Fbi Wind Down (FBN) 10-Q 2006 Q4 Quarterly report

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

	(Mark one)
(X)	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2006 or
	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 I-91

Furniture Brands International, Inc.

(Exact name of registrant as specified in its charter)

Delaware	43-0337683
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

101 South Hanley Road, St. Louis, Missouri	63105
(Address of principal executive offices)	(Zip Code)

(Registrant's telephone number, including area code) (314) 863-1100

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.

 Yes (X) No ( )

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large Accelerated Filer (X) Accelerated Filer ( ) Non-Accelerated Filer ( )

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

 Yes ( ) No (X)

APPLICABLE ONLY TO CORPORATE ISSUERS

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

48,331,752 shares as of October 31, 2006

1

PART I FINANCIAL INFORMATION

Item 1.Financial Statements

Consolidated Financial Statements for the quarter ended September 30, 2006.

Consolidated Balance Sheets:

September 30, 2006

December 31, 2005

Consolidated Statements of Operations:

Three Months Ended September 30, 2006

Three Months Ended September 30, 2005

Nine Months Ended September 30, 2006

Nine Months Ended September 30, 2005

Consolidated Statements of Cash Flows:

Nine Months Ended September 30, 2006

Nine Months Ended September 30, 2005

Notes to Consolidated Financial Statements

The financial statements are unaudited, but include all adjustments (consisting of normal recurring adjustments) that we consider necessary for a fair presentation of the results of the period. The results for the three months and nine months ended September 30, 2006 are not necessarily indicative of the results to be expected for the full year. The interim 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, 2005.

2

FURNITURE BRANDS INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

(Unaudited)

	September 30,			December 31,
		2006			2005
ASSETS
Current assets:
Cash and cash equivalents	$	41,610		$	114,322
Receivables, less allowances of $24,553 ($23,368 at December 31, 2005)		360,206			349,202
Inventories (Note 1)		516,837			432,814
Deferred income taxes		27,383			25,540
Prepaid expenses and other current assets		19,870			9,790
Total current assets		965,906			931,668
Property, plant and equipment		638,931			666,079
Less accumulated depreciation		408,509			415,262
Net property, plant and equipment		230,422			250,817
Goodwill		182,507			182,507
Other intangible assets		169,671			169,671
Other assets		44,120			47,561
	$	1,592,626		$	1,582,224
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	111,600		$	101,860
Accrued employee compensation		34,324			30,605
Other current liabilities		71,844			81,020
Total current liabilities		217,768			213,485
Long-term debt		300,800			301,600
Deferred income taxes		42,953			60,668
Other long-term liabilities		129,230			102,519
Shareholders' equity:
Preferred stock, authorized 10,000,000
shares, no par value - issued, none		-			-
Common stock, authorized 200,000,000 shares,
$1.00 stated value - issued 56,482,541
shares at September 30, 2006 and December 31, 2005		56,483			56,483
Paid-in capital		226,274			221,754
Retained earnings		849,486			820,025
Accumulated other comprehensive income (expense) (Note 3)		(46,175	)		(41,382	)
Treasury stock at cost (8,158,789 shares at
September 30, 2006 and 6,814,963 shares at
December 31, 2005)		(184,193	)		(152,928	)
Total shareholders' equity		901,875			903,952
	$	1,592,626		$	1,582,224

See accompanying notes to consolidated financial statements.

3

FURNITURE BRANDS INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands except per share data)

(Unaudited)

	Three Months		Three Months
	Ended		Ended
	September 30,		September 30,
	2006		2005
Net sales	$	568,917	$	557,927
Cost of sales		446,150		438,149
Gross profit		122,767		119,778
Selling, general and administrative expenses		109,788		102,969
Earnings from operations		12,979		16,809
Interest expense		4,902		3,146
Other income, net		870		903
Earnings before income tax expense		8,947		14,566
Income tax expense		3,150		4,647
Net earnings	$	5,797	$	9,919
Net earnings per common share:
Basic	$	0.12	$	0.19
Diluted	$	0.12	$	0.19
Weighted average common shares outstanding (Note 2):
Basic		48,320,622		51,616,863
Diluted		48,320,622		51,707,929

See accompanying notes to consolidated financial statements.

