Fbi Wind Down 10Q 2010 Q2 Quarterly report

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 June 30, 2010


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	Smaller reporting company o
	(Do not check if a smaller reporting company)

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

o Yesþ No

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

50,855,206 shares as of July 31, 2010

FURNITURE BRANDS INTERNATIONAL, INC.
TABLE OF CONTENTS


	Page
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements		3

Consolidated Financial Statements (unaudited):

Consolidated Balance Sheets:		3

June 30, 2010
December 31, 2009

Consolidated Statements of Operations:		4

Three Months Ended June 30, 2010
Three Months Ended June 30, 2009

Six Months Ended June 30, 2010
Six Months Ended June 30, 2009

Consolidated Statements of Cash Flows:		6

Six Months Ended June 30, 2010
Six Months Ended June 30, 2009

Notes to Consolidated Financial Statements		7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		17

Item 3. Quantitative and Qualitative Disclosures about Market Risk		26

Item 4. Controls and Procedures		26

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		27

Item 1A. Risk Factors		27

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		31

Item 6. Exhibits		32

Trademarks and trade names referred to in this filing include Broyhill, Lane, Thomasville, Drexel Heritage, Henredon, Hickory Chair, Pearson, Laneventure, and Maitland-Smith, among others.

PART I


Item 1.		*Financial Statements*

FURNITURE BRANDS INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)

(unaudited)


	June 30,			December 31,
	2010			2009

ASSETS
Current assets:
Cash and cash equivalents	$	102,790		$	83,872
Receivables, less allowances of $15,680 ($26,225 at December 31, 2009)		121,639			125,513
Income tax refunds receivable		6,983			58,976
Inventories		251,454			226,078
Prepaid expenses and other current assets		9,476			9,274

Total current assets		492,342			503,713


Property, plant, and equipment, net		127,693			134,352
Trade names		87,608			87,608
Other assets		38,694			32,432

Total assets	$	746,337		$	758,105


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	77,000		$	17,000
Accounts payable		89,894			83,813
Accrued employee compensation		31,138			21,036
Other accrued expenses		42,203			54,912

Total current liabilities		240,235			176,761


Long-term debt		—			78,000
Deferred income taxes		25,217			25,737
Pension liability		113,545			135,557
Other long-term liabilities		75,209			79,259

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 – 56,482,541 shares issued at June 30, 2010 and December 31, 2009		56,483			56,483
Paid-in capital		193,403			224,133
Retained earnings		275,574			267,829
Accumulated other comprehensive loss		(107,261	)		(111,471	)
Treasury stock at cost 5,627,335 shares at June 30, 2010 and 7,797,319 shares at December 31, 2009		(126,068	)		(174,183	)

Total shareholders’ equity		292,131			262,791

Total liabilities and shareholders’ equity	$	746,337		$	758,105

See accompanying notes to consolidated financial statements.

FURNITURE BRANDS INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands except per share information)

(unaudited)


	Three Months Ended June 30,
	2010			2009

Net sales	$	289,463		$	288,263

Cost of sales		215,072			226,635


Gross profit		74,391			61,628

Selling, general, and administrative expenses		75,166			76,015


Operating loss		(775	)		(14,387	)

Interest expense		734			1,512

Other income, net		462			761


Loss before income tax expense (benefit)		(1,047	)		(15,138	)

Income tax expense (benefit)		(5,295	)		855


Net earnings (loss)	$	4,248		$	(15,993	)


Net earnings (loss) per common share — basic and diluted:	$	0.09		$	(0.33	)

Weighted average shares of common stock outstanding:
Basic		49,350			48,282
Diluted		49,414			48,282

See accompanying notes to consolidated financial statements.

FURNITURE BRANDS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share information)
(unaudited)


	Six Months Ended June 30,
	2010			2009

Net sales	$	611,854		$	645,134

Cost of sales		453,014			503,165


Gross profit		158,840			141,969

Selling, general, and administrative expenses		155,030			159,229


Operating earnings (loss)		3,810			(17,260	)

Interest expense		1,578			3,300

Other income, net		741			1,687


Earnings (loss) before income tