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Furniture Brands International 10-Q 2011

Documents found in this filing:

  1. 10-Q
  2. Ex-10.1
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Ex-32.2
  7. Ex-32.2
FBN-2011.9.30-10Q
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended September 30, 2011
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from                      to                                        
Commission file number 001-00091
Furniture Brands International, Inc.
 
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
 
43-0337683
(I.R.S. Employer Identification No.)
 
 
 
1 North Brentwood Blvd., St. Louis, Missouri
(Address of principal executive offices)
 
63105
(Zip Code)
(314) 863-1100
(Registrant’s telephone number, including area code)
 
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 þ Yes   o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 þ Yes   o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
Accelerated filer R 
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).
 o Yes   þ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
55,498,327 shares as of October 31, 2011
 


FURNITURE BRANDS INTERNATIONAL, INC.
TABLE OF CONTENTS

 
Page
 
 
 
 
 
 
Consolidated Financial Statements (unaudited):
 
 
 
 
 
September 30, 2011
 
December 31, 2010
 
 
 
 
 
Three Months Ended September 30, 2011
 
Three Months Ended September 30, 2010
 
 
 
Nine Months Ended September 30, 2011
 
Nine Months Ended September 30, 2010
 
 
 
 
 
Nine Months Ended September 30, 2011
 
Nine Months Ended September 30, 2010
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trademarks and trade names referred to in this filing include Broyhill, Lane, Thomasville, Drexel Heritage, Henredon, Hickory Chair, Pearson, Laneventure, Maitland-Smith, and Creative Interiors, among others.


2


PART I

Item 1. Financial Statements
FURNITURE BRANDS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands except per share data)
(unaudited)

 
September 30,
2011
 
December 31,
2010
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
21,191

 
$
51,964

Receivables, less allowances of $8,628 ($18,076 at December 31, 2010)
109,616

 
114,535

Inventories
248,879

 
249,691

Prepaid expenses and other current assets
10,603

 
11,242

Total current assets
390,289

 
427,432

Property, plant, and equipment, net
117,529

 
124,866

Trade names
77,508

 
86,508

Other assets
54,315

 
37,607

Total assets
$
639,641

 
$
676,413

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable
$
84,034

 
$
79,846

Accrued employee compensation
21,678

 
18,336

Other accrued expenses
38,992

 
42,887

Total current liabilities
144,704

 
141,069

Long-term debt
77,000

 
77,000

Deferred income taxes
18,976

 
23,114

Pension liability
100,882

 
104,736

Other long-term liabilities
67,554

 
70,927

Shareholders’ equity:
 
 
 
Preferred stock, 10,000,000 shares authorized, no par value — none issued

 

Common stock, 200,000,000 shares authorized, $1.00 stated value — 60,614,741 shares issued at September 30, 2011 and December 31, 2010
60,615

 
60,615

Paid-in capital
202,659

 
210,945

Retained earnings
194,550

 
228,803

Accumulated other comprehensive loss
(112,363
)
 
(115,675
)
Treasury stock at cost 5,111,230 shares at September 30, 2011 and 5,586,251 shares at December 31, 2010
(114,936
)
 
(125,121
)
Total shareholders’ equity
230,525

 
259,567

Total liabilities and shareholders’ equity
$
639,641

 
$
676,413

See accompanying notes to consolidated financial statements.


3


FURNITURE BRANDS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
(unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2011
 
2010
 
2011
 
2010
Net sales
$
258,047

 
$
271,987

 
$
852,128

 
$
883,841

Cost of sales
200,506

 
204,592

 
643,623

 
657,606

Gross profit
57,541

 
67,395

 
208,505

 
226,235

Selling, general, and administrative expenses
74,995

 
70,721

 
233,849

 
225,751

Impairment of trade names
9,000

 

 
9,000

 

Operating earnings (loss)
(26,454
)
 
(3,326
)
 
(34,344
)
 
484

Interest expense
862

 
789

 
2,581

 
2,367

Other income (expense), net
23

 
(395
)
 
918

 
346

Loss before income tax benefit
(27,293
)
 
(4,510
)
 
(36,007
)
 
(1,537
)
Income tax benefit
(2,747
)
 
(2,416
)
 
(1,754
)
 
(7,188
)
Net earnings (loss)
$
(24,546
)
 
$
(2,094
)
 
$
(34,253
)
 
$
5,651

Net earnings (loss) per common share — basic and diluted:
$
(0.45
)
 
$
(0.04
)
 
$
(0.62
)
 
$
0.11

 
 
 
 
 
 
 
 
Weighted average shares of common stock outstanding - Basic
54,990

 
51,927

 
54,909

 
49,871

Weighted average shares of common stock outstanding - Diluted
54,990

 
51,927

 
54,909

 
49,887

See accompanying notes to consolidated financial statements.


4


FURNITURE BRANDS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

 
Nine Months Ended September 30,
 
2011
 
2010
Cash flows from operating activities:
 
 
 
Net earnings (loss)
$
(34,253
)
 
$
5,651

Adjustments to reconcile net earnings (loss) to net cash provided (used) by operating activities:
 
 
 
Depreciation and amortization
16,726

 
17,540

Compensation expense related to stock option grants and restricted stock awards
1,832

 
1,816

Impairment of trade names
9,000

 

Other, net
(782
)
 
(591
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
4,437

 
7,206

Income taxes receivable
482

 
51,993

Inventories
812

 
(50,392
)
Prepaid expenses and other assets
754

 
(2,006
)
Accounts payable and other accrued expenses
2,361

 
(3,040
)
Deferred income taxes
(2,863
)
 
(3,018
)
Other long-term liabilities
(5,994
)
 
(6,922
)
Net cash provided (used) by operating activities
(7,488
)
 
18,237

Cash flows from investing activities:
 
 
 
Additions to property, plant, equipment, and software
(24,049
)
 
(16,190
)
Proceeds from the disposal of assets
3,119

 
2,338

Net cash used in investing activities
(20,930
)
 
(13,852
)
Cash flows from financing activities:
 
 
 
Payments of long-term debt

 
(18,000
)
Payments for debt issuance costs
(2,423
)
 

Other
68

 
(68
)
Net cash used in financing activities
(2,355
)
 
(18,068
)
Net decrease in cash and cash equivalents
(30,773
)
 
(13,683
)
Cash and cash equivalents at beginning of period
51,964

 
83,872

Cash and cash equivalents at end of period
$
21,191

 
$
70,189

Supplemental disclosure:
 
 
 
Cash payments (refunds) for income taxes, net
$
340

 
$
(56,561
)
Cash payments for interest expense
$
2,223

 
$
2,177

See accompanying notes to consolidated financial statements.


5


FURNITURE BRANDS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands except per share data)
(unaudited)

1.
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Furniture Brands International, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and such principles are applied on a basis consistent with those reflected in our 2010 Annual Report on Form 10-K, filed with the Securities and Exchange Commission. The year end balance sheet data was derived from audited financial statements. The accompanying unaudited consolidated financial statements include all adjustments (consisting of normal recurring adjustments and accruals) which management considers necessary for a fair presentation of the results of the periods presented. These consolidated financial statements do not include all information and footnotes normally included in financial statements prepared in accordance with U.S. GAAP. These consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2010. The consolidated financial statements consist of the accounts of our Company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Financial information reported in prior periods is reflected in a manner consistent with the current period presentation. The results for the three and nine months ended September 30, 2011 are not necessarily indicative of the results which will occur for the full fiscal year ending December 31, 2011.
The preparation of financial statements in accordance with U.S. GAAP requires us to make estimates, judgments, and assumptions, which we believe to be reasonable, based on the information available. These estimates, judgments, and assumptions affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. Actual results could differ from those estimates.

2.
RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
We have been executing plans to improve our performance. These measures include consolidating and reconfiguring manufacturing facilities and processes to eliminate waste and improve efficiency, managing product inventory levels better to reflect consumer demand, transforming our transportation methods to be more cost effective, exiting unprofitable retail locations, limiting our credit exposure to weak retail partners, and discontinuing unprofitable lines of business and licensing arrangements. In addition, we have been executing plans to reduce our workforce and to centralize certain functions.
Restructuring and asset impairment charges associated with these measures include the following:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2011
 
2010
 
2011
 
2010
Restructuring charges:
 
 
 
 
 
 
 
Contract termination costs (credit)
$

 
$
(614
)
 
$

 
$

Facility costs to shutdown, cleanup, and vacate
669

 

 
1,484

 

Termination benefits
7,495

 
194

 
7,606

 
1,049

Closed store occupancy and lease costs
2,831

 
1,610

 
5,096

 
3,530

Loss (gain) on the sale of assets
(837
)
 

 
(1,276
)
 
(928
)
 
10,158

 
1,190

 
12,910

 
3,651

Impairment charges

 
1,847

 
1,102

 
2,034

 
$
10,158

 
$
3,037

 
$
14,012

 
$
5,685

 
 
 
 
 
 
 
 
Statement of Operations classification:
 
 
 
 
 
 
 
Cost of sales
$
2,759

 
$
175

 
$
3,265

 
$
208

Selling, general, and administrative expenses
7,399

 
2,862

 
10,747

 
5,477

 
$
10,158

 
$
3,037

 
$
14,012

 
$
5,685

Asset impairment charges were recorded to reduce the carrying value of idle facilities and related assets to their net realizable value. The determination of impairment charges is based primarily upon (i) consultations with real estate brokers, (ii) proceeds from recent sales of Company facilities, and (iii) the market prices being obtained for similar long-lived assets. Qualifying assets related to restructuring are recorded as assets held for sale within Other Assets in the Consolidated Balance Sheets until sold. Total assets held for sale were $17,526 at September 30, 2011 and $9,609 at December 31, 2010.