4

FURNITURE BRANDS INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands except per share data)

(Unaudited)

	Nine Months		Nine Months
	Ended		Ended
	September 30,		September 30,
	2006		2005
Net sales	$	1,831,637	$	1,793,245
Cost of sales		1,418,776		1,390,234
Gross profit		412,861		403,011
Selling, general and administrative expenses		332,372		331,055
Earnings from operations		80,489		71,956
Interest expense		12,590		9,094
Other income, net (Note 7)		13,448		3,437
Earnings before income tax expense		81,347		66,299
Income tax expense		28,350		22,005
Net earnings	$	52,997	$	44,294
Net earnings per common share:
Basic	$	1.08	$	0.84
Diluted	$	1.08	$	0.84
Weighted average common shares outstanding (Note 2):
Basic		48,894,276		52,498,436
Diluted		48,894,276		52,653,801

See accompanying notes to consolidated financial statements.

5

FURNITURE BRANDS INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

	Nine Months			Nine Months
	Ended			Ended
	September 30,			September 30,
	2006			2005
Cash flows from operating activities:
Net earnings	$	52,997		$	44,294
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization		28,272			34,755
Compensation expense related to stock option grants and restricted stock awards		4,708			150
Provision (benefit) for deferred income taxes		(11,226	)		(4,528	)
Other, net		(2,755	)		11,031
Changes in operating assets and liabilities:
Accounts receivable		(11,004	)		31,231
Inventories		(84,023	)		10,014
Prepaid expenses and other assets		(6,031	)		(13,433	)
Accounts payable and other accrued expenses		6,524			24,878
Other long-term liabilities		12,893			14,800
Net cash provided (used) by operating activities		(9,645	)		153,192
Cash flows from investing activities:
Proceeds from the disposal of assets		4,957			4,261
Additions to property, plant and equipment		(19,646	)		(21,186	)
Net cash used by investing activities		(14,689	)		(16,925	)
Cash flows from financing activities:
Proceeds from termination of cash flow hedges		8,623			-
Payments for debt issuance costs		(1,212	)		-
Additions to long-term debt		450,000			-
Payments of long-term debt		(450,800	)		(800	)
Proceeds from the exercise of stock options		8,095			7,445
Tax benefit from the exercise of stock options		527			-
Payments of cash dividends		(23,536	)		(23,649	)
Payments for the purchase of treasury stock		(40,075	)		(52,022	)
Net cash used by financing activities		(48,378	)		(69,026	)
Net increase (decrease) in cash and cash equivalents		(72,712	)		67,241
Cash and cash equivalents at beginning of period		114,322			51,248
Cash and cash equivalents at end of period	$	41,610		$	118,489
Supplemental disclosure:
Cash payments for income taxes, net	$	50,370		$	32,815
Cash payments for interest expense	$	7,879		$	9,232

See accompanying notes to consolidated financial statements.

6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

(Unaudited)

(1) Inventories are summarized as follows:

	September 30,		December 31,
	2006		2005
Finished products	$	364,201	$	275,985
Work-in-process		39,542		43,747
Raw materials		113,094		113,082
	$	516,837	$	432,814

(2) Weighted average shares used in the computation of basic and diluted net earnings per common share are as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006		2005
Weighted average shares used
for basic net earnings per
common share		48,320,622		51,616,863		48,894,276		52,498,436
Effect of dilutive securities:
Stock options		-		91,066		-		155,365
Weighted average shares used
for diluted net earnings
per common share		48,320,622		51,707,929		48,894,276		52,653,801

Stock options excluded from the computation of diluted earnings per common share because their inclusion would be antidilutive were as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006		2005
Stock options		3,431,175		3,506,850		2,880,125		3,463,850
Average exercise price	$	25.43	$	25.23	$	26.19	$	25.28

(3) Comprehensive income (expense) is as follows:

