e10vq

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 March 31, 2011


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).

o 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 þ

Non-accelerated filer o
(Do not check if a smaller reporting company)

Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).

o Yes þ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

55,324,757 shares as of April 30, 2011

PART I

Item 1. Financial Statements

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


	March 31,			December 31,
	2011			2010
ASSETS
Current assets:
Cash and cash equivalents	$	40,846		$	51,964
Receivables, less allowances of $16,594 ($18,076 at December 31, 2010)		123,655			114,535
Inventories		255,511			249,691
Prepaid expenses and other current assets		13,850			11,242

Total current assets		433,862			427,432


Property, plant, and equipment, net		120,066			124,866
Trade names		86,508			86,508
Other assets		46,572			37,607

Total assets	$	687,008		$	676,413


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	96,590		$	79,846
Accrued employee compensation		17,629			18,336
Other accrued expenses		38,442			42,887

Total current liabilities		152,661			141,069


Long-term debt		77,000			77,000
Deferred income taxes		22,180			23,114
Pension liability		103,558			104,736
Other long-term liabilities		72,305			70,927

Shareholders’ equity:
Preferred stock, 10,000,000 shares authorized, no par value — none issued		—			—
Common stock, 200,000,000 shares authorized, $1.00 stated value — 60,614,741 shares issued at March 31, 2011 and December 31, 2010		60,615			60,615
Paid-in capital		205,274			210,945
Retained earnings		225,745			228,803
Accumulated other comprehensive loss		(113,875	)		(115,675	)
Treasury stock at cost 5,291,322 shares at March 31, 2011 and 5,586,251 shares at December 31, 2010		(118,455	)		(125,121	)

Total shareholders’ equity		259,304			259,567

Total liabilities and shareholders’ equity	$	687,008		$	676,413

See accompanying notes to consolidated financial statements.

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


	Three Months Ended March 31,
	2011			2010
Cash flows from operating activities:
Net earnings (loss)	$	(3,058	)	$	3,497
Adjustments to reconcile net earnings (loss) to net cash used in operating activities:
Depreciation and amortization		6,114			6,105
Compensation expense related to stock option grants and restricted stock awards		974			226
Other, net		(791	)		(1,530	)
Changes in operating assets and liabilities:
Accounts receivable		(9,120	)		(3,395	)
Inventories		(5,820	)		(5,314	)
Prepaid expenses and other assets		(2,515	)		(292	)
Accounts payable and other accrued expenses		10,663			2,769
Deferred income taxes		(6	)		(87	)
Other long-term liabilities		(1,452	)		(2,702	)

Net cash used in operating activities		(5,011	)		(723	)


Cash flows from investing activities:
Additions to property, plant, equipment, and software		(8,340	)		(7,494	)
Proceeds from the disposal of assets		2,212			1,869

Net cash used in investing activities		(6,128	)		(5,625	)


Cash flows from financing activities:
Payments of long-term debt		—			(17,000	)
Other		21			—

Net cash provided (used) by financing activities		21			(17,000	)


Net decrease in cash and cash equivalents		(11,118	)		(23,348	)
Cash and cash equivalents at beginning of period		51,964			83,872

Cash and cash equivalents at end of period	$	40,846		$	60,524


Supplemental disclosure:
Cash payments (refunds) for income taxes, net	$	(606	)	$	103
Cash payments for interest expense	$	652		$	866

See accompanying notes to consolidated financial statements.

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

1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Furniture Brands International, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and such principles are applied on a basis consistent with those reflected in our 2010 Annual Report on Form 10-K, filed with the Securities and Exchange Commission. The year end balance sheet data was derived from audited financial statements. The accompanying unaudited consolidated financial statements include all adjustments (consisting of normal recurring adjustments and accruals) which management considers necessary for a fair presentation of the results of the periods presented. These consolidated financial statements do not include all information and footnotes normally included in financial statements prepared in accordance with U.S. GAAP. These consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2010. The consolidated financial statements consist of the accounts of our company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Financial information reported in prior periods is reflected in a manner consistent with the current period presentation. The results for the three months ended March 31, 2011 are not necessarily indicative of the results which will occur for the full fiscal year ending December 31, 2011.

The preparation of financial statements in accordance with U.S. GAAP requires us to make estimates, judgments, and assumptions, which we believe to be reasonable, based on the information available. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. Actual results could differ from those estimates.

2. RESTRUCTURING AND ASSET IMPAIRMENT CHARGES

We have been executing plans to improve our performance. These measures include consolidating and reconfiguring manufacturing facilities and processes to eliminate waste and improve efficiency, managing product inventory levels better to reflect consumer demand, transforming our transportation methods to be more cost effective, exiting unprofitable retail locations, limiting our credit exposure to weak retail partners, and discontinuing unprofitable lines of business and licensing arrangements. In addition, we have been executing plans to reduce our workforce and to centralize certain functions.

Restructuring and asset impairment charges associated with these measures include the following:


	Three Months Ended March 31,
	2011			2010
Restructuring charges:
Contract termination costs	$	—		$	614
Facility costs to shutdown, cleanup, and vacate		195			—
Termination benefits		(94	)		33
Closed store occupancy and lease costs		1,422			932
Loss (gain) on the sale of assets		(439	)		(928	)

		1,084			651
Impairment charges		502			67

	$	1,586		$	718


Statement of Operations classification:
Cost of sales	$	1,178		$	33
Selling, general, and administrative expenses		408			685

	$	1,586		$	718

Asset impairment charges were recorded to reduce the carrying value of idle facilities and related assets to their net realizable value. The determination of impairment charges is based primarily upon (i) consultations with real estate brokers, (ii) proceeds from recent sales of Company facilities, and (iii) the market prices being obtained for similar long-lived assets. Qualifying assets related to restructuring are recorded as assets held for sale within Other Assets in the Consolidated Balance Sheets until sold. Total assets held for sale were $14,680 at March 31, 2011 and $9,609 at December 31, 2010.

