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FBN > SEC Filings for FBN > Form 10-Q on 4-Nov-2011All Recent SEC Filings

Show all filings for FURNITURE BRANDS INTERNATIONAL INC

Form 10-Q for FURNITURE BRANDS INTERNATIONAL INC


4-Nov-2011

Quarterly Report


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

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

Forward-Looking Statements
Our Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is provided in addition to the accompanying unaudited consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. The various sections of this MD&A contain a number of forward-looking statements. Words such as "expects," "goals," "plans," "believes," "continues," "may," and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this and previous filings and particularly in the "Risk Factors" in Part II, Item 1A of this Form 10-Q. Overview
We are one of the world's leading designers, manufacturers, sourcers, wholesalers, and retailers of home furnishings. We market through a wide range of retail channels, from mass merchant stores to single-branded and independent dealers to specialized interior designers. We serve our customers through some of the best known and most respected brands in the furniture industry, including Broyhill, Lane, Thomasville, Drexel Heritage, Henredon, Hickory Chair, Pearson, Laneventure, Maitland-Smith, and Creative Interiors.
Through these brands, we offer (i) case goods, consisting of bedroom, dining room, and living room wood furniture, (ii) stationary upholstery products, consisting of sofas, loveseats, sectionals, and chairs, (iii) motion upholstered furniture, consisting of recliners and sleep sofas, (iv) occasional furniture, consisting of wood, metal and glass tables, accent pieces, home entertainment centers, and home office furniture, and (v) decorative accessories and accent pieces. Our brands are featured in nearly every price and product category in the residential furniture industry.
Each of our brands targets specific customers in relation to style and price point.
Broyhill offers collections of mid-priced furniture, including both wood furniture and upholstered products, in a wide range of styles and product categories including bedroom, dining room, living room, occasional, youth, home office, and home entertainment.

Lane focuses primarily on mid-priced upholstered furniture, including motion and stationary furniture with an emphasis on home entertainment and family rooms.

Thomasville has both wood furniture and upholstered products in the mid- to upper-price ranges and also offers ready-to-assemble furniture under the Creative Interiors brand name, as well as case goods for the hospitality and contract markets.

Drexel Heritage markets both casegoods and upholstered furniture in categories ranging from mid- to premium-priced.

Henredon specializes in both wood furniture and upholstered products in the premium-price category.

Hickory Chair manufactures premium-priced wood and upholstered furniture, offering traditional and modern styles.

Pearson offers contemporary and traditional styles of finely tailored upholstered furniture in the premium-price category.

Laneventure markets a premium-priced outdoor line of wicker, rattan, bamboo, exposed aluminum, and teak furniture, as well as casual indoor home furnishings.

Maitland-Smith designs and manufactures premium hand crafted, antique-inspired furniture, accessories, and lighting, utilizing a wide range of unique materials. Maitland-Smith markets under both the Maitland-Smith and LaBarge brand names.

Business Trends and Strategy
Sales decreased 5.1% in the third quarter of 2011 compared to the third quarter of 2010 and decreased 3.6% in the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. Based on these comparative periods, sales for our brands that specialize in premium-priced offerings generally outperformed sales for our brands that focus more on mid-priced offerings and sales of upholstery products generally outperformed sales of case goods. We believe sales continue to be depressed as a result of continued weak retail conditions in the residential furniture industry. We believe these weak retail conditions are primarily the result of low existing home sales, low new home sales, wavering consumer


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confidence and a number of other ongoing factors in the global economy that have negatively impacted consumers' discretionary spending. These other ongoing factors include lower home values, prolonged foreclosure activity throughout the country, continued high levels of unemployment, and reduced access to consumer credit. These factors are outside of our control, but have a direct impact on our sales due to resulting weak levels of consumer confidence and reduced consumer spending.
We have been taking significant steps, some of which we began before the initial downturn in the economy, and we continue to take actions to reduce costs, preserve cash, and drive profitable sales. These actions have resulted in reduced selling, general and administrative expenses, improvements in gross margin, and lower levels of debt.
Our entire organization continues to be focused on bringing the best products to the market, increasing top-line sales, continuing to take costs out of the business, and strengthening our financial position for the future. In 2011, our initiatives include:
More product launches driven by a multi-stage product development process that blends the decades of experience of our designers, merchandisers, marketers and dealers with proven consumer research methodologies that are new to the furniture industry. This process will result in more offerings with clean contemporary looks, more updated-traditional offerings, as well as introductions at lower price points.