6


Closed store occupancy and lease costs include occupancy costs associated with closed retail locations, early contract termination settlements for retail leases, and closed store lease liabilities representing the present value of the remaining lease rentals reduced by the current market rate for sublease rentals of similar properties. This liability is reviewed quarterly and adjusted, as necessary, to reflect changes in estimated sublease rentals.
Activity in the accrual for closed store lease liabilities was as follows:
 
Three Months Ended September 30,
 
2011
 
2010
Accrual for closed store lease liabilities at beginning of period
$
18,909

 
$
22,136

Charges to expense
1,684

 
257

Less cash payments
2,065

 
1,481

Accrual for closed store lease liabilities at end of period
$
18,528

 
$
20,912

At September 30, 2011, $5,214 of the accrual for closed store lease liabilities is classified as other accrued expenses, with the remaining balance in other long-term liabilities.
Remaining minimum payments under operating leases for closed stores as of September 30, 2011 are as follows:
 
 
Minimum
 
 
Lease
 
 
Payments —
Year
 
Closed Stores
2011
 
$
2,025

2012
 
8,035

2013
 
7,945

2014
 
7,296

2015
 
4,184

thereafter
 
2,440

 
 
$
31,925

Activity in the accrual for termination benefits was as follows:
 
Three Months Ended September 30,
 
2011
 
2010
Accrual for termination benefits at beginning of period
$
2,838

 
$
998

Charges to expense
7,495

 
194

Less cash payments
1,846

 
822

Accrual for termination benefits at end of period
$
8,487

 
$
370

The accrual for termination benefits at September 30, 2011 is classified as accrued employee compensation.

3.
INVENTORIES
Inventories are summarized as follows:
 
September 30,
2011
 
December 31,
2010
Finished products
$
151,855

 
$
156,129

Work-in-process
15,785

 
16,395

Raw materials
81,239

 
77,167

 
$
248,879

 
$
249,691



7


4.
PROPERTY, PLANT, AND EQUIPMENT
Major classes of property, plant, and equipment consist of the following:
 
September 30,
2011
 
December 31,
2010
Land
$
8,861

 
$
11,375

Buildings and improvements
178,893

 
190,855

Machinery and equipment
196,540

 
217,404

 
384,294

 
419,634

Less accumulated depreciation
266,765

 
294,768

 
$
117,529

 
$
124,866

Depreciation expense was $4,069 and $4,379 for the three months ended September 30, 2011 and September 30, 2010, respectively and $13,212 and $14,172 for the nine months ended September 30, 2011 and September 30, 2010, respectively.

5.
TRADE NAMES

Our trade names are tested for impairment annually, in the fourth fiscal quarter. Trade names, and long-lived assets, are also tested for impairment whenever events or changes in circumstances indicate that the asset may be impaired. Each quarter, we assess whether events or changes in circumstances indicate a potential impairment of these assets considering many factors, including significant changes in market capitalization, cash flow or projected cash flow, the condition of assets, and the manner in which assets are used.
Trade names are tested by comparing the carrying value and fair value of each trade name to determine the amount, if any, of impairment. The fair value of trade names is calculated using a "relief from royalty payments" methodology. This approach involves two steps: (i) estimating royalty rates for each trademark and (ii) applying these royalty rates to a net sales stream and discounting the resulting cash flows to determine fair value.
We tested our trade names for impairment in the third quarter of 2011 primarily due to deterioration in sales in certain brands. As a result, we recorded an impairment charge of $9,000 caused by the carrying value being greater than the fair value of certain of our trade names. The decrease in the fair value of these trade names was primarily caused by a decrease in sales and an increase in the discount rate used in our valuation calculations. For our trade names with carrying values not effected by an impairment charge, the fair value is not materially greater than the carrying value as of September 30, 2011. Any future decrease in the fair value of our trade names could result in a corresponding impairment charge. The estimated fair value of our trade names is highly contingent upon sales trends and assumptions including royalty rates, net sales streams, and a discount rate. Lower sales trends, decreases in projected net sales, decreases in royalty rates, or increases in the discount rate would cause additional impairment charges and a corresponding reduction in our earnings.

6.
LONG-TERM DEBT
Long-term debt consists of the following:
 
September 30,
2011
 
December 31,
2010
Asset-based loan
$
77,000

 
$
77,000

Less: current maturities

 

Long-term debt
$
77,000

 
$
77,000

On April 27, 2011, we refinanced our revolving credit facility with a group of financial institutions. The amended and restated facility is a five-year asset based loan (the “ABL”) with commitments to lend up to $250,000. The thresholds at which certain covenants and restrictions become effective were lessened in this amended and restated ABL, resulting in additional availability to borrow. Under this amended and restated ABL we are also no longer subject to certain representation requirements regarding our pension underfunded status, for which we previously had obtained a waiver.
The ABL provides for the issuance of letters of credit and cash borrowings, is secured by our accounts receivable, inventory and cash and is guaranteed by all of our domestic subsidiaries. The issuance of letters of credit and cash borrowings are limited by the level of a borrowing base consisting of eligible accounts receivable and inventory.
The amount of the borrowing base above the current level of letters of credit and cash borrowings outstanding represents the total borrowing availability. Certain covenants and restrictions, including cash dominion, weekly borrowing base reporting, and a fixed

8


charge coverage ratio, would become effective if total availability fell below various thresholds. If total availability falls below $42,000, we are subject to cash dominion and weekly borrowing base reporting. If total availability falls below $35,000, we are also subject to the fixed charge coverage ratio, which we currently do not meet. As of September 30, 2011, total availability was $74,341. Therefore, as of September 30, 2011, we have $32,341 of excess availability without being subject to the cash dominion and weekly reporting covenants of the agreement and $39,341 of excess availability before we would be subject to the fixed charge coverage ratio.
We intend to continue to manage our availability to remain above the $42,000 threshold, as we choose not to be subject to the cash dominion and weekly reporting covenants.
The borrowing base is reported on the 25th day of each month based on our financial position at the end of the previous month. Our borrowing base calculations are subject to periodic examinations by the financial institutions which can result in adjustments to the borrowing base and our availability under the ABL. These examinations have not resulted in material adjustments to our borrowing base or availability in the past and are not expected to result in material adjustments in the future.
The interest rate on cash borrowings outstanding under the ABL is either (i) a base rate (the greatest of the prime rate, the Federal Funds Effective Rate plus 1/2%, and the adjusted LIBOR plus 1%) plus a margin ranging from 1.00% to 1.75% or (ii) LIBOR plus a margin ranging from 2.25% to 3.00%. These margins fluctuate with average availability. As of September 30, 2011, loans outstanding were $77,000 with a weighted average interest rate of 3.13%.
Under the terms of the ABL, we are required to comply with certain operating covenants, the most significant of which have been described above. We are currently in compliance with all of these covenants and expect to remain in compliance for the foreseeable future.

7.
LIQUIDITY
The primary items impacting our liquidity in the future are cash from operations and working capital, capital expenditures, acquisition of stores, sale of surplus assets, expiration of dark store leases, borrowings and payments of long-term debt, and pension funding requirements.
We are focused on effective cash management. However, if we do not have sufficient cash reserves or sufficient cash flow from our operations or if our borrowing capacity under our ABL is insufficient, we may need to raise additional funds through equity or debt financings in the future in order to meet our operating and capital needs. If additional funds were to be needed, we may not be able to secure adequate debt or equity financing on favorable terms, or at all, at the time when we need such funding. In the event that we are unable to raise additional funds, our liquidity will be adversely impacted and our business could suffer. If we are able to secure additional financing, these funds could be costly to secure and maintain, which could significantly impact our earnings and our liquidity.
At September 30, 2011, we had $21,191 of cash and cash equivalents, $77,000 of debt outstanding, and excess availability to borrow up to an additional $39,341 under the ABL, subject to certain provisions, as described in Note 6 Long-Term Debt above. The breach of any of these provisions could result in a default under the ABL and could trigger acceleration of repayment, which could have a significant adverse impact on our liquidity and our business. While we expect to comply with the provisions of the agreement for the foreseeable future, deterioration in the economy and our results could cause us to not be in compliance with our ABL agreement.

8.
EMPLOYEE BENEFITS
We sponsor or contribute to retirement plans covering substantially all employees. The expenses related to these plans were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2011
 
2010
 
2011
 
2010
Defined benefit plans
$
790

 
$
2,714

 
$
2,370

 
$
8,142

Defined contribution plan (401k plan) — company match
1,494

 
1,550

 
4,768

 
4,914

Other
363

 
174

 
1,064

 
444

 
$
2,647

 
$
4,438

 
$
8,202

 
$
13,500


9


The components of net periodic pension expense for the Company-sponsored defined benefit plans are as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2011
 
2010
 
2011
 
2010
Service cost
$

 
$
605

 
$

 
$
1,815

Interest Cost
6,388

 
6,464

 
19,164

 
19,392

Expected return on plan assets
(6,656
)
 
(6,227
)
 
(19,968
)
 
(18,681
)
Net amortization and deferral
1,058

 
1,872

 
3,174

 
5,616

Net periodic pension expense
$
790

 
$
2,714

 
$
2,370

 
$
8,142

We currently provide retirement benefits to our employees through a defined contribution plan. Through 2005, employees were covered primarily by noncontributory plans, funded by company contributions to trust funds held for the sole benefit of employees. We amended the defined benefit plans, freezing and ceasing future benefits as of December 31, 2005. Certain transitional benefits were provided to certain participants, but ceased accruing when the plan became inactive on December 31, 2010. Effective January 1, 2011, actuarial losses on plan assets are amortized from accumulated other comprehensive loss into net periodic pension expense over the average remaining life expectancy of plan participants, resulting in estimated actuarial losses that will be amortized in 2011 of $4,231.
The projected benefit obligation of our qualified defined benefit pension plan exceeded the fair value of plan assets by $84,675 at December 31, 2010, the measurement date. On June 25, 2010, the federal government passed the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 (“the act”) which is designed to provide additional relief from the funding requirements of the Pension Protection Act of 2006. The act provides opportunities for plan sponsors to extend the time over which plan deficits may be funded, up to 15 years, subject to certain limitations including offsets for excess compensation and extraordinary dividends. With the improvement in the funded status in the plan in 2010 and the benefit of the act, our funding requirements for 2011 under the Employee Retirement Income Security Act of 1974 (“ERISA”) are approximately $3,100. Our final $2,500 contribution for 2011 was made in cash on October 14, 2011.
If the relief provided by the federal government expires or is no longer applicable to our qualified pension plan, or if there is downward pressure on the asset values of the plan, or if the present value of the projected benefit obligation of the plan increases, as would occur in the event of a decrease in the discount rate used to measure the obligation, it would necessitate significantly increased funding of the plan in the future.

