FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002 or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from to
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Commission file number I-91
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Furniture Brands International, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 43-0337683
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 South Hanley Road, St. Louis, Missouri 63105
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (314) 863-1100
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Former name, former address and former fiscal year, if changed since last report
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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 requirement for the past 90 days.
Yes X No
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APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
56,277,066 Shares as of October 31, 2002
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Financial Statements for the quarter ended September 30, 2002.
Consolidated Balance Sheets
Consolidated Statements of Operations:
Three Months Ended September 30, 2002
Three Months Ended September 30, 2001
Nine Months Ended September 30, 2002
Nine Months Ended September 30, 2001
Consolidated Statements of Cash Flows:
Nine Months Ended September 30, 2002
Nine Months Ended September 30, 2001
Notes to Consolidated Financial Statements
The financial statements are unaudited, but include all adjustments (consisting
of normal recurring adjustments) which the management of the Company considers
necessary for a fair presentation of the results of the period. The results for
the three months and nine months ended September 30, 2002 are not necessarily
indicative of the results to be expected for the full year.
FURNITURE BRANDS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
September 30, December 31,
2002 2001
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ASSETS
Current assets:
Cash and cash equivalents....................... $ 18,181 $ 15,707
Receivables, less allowances of $23,475
($18,841 at December 31, 2001)................ 383,102 359,493
Inventories...(Note 1).......................... 420,275 369,773
Deferred income taxes........................... 21,540 26,160
Prepaid expenses and other current assets....... 6,847 7,582
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Total current assets.......................... 849,945 778,715
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Property, plant and equipment..................... 648,006 605,104
Less accumulated depreciation................... 318,390 283,464
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Net property, plant and equipment............. 329,616 321,640
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Goodwill...(Note 6)............................... 188,035 156,435
Other intangible assets...(Note 6)................ 171,008 210,870
Other assets...................................... 38,551 35,829
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$ 1,577,155 $ 1,503,489
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accrued interest expense........................ $ 3,087 $ 2,805
Accounts payable and other accrued expenses..... 212,610 172,490
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Total current liabilities..................... 215,697 175,295
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Long-term debt.................................... 374,800 454,400
Deferred income taxes............................. 68,089 69,032
Other long-term liabilities....................... 52,710 45,103
Shareholders' equity:
Preferred stock, authorized 10,000,000
shares, no par value - issued, none........... - -
Common stock, authorized 200,000,000 shares,
$1.00 stated value - issued 56,277,066
shares at September 30, 2002 and
December 31, 2001............................. 56,277 56,277
Paid-in capital................................. 221,605 219,469
Retained earnings............................... 610,017 520,503
Accumulated other comprehensive income (Note 3). (9,896) (5,108)
Treasury stock at cost (642,159 shares at
September 30, 2002 and 1,664,666 shares at
December 31, 2001)............................ (12,144) (31,482)
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Total shareholders' equity.................... 865,859 759,659
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$ 1,577,155 $ 1,503,489
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See accompanying notes to consolidated financial statements.
FURNITURE BRANDS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share data)
(Unaudited)
Three Months Three Months
Ended Ended
September 30, September 30,
2002 2001
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Net sales...................................... $ 563,246 $ 448,682
Costs and expenses:
Cost of operations........................... 404,899 327,787
Selling, general and administrative expenses. 103,552 82,115
Depreciation and amortization................ 12,018 13,507
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Earnings from operations....................... 42,777 25,273
Interest expense............................... 5,388 5,197
Other income, net.............................. 911 790
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Earnings before income tax expense............. 38,300 20,866
Income tax expense............................. 13,642 6,995
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Net earnings................................... $ 24,658 $ 13,871
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Net earnings per common share:
Basic........................................ $ 0.44 $ 0.27
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Diluted...................................... $ 0.44 $ 0.27
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Weighted average common shares outstanding (Note 2):
Basic........................................ 55,628,687 50,503,561
============ ============
Diluted...................................... 56,175,883 51,465,726
============ ============
See accompanying notes to consolidated financial statements.