	Nine Months			Nine Months
	Ended			Ended
	September 30,			September 30,
	2006			2005
Net earnings	$	52,997		$	44,294
Other comprehensive income (expense), net of tax:
Change in fair value of financial instruments accounted
for as hedges		(5,663	)		1,834
Foreign currency translation		870			(166	)
Other comprehensive income (expense)		(4,793	)		1,668
	$	48,204		$	45,962

7

The components of accumulated other comprehensive income (expense), each presented net of tax benefits, are as follows:

	September 30,			December 31,
	2006			2005
Fair value of financial instruments accounted
for as hedges	$	-		$	5,663
Minimum pension liability		(46,608	)		(46,608	)
Foreign currency translation		433			(437	)
	$	(46,175	)	$	(41,382	)

(4) Effective January 1, 2006 we adopted Statement of Financial Accounting Standard No. 123 (Revised 2004) - Share-Based Payment (SFAS No. 123R) using the modified prospective application transition method. Under the modified prospective approach, the provisions of SFAS No. 123R are applied to new awards and to awards modified, repurchased or cancelled after the effective date. Additionally, compensation cost is also recognized for the unvested portion of awards granted prior to adoption. Prior year financial statements are not restated.

The adoption of SFAS No. 123R resulted in share-based compensation expense of $1,551 for the three months ended September 30, 2006 and $4,700 for the nine months ended September 30, 2006. For the nine months ended September 30, 2005 we accounted for stock based compensation plans under APB Opinion No. 25 “Accounting for Stock Issued to Employees.” The following table illustrates the impact on net earnings and earnings per common share if the fair value method had been applied.

	Three			Nine
	Months			Months
	Ended			Ended
	September 30, 2005			September 30, 2005
Net earnings	$	9,919		$	44,294
Deduct: Stock-based employee compensation expense determined under fair value based
method, net of income tax benefits		(1,135	)		(3,355	)
Net earnings - pro forma	$	8,784		$	40,939
Earnings per share - basic:
As reported	$	0.19		$	0.84
Pro forma	$	0.17		$	0.78
Earnings per share - diluted:
As reported	$	0.19		$	0.84
Pro forma	$	0.17		$	0.78

The stock option plan allows for the granting of options to purchase common stock, restricted stock and restricted stock units. Compensation expense is recognized on a straight-line basis over the vesting period, generally four years for stock options and various terms ranging from one to seventeen years for the restricted stock and restricted stock units.

8

A summary of option activity during the nine months ended September 30, 2006 is presented below:

						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic
	Shares			Price		Term (Years)		Value
Outstanding at December 31, 2005		3,916,350		$	23.88
Granted		682,800			24.01
Exercised		(395,625	)		20.46
Cancelled		(280,900	)		24.15
Outstanding at September 30, 2006		3,922,625		$	24.22		5.6	$	1,118
Exercisable at September 30, 2006		2,549,800		$	24.30		4.1	$	1,075

The aggregate intrinsic value was calculated using the difference between the market price of our stock on September 30, 2006 and the exercise price for only those options that have an exercise price that is less than the market price.

The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model. The risk-free interest rate is based upon U.S. Treasury Securities with a term similar to the expected life of the option grant. The dividend yield is calculated based upon the dividend rate on the date of the grant. The expected term of the option grant is based upon historical exercise results. Expected volatility is calculated based upon the historical volatility over a period equal to the expected term of the option grant. The weighted-average assumptions used to value stock option grants issued in the nine months ended September 30, 2006 are as follows:

	2006			2005
Risk-free interest rate		4.42	%		3.77	%
Expected dividend yield		2.45	%		2.62	%
Expected term (years)		5.6			6.0
Expected volatility		39.91	%		42.61	%

Information pertaining to option activity during the three months and nine months ended September 30, 2006 and 2005 was as follows:

	Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2006		2005		2006		2005
Weighted average fair value per share
of options granted	$	6.35	$	6.45	$	8.54	$	8.26
Total intrinsic value of
stock options exercised	$	-	$	1,338	$	1,392	$	4,060

9

Non-vested restricted stock and restricted stock unit activity for the nine months ended September 30, 2006 are as follows:

	Shares
Non-vested balance at December 31, 2005		52,166
Granted		60,190
Vested		(13,334	)
Forfeited		(14,941	)
Non-vested balance at September 30, 2006		84,081

The fair value of restricted stock and restricted stock units issued during the nine months ended September 30, 2006 was $1,478.