9.
STOCK OPTIONS, RESTRICTED STOCK, AND RESTRICTED STOCK UNITS
We have outstanding stock options, restricted stock, and restricted stock units. For the three months ended September 30, 2011 and September 30, 2010, we recognized a credit of $2,462 and expense of $2,524 related to these awards, respectively. For the nine months ended September 30, 2011 and September 30, 2010, we recognized a credit of $826 and expense of $7,880, respectively. The credits in the 2011 periods resulted from a decrease in the fair value of outstanding restricted stock units.
A summary of stock option activity for the nine months ended September 30, 2011 is presented below:
 
Shares
 
Weighted
Average
Exercise
Price
Outstanding at December 31, 2010
2,621,267

 
$
15.97

Granted
692,888

 
4.64

Exercised

 

Forfeited or expired
(885,734
)
 
21.78

Outstanding at September 30, 2011
2,428,421

 
$
9.33

The weighted average exercise price and the weighted average fair value per share for stock options granted during the nine months ended September 30, 2011 was $4.64 and $2.83, respectively. The fair value of each stock option is estimated on the date of grant using the Black-Scholes option pricing model.

10


A summary of non-vested restricted stock activity for the nine months ended September 30, 2011 is presented below:
 
Shares
 
Weighted
Average
Grant-Date
Fair Value
Outstanding at December 31, 2010
826,958

 
$
7.85

Granted
455,901

 
4.54

Vested
(141,189
)
 
8.05

Forfeited
(22,066
)
 
5.20

Outstanding at September 30, 2011
1,119,604

 
$
6.53

Since December 2008, we have awarded restricted stock units to certain key employees and executive officers. The awards may only be settled in cash. The awards are contingent on the achievement of both the Company’s share price objectives and service-based retention periods. The awards expire on December 19, 2013. If the trailing 10 day average price of our common stock reaches the share price objective and the service retention period is satisfied, then the units will vest and the participant will be entitled to receive a cash payment for each unit that is equal to the share price objective. At September 30, 2011, all outstanding awards have a share price objective of $9.39 and a service retention period which is the later of i) December 19, 2011 or ii) the date upon which the trailing 10 day average price of our common stock reaches the share price objective. The awards are designed to reward participants for increases in share price as well as encouraging the long-term employment of the participants.
There are 1,250,023 restricted stock units outstanding as of September 30, 2011. No restricted stock units were granted, forfeited, or became vested during the nine months ended September 30, 2011. The fair value of the restricted stock unit awards is estimated and adjusted each quarter using binomial pricing models. The fair value of the awards is recognized as compensation expense ratably over the derived service period. At September 30, 2011, the remaining duration of the derived service period is 0.4 years for all outstanding awards.

11


10.
EARNINGS PER SHARE
Weighted average shares used in the computation of basic and diluted earnings (loss) per common share are as follows:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2011
 
2010
 
2011
 
2010
Weighted average shares used for basic earnings (loss) per common share
54,990,000

 
51,926,978

 
54,909,000

 
49,871,294

Effect of dilutive stock options and restricted stock

 

 

 
16,096

Weighted average shares used for diluted earnings (loss) per common share
54,990,000

 
51,926,978

 
54,909,000

 
49,887,390


For the three and nine months ended September 30, 2011 and the three months ended September 30, 2010, all potentially dilutive securities are excluded from the calculation of diluted earnings (loss) per share as we generated a net loss in each period. Excluded from the computation of diluted earnings per common share for the nine months ended September 30, 2010 were options to purchase 2,145,562 shares at an average price of $19.04 per share. These options have been excluded from the calculation of diluted earnings (loss) per share because their inclusion would be antidilutive.

11.
INCOME TAXES
We file income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions. With few exceptions, we are no longer subject to United States federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2004. The Internal Revenue Service (“IRS”) has commenced full or limited scope examinations of our United States income tax returns for subsequent years through 2009. The company and the IRS have not agreed upon certain issues which remain in the Appeals process. We also have several state examinations in progress.
We recognized income tax benefit of $2,747 and $1,754 in the three and nine months ended September 30, 2011, respectively. We recognized income tax benefit of $2,416 and $7,188 in the three and nine months ended September 30, 2010, respectively. In all periods, income tax benefit includes 1) the effects of a valuation allowance maintained for federal and certain state deferred tax assets including net operating loss carry forwards, 2) expense for jurisdictions where we generated income but do not have net operating loss carry forwards available, 3) expense for certain jurisdictions where the tax liability is determined based on non-income related activities, such as gross sales, and 4) expense related to unrecognized tax benefits. The income tax benefit in the three and nine months ended September 30, 2011 resulted from impairment charges recorded to reduce the value of certain trade names and the related reduction in deferred tax liabilities associated with these indefinite lived intangible assets. The income tax benefit in the three and nine months ended September 30, 2010 was driven by additional net operating loss carry backs created from contributions to our pension plans. These 2010 contributions allowed us to utilize remaining carry back capacity from previous tax years and increase our income tax refund receivable.
At September 30, 2011, the deferred tax assets attributable to federal net operating loss carry forwards were $56,361, state net operating loss carry forwards were $27,507, federal tax credit carry forwards were $3,006, and state tax credit carry forwards were $1,539. The federal net operating loss carry forwards begin to expire in the year 2028, state net operating loss carry forwards generally start to expire in the year 2021, and tax credit carry forwards are subject to certain limitations. While we have no other limitations on the use of our net operating loss carry forwards, we are potentially subject to limitations if a change in control occurs pursuant to applicable statutory regulations.
We evaluated all significant available positive and negative evidence, including the existence of losses in recent years and our forecast of future taxable income, and, as a result, determined it was more likely than not that our federal and certain state deferred tax assets, including benefits related to net operating loss carry forwards, would not be realized based on the measurement standards required under the FASB Accounting Standard Codification section 740. As such, we maintain a valuation allowance for these deferred tax assets which increased $5,674 and $1,261 in the three and nine months ended September 30, 2011, respectively, to $175,891 at September 30, 2011. The increase in the valuation allowance in the three and nine months ended September 30, 2011 is primarily attributable to net operating losses.

12.
OTHER LONG-TERM LIABILITIES
Other long-term liabilities includes the non-current portion of closed store lease liabilities, accrued workers compensation, accrued rent associated with leases with escalating payments, liabilities for unrecognized tax benefits, deferred compensation and long-term incentive plans, and various other non-current liabilities.

12



13.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) consists of the following:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2011
 
2010
 
2011
 
2010
Net earnings (loss)
$
(24,546
)
 
$
(2,094
)
 
$
(34,253
)
 
$
5,651

Other comprehensive income (loss):
 
 
 
 
 
 
 
   Pension liability
1,058

 
1,870

 
3,174

 
5,610

   Foreign currency translation
(1,118
)
 
972

 
138

 
1,442

 
(60
)
 
2,842

 
3,312

 
7,052

   Income tax expense

 

 

 

   Other comprehensive income
(60
)
 
2,842

 
3,312

 
7,052

Total comprehensive income (loss)
$
(24,606
)
 
$
748

 
$
(30,941
)
 
$
12,703


The components of accumulated other comprehensive loss, presented net of tax, are as follows:
 
September 30,
2011
 
December 31,
2010
Pension liability
$
(114,971
)
 
$
(118,145
)
Foreign currency translation
2,608

 
2,470

 
$
(112,363
)
 
$
(115,675
)

14.
CONTINGENT LIABILITIES
We are involved, from time to time, in litigation and other legal proceedings incidental to our business. Management believes that the outcome of current litigation and legal proceedings will not have a material adverse effect upon our results of operations or financial condition. However, management’s assessment of our current litigation and other legal proceedings could change in light of the discovery of facts with respect to legal actions or other proceedings pending against us not presently known to us or determinations by judges, juries or other finders of fact which are not in accordance with management’s evaluation of the probable liability or outcome of such litigation or proceedings.
We are also involved in various claims relating to environmental matters at a number of current and former plant sites. We engage or participate in remedial and other environmental compliance activities at certain of these sites. At other sites, we have been named as a potentially responsible party under federal and state environmental laws for site remediation. Management analyzes each individual site, considering the number of parties involved, the level of our potential liability or contribution relative to the other parties, the nature and magnitude of the hazardous wastes involved, the method and extent of remediation, the potential insurance coverage, the estimated legal and consulting expense with respect to each site and the time period over which any costs would likely be incurred. Based on the above analysis, management believes at the present time that it is not reasonably possible that any claims, penalties or costs incurred in connection with known environmental matters will have a material adverse effect upon our consolidated financial position or results of operations. However, management’s assessment of our current claims could change in light of the discovery of facts with respect to environmental sites, which are not in accordance with management’s evaluation of the probable liability or outcome of such claims.
We are the prime tenant on operating leases that we have subleased to independent furniture dealers. In addition, we guarantee leases which primarily relate to company-branded stores operated by independent furniture dealers. These subleases and guarantees have remaining terms ranging up to five years and generally require us to make lease payments in the event of default by the sublessor or independent party. In the event of default, we have the right to assign or assume the lease with certain restrictions. As of September 30, 2011, the total amounts remaining under lease guarantees were $7,886. Our estimate of probable future losses under these guaranteed leases is not material.