FURNITURE BRANDS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share data)
(Unaudited)
Nine Months Nine Months
Ended Ended
September 30, September 30,
2002 2001
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Net sales...................................... $ 1,802,218 $ 1,414,512
Costs and expenses:
Cost of operations........................... 1,290,727 1,033,237
Selling, general and administrative expenses. 322,320 251,392
Depreciation and amortization................ 36,840 43,530
Asset impairment charges..................... - 18,000
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Earnings from operations....................... 152,331 68,353
Interest expense............................... 16,482 17,505
Other income, net.............................. 2,981 2,209
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Earnings before income tax expense............. 138,830 53,057
Income tax expense............................. 49,316 17,858
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Net earnings................................... $ 89,514 $ 35,199
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Net earnings per common share:
Basic........................................ $ 1.61 $ 0.70
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Diluted...................................... $ 1.59 $ 0.69
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Weighted average common shares outstanding (Note 2):
Basic........................................ 55,460,621 50,275,443
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Diluted...................................... 56,458,233 51,255,001
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See accompanying notes to consolidated financial statements.
FURNITURE BRANDS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine Months Nine Months
Ended Ended
September 30, September 30,
2002 2001
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Cash flows from operating activities:
Net earnings......................................... $ 89,514 $ 35,199
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization.................... 36,840 43,530
Asset impairment charges......................... - 18,000
Other noncash items, net......................... (344) 1,060
(Increase) decrease in receivables............... (23,609) 37,898
(Increase) decrease in inventories............... (50,502) 15,688
Increase in prepaid expenses and other assets.... (2,722) (1,465)
Increase in accounts payable, accrued interest
expense and other accrued expenses............. 48,041 20,715
Increase(decrease)in net deferred tax
liabilities.................................... 6,103 (9,385)
Increase (decrease) in other long-term
liabilities.................................... 699 (958)
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Net cash provided by operating activities............ 104,020 160,282
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Cash flows from investing activities:
Proceeds from the disposal of assets................. 2,468 2,442
Additions to property, plant and equipment........... (37,744) (15,053)
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Net cash used by investing activities................ (35,276) (12,611)
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Cash flows from financing activities:
Payments of long-term debt........................... (79,600) (147,600)
Proceeds from the issuance of treasury stock......... 13,330 4,722
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Net cash used by financing activities................ (66,270) (142,878)
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Net increase in cash and cash equivalents.............. 2,474 4,793
Cash and cash equivalents at beginning of period....... 15,707 14,606
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Cash and cash equivalents at end of period............. $ 18,181 $ 19,399
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Supplemental Disclosure:
Cash payments for income taxes, net.................. $ 33,742 $ 13,238
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Cash payments for interest........................... $ 15,566 $ 22,473
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See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)
(1) Inventories are summarized as follows:
September 30, December 31,
2002 2001
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Finished products $ 237,211 $ 187,523
Work-in-process 69,086 69,507
Raw materials 113,978 112,743
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$ 420,275 $ 369,773
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(2) Weighted average shares used in the computation of basic and diluted net
earnings per common share are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
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2002 2001 2002 2001
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Weighted average shares used
for basic net earnings per
common share 55,628,687 50,503,561 55,460,621 50,275,443
Effect of dilutive securities:
Stock options 547,196 962,165 997,612 979,558