As of September 30, 2006 there was $10,833 of total unrecognized compensation cost related to non-vested share-based compensation arrangements under the plan. This cost is expected to be recognized over a weighted-average period of 1.9 years.

(5) The components of net periodic pension cost for Company-sponsored defined benefit plans are as follows:

	Nine Months Ended
	September 30, 2006,			September 30, 2005
Service cost	$	4,091		$	10,200
Interest cost		18,425			19,275
Expected return on plan assets		(19,124	)		(19,500	)
Net amortization and deferral		5,504			4,727
	$	8,896		$	14,702

As of December 31, 2005 we amended the defined benefit plans, freezing and ceasing future benefits as of that date. Certain transitional benefits will be provided to participants who have attained age 50 and completed 10 years of service as of December 31, 2005. Effective January 1, 2006 retirement benefits are provided to substantially all employees through increased matching contributions to our 401(k) plan. Total retirement costs for the nine months ended September 30, 2006 were $17,867 compared to $15,606 for the nine months ended September 30, 2005.

(6) We have provided guarantees related to store leases for certain independent dealers opening Company-branded stores (e.g., Thomasville Home Furnishings Stores). The guarantees range from one to fifteen years and generally require us to make lease payments in the event of default by the dealer. In the event of default, we have the right to assign or assume the lease. The total future lease payments guaranteed at September 30, 2006 were $85,976. We consider the estimated loss on these guarantees to be insignificant; therefore, as of September 30, 2006 we have not recorded any contingent liability for lease guarantees.

(7) Long-term debt as of September 30, 2006 consisted of the following:

Revolving credit facility	$	150,000
6.83% Senior Notes		150,000
Other		800
	$	300,800

10

On April 21, 2006, we refinanced our revolving credit facility with a group of financial institutions. The new facility is an unsecured revolving credit facility with a commitment of $400,000 and a maturity date of April 21, 2011. The facility allows for cash borrowings and issuance of letters of credit. Cash borrowings under the revolving credit facility bear interest at a base rate or at an adjusted Eurodollar rate plus an applicable margin, depending upon which type of loan we select. The applicable margin over the adjusted Eurodollar rate is dependent upon our credit ratings. The revolving credit facility has no mandatory principal payments. The facility requires us to meet certain financial covenants including a maximum leverage ratio and minimum fixed charge coverage ratio.

On May 17, 2006, we entered into a Note Purchase Agreement with a group of private investors. The Note Purchase Agreement allowed for the issuance and sale of $150,000 of 6.83% Senior Notes, and the proceeds were used to reduce borrowings under the revolving credit facility. These notes mature over varying dates ranging from May 17, 2014 through May 17, 2018. The Note Purchase Agreement requires the same financial covenants as the revolving credit facility with more permissible limits.

In May 2004, in order to reduce the impact of changes in interest rates on our floating rate long-term debt, we entered into three interest rate swap agreements, each having a notional amount of $100,000 and a termination date in May 2007. As a result of the April 21, 2006 refinancing we discontinued accounting for the interest rate swaps as cash flow hedges as of March 31, 2006 and reclassified the gain of $8,503 ($5,408 net of income tax expense) from accumulated other comprehensive income into earnings. As a result of reducing the amount of floating rate debt outstanding with the proceeds of the Note Purchase Agreement, on May 18, 2006 we terminated $150 million of interest rate swap agreements.

(8) Other long-term liabilities consist of the following:

	September 30, 2006		December 31, 2005
Pension Liability	$	79,560	$	72,678
Other		49,670		29,841
	$	129,230	$	102,519

Other long-term liabilities includes the non-current portion of 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.