13


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Forward-Looking Statements
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is provided in addition to the accompanying unaudited consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. The various sections of this MD&A contain a number of forward-looking statements. Words such as “expects,” “goals,” “plans,” “believes,” “continues,” “may,” and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this and previous filings and particularly in the “Risk Factors” in Part II, Item 1A of this Form 10-Q.
Overview
We are one of the world’s leading designers, manufacturers, sourcers, wholesalers, and retailers of home furnishings. We market through a wide range of retail channels, from mass merchant stores to single-branded and independent dealers to specialized interior designers. We serve our customers through some of the best known and most respected brands in the furniture industry, including Broyhill, Lane, Thomasville, Drexel Heritage, Henredon, Hickory Chair, Pearson, Laneventure, Maitland-Smith, and Creative Interiors.
Through these brands, we offer (i) case goods, consisting of bedroom, dining room, and living room wood furniture, (ii) stationary upholstery products, consisting of sofas, loveseats, sectionals, and chairs, (iii) motion upholstered furniture, consisting of recliners and sleep sofas, (iv) occasional furniture, consisting of wood, metal and glass tables, accent pieces, home entertainment centers, and home office furniture, and (v) decorative accessories and accent pieces. Our brands are featured in nearly every price and product category in the residential furniture industry.
Each of our brands targets specific customers in relation to style and price point.
Broyhill offers collections of mid-priced furniture, including both wood furniture and upholstered products, in a wide range of styles and product categories including bedroom, dining room, living room, occasional, youth, home office, and home entertainment.
Lane focuses primarily on mid-priced upholstered furniture, including motion and stationary furniture with an emphasis on home entertainment and family rooms.
Thomasville has both wood furniture and upholstered products in the mid- to upper-price ranges and also offers ready-to-assemble furniture under the Creative Interiors brand name, as well as case goods for the hospitality and contract markets.
Drexel Heritage markets both casegoods and upholstered furniture in categories ranging from mid- to premium-priced.
Henredon specializes in both wood furniture and upholstered products in the premium-price category.
Hickory Chair manufactures premium-priced wood and upholstered furniture, offering traditional and modern styles.
Pearson offers contemporary and traditional styles of finely tailored upholstered furniture in the premium-price category.
Laneventure markets a premium-priced outdoor line of wicker, rattan, bamboo, exposed aluminum, and teak furniture, as well as casual indoor home furnishings.
Maitland-Smith designs and manufactures premium hand crafted, antique-inspired furniture, accessories, and lighting, utilizing a wide range of unique materials. Maitland-Smith markets under both the Maitland-Smith and LaBarge brand names.
Business Trends and Strategy
Sales decreased 5.1% in the third quarter of 2011 compared to the third quarter of 2010 and decreased 3.6% in the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. Based on these comparative periods, sales for our brands that specialize in premium-priced offerings generally outperformed sales for our brands that focus more on mid-priced offerings and sales of upholstery products generally outperformed sales of case goods.
We believe sales continue to be depressed as a result of continued weak retail conditions in the residential furniture industry. We believe these weak retail conditions are primarily the result of low existing home sales, low new home sales, wavering consumer

14


confidence and a number of other ongoing factors in the global economy that have negatively impacted consumers’ discretionary spending. These other ongoing factors include lower home values, prolonged foreclosure activity throughout the country, continued high levels of unemployment, and reduced access to consumer credit. These factors are outside of our control, but have a direct impact on our sales due to resulting weak levels of consumer confidence and reduced consumer spending.
We have been taking significant steps, some of which we began before the initial downturn in the economy, and we continue to take actions to reduce costs, preserve cash, and drive profitable sales. These actions have resulted in reduced selling, general and administrative expenses, improvements in gross margin, and lower levels of debt.
Our entire organization continues to be focused on bringing the best products to the market, increasing top-line sales, continuing to take costs out of the business, and strengthening our financial position for the future. In 2011, our initiatives include:
More product launches driven by a multi-stage product development process that blends the decades of experience of our designers, merchandisers, marketers and dealers with proven consumer research methodologies that are new to the furniture industry. This process will result in more offerings with clean contemporary looks, more updated-traditional offerings, as well as introductions at lower price points.
Increased support of our retail partners with a larger investment in national television and print advertising, innovative promotions and a web presence that drives consumer traffic to their locations.
Further reductions to manufacturing costs through the implementation of lean and cellular manufacturing methods and through strategic sourcing relationships with suppliers that leverage the company’s scale.
Completing our investments to expand our manufacturing facilities in Indonesia and develop a new facility in Mexico, both of which we expect will deliver components and finished product at a lower cost than would otherwise be possible.
Consolidating operations and closing and selling excess manufacturing, warehouse, and office properties.
While we believe that these initiatives will positively impact our financial performance, and particularly benefit our sales performance as economic conditions improve, we remain cautious about future sales as we cannot predict how long the residential furniture retail environment will remain weak.


15


Results of Operations
As an aid to understanding our results of operations on a comparative basis, the following table has been prepared to set forth certain statement of operations and other data for the three and nine months ended September 30, 2011 and 2010:
 
 
Three Months Ended September 30,
 
 
2011
 
2010
 
 
 
 
% of
 
 
 
% of
(in millions, except per share data)
 
Dollars
 
Net Sales
 
Dollars
 
Net Sales
Net sales
 
$
258.0

 
100.0
 %
 
$
272.0

 
100.0
 %
Cost of sales
 
200.5

 
77.7

 
204.6

 
75.2

Gross profit
 
57.5

 
22.3

 
67.4

 
24.8

Selling, general, and administrative expenses
 
75.0

 
29.1

 
70.7

 
26.0

Impairment of trade names
 
9.0

 
3.5

 

 

Operating loss
 
(26.5
)
 
(10.3
)
 
(3.3
)
 
(1.2
)
Interest expense
 
0.9

 
0.3

 
0.8

 
0.3

Other income, net
 

 

 
(0.4
)
 
(0.1
)
Loss before income tax benefit
 
(27.3
)
 
(10.6
)
 
(4.5
)
 
(1.7
)
Income tax benefit
 
(2.7
)
 
(1.1
)%
 
(2.4
)
 
(0.9
)
Net loss
 
$
(24.5
)
 
(9.5
)%
 
$
(2.1
)
 
(0.8
)%
Net loss per common share — basic and diluted
 
$
(0.45
)
 
 
 
$
(0.04
)
 
 
 
 
Nine Months Ended September 30,
 
 
2011
 
2010
 
 
 
 
% of
 
 
 
% of
(in millions, except per share data)
 
Dollars
 
Net Sales
 
Dollars
 
Net Sales
Net sales
 
$
852.1

 
100.0
 %
 
$
883.8

 
100.0
 %
Cost of sales
 
643.6

 
75.5

 
657.6

 
74.4

Gross profit
 
208.5

 
24.5

 
226.2

 
25.6

Selling, general, and administrative expenses
 
233.8

 
27.4

 
225.8

 
25.5

Impairment of trade names
`
9.0

 
1.1

 

 

Operating earnings (loss)
 
(34.3
)
 
(4.0
)
 
0.5

 
0.1

Interest expense
 
2.6

 
0.3

 
2.4

 
0.3

Other income, net
 
0.9

 
0.1

 
0.3

 

Loss before income tax benefit
 
(36.0
)
 
(4.2
)
 
(1.5
)
 
(0.2
)
Income tax benefit
 
(1.8
)
 
(0.2
)
 
(7.2
)
 
(0.8
)
Net earnings (loss)
 
$
(34.3
)
 
(4.0
)%
 
$
5.7

 
0.6
 %
Net earnings (loss) per common share — basic and diluted
 
$
(0.62
)
 
 
 
$
0.11

 
 
Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010
Net sales for the three months ended September 30, 2011 were $258.0 million compared to $272.0 million in the three months ended September 30, 2010, a decrease of $14.0 million, or 5.1%. The decrease in net sales was primarily the result of continued weak retail conditions, resulting in lower sales volume.
Gross profit for the three months ended September 30, 2011 was $57.5 million compared to $67.4 million in the three months ended September 30, 2010. The decrease in gross profit is primarily attributable to lower sales ($3.5 million), higher material costs ($4.3 million), increased severance expense ($2.6 million), and increased incentive compensation expense ($1.9 million), partially offset by an increase in the utilization rates of our operating plants ($2.1 million). Gross margin for the three months ended September 30, 2011 decreased to 22.3% compared to 24.8% in the three months ended September 30, 2010.
Selling, general, and administrative expenses increased to $75.0 million in the three months ended September 30, 2011 compared

16


to $70.7 million in the three months ended September 30, 2010 primarily due to increased severance expense ($4.7 million) and increased investments in advertising ($1.2 million).