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Weighted average shares used
for diluted net earnings
per common share 56,175,883 51,465,726 56,458,233 51,255,001
========== ========== ========== ==========
(3) Comprehensive income is as follows:
Nine Months Ended
September 30,
----------------------
2002 2001
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Net earnings $89,514 $35,199
Cumulative effect of adopting SFAS
No. 133 - 2,960
Effect of financial instruments
accounted for as hedges (4,504) (8,855)
Effect of foreign currency
translation (284) -
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$84,726 $29,304
(4) On January 1, 2002 the Company adopted Statement of Financial Accounting
Standards No. 142 (FAS 142), "Goodwill and Other Intangible Assets." FAS
142 requires that goodwill and other intangible assets with indefinite
lives no longer be amortized, but instead be tested annually for
impairment. The Company's intangible assets, consisting of trademarks,
trade names and goodwill all have indefinite lives. The following table
presents net earnings on a comparative basis, after adjusting to exclude
the amortization of goodwill and other intangible assets:
Three Months Ended Nine Months Ended
September 30, September 30,
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2002 2001 2002 2001
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Net earnings:
As reported $24,658 $13,871 $89,514 $35,199
Exclude amortization of goodwill
and other intangible assets (net
of income tax benefit) - 2,790 - 8,370
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$24,658 $16,661 $89,514 $43,569
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Basic earnings per share:
As reported $0.44 $0.27 $1.61 $0.70
As adjusted $0.44 $0.33 $1.61 $0.87
Diluted earnings per share:
As reported $0.44 $0.27 $1.59 $0.69
As adjusted $0.44 $0.32 $1.59 $0.85
(5) In 2001, the Company implemented a restructuring plan which included the
closing of 12 manufacturing facilities. As of September 30, 2002, real
estate with a carrying value of $6,129 was included in other assets. No
events occurred during the nine months ended September 30, 2002 that would
indicate the need for a change in the carrying value of these assets.
(6) The purchase price allocation for the December 28, 2001 acquisition of
Henredon, Drexel Heritage and Maitland-Smith was finalized during the
second quarter of 2002. The allocation resulted in the reclassification of
$39,862 from Other Intangible Assets to Goodwill and Property, Plant and
Equipment.
(7) The accumulated benefit obligation of the Company's defined benefit pension
plan as of December 31, 2002 (the measurement date) exceeds the fair value
of the plan's assets as of September 30, 2002 by approximately $15,000.
Should a shortfall exist at year-end, the Company would be required to
record a charge to accumulated other comprehensive income in shareholders'
equity, consisting of the amount of any shortfall plus the amount of the
prepaid pension asset (approximately $10,000 at September 30, 2002), less
the income tax benefit.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
RESULTS OF OPERATIONS
Furniture Brands International, Inc. (referred to herein as the "Company") is
the largest manufacturer of residential furniture in the United States. The
Company manufactures and sources its products through its four primary operating
subsidiaries: Broyhill Furniture Industries, Inc.; Lane Furniture Industries,
Inc.; Thomasville Furniture Industries, Inc, and HDM Furniture Industries, Inc.
(which includes the operations of Henredon, Drexel Heritage and Maitland-Smith).
Comparison of Three Months and Nine Months Ended September 30, 2002 and 2001
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Selected financial information for the three months and nine months ended
September 30, 2002 and September 30, 2001 is presented below:
(Dollars in millions except per share data)
Three Months Ended
September 30, 2002 September 30, 2001
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% of % of
Dollars Net Sales Dollars Net Sales
-------- --------- -------- ---------
Net sales $ 563.2 100.0% $ 448.7 100.0%
Earnings from operations 42.7 7.6% 25.3 5.6%
Interest expense 5.4 1.0% 5.2 1.2%
Income tax expense 13.7 2.4% 7.0 1.6%
Net earnings 24.6 4.4% 13.9 3.1%
Net earnings per common share -
diluted 0.44 - 0.27 -
Gross profit (1) $ 148.0 26.3% $ 112.3 25.0%
Nine Months Ended
September 30, 2002 September 30, 2001
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% of % of
Dollars Net Sales Dollars Net Sales
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Net sales $1,802.2 100.0% $1,414.5 100.0%
Earnings from operations 152.3 8.5% 68.4 4.8%
Interest expense 16.5 0.9% 17.5 1.2%
Income tax expense 49.3 2.7% 17.9 1.3%
Net earnings 89.5 5.0% 35.2 2.5%
Net earnings per common share -
diluted 1.59 - 0.69 -
Gross profit (1) $ 479.5 26.6% $ 352.4 24.9%
(1) The Company believes that gross profit provides useful information
regarding a company's financial performance. Gross profit has been
calculated by subtracting cost of operations and the portion of
depreciation associated with cost of goods sold from net sales.
