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EX-32.2 - CFO 1350 CERTIFICATION - FBI WIND DOWN, INC.fbn-ex322_2012929xq2.htm

 

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 29, 2012
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.
56,327,331 shares as of October 26, 2012
 



FURNITURE BRANDS INTERNATIONAL, INC.
TABLE OF CONTENTS

 
Page
 
 
 
 
 
 
Consolidated Financial Statements (unaudited):
 
 
 
 
 
September 29, 2012
 
December 31, 2011
 
 
 
 
 
Three and Nine Months Ended September 29, 2012
 
Three and Nine Months Ended September 30, 2011
 
 
 
 
 
Three and Nine Months Ended September 29, 2012
 
Three and Nine Months Ended September 30, 2011
 
 
 
 
 
Nine Months Ended September 29, 2012
 
Nine Months Ended September 30, 2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trademarks and trade names referred to in this filing include Broyhill, Lane, Thomasville, Drexel Heritage, Henredon, Hickory Chair, Pearson, Lane Venture, Maitland-Smith, La Barge, 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 29,
2012
 
December 31,
2011
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
15,512

 
$
25,387

Receivables, less allowances of $10,795 ($10,413 at December 31, 2011)
120,282

 
107,974

Inventories
259,761

 
228,155

Prepaid expenses and other current assets
11,830

 
9,490

Total current assets
407,385

 
371,006

Property, plant, and equipment, net
106,742

 
115,803

Trade names
77,508

 
77,508

Other assets
53,945

 
50,179

Total assets
$
645,580

 
$
614,496

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable
$
140,028

 
$
85,603

Accrued employee compensation
17,080

 
15,161

Other accrued expenses
36,624

 
38,390

Total current liabilities
193,732

 
139,154

Long-term debt
83,335

 
77,000

Deferred income taxes
20,407

 
19,330

Pension liability
175,330

 
185,991

Other long-term liabilities
58,059

 
60,740

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 29, 2012 and December 31, 2011
60,615

 
60,615

Paid-in capital
187,456

 
202,471

Retained earnings
160,681

 
185,053

Accumulated other comprehensive loss
(196,856
)
 
(201,853
)
Treasury stock at cost 4,320,723 shares at September 29, 2012 and 5,071,125 shares at December 31, 2011
(97,179
)
 
(114,005
)
Total shareholders’ equity
114,717

 
132,281

Total liabilities and shareholders’ equity
$
645,580

 
$
614,496

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
 
Nine Months Ended
 
September 29, 2012
 
September 30, 2011
 
September 29, 2012
 
September 30, 2011
Net sales
$
255,639

 
$
258,047

 
$
808,371

 
$
852,128

Cost of sales
201,399

 
200,506

 
618,681

 
643,623

Gross profit
54,240

 
57,541

 
189,690

 
208,505

Selling, general, and administrative expenses
70,064

 
74,995

 
209,898

 
233,849

Impairment of trade names

 
9,000

 

 
9,000

Operating loss
(15,824
)
 
(26,454
)
 
(20,208
)
 
(34,344
)
Interest expense
1,798

 
862

 
3,388

 
2,581

Other income, net
38

 
23

 
341

 
918

Loss before income tax expense (benefit)
(17,584
)
 
(27,293
)
 
(23,255
)
 
(36,007
)
Income tax expense (benefit)
397

 
(2,747
)
 
1,117

 
(1,754
)
Net loss
$
(17,981
)
 
$
(24,546
)
 
$
(24,372
)
 
$
(34,253
)
Net loss per common share — basic and diluted:
$
(0.33
)
 
$
(0.45
)
 
$
(0.44
)
 
$
(0.62
)
 
 
 
 
 
 
 
 
Weighted average shares of common stock outstanding - Basic
55,212

 
54,990

 
55,128

 
54,909

Weighted average shares of common stock outstanding - Diluted
55,212

 
54,990

 
55,128

 
54,909

See accompanying notes to consolidated financial statements.


4



FURNITURE BRANDS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2012
 
September 30, 2011
 
September 29, 2012
 
September 30, 2011
Net loss
$
(17,981
)
 
$
(24,546
)
 
$
(24,372
)
 
$
(34,253
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
   Pension liability
1,788

 
1,058

 
5,364

 
3,174

   Foreign currency translation
6

 
(1,118
)
 
(366
)
 
138

   Other comprehensive income (loss), before tax
1,794

 
(60
)
 
4,998

 
3,312

   Income tax expense

 

 

 

   Other comprehensive income (loss), net of tax
1,794

 
(60
)
 
4,998

 
3,312

Total comprehensive loss
$
(16,187
)
 
$
(24,606
)
 
$
(19,374
)
 
$
(30,941
)
See accompanying notes to consolidated financial statements.



5


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

 
Nine Months Ended
 
September 29, 2012
 
September 30, 2011
Cash flows from operating activities:
 
 
 
Net loss
$
(24,372
)
 
$
(34,253
)
Adjustments to reconcile net loss to net cash used by operating activities:
 
 
 
Depreciation and amortization
14,754

 
16,726

Compensation expense related to stock option grants and restricted stock awards
1,740

 
1,832

Impairment of trade names

 
9,000

Other, net
1,867

 
(782
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(12,712
)
 
4,437

Income taxes receivable
405

 
482

Inventories
(31,606
)
 
812

Prepaid expenses and other assets
(1,678
)
 
754

Accounts payable and other accrued expenses
54,835

 
2,361

Deferred income taxes
819

 
(2,863
)
Other long-term liabilities
(7,197
)
 
(5,994
)
Net cash used by operating activities
(3,145
)
 
(7,488
)
Cash flows from investing activities:
 
 
 
Additions to property, plant, equipment, and software
(4,964
)
 
(24,049
)
Proceeds from the disposal of assets
197

 
3,119

Net cash used in investing activities
(4,767
)
 
(20,930
)
Cash flows from financing activities:
 
 
 
Payments of long-term debt
(77,000
)
 

Payments for debt issuance costs
(8,366
)
 
(2,423
)
Proceeds from the issuance of the term loan
50,000

 

Proceeds from the issuance of long term debt
33,335

 

Other
68

 
68

Net cash used by financing activities
(1,963
)
 
(2,355
)
Net decrease in cash and cash equivalents
(9,875
)
 
(30,773
)
Cash and cash equivalents at beginning of period
25,387

 
51,964

Cash and cash equivalents at end of period
$
15,512

 
$
21,191

Supplemental disclosure:
 
 
 
Cash refunds for income taxes, net
$
147

 
$
340

Cash payments for interest expense
$
2,691

 
$
2,223

See accompanying notes to consolidated financial statements.