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 March 31,
	2011		2010
Accrual for closed store lease liabilities at beginning of period	$	21,704	$	26,645
Charges to expense		307		478
Less cash payments		1,330		2,549

Accrual for closed store lease liabilities at end of period	$	20,681	$	24,574

At March 31, 2011, $5,216 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 March 31, 2011 are as follows:


	Minimum
	Lease
	Payments —
Year	Closed Stores
2011	$	6,074
2012		8,285
2013		8,185
2014		7,074
2015		3,760
thereafter		1,833

	$	35,211

Activity in the accrual for termination benefits was as follows:


	Three Months Ended March 31,
	2011			2010
Accrual for termination benefits at beginning of period	$	4,950		$	4,138
Charges (credit) to expense		(94	)		33
Less cash payments		775			2,226

Accrual for termination benefits at end of period	$	4,081		$	1,945

The accrual for termination benefits at March 31, 2011 is classified as accrued employee compensation.

3. INVENTORIES

Inventories are summarized as follows:


	March 31,		December 31,
	2011		2010
Finished products	$	161,411	$	156,129
Work-in-process		17,376		16,395
Raw materials		76,724		77,167

	$	255,511	$	249,691

4. PROPERTY, PLANT, AND EQUIPMENT

Major classes of property, plant, and equipment consist of the following:


	March 31,		December 31,
	2011		2010
Land	$	10,820	$	11,375
Buildings and improvements		180,912		190,855
Machinery and equipment		217,724		217,404

		409,456		419,634
Less accumulated depreciation		289,390		294,768

	$	120,066	$	124,866

Depreciation expense was $4,874 and $4,994 for the three months ended March 31, 2011 and March 31, 2010, respectively.

5. LONG-TERM DEBT

Long-term debt consists of the following:


	March 31,		December 31,
	2011		2010
Asset-based loan	$	77,000	$	77,000
Less: current maturities		—		—

Long-term debt	$	77,000	$	77,000

As of March 31, 2011 we had $77,000 of cash borrowings outstanding under our asset based loan (the “ABL”). For additional information regarding the terms of the ABL and the covenants and restrictions affecting availability, see Note 8. Long-Term Debt in our 2010 Annual Report on Form 10-K filed on March 4, 2011.

On April 27, 2011, we refinanced our existing ABL with a group of financial institutions. The amended and restated facility is a five-year asset based loan (the “New ABL”) with commitments to lend up to $250,000. The thresholds at which certain covenants and restrictions become effective were lessened in the New ABL, resulting in additional availability to borrow. Under the New 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 new facility, which 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 excess of the borrowing base over the current level of letters of credit and cash borrowings outstanding represents the additional borrowing availability under the New ABL. Certain covenants and restrictions, including cash dominion, weekly borrowing base reporting, and a fixed charge coverage ratio, would become effective if excess availability fell below various thresholds. If we fall below $42,000 of excess availability, we are subject to cash dominion and weekly borrowing base reporting. If we fall below $35,000 of excess availability, we are also subject to the fixed charge coverage ratio, which we currently do not meet. As of May 6, 2011, excess availability was $93,501. Therefore, as of May 6, 2011, we have $51,501 of availability without being subject to the cash dominion and weekly reporting covenants of the agreement and $58,501 of availability before we would be subject to the fixed charge coverage ratio.

We intend to continue to manage our excess availability to remain above the $42,000 threshold, as we choose not to be subject to the cash dominion and weekly reporting covenants. We do not expect to fall below this threshold in 2011.

The borrowing base will be reported on the 25th day of each month based on our financial position at the end of the previous month. Our borrowing base calculations are subject to periodic examinations by the financial institutions which can result in adjustments to the borrowing base and our availability under the New ABL. These examinations have not resulted in significant adjustments to our borrowing base or availability in the past and are not expected to result in material adjustments in the future.

Interest on cash borrowings outstanding under the New ABL will be at either (i) a base rate (the greatest of the prime rate, the Federal Funds Effective Rate plus ¹/2%, and the adjusted LIBOR plus 1%) plus a margin ranging from 1.00% to 1.75% or (ii) LIBOR plus a margin ranging from 2.25% to 3.00%. These margins fluctuate with average availability. As of May 6, 2011, loans outstanding were $77,000 with a weighted average interest rate of 3.28%.

Under the terms of the New ABL, we are required to comply with certain operating covenants, the most significant of which have been described above. We are currently in compliance with all of these covenants and expect to remain in compliance for the foreseeable future. For additional information regarding the terms and conditions of the New ABL agreement, refer to our Form 8-K filed on May 2, 2011.

6. LIQUIDITY

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 New 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 March 31, 2011, we had $40,846 of cash and cash equivalents and $77,000 of debt outstanding. On April 27, 2011, we refinanced the ABL which resulted in additional availability to borrow under the New ABL, subject to certain provisions, as described in Note 5. Long-Term Debt. The breach of any of these provisions could result in a default under the New 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 New ABL agreement.