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
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Net sales $563.2 $448.7 $1,802.2 $1,414.5
Cost of operations 404.9 327.8 1,290.7 1,033.2
Depreciation (associated with
cost of goods sold) 10.3 8.6 32.0 28.9
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Gross profit $148.0 $112.3 $ 479.5 $ 352.4
====== ====== ======== ========
Net sales for the three months ended September 30, 2002 were $563.2 million,
compared to $448.7 million in the three months ended September 30, 2001, an
increase of $114.5 million or 25.5%. For the nine months ended September 30,
2002, net sales increased $387.7 million or 27.4% to $1,802.2 million from
$1,414.5 million for the nine months ended September 30, 2001. Excluding the
impact of Henredon, Drexel Heritage and Maitland-Smith, which the Company
acquired as of the close of business on December 28, 2001, the Company's sales
showed year-over-year growth of 4.5% in the quarter and 6.7% in the nine months,
reflecting improved business conditions, particularly in middle-price point
products, partially offset by continued weakness in higher-end product
offerings.
Earnings from operations for the three months ended September 30, 2002 and
September 30, 2001 were $42.7 million and $25.3 million, respectively. As a
percentage of net sales, earnings from operations for the three months ended
September 30, 2002 and September 30, 2001 were 7.6% and 5.6%, respectively. For
the nine months ended September 30, 2002 and September 30, 2001, earnings from
operations were $152.3 million and $68.4 million, respectively. Earnings from
operations for the nine months ended September 30, 2002 and September 30, 2001
were 8.5% and 4.8% of net sales, respectively. The improved operating
profitability was due to the higher sales volume, increased plant utilization,
added focus on imported products and past cost reduction efforts, partially
offset by the impact of permanently closing two manufacturing facilities and
implementing selected discount programs designed to stimulate sales. Operating
profits also improved due to the adoption of Statement of Financial Accounting
Standards No. 142 which eliminated the amortization of goodwill and other
intangible assets. Such amortization for the comparable periods of 2001 totaled
$3.4 million in the quarter and $10.2 million for the nine months.
Interest expense totaled $5.4 million and $16.5 million for the three months and
nine months ended September 30, 2002, respectively, compared to $5.2 million and
$17.5 million for the prior year comparable periods. The decrease in interest
expense during the nine month period resulted from lower interest rates,
partially offset by the increase in long-term debt used to fund the acquisition
of HDM Furniture Industries, Inc.
The effective income tax rates were 35.6% and 33.5% for the three months ended
September 30, 2002 and September 30, 2001, respectively, and 35.5% and 33.7% for
the nine months ended September 30, 2002 and September 30, 2001, respectively.
The effective tax rate for the three months and nine months ended September 30,
2002 was less favorably impacted than the comparable prior year periods due in
part to a reduction in nontaxable income and income tax credits.
Net earnings per common share for basic and diluted were $0.44 and $0.44 for the
three months ended September 30, 2002, respectively, compared with $0.27 and
$0.27 for the same period last year, respectively. For the nine months ended
September 30, 2002 and September 30, 2001, net earnings per common share for
basic and diluted were $1.61 and $1.59, respectively, and $0.70 and $0.69,
respectively. Average common and common equivalent shares outstanding used in
the calculation of net earnings per common share on a basic and diluted basis
were 55,629,000 and 56,176,000, respectively, for the three months ended
September 30, 2002, and 50,504,000 and 51,466,000, respectively, for the three
months ended September 30, 2001. For the nine months ended September 30, 2002
and September 30, 2001, average common and common equivalent shares outstanding
used in the calculation of net earnings per common share on a basic and diluted
basis were 55,461,000 and 56,458,000, respectively, and 50,275,000 and
51,255,000, respectively.
FINANCIAL CONDITION
Working Capital
Cash and cash equivalents at September 30, 2002 amounted to $18.2 million,
compared with $15.7 million at December 31, 2001. During the nine months ended
September 30, 2002, net cash provided by operating activities totaled $104.0
million, net cash used by investing activities totaled $35.3 million and net
cash used by financing activities totaled $66.2 million.