6


FURNITURE BRANDS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in thousands)
(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 2011 Annual Report on Form 10-K, filed with the Securities and Exchange Commission ("SEC"). 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 financial statements have been prepared on a condensed basis pursuant to the rules and regulations of the SEC, and accordingly, certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. 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, 2011. 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 29, 2012 are not necessarily indicative of the results which will occur for the full fiscal year ending December 29, 2012.
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
The Company has been executing plans to improve its performance. These measures include consolidating and reconfiguring manufacturing facilities, warehouses, and processes to eliminate waste and improve efficiency, managing product inventory levels better to reflect consumer demand, transforming transportation methods to be more cost effective, exiting unprofitable retail locations, limiting credit exposure to weak retail partners, and discontinuing unprofitable lines of business and licensing arrangements. In addition, the Company has 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
 
Nine Months Ended
 
September 29, 2012
 
September 30, 2011
 
September 29, 2012
 
September 30, 2011
Restructuring charges:
 
 
 
 
 
 
 
Facility costs to shutdown, cleanup, and vacate
$

 
$
669

 
$

 
$
1,484

Termination benefits
235

 
7,495

 
1,741

 
7,606

Closed store occupancy and lease costs
526

 
2,831

 
2,029

 
5,096

Gain on the sale of assets

 
(837
)
 

 
(1,276
)
 
761

 
10,158

 
3,770

 
12,910

Impairment charges
696

 

 
1,173

 
1,102

 
$
1,457

 
$
10,158

 
$
4,943

 
$
14,012

 
 
 
 
 
 
 
 
Statement of Operations classification:
 
 
 
 
 
 
 
Cost of sales
$
85

 
$
2,759

 
$
(442
)
 
$
3,265

Selling, general, and administrative expenses
1,372

 
7,399

 
5,385

 
10,747

 
$
1,457

 
$
10,158

 
$
4,943

 
$
14,012


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

7


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 $11,896 at September 29, 2012 and $13,553 at December 31, 2011.
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 29, 2012
 
September 30, 2011
Accrual for closed store lease liabilities at beginning of period
$
14,583

 
$
18,909

Charges (credit) to expense
(49
)
 
1,684

Less cash payments
1,714

 
2,065

Accrual for closed store lease liabilities at end of period
$
12,820

 
$
18,528

At September 29, 2012, $4,636 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 29, 2012 are as follows:
 
 
Minimum
 
 
Lease
 
 
Payments —
Year
 
Closed Stores
2012
 
$
1,664

2013
 
6,670

2014
 
6,206

2015
 
3,569

2016
 
1,085

thereafter
 
357

 
 
$
19,551

Activity in the accrual for termination benefits was as follows:
 
Three Months Ended
 
September 29, 2012
 
September 30, 2011
Accrual for termination benefits at beginning of period
$
1,662

 
$
2,838

Charges to expense
235

 
7,495

Less cash payments
245

 
1,846

Accrual for termination benefits at end of period
$
1,652

 
$
8,487

The accrual for termination benefits at September 29, 2012 is classified as Accrued Employee Compensation.

8



3.
INVENTORIES
Inventories are summarized as follows:
 
September 29,
2012
 
December 31,
2011
Finished products
$
149,569

 
$
132,508

Work-in-process
18,611

 
15,585

Raw materials
91,581

 
80,062

 
$
259,761

 
$
228,155

4.
PROPERTY, PLANT, AND EQUIPMENT
Major classes of property, plant, and equipment consist of the following:
 
September 29,
2012
 
December 31,
2011
Land
$
9,447

 
$
8,861

Buildings and improvements
178,015

 
179,999

Machinery and equipment
192,774

 
194,055

 
380,236

 
382,915

Less accumulated depreciation
273,494

 
267,112

 
$
106,742

 
$
115,803

Depreciation expense was $3,698 and $4,069 for the three months ended September 29, 2012 and September 30, 2011, respectively. Depreciation expense was $11,659 and $13,212 for the nine months ended September 29, 2012 and September 30, 2011, respectively.

9





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 deemed it necessary to test 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. 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 29,
2012
 
December 31,
2011
Term Loan
$
50,000

 
$

Asset-based loan
33,335

 
77,000

Less: current maturities

 

Long-term debt
$
83,335

 
$
77,000


On September 25, 2012 (the "effective date"), the Company refinanced its existing asset-based credit facility (the "Old Credit Agreement") by entering into a new five-year asset based credit facility (the “ABL”) with a group of financial institutions and a new five-year Term Loan Agreement (the “Term Loan”) in order to provide financial flexibility and increase the Company's borrowing availability. The new ABL is an asset-based revolving facility with a commitment of $200,000 subject to a borrowing base of eligible accounts receivable and inventory. The ABL also includes an accordion feature that will allow the Company to increase the ABL by up to $50,000 subject to securing additional commitments from the lenders. The Term Loan is a $50,000 secured facility. Capitalized fees incurred in the third quarter of 2012 for both of these facilities totaled $8,366.

On September 26, 2012, the Company borrowed funds under the ABL and Term Loan to pay in full the existing indebtedness in the amount of $77,000 owed by the Company pursuant to the terms of the Old Credit Agreement. The Old Credit Agreement was an asset-based revolving facility provided by a syndicate of financial institutions with a commitment of $250,000, subject to a borrowing base of eligible accounts receivable and inventory. Capitalized fees of $927 related to the Old Credit Agreement were written off and are reflected in interest expense in the current period.

