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

The accompanying unaudited condensed consolidated financial statements of Knoll, Inc. (the “Company”) have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations.  The consolidated balance sheet of the Company, as of December 31, 2015,2016, was derived from the Company’s audited consolidated balance sheet as of that date. All other condensed consolidated financial statements contained herein are unaudited and reflect all adjustments which are, in the opinion of management, necessary to summarize fairly the financial position of the Company and the results of the Company’s operations and cash flows for the periods presented. All of these adjustments are of a normal recurring nature. The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries and any partially owned subsidiaries that the Company has the ability to control. All significant intercompany balances and transactions have been eliminated in consolidation. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2015.2016.

Information regarding the Company's inventories is as follows (in thousands):

Inventory reserves for obsolescence and other estimated losses were $9.5$10.6 million and $8.3$9.5 million at June 30, 20162017 and December 31, 2015,2016, respectively, and have been included in the amounts above.

Pursuant to the agreement governing the acquisition of HOLLY HUNT®, the Company was required to make annual contingent purchase price payments. The payouts were based upon HOLLY HUNT® reaching an annual net sales target, for each year through 2016, and were paid out on or around February 20 of the following calendar year. The Company classifies this as a Level 3 measurement and is required to remeasure this liability at fair value on a recurring basis. The fair value of such contingent purchase price payments, totaling $16.0 million, was determined at the time of acquisition based upon net sales projections for HOLLY HUNT® for 2014, 2015, and 2016. The Company paid the remaining $6.0 million contingent purchase price in the warranty reservethree months ended March 31, 2017, as a result of HOLLY HUNT® achieving the 2016 net sales projections.

Pursuant to the agreement governing the acquisition of DatesWeiser, the Company may be required to make annual contingent purchase price payments. The payouts are based upon DatesWeiser reaching an annual net sales target, for each year through 2020. The Company classifies this as a Level 3 measurement and is required to remeasure this liability at fair value on a recurring basis. The fair value of such contingent purchase price payments, totaling $1.1 million, was determined at the time of acquisition based upon net sales projections for DatesWeiser for 2017, 2018, 2019 and 2020. Excluding the initial recognition of the liability for the contingent purchase price payments and payments made to reduce the liability, any changes in the fair value will be included within selling, general and administrative expenses.

Information regarding the Company's other current liabilities is as follows (in thousands):

The Company's long-term debt is summarized as follows (in thousands):

The carrying valueCompany is currently involved in matters of litigation, including environmental contingencies, arising in the ordinary course of business. The Company accrues for such matters when expenditures are probable and reasonably estimable. Based upon information presently known, management is of the opinion that such litigation, either individually or in the aggregate, will not have a material adverse effect on the Company’s financial position, results of operations, or cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to their short maturities.flows.

The carrying value of the Company’s long-term debt approximates its fair value, as it is variable rate debt and the termsCompany provides for estimated product warranty expenses when related products are comparable to market terms as of the balance sheet dates,sold and are classifiedincluded within other current liabilities. Because warranty estimates are forecasts that are based on the best available information, primarily historical claims experience, future warranty claims may differ from the amounts provided.

Changes in the warranty reserve are as Level 2.

The following reclassifications were made from accumulated other comprehensive income (loss) to the agreement governingcondensed consolidated statements of operations and other comprehensive income (in thousands):

Basic earnings per share excludes the Company maydilutive effect of common shares that could potentially be requiredissued due to make annual contingent purchase price payments.the exercise of stock options and unvested restricted stock and restricted stock units, and is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share includes the effect of shares and potential shares and units issued under the stock incentive plans. The payouts arefollowing table sets forth the reconciliation from basic to dilutive average common shares (in thousands):

The Company’s income tax provision consists of federal, state and foreign income taxes. The tax provisions for the three months ended June 30, 2017 and 2016 were based upon HOLLY HUNT® reaching an annual net sales target,on the estimated effective tax rates applicable for each year throughthe full years ending December 31, 2017 and 2016 and are paid out on or around February 20includes items specifically related to the interim periods. The Company’s effective tax rate was 31.3% and 34.6% for the six months ended June 30, 2017 and 2016, respectively. The decrease in the Company's effective tax rate for the six months ended June 30, 2017 was due primarily to the adoption of ASU 2016-09 in the following calendar year. The Company classifies this as a Level 3 measurement and is requiredthird quarter of 2016, which impacted the accounting treatment of excess tax benefits related to remeasure this liability at fair value on a recurring basis. The fair valuevesting of such contingent purchase price payments, totaling $16.0 million, was determined at the time of acquisition based upon net sales projections for HOLLY HUNT® for 2014, 2015, and 2016. The Company paid $5.0 million of the remaining $11.0 million contingent purchase priceequity awards in the six months ended June 30, 20162017. This resulted in the realization of tax benefits as a result of HOLLY HUNT® achieving the 2015 net sales projections. Excluding the initial recognition of the liability for the contingent purchase price payments and payments madereduction to reduce the liability, any further changesincome tax expense in the fair value would be included within selling, generalquarter. In addition, the effective tax rate was affected by the geographic mix of pretax income and administrative expenses.the varying effective tax rates in the countries and states in which the Company operates.

