** | **Before-Tax  Gain (Loss)  Recognized in  OCI on Derivative  (Effective Portion)** | ** ** | **Locations of Gain (Loss)  Reclassified from********AOCI into Income  (Effective Portion)** | ** **            | **Before-Tax********Gain (Loss)  Reclassified from  AOCI into Income  (Effective Portion)** | ** ** | **Locations of Gain (Loss)  Recognized in Income on  Derivative (Ineffective Portion)** | ** ** | **Gain (Loss)  Recognized in Income on  Derivative (Ineffective Portion)** | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|-----------------------|-----------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| Interest rate swap  contracts                  |       | $                                                                                                           | (1,810     | )                                                                                                           | Interest Expense |                                                                                                            | $          | (2,439                                                                                                                          | )          | None                                                                                                     |       | $ | — |   |
| Total                                                    |       | $                                                                                                           | (1,810     | )                                                                                                           |                  |                                                                                                            | $          | (2,439                                                                                                                          | )          |                                                                                                     |       | $ | — |   |

 

The effect of derivativeinstruments on the condensed consolidated statement of income for the threemonths ended March 31, 2009 was as follows (in thousands):

 
| **Derivatives  in********Cash Flow Hedge  Relationship** | ** ** | **Before-Tax  Gain (Loss)  Recognized in  OCI on Derivative  (Effective Portion)** | ** ** | **Locations of Gain (Loss)  Reclassified from********AOCI into Income  (Effective Portion)** | ** **            | **Before-Tax********Gain (Loss)  Reclassified from  AOCI into Income  (Effective Portion)** | ** ** | **Locations of Gain (Loss)  Recognized in Income on  Derivative (Ineffective Portion)** | ** ** | **Gain (Loss)  Recognized in Income on  Derivative (Ineffective Portion)** | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|-----------------------|-----------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| Interest rate swap  contracts                  |       | $                                                                                                           | (1,341     | )                                                                                                           | Interest Expense |                                                                                                            | $          | —                                                                                                                          |       | None                                                                                                     |       | $ | — |   |
| Total                                                    |       | $                                                                                                           | (1,341     | )                                                                                                           |                  |                                                                                                            | $          | —                                                                                                                          |       |                                                                                                     |       | $ | — |   |

 

Assuming interest ratesstay at current levels, in the next twelve months, the Company anticipates thatapproximately $10.2 million will be reclassified from other comprehensiveincome (loss), to interest expense in connection with quarterly settlements ofthe above-referenced swap agreements.

 

The following table setsforth the fair value of the interest rate swap contract liabilities included incurrent and non-current liabilities within the condensed consolidated balancesheets at March 31, 2010 and December 31, 2009:

 
| ** **                     | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|--------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                     | ** ** | **(in thousands)**       | ** ** |
| Interest  rate swap agreements |       | $                        | (12,160    | )                           | $          | (12,789 | ) |
|                                |            |                          |            |                             |            |  |  |

 

The fair value of theCompany’s derivative instruments included in current liabilities was $10.2million at March 31, 2010.  The fairvalue of the Company’s derivative instruments included in non-currentliabilities was $2.0 million at March 31, 2010.  The fair value of the Company’s derivativeinstruments included in current liabilities was $9.0 million at December 31,2009.  The fair value of the Company’sderivative instruments included in non-current liabilities was $3.8 million at December 31,2009.

 

The Company will continueto review its exposure to interest rate fluctuations and evaluate whether itshould manage such exposure through derivative transactions.

 

8

----

Tableof Contents

 

**KNOLL,INC.**

 

**NOTES TOTHE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

 

***Foreign CurrencyContracts***

 

From time-to-time, theCompany enters into foreign currency forward exchange contracts and foreigncurrency option contracts to manage its exposure to foreign exchange ratesassociated with short-term operating receivables of a Canadian subsidiary thatare payable by the U.S. operations.  Theterms of these contracts are generally less than a year. Changes in the fairvalue of such contracts are reported in earnings in the period the value of thecontract changes.  The net gain or lossupon settlement and the remaining change in fair value is recorded as acomponent of other income (expense).

 

The Company did not enterinto any outstanding foreign currency contracts for the three months ended March 31,2010 and 2009.

 

**NOTE 6:CONTINGENT LIABILITIES AND COMMITMENTS**

 

The Company is currentlyinvolved in matters of litigation, including environmental contingencies,arising in the ordinary course of business. The Company accrues for such matters when expenditures are probable andreasonably estimatable.  Based uponinformation presently known, management is of the opinion that such litigation,either individually or in the aggregate, will not have a material adverseeffect on the Company’s consolidated financial position, results of operations,or cash flows.

 

At March 31, 2010,the Company employed a total of 3,127 people.  Approximately 14.4% of the employees arerepresented by unions.  The Grand Rapids,Michigan plant is the only unionized plant within the U.S and has an agreementwith the Carpenters Union, Local 1615, of the United Brotherhood of Carpentersand Joiners of America, Affiliate of the Carpenters Industrial Council (the “Union”),covering approximately 258 hourly employees. The Collective BargainingAgreement expires August 27, 2011. Certain workers in the facilities in Italy are also represented byunions.

 

The Company offers awarranty for all of its products.  Thespecific terms and conditions of those warranties vary depending upon theproduct sold.  The Company estimates thecosts that may be incurred under its warranties and records a liability in theamount of such costs at the time product revenue is recognized.  Factors that affect the Company’s liabilityinclude historical product-failure experience and estimated repair costs foridentified matters for each specific product category.  The Company periodically assesses theadequacy of its recorded warranty liabilities and adjusts the amounts asnecessary.