Impairment of trade names of $9.0 million in 2011 was driven primarily by a decrease in sales and an increase in the discount rate used in our valuation calculations.
Income tax benefit for the three months ended September 30, 2011 totaled $2.7 million compared to income tax benefit of $2.4 million in the three months ended September 30, 2010. Income tax benefit in both periods reflects the effects of a valuation allowance maintained for federal and certain state deferred tax assets including net operating loss carry forwards. The income tax benefit in the three months ended September 30, 2011 resulted from impairment charges recorded to reduce the value of certain trade names and the related reduction in deferred tax liabilities associated with these indefinite lived intangible assets. The income tax benefit in the three months ended September 30, 2010 was driven by additional net operating loss carry backs created from contributions to our pension plans. These 2010 contributions allowed us to utilize remaining carry back capacity from previous tax years and increase our income tax refund receivable.
Net loss per common share was $0.45 and $0.04 for the three months ended September 30, 2011 and 2010, respectively, on both a basic and diluted basis. Weighted average shares outstanding used in the calculation of net loss per common share on a diluted basis was 55.0 million for the three months ended September 30, 2011 and 51.9 million for the three months ended September 30, 2010.
Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010
Net sales for the nine months ended September 30, 2011 were $852.1 million compared to $883.8 million in the nine months ended September 30, 2010, a decrease of $31.7 million or 3.6%. The decrease in net sales was primarily the result of continued weak retail conditions, resulting in lower sales volume.
Gross profit for the nine months ended September 30, 2011 was $208.5 million compared to $226.2 million in the nine months ended September 30, 2010. The decrease in gross profit is primarily attributable to lower sales ($8.1 million), higher material costs ($9.4 million), higher inventory charges ($3.9 million), increased severance expense ($2.5 million), and higher incentive compensation expense ($1.4 million), partially offset by lower employee benefit and welfare costs ($6.7 million) and an increase in the utilization rates of our operating plants ($5.1 million). Gross margin for the nine months ended September 30, 2011 decreased to 24.5% compared to 25.6% in the nine months ended September 30, 2010.
Selling, general, and administrative expenses increased to $233.8 million in the nine months ended September 30, 2011 compared to $225.8 million in the nine months ended September 30, 2010 primarily due to increased investments in advertising ($5.6 million), increased severance expense ($4.1 million), favorable settlements in 2010 that did not occur in 2011 related to certain international tax and trade compliance matters ($4.1 million), and favorable recoveries of bad debt in 2010 that did not occur in 2011 ($1.2 million), partially offset by lower incentive compensation expense ($8.7 million).

Impairment of trade names of $9.0 million in 2011 was driven primarily by a decrease in sales and an increase in the discount rate used in our valuation calculations.
Income tax benefit for the nine months ended September 30, 2011 totaled $1.8 million compared to income tax benefit of $7.2 million in the nine months ended September 30, 2010. Income tax benefit in both periods reflects the effects of a valuation allowance maintained for federal and certain state deferred tax assets including net operating loss carry forwards. The income tax benefit in the nine months ended September 30, 2011 resulted from impairment charges recorded to reduce the value of certain trade names and the related reduction in deferred tax liabilities associated with these indefinite lived intangible assets. The income tax benefit in the nine months ended September 30, 2010 was driven by additional net operating loss carry backs created from contributions to our pension plans. These 2010 contributions allowed us to utilize remaining carry back capacity from previous tax years and increase our income tax refund receivable.
Net earnings (loss) per common share was $(0.62) and $0.11 for the nine months ended September 30, 2011 and 2010, respectively, on both a basic and diluted basis. Weighted average shares outstanding used in the calculation of net earnings (loss) per common share on a diluted basis was 54.9 million for the nine months ended September 30, 2011 and 49.9 million  for the nine months ended September 30, 2010.

17



Retail Results of Operations
Based on the structure of our operations and management as well as the similarity of the economic environment in which our significant operations compete, we have only one reportable segment. However, as a supplement to the information required in this Form 10-Q, we have summarized the following results of our company-owned Thomasville Home Furnishings Stores and all other company-owned retail locations:
 
 
Thomasville Stores (a)
 
All Other Retail Locations (b)
 
 
Three Months Ended September 30,
 
Three Months Ended September 30,
(Dollars in millions)
 
2011
 
2010
 
2011
 
2010
Net sales
 
$
26.7

 
$
27.0

 
$
9.3

 
$
9.9

Cost of sales
 
15.2

 
16.4

 
6.2

 
6.2

Gross profit
 
11.4

 
10.5

 
3.0

 
3.8

Selling, general and administrative expenses — open stores
 
15.3

 
15.3

 
4.3

 
5.3

Operating loss — open stores (c)
 
$
(3.9
)
 
$
(4.7
)
 
$
(1.3
)
 
$
(1.5
)
Selling, general and administrative expenses — closed stores
 

 

 
2.8

 
1.6

Operating loss (c)
 
$
(3.9
)
 
$
(4.7
)
 
$
(4.1
)
 
$
(3.1
)
Number of open stores and showrooms at end of period
 
49

 
51

 
18

 
19

Number of closed locations at end of period
 

 

 
26

 
26

Same-store-sales (d):
 
 
 
 
 
 
 
 
Percentage increase
 
5
%
 
22
%
 
(e)

 
(e)

Number of stores
 
45

 
42

 

 


 
 
Thomasville Stores (a)
 
All Other Retail Locations (b)
 
 
Nine Months Ended September 30,
 
Nine Months Ended September 30,
(Dollars in millions)
 
2011
 
2010
 
2011
 
2010
Net sales
 
$
82.5

 
$
79.0

 
$
28.8

 
$
30.0

Cost of sales
 
48.4

 
45.9

 
18.6

 
18.5

Gross profit
 
34.1

 
33.1

 
10.2

 
11.4

Selling, general and administrative expenses — open stores
 
47.3

 
46.4

 
14.5

 
16.7

Operating loss — open stores (c)
 
$
(13.2
)
 
$
(13.3
)
 
$
(4.3
)
 
$
(5.3
)
Selling, general and administrative expenses — closed stores
 

 

 
5.1

 
3.5

Operating loss (c)
 
$
(13.2
)
 
$
(13.3
)
 
$
(9.4
)
 
$
(8.8
)
Same-store-sales (d):
 
 
 
 
 
 
 
 
Percentage increase
 
10
%
 
21
%
 
(e)

 
(e)

Number of stores
 
48

 
42

 

 

____________________________
a)
This supplemental data includes company-owned Thomasville retail store locations that were open during the three or nine months ended September 30, 2011 and 2010.
b)
This supplemental data includes all company-owned retail locations other than open Thomasville stores (“all other retail locations”). Selling, general and administrative expenses — closed stores includes occupancy costs, lease termination costs, and costs associated with closed store lease liabilities. Closed stores have no net sales, cost of sales, or gross profit.
c)
Operating loss does not include our wholesale profit on the above retail net sales.
d)
The same-store sales percentage is based on sales from stores that have been in operation and company-owned for at

18


least 15 months.
e)
Same-store-sales information is not meaningful and is not presented for all other retail locations because results include retail store locations of multiple brands, including seven Drexel Heritage stores, one Lane store, one Henredon store, one Broyhill store, and eight designer showrooms at September 30, 2011; and it is not one of our long-term strategic initiatives to grow non-Thomasville brand company-owned retail locations.
In addition to the above company-owned stores, there were 62 and 71 Thomasville dealer-owned stores at September 30, 2011 and 2010, respectively.

Financial Condition and Liquidity
Liquidity
Cash and cash equivalents at September 30, 2011 totaled $21.2 million, compared to $52.0 million at December 31, 2010. Net cash used by operating activities totaled $7.5 million in the nine months ended September 30, 2011 compared with net cash provided by operating activities of $18.2 million in the nine months ended September 30, 2010. The decrease in cash flow from operations was primarily driven by decreased cash generated from income taxes receivable and decreased earnings from operations in the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010 , partially offset by increased cash generated from working capital. Net cash used in investing activities for the nine months ended September 30, 2011 totaled $20.9 million compared with $13.9 million in the nine months ended September 30, 2010. The increase in cash used in investing activities is primarily the result of investments in our infrastructure with greater additions to property, plant, equipment, and software. Net cash used in financing activities totaled $2.4 million in the nine months ended September 30, 2011 and $18.1 million in the nine months ended September 30, 2010. The decrease in cash used in financing activities is primarily the result of decreased payments of long-term debt. Working capital was $245.6 million at September 30, 2011, compared to $286.4 million at December 31, 2010.
The primary items impacting our liquidity in the future are cash from operations including the effects of our cost reduction activities and our management of working capital, capital expenditures, acquisition of stores, sale of surplus assets, expiration of dark store leases, borrowings and payments of long-term debt and pension funding requirements.
We are focused on effective cash management and we believe our liquidity will be sufficient to support our operations for the foreseeable future. However, if we do not have sufficient cash reserves or sufficient cash flow from our operations or if our borrowing capacity under our asset-based loan ("ABL") is insufficient, we may need to raise additional funds through equity or debt financings in the future in order to meet our operating and capital needs. If additional funds were to be needed, we may not be able to secure adequate debt or equity financing on favorable terms, or at all, at the time when we need such funding. In the event that we are unable to raise additional funds, our liquidity will be adversely impacted and our business could suffer. If we are able to secure additional financing, these funds could be costly to secure and maintain, which could significantly impact our earnings and our liquidity.
At September 30, 2011, we had $21.2 million of cash and cash equivalents and $77.0 million of debt outstanding and excess availability to borrow up to an additional $39.3 million under the ABL, subject to certain provisions, as described in "Financing Arrangements" below. The breach of any of these provisions could result in a default under the ABL and could trigger acceleration of repayment, which could have a significant adverse impact to our liquidity and our business. While we expect to comply with the provisions of the agreement for the foreseeable future, deterioration in the economy and our results could cause us to not be in compliance with our ABL agreement.

