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.

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.

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

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.

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

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.

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. . . .