 

Changes in the warrantyreserves for periods indicated are as follows:

 
| ** **                     | ** ** | **Three months ended**         | ** ** |
|--------------------------------|------------|--------------------------------|------------|
| ** **                     | ** ** | **March 31,********2010** | ** ** | **March 31,********2009** | ** ** |
| ** **                     | ** ** | **(in thousands)**             | ** ** |
| Balance at beginning of period |       | $                              | 9,773      |   | $ | 11,528 |   |
| Provision for warranty claims  |       | 746                            |       | 1,977 |   |
| Warranty claims paid           |       | (1,428                         | )          | (2,190 | ) |
|                           |       |                           |       |   |   |
| Balance at end of period       |       | $                              | 9,091      |   | $ | 11,315 |   |

 

9

----

Tableof Contents

 

**KNOLL,INC.**

 

**NOTES TOTHE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

 

**NOTE 7:PENSIONS AND OTHER POSTRETIREMENT BENEFITS**

 

The following tablessummarize the costs of the Company’s employee pension and post-retirement plansfor the periods indicated.

 
| ** **                         | ** ** | **Pension Benefits**           | ** ** | **Other Benefits**             | ** ** |
|------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                         | ** ** | **Three months ended**         | ** ** | **Three months ended**         | ** ** |
| ** **                         | ** ** | **March 31,********2010** | ** ** | **March 31,********2009** | ** ** | **March 31,********2010** | ** ** | **March 31,********2009** | ** ** |
| ** **                         | ** ** | **(in thousands)**             | ** ** |
| Service cost                       |       | $                              | 2,600      |                           | $          | 2,580 |   | $ | 113 |   | $ | 108 |   |
| Interest cost                      |       | 2,703                          |       | 2,433                          |       | 370 |   | 394 |   |
| Expected return on plan assets     |       | (2,918                         | )          | (2,606                         | )          | — |   | — |   |
| Amortization of prior service cost |       | 15                             |       | 19                             |       | (301 | ) | (335 | ) |
| Recognized actuarial loss          |       | 265                            |       | 18                             |       | 138 |   | 170 |   |
|                               |       |                           |       |                           |       |   |   |   |   |
| Net periodic benefit cost          |       | $                              | 2,665      |                           | $          | 2,445 |   | $ | 320 |   | $ | 337 |   |

 

**NOTE 8:OTHER COMPREHENSIVE INCOME**

 

Comprehensive income(loss) consists of net earnings, plus other comprehensive income which includespension liability adjustments, foreign currency translation adjustments, andunrealized losses on derivatives. Comprehensive income was approximately $1.4 million and $6.3 million forthe three months ended March 31, 2010 and March 31, 2009,respectively.  The following presents thecomponents of “Accumulated Other Comprehensive Income (Loss)” for the periodindicated, net of tax (in thousands).

 
| **Three months ended:**                           | ** ** | **Beginning** | ** ** | **Before-Tax** | ** ** | **Tax  Benefit** | ** ** | **Net-of-Tax** | ** ** | **Ending**  | ** ** |
|---------------------------------------------------|------------|---------------|------------|----------------|------------|------------------|------------|----------------|------------|-------------|------------|
| **March 31,  2010**                          | ** ** | **Balance**   | ** ** | **Amount**     | ** ** | **(Expense)**    | ** ** | **Amount**     | ** ** | **Balance** | ** ** |
| Pension  Adjustment                               |       | $             | (24,420    | )              | $          | —           |       | $              | —     |        | —     |   | $ | (24,420 | ) |
| Foreign currency  translation adjustment          |       | 21,937        |       | (1,214         | )          | —           |       | (1,214         | )          | 20,723      |       |
| Unrealized loss  on derivatives                   |       | (7,744        | )          | 629            |       | (249             | )          | 380            |       | (7,364      | )          |
|                                              |       |          |       |           |       |             |       |           |       |        |       |
| Accumulated  other comprehensive loss, net of tax |       | $             | (10,227    | )              | $          | (585             | )          | $              | (249       | )           | $          | (834 | ) | $ | (11,061 | ) |
|                                                   |            |               |            |                |            |                  |            |                |            |             |            |  |  |  |  |  |

 

10

----

Tableof Contents

 

**KNOLL,INC.**

 

**NOTES TOTHE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

 

**NOTE 9:COMMON STOCK AND EARNINGS PER SHARE**

 

Basic earnings per shareis computed by dividing net income by the weighted-average number of commonshares outstanding for the period (excluding unvested restricted shares).  Diluted earnings per share reflect theadditional dilution for all shares and potential shares issued under the stockincentive plans.

 
| ** **                                                                       | ** ** | **Three months ended**         | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                       | ** ** | **March 31,********2010** | ** ** | **March 31,********2009** | ** ** |
| Weighted average shares of common stock  outstanding—basic                  |       | 45,627                         |       | 45,301 |   |
| Potentially dilutive shares resulting from stock  plans                          |       | 239                            |       | — |   |
|                                                                             |       |                           |       |   |   |
| Weighted average common shares—diluted                                      |       | 45,866                         |       | 45,301 |   |
|                                                                             |       |                           |       |   |   |
| Antidilutive options not included in the weighted  average common shares-diluted |       | 2,874                          |       | 2,727 |   |

 

Common stock activity forthe three months ended March 31, 2010 and 2009 included the repurchase ofapproximately 458,405 shares for $5.5 million and 86,952 shares for $663,000,respectively.  Common stock activity forthe first three months of 2010 also included the exercise of 512,980 optionsfor $5.5 million and the vesting of 19,817 restricted shares.  Common stock activity for the first threemonths of 2009 also included the issuance of 4,637 shares for $28,000 and thevesting of 244,745 restricted shares.

 

**NOTE 10:RESTRUCTURING CHARGES**

 

On April 3, 2008 theCompany initiated a restructuring plan in order to reduce costs. Additionalreductions were announced December 4, 2008, and February 3,2009.  The Company based its accountingand disclosures on the applicable accounting guidance.  As a result, charges to operations were madein the periods in which restructuring plan liabilities were incurred. Duringthe first three months of 2009, the Company incurred $6.2 million ofrestructuring charges.  Theserestructuring charges related to employee termination costs.  A reserve was recorded on the balance sheetfor employee termination costs and showroom lease payments that have not beenpaid as of March 31, 2010 and December 31, 2009, respectively.