Working capital was $634.2 million at September 30, 2002, compared with $603.4
million at December 31, 2001. The current ratio was 3.9-to-1 at September 30,
2002, compared to 4.4-to-1 at December 31, 2001.
Financing Arrangements
As of September 30, 2002, long-term debt consisted of the following, in
millions:
Revolving credit facility (unsecured) $370.0
Other 4.8
------
$374.8
To meet short-term capital and other financial requirements, the Company
maintains a $630.0 million revolving credit facility with a group of financial
institutions. The revolving credit facility allows for the issuance of letters
of credit and cash borrowings. Letter of credit outstandings are limited to no
more than $150.0 million, with cash borrowings limited only by the facility's
maximum availability less letters of credit outstanding. On September 30, 2002,
there were $370.0 million in cash borrowings and $34.6 million in letters of
credit outstanding.
The facility requires the Company to meet certain financial covenants including
a minimum consolidated net worth and maximum leverage ratio. As of September 30,
2002, the Company was in compliance with all financial covenants.
Cash borrowings under the revolving credit facility bear interest at a base rate
or at an adjusted Eurodollar rate plus an applicable margin which varies,
depending upon the type of loan the Company executes. The applicable margin over
the base rate and Eurodollar rate is subject to adjustment based upon achieving
certain credit ratings. At September 30, 2002, loans outstanding under the
revolving credit facility consisted of $370.0 million based on the adjusted
Eurodollar rate, which in conjunction with the interest rate swaps (used to
hedge $300.0 million of the floating rate debt), have a weighted average
interest rate of 5.11%.
The Company believes that cash generated from operations, together with its
revolving credit facility, will be adequate to meet liquidity requirements for
the foreseeable future.
Recently Issued Statements of Financial Accounting Standards
On January 1, 2002 the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142
requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead be tested for impairment at least annually.
Intangible assets with definite useful lives will continue to be amortized over
their respective estimated useful lives. The Company estimates the impact of
discontinuing the amortization of intangible assets will be to increase annual
earnings by approximately $0.20 per share.
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
143, "Accounting for Asset Retirement Obligations." This statement applies to
legal obligations associated with the retirement of tangible long-lived assets
and is effective for the Company in 2003. Management does not believe adoption
of this statement will have a material impact on the Company's financial
statements.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment of
long-lived assets." This statement addresses the impairment or disposal of
long-lived assets and the reporting of discontinued operations and was adopted
by the Company on January 1, 2002. The adoption of this statement did not have a
material impact on the Company's financial statements.
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". This statement requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. The statement
covers costs, including certain types of employee severance, associated with a
restructuring, discontinued operations, plant closing or other exit or disposal
activities. The statement is to be applied prospectively for such activities
started after December 31, 2002. Management does not believe the adoption of
this statement will have a material impact the Company's financial statements.
OUTLOOK
The Company continues to see generally weak consumer spending in its market
sector. Although orders in the middle-price points, particularly in upholstered
products, continue to show favorable year over year comparisons, the Company has
yet to see such a turnaround at the upper-end. However, the cost savings
initiatives undertaken during the last two years as well as the recent
acquisition position it for strong operating profit margin improvement. The
Company believes revenues for the fourth quarter should be up 23% (essentially
flat excluding the acquisition) from the fourth quarter of 2001. The Company is
currently projecting earnings per share of $0.50 to $0.55 for the fourth quarter
and $2.09-$2.14 for the full year.
Capital expenditures are forecasted at $45.0 - $48.0 million for 2002, with
depreciation expense anticipated to be approximately $50.0 million. Selling,
general and administrative expenses for the year are expected to be 17.50% -
17.75% of net sales. Based upon current interest rates and budgeted debt
reduction, interest expense is estimated to be approximately $22.0 million for
2002. For the full year, the Company believes it will generate in excess of
$100.0 million in cash flow from operations, the majority of which will be used
to reduce long-term debt.