7. EMPLOYEE BENEFITS

We sponsor or contribute to retirement plans covering substantially all employees. The total costs of these plans were as follows:


	Three Months Ended March 31,
	2011		2010
Defined benefit plans	$	790	$	2,714
Defined contribution plan (401k plan) — company match		1,679		1,673
Other		348		130

	$	2,817	$	4,517

The components of net periodic pension expense for the Company-sponsored defined benefit plans are as follows:


	Three Months Ended March 31,
	2011			2010
Service cost	$	—		$	605
Interest Cost		6,388			6,464
Expected return on plan assets		(6,656	)		(6,227	)
Net amortization and deferral		1,058			1,872

Net periodic pension expense	$	790		$	2,714

We currently provide retirement benefits to our employees through a defined contribution plan. Through 2005, employees were covered primarily by noncontributory plans, funded by company contributions to trust funds held for the sole benefit of employees. We amended the defined benefit plans, freezing and ceasing future benefits as of December 31, 2005. Certain transitional benefits were provided to certain participants, but ceased accruing when the plan became inactive on December 31, 2010. Effective January 1, 2011, actuarial losses on plan assets are amortized from accumulated other comprehensive loss into net periodic pension expense over the average remaining life expectancy of plan participants, resulting in estimated actuarial losses that will be amortized in 2011 of $4,231.

The projected benefit obligation of our qualified defined benefit pension plan exceeded the fair value of plan assets by $84,675 at December 31, 2010, the measurement date. On June 25, 2010, the federal government passed the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 (“the act”) which is designed to provide additional relief from the funding requirements of the Pension Protection Act of 2006. The act provides opportunities for plan sponsors to extend the time over which plan deficits may be funded, up to 15 years, subject to certain limitations including offsets for excess compensation and extraordinary dividends. With the improvement in the funded status in the plan in 2010 and the benefit of the act, our funding requirements for 2011 under the Employee Retirement Income Security Act of 1974 (“ERISA”) are expected to be approximately $3,000. The contributions may be in the form of cash, company common stock or a combination of both. Any contributions using company common stock would require the approval of the Company’s Board of Directors and are subject to certain limitations or penalties, including those established by ERISA, based on the percentage of plan assets held in company common stock.

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.

8. STOCK OPTIONS, RESTRICTED STOCK, AND RESTRICTED STOCK UNITS

We have outstanding stock options, restricted stock, and restricted stock units. Compensation expense of $865 and $3,774 was recorded for the three months ended March 31, 2011 and March 31, 2010, respectively, related to these awards.

A summary of option activity for the three months ended March 31, 2011 is presented below:


				Weighted
				Average
				Exercise
	Shares			Price
Outstanding at December 31, 2010		2,621,267		$	15.97
Granted		687,888			4.64
Exercised		—			—
Forfeited or expired		(478,195	)		23.02

Outstanding at March 31, 2011		2,830,960		$	10.91

The weighted average exercise price and the weighted average fair value per share for stock options granted during the three months ended March 31, 2011 was $4.64 and $2.83, respectively. The fair value of each stock option is estimated on the date of grant using the Black-Scholes option pricing model.

A summary of non-vested restricted stock activity for the three months ended March 31, 2011 is presented below:


				Weighted
				Average
				Grant-Date
	Shares			Fair Value
Outstanding at December 31, 2010		826,958		$	7.85
Granted		297,448			4.59
Vested		(9,167	)		6.55
Forfeited		(6,234	)		7.03

Outstanding at March 31, 2011		1,109,005		$	6.99

Since December 2008, we have awarded restricted stock units to certain key employees and executive officers. The awards may only be settled in cash. The awards are contingent on the achievement of both the Company’s share price objectives and service-based retention periods. The awards expire on December 19, 2013. If the trailing 10 day average price of our common stock reaches the share price objective and the service retention period is satisfied, then the units will vest and the participant will be entitled to receive a cash payment for each unit that is equal to the share price objective. At March 31, 2011, all outstanding awards have a share price objective of $9.39 and a service retention period which is the later of i) December 19, 2011 or ii) the date upon which the trailing 10 day average price of our common stock reaches the share price objective. The awards are designed to reward participants for increases in share price as well as encouraging the long-term employment of the participants.

There are 1,250,023 restricted stock units outstanding as of March 31, 2011. No restricted stock units were granted, forfeited, or became vested during the three months ended March 31, 2011. The fair value of the restricted stock unit awards is estimated each quarter using binomial pricing models. The fair value of the awards is recognized as compensation expense ratably over the derived service period. At March 31, 2011, the remaining duration of the derived service period is 0.85 years for all outstanding awards.

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 March 31,
	2011		2010
Weighted average shares used for basic earnings (loss) per common share		54,818,000		48,297,000
Effect of dilutive stock options and restricted stock		—		59,000

Weighted average shares used for diluted earnings (loss) per common share		54,818,000		48,356,000

For the three months ended March 31, 2011, all potentially dilutive securities are excluded from the calculation of diluted earnings (loss) per share as we have generated a net loss. Excluded from the computation of diluted earnings per common share for the three months ended March 31, 2010 were options to purchase 1,931,142 shares at an average price of $21.39 per share. These options have been excluded from the diluted earnings (loss) per share calculation because their inclusion would be antidilutive.

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 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 all subsequent years. The company and the IRS have not agreed upon certain issues which remain in the Appeals process. We also have several state examinations in progress.

We recognized income tax expense of $754 and $523 in the three months ended March 31, 2011 and 2010, respectively. In both periods, income tax expense includes 1) expense for jurisdictions where we generated income but do not have net operating loss carry forwards available, 2) expense for certain jurisdictions where the tax liability is determined based on non-income related activities, such as gross sales, and 3) expense related to unrecognized tax benefits.