 

On March 18, 2010,the Company announced a plan to better align its manufacturing footprint withdemand while further focusing the particular manufacturing activities of eachof its North American production facilities. The Company has elected to undergo this restructuring in order to betterutilize its manufacturing capacity, eliminate duplication of capabilities andreduce associated costs.  The Company based its accounting and disclosureson the applicable accounting guidance. As a result, charges to operations were made in the periods in whichrestructuring plan liabilities were incurred. The Company expects the 2010 planto continue through the second quarter of 2011, with total estimated charges toapproximately $10.7 million.  During thefirst quarter of 2010, the Company incurred approximately $3.6 million ofrestructuring charges.  Theserestructuring charges included employee termination costs as well as costsassociated with the write off of fixed-assets. A reserve was recorded on the balance sheet for employee terminationcosts that have not been paid as of March 31, 2010

 

11

----

Tableof Contents

 

**KNOLL,INC.**

 

**NOTES TOTHE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

 

Below is the summary ofthe restructuring reserve balance as of March 31, 2010:

 
| ** **                 | ** ** | **March 31,** | ** ** |
|----------------------------|------------|--------------------|------------|
| **Restructuring  Reserve** | ** ** | **2010**           | ** ** |
| Reserve balance            |       | $                  | 1,774      |   |
| Additions                  |       | 1,334              |       |
| Payments                   |       | (993               | )          |
| Adjustments                |       | —             |       |
| Ending Reserve balance     |       | $                  | 2,115      |   |

 

Duringthe first quarter of 2010, $2.3 million of costs associated with the write-offof fixed assets were recorded as a direct reduction of the asset which had nofurther net realizable value.

 

**NOTE 11:FAIR VALUE OF FINANCIAL INSTRUMENTS**

 

The following methods andassumptions are used to estimate the fair value of each class of financialinstruments for which it is practicable to estimate:

 

*Cashand Cash Equivalents*

 

The fair value of theCompany’s cash and cash equivalents approximates the carrying value of theCompany’s cash and cash equivalents, due to the short maturity of the cashequivalents.

 

*Long-termDebt*

 

The fair value of theCompany’s $290.1 million outstanding indebtedness under its revolvingcredit facility approximates its carrying value, as it is variable-ratedebt.  The fair value of the Company’sother long-term obligations approximates its carrying value.

 

*InterestRate Swap Contracts*

 

The fair value of theCompany’s interest rate swap contracts is measured as the present value of allexpected future cash flows based on the LIBOR-based swap yield curve as of thedate of the valuation.

 

The estimated fair valuesof the Company’s financial instruments are as follows (in thousands):

 
| ** **                 | ** ** | **March 31, 2010** | ** ** | **December 31, 2009** | ** ** |
|----------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                 | ** ** | **Carrying  Amount**    | ** ** | **Fair Value**             | ** ** | **Carrying  Amount** | ** ** | **Fair Value** | ** ** |
| **Financial Assets:**      |       |                    |       |                       |       |   |   |   |   |
| Cash  and cash equivalents |       | $                       | 8,135      |                       | $          | 8,135 |   | $ | 5,961 |   | $ | 5,961 |   |
| **Financial Liabilities:** |       |                    |       |                       |       |   |   |   |   |
| Long-term  debt            |       |                    |       |                       |       |   |   |   |   |
| Senior  credit facility    |       | 290,141                 |       | 290,141                    |       | 295,156 |   | 295,156 |   |
| Interest  swap contracts   |       | 12,160                  |       | 12,160                     |       | 12,789 |   | 12,789 |   |
|                            |            |                         |            |                            |            |  |  |  |  |  |  |  |  |

 

12

----

Tableof Contents

 

**KNOLL,INC.**

 

**NOTES TOTHE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

 

**NOTE 12.FAIR VALUE MEASUREMENTS**

 

ASC 820, “Fair ValueMeasurements and Disclosures”, establishes a hierarchy that prioritizes fairvalue measurements based on types of inputs used for the various valuationtechniques (market approach, income approach, and cost approach).  The levels of the hierarchy are describedbelow:

 
| · |   | Level 1: Observable  inputs such as quoted prices in active markets for identical assets or  liabilities                                                                                                                                                                                                    |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                        |
| · |   | Level 2: Inputs other  than quoted prices that are observable for the asset or liability, either  directly or indirectly; these include quoted prices for similar assets or  liabilities in active markets and quoted prices for identical or similar  assets or liabilities in markets that are not active |
|   |   |                                                                                                                                                                                                                                                                                                        |
| · |   | Level 3: Unobservable  inputs that reflect the reporting entity’s own assumptions                                                                                                                                                                                                                      |

 

The Company’s assessmentof the significance of a particular input to the fair value measurementrequires judgment, and may affect the valuation of assets and liabilities andtheir placement within the fair value hierarchy.  The following table sets forth the assets andliabilities measured at fair value on a recurring basis, by input level, in thecondensed consolidated balance sheet at March 31, 2010 (in thousands):

 
| ** **           | ** ** | **Quoted Prices in  Active Markets for  Identical Assets or  Liabilities (Level 1)** | ** ** | **Significant Other  Observable Inputs********(Level 2)** | ** ** | **Significant********Unobservable Inputs********(Level 3)** | ** ** | **Total** | ** ** |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|-----------|------------|
| Liabilities:         |       |                                                                                                               |       |                                                                |       |                                                             |       |      |       |
| Interest  rate swaps |       | $                                                                                                                  | —     |                                                                | $          | 12,160                                                           |       | $         | —     |   | $ | 12,160 |   |
| Total                |       | $                                                                                                                  | —     |                                                                | $          | 12,160                                                           |       | $         | —     |   | $ | 12,160 |   |

 

The interest rate swapsreferred to above are included in current and non-current liabilities withinthe condensed consolidated balance sheet at March 31, 2010.