There were no additional assets or liabilities recorded at fair value on a recurring basis asAs of June 30, 2016 or2017 and December 31, 2015.2016, the Company had unrecognized tax benefits of approximately $0.9 million, respectively. These unrecognized tax benefit amounts would affect the effective tax rate if recognized. As of June 30, 2017, the Company is subject to U.S. Federal Income Tax examination for the tax years 2007 through 2016, and to non-U.S. income tax examination for the tax years 2010 to 2016. In addition, the Company is subject to state and local income tax examinations for the tax years 2007 through 2016.

The followingCompany manages its business through its reporting segments: Office, Studio, and Coverings. All unallocated expenses are included within Corporate.

Corporate costs include unallocated costs relating to shared services and general corporate activities such as legal expenses, acquisition expenses, certain finance, human resources, administrative and executive expenses and other expenses that are not directly attributable to an operating segment. Dedicated, direct selling, general and administrative expenses of the segments continue to be included within segment operating profit. Management regularly reviews the costs included in the Corporate function, and believes disclosing such information below categorizes certain financial information intoprovides more visibility and transparency of how the Company's reportable segmentschief operating decision maker reviews the results for the three and six months ended June 30, 2016 and 2015Company.

The tables below present the Company’s segment information with Corporate costs excluded from operating segment results. Prior year amounts have been recast to conform to the current presentation (in thousands):

This Quarterlyquarterly report on Form 10-Q contains forward-looking statements, principally in the sections entitled “Management’s“Business,” “Risk Factors,” “Management's Discussion and Analysis of Financial Condition and Results of Operations,” and “Quantitative and Qualitative Disclosures About Market Risk.” Statements and financial discussion and analysis contained in this Form 10-Q that are not historical facts are forward-looking statements. These statements discuss goals, intentions and expectations as to future trends, plans, events, results of operations or financial condition, or state other information relating to us, based on our current beliefs as well as assumptions made by us and information currently available to us. Forward-looking statements generally will be accompanied by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “possible,” “potential,” “predict,” “project,” or other similar words, phrases or expressions. This includes, without limitation, our statements and expectations regarding any current or future recovery in our industry and publicly announced plans for increased capital and investment spending to achieve our long-term revenue and profitability growth goals, and our expectations with respect to leverage. Although we believe these forward-looking statements are reasonable, they are based upon a number of assumptions concerning future conditions, any or all of which may ultimately prove to be inaccurate. Important factors that could cause actual results to differ materially from the forward-looking statements include, without limitation: the risks described in Item 1A and Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2015;2016; changes in the financial stability of our clients or the overall economic environment, resulting in decreased corporate spending and service sector employment; changes in relationships with clients; the mix of products sold and of clients purchasing our products; the success of new technology initiatives; changes in business strategies and decisions; competition from our competitors; our ability to recruit and retain an experienced management team; changes in raw material and commodity prices and availability; restrictions on government spending resulting in fewer sales to the U.S. government, one of our largest customers; our debt restrictions on spending; our ability to protect our patents, copyrights and trademarks; our reliance on furniture dealers to produce sales; lawsuits arising from allegations of patents, copyrights and trademark infringements; violations of environmental laws and regulations; potential labor disruptions; adequacy of our insurance policies; the availability of future capital;capital and the cost of borrowing; the overall strength and stability of our dealers, suppliers, and customers; access to necessary capital; our ability to successfully integrate acquired businesses; the success of our design and implementation of a new enterprise resource planning system; and currency rate fluctuations. The factors identified above are believed to be important factors (but not necessarily all of the important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement. Unpredictable or unknown factors could also have material adverse effects on us. All forward-looking statements included in this Form 10-Q are expressly qualified in their entirety by the foregoing cautionary statements. Except as required under the Federal securities laws and the rules and regulations of the SEC, we undertake no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise.

We design, manufacture, market and sell high-end furnishingscommercial and residential furniture, accessories, textiles, fine leathers and designer felt for the workplace and home. We work with clients to create inspired modern interiors. Our commitment to innovationdesign-driven businesses share a reputation for high-quality and modern design has yieldedsophistication offering a comprehensivediversified product portfolio of products and a brand recognized for high quality and a sophisticated image.that endures throughout evolving trends. Our products are targeted at the middle to upper endupper-end of the market and are soldwhere we reach customers primarily in North America and Europe through a direct sales force and a broad network of independent dealers and distribution partners, our direct sales force, our showrooms retailers and websites.our online presence.

During the last decade, we have diversified our sources of revenue among our varying operating segments. We continue to build Knoll with an eye toward what works for our customers and shareholders: a constellation of high-design, high-margin businesses that leverage our historic relationships with architects, designers and decorators.

We believe that over the long runtime our diversification efforts and strategy will continue to result in a more profitable and less cyclical enterprise. At the same time, we have continued to focus on growingThe 2016 acquisitions of DatesWeiser and improving the operating performance of our Office segment. Recent introductions of complementary products like adjustable tables, seating and ergonomic accessories have driven our recent growth in the Office business.