19


Financing Arrangements
Long-term debt consists of the following (in millions):
 
June 30,
2011
 
December 31,
2010
Asset-based loan
$
77.0

 
$
77.0

Less: current maturities

 

Long-term debt
$
77.0

 
$
77.0

On April 27, 2011, we refinanced our revolving credit facility with a group of financial institutions. The amended and restated facility is a five-year ABL with commitments to lend up to $250.0 million. The thresholds at which certain covenants and restrictions become effective were lessened in this amended and restated ABL, resulting in additional availability to borrow. Under this amended and restated ABL we are also no longer subject to certain representation requirements regarding our pension underfunded status, for which we previously had obtained a waiver.
The ABL provides for the issuance of letters of credit and cash borrowings, is secured by our accounts receivable, inventory and cash and is guaranteed by all of our domestic subsidiaries. The issuance of letters of credit and cash borrowings are limited by the level of a borrowing base consisting of eligible accounts receivable and inventory.
The amount of the borrowing base above the current level of letters of credit and cash borrowings outstanding represents the total borrowing availability. Certain covenants and restrictions, including cash dominion, weekly borrowing base reporting, and a fixed charge coverage ratio, would become effective if total availability fell below various thresholds. If total availability falls below $42.0 million, we are subject to cash dominion and weekly borrowing base reporting. If total availability falls below $35.0 million, we are also subject to the fixed charge coverage ratio, which we currently do not meet. As of September 30, 2011, total availability was $74.3 million. Therefore, as of September 30, 2011, we have $32.3 million of excess availability without being subject to the cash dominion and weekly reporting covenants of the agreement and $39.3 million of excess availability before we would be subject to the fixed charge coverage ratio.
We intend to continue to manage our availability to remain above the $42.0 million threshold, as we choose not to be subject to the cash dominion and weekly reporting covenants.
The borrowing base is reported on the 25th day of each month based on our financial position at the end of the previous month. Our borrowing base calculations are subject to periodic examinations by the financial institutions which can result in adjustments to the borrowing base and our availability under the ABL. These examinations have not resulted in material adjustments to our borrowing base or availability in the past and are not expected to result in material adjustments in the future.
The interest rate on cash borrowings outstanding under the ABL is either (i) a base rate (the greatest of the prime rate, the Federal Funds Effective Rate plus 1/2%, and the adjusted LIBOR plus 1%) plus a margin ranging from 1.00% to 1.75% or (ii) LIBOR plus a margin ranging from 2.25% to 3.00%. These margins fluctuate with average availability. As of September 30, 2011, loans outstanding were $77.0 million with a weighted average interest rate of 3.13%.
Under the terms of the ABL, we are required to comply with certain operating covenants, the most significant of which have been described above. We are currently in compliance with all of these covenants and expect to remain in compliance for the foreseeable future.
Funded Status of Qualified Defined Benefit Pension Plan
The projected benefit obligation of our qualified defined benefit pension plan exceeded the fair value of plan assets by $84.7 million at December 31, 2010, the measurement date. The projected benefit obligation calculations are dependent on various assumptions, including discount rate. The discount rate is selected based on yields of high quality bonds (rated Aa by Moody’s as of the measurement date) with cash flows matching the timing and amount of expected future benefit payments. We believe the assumptions to be reasonable; however, differences in assumptions would impact the calculated obligation. Additionally, changes in the yields of the underlying financial instruments from which the assumptions are derived may significantly impact the calculated obligation at future measurement dates. For example, at our December 31, 2010 measurement date, we used a discount rate of 5.75% to measure the projected benefit obligation. If we had used a discount rate of 6.00% or 5.50%, the projected benefit obligation and underfunded status of our pension plan would have decreased or increased by approximately $13.0 million, respectively.
On June 25, 2010, the federal government passed the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 (“the act”) which is designed to provide additional relief from the funding requirements of the Pension Protection Act of 2006. The act provides opportunities for plan sponsors to extend the time over which plan deficits may be funded, up to 15 years, subject to certain limitations including offsets for excess compensation and extraordinary dividends. With the improvement in the funded status of the plan in 2010 and the benefit of the act, our funding requirements for 2011 under the Employee Retirement

20


Income Security Act of 1974 ("ERISA") are approximately $3.1 million. Our final $2.5 million contribution for 2011 was made in cash on October 14, 2011.
If the relief provided by the federal government expires or is no longer applicable to our qualified pension plan, if there is downward pressure on the asset values of the plan, or if the present value of the projected benefit obligation of the plan increases, as would occur in the event of a decrease in the discount rate used to measure the obligation, it would necessitate significantly increased funding of the plan in the future.
Our required funding for 2012 will not be known until we reach our December 31, 2011 measurement date. However, we currently estimate that we will contribute $14.0 million to the pension plan in 2012. This estimate is based on the following assumptions: 1) the discount rate decreases 75 basis points from our previous 2010 measurement date, 2) the plan asset values remain unchanged from September 30, 2011 to December 31, 2011, 3) we choose to avoid letting the plan become classified as at-risk by maintaining a funded status greater than 75% and there are no changes in applicable regulations or minimum funding requirements needed to avoid at-risk classification, and 4) the expected return on plan assets is equal to or greater than 7.25% at December 31, 2011. These assumptions and the resulting estimate are highly dependent on certain factors and market conditions that are outside of our control. Actual funding requirements in 2012 could be significantly more or significantly less.
Contractual Obligations and Other Commitments
Off-Balance Sheet Arrangements
We are the prime tenant on operating leases that we have subleased to independent furniture dealers. In addition, we guarantee leases which primarily relate to company-branded stores operated by independent furniture dealers. These subleases and guarantees have remaining terms ranging up to five years and generally require us to make lease payments in the event of default by the sublessor or independent party. In the event of default, we have the right to assign or assume the lease with certain restrictions. As of September 30, 2011, the total amounts remaining under lease guarantees were $7.9 million. Our estimate of probable future losses under these guaranteed leases is not material.

Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations is based upon the Consolidated Financial Statements and Notes to the Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of financial statements in accordance with U.S. GAAP requires us to make estimates, judgments, and assumptions, which we believe to be reasonable, based on the information available. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. Actual results could differ from those estimates. The consolidated financial statements consist of the accounts of our company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
We have chosen accounting policies we believe are appropriate to accurately and fairly report our operating results and financial position, and we apply those accounting policies in a consistent manner. Accounting policies we consider most critical are described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2010.

Intangible Assets
Our trade names are tested for impairment annually in the fourth fiscal quarter. Trade names, and long-lived assets, are also tested for impairment whenever events or changes in circumstances indicate that the asset may be impaired. Each quarter, we assess whether events or changes in circumstances indicate a potential impairment of these assets considering many factors, including significant changes in market capitalization, cash flow or projected cash flow, the condition of assets, and the manner in which assets are used.
Trade names are tested by comparing the carrying value and fair value of each trade name to determine the amount, if any, of impairment. The fair value of trade names is calculated using a "relief from royalty payments" methodology. This approach involves two steps: (i) estimating royalty rates for each trademark and (ii) applying these royalty rates to a net sales stream and discounting the resulting cash flows to determine fair value.
We tested our trade names for impairment in the third quarter of 2011 primarily due to deterioration in sales in certain brands. As a result, we recorded an impairment charge of $9.0 million caused by the carrying value being greater than the fair value of certain of our trade names. The decrease in the fair value of these trade names was primarily caused by a decrease in sales and an increase in the discount rate used in our valuation calculations. For our trade names with carrying values not effected by an impairment charge, the fair value is not materially greater than the carrying value as of September 30, 2011. Any future decrease in the fair value of our trade names could result in a corresponding impairment charge. The estimated fair value of our trade names is highly contingent upon sales trends and assumptions including royalty rates, net sales streams, and a discount

21


rate. Lower sales trends, decreases in projected sales, decreases in royalty rates, or increases in the discount rate would cause additional impairment charges and a corresponding reduction in our earnings.
We determine royalty rates for each trademark considering contracted rates and industry benchmarks. Royalty rates generally are not volatile and do not fluctuate significantly with short term changes in economic conditions. A 25 basis point decrease in assumed royalty rates would have resulted in additional impairment of $8.2 million.
Weighted average net sales streams are calculated for each trademark based on a probability weighting assigned to each reasonably possible future net sales stream. The probability weightings are determined considering historical performance, management forecasts and other factors such as economic conditions and trends. Estimated net sales streams could fluctuate significantly based on changes in the economy, actual sales, or forecasted sales. A ten percent decrease in the assumed net sales streams would have resulted in additional impairment of $7.2 million.
The discount rate is a calculated weighted average cost of capital determined by observing typical rates and proportions of interest-bearing debt, preferred equity, and common equity of publicly traded companies engaged in lines of business similar to our company. The fair value was calculated using a discount rate of 17.0% in the third quarter of 2011 and 16.5% in the fourth quarter of 2010 and we recorded impairment charges of $9.0 million and $1.1 million in the third quarter of 2011 and the fourth quarter of 2010, respectively. The discount rate could fluctuate significantly with changes in the risk profile of our industry or in the general economy. A 50 basis point increase in the assumed discount rate would have resulted in additional impairment of $2.4 million.

Item 3. Quantitative and Qualitative Disclosures about Market Risk
We have exposure to market risk from changes in interest rates. Our exposure to interest rate risk consists of interest expense on our asset-based loan and interest income on our cash equivalents. A 10% interest rate increase would result in additional interest expense of $0.2 million annually. We have no derivative financial instruments at September 30, 2011.


22


Item 4. Controls and Procedures
a)
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as such terms are defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”), as of September 30, 2011, the end of the period covered by this Quarterly Report on Form 10-Q.
Disclosure controls and procedures are controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Based on this evaluation, management, including our Chief Executive Officer and Chief Financial Officer, has concluded that our disclosure controls and procedures were effective as of September 30, 2011.
b)
Changes in Internal Control over Financial Reporting
There have not been any changes in our internal control over financial reporting during the quarter ended September 30, 2011, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


23


PART II

Item 1. Legal Proceedings
For a discussion of legal proceedings, refer to Part I, Note 14 to the Consolidated Financial Statements in this Form 10-Q, which is incorporated herein by reference.