 

The following table setsforth the assets and liabilities measured at fair value on a recurring basis,by input level, in the condensed consolidated balance sheet at December 31,2009 (in thousands):

 
| ** **           | ** ** | **Quoted Prices in********Active Markets for********Identical Assets or********Liabilities (Level 1)** | ** ** | **Significant Other********Observable Inputs********(Level 2)** | ** ** | **Significant********Unobservable Inputs********(Level 3)** | ** ** | **Total** | ** ** |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|-----------|------------|
| Liabilities:         |       |                                                                                                                                 |       |                                                                      |       |                                                             |       |      |       |
| Interest  rate swaps |       | $                                                                                                                                    | —     |                                                                      | $          | 12,789                                                           |       | $         | —     |   | $ | 12,789 |   |
| Total                |       | $                                                                                                                                    | —     |                                                                      | $          | 12,789                                                           |       | $         | —     |   | $ | 12,789 |   |

 

The interest rate swapsreferred to above were included in current and non-current liabilities withinthe condensed consolidated balance sheet at December 31, 2009.

 

**NOTE 13.SUBSEQUENT EVENT**

 

The Company evaluated allsubsequent events through the date that the condensed consolidated financialstatements were issued.  No materialsubsequent events have occurred since March 31, 2010 that requiredrecognition or disclosure in the condensed consolidated financial statements.

 

13

----

Tableof Contents

 

**ITEM 2:****                       ****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS**

 

*Management’sdiscussion and analysis of financial condition and results of operationsprovides an account of our financial performance and financial condition thatshould be read in conjunction with the accompanying unaudited condensedconsolidated financial statements.*

 

**Forward-lookingStatements**

 

This Quarterly report on Form 10-Qcontains forward-looking statements, principally in the sections entitled “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” and “Quantitativeand Qualitative Disclosures About Market Risk.” Statements and financialdiscussion and analysis contained in this Form 10-Q that are nothistorical facts are forward-looking statements. These statements discussgoals, intentions and expectations as to future trends, plans, events, resultsof operations or financial condition, or state other information relating tous, based on our current beliefs as well as assumptions made by us andinformation currently available to us. Forward-looking statements generallywill 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. This includes, withoutlimitation, our statements and expectations regarding any future recovery inour industry and our projections and estimates with respect to our plannedrestructuring activities.** **Although we believe these forward-lookingstatements are reasonable, they are based upon a number of assumptionsconcerning future conditions, any or all of which may ultimately prove to beinaccurate. Important factors that could cause actual results to differmaterially from the forward-looking statements include, without limitation: therisks described in Item 1A and in Item 7A of our Annual Report on Form 10-Kfor the year ended December 31, 2009; changes in the financial stabilityof our clients or the overall economic environment, resulting in decreased corporatespending and service sector employment; changes in relationships with clients;the mix of products sold and of clients purchasing our products; the success ofnew technology initiatives; changes in business strategies and decisions;competition from our competitors; our ability to recruit and retain anexperienced 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 onfurniture dealers to produce sales; lawsuits arising from patents, copyrightsand trademark infringements; violations of environment laws and regulations;potential labor disruptions; adequacy of our insurance policies; theavailability of future capital; the overall strength and stability of ourdealers, suppliers, and customers; access to necessary capital; and currencyrate fluctuations. The factors identified above are believed to be importantfactors (but not necessarily all of the important factors) that could causeactual results to differ materially from those expressed in any forward-lookingstatement. Unpredictable or unknown factors could also have material adverseeffects on us. All forward-looking statements included in this Form 10-Qare expressly qualified in their entirety by the foregoing cautionarystatements. Except as required under the Federal securities laws and rules regulationsof the SEC, we undertake no obligation to update, amend, or clarifyforward-looking statements, whether as a result of new information, futureevents, or otherwise.

 

**Overview**

 

The first quarter of 2010proved to be very difficult as we continued to be impacted by decreased demandacross the industry.  Net sales were down17.5% from $212.6 million during the first quarter of 2009 to $175.3 millionduring the first quarter of 2010.  Thedecrease in sales was experienced over the majority of our product categories.However, we did have sales in seating increase on a year-over-year basis assales for the Generation by Knoll***®*** chair continueto generate momentum.  Our largestpercentage sales declines were seen in our office systems category, whichcontinued to experience double digit declines. Geographically, during the firstquarter of 2010 sales in North America decreased while sales in Europeincreased when compared with the prior year. Backlog of unfilled orders fell $24.9 million to $138.9 million, or15.2%, compared to unfilled orders of $163.8 million at March 31, 2009.  Earnings per share was $0.05, a decrease of 76.2%,when compared to $0.21 earnings per share in the prior year.

 

14

----

Tableof Contents

 

During the first quarterof 2010, we announced a plan to better align our manufacturing footprint.  We have elected to undergo this restructuringin order to better utilize our manufacturing capacity, eliminate duplication ofcapabilities and reduce associated costs. We estimated that total restructuring charges of $10.7 million will beincurred for this plan.  During the firstquarter of 2010, $3.6 million were recorded. We expect the plan to be completed during the next fifteen months.  Annual savings of this plan are expected tobe approximately $7.1 million.

 

For the first quarter of2010, gross margin decreased 290 basis points to 32.3% versus the comparablequarter of the prior year. The decrease in gross margin largely resulted fromprice deterioration and unfavorable movements in foreign exchange on theCanadian dollar. Our gross margin was alsoimpacted by lower absorption of our fixed costs as a result of our lowersales.  Operating profit for the firstquarter of 2010 was $9.4 million, a decrease of 44.0% from the first quarter of2009.  Operating expenses for the firstquarter of 2010 decreased $8.1 million, or 15.8%, when compared to the prioryear.  We continue to aggressively manageour cost structure in order to bring our expenses in line with current salesvolume levels.