(9) In September 2006, Thomasville received an unfavorable judgment in a litigation matter originating over ten years ago. This matter has had several favorable and unfavorable judgments over the years and we will continue to aggressively defend ourselves in this case. However, based upon legal advice and our current evaluation of the case we have recorded a charge of $1,300 in the three month period ended September 30, 2006. If we are unsuccessful in defending our position in this case we could be potentially liable for an additional $3,500.

11

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

RESULTS OF OPERATIONS

Furniture Brands International, Inc. is one of the largest furniture companies in the United States. We are one company marketing our products through four operating subsidiaries: Broyhill Furniture Industries, Inc.; Lane Furniture Industries, Inc.; Thomasville Furniture Industries, Inc. and HDM Furniture Industries, Inc. (which includes the operations of Henredon, Drexel Heritage and Maitland-Smith). Through these four subsidiaries, we design, manufacture, source, market and distribute a full line of branded products consisting of both wood and upholstered furniture.

Comparison of Three Months and Nine Months Ended September 30, 2006 and 2005

Selected financial information for the three months and the nine months ended September 30, 2006 and September 30, 2005 is presented below:

(Dollars in millions except per share data)

	Three Months Ended
	September 30, 2006					September 30, 2005
			% of					% of
	Dollars		Net Sales			Dollars		Net Sales
Net sales	$	568.9		100.0	%	$	557.9		100.0	%
Cost of sales		446.1		78.4			438.1		78.5
Gross profit		122.8		21.6			119.8		21.5
Selling, general and administrative expenses		109.8		19.3			103.0		18.5
Earnings from operations		13.0		2.3			16.8		3.0
Interest expense		4.9		0.8			3.1		0.6
Other income, net		0.8		0.1			0.9		0.2
Earnings before income tax expense		8.9		1.6			14.6		2.6
Income tax expense		3.1		0.6			4.7		0.8
Net earnings	$	5.8		1.0	%	$	9.9		1.8	%
Net earnings per common share - diluted	$	0.12		-		$	0.19		-

	Nine Months Ended
	September 30, 2006					September 30, 2005
			% of					% of
	Dollars		Net Sales			Dollars		Net Sales
Net sales	$	1,831.6		100.0	%	$	1,793.2		100.0	%
Cost of sales		1,418.7		77.5			1,390.2		77.5
Gross profit		412.9		22.5			403.0		22.5
Selling, general and administrative expenses		332.4		18.1			331.0		18.5
Earnings from operations		80.5		4.4			72.0		4.0
Interest expense		12.6		0.7			9.1		0.5
Other income, net		13.4		0.7			3.4		0.2
Earnings before income tax expense		81.3		4.4			66.3		3.7
Income tax expense		28.3		1.5			22.0		1.2
Net earnings	$	53.0		2.9	%	$	44.3		2.5	%
Net earnings per common share - diluted	$	1.08		-		$	0.84		-

Net sales for the three months ended September 30, 2006 were $568.9 million, compared to $557.9 million in the three months ended September 30, 2005, an increase of $11.0 million or 2.0%. For the nine months ended September 30, 2006, net sales increased $38.4 million or 2.1%, to $1,831.6 million from $1,793.2 million for the nine months ended September 30, 2005. The sales increase in the three months ended September 30, 2006 was driven by continued demand for Lane and Broyhill upholstered product; improved sales performances at certain of our other brands, including Maitland-Smith, Hickory Chair, HBF and Virginia Operations; partially offset by declines at Thomasville, Henredon and

12

Drexel Heritage. In addition to the third quarter impact noted above, net sales for the nine months ended September 30, 2006 was negatively impacted by sales declines at Broyhill due to the continued transition of case goods from domestic production to an imported product and upholstery service issues at HDM in the first half of the year.