Asset-Based Revolving Credit Facility
The ABL provides for the issuance of letters of credit and cash borrowings, and is secured by a first priority lien on the Company's accounts receivable, inventory, cash deposit and securities accounts and certain related assets (the “ABL Collateral”), and a second priority lien on the Term Loan priority collateral described below. 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, less a $25,000 availability block and certain reserves set forth in the ABL agreement (the “Borrowing Base”). The amount of the Borrowing Base above the current level of letters of credit and cash borrowings outstanding represents the total borrowing availability (“Total Availability”). Certain covenants and restrictions, including cash dominion and weekly borrowing base reporting would become effective if Total Availability falls below various thresholds. Weekly borrowing base reporting is

10


triggered if Total Availability is less than the greater of (i) $25,000 and (ii) 12.50% of the aggregate loan commitments. Cash Dominion is triggered if Total Availability is less than the greater of (i) 5.00% of the aggregate loan commitments and (ii) $10,000. We intend to manage our availability to remain above these thresholds, as we choose not to be subject to the cash dominion and weekly reporting covenants. The ABL contains certain negative covenants which limit or restrict the Company's ability to among other things, incur indebtedness and contingent obligations, make investments, intercompany loans and capital contributions, and dispose of property or assets. The ABL also includes customary representations and warranties of the Company, imposes on the Company certain affirmative covenants, and includes other typical provisions. The ABL does not contain any financial covenant tests.
The borrowing base is reported on the 25th day of each fiscal month based on the Company's financial position at the end of the previous month for the first six months following the effective date of the ABL, and on the 20th day of each fiscal month based on our financial position at the end of the previous month thereafter. As of September 29, 2012, based on our August 25, 2012 financial position, we had $94,200 of Total Availability to borrow under our ABL. 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.
The interest rate on cash borrowings outstanding under the ABL is either (i) a base rate (the greater of the prime rate, the Federal Funds Rate plus 0.50% and LIBOR plus 1%) or (ii) LIBOR; plus a margin. The applicable margin ranges from 1.25% to 2.00% for base rate borrowings and 2.25% to 3.00% for LIBOR borrowings. The initial applicable margin for the first six months following the effective date for base rate borrowings is 1.75% and for LIBOR borrowings is 2.75%. These margins fluctuate with average availability, and will be reduced by 0.25% if certain EBITDA performance measures are met by the Company. As of September 29, 2012, loans outstanding were $33,335 with a weighted average interest rate of 5.00%.
Term Loan Facility
The Term Loan is guaranteed by all of the Company's material domestic subsidiaries and is secured by a first priority lien on substantially all of the Company's intellectual property, real estate, fixtures, furniture and equipment and capital stock of the Company's subsidiaries, subject to certain exceptions, and a second priority lien on the ABL Collateral. The Term Loan is a five-year term loan which carries interest at LIBOR plus 12.00%. Interest on loans under the Term Loan will be payable monthly in arrears. As of September 29, 2012, the outstanding loan balance was $50,000 with a weighted average interest rate of 12.22%. If the Term Loan is prepaid, in whole or in part, prior to the maturity date, there will be a prepayment premium as set forth in the Term Loan Agreement.
The Term Loan contains certain negative covenants which limit or restrict the Company's ability to from among other things, incur indebtedness and contingent obligations, make investments, intercompany loans and capital contributions, and dispose of property or assets. The Term Loan also includes customary representations and warranties of the Company, imposes on the Company certain affirmative covenants, and includes other typical provisions.
The Term Loan contains several limitations on the aggregate amount that may be borrowed under the ABL. If the outstanding principal amount of the Term Loan exceeds the Term Loan borrowing base calculation set forth in the Term Loan agreement, then an additional availability reserve in the amount of such excess must be taken against the Borrowing Base under the ABL, which will reduce the Total Availability under the ABL. In addition, beginning in December of 2013, an additional availability reserve, ranging from $5,000 to $15,000, can be taken against the ABL Borrowing Base and thus reduce the Total Availability under the ABL if the Company fails to meet certain EBITDA performance measures set forth in the Term Loan agreement.
Under the terms of the ABL and the Term Loan, we are required to comply with certain negative and affirmative covenants, the most significant of which have been described above. The Company was in compliance with all applicable ABL and Term Loan covenants as of September 29, 2012 and anticipates compliance with all covenants for the foreseeable future.

7.
LIQUIDITY
The primary items impacting our liquidity in the future are cash from operations (some of which include the effects of our cost reduction activities, our management of working capital, expiration or buyout of dark store leases, and pension funding requirements), capital expenditures, acquisition of stores, sale of surplus assets, and borrowings or payments of debt.
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

11


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 29, 2012, we had $15,512 of cash and cash equivalents, $83,335 of debt outstanding, and subject to certain provisions as described in Note 6 Long-Term Debt above, Total Availability to borrow up to an additional $94,200 under the ABL. The breach of any of the provisions in the ABL or Term Loan could result in a default 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 agreements for the foreseeable future, deterioration in the economy and our results could cause us to not be in compliance with our ABL and Term Loan agreements.