 

Interest expense duringthe first quarter of 2010 increased $1.4 million when compared to the prioryear.  The increase in interest expenseis the result of an interest rate swap agreement that went into effect duringthe second quarter of 2009.  Thisagreement increased interest expense by $2.4 million during the first quarterof 2010. For a further discussion of the interest rate swap agreements, seeNote 5 to the condensed consolidated financial statements included in thisquarterly report on Form 10-Q.

 

Despite the industrydemand challenges we continue to face, this quarter we were able to pay down anadditional $5.0 million of our debt to bring our total debt outstanding to$290.3 million.  We also were able torepurchase $5.5 million of our common shares outstanding using stock optionproceeds and pay a quarterly dividend of $0.02 per share.  We remain in compliance with all our bankcovenants.

 

Weexpect 2010 to be a challenging year but we believe we are beginning to seesigns of a recovery that will impact our results during the second half of theyear.  Our industry trade association, The Business and Institutional FurnitureManufacturer’s Association (“BIFMA”), is forecasting a sales decline of 3.8%for 2010 compared with a decline of 29.7% in 2009.  Until the industry recovery occurs we willcontinue to aggressively manage our costs while investing in products that willbetter position us in the future.

 

**CriticalAccounting Policies**

 

The preparation ofthe consolidated financial statements in conformity with accounting principlesgenerally accepted in the U.S. requires us to make estimates and assumptionsthat affect the reported amounts of certain assets, liabilities, revenues andexpenses and the disclosure of certain contingent assets and liabilities.  Actual results may differ from suchestimates.  On an ongoing basis, wereview our accounting policies and procedures. A more detailed review of our critical accounting policies is containedin our Annual Report on Form 10-K for the fiscal year ended December 31,2009.

 

15

----

Table ofContents

 

**Results of Operations**

 

***Comparisonof First Quarter Ended March 31, 2010 to First Quarter Ended March 31,2009***

 
| ** **                                                     | ** ** | **Three  Months  Ended** | ** ** | **Three  Months  Ended** | ** ** |
|----------------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                                                     | ** ** | **March 31,  2010** | ** ** | **March 31,  2009** | ** ** |
| **Consolidated Statement of  Operations Data (in thousands):** |       |                     |       |                     |       |
| Net Sales                                                      |       | $                        | 175,259    |                     | $          | 212,609 |   |
| Gross Profit                                                   |       | 56,661                   |       | 74,767                   |       |
| Restructuring Charges                                          |       | 3,608                    |       | 6,239                    |       |
| Operating Income                                               |       | 9,408                    |       | 16,765                   |       |
| Interest Expense                                               |       | 4,153                    |       | 2,771                    |       |
| Other (Expense) Income, net                                    |       | (1,413                   | )          | 1,324                    |       |
| Income Tax Expense                                             |       | 1,627                    |       | 5,793                    |       |
| Net Income                                                     |       | $                        | 2,215      |                     | $          | 9,525 |   |
|                                                           |       |                     |       |                     |       |
| **Statistical and Other Data:**                                |       |                     |       |                     |       |
| Sales Growth From Comparable Prior Year                        |       | (17.5                    | )%         | (20.6                    | )%         |
| Gross Profit Margin                                            |       | 32.3                     | %          | 35.2                     | %          |
| Backlog                                                        |       | $                        | 138,946    |                     | $          | 163,768 |   |

 

***Sales***

 

Sales for the firstquarter of 2010 were $175.3 million, a decrease of $37.3 million, or 17.5%,from sales of $212.6 million for the same period in the prior year.  The decrease in sales was experienced acrossall product categories except for seating. During the first quarter of 2010, pricing pressures continued to impactsales as the sales environment remains very competitive.  Limited activity in the industry isincreasing competition in the market place and allowing customers to obtainhigher discounts on the products we sell.

 

During the first quarterof 2010, sales to the U.S. government continued to represent a large portion ofour overall sales.  Sales to the U.S.government were 18.2% of net sales during the first quarter of 2010.

 

At March 31, 2010,our sales backlog was $138.9 million, a decrease of $24.9 million, or 15.2%,from our sales backlog of $163.8 million as of March 31, 2009.

 

***Gross Profit and Operating Income***

 

Gross profit for thefirst quarter of 2010 was $56.6 million, a decrease of $18.2 million, or 24.3%,from gross profit of $74.8 million for the first quarter ended March 31,2009.  Operating income for the firstquarter of 2010 was $9.4 million, a decrease of $7.4 million, or 44.0%, fromoperating income of $16.8 million for the first quarter of 2009.  Operating income for the first quarter of2010 includes restructuring charges of $3.6 million.  Operating income for the first quarter of2009 includes restructuring charges of $6.2 million.  As a percentage of sales, gross profitdecreased to 32.3% for the first quarter of 2010 from 35.2% for the firstquarter of 2009. Operating income as a percentage of sales decreased to 5.4% inthe first quarter of 2010 from 7.9% over the same period of 2009.

 

The decrease in grossprofit margin from the first quarter of 2009 largely resulted from pricingpressures and unfavorable movements in foreign exchange.  Lower absorption of our fixed costs becauseof our lower sales volumes also added to the decline.

 

Operating expenses forthe first quarter of 2010 were $43.6 million, or 24.9% of sales, compared to$51.8 million, or 24.3% of sales, for the first quarter of 2009.  The decrease in operating expense dollarsduring the first quarter of 2010 was largely due to decreased spending inconjunction with our lower sales volumes. Decreased sales and incentive compensation accounted for approximately$4.1 million of the reduction in operating expenses for the first quarter of 2010.

