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 pursuantfor interim financial information and with the instructions to such rulesForm 10-Q and regulations.Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  The consolidated balance sheet of the Company, as of December 31, 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,considered 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.a fair presentation.  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 annual report on Form 10-K for the year ended December 31, 2016.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”, which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. This ASU supersedes the revenue recognition requirements in FASB ASC Topic 605, “Revenue Recognition,” and most industry-specific guidance. This ASU sets forth a five-step model for determining when and how revenue is recognized. Under the model, an entity will be required to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2016. The FASB subsequently deferred the effective date of this standard to periods beginning after December 15, 2017 with early adoption permitted as offor the periods beginning after December 15, 2016. The Company will adopt the new standard in the annual period beginning January 1, 2018. The standard permits the use of either the full retrospective or modified retrospective (cumulative effect) transition method. Transition practical expedients are available for both methods. The Company plans to apply the modified retrospective transition method. The Company assembled an implementation work team to assess and document the accounting conclusions for the adoption of ASU 2014-09. Based on this analysis, the Company does not believe the adoption of the ASU will have a material impact to the consolidated financial statements. The Company continues to assess the potential impact on accounting policies, internal control processes and related disclosures required under the new guidance.

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

The following tables set forth the components of the net periodic benefit income for the Company's pension and other post-employment benefit plans (in thousands):

The fair values of the Company’s cash and cash equivalents customer receivables, and accounts payable approximate carrying value due to their short maturities.maturities and are classified as Level 1.

The fair value of the Company’s long-term debt approximates its carrying value, as it is variable rate debt and the terms are comparable to market terms as of the balance sheet dates, and are classified as Level 2.

The following table represents the assets and liabilities, measured at fair value on a recurring basis and the basis for that measurement (in thousands):

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 classifiesclassified this as a Level 3 measurement and iswas 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 three 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.

There were no additional assets and/or liabilities recorded at fair value on a recurring basis as of JuneSeptember 30, 2017 or December 31, 2016.

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 Company 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 flows.

The Company provides for estimated product warranty expenses when related products are sold and are included 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 follows (in thousands):

Warranty expense for the three and sixnine months ended JuneSeptember 30, 2017 was $1.7 million and $2.8$4.6 million, respectively. Warranty expense for the three and sixnine months ended JuneSeptember 30, 2016 was $1.8$1.7 million and $3.4$5.1 million, respectively.

The following table shows the change in equity attributable to Knoll, Inc. stockholders and noncontrolling interests during the sixnine months ended JuneSeptember 30, 2017 (in thousands):

The following table summarizes the changes in accumulated other comprehensive income (loss) by component for the sixnine months ended JuneSeptember 30, 2017 (in thousands):

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

Basic earnings per share excludes the dilutive effect of common shares that could potentially be issued due to the exercise of stock options and vesting of 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 following 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 JuneSeptember 30, 2017 and 2016 were based on the estimated effective tax rates applicable for the full years ending December 31, 2017 and 2016 and includes items specifically related to the interim periods. The Company’s effective tax rate was 31.3%30.8% and 34.6%34.7% for the sixnine months ended JuneSeptember 30, 2017 and 2016, respectively. The decrease in the Company's effective tax rate for the six months ended June 30, 2017 was duerelated primarily to the adoptionreversal of ASU 2016-09a valuation allowance against certain foreign jurisdiction deferred tax assets recorded during the period ended September 30, 2017. The Company believes it will have sufficient future taxable income to realize its net operating loss carryforwards in this foreign jurisdiction. The decrease in the third quarter of 2016, which impacted the accounting treatment of excesstax rate was also related to an increase in tax benefits related to the vesting of equity awards induring the sixnine months ended Juneending September 30, 2017. This resulted in the realization of tax benefits as a reduction to income tax expense in the quarter. In addition, the effective tax rate was affectedimpacted by the geographic mix of pretax income and the varying effective tax rates in the countries and states in which the Company operates.

As of Juneboth September 30, 2017 and December 31, 2016, the Company had unrecognized tax benefits of approximately $0.9 million, respectively.million. These unrecognized tax benefit amounts would affect the effective tax rate if recognized.  As of JuneSeptember 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 tothrough 2016. In addition, the Company is subject to state and local income tax examinations for the tax years 2007 through 2016.

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

The Office segment includes a complete range of workplace products that address diverse workplace planning paradigms. These products include: systems furniture, seating, storage, tables, desks and KnollExtra® accessories as well as the international sales of North American Office products.