Increased support of our retail partners with a larger investment in national television and print advertising, innovative promotions and a web presence that drives consumer traffic to their locations.

Further reductions to manufacturing costs through the implementation of lean and cellular manufacturing methods and through strategic sourcing relationships with suppliers that leverage the company's scale.

Completing our investments to expand our manufacturing facilities in Indonesia and develop a new facility in Mexico, both of which we expect will deliver components and finished product at a lower cost than would otherwise be possible.

Consolidating operations and closing and selling excess manufacturing, warehouse, and office properties.

While we believe that these initiatives will positively impact our financial performance, and particularly benefit our sales performance as economic conditions improve, we remain cautious about future sales as we cannot predict how long the residential furniture retail environment will remain weak.


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Results of Operations
As an aid to understanding our results of operations on a comparative basis, the
following table has been prepared to set forth certain statement of operations
and other data for the three and nine months ended September 30, 2011 and 2010:
                                                   Three Months Ended September 30,
                                                  2011                          2010
                                                          % of                          % of
(in millions, except per share
data)                                    Dollars       Net Sales       Dollars       Net Sales
Net sales                             $     258.0         100.0  %   $    272.0         100.0  %
Cost of sales                               200.5          77.7           204.6          75.2
Gross profit                                 57.5          22.3            67.4          24.8
Selling, general, and
administrative expenses                      75.0          29.1            70.7          26.0
Impairment of trade names                     9.0           3.5               -             -
Operating loss                              (26.5 )       (10.3 )          (3.3 )        (1.2 )
Interest expense                              0.9           0.3             0.8           0.3
Other income, net                               -             -            (0.4 )        (0.1 )
Loss before income tax benefit              (27.3 )       (10.6 )          (4.5 )        (1.7 )
Income tax benefit                           (2.7 )        (1.1 )%         (2.4 )        (0.9 )
Net loss                              $     (24.5 )        (9.5 )%   $     (2.1 )        (0.8 )%
Net loss per common share - basic
and diluted                           $     (0.45 )                  $    (0.04 )


                                                   Nine Months Ended September 30,
                                                 2011                          2010
                                                         % of                          % of
(in millions, except per share
data)                                   Dollars       Net Sales       Dollars       Net Sales
Net sales                             $    852.1         100.0  %   $    883.8         100.0  %
Cost of sales                              643.6          75.5           657.6          74.4
Gross profit                               208.5          24.5           226.2          25.6
Selling, general, and
administrative expenses                    233.8          27.4           225.8          25.5
Impairment of trade names           `        9.0           1.1               -             -
Operating earnings (loss)                  (34.3 )        (4.0 )           0.5           0.1
Interest expense                             2.6           0.3             2.4           0.3
Other income, net                            0.9           0.1             0.3             -
Loss before income tax benefit             (36.0 )        (4.2 )          (1.5 )        (0.2 )
Income tax benefit                          (1.8 )        (0.2 )          (7.2 )        (0.8 )
Net earnings (loss)                   $    (34.3 )        (4.0 )%   $      5.7           0.6  %
Net earnings (loss) per common
share - basic and diluted             $    (0.62 )                  $     0.11