 

16

----

Tableof Contents

 

***Interest Expense***

 

Interest expense for thequarter ended March 31, 2010 was $4.2 million, an increase of $1.4 millionfrom the same period in 2009.  Theincrease in interest expense for the three months ended March 31, 2010 wasdue to an interest rate swap agreement that went into effect during the secondquarter of 2009.  For the three monthsended March 31, 2010 additional interest expense of $2.4 million wasincurred as a result of the interest rate swap agreement. See Note 5 of thecondensed consolidated financial statements included in this quarterly reporton Form 10-Q. for further information regarding the interest rate swaps.Taking into account the effect of the interest rate swap payments, the weightedaverage interest rate for the first quarter of 2010 was 5.0%. The weightedaverage interest rate for the same period in 2009 was 2.9%.

 

***Other (Expense) Income, net***

 

Other expense for the firstquarter of 2010 was $1.4 million.  Otherincome for the first quarter of 2009 was $1.3 million.  The decrease in other (expense) income wasprimarily due to losses on foreign exchange particularly the increase in theCanadian Dollar.

 

***Income Tax Expense***

 

Our effective tax ratewas 42.3% for the first quarter of 2010, as compared to 37.8% for the sameperiod last year.  The increase in theeffective tax rate is largely due to the mix of pretax income in the countries inwhich we operate.

 

**Liquidityand Capital Resources**

 

The following tablehighlights certain key cash flows and capital information pertinent to thediscussion that follows:

 
| ** **                                          | ** ** | **March 31,  2010** | ** ** | **March 31,  2009** | ** ** |
|-----------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                                          | ** ** | **(in  thousands)**      | ** ** |
| Cash (used in) provided by operating activities     |       | $                        | 11,521     |                     | $          | (14,840 | ) |
| Capital expenditures                                |       | (1,348                   | )          | (5,138                   | )          |
| Net cash used in investing activities               |       | (1,661                   | )          | (5,138                   | )          |
| Purchase of common stock                            |       | (5,490                   | )          | (663                     | )          |
| Net (repayment) borrowings of debt                  |       | (5,000                   | )          | 24,000                   |       |
| Payment of dividend                                 |       | (912                     | )          | (5,445                   | )          |
| Net proceeds from issuance of stock                 |       | 5,531                    |       | 28                       |       |
| Net cash (used in) provided by financing activities |       | (5,676                   | )          | 17,920                   |       |
|                                                     |            |                          |            |                          |            |  |  |

 

Historically, we havecarried significant amounts of debt, and cash generated by operating activitieshas been used to fund working capital, capital expenditures, repurchase shares,pay quarterly dividends and scheduled payments of principal and interest underour credit facility.  Our capitalexpenditures are typically for new product tooling and manufacturingequipment.  These capital expendituressupport new products and continuous improvements in our manufacturingprocesses.

 

Year-to-date net cashprovided by operations was $11.5 million, of which $11.3 million was providedby net income plus non-cash amortizations and stock-based compensation, plus$0.2 million of favorable changes in assets and liabilities.  During the first quarter of 2009, cash usedin operating activities was $14.8 million, of which $17.3 million was providedby net income plus non-cash amortizations and stock-based compensation, offsetby $32.1 million of unfavorable changes in working capital and other assets andliabilities.

 

17

----

Tableof Contents

 

For the first quarter of2010, we used available cash, including the $11.5 million of net cash providedby operating activities and $5.5 million provided from option proceeds, torepay $5.0 million of our outstanding debt, repurchase $5.5 million of commonstock for treasury, fund $1.3 million in capital expenditures, fund a dividendpayment to shareholders totaling $0.9 million and fund workingcapital.   For the first quarter of 2009,we used available cash, including the $17.9 million of net cash from financingactivities, to fund $5.1 million in capital expenditures, repurchase $663,000of common stock for treasury, fund a dividend payment to shareholders totaling$5.4 million and fund working capital.

 

Cash used in investingactivities was $1.7 million for the first quarter of 2010 and $5.1 million forthe same period in 2009.  Fluctuations incash used in investing activities are primarily attributable to the levels ofcapital expenditures.

 

We use our existingsecured $500 million revolving credit facility in the ordinary course ofbusiness to fund our working capital needs, and at times make significantborrowings and repayments under the facility depending on our cash needs andavailability at such time. This facility matures in June 2013 and providesus 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. Asof March 31, 2010 there was approximately $290 million outstanding underthe facility, compared to $361 million outstanding under the facility as of March 31,2009. Borrowings under the revolving credit facility may be repaid at any time,but no later than June 2013.

 

Our revolving creditfacility requires that we comply with two financial covenants: our consolidatedleverage ratio, defined as the ratio of total indebtedness to consolidatedEBITDA (as defined in our credit agreement) for a period of four fiscalquarters, cannot exceed 4 to 1, and our consolidated interest coverage ratio,defined as the ratio of our consolidated EBITDA (as defined in our creditagreement) for a period of four fiscal quarters to our consolidated interestexpense, must be a minimum of 3 to 1. We are also required to comply withvarious other affirmative and negative covenants, including without limitation,covenants that prevent or restrict our ability to pay dividends, engage incertain mergers or acquisitions, make certain investments or loans, incurfuture indebtedness, make significant capital expenditures, engage in sale-leasebacktransactions, alter our capital structure or line of business, prepaysubordinated indebtedness, engage in certain transactions with affiliates andsell stock or assets.

 

We are currently incompliance 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 besufficient to fund normal working capital needs, capital spending requirements,debt service requirements and dividend payments for at least the next twelvemonths. However, because of the financial covenants mentioned above, ourcapacity under our revolving credit facility could be reduced if our trailingconsolidated EBITDA (as defined by our credit agreement) continues to declinedue to deteriorating market conditions. Future principal debt payments may bepaid out of cash flows from operations, from future refinancing of our debt orfrom equity issuances. However, our ability to make scheduled payments ofprincipal, to pay interest on or to refinance our indebtedness, to satisfy ourother debt obligations and to pay dividends to stockholders will depend uponour future operating performance, which will be affected by general economic,financial, competitive, legislative, regulatory, business and other factorsbeyond our control.