The Studio segment includes KnollStudio®, HOLLY HUNT®, Knoll Europe and DatesWeiser. KnollStudio® products, include iconic seating, lounge furniture, side, cafe and dining chairs as well as conference, training and dining and occasional tables. HOLLY HUNT® is known for high quality residential furniture, lighting, rugs, textiles and leathers. In 2016, HOLLY HUNT® acquired Vladimir Kagan Design Group, a renowned collection of modern luxury furnishings. Knoll Europe, which markets and sells both KnollStudio® and Knoll Office products, manufactures and sells products to customers primarily in Europe. DatesWeiser, known for its sophisticated meeting and conference tables and credenzas, sets a standard for design, quality and technology integration.

The Coverings segment includes KnollTextiles®, Spinneybeck® (including Filzfelt®), and Edelman® Leather. These businesses provide a wide range of customers with high-quality fabrics, felt, leather and related architectural products.

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 provides more visibility and transparency of how the chief operating decision maker reviews the results for the Company.

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

This quarterly report on Form 10-Q contains forward-looking statements, principally in the sections entitled “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 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, 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 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 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 commercial 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 design-driven businesses share a reputation for high-quality and sophistication offering a diversified product portfolio that endures throughout evolving trends. Our products are targeted at the middle to upper-end of the market where we reach customers primarily through a broad network of independent dealers and distribution partners, our direct sales force, our showrooms and 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 time our diversification efforts and strategy will continue to result in a more profitable and less cyclical enterprise. The 2016 acquisitions of DatesWeiser and Vladimir Kagan further advance our strategy of building global capability as a singular go-to resource for high-design workplaces and homes. DatesWeiser plays an integral role in the creation of high performance workplaces as its sophisticated meeting and conference tables and credenzas set a standard for design, quality and technology integration. DatesWeiser products are offered as a compliment of our ‘ancillary’ offerings. Vladimir Kagan's elegant and contemporary designs are leveraged within our HOLLY HUNT® distribution channels to maximize profitability and growth in future years.

We are committed to building a more 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 business through technology infrastructure upgrades, continued investments in our manufacturing facilities focusing on lean initiatives and in our showroom footprint.

Gross profit for the three months ended JuneSeptember 30, 2017 was $100.0$106.6 million, a decrease of $14.1$6.2 million, or 12.4%5.5%, from gross profit of $114.1$112.8 million for the three months ended JuneSeptember 30, 2016. As a percentage of sales, gross profit decreased from 38.7%38.6% for the three months ended JuneSeptember 30, 2016 to 37.2%36.6% for the three months ended JuneSeptember 30, 2017. This decrease was driven mainlyprimarily by the Office segment, where lower volume hadaccelerated commodity inflation, foreign exchange impacts, and an unfavorable impact on fixed-cost leverage,mix related to the ramp-up of newer product platforms in our Office segment. These declines were partially offset by net price realization.continuous improvement and lean initiatives.

Operating profit for the three months ended JuneSeptember 30, 2017 was $22.2$30.1 million, a decrease of $11.2$5.1 million, or 33.6%14.4%, from operating profit of $33.5$35.2 million for the three months ended JuneSeptember 30, 2016. The decrease in operating profit was driven primarily by the Office segment resulting from lower sales volume and unfavorable product mix partially offset by reduced performance basedperformance-based incentive accruals and lower sales commissions. Operating profit for the Office segment was $4.4$15.5 million or 2.9% of net sales for the three months ended JuneSeptember 30, 2017, a decrease of $11.4$4.8 million, or 72.2%23.8%, when compared withfrom the three months ended JuneSeptember 30, 2016.

Selling, general, and administrative expenses for the three months ended JuneSeptember 30, 2017 were $75.6$76.5 million, or 28.2%26.3% of sales, compared to $80.6a decrease of $1.1 million from $77.6 million, or 27.0%26.6% of sales, for the three months ended JuneSeptember 30, 2016. The decrease iswas due primarily to lower incentive accrualscompensation from decreased profitability, as well as lower sales commissions as a result of a reduction in volume in the Office segment.and profitability.

Interest expense for the three months ended JuneSeptember 30, 2017 was $1.9$2.0 million, an increase of $0.6$0.7 million from interest expense of $1.3 million for the three months ended JuneSeptember 30, 2016. The increase in interest expense is due to an increase in outstanding borrowings in the three months ended JuneSeptember 30, 2017 compared to the same period in 2016. During the three months ended JuneSeptember 30, 2017 and 2016, our weighted average interest rate was approximately 2.4%2.7% and 1.9%2.0%, respectively.

During the three months ended JuneSeptember 30, 2017 and 2016, other expense was $0.2 million.$0.8 million and $0.7 million, respectively. Other expenses are primarily related to foreign exchange losses.

Net sales for the sixnine months ended JuneSeptember 30, 2017 were $525.5$816.8 million, a decrease of $53.8$54.7 million, or 9.3%6.3%, from sales of $579.3$871.4 million for the sixnine months ended JuneSeptember 30, 2016. The decrease in sales was due to a $61.8$66.3 million decrease in our Office segment sales resulting from a reduction in the quantity anddriven primarily by lower average size of project opportunities as well as 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.sales. The decrease in sales in our Office segment werewas 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.