Cost of sales for the three months ended September 30, 2006 was $446.1 million compared to $438.1 million in the three months ended September 30, 2005. Cost of sales as a percentage of net sales in the three months ended September 30, 2006 was 78.4%, basically flat compared with 78.5% in the three months ended September 30, 2005. Cost of sales for the nine months ended September 30, 2006 was $1,418.7 million compared to $1,390.2 million in the nine months ended September 30, 2005. Cost of sales as a percentage of net sales was 77.5% in the nine months ended September 30, 2006 and September 30, 2005. Restructuring, asset impairment and severance charges included in cost of sales were $2.6 million for the three months ended September 30, 2006; $2.4 million for the three months ended September 30, 2005; $4.2 million for the nine months ended September 30, 2006; and $5.5 million for the nine months ended September 30, 2005. Excluding restructuring, asset impairment and severance charges, cost of sales as a percentage of net sales were essentially flat in the three month and nine month periods due to a combination of leverage at the sales line, cost savings programs, and price increases. These benefits were offset by raw material prices increases and plant inefficiencies.

Selling, general and administrative expenses for the three months ended September 30, 2006 were $109.8 million compared to $103.0 million in the three months ended September 30, 2005. As a percentage of net sales, these expenses were 19.3% and 18.5% for the three months ended September 30, 2006 and September 30, 2005. Selling, general and administrative expenses were $332.4 million for the nine months ended September 30, 2006 and $331.0 million for the nine months ended September 30, 2005. As a percentage of net sales, these expenses were 18.1% and 18.5% of net sales. Restructuring, asset impairment and severance charges included in selling, general and administrative expenses were $2.0 million for the three months ended September 30, 2006; $1.2 million for the three months ended September 30, 2005; $2.1 million for the nine months ended September 30, 2006; and $14.4 million for the nine months ended September 30, 2005. Included in the quarter were charges for stock-based compensation, operating expenses from additional Company-owned stores (21 stores at September 30, 2006 compared with 15 stores at September 30, 2005) and a charge for a litigation matter originating over ten years ago. Selling, general and administrative expenses increased for the nine months ended September 30, 2006 compared with the prior year period due to increases in stock-based compensation, bad debt expenses, operating expenses for Company-owned stores and the litigation charge, partially offset by reduced advertising costs.

Interest expense totaled $4.9 million and $12.6 million for the three months and nine months ended September 30, 2006 compared to $3.1 million and $9.1 million in the prior year comparable periods. Interest expense increased in both the three month and nine month periods due to higher interest rates on the refinanced long-term debt and the termination of hedge accounting on the interest rate swaps effective March 31, 2006.

Other income, net totaled $0.8 million for the three months ended September 30, 2006 and $13.4 million for the nine months ended September 30, 2006 compared to $0.9 million for the three months ended September 30, 2005 and $3.4 million for the nine months ended September 30, 2005. For the nine months ended September 30, 2006 other income consisted of interest on short-term investments and notes receivable of $2.3 million, an $8.8 million gain on a cash flow hedge as a result of refinancing the revolving credit facility, and other miscellaneous income and expense items totaling $2.3 million. For the nine months ended September 30, 2005 other income consisted of interest on short-term investments and notes receivable of $1.5 million, proceeds received from an anti-trust lawsuit settlement of $0.6 million, and other miscellaneous income and expense items totaling $1.4 million.

The effective income tax rate was 35.2% for the three months ended September 30, 2006, 31.9% for the three months ended September 30, 2005, 34.9% for the nine months ended September 30, 2006, and 33.2% for the nine months ended September 30, 2005. The effective tax rates for 2006 increased mainly due to certain state income tax credits no longer being available. This increase was partially offset in the three month and nine month periods by the favorable impact of domestic manufacturing deductions included in the American Jobs Creation Act of 2004 and reductions for tax positions of prior years released in the first quarter of 2006.

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Net earnings per common share and average common shares outstanding used in the calculation of net earnings for the three months and nine months ending September 30, 2006 and September 30, 2005 were as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2006		2005		2006		2005
Net earnings per common share:
Basic		0.12		0.19		1.08		0.84
Diluted		0.12		0.19		1.08		0.84
Average common shares outstanding:
Basic		48,320,622		51,616,863		48,894,276		52,498,436
Diluted		48,320,622		51,707,929		48,894,276		52,653,801

The reduction in average shares outstanding was due to share repurchases during 2005 and 2006.