 

**ContractualObligations**

 

Contractualobligations associated with our ongoing business will result in cash paymentsin future periods.  A table summarizing theamounts and timing of these future cash payments was provided in the Company’s Form 10-Kfiling for the fiscal year ended December 31, 2009.

 

18

----

Tableof Contents

 

**EnvironmentalMatters**

 

Our past and presentbusiness operations and the past and present ownership and operation ofmanufacturing plants on real property are subject to extensive and changingfederal, state, local and foreign environmental laws and regulations, includingthose relating to discharges to air, water and land, the handling and disposalof solid and hazardous waste and the cleanup of properties affected byhazardous substances.  As a result, weare involved from time-to-time in administrative and judicial proceedings andinquiries relating to environmental matters and could become subject to finesor penalties related thereto.  We cannotpredict what environmental legislation or regulations will be enacted in thefuture, how existing or future laws or regulations will be administered orinterpreted or what environmental conditions may be found to exist.  Compliance with more stringent laws orregulations, or stricter interpretation of existing laws, may require additionalexpenditures by us, some of which may be material.  We have been identified as a potentiallyresponsible party pursuant to the Comprehensive Environmental Response,Compensation and Liability Act of 1980 (“CERCLA”) for remediation costsassociated with waste disposal sites that we previously used.  The remediation costs and our allocated shareat some of these CERCLA sites are unknown. We may also be subject to claims forpersonal injury or contribution relating to CERCLA sites.  We reserve amounts for such matters whenexpenditures are probable and reasonably estimable.

 

**Off-BalanceSheet Arrangements**

 

We do not currently haveany relationships with unconsolidated entities or financial partnerships, suchas entities often referred to as structured finance or special purposeentities, which would have been established for the purpose of facilitatingoff-balance sheet arrangements or other contractually narrow or limitedpurposes. In addition, we do not engage in trading activities involving non-exchangetraded contracts.  As a result, we arenot materially exposed to any financing, liquidity, market or credit risk thatcould arise if we had engaged in these relationships.

 

19

----

Tableof Contents

 

**ITEM 3.          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK**

 

We provided a discussionof our market risk in Part II, Item 7A, of our Annual Report on Form 10-Kfor the year ended December 31, 2009. During the first three months of 2010, there was no substantive changein our market risk except for the items noted below.  This discussion should be read in conjunctionwith Part II, Item 7A, of our Annual Report on Form 10-K for the yearended December 31, 2009.

 

During the normal courseof business, we are routinely subjected to market risk associated with interestrate movements and foreign currency exchange rate movements.  Interest rate risk arises from our debtobligations and related interest rate hedge agreements.  Foreign currency exchange rate risk arisesfrom our non-U.S. operations and purchases of inventory from foreign suppliers.

 

We have risk in ourexposure to certain material and transportation costs.  Steel, leather, wood products and plasticsare all used in the manufacture of our products.  We continue to work to offset these pricechanges in raw materials and transportation through our global sourcinginitiatives, cost improvements and price increases to our products.

 

***Interest Rate Risk***

 

We have variable ratedebt obligations that are denominated in U.S. dollars.  A change in interest rates impacts theinterest incurred and cash paid on our variable rate debt obligations.

 

We use interest rate swapagreements for other than trading purposes in order to manage our exposure tofluctuations in interest rates on our variable-rate debt.  In May of 2008, we entered into fourinterest rate swap agreements in order to manage our interest rate risk.  Each agreement hedges a notional amount of$150.0 million of our $500.0 million revolving credit facility.  Two of the agreements are effective from June 9,2009 through June 9, 2010 and the other two are effective June 9,2010 through June 9, 2011. Fluctuations in LIBOR affect both our net financial instrument positionand the amount of cash to be paid or received by us, if any, under theseagreements. See Note 5 of the condensed consolidated financial statements forfurther information regarding the interest rate swap agreements.

 

Taking into accountpayments on the above noted interest rate swap agreements, our weighted averagerate of interest for the first quarter of 2010 was 5.0%. Our weighted averagerate of interest for the same period of 2009 was 2.9%.

 

***Foreign Currency Exchange Rate Risk***

 

We manufacture ourproducts in the United States, Canada and Italy, and sell our productsprimarily in those markets as well as in other European countries.  Our foreign sales and certain expenses aretransacted in foreign currencies.  Our productioncosts, profit margins and competitive position are affected by the strength ofthe currencies in countries where we manufacture or purchase goods relative tothe strength of the currencies in countries where our products are sold.  Additionally, as we report currency in theU.S. dollar, our financial position is affected by the strength of thecurrencies in countries where we have operations relative to the strength ofthe U.S. dollar.  The principal foreign currenciesin which we conduct business are the Canadian dollar and the Euro.Approximately 15.6% of our revenues for the first quarter 2010 and 11.6% in thesame period for 2009, and 32.7% of our cost of goods sold for the first quarterof 2010 and 33.3 % in the same period of 2009, were denominated in currenciesother than the U.S. dollar.  Foreigncurrency exchange rate fluctuations resulted in a $1.5 million loss in thefirst quarter of 2010 and a $1.1million gain in 2009.

 

20

----

Tableof Contents

 

From time to time, weenter into foreign currency forward exchange contracts and foreign currencyoption contracts for other than trading purposes in order to manage ourexposure to foreign exchange rates associated with short-term operatingreceivables of a Canadian subsidiary that are payable by our U.S.operations.  The terms of these contractsare generally less than a year. Changes in the fair value of such contracts arereported in earnings in the period the value of the contract changes.  The Company had no outstanding foreigncurrency contracts as of March 31, 2010 and 2009.