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
 
Nine Months Ended
 
September 29, 2012
 
September 30, 2011
 
September 29, 2012
 
September 30, 2011
Defined benefit plans
$
1,593

 
$
790

 
$
4,779

 
$
2,370

Defined contribution plan (401k plan) — company match
666

 
1,494

 
2,095

 
4,768

Other
472

 
363

 
1,390

 
1,064

 
$
2,731

 
$
2,647

 
$
8,264

 
$
8,202

The components of net periodic pension expense for the Company-sponsored defined benefit plans are as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2012
 
September 30, 2011
 
September 29, 2012
 
September 30, 2011
Interest Cost
$
6,058

 
$
6,388

 
$
18,174

 
$
19,164

Expected return on plan assets
(6,268
)
 
(6,656
)
 
(18,804
)
 
(19,968
)
Net amortization and deferral
1,803

 
1,058

 
5,409

 
3,174

Net periodic pension expense
$
1,593

 
$
790

 
$
4,779

 
$
2,370

We currently provide retirement benefits to our domestic employees through a defined contribution plan. Through 2005, domestic 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.
The projected benefit obligation of our qualified defined benefit pension plan exceeded the fair value of plan assets by $165,393 at December 31, 2011, 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 Pension Relief Act”) which is designed to provide relief from the funding requirements of the Pension Protection Act of 2006. The Pension Relief 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. On July 6, 2012, the federal government passed the Moving Ahead for Progress in the 21st Century Act (“MAP-21”), which includes provisions designed to provide additional funding relief. MAP-21 allows plan sponsors to extend the period over which average interest rates are calculated, from two years to 25 years, for use in discounting pension liabilities and determining funding requirements. With the benefit of the Pension Relief Act and MAP-21, we have no ($0) remaining funding requirements for 2012 under the Employee Retirement Income Security Act of 1974 (“ERISA”) as of September 29, 2012.
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.


12


9.
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
 
Nine Months Ended
 
September 29, 2012
 
September 30, 2011
 
September 29, 2012
 
September 30, 2011
Weighted average shares used for basic earnings (loss) per common share
55,212

 
54,990

 
55,128

 
54,909

Effect of dilutive stock options and restricted stock

 

 

 

Weighted average shares used for diluted earnings (loss) per common share
55,212

 
54,990

 
55,128

 
54,909


For the three and nine months ended September 29, 2012 and September 30, 2011, all potentially dilutive securities are excluded from the calculation of diluted earnings (loss) per share as we generated a net loss for the periods. For the period ended September 29, 2012, securities excluded from the calculation of diluted earnings (loss) per share, because their inclusion would be antidilutive, include options to purchase 1,844 shares at an average price of $9.49 per share and 1,567 shares of restricted stock. For the period ended September 30, 2011, securities excluded from the calculation of diluted earnings (loss) per share, because their inclusion would be antidilutive, include options to purchase 2,428 shares at an average price of $10.69 per share and 1,120 shares of restricted stock.

10.
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 audit 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 state examinations in progress.
We recognized income tax expense of $397 and a benefit of $2,747 in the three months ended September 29, 2012 and September 30, 2011, respectively. We recognized income tax expense of $1,117 and a benefit of $1,754 in the nine months ended September 29, 2012 and September 30, 2011, respectively. In all periods, income tax expense 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.
At September 29, 2012, the deferred tax assets attributable to federal net operating loss carry forwards were $79,098, state net operating loss carry forwards were $29,840, federal tax credit carry forwards were $2,726, and state tax credit carry forwards were $389. 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.

13


11.
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.
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. Reasonably possible losses and amounts reserved for litigation and other legal proceedings are not material to our consolidated financial statements.
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 29, 2012, the total amounts remaining under lease guarantees were $4,045. Our estimate of probable future losses under these guaranteed leases is not material.


14


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 a world leader in designing, manufacturing, sourcing, and retailing home furnishings.  Furniture Brands markets products through a wide range of channels, including its own Thomasville retail stores and through interior designers, multi-line/independent retailers, and mass merchant stores.  Furniture Brands' portfolio includes some of the best known and most respected brands in the furniture industry, including Thomasville, Broyhill, Lane, Drexel Heritage, Henredon, Pearson, Hickory Chair, Lane Venture, Maitland-Smith, La Barge 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 reclining upholstery 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.
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.
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 lower and mid-priced upholstered furniture, including motion and stationary furniture with an emphasis on home entertainment and family rooms.
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.
Pearson offers finely tailored upholstered furniture in the premium-price category.
Hickory Chair manufactures premium-priced wood and upholstered furniture.
Lane Venture 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 0.9% in the third quarter of 2012 compared to the third quarter of 2011 and sales decreased 5.1% in the nine months ended September 29, 2012 compared to the nine months ended September 30, 2011. However, backlog increased at the end of the third quarter compared to a year ago. The backlog should benefit sales in the fourth quarter and following fiscal year. 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 low and mid-priced offerings and sales of upholstery products generally outperformed sales of case goods.

15


We believe sales continue to be depressed as a result of continued weak but improving retail conditions in the residential furniture industry. We believe these weak retail conditions are primarily the result of sustained weakness in the housing market, wavering consumer 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, persistent 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 to improve earnings, 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 over the past few years.
We have made tough cost elimination decisions to enable us to invest in new products and effective marketing as we focus on top-line sales for the future. We have consolidated our domestic operations with the closing and selling of excess manufacturing, warehouse, and office properties. We have completed 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. We have reduced our manufacturing costs through the implementation of lean manufacturing methods and through strategic sourcing relationships with suppliers that leverage our scale. Through these actions we have embraced a lean culture that we believe will allow us to compete better in the future. Our entire organization is focused on bringing the best products to the market, increasing top-line sales, fueling efficiency in all of our processes, and strengthening our financial position for the future.
In 2012, we introduced 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. Through this process, we are focused on identifying the right consumer target for each brand and ensuring that each brand portfolio offers the correct balance of contemporary, updated-traditional, and traditional furniture styling. With an improved cost structure, we are also delivering more product introductions at lower price points.
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.