At March 31, 2011, the deferred tax assets attributable to federal net operating loss carry forwards were $44,879, state net operating loss carry forwards were $26,929, federal tax credit carry forwards were $3,095, and state tax credit carry forwards were $1,544. The federal net operating loss carry forwards begin to expire in the year 2028, state net operating loss carry forwards generally start to expire in the year 2021, and tax credit carry forwards are subject to certain limitations. While we have no other limitations on the use of our net operating loss carry forwards, we are potentially subject to limitations if a change in control occurs pursuant to applicable statutory regulations.

We evaluated all significant available positive and negative evidence, including the existence of losses in recent years and our forecast of future taxable income, and, as a result, determined it was more likely than not that our federal and certain state deferred tax assets, including benefits related to net operating loss carry forwards, would not be realized based on the measurement standards required under the FASB Accounting Standard Codification section 740. As such, we maintain a valuation allowance for these deferred tax assets which decreased $5,623 to $169,007 in the three months ended March 31, 2011. The decrease in the valuation allowance in the first quarter of 2011 is primarily attributable to decreases in net deferred tax assets, driven by a decrease in certain accrued expenses.

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. COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) consists of the following:


	Three Months Ended March 31,
	2011			2010
Net earnings (loss)	$	(3,058	)	$	3,497
Other comprehensive income:
Pension liability		1,058			1,870
Foreign currency translation		742			779

		1,800			2,649
Income tax expense		—			(709	)

Other compressive income		1,800			1,940

Total comprehensive income (loss)	$	(1,258	)	$	5,437

The components of accumulated other comprehensive loss, presented net of tax, are as follows:


	March 31,			December 31,
	2011			2010
Pension liability	$	(117,087	)	$	(118,145	)
Foreign currency translation		3,212			2,470

	$	(113,875	)	$	(115,675	)

13. CONTINGENT LIABILITIES

We are involved, from time to time, in litigation and other legal proceedings incidental to our business. Management believes that the outcome of current litigation and legal proceedings will not have a material adverse effect upon our results of operations or financial condition. However, management’s assessment of our current litigation and other legal proceedings could change in light of the discovery of facts with respect to legal actions or other proceedings pending against us not presently known to us or determinations by judges, juries or other finders of fact which are not in accordance with management’s evaluation of the probable liability or outcome of such litigation or proceedings.

We are also involved in various claims relating to environmental matters at a number of current and former plant sites. We engage or participate in remedial and other environmental compliance activities at certain of these sites. At other sites, we have been named as a potentially responsible party under federal and state environmental laws for site remediation. Management analyzes each individual site, considering the number of parties involved, the level of our potential liability or contribution relative to the other parties, the nature and magnitude of the hazardous wastes involved, the method and extent of remediation, the potential insurance coverage, the estimated legal and consulting expense with respect to each site and the time period over which any costs would likely be incurred. Based on the above analysis, management believes at the present time that any claims, penalties or costs incurred in connection with known environmental matters will not reasonably likely 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.

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 design, manufacture, source, market, and distribute (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 designs, manufactures, sources, and markets home furnishings, targeting specific customers in relation to style and price point.

•		Broyhill has 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 manufactures and markets 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

Compared to the first quarter of 2010, sales decreased 7.6% in the first quarter of 2011 although this comparative trend improved in each sequential month during the quarter. We experienced a 7.9% sequential increase in sales from the fourth quarter of 2010 to the first quarter of 2011. 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 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 taken several significant steps and continue to take actions to reduce costs, preserve cash, and drive profitable sales. In the first quarter of 2011, we experienced benefits from these measures including sustained improvement in gross margin; continued improvement in selling, general, and administrative expenses while increasing investments in advertising; and the maintenance of low levels of debt.

In 2011, our entire organization is 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. 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.

	•		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.

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 months ended March 31, 2011 and 2010:


	Three Months Ended March 31,
	2011						2010
				% of					% of
(in millions, except per share data)	Dollars			Net Sales			Dollars		Net Sales
Net sales	$	297.9			100.0	%	$	322.4		100.0	%
Cost of sales		220.3			74.0			237.9		73.8


Gross profit		77.5			26.0			84.4		26.2
Selling, general, and administrative expenses		79.6			26.7			79.9		24.8


Earnings (loss) from operations		(2.1	)		(0.7	)		4.6		1.4
Interest expense		0.8			0.3			0.8		0.3
Other income, net		0.5			0.2			0.3		0.1


Earnings (loss) before income tax expense		(2.3	)		(0.8	)		4.0		1.2
Income tax expense		0.8			0.3			0.5		0.2


Net earnings (loss)	$	(3.1	)		(1.0	)%	$	3.5		1.1	%


Net earnings (loss) per common share — basic and diluted	$	(0.06	)				$	0.07

Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010

Net sales for the three months ended March 31, 2011 was $297.9 million compared to $322.4 million in the three months ended March 31, 2010, a decrease of $24.5 million, or 7.6%. The decrease in net sales was primarily the result of continued weak retail conditions, resulting in lower sales volume, and was partially offset by lower price discounts.

Gross profit for the three months ended March 31, 2011 was $77.5 million compared to $84.4 million in the three months ended March 31, 2010. The decrease in gross profit is primarily attributable to lower sales ($6.4 million). Gross margin for the three months ended March 31, 2011 remained consistent at 26.0% compared to 26.2% in the three months ended March 31, 2010.

Selling, general, and administrative expenses remained consistent at $79.6 million in the three months ended March 31, 2011 compared to $79.9 million in the three months ended March 31, 2010.