 

**ITEM 4.          CONTROLS AND PROCEDURES**

** **

*Evaluationof disclosure controls and procedures.* We, under the supervision and with the participationof our management, including our principal executive officer and principalfinancial officer, evaluated the effectiveness of the design and operation ofour disclosure controls and procedures, as defined in Rule 13a-15(e) ofthe Securities Exchange Act of 1934 as of the end of the period covered by thisreport (March 31, 2010) (“Disclosure Controls”). Based upon the DisclosureControls evaluation, our principal executive officer and principal financialofficer have concluded that the Disclosure Controls are effective in reaching areasonable level of assurance that (i) information required to bedisclosed by us in the reports that we file or submit under the SecuritiesExchange Act of 1934 is recorded, processed, summarized and reported within thetime periods specified in the Securities and Exchange Commission’s rules andforms and (ii) information required to be disclosed by us in the reportsthat we file or submit under the Securities Exchange Act of 1934 is accumulatedand communicated to our management, including our principal executive andprincipal financial officers, or persons performing similar functions, asappropriate to allow timely decisions regarding required disclosure.

 

*Changesin internal control over financial reporting.* Our principal executive officer and principalfinancial officer also conducted an evaluation of our internal control overfinancial reporting (“Internal Control”) to determine whether any changes inInternal Control occurred during the quarter ended March 31, 2010 thathave materially affected or which are reasonably likely to materially affectInternal Control.  Based on thatevaluation, there has been no such change during the quarter ended March 31,2010.

 

21

----

Tableof Contents

 

### **PART II — OTHERINFORMATION**

 

**ITEM 1.****LEGAL PROCEEDINGS**

 

During the first quarterof 2010, there have been no new material legal proceedings or material changesin the legal proceedings disclosed in our Annual Report on Form 10-K forthe year ended December 31, 2009.

 

**ITEM 1A.RISK FACTORS**

 

During the first quarterof 2010, there were no material changes in the risk factors disclosed in ourAnnual Report on Form 10-K report for the year ended December 31,2009.

 

**ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND THE USE OF PROCEEDS**

 

**Repurchases of Equity Securities**

 

Thefollowing is a summary of share repurchase activity during the three months endedMarch 31, 2010.

 

On August 17, 2005,our board of directors approved a stock repurchase program (the “OptionsProceeds Program”), whereby it authorized us to purchase shares of our commonstock in the open market using the cash proceeds received by us upon exerciseof outstanding options to purchase shares of our common stock.

 

On February 2, 2006,our board of directors approved an additional stock repurchase program,pursuant to which we are authorized to purchase up to $50.0 million of ourcommon stock in the open market, through privately negotiated transactions, orotherwise.  On February 4, 2008, ourboard of directors expanded this previously authorized $50.0 million stockrepurchase program by an additional $50.0 million.

 
| **Period**                                           | ** ** | **Total Number  of Shares  Purchased** | ** ** | **Average Price  Paid per Share** | ** ** | **Total Number of  Shares  Purchased as  part of publicly  Announced  Plans or  Programs** | ** ** | **Maximum  Dollar Value of  Shares that may  yet be  Purchased  Under the Plans  or Programs (1)** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|
| January 1,  2010 – January 31, 2010   |       | 36,044                                      |       | 11.60                                            |       | 36,044                                                                                               | (2)        | 32,352,413                                                                                                             |       |
| February 1,  2010 – February 28, 2010 |       | 305,961                                     |       | 11.96                                            |       | 305,961                                                                                              | (2)        | 32,352,413                                                                                                             |       |
| March 1,  2010 – March 31, 2010       |       | 116,400                                     |       | 12.13                                            |       | 116,400                                                                                              | (2)        | 32,352,413                                                                                                             |       |
| Total                                                |       | 458,405                                     |       |                                             |       | 458,405                                                                                              |       |                                                                                                                   |       |

 

----

| (1) |   | There is no limit on  the number or value of shares that may be purchased by us under the Options  Proceeds Program. Under our $50.0 million stock repurchase program, which was  expanded by an additional $50.0 million in February of 2008, we are only  authorized to spend an aggregate of $100.0 million on stock repurchases.  Amounts in this column represent the amounts that remain available under the  $100.0 million stock repurchase program as of the end of the period  indicated. There is no scheduled expiration date for the Option Proceeds  Program or the $100.0 million stock repurchase program, but our board of  directors may terminate either program in the future. |
|-----|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | These shares were  purchased under the Options Proceeds Program.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

 

22

----

Tableof Contents

 

**ITEM6.  EXHIBITS**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                  |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                             |
| 31.1                |       | Certification of Chief  Executive Officer pursuant to Rule 13a-14(a) of the Securities  Exchange Act of 1934, as amended.                                                                                                              |
| 31.2                |       | Certification of Chief  Financial Officer pursuant to Rule 13a-14(a) of the Securities  Exchange Act of 1934, as amended.                                                                                                              |
| 32.1                |       | Certification of Chief  Executive Officer pursuant to Rule 13a-14(b) of the Securities  Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2                |       | Certification of Chief  Financial Officer pursuant to Rule 13a-14(b) of the Securities  Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

23

----

Tableof Contents

 

**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the Registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 
| **KNOLL, INC.**          |                     |
|--------------------------|--------------------------|
| (Registrant)             |                     |
|                     |                     |
|                     |                     |
| Date: May 10, 2010  |                     |
| By:                      | /s/ Andrew B.  Cogan     |   |
|                     | **Andrew  B. Cogan**     |   |
|                     | Chief Executive  Officer |   |
|                     |                     |   |
|                     |                     |   |
| Date:  May 10, 2010 |                     |
| By:                      | /s/ Barry L.  McCabe     |   |
|                     | **Barry  L. McCabe**     |   |
|                     | Chief Financial  Officer |   |

 

24

----