16


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 29, 2012 and September 30, 2011:
 
 
Three Months Ended
 
 
September 29, 2012
 
September 30, 2011
 
 
 
 
% of
 
 
 
% of
(in millions, except per share data)
 
Dollars
 
Net Sales
 
Dollars
 
Net Sales
Net sales
 
$
255.6

 
100.0
 %
 
$
258.0

 
100.0
 %
Cost of sales
 
201.4

 
78.8

 
200.5

 
77.7

Gross profit
 
54.2

 
21.2

 
57.5

 
22.3

Selling, general, and administrative expenses
 
70.1

 
27.4

 
75.0

 

Impairment of trade names
 

 

 
9.0

 
3.5

Operating loss
 
(15.8
)
 
(6.2
)
 
(26.5
)
 
(10.3
)
Interest expense
 
1.8

 
0.7

 
0.9

 
0.3

Other income, net
 

 

 

 

Loss before income tax expense (benefit)
 
(17.6
)
 
(6.9
)
 
(27.3
)
 
(10.6
)
Income tax expense (benefit)
 
0.4

 
0.2

 
(2.7
)
 
(1.1
)
Net loss
 
$
(18.0
)
 
(7.0
)%
 
$
(24.5
)
 
(9.5
)%
Net loss per common share — basic and diluted
 
$
(0.33
)
 
 
 
$
(0.45
)
 
 
 
 
Nine Months Ended
 
 
September 29, 2012
 
September 30, 2011
 
 
 
 
% of
 
 
 
% of
(in millions, except per share data)
 
Dollars
 
Net Sales
 
Dollars
 
Net Sales
Net sales
 
$
808.4

 
100.0
 %
 
$
852.1

 
100.0
 %
Cost of sales
 
618.7

 
76.5

 
643.6

 
75.5

Gross profit
 
189.7

 
23.5

 
208.5

 
24.5

Selling, general, and administrative expenses
 
209.9

 
26.0

 
233.8

 
27.4

Impairment of trade names
 

 

 
9.0

 
1.1

Operating loss
 
(20.2
)
 
(2.5
)
 
(34.3
)
 
(4.0
)
Interest expense
 
3.4

 
0.4

 
2.6

 
0.3

Other income, net
 
0.3

 

 
0.9

 
0.1

Loss before income tax expense (benefit)
 
(23.3
)
 
(2.9
)
 
(36.0
)
 
(4.2
)
Income tax expense (benefit)
 
1.1

 
0.1

 
(1.8
)
 
(0.2
)
Net loss
 
$
(24.4
)
 
(3.0
)%
 
$
(34.3
)
 
(4.0
)%
Net loss per common share — basic and diluted
 
$
(0.44
)
 
 
 
$
(0.62
)
 
 

Three Months Ended September 29, 2012 Compared to Three Months Ended September 30, 2011
Net sales for the three months ended September 29, 2012 were $255.6 million compared to $258.0 million in the three months ended September 30, 2011, a decrease of $2.4 million, or 0.9%. The decrease in net sales was primarily the result of continued weak retail conditions and discounts, including continued clearance of older inventory and product that is being replaced.
Gross profit for the three months ended September 29, 2012 was $54.2 million compared to $57.5 million in the three months ended September 30, 2011. The decrease in gross profit was primarily due to a decrease in net sales driven by discounts, including the additional clearance of older inventory and product that is being replaced ($2.1 million), charges from inventory write-downs related to product rationalization ($1.9 million), and increased product write-downs ($1.6 million), partially offset by lower severance expense ($2.5 million). Gross margin for the three months ended September 29, 2012 decreased to 21.2% compared to

17


22.3% in the three months ended September 30, 2011, primarily due to discounts, including the additional clearance of older inventory, and product that is being replaced, charges from inventory write-downs related to product rationalization and increased product write-downs, partially offset by lower severance expense.
Selling, general, and administrative expenses decreased to $70.1 million in the three months ended September 29, 2012 compared to $75.0 million in the three months ended September 30, 2011, primarily due to lower employee salaries, wages, and benefits and other effects from prior cost reduction activities ($6.7 million), and decreased severance expense ($4.7 million), partially offset by an increase in accrued incentive compensation cost ($3.9 million) and higher environmental costs ($3.1 million).
Impairment of trade names of $9.0 million in the third quarter of 2011 was driven primarily by a decrease in sales and an increase in the discount rate used in our valuation calculations compared to the previous measurement date.
Income tax expense was $0.4 million in the three months ended September 29, 2012 compared to a benefit of $2.7 million in the three months ended September 30, 2011. Income tax expense 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 recorded for 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.
Net loss per common share was $0.33 for the three months ended September 29, 2012 compared to net loss per common share of $0.45 for the three months ended September 30, 2011, 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 55.2 million for the three months ended September 29, 2012 and 55.0 million for the three months ended September 30, 2011.
Nine Months Ended September 29, 2012 Compared to Nine Months Ended September 30, 2011
Net sales for the nine months ended September 29, 2012 were $808.4 million compared to $852.1 million in the nine months ended September 30, 2011, a decrease of $43.8 million or 5.1%. The decrease in net sales was primarily the result of continued weak retail conditions resulting in decreased sales and discounts, including the additional clearance of older inventory and product that is being replaced.
Gross profit for the nine months ended September 29, 2012 was $189.7 million compared to $208.5 million in the nine months ended September 30, 2011. The decrease in gross profit was primarily due to a decrease in net sales driven by discounts, including the additional clearance of older inventory and product that is being replaced ($27.8 million), charges from inventory write-downs related to product rationalization ($1.9 million) and increased freight expense ($2.5 million), partially offset by lower employee compensation and benefits and other effects from prior cost reduction activities ($10.1 million), and lower severance expense ($3.0 million). Gross margin for the nine months ended September 29, 2012 decreased to 23.5% compared to 24.5% in the nine months ended September 30, 2011, primarily due to discounts, including the additional clearance of older inventory and product that is being replaced and increased product write-downs, partially offset by lower employee compensation and benefits and other effects from prior cost reduction activities, and lower severance expense.
Selling, general, and administrative expenses decreased to $209.9 million in the nine months ended September 29, 2012 compared to $233.8 million in the nine months ended September 30, 2011, primarily due to lower employee salaries, wages, and benefits and other effects from prior restructuring activities ($20.4 million), lower advertising costs ($8.6 million), lower commissions ($3.4 million), and lower severance expense ($2.7 million), partially offset by an increase in accrued incentive compensation costs($7.0 million), higher pension expense ($2.8 million), and higher environmental costs ($2.9 million).
Impairment of trade names of $9.0 million in the third quarter of 2011 was driven primarily by a decrease in sales and an increase in the discount rate used in our valuation calculations during that period in the prior year.
Income tax expense for the nine months ended September 29, 2012 totaled $1.1 million compared to an income tax benefit of $1.8 million in the nine months ended September 30, 2011. Income tax expense 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 recorded for 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.
Net loss per common share was $0.44 and $0.62 for the nine months ended September 29, 2012 and September 30, 2011, 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 55.1 million for the nine months ended September 29, 2012 and 54.9 million for the nine months ended September 30, 2011.