FORWARD-LOOKING STATEMENTS
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The Company herein has made forward-looking statements within the meaning of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. These forward-looking statements include the Company's expected sales,
earnings per share, profit margins, and cash flows, the effects of certain
manufacturing realignments and other business strategies, the prospects for the
overall business environment, and other statements containing the words
"expects," "anticipates," "estimates," "believes," and words of similar import.
The Company cautions investors that any such forward-looking statements are not
guarantees of future performance and that certain factors may cause actual
results to differ materially from those in the forward-looking statements. Such
factors include:
An economic downturn could result in a decrease in our sales and earnings.
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The furniture industry has historically been subject to cyclical variations in
the general economy and to uncertainty regarding future economic prospects.
Economic downturns could affect consumer spending habits by decreasing the
overall demand for home furnishings. Such events would also impact retailers,
our primary customers, resulting in a decrease in our sales and earnings. For
example, the general economic slowdown during 2001 was in part responsible for
the 10.6% decrease in our sales in 2001.
Loss of market share due to competition would result in a decrease in future
sales and earnings.
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The residential furniture manufacturing business is highly competitive and
fragmented. We compete with many other manufacturers some of which offer widely
advertised, well known, branded products. The highly competitive nature of the
industry means we are constantly subject to the risk of losing market share to
those privately held competitors who have lower sales and profitability targets.
As a result, we may not be able to maintain or to raise the prices of our
products in response to such inflationary pressures 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.
Failure to anticipate or respond to changes in consumer tastes and fashion
trends in a timely manner could result in a decrease in future sales and
earnings.
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Residential furniture is a highly styled product subject to fashion trends and
geographic consumer tastes. Consumer tastes and fashion trends can change
rapidly. If we are unable to anticipate or respond to changes in consumer tastes
and fashion trends in a timely manner we may lose sales and be faced with excess
inventory (both raw materials and finished goods). Disposal of excess inventory
may result in a decrease in our sales and earnings.
Failure to achieve our projected mix of product sales could result in a decrease
in our future sales and earnings.
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Some of our products are sold for a higher profit than other of our products. An
increase in the sales of lower profit products at the expense of the sales of
higher profit products could result in a decrease in our earnings.
Business failures of large customers could result in a decrease in our future
sales and earnings.
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Although we have no customers who individually represent 10% or more of our
total annual sales the possibility of business failures of large customers could
result in a decrease in our future sales and earnings in that these sales are
difficult to replace. For example, in 2001 the failures of Homelife, Wards and
Heilig-Meyers were in part responsible for the 10.6% decrease in our sales.
Distribution realignments and cost savings programs can result in a decrease in
our near-term sales and earnings.
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At times it is necessary for us to discontinue certain relationships with
customers (retailers) who do not meet our growth and profitability standards.
Until a realignment is established, there can be a decrease in our near-term
sales and earnings. The continuation in 2001 of such a realignment program was
in part responsible for the 10.6% decrease in our sales in 2001. We continually
review our relationships with our customers (retailers) and future realignments
are possible based upon such ongoing reviews.
Manufacturing realignments could result in a decrease in our near-term earnings
- --------------------------------------------------------------------------------
We continually review our domestic manufacturing operations and offshore
(import) sourcing capabilities. Effects of periodic manufacturing realignments
and cost savings programs, such as our efforts to reduce domestic case goods
manufacturing capacity in 2001, could result in a decrease in our near-term
earnings 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 sourcing. Such actions may not be accomplished as quickly as
anticipated and the expected cost reductions may not be achieved in full.
Increased reliance on offshore (import) sourcing of various products could
adversely affect our ability to service customers which could result in a
decrease in our sales.
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During the last several years, we have been increasing our offshore (import)
capabilities to provide flexibility in product programs and pricing to meet
competitive pressures. The mix of our various product lines has been moving from
domestically manufactured to offshore sourced and was the primary reason for our
efforts to reduce domestic case goods manufacturing capacity in 2001. Offshore
(import) sourcing is subject to political instability in countries where
contractors and suppliers are located and possible delay due to managing at a
distance. Either could make it more difficult for us to service our customers.