FINANCIAL CONDITION

Working Capital

Cash and cash equivalents at September 30, 2006 amounted to $41.6 million, compared with $114.3 million at December 31, 2005. During the nine months ended September 30, 2006, net cash used by operating activities totaled $9.6 million, net cash used by investing activities totaled $14.7 million, and net cash used by financing activities totaled $48.4 million. The decrease in net cash provided by operating activities as compared with the nine months ended September 30, 2005 is the result of working capital increases, primarily accounts receivable and inventory. Inventory increased at each of the Brands for various reasons; including additions for quick-ship programs and improved service positions; an increase in certain domestic products to assure no supply disruptions as they are transitioned to imports; and the addition of Company-owned retail stores. Some of these increases are one-time increases and some are timing issues.

Working capital was $748.1 million at September 30, 2006, compared with $718.2 million at December 31, 2005. The current ratio was 4.4-to-1 at September 30, 2006, compared to 4.4-to-1 at December 31, 2005.

Financing Arrangements

As of September 30, 2006, long-term debt consisted of the following in millions:

Revolving credit facility (unsecured)	$	150.0
6.83% Senior Notes		150.0
Other		0.8
	$	300.8

To meet short-term capital and other financial requirements, we maintain a $400.0 million revolving credit facility with a group of financial institutions. The revolving credit facility is unsecured and allows for the issuance of letters of credit and cash borrowings. Letters of credit outstanding are limited to no more than $100.0 million, with cash borrowings limited only by the facility's maximum availability less letters of credit outstanding. On September 30, 2006, there were $150.0 million in cash borrowings and $9.2 million in letters of credit outstanding under the revolving credit facility, leaving an excess of $240.8 million available for future liquidity needs.

The facility required us to meet certain financial covenants including a maximum leverage ratio and a minimum fixed charge coverage ratio. As of September 30, 2006, we were in compliance with all financial covenants.

Cash borrowings under the revolving credit facility bear interest at a base rate or at an adjusted Eurodollar rate plus an applicable margin, depending upon which type of loan we select. The applicable margin over the Eurodollar rate is subject to adjustment based upon achieving certain credit ratings. At September 30, 2006, loans outstanding under the

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revolving credit facility consisted of $150.0 million based upon the adjusted Eurodollar rate currently at an annual interest rate of 6.08%.

On May 17, 2006, the Company entered into a Note Purchase Agreement with a group of private investors. The Note Purchase Agreement allowed for the issuance and sale of $150,000 of 6.83% Senior Notes, and the proceeds were used to reduce borrowings under the revolving credit facility. These notes mature over varying dates ranging from May 17, 2014 through May 17, 2018. The Note Purchase Agreement requires the same financial covenants as the revolving credit facility with more permissible limits.

We believe that our current cash balance, cash generated from operations, and our revolving credit facility will be adequate to meet liquidity requirements for the foreseeable future.

Recently Issued Statements of Financial Accounting Standards

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (FIN 48). FIN 48 clarifies the recognition threshold and measurement of a tax position taken in a tax return. FIN 48 also requires expanded disclosure with respect to the uncertainty of income taxes. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently evaluating the requirements of FIN 48 and the impact this interpretation may have on our financial statements.

In September, 2006 the FASB issued Statement of Financial Accounting Standard (SFAS) No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132 (r)”. This standard requires an employer to:

-   Recognize the funded status of a benefit plan in its statement of financial position.

-   Recognize as a component of other comprehensive income the actuarial gains and losses and the prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit costs.

The standard is effective for fiscal years ending after December 15, 2006. As of December 31, 2006 we estimate the required adjustment to our statement of financial position would increase the liability for pension expense and increase accumulated other comprehensive loss by approximately $10.0 million.

In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108 (SAB 108). Due to diversity in practice, SAB 108 expresses SEC Staff views regarding the process by which financial statement misstatements are evaluated for purposes of determining whether restatement is necessary. SAB 108 is effective for fiscal years ending after November 15, 2006. We do not believe SAB 108 will have a material impact on our results of operations or financial position.