18


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
(Dollars in millions)
 
September 29, 2012
 
September 30, 2011
 
September 29, 2012
 
September 30, 2011
Net sales
 
$
24.9

 
$
26.7

 
$
8.7

 
$
9.3

Cost of sales
 
14.5

 
15.2

 
5.5

 
6.2

Gross profit
 
10.4

 
11.4

 
3.2

 
3.0

Selling, general and administrative expenses — open stores
 
15.1

 
15.3

 
4.0

 
4.3

Operating loss — open stores (c)
 
(4.7
)
 
(3.9
)
 
(0.8
)
 
(1.3
)
Selling, general and administrative expenses — closed stores (d)
 

 

 
0.5

 
2.8

Operating loss - retail operations (c)
 
$
(4.7
)
 
$
(3.9
)
 
$
(1.3
)
 
$
(4.1
)
Number of open stores and showrooms at end of period
 
48

 
49

 
16

 
18

Number of closed locations at end of period
 

 

 
20

 
26

Same-store-sales (e):
 
 
 
 
 
 
 
 
Percentage increase/(decrease)
 
(4
)%
 
5
%
 
(f)

 
(f)

Number of stores
 
45

 
45

 
 
 
 

 
 
Thomasville Stores (a)
 
All Other Retail Locations (b)
 
 
Nine Months Ended
(Dollars in millions)
 
September 29, 2012
 
September 30, 2011
 
September 29, 2012
 
September 30, 2011
Net sales
 
$
78.0

 
$
82.5

 
$
25.4

 
$
28.8

Cost of sales
 
45.3

 
48.4

 
16.2

 
18.6

Gross profit
 
32.6

 
34.1

 
9.2

 
10.2

Selling, general and administrative expenses — open stores
 
44.7

 
47.3

 
12.1

 
14.5

Operating loss — open stores (c)
 
(12.1
)
 
(13.2
)
 
(2.9
)
 
(4.3
)
Selling, general and administrative expenses — closed stores (d)
 

 

 
1.9

 
5.1

Operating loss - retail operations (c)
 
$
(12.1
)
 
$
(13.2
)
 
$
(4.8
)
 
$
(9.4
)
Same-store-sales (e):
 
 
 
 
 
 
 
 
Percentage increase/(decrease)
 
(4
)%
 
10
%
 
(f)

 
(f)

Number of stores
 
45

 
48

 
 
 
 

____________________________
a)
This supplemental data includes company-owned Thomasville retail store locations that were open during the three or nine months ended September 29, 2012 and September 30, 2011.
b)
This supplemental data includes all company-owned retail locations other than open Thomasville stores (“all other retail locations”).
c)
Operating loss does not include our wholesale profit on the above retail net sales.
d)
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.

19


e)
The Thomasville same-store sales percentage is based on sales from stores that have been in operation and company-owned for at least 15 months, including any stores that had been opened for at least 15 months but were closed during the period.
f)
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 six Drexel Heritage stores, one Henredon store, one Broyhill store, and eight designer showrooms at September 29, 2012; and other than designer showrooms, 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 50 Thomasville dealer-owned stores at September 29, 2012.

Financial Condition and Liquidity
Liquidity
Cash and cash equivalents at September 29, 2012 totaled $15.5 million, compared to $25.4 million at December 31, 2011. Net cash used by operating activities totaled $3.1 million in the nine months ended September 29, 2012 compared with net cash used by operating activities of $7.5 million in the nine months ended September 30, 2011. The increase in cash flow from operations in the nine months ended September 29, 2012 compared to the nine months ended September 30, 2011 was primarily driven by a lower net loss for the period and an increase in accounts payable, partially offset by a greater increase in inventory and an increase in accounts receivable. Net cash used in investing activities for the nine months ended September 29, 2012 totaled $4.8 million compared with $20.9 million in the nine months ended September 30, 2011. The decrease in cash used in investing activities is primarily the result of investments in our infrastructure in the first half of 2011 with greater additions to property, plant, equipment, and software. Cash used in financing activities in the nine months ended September 29, 2012 was $2.0 million compared with $2.4 million of cash used in the nine months ended September 30, 2011. Cash used in financing activities for the nine months ended September 29, 2012 included payments of debt of $77.0 million, and debt issuance costs of $8.4 million, partially offset by new borrowings of $50.0 million on our new term loan and $33.3 million against our new asset-based credit facility ("ABL"). Cash used in financing activities for the nine months ended September 30, 2011 is primarily related to debt issuance costs of $2.4 million associated with the refinancing of our credit facility in the first half of 2011. Working capital was $213.7 million at September 29, 2012 compared to $231.9 million at December 31, 2011. We continue to manage our working capital to maximize liquidity and minimize borrowings under our ABL. Our efforts include actions to manage inventories to meet current demand, reduce expenses and capital expenditures, and extend payments to third parties through delayed payments and in some cases, negotiated new terms. The increase in accounts payable since the beginning of 2012 is primarily due to delayed payments. We expect delayed payments to decrease in the future through operations, and as needed, through additional borrowings under our ABL.
The primary items impacting our liquidity in the future are cash from operations (some of which include the effects of our cost reduction activities, our management of working capital, expiration or buyout of dark store leases, and pension funding requirements), capital expenditures, acquisition of stores, sale of surplus assets, and borrowings or payments of debt.
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 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 29, 2012, we had $15.5 million of cash and cash equivalents and $83.3 million of debt outstanding, and subject to certain provisions as described in "Financing Arrangements" below, Total Availability to borrow up to an additional $94.2 million under the ABL. The breach of any of the provisions in the ABL or term loan could result in a default 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 these agreements for the foreseeable future, deterioration in the economy and our results could cause us to not be in compliance with our ABL and term loan agreements.