Item 1A. Risk Factors
We describe the risk factors associated with our business below. This description includes any material changes to and supersedes the description of the risk factors associated with our business previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010. Additional risks and uncertainties that we are unaware of or that we currently deem immaterial also may become important factors that affect our company. You should carefully consider the risks described below in addition to all other information provided to you in this document, in our Annual Report on Form 10-K for the year ended December 31, 2010, and in our subsequent filings with the Securities and Exchange Commission. Any of the following risks could materially and adversely affect our business, results of operations, and financial condition.
Unfavorable economic conditions could result in a decrease in our future sales, earnings, and liquidity.
Economic conditions deteriorated significantly in the United States, and worldwide in recent years. Although the general economy has begun to recover, sales of residential furniture remain depressed due to wavering consumer confidence and a number of ongoing factors in the global economy that have negatively impacted consumers’ discretionary spending. These ongoing factors include lower home values, prolonged foreclosure activity throughout the country, a weak market for home sales, continued high levels of unemployment, and reduced access to consumer credit. These factors are outside of our control, but have a direct impact on our sales due to resulting weak levels of consumer confidence and reduced consumer spending. These conditions have resulted in a decline in our sales, earnings and liquidity and could continue to impact our sales, earnings and liquidity in the future. The general level of consumer spending is also affected by a number of factors, including, among others, general economic conditions and inflation, which are generally beyond our control. Unfavorable economic conditions impact retailers, our primary customers, potentially resulting in the inability of our customers to pay amounts owed to us. In addition, if our customers are unable to sell our products or are unable to access credit, they may experience financial difficulties leading to bankruptcies, liquidations, and other unfavorable events. If any of these events occur, or if unfavorable economic conditions continue to challenge the consumer environment, our future sales, earnings, and liquidity would likely be adversely impacted.
Market returns could have a negative impact on the return on plan assets for our qualified pension plan, which may require significant funding.
Financial markets have experienced extreme volatility in recent years. As a result of this volatility in the domestic and international equity and bond markets, the asset values of our pension plans have fluctuated significantly and further disruptions in the financial markets could adversely impact the value of our pension plan assets in the future. The projected benefit obligation of our qualified defined benefit plan exceeded the fair value of plan assets by $84.7 million at December 31, 2010. On June 25, 2010, the federal government passed the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 (“the act”), which provides additional relief from the funding requirements of the Pension Protection Act of 2006. The act provides opportunities for plan sponsors to extend the time over which plan deficits may be funded, up to 15 years, subject to certain limitations including offsets for excess compensation and extraordinary dividends. However, if the relief provided by the federal government expires or is no longer applicable to our qualified pension plan, if there is downward pressure on the asset value of the plan, or if the present value of the benefit obligation of the plan increases, as would occur in the event of a decrease in the discount rate used to measure the obligation, significantly increased funding of the plan in the future could be required, which would negatively impact our liquidity.
Loss of market share and other financial or operational difficulties due to competition would likely result in a decrease in our sales, earnings, and liquidity.
The residential furniture industry is highly competitive and fragmented. We compete with many other manufacturers and retailers, some of which offer widely advertised, well-known, branded products, and others are large retail furniture dealers who offer their own store-branded products. Competition in the residential furniture industry is based on the pricing of products, quality of products, style of products, perceived value, service to the customer, promotional activities, and advertising. It is difficult for us to predict the timing and scale of our competitors’ actions in these areas. The highly competitive nature of the industry means we are constantly subject to the risk of losing market share, which would likely decrease our future sales, earnings and liquidity. In addition, due to competition, we may not be able to maintain or raise the prices of our products in response to inflationary pressures such as increasing costs. Also, due to the large number of competitors and their wide range of product offerings, we may not be able to differentiate our products (through styling, finish, and other construction techniques) from those of our competitors. These and other competitive pressures would likely result in a decrease in our sales, earnings, and liquidity.

24


An inability to forecast demand or respond to changes in consumer tastes and fashion trends in a timely manner could result in a decrease in our future sales, earnings, and liquidity.
Residential furniture is a highly styled product subject to fashion trends and geographic consumer tastes that can change rapidly. If we are unable to anticipate or respond to changes in consumer tastes and fashion trends in a timely manner or to otherwise forecast demand accurately, we may lose sales and have excess inventory (both raw materials and finished goods), both of which could result in a decrease in our sales, earnings, and liquidity.
A change in our mix of product sales could result in a decrease in our future earnings and liquidity.
Our products are sold at varying price points and levels of profit. An increase in the sales of our lower profit products at the expense of the sales of our higher profit products could result in a decrease in our gross margin, earnings, and liquidity.
Business failures of large dealers, a group of customers or our own retail stores could result in a decrease in our future sales , earnings, and liquidity.
Our business practice has been to extend payment terms to our customers when selling furniture. As a result, we have a substantial amount of receivables we manage daily. Although we have no customers who individually represent 10% or more of our total annual sales, the business failures of a large customer or a group of customers could require us to record receivable reserves, which would decrease earnings, as it has in past periods. Receivables collection can be significantly impacted by economic conditions. Therefore, deterioration in the economy, or a lack of economic recovery, could cause further business failures of our customers, which could in turn require additional receivable reserves thereby lowering earnings. These business failures can also cause loss of future sales. In addition, we are either prime tenant on or guarantor of many leases of company-branded stores operated by independent furniture dealers. The viability of these dealer stores are also highly influenced by economic conditions. Defaults by any of these dealers would result in our becoming responsible for payments under these leases. If we were to decide not to operate these stores, we would still be required to pay store occupancy costs, which results in a reduction in our future sales, earnings and liquidity.
Inventory write-downs or write-offs could result in a decrease in our earnings.
Our inventory is valued at the lower of cost or market. However, future sales of inventory are dependent on economic conditions, among other things. Weak economic and retail conditions could cause a lowering of inventory values in order to sell our product. For example, in 2010, we incurred charges of $6.7 million related to product write-downs to actual or anticipated sales values in this difficult retail environment. Deterioration in the economy could require us to lower inventory values further, which would lower our earnings.
Sales distribution realignments can result in a decrease in our sales, earnings and liquidity.
We continually review relationships with our wholesale customers to ensure each meets our standards. These standards cover, among others, credit worthiness, market penetration, sales growth, competitive improvements, and sound, ethical business practices. If customers do not meet our standards, we will consider discontinuing these business relationships. If we discontinue a relationship, there would likely be a decrease in near-term sales, earnings, and liquidity and possibly long-term sales, earnings and liquidity if we are unable to replace such customers.
Manufacturing realignments and cost savings programs could result in a decrease in our near-term earnings and liquidity.
We continually review our domestic manufacturing operations and offshore sourcing capabilities. Effects of periodic manufacturing realignments and cost savings programs would likely result in a decrease in our near-term earnings and liquidity until the expected cost reductions are achieved. Such programs can include the consolidation and integration of facilities, functions, systems, and procedures. Certain products may also be shifted from domestic manufacturing to offshore manufacturing or sourcing, and vice versa. These realignments have, and would likely in the future, result in substantial capital expenditures and costs including, among others, severance, impairment, exit, and disposal costs. Such actions may not be accomplished as quickly as anticipated and the expected cost reductions may not be achieved in full, both of which have, and could in the future, result in a decrease in our near-term earnings and liquidity.
Reliance on offshore sourcing of our products subjects us to government regulations and currency fluctuations which could result in a decrease in our earnings and liquidity.
We have offshore capabilities that provide flexibility in product programs and pricing to meet competitive pressures. Risks inherent in conducting business internationally include, among others, fluctuations in foreign-currency exchange rates, changes to and compliance with government regulations and policies, including those related to duties, tariffs, and trade barriers, investments, taxation, exchange controls, repatriation of earnings, and changes in local political or economic conditions, all of which could increase our costs and decrease our earnings and liquidity.

25


Our operations depend on production facilities located outside the United States which are subject to increased risks of disrupted production which could cause delays in shipments, loss of customers, and decreases in sales, earnings, and liquidity.
We have placed production in emerging markets to capitalize on market opportunities and to minimize our costs. Our international production operations could be disrupted by a natural disaster, labor strike, war, political unrest, terrorist activity, or public health concerns, particularly in emerging countries that are not well-equipped to handle such occurrences. Our production abroad may also be more susceptible to changes in laws and policies in host countries and economic and political upheaval than our domestic production. Any such disruption could cause delays in shipments of products, loss of customers, and decreases in sales, earnings and liquidity.
Fluctuations in the price, availability, and quality of raw materials could cause delays in production and could increase the costs of materials which could result in a decrease in our sales, earnings, and liquidity.
We use various types of wood, fabrics, leathers, glass, upholstered filling material, steel, and other raw materials in manufacturing furniture. Fluctuations in the price, availability, and quality of the raw materials we use in manufacturing residential furniture could have a negative effect on our cost of sales and our ability to meet the demands of our customers. Inability to meet the demands of our customers could result in the loss of future sales. In addition, the costs to manufacture furniture depend in part on the market prices of the raw materials used to produce the furniture. We may not be able to pass along to our customers all or a portion of our higher costs of raw materials due to competitive and market pressures, which could decrease our earnings and liquidity.
We are subject to litigation, environmental regulations, and governmental matters that could adversely impact our sales, earnings, and liquidity.
We are, and may in the future be, a party to legal proceedings and claims, including, but not limited to, those involving product liability, business matters, government regulatory and trade compliance matters, and environmental matters, some of which claim significant damages. We face the business risk of exposure to product liability claims in the event that the use of any of our products results in personal injury or property damage. In the event any of our products prove to be defective, we may be required to recall or redesign such products. We maintain insurance against product liability claims, but there can be no assurance such coverage will continue to be available on terms acceptable to us or such coverage will be adequate to cover exposures. We also are, and may in the future be, a party to legal proceedings and claims arising out of certain customer or dealer terminations as we continue to re-examine and realign our retail distribution strategy. Given the inherent uncertainty of litigation, these matters could have a material adverse impact on our sales, earnings, and liquidity. We are also subject to various laws and regulations relating to environmental protection and we could incur substantial costs as a result of the noncompliance with or liability for cleanup or other costs or damages under environmental laws. In addition, our defined benefit plans are subject to certain pension obligations, regulations, and funding requirements, which could cause us to incur substantial costs and require substantial funding. All of these matters could cause a decrease in our sales, earnings, and liquidity.
We may not realize the anticipated benefits of mergers, acquisitions, or dispositions.
As part of our business strategy, we may merge with or acquire businesses and divest assets and operations. Risks commonly encountered in mergers and acquisitions include the possibility that we pay more than the acquired company or assets are worth, the difficulty of assimilating the operations and personnel of the acquired business, the potential disruption of our ongoing business, and the distraction of our management from ongoing business. Consideration paid for future acquisitions could be in the form of cash or stock or a combination thereof, which could result in dilution to existing shareholders and to earnings per share. We may also evaluate the potential disposition of assets and operations that may no longer help us meet our objectives. When we decide to sell assets or operations, we may encounter difficulty in finding buyers or alternate exit strategies on acceptable terms in a timely manner. In addition, we may dispose of assets at a price or on terms that are less than we had anticipated.
Loss of key personnel or the inability to hire qualified personnel could adversely affect our business.
Our success depends, in part, on our ability to retain our key personnel, including our executive officers and senior management team. The unexpected loss of one or more of our key employees could adversely affect our business. Our success also depends, in part, on our continuing ability to identify, hire, train, and retain highly qualified personnel. Competition for employees can be intense. We may not be able to attract or retain qualified personnel in the future, and our failure to do so could adversely affect our business.
Impairment of our trade name intangible assets would result in a decrease in our earnings and net worth.
Our trade names are tested for impairment annually or whenever events or changes in business circumstances indicate the carrying value of the assets may not be recoverable. Trade names are tested by comparing the carrying value and fair value of each trade name to determine the amount, if any, of impairment. The fair value of our trade names is estimated using a “relief from royalty payments” methodology, which is highly contingent upon assumed sales trends and projections, royalty rates, and a discount rate. Lower sales trends, decreases in projected net sales, decreases in royalty rates, or increases in the discount rate would cause impairment charges and a corresponding reduction in our earnings and net worth. For example, in the third quarter of 2011, we