We are committed to building a sophisticated clientèle that is pleasedmore efficient and responsive customer centric service culture and technology infrastructure across our organization. Our capital expenditures are reflective of this commitment as we continued to invest in the finestbusiness through technology infrastructure upgrades, continued investments in modern design.our manufacturing facilities focusing on lean initiatives and in our showroom footprint.

Gross profit for the three months ended June 30, 20162017 was $114.1$100.0 million, an increasea decrease of $12.9$14.1 million, or 12.7%12.4%, from gross profit of $101.2$114.1 million for the three months ended June 30, 2015.2016. As a percentage of sales, gross profit increaseddecreased from 37.7% for the three months ended June 30, 2015 to 38.7% for the three months ended June 30, 2016.2016 to 37.2% for the three months ended June 30, 2017. This improvementdecrease was driven mainly by the Office segment, where operating efficiencies and improvedlower volume had an unfavorable impact on fixed-cost leverage, from higher volumes were favorable.partially offset by net price realization.

Operating profit for the three months ended June 30, 20162017 was $33.5$22.2 million, an increasea decrease of $5.2$11.2 million, or 18.5%33.6%, from operating profit of $28.3$33.5 million for the three months ended June 30, 2015.2016. The increasedecrease in operating profit was driven primarily by the Office segment resulting from higherlower sales volume as well as cost improvement benefits.partially offset by reduced performance based incentive accruals and lower sales commissions. Operating profit as a percentagefor the Office segment was $4.4 million, or 2.9% of net sales increased from 10.5% infor the three months ended June 30, 2015 to 11.4% in the2017, a decrease of $11.4 million, or 72.2%, when compared with three months ended June 30, 2016.

Selling, general, and administrative expenses for the three months ended June 30, 20162017 were $80.6$75.6 million, or 27.3%28.2% of sales, compared to $72.9$80.6 million, or 27.2%27.0% of sales, for the three months ended June 30, 2015.2016. The increase in operating expenses wasdecrease is due primarily related to expanded sales and marketing investmentslower incentive accruals from decreased profitability, as well as higher incentive accruals related to increased profitability.lower sales commissions as a result of a reduction in volume in the Office segment.

Interest expense for the three months ended June 30, 20162017 was $1.3$1.9 million, a decreasean increase of $0.6 million from interest expense of $1.9$1.3 million for the three months ended June 30, 2015.2016. The decreaseincrease in interest expense wasis due primarily to loweran increase in outstanding debt balances.borrowings in the three months ended June 30, 2017 compared to the same period in 2016. During the three months ended June 30, 20162017 and 2015,2016, our weighted average interest rate was approximately 2.4% and 1.9%, respectively.

Net sales for the six months ended June 30, 2017 were $525.5 million, a decrease of $53.8 million, or 9.3%, from sales of $579.3 million for the six months ended June 30, 2016. The decrease in sales was due to a $61.8 million decrease in our Office segment sales resulting from a reduction in the quantity and lower average size of project opportunities, lower government sales, and a limited ship week at the end of March to facilitate the first phase of the implementation of a new enterprise resource planning system. The decrease in sales in our Office segment were partially offset by our Studio segment, where sales increased 4.3% from the same period in the prior year. The increase in the Studio segment was driven by strong sales growth in HOLLY HUNT® and incremental sales from DatesWeiser which was acquired in the fourth quarter of 2016.

Interest expense for the six months ended June 30, 2017 was $3.5 million, an increase of $0.7 million from interest expense of $2.9 million for the six months ended June 30, 2016. During the six months ended June 30, 2017 and 2016, our weighted average interest rate was approximately 1.9%2.3% and 2.1%, respectively.

Other expense for the threesix months ended June 30, 2017 was $0.4 million a decrease of $2.4 million from $2.8 million for the six months ended June 30, 2016. Other expense for the six months ended June 30, 2017 was primarily related to foreign exchange losses. Other expense for the six months ended June 30, 2016 was $0.2 million compared to other expense for the three months ended June 30, 2015 of $0.2 million. Other expense for the three months ended June 30, 2016 and 2015 was primarily related to foreign exchangeexchanges losses that resulted from the revaluation of intercompany balances between our Canadian and U.S. entities.

Our effective tax rate was 33.0%31.3% for the threesix months ended June 30, 2016,2017, compared to 34.3%34.6% for the threesix months ended June 30, 2015.2016. The decreasechange in our effectivethe tax rate forwas due primarily to the three months ended June 30,early adoption of ASU 2016-09 in the third quarter of 2016, was a resultwhich impacted the accounting treatment of the geographicvesting of a large quantity of equity awards. This resulted in the realization of tax benefits recognized as a reduction of income tax expense. In addition, the tax rate was affected by the mix of pretax income and the varying effective tax rates in the countries and states in which we operate, and a favorable income tax examination ruling received from a non-U.S. income tax jurisdiction.