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Financing Arrangements
Long-term debt consists of the following (in millions):
 
September 29,
2012
 
December 31,
2011
Term Loan
$
50.0

 
$

Asset-based loan
33.3

 
77.0

Less: current maturities

 

Long-term debt
$
83.3

 
$
77.0


On September 25, 2012, we refinanced our existing asset-based credit facility (the “Old Credit Agreement”) by entering into a new five-year asset based credit facility (the “ABL”) with a group of financial institutions and a new five-year Term Loan Agreement (the “Term Loan”) in order to provide financial flexibility and increase our borrowing availability. The new ABL is an asset-based revolving facility with a commitment of $200.0 million subject to a borrowing base of certain eligible accounts receivable and inventory. The ABL also includes an accordion feature that will allow us to increase the ABL by up to $50.0 million subject to securing additional commitments from the lenders. The Term Loan is a $50.0 million secured facility. Capitalized fees incurred in the third quarter of 2012 for both of these facilities totaled $8.4 million.

On September 26, 2012, we borrowed funds under the ABL and Term Loan to pay in full the existing indebtedness in the amount of $77.0 million owed by us under our Old Credit Agreement. The Old Credit Agreement was an asset-based revolving facility provided by a syndicate of financial institutions with a commitment of $250.0 million, subject to a borrowing base of eligible accounts receivable and inventory. Capitalized fees of $0.9 million related to the Old Credit Agreement were written off and are reflected in interest expense in the current period.

Asset-Based Revolving Credit Facility
The ABL provides for the issuance of letters of credit and cash borrowings, and is secured by a first priority lien on our accounts receivable, inventory, cash deposit and securities accounts and certain related assets (the “ABL Collateral”), and a second priority lien on the Term Loan priority collateral described below. 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, less a $25.0 million availability block and certain reserves set forth in the ABL agreement (the “Borrowing Base”). The amount of the Borrowing Base above the current level of letters of credit and cash borrowings outstanding represents the total borrowing availability (“Total Availability”). Certain covenants and restrictions, including cash dominion and weekly borrowing base reporting would become effective if Total Availability falls below various thresholds. Weekly borrowing base reporting is triggered if Total Availability is less than the greater of (i) $25.0 million and (ii) 12.50% of the aggregate loan commitments. Cash Dominion is triggered if Total Availability is less than the greater of (i) 5.00% of the aggregate loan commitments and (ii) $10.0 million. We intend to manage our availability to remain above these thresholds, as we choose not to be subject to the cash dominion and weekly reporting covenants. The ABL contains certain negative covenants which limit or restrict our ability to among other things, incur indebtedness and contingent obligations, make investments, intercompany loans and capital contributions, and dispose of property or assets. The ABL also includes customary representations and warranties , imposes certain affirmative covenants on us, and includes other typical provisions. The ABL does not contain any financial covenant tests.
The borrowing base is reported on the 25th day of each fiscal month based on our financial position at the end of the previous month for the first six months following the effective date of the ABL, and on the 20th day of each fiscal month based on our financial position at the end of the previous month thereafter. As of September 29, 2012, based on our August 25, 2012 financial position, we had $94.2 million of Total Availability to borrow under our ABL. 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.
The interest rate on cash borrowings outstanding under the ABL is either (i) a base rate (the greater of the prime rate, the Federal Funds Rate plus 0.50% and LIBOR plus 1.00%) or (ii) LIBOR; plus a margin. The applicable margin ranges from 1.25% to 2.00% for base rate borrowings and 2.25% to 3.00% for LIBOR borrowings. The initial applicable margin for the first six months following the effective date for base rate borrowings is 1.75% and for LIBOR borrowings is 2.75%. These margins fluctuate with average availability, and will be reduced by 0.25% if certain EBITDA performance measures are met by the Company. As of September 29, 2012, loans outstanding were $33.3 million with a weighted average interest rate of 5.00%.

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Term Loan Facility
The Term Loan is secured by a first priority lien on substantially all of our intellectual property, real estate, fixtures, furniture and equipment and capital stock of our subsidiaries, subject to certain exceptions, and a second priority lien on the ABL Collateral. The Term Loan is a five-year term loan which carries interest at LIBOR plus 12.00%. Interest on loans under the Term Loan will be payable monthly in arrears. As of September 29, 2012, the outstanding loan balance was $50.0 million with a weighted average interest rate of 12.22%. If the Term Loan is prepaid, in whole or in part, prior to the maturity date, there will be a prepayment premium as set forth in the Term Loan Agreement.
The Term Loan contains certain negative covenants which limit or restrict our ability to from among other things, incur indebtedness and contingent obligations, make investments, intercompany loans and capital contributions, and dispose of property or assets. The Term Loan also includes customary representations and warranties, imposes certain affirmative covenants on us, and includes other typical provisions.
The Term Loan contains several limitations on the aggregate amount that may be borrowed under the ABL. If the outstanding principal amount of the Term Loan exceeds the Term Loan borrowing base calculation set forth in the Term Loan agreement, then an additional availability reserve in the amount of such excess must be taken against the Borrowing Base under the ABL, which will reduce the Total Availability under the ABL. In addition, beginning in December of 2013, an additional availability reserve, ranging from $5.0 million to $15.0 million can be taken against the ABL Borrowing Base and thus reduce the Total Availability under the ABL if we fail to meet certain EBITDA performance measures set forth in the Term Loan agreement.
Under the terms of the ABL and the Term Loan, we are required to comply with certain negative and affirmative covenants, the most significant of which have been described above. We were in compliance with all applicable ABL and Term Loan covenants as of September 29, 2012 and anticipate compliance with all covenants 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 $165.4 million at December 31, 2011, 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, 2011 measurement date, we used a discount rate of 5.00% to measure the projected benefit obligation. If we had used a discount rate of 5.25% or 4.75%, the projected benefit obligation and underfunded status of our pension plan would have decreased or increased by approximately $14.0 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 Pension Relief Act”) which is designed to provide relief from the funding requirements of the Pension Protection Act of 2006. The Pension Relief 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. On July 6, 2012, the federal government passed the Moving Ahead for Progress in the 21st Century Act (“MAP-21”), which includes provisions designed to provide additional funding relief. MAP-21 allows plan sponsors to extend the period over which average interest rates are calculated, from two years to 25 years, for use in discounting pension liabilities and determining funding requirements. With the benefit of the Pension Relief Act and MAP-21, we have no ($0) remaining pension funding requirements for 2012 under the Employee Retirement Income Security Act of 1974 as of September 29, 2012.
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.