Income tax expense for the three months ended March 31, 2011 remained consistent at $0.8 million compared to $0.5 million in the three months ended March 31, 2010. 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.

Net earnings (loss) per common share was $(0.06) and $0.07 for the three months ended March 31, 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 54.8 million for the three months ended March 31, 2011 and 48.4 million for the three months ended March 31, 2010.

Retail Results of Operations

Based on the structure of our operations and management and 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 stores:


	Thomasville Stores (a)						All Other Retail Locations (b)
	Three Months Ended March 31,						Three Months Ended March 31,
(Dollars in millions)	2011			2010			2011			2010
Net sales	$	29.0		$	25.6		$	10.0		$	10.0

Cost of sales		17.6			14.6			6.7			5.9


Gross profit		11.4			11.0			3.3			4.1

Selling, general and administrative expenses — open stores		15.9			15.3			5.0			5.8


Operating loss — open stores (c)	$	(4.6	)	$	(4.3	)	$	(1.7	)	$	(1.8	)

Selling, general and administrative expenses — closed stores		—			—			1.4			0.9


Operating loss (c)	$	(4.6	)	$	(4.3	)	$	(3.1	)	$	(2.7	)


Number of open stores and showrooms at end of period		47			51			18			21
Number of closed locations at end of period		—			—			27			28
Same-store-sales (d):
Percentage increase		17	%		16	%		(e	)		(e	)
Number of stores		46			40


a)		This supplemental data includes company-owned Thomasville retail store locations that were open during the three months ended March 31, 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.

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 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, two Lane stores, one Henredon store, one Broyhill store, and seven designer showrooms at March 31, 2011; and it is not one of our long-term strategic initiatives to grow non-Thomasville brand company-owned retail locations.

Gross margin for company-owned Thomasville retail store locations for the three months ended March 31, 2011 was 39.3% as compared to 43.0% for the three months ended March 31, 2010. The decrease in gross margin was primarily due to the liquidation of inventory from three stores during the three months ended March 31, 2011 in anticipation of closing these locations. In addition to the above company-owned stores, there were 64 and 72 Thomasville dealer-owned stores at March 31, 2011 and 2010, respectively.

Financial Condition and Liquidity

Liquidity

Cash and cash equivalents at March 31, 2011 totaled $40.8 million, compared to $52.0 million at December 31, 2010. Net cash used in operating activities totaled $5.0 million in the three months ended March 31, 2011 compared with $0.7 million in the three months ended March 31, 2010. The decrease in cash flow from operations was primarily driven by decreased earnings from operations in the three months ended March 31, 2011 compared to the three months ended March 31, 2010 and decreased cash generated from working capital. Net cash used in investing activities for the three months ended March 31, 2011 totaled $6.1 million compared with $5.6 million in the three months ended March 31, 2010. The increase in cash used in investing activities is primarily the result of greater additions to property, plant, equipment, and software. Net cash provided by financing activities totaled $21.0 thousand in the three months ended March 31, 2011 compared with net cash used in financing activities of $17.0 million in the three months ended March 31, 2010, consisting of the payment of long-term debt. Working capital was $281.2 million at March 31, 2011, compared to $286.4 million at December 31, 2010.

The primary items impacting our liquidity in the future are cash from operations and working capital, capital expenditures, acquisition of stores, sale of surplus assets, 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 debt agreement 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 March 31, 2011, we had $40.8 million of cash and cash equivalents and $77.0 million of debt outstanding. On April 27, 2011, we refinanced our existing asset based loan (the “ABL”) which resulted in additional availability to borrow under the new asset based loan (the “New 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 New 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 New ABL agreement.

Financing Arrangements

Long-term debt consists of the following (in millions):


	March 31,		December 31,
	2011		2010
Asset-based loan	$	77.0	$	77.0
Less: current maturities		—		—

Long-term debt	$	77.0	$	77.0

As of March 31, 2011 we had $77.0 million of cash borrowings outstanding under our ABL. For additional information regarding the terms of the ABL and the covenants and restrictions affecting availability, see Note 8. Long-Term Debt in our 2010 Annual Report on Form 10-K filed on March 4, 2011.

On April 27, 2011, we refinanced our existing ABL with a group of financial institutions. The amended and restated facility is a five-year asset based loan with commitments to lend up to $250.0 million. The thresholds at which certain covenants and restrictions become effective were lessened in the New ABL, resulting in additional availability to borrow. Under the New 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 excess of the borrowing base over the current level of letters of credit and cash borrowings outstanding represents the additional borrowing availability under the New ABL. Certain covenants and restrictions, including cash dominion, weekly borrowing base reporting, and a fixed charge coverage ratio, would become effective if excess availability fell below various thresholds. If we fall below $42.0 million of excess availability, we are subject to cash dominion and weekly borrowing base reporting. If we fall below $35.0 million of excess availability, we are also subject to the fixed charge coverage ratio, which we currently do not meet. As of May 6, 2011, excess availability was $93.5 million. Therefore, as of May 6, 2011, we have $51.5 million of availability without being subject to the cash dominion and weekly reporting covenants of the agreement and $58.5 million of availability before we would be subject to the fixed charge coverage ratio.

We intend to continue to manage our excess availability to remain above the $42.0 million threshold, as we choose not to be subject to the cash dominion and weekly reporting covenants. We do not expect to fall below this threshold in 2011.

Interest on cash borrowings outstanding under the New ABL will be at either (i) a base rate (the greatest of the prime rate, the Federal Funds Effective Rate plus ¹/2%, and the adjusted LIBOR plus 1%) plus a margin ranging from 1.00% to 1.75% or (ii) LIBOR plus a margin ranging from 2.25% to 3.00%. These margins fluctuate with average availability. As of May 6, 2011, loans outstanding were $77.0 million with a weighted average interest rate of 3.28%.