OUTLOOK

We currently expect net sales to be flat versus the fourth quarter of last year and net earnings per diluted common share to be in the $0.11 to $0.15 range. This includes the effect of $0.07 in previously disclosed restructuring, asset impairment and severance charges. This also includes the effect of $0.03 in increased interest expense due to the upfront recognition of the gain on the interest rate swaps, also previously disclosed.

FORWARD-LOOKING STATEMENTS

We have made forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include our expected sales, earnings per share, profit margins, and cash flows, the effects of certain manufacturing realignments and other business strategies, the prospects for the overall business environment and other statements containing the words "expects," "anticipates," "estimates," "believes," and words of similar import. We caution investors any such forward-looking statements are not guarantees of future performance and certain factors may cause actual results to differ materially from those in the forward-looking statements. Such factors include, but are not limited to: changes in economic conditions; failure to accomplish our strategic imperatives; loss of market share due to competition; failure to forecast demand or anticipate or respond to changes in consumer tastes and fashion trends; failure to achieve projected mix of product sales; business failures of large customers; distribution and cost savings programs; manufacturing realignments; increased reliance on offshore (import) sourcing of various products; fluctuations in the cost, availability and quality of raw materials; product liability

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uncertainty; environmental regulations; future acquisitions; impairment of goodwill and other intangible assets; anti-takeover provisions that could result in a decreased valuation of our common stock; loss of funding sources; and our ability to open and operate new retail stores successfully. Other risk factors may be listed from time to time in our future public releases and SEC reports. Please refer to our Annual Report on Form 10-K for a more detailed explanation of our risk factors.

Item 3.Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk from changes in interest rates. Our exposure to interest rate risk consists of our floating rate revolving credit facility. The cash flow aspect of this risk is managed using interest rate swaps to fix a portion of our floating rate long-term debt. Currently, interest rate swaps fix the cashflow related to the entire outstanding balance on the revolving credit facility; therefore, an increase in interest rates would have no impact on our cash flow. However, because these swaps are not considered hedges under SFAS # 133, changes to interest rates will have an impact on our interest expense, partially offset by changes in market value of swaps.

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Item 4.Controls and Procedures

(a) Our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures are effective based on their evaluation of these controls and procedures as of the end of the period covered by this report. Notwithstanding the foregoing, there can be no assurance that our disclosure controls and procedures will detect or uncover all failures of persons within the Company and its consolidated subsidiaries to disclose material information otherwise required to be set forth in our report.

(b) No change in our internal control over financial reporting has occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

Item 1A.Risk Factors

Additional incentives may be needed to reduce current inventory levels.

In order to reduce our inventory balance to a more acceptable level, we may have to offer additional incentives, including increased discounts to our normal selling prices. These additional discounts would result in lower gross margins and, therefore, would reduce net earning in future periods.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

On July 28, 2005 the Board of Directors authorized the repurchase of up to $100 million of our Common Stock over the next twelve month period. As of July 28, 2006, 4,446,872 shares had been purchased, leaving an unused balance of $7,183,082 under this authorization which has expired.

On January 26, 2006 the Board of Directors authorized the repurchase of an additional $50 million of our Common Stock over the next twelve months period. As of September 30, 2006 no shares have been purchased under this authorization.

Item 6.                        Exhibits

31	Certifications of W. G. Holliman, Chief Executive Officer of the Company and Denise L. Ramos, Chief Financial Officer of the Company, Pursuant to Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certifications of W. G. Holliman, Chief Executive Officer of the Company and Denise L. Ramos, Chief Financial Officer of the Company, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Furniture Brands International, Inc.

(Registrant)

By /s/ Steven W. Alstadt

Steven W. Alstadt

Controller and

Chief Accounting Officer

Date: November 9 , 2006

EXHIBIT INDEX

Exhibit No.	Description
31	Certifications of W. G. Holliman, Chief Executive Officer of the Company and Denise L. Ramos, Chief Financial Officer of the Company, Pursuant to Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certifications of W. G. Holliman, Chief Executive Officer of the Company and Denise L. Ramos, Chief Financial Officer of the Company, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.