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


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

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

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


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Retail Results of Operations
Based on the structure of our operations and management as well as the
similarity of the economic environment in which our significant operations
compete, we have only one reportable segment. However, as a supplement to the
information required in this Form 10-Q, we have summarized the following results
of our company-owned Thomasville Home Furnishings Stores and all other
company-owned retail locations:
                                              Thomasville Stores (a)                All Other Retail Locations (b)
                                         Three Months Ended September 30,          Three Months Ended September 30,
(Dollars in millions)                        2011                  2010                2011                  2010
Net sales                             $         26.7         $         27.0     $          9.3         $          9.9
Cost of sales                                   15.2                   16.4                6.2                    6.2
Gross profit                                    11.4                   10.5                3.0                    3.8
Selling, general and administrative
expenses - open stores                          15.3                   15.3                4.3                    5.3
Operating loss - open stores (c)      $         (3.9 )       $         (4.7 )   $         (1.3 )       $         (1.5 )
Selling, general and administrative
expenses - closed stores                           -                      -                2.8                    1.6
Operating loss (c)                    $         (3.9 )       $         (4.7 )   $         (4.1 )       $         (3.1 )
Number of open stores and showrooms
at end of period                                  49                     51                 18                     19
Number of closed locations at end
of period                                          -                      -                 26                     26
Same-store-sales (d):
Percentage increase                                5 %                   22 %              (e)                    (e)
Number of stores                                  45                     42



                                              Thomasville Stores (a)                All Other Retail Locations (b)
                                          Nine Months Ended September 30,           Nine Months Ended September 30,
(Dollars in millions)                         2011                  2010               2011                  2010
Net sales                             $           82.5         $       79.0     $         28.8         $         30.0
Cost of sales                                     48.4                 45.9               18.6                   18.5
Gross profit                                      34.1                 33.1               10.2                   11.4
Selling, general and administrative
expenses - open stores                            47.3                 46.4               14.5                   16.7
Operating loss - open stores (c)      $          (13.2 )       $      (13.3 )   $         (4.3 )       $         (5.3 )
Selling, general and administrative
expenses - closed stores                             -                    -                5.1                    3.5
Operating loss (c)                    $          (13.2 )       $      (13.3 )   $         (9.4 )       $         (8.8 )
Same-store-sales (d):
Percentage increase                                 10 %                 21 %              (e)                    (e)
Number of stores                                    48                   42


____________________________


a) This supplemental data includes company-owned Thomasville retail store locations that were open during the three or nine months ended September 30, 2011 and 2010.

b) This supplemental data includes all company-owned retail locations other than open Thomasville stores ("all other retail locations"). Selling, general and administrative expenses - closed stores includes occupancy costs, lease termination costs, and costs associated with closed store lease liabilities. Closed stores have no net sales, cost of sales, or gross profit.

c) Operating loss does not include our wholesale profit on the above retail net sales.

d) The same-store sales percentage is based on sales from stores that have been in operation and company-owned for at


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

In addition to the above company-owned stores, there were 62 and 71 Thomasville dealer-owned stores at September 30, 2011 and 2010, respectively.

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


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

On April 27, 2011, we refinanced our revolving credit facility with a group of financial institutions. The amended and restated facility is a five-year ABL with commitments to lend up to $250.0 million. The thresholds at which certain covenants and restrictions become effective were lessened in this amended and restated ABL, resulting in additional availability to borrow. Under this amended and restated ABL we are also no longer subject to certain representation requirements regarding our pension underfunded status, for which we previously had obtained a waiver.
The ABL provides for the issuance of letters of credit and cash borrowings, is secured by our accounts receivable, inventory and cash and is guaranteed by all of our domestic subsidiaries. The issuance of letters of credit and cash borrowings are limited by the level of a borrowing base consisting of eligible accounts receivable and inventory.
The amount of the borrowing base above the current level of letters of credit and cash borrowings outstanding represents the total borrowing availability. Certain covenants and restrictions, including cash dominion, weekly borrowing base reporting, and a fixed charge coverage ratio, would become effective if total availability fell below various thresholds. If total availability falls below $42.0 million, we are subject to cash dominion and weekly borrowing base reporting. If total availability falls below $35.0 million, we are also subject to the fixed charge coverage ratio, which we currently do not meet. As of September 30, 2011, total availability was $74.3 million. Therefore, as of September 30, 2011, we have $32.3 million of excess availability without being subject to the cash dominion and weekly reporting covenants of the agreement and $39.3 million of excess availability before we would be subject to the fixed charge coverage ratio.
We intend to continue to manage our availability to remain above the $42.0 . . .

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