We believe our current cash position along with our cash flow from operations and availability under the New ABL will be sufficient to fund our liquidity requirements for the foreseeable future.

Funded Status of Qualified Defined Benefit Pension Plan

The projected benefit obligation of our qualified defined benefit pension plan exceeded the fair value of plan assets by $84.7 million at December 31, 2010, the measurement date. The projected benefit obligation calculations are dependent on various assumptions, including discount rate. The discount rate is selected based on yields of high quality bonds (rated Aa by Moody’s as of the measurement date) with

cash flows matching the timing and amount of expected future benefit payments. We believe the assumptions to be reasonable; however, differences in assumptions would impact the calculated obligation. Additionally, changes in the yields of the underlying financial instruments from which the assumptions are derived may significantly impact the calculated obligation at future measurement dates. For example, at our December 31, 2010 measurement date, we used a discount rate of 5.75% to measure the projected benefit obligation. If we had used a discount rate of 6.00% or 5.50%, the projected benefit obligation and underfunded status of our pension plan would have decreased or increased by approximately $13.0 million, respectively.

On June 25, 2010, the federal government passed the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 (“the act”) which is designed to provide additional relief from the funding requirements of the Pension Protection Act of 2006. The act provides opportunities for plan sponsors to extend the time over which plan deficits may be funded, up to 15 years, subject to certain limitations including offsets for excess compensation and extraordinary dividends. With the improvement in the funded status of the plan in 2010 and the benefit of the act, our funding requirements for 2011 under the Employee Retirement Income Security Act of 1974 are expected to be approximately $3.0 million. However, if the relief provided by the federal government expires or is no longer applicable to our qualified pension plan, if there is downward pressure on the asset 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.

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 of company-branded stores operated by independent furniture dealers and guarantee leases of tractors and trailers operated by an independent transportation company. 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 March 31, 2011, the total amounts remaining under lease guarantees were $9.2 million. Our estimate of probable future losses under these guaranteed leases is not material.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based upon the Consolidated Financial Statements and Notes to the Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of financial statements in accordance with U.S. GAAP requires us to make estimates, judgments, and assumptions, which we believe to be reasonable, based on the information available. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. Actual results could differ from those estimates. The consolidated financial statements consist of the accounts of our company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

We have chosen accounting policies we believe are appropriate to accurately and fairly report our operating results and financial position, and we apply those accounting policies in a consistent manner. Accounting policies we consider most critical are described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2010.

Subsequent Events

As described in “Financial Condition and Liquidity” above, on April 27, 2011, we refinanced our existing ABL with a group of financial institutions.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We have exposure to market risk from changes in interest rates. Our exposure to interest rate risk consists of interest expense on our asset-based loan and interest income on our cash equivalents. A 10% interest rate increase would result in additional interest expense of $0.2 million annually. We have no derivative financial instruments at March 31, 2011.

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 March 31, 2011, the end of the period covered by this Quarterly Report on Form 10-Q.

			Disclosure controls and procedures are controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

			Based on this evaluation, management, including our Chief Executive Officer and Chief Financial Officer, has concluded that our disclosure controls and procedures were effective as of March 31, 2011.

	b)		Changes in Internal Control over Financial Reporting

			There have not been any changes in our internal control over financial reporting during the quarter ended March 31, 2011, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

Item 1. Legal Proceedings

For a discussion of legal proceedings, refer to Part I, Note 13 to the Consolidated Financial Statements in this Form 10-Q, which is incorporated herein by reference.

Item 1A. Risk Factors

We describe the risk factors associated with our business below. This description includes any material changes to and supersedes the description of the risk factors associated with our business previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010. Additional risks and uncertainties that we are unaware of or that we currently deem immaterial also may become important factors that affect our company. You should carefully consider the risks described below in addition to all other information provided to you in this document, in our Annual Report on Form 10-K for the year ended December 31, 2010, and in our subsequent filings with the Securities and Exchange Commission. Any of the following risks could materially and adversely affect our business, results of operations, and financial condition.

Unfavorable economic conditions could result in a decrease in our future sales, earnings, and liquidity.

Economic conditions deteriorated significantly in the United States, and worldwide in recent years. Although the general economy has begun to recover, sales of residential furniture remain depressed due to wavering consumer confidence and a number of ongoing factors in the global economy that have negatively impacted consumers’ discretionary spending. These ongoing factors include lower home values, prolonged foreclosure activity throughout the country, a weak market for home sales, continued high levels of unemployment, and reduced access to consumer credit. These factors are outside of our control, but have a direct impact on our sales due to resulting weak levels of consumer confidence and reduced consumer spending. These conditions have resulted in a decline in our sales and earnings and could continue to impact our sales and earnings 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 product or are unable to access credit, they may experience financial difficulties leading to bankruptcies, liquidations, and other unfavorable events. If any of these events occur, or if unfavorable economic conditions continue to challenge the consumer environment, our future sales, earnings, and liquidity would likely be adversely impacted.

Market returns could have a negative impact on the return on plan assets for our qualified pension plan, which may require significant funding.