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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 29, 2012, the total amounts remaining under lease guarantees were $4.0 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, 2011.

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, term loan and interest income on our cash equivalents. A 10% increase on variable interest rates would result in additional interest expense of $0.1 million annually. We have no derivative financial instruments at September 29, 2012.

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 29, 2012, 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 29, 2012.
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 29, 2012, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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PART II

Item 1. Legal Proceedings
For a discussion of legal proceedings, refer to Part I, Note 12 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, 2011. 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, 2011, 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.
Our operations and performance depend significantly on economic conditions, particularly in the United States, and their impact on levels of existing home sales, new home construction, consumer confidence, and consumer discretionary spending. 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. 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.
A variety of factors including market returns and lower interest rates could significantly increase our funding obligations for our qualified pension plan, which would negatively impact our liquidity.
Our funding obligations for our qualified pension plan depend on the performance of assets held in the pension plan, changes in the discount rate used to measure the benefit obligation, and changes in government regulations applicable to our pension plan. The projected benefit obligation of our qualified defined benefit plan exceeded the fair value of plan assets by $165.4 million at December 31, 2011. A decrease in the fair value of plan assets, or a decrease in interest rates with a corresponding decrease in the discount rate used to measure the benefit obligation could significantly increase our funding obligation. 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 and the discount rate used to measure the benefit obligation have fluctuated significantly. Further disruptions in the financial markets could adversely impact our funding obligations in the future. In addition, the federal government has passed pension funding relief legislation which extended the time over which plan deficits may be funded and changed the method for calculating the discount rate. 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

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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.
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), 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 incur bad debt expense, 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 result in additional bad debt expense 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 would result 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. 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, creditworthiness, 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 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.

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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, or quality of raw materials or sourced product could cause delays in production and product delivery, could increase the costs of materials, and 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. We also source products from independent manufacturers. Our suppliers could choose to discontinue business with us or could change the terms under which they are willing to do business, such as price, minimum quantities, required lead times, or payment terms. Fluctuations in the price, availability, or quality of the raw materials we use in manufacturing or products we source could have a negative effect on our cost of sales and our ability to meet the demands of our customers. In the event of a significant disruption in our supply of raw materials or sourced product, we may not be able to locate alternative sources at an acceptable price or in a timely manner. Inability to meet the demands of our customers could result in the loss of future sales. In addition, if the price of raw materials increases we may not be able to pass along to our customers all or a portion of our higher costs due to competitive and market pressures, which could decrease our earnings and liquidity. Also, if payment terms with our suppliers and vendors decrease, it could adversely impact our liquidity and cash flow.
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. 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.

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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, as it has in past periods.
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 have a significant adverse impact on our liquidity and our business.
Our availability to borrow is dependent on certain provisions of our debt agreements, 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 agreements and could trigger acceleration of repayment, which would have a significant adverse impact to our liquidity and our business. 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. Also, our availability to borrow is dependent on our borrowing base calculations. Our borrowing base calculations are subject to periodic examinations by the financial institutions which could result in unfavorable adjustments to the borrowing base and our availability to borrow. Also, we maintain certain payment terms with our suppliers and vendors. If these payments terms decrease, it could adversely impact our liquidity and cash flow.
If we do not have sufficient cash reserves, cash flow from our operations, supplier or vendor payment terms, or borrowing capacity, 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.


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Any material disruption of our information systems could disrupt our business and adversely impact our financial condition.

We may be subject to information technology system failures, network disruptions and cybersecurity concerns. These may be caused by natural disasters, accidents, power disruptions, telecommunications failures, viruses, cyber incidents, or similar events or disruptions. System redundancy may be ineffective or inadequate, and our disaster recovery planning may not be sufficient for all eventualities. Such failures or disruptions could prevent retail store transactions, compromise our data or customer data, result in delays in the manufacturing and shipping of our products to customers or lost sales. System failures and disruptions could also impede transaction processing and financial reporting.


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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 June 18, 2012, between the Company and American Stock Transfer and Trust Company, LLC, as Rights Agent
 
 
 
8-K
 
June 19, 2012
 
4.1
10.1
 
2012-2013 Furniture Brands Drive For Results Incentive Plan

 
 
 
8-K
 
June 28, 2012
 
10.1
10.2
 
Credit Agreement dated September 25, 2012, by and among the Company, Broyhill Furniture Industries, Inc., HDM Furniture Industries, Inc., Lane Furniture Industries, Inc., Maitland-Smith Furniture Industries, Inc. and Thomasville Furniture Industries, Inc., the Other Credit Parties named therein, the Lenders party thereto, and General Electric Capital Corporation, as Administrative Agent.

 
 
 
8-K
 
September 27, 2012
 
10.1
10.3
 
Term Loan Agreement dated September 25, 2012, by and among the Company, Broyhill Furniture Industries, Inc., HDM Furniture Industries, Inc., Lane Furniture Industries, Inc., Maitland-Smith Furniture Industries, Inc. and Thomasville Furniture Industries, Inc., the Other Credit Parties named therein, the Lenders party thereto, and Pathlight Capital LLC, as Administrative Agent.

 
 
 
8-K
 
September 27, 2012
 
10.2
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
 
 
 
 
 
 


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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/ Vance C. Johnston  
 
 
Vance C. Johnston
 
 
Chief Financial Officer (On behalf of the registrant and as Principal Financial Officer)
 
 
Date: 
November 2, 2012


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