Gross profit for the sixnine months ended JuneSeptember 30, 2017 was $195.6$302.2 million, a decrease of $26.2$32.4 million, or 11.8%9.7%, from gross profit of $221.8$334.6 million for the sixnine months ended JuneSeptember 30, 2016. As a percentage of sales, gross profit decreased from 38.3%38.4% for the sixnine months ended JuneSeptember 30, 2016 to 37.2%37.0% for the sixnine months ended JuneSeptember 30, 2017. This decrease was driven primarily by the Office segment, where lower volume had an unfavorable impact on fixed-cost leverage, partially offset by net price realization.

Operating profit for the sixnine months ended JuneSeptember 30, 2017 was $45.3$75.4 million, a decrease of $20.1$25.1 million, or 30.7%25.0%, from operating profit of $65.3$100.5 million for the sixnine months ended JuneSeptember 30, 2016. The decrease in operating profit was driven primarily by the Office segment resulting from lower sales volume partially offset by reduced performance based incentive accruals and lower sales commissions. Operating profit as a percentage of sales decreased from 11.3%11.5% in the sixnine months ended JuneSeptember 30, 2016 to 8.6%9.2% in the sixnine months ended JuneSeptember 30, 2017.

Interest expense for the sixnine months ended JuneSeptember 30, 2017 was $3.5$5.5 million, an increase of $0.7$1.4 million from interest expense of $2.9$4.2 million for the sixnine months ended JuneSeptember 30, 2016. During the sixnine months ended JuneSeptember 30, 2017 and 2016, our weighted average interest rate was approximately 2.3%2.4% and 2.1%2.0%, respectively.

Other expense for the sixnine months ended JuneSeptember 30, 2017 was $0.4$1.3 million, a decrease of $2.4$2.2 million from $2.8$3.5 million for the sixnine months ended JuneSeptember 30, 2016. Other expense for the sixnine months ended JuneSeptember 30, 2017 was related primarily related to foreign exchange losses. Other expense for the sixnine months ended JuneSeptember 30, 2016 was primarily related to foreign exchanges losses that resulted from the revaluation of intercompany balances between our Canadian and U.S. entities.

Our effective tax rate was 31.3%30.8% for the sixnine months ended JuneSeptember 30, 2017, compared to 34.6%34.7% for the sixnine months ended JuneSeptember 30, 2016. The changedecrease in the tax rate was duerelated primarily to the early adoptionreversal of ASU 2016-09a valuation allowance against certain foreign jurisdiction deferred tax assets recorded during the period ended September 30, 2017, as well as an increase in the third quarter of 2016, which impacted the accounting treatment oftax benefits related to the vesting of a large quantity of equity awards. This resulted inawards during the realization of tax benefits recognized as a reduction of income tax expense. In addition, thenine months ending September 30, 2017. The tax rate was also affected by the mix of pretax income and the varying effective tax rates in the countries and states in which we operate.

We manage our business through our reporting segments: Office, Studio, and Coverings. All unallocated expenses are included within Corporate.

Our Office segment includes a complete range of workplace products that address diverse workplace planning paradigms. These products include: systems furniture, seating, storage, tables, desks and KnollExtra® accessories as well as the international sales of our North American Office products.

Our Studio segment includes KnollStudio®, HOLLY HUNT®, Knoll Europe and DatesWeiser. KnollStudio® products, include iconic seating, lounge furniture, side, cafe and dining chairs as well as conference, training and dining and occasional tables. HOLLY HUNT® is known for high quality residential furniture, lighting, rugs, textiles and leathers. In 2016, HOLLY HUNT® acquired Vladimir Kagan Design Group, a renowned collection of modern luxury furnishings. Knoll Europe, which distributes both KnollStudio® and Knoll Office products, manufactures and sells products to customers primarily in Europe. DatesWeiser, known for its sophisticated meeting and conference tables and credenzas, sets a standard for design, quality and technology integration.

Our Coverings segment includes KnollTextiles®, Spinneybeck® (including Filzfelt®), and Edelman® Leather. These businesses provide a wide range of customers with high-quality fabrics, felt, leather and related architectural products.

In 2016, we revised our segment presentation to segregate Corporate costs. We believe this facilitates improved communication as we report segment results and better aligns with how we view and operate the Company. Corporate costs represent the portion of unallocated expenses relating to shared services and general corporate functions including, but not limited to, 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. We regularly review the costs included in the Corporate function, and believe disclosing such information provides more visibility and transparency of how our chief operating decision maker reviews the results for the Company.

The comparisons of segment results found below present our segment information with Corporate costs excluded from operating segment results. Prior year amounts have been recast to conform to the current presentation.