Financial markets have experienced extreme volatility in recent years. As a result of this volatility in the domestic and international equity and bond markets, the asset values of our pension plans have fluctuated significantly and further disruptions in the financial markets could adversely impact the value of our pension plan assets in the future. The projected benefit obligation of our qualified defined benefit plan exceeded the fair value of plan assets by $84.7 million at December 31, 2010. On June 25, 2010, the federal government passed the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 (“the act”), which provides additional relief from the funding requirements of the Pension Protection Act of 2006. The act provides opportunities for plan sponsors to extend the time over which plan deficits may be funded, up to 15 years, subject to certain limitations including offsets for excess compensation and extraordinary dividends. With the potential benefit of the act, we do not expect our minimum funding requirements for 2011 to be significant. However, if the relief provided by the federal government expires or is no longer applicable to our qualified pension plan, if there is downward pressure on the asset value of the plan, or if the present value of the benefit obligation of the plan increases, as would occur in the event of a decrease in 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 and earnings.

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 and earnings. In addition, due to competition, we may not be able to maintain or raise the prices of our products in response to inflationary pressures such as increasing costs. Also, due to the large number of competitors and their wide range of product offerings, we may not be able to differentiate our products (through styling, finish, and other construction techniques) from those of our competitors. These and other competitive pressures would likely result in a decrease in our sales and earnings.

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 and earnings.

Residential furniture is a highly styled product subject to fashion trends and geographic consumer tastes that can change rapidly. If we are unable to anticipate or respond to changes in consumer tastes and fashion trends in a timely manner or to otherwise forecast demand accurately, we may lose sales and have excess inventory (both raw materials and finished goods), both of which could result in a decrease in our sales and earnings.

A change in our mix of product sales could result in a decrease in our future earnings.

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 and earnings.

Business failures of large dealers, a group of customers or our own retail stores could result in a decrease in our future sales and earnings.

Our business practice has been to extend payment terms to our customers when selling furniture. As a result, we have a substantial amount of receivables we manage daily. Although we have no customers who individually represent 10% or more of our total annual sales, the business failures of a large customer or a group of customers could require us to record receivable reserves, which would decrease earnings, as it has in past periods. Receivables collection can be significantly impacted by economic conditions. Therefore, deterioration in the economy, or a lack of economic recovery, could cause further business failures of our customers, which could in turn require additional receivable reserves thereby lowering earnings. These business failures can also cause loss of future sales. In addition, we are either prime tenant on or guarantor of many leases of company-branded stores operated by independent furniture dealers. The viability of these dealer stores are also highly influenced by economic conditions. Defaults by any of these dealers would result in our becoming responsible for payments under these leases. If we do not operate these stores, we are still required to pay store occupancy costs, which results in a reduction in our future sales and earnings.

Inventory write-downs or write-offs could result in a decrease in our earnings.

Our inventory is valued at the lower of cost or market. However, future sales of inventory are dependent on economic conditions, among other things. Weak economic and retail conditions could cause a lowering of inventory values in order to sell our product. For example, in 2010, we incurred charges of $6.7 million related to product write-downs to actual or anticipated sales values in this difficult retail environment. Deterioration in the economy could require us to lower inventory values further, which would lower our earnings.

Sales distribution realignments can result in a decrease in our sales and earnings.

We continually review relationships with our customers to ensure each meets our standards. These standards cover, among others, credit worthiness, market penetration, sales growth, competitive improvements, and sound, ethical business practices. If customers do not meet our standards, we will consider discontinuing these business relationships. If we discontinue a relationship, there would likely be a decrease in near-term sales and earnings and possibly long-term sales and earnings if we are unable to replace such customers.

Manufacturing realignments and cost savings programs could result in a decrease in our near-term earnings and liquidity.

We continually review our domestic manufacturing operations and offshore sourcing capabilities. Effects of periodic manufacturing realignments and cost savings programs would likely result in a decrease in our near-term earnings and liquidity until the expected cost reductions are achieved. Such programs can include the consolidation and integration of facilities, functions, systems, and procedures. Certain products may also be shifted from domestic manufacturing to offshore 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 changes in local government regulations and currency fluctuations which could result in a decrease in our earnings.

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 in local 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.

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 and earnings.

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 and earnings.

Fluctuations in the price, availability, and quality of raw materials could cause delays in production and could increase the costs of materials which could result in a decrease in our sales and earnings.

We use various types of wood, fabrics, leathers, glass, upholstered filling material, steel, and other raw materials in manufacturing furniture. Fluctuations in the price, availability, and quality of the raw materials we use in manufacturing residential furniture could have a negative effect on our cost of sales and our ability to meet the demands of our customers. Inability to meet the demands of our customers could result in the loss of future sales. In addition, the costs to manufacture furniture depend in part on the market prices of the raw materials used to produce the furniture. We may not be able to pass along to our customers all or a portion of our higher costs of raw materials due to competitive and market pressures, which could decrease our earnings.

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, and environmental matters, some of which claim significant damages. We face the business risk of exposure to product liability claims in the event that the use of any of our products results in personal injury or property damage. In the event any of our products prove to be defective, we may be required to recall or redesign such products. We maintain insurance against product liability claims, but there can be no assurance such coverage will continue to be available on terms acceptable to us or such coverage will be adequate to cover exposures. We also are, and may in the future be, a party to legal proceedings and claims arising out of certain customer or dealer terminations as we continue to re-examine and realign our retail distribution strategy. Given the inherent uncertainty of litigation, these matters could have a material adverse impact on our sales, earnings, and liquidity. We are also subject to various laws and regulations relating to environmental protection and we could incur substantial costs as a result of the noncompliance with or liability for cleanup or other costs or damages under environmental laws. In addition, our defined benefit plans are subject to certain pension obligations, regulations, and funding requirements, which could cause us to incur substantial costs and require substantial funding. All of these matters could cause a decrease in our sales, earnings, and liquidity.