Other risks include the imposition of regulations and quotas relating to
imports; duties, taxes and other charges on imports; and, significant
fluctuation of the value of the U.S. dollar against foreign currencies, all of
which could increase costs and decrease earnings.
Fluctuations in the price, availability and quality of raw materials could cause
delay which could result in a decrease in our sales and increase costs which
would result in a decrease in our earnings.
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Fluctuations in the price, availability and quality of the raw materials that 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 (retailers).
Inability to meet the demands of our customers could result in the loss of
future sales. We use various types of wood, fabrics, leathers, glass,
upholstered filling material and other raw materials in manufacturing our
furniture. The costs to manufacture our 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 the costs of higher raw
materials due to competitive and marketing pressures.
A successful product liability claim brought against us in excess of available
insurance coverage would result in a decrease in earnings and any claim or
product recall that results in significant adverse publicity against us may
result in a decrease in our sales and earnings.
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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 that 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 that such coverage will
continue to be available on terms acceptable to us or that such coverage will be
adequate for liabilities actually incurred
Future acquisitions and investments could result in dilution to earnings per
share and a decrease in the valuation of our common stock.
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As part of our business strategy, we have made and expect to continue to make
acquisitions and investments in businesses that offer complementary products.
Risks commonly encountered in our 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 management
from our ongoing business. Consideration paid for future acquisitions could be
in the form of cash or stock or a combination thereof. Dilution to existing
stockholders and to earnings per share may result in connection with any such
future acquisition.
Impairment of goodwill and other intangible assets would result in a decrease in
our earnings.
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Current accounting rules require that goodwill and other intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually. The Company has substantial goodwill and other
intangible assets which based upon the outcome of the annual test could result
in the write-down of all or a portion of these assets and a corresponding
reduction in earnings and net worth.
Our current policy of not paying cash dividends means the only way to realize a
return on your investment in our common stock is to sell it at a profit.
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We do not anticipate paying cash dividends in the foreseeable future. Currently
the only way you will realize a return on your investment in our common stock is
to sell your stock at a profit.
Certain anti-takeover provisions and preferred stock could result in a decrease
in a potential acquirer's valuation of our common stock.
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Certain provisions of our Certificate of Incorporation could make it more
difficult for a third party to acquire control of our company, even if such
change in control would be beneficial to stockholders. Also, the Certificate of
Incorporation allows us to issue preferred stock without stockholder approval.
Such issuances could also make it more difficult for a third party to acquire
the Company.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risk from changes in interest rates. The
company's exposure to interest rate risk consists of its floating rate Secured
Credit agreement. This risk is managed using interest rate swaps to fix a
portion of the Company's floating rate long-term debt. Based upon a hypothetical
ten percent increase in interest rates the potential impact to the Company's net
earnings would be $0.1 million.
Item 4. Controls and Procedures
(a) The Company's chief executive officer and chief financial officer have
concluded that the Company's disclosure controls and procedures are
effective based on their evaluation of these controls and procedures within
90 days of the date of this report.
(b) There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect these controls
subsequent to the date of their evaluation.
PART II OTHER INFORMATION
Item 5. Other Information
On October 24, 2002 the Company announced that its Board of Directors
had authorized the repurchase of $100 million of its outstanding
common stock over the next twenty-four months.
The timing and amounts of purchases will depend on market conditions.
Repurchases will be effected from time to time in open market or
privately negotiated transactions. The shares of common stock will be
kept as treasury shares and will be used for general corporate
purposes.