26


tested our trade names for impairment under this methodology and recorded an impairment charge of $9.0 million, driven primarily by a decrease in sales and an increase in the discount rate used in our valuation calculations, resulting in a remaining trade name balance of $77.5 million at September 30, 2011.
Provisions in our certificate of incorporation and our shareholders’ rights plan could discourage a takeover and could result in a decrease in the value of our common stock.
Certain provisions of our certificate of incorporation and shareholders’ rights plan could make it more difficult for a third party to acquire control of us, even if such change in control would be beneficial to our shareholders. Our certificate of incorporation contains provisions that may make the acquisition of control by a third party without the approval of our board of directors more difficult, including provisions relating to the issuance of stock without shareholder approval. In addition, we have also adopted a dual-trigger shareholders’ rights plan designed to deter shareholders from acquiring shares of stock in excess of 4.75% in order to reduce the risk of limitation of use of our net operating loss carry forwards under Section 382 of the Internal Revenue Code, and to protect our stockholders against potential acquirers who may pursue coercive or unfair tactics aimed at gaining control of the company without paying all stockholders a full and fair price. These provisions may have unintended anti-takeover effects and may delay or prevent a change in control, which could result in a decrease of the price of our common stock.
A change in control could limit the use of our net operating loss carry forwards and decrease a potential acquirer’s valuation of our businesses, both of which could decrease our liquidity and earnings.
If a change in control occurs pursuant to applicable statutory regulations, we are potentially subject to limitations on the use of our net operating loss carry forwards which in turn could adversely impact our future liquidity and profitability. A change in control could also decrease a potential acquirer’s valuation of our businesses and discourage a potential acquirer from purchasing our businesses.
If we and our dealers are not able to open new stores or effectively manage the growth of these stores, our ability to grow sales and our profitability and liquidity could be adversely affected.
We have in the past and may continue in the future to open new stores or purchase or otherwise assume operation of branded stores from independent dealers. Increased demands on our operational, managerial, and administrative resources could cause us to operate our business, including our existing and new stores, less effectively, which in turn could cause deterioration in our profitability. If we and our dealers are not able to identify and open new stores in desirable locations and operate stores profitably, it could adversely impact our ability to grow sales and our profitability and liquidity could be adversely affected.
We may not be able to comply with our debt agreement or secure additional financing on favorable terms or generate sufficient profit to meet our future operating and capital needs, which could significantly adversely impact our liquidity and our business.
Our availability to borrow is dependent on certain provisions of our debt agreement, including those described in Note 6 “Long-Term Debt” in Part I, Item 1 of this Form 10-Q. The breach of any of these provisions could result in a default under our debt agreement and could trigger acceleration of repayment, which would have a significant adverse impact to our liquidity and our business. In addition, an inability to generate sufficient future profits could have a significant adverse impact on our cash flow and liquidity and could cause us to not be in compliance with our debt agreement. While we would attempt to obtain waivers for noncompliance, we may not be able to obtain waivers, which could have a significant adverse impact on our liquidity and our business.
If we do not have sufficient cash reserves, cash flow from our operations, or our borrowing capacity is insufficient, we may need to raise additional funds through equity or debt financings in the future in order to meet our operating and capital needs. Nevertheless, we may not be able to secure adequate debt or equity financing on favorable terms, or at all, at the time when we need such funding. In the event that we are unable to raise additional funds, our liquidity will be adversely impacted and our business could suffer. If we are able to secure additional financing, these funds could be costly to secure and maintain, which could significantly impact our earnings and our liquidity. Also, if we raise additional funds or settle liabilities through issuances of equity or convertible securities, our existing shareholders could suffer significant dilution in their percentage ownership of our company, and any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our common stock. In addition, any debt financing that we may secure in the future could have restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions.


27


Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
During the quarter ended September 30, 2011 there were no purchases by us of equity securities that are registered under Section 12 of the Securities Exchange Act of 1934, as amended, and no shares were withheld to cover withholding taxes upon the vesting of restricted stock awards.

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Item 5. Other Information
On November 3, 2011, our Board of Directors approved a change in our fiscal year from a calendar year ending on December 31 to a 52/53 week fiscal year ending on the Saturday closest to December 31 effective January 1, 2012. Since the change in fiscal year end is from the last day of the month to a 52/53 week fiscal year commencing within seven days of the month end, and the new fiscal year will commence with the end of the old fiscal year, the change is not deemed a change in fiscal year for purposes of reporting subject to Rule 13a-10 or 15d-10. As a result, a transition report is not required to be filed. The 2012 fiscal year will end on December 29, 2012.
On November 3, 2011, we entered into a First Amendment to the Amended and Restated Credit Agreement dated April 27, 2011, by and among the Company, Broyhill Furniture Industries, Inc., HDM Furniture Industries, Inc., Lane Furniture Industries, Inc., Thomasville Furniture Industries, Inc., and Maitland-Smith Furniture Industries, Inc., the Other Loan Parties named therein, the Lenders Party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent (the “Credit Agreement”). The First Amendment amends the Credit Agreement to reflect the change in our fiscal year to a 52/53 week fiscal year ending on the Saturday closest to December 31. The foregoing description of the First Amendment to the Credit Agreement is qualified in its entirety by reference to Exhibit 10.1 filed with this Form 10-Q.

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Item 6. Exhibits
 
 
 
 
Filed
 
 
 
 
 
 
 
 
 
 
with
 
 
 
 
 
 
Exhibit
 
 
 
the
 
Incorporated by Reference
Index
 
 
 
Form
 
 
 
Filing Date
 
Exhibit
No.
 
Exhibit Description
 
10-Q
 
Form
 
with the SEC
 
No.
3.1
 
Restated Certificate of Incorporation of the Company, as amended
 
 
 
10-Q
 
May 14, 2002
 
3
3.2
 
By-Laws of the Company, as amended effective as of August 5, 2010
 
 
 
8-K
 
August 10, 2010
 
3.1
3.3
 
Certificate of Designation of Series B Junior Participating Preferred Stock
 
 
 
8-K
 
August 4, 2009
 
3.1
4.1
 
Amended and Restated Stockholders Rights Agreement, dated as of February 26, 2010, between the Company and American Stock Transfer and Trust Company, LLC, as Rights Agent
 
 
 
8-K
 
March 1, 2010
 
4.1
10.1
 
First Amendment dated November 3, 2011, to the Amended and Restated Credit Agreement dated April 27, 2011, by and among the Company, Broyhill Furniture Industries, Inc., HDM Furniture Industries, Inc., Lane Furniture Industries, Inc., Thomasville Furniture Industries, Inc., and Maitland-Smith Furniture Industries, Inc., the Other Loan Parties named therein, the Lenders Party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent
 
X
 
 
 
 
 
 
31.1
 
Certification of Chief Executive Officer of the Company, Pursuant to Rule 13a-14(a)/15d-14(a)
 
X
 
 
 
 
 
 
31.2
 
Certification of Chief Financial Officer (Principal Financial Officer) of the Company, Pursuant to Rule 13a-14(a)/15d-14(a)
 
X
 
 
 
 
 
 
32.1
 
Certification of Chief Executive Officer of the Company, Pursuant to 18 U.S.C. Section 1350
 
X
 
 
 
 
 
 
32.2
 
Certification of Chief Financial Officer (Principal Financial Officer) of the Company, Pursuant to 18 U.S.C. Section 1350
 
X
 
 
 
 
 
 
101.INS
 
XBRL Instance Document
 
X
 
 
 
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
X
 
 
 
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
X
 
 
 
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
X
 
 
 
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
X
 
 
 
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
X
 
 
 
 
 
 


30



SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
Furniture Brands International, Inc.
 
 
 
(Registrant)
 
 
 
 
By:  
/s/ Steven G. Rolls  
 
 
Steven G. Rolls 
 
 
Chief Financial Officer (On behalf of the registrant and as Principal Financial Officer)
 
 
Date: 
November 4, 2011


31
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