We may not realize the anticipated benefits of mergers, acquisitions, or dispositions.

As part of our business strategy, we may merge with or acquire businesses and divest assets and operations. Risks commonly encountered in mergers and acquisitions include the possibility that we pay more than the acquired company or assets are worth, the difficulty of assimilating the operations and personnel of the acquired business, the potential disruption of our ongoing business, and the distraction of our management from ongoing business. Consideration paid for future acquisitions could be in the form of cash or stock or a combination thereof, which could result in dilution to existing shareholders and to earnings per share. We may also evaluate the potential disposition of assets and operations that may no longer help us meet our objectives. When we decide to sell assets or operations, we may encounter difficulty in finding buyers or alternate exit strategies on acceptable terms in a timely manner, In addition, we may dispose of assets at a price or on terms that are less than we had anticipated.

Loss of key personnel or the inability to hire qualified personnel could adversely affect our business.

Our success depends, in part, on our ability to retain our key personnel, including our executive officers and senior management team. The unexpected loss of one or more of our key employees could adversely affect our business. Our success also depends, in part, on our continuing ability to identify, hire, train, and retain highly qualified personnel. Competition for employees can be intense. We may not be able to attract or retain qualified personnel in the future, and our failure to do so could adversely affect our business.

Impairment of our trade name intangible assets would result in a decrease in our earnings and net worth.

Our trade names are tested for impairment annually or whenever events or changes in business circumstances indicate the carrying value of the assets may not be recoverable. Trade names are tested by comparing the carrying value and fair value of each trade name to determine the amount, if any, of impairment. The fair value of our trade names is estimated using a “relief from royalty payments” methodology, which is highly contingent upon assumed sales trends and projections, royalty rates, and a discount rate. Lower sales trends, decreases in projected net sales, decreases in royalty rates, or increases in the discount rate would cause impairment charges and a corresponding reduction in our earnings and net worth. For example, in the fourth quarter of 2010, we tested our trade names for impairment under this methodology and recorded an impairment charge of $1.1 million, driven primarily by a decrease in projected net sales, resulting in a remaining trade name balance of $86.5 million at December 31, 2010.

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 profitability 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 profitability.

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 capital needs, which could significantly adversely impact our liquidity and our business.

Our availability to borrow is dependent on certain provisions of our debt agreement, including those described in Note 5 “Long-Term Debt” in Part I, Item 1 of this Form 10-Q. The breach of any of these provisions could result in a default under our debt agreement and could trigger acceleration of repayment, which would have a significant adverse impact to our liquidity and our business. In addition, an inability to generate sufficient future profits could have a significant adverse impact on our cash flow and liquidity and could cause us to not be in compliance with our debt agreement. While we would attempt to obtain waivers for noncompliance, we may not be able to obtain waivers, which could have a significant adverse impact on our liquidity and our business.

If we do not have sufficient cash reserves, cash flow from our operations, or our borrowing capacity is insufficient, we may need to raise additional funds through equity or debt financings in the future in order to meet our operating and capital needs. Nevertheless, we may not be able to secure adequate debt or equity financing on favorable terms, or at all, at the time when we need such funding. In the event that we are unable to raise additional funds, our liquidity will be adversely impacted and our business could suffer. If we are able to secure additional financing, these funds could be costly to secure and maintain, which could significantly impact our earnings and our liquidity. Also, if we raise additional funds or settle liabilities through issuances of equity or convertible securities, our existing shareholders could suffer significant dilution in their percentage ownership of our company, and any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our common stock. In addition, any debt financing that we may secure in the future could have restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions.


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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Financial Statements (unaudited):

Consolidated Balance Sheets:		3

March 31, 2011
December 31, 2010

Consolidated Statements of Operations:		4

Three Months Ended March 31, 2011
Three Months Ended March 31, 2010

Consolidated Statements of Cash Flows:		5

Three Months Ended March 31, 2011
Three Months Ended March 31, 2010

Notes to Consolidated Financial Statements		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		14

Item 3. Quantitative and Qualitative Disclosures about Market Risk		20

Item 4. Controls and Procedures		21

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		22

Item 1A. Risk Factors		22

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds		26

Item 6. Exhibits		27
EX-31.1
EX-31.2
EX-32.1
EX-32.2


					Total Number of		Maximum Number
	Total				Shares Purchased as		of Shares that May
	Number of		Average		Part of Publicly		Yet Be Purchased
	Shares		Price Paid		Announced Plans or		Under the Plans or
	Purchased		per Share (1)		Programs		Programs.
January 2011: January 1, 2011 through January 31, 2011		—	$	—		(2)		(2)
February 2011: February 1, 2011 through February 28, 2011		3,361		4.46		(2)		(2)
March 2011: March 1, 2011 through March 31, 2011		—		—		(2)		(2)

Total		3,361	$	4.46


	Furniture Brands International, Inc. (Registrant)
	By:	/s/ Steven G. Rolls
		Steven G. Rolls
		Chief Financial Officer (On behalf of the registrant and as Principal Financial Officer) Date: May 6, 2011



Signature:	/s/ Ralph P. Scozzafava
	Ralph P. Scozzafava
	Chief Executive Officer (Principal Executive Officer) May 6, 2011



Signature:	/s/ Steven G. Rolls
	Steven G. Rolls
	Chief Financial Officer (Principal Financial Officer) May 6, 2011

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(1)		Shares valued at the average of the high and low prices of common stock as reported by the New York Stock Exchange on the vesting date.

(2)		We did not have any publicly announced plan or program to repurchase equity securities during the quarter ended March 31, 2011.