Item 6. Exhibits and Reports on Form 8 -K
(a) 99.1 Press Release, dated October 24, 2002
99.2 Certification of W. G. Holliman, Chief Executive Officer of
the Company, Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.3 Certification of David P. Howard, Chief Financial Officer of
the Company, Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) A Form 8-K was filed on July 26, 2002 announcing second quarter
and first half of 2002 operating results and projections for
third quarter and full year sales and earnings. A Form 8-K was
filed on August 12, 2002 announcing the mailing of Statements
Under Oath of the Principal Executive Officer and Principal
Financial Officer of the Company Pursuant to Section 21(a)(1) of
the Securities Exchange Act of 1934. A Form 8-K was filed on
September 12, 2002 announcing projections for third quarter and
full year earnings per share. A Form 8-K was filed on October 25,
2002 announcing third quarter and nine months of 2002 operating
results and projections for the fourth quarter and full year
earnings per share.
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 Steven W. Alstadt
-----------------------------
Steven W. Alstadt
Controller and
Chief Accounting Officer
Date: November 13, 2002
CERTIFICATIONS
I, Wilbert G. Holliman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Furniture Brands
International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
November 13, 2002
By /s/ Wilbert G. Holliman
Wilbert G. Holliman
Chairman of the Board, President
and Chief Executive Officer
I, David P. Howard, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Furniture Brands
International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
November 13, 2002
By /s/ David P. Howard
David P. Howard
Vice President, Treasurer
and Chief Financial Officer
Exhibit 99.1
INFORMATION
FOR IMMEDIATE RELEASE
FURNITURE BRANDS INTERNATIONAL AUTHORIZES
COMMON STOCK REPURCHASES
St. Louis, Missouri, October 24, 2002 - The Board of Directors of Furniture
Brands International, Inc. (NYSE:FBN) announced today that it has authorized the
repurchase of $100 million of its outstanding common stock over the next
twenty-four months.
The timing and amounts of purchases will depend on market conditions.
Repurchases will be effected from time to time in open market or privately
negotiated transactions. The shares of common stock repurchased will be kept as
treasury shares and will be used for general corporate purposes.
W.G. (Mickey) Holliman, Chairman, President and Chief Executive Officer of
Furniture Brands International, stated: "The stock repurchase authority granted
by our Board two years ago has now expired. While our current intention is to
use our free cash to continue with our deleveraging program, this renewed
authority will give us the flexibility to consider stock purchases as market
conditions warrant."
Furniture Brands International is America's largest home furnishings
manufacturer, manufacturing and sourcing its products under six of the
best-known brand names in the industry - Broyhill, Lane, Thomasville, Henredon,
Drexel Heritage and Maitland-Smith. The company markets its products across a
broad spectrum of price categories and distributes its products through an
extensive system of independently owned national, regional and local retailers.
This release contains forward-looking statements within the meaning of the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include the company's expected earnings per
share, the prospects for the overall business environment, and other statements
containing the words "expects," "anticipates," "estimates," "believes," and
words of similar import. The company cautions investors that any such
forward-looking statements are not guarantees of future performance and that
certain factors may cause actual results to differ materially from those in the
forward-looking statements. Such factors may include: overall business and
economic conditions and growth in the furniture industry; changes in customer
spending patterns and demand for home furnishings; competitive factors, such as
design and marketing efforts by other furniture manufacturers; pricing
pressures; success of the marketing efforts of retailers and the prospects for
further customer failures; the company's success in furniture design and
manufacture; the effects of manufacturing realignments and cost savings
programs; and other risk factors listed from time to time in the company's
public releases and SEC reports, including but not limited to the most recent
reports on Forms 10-Q and 10-K. The company also cautions investors that our
forecast for the fourth quarter and the year 2002 represents our outlook only as
of this date, and we undertake no obligation to update or revise any
forward-looking statements, whether as a result of new developments or
otherwise.
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Furniture Brands International,
Inc. (the "Company") on Form 10-Q for the period ending September 30, 2002 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, W. G. Holliman, Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ W.G. Holliman
W. G. Holliman
Title: Chief Executive Officer
Furniture Brands International, Inc.
November 13, 2002
Exhibit 99.3
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Furniture Brands International,
Inc. (the "Company") on Form 10-Q for the period ending September 30, 2002 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, David P. Howard, Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ David P. Howard
David P. Howard
Title: Chief Financial Officer
Furniture Brands International, Inc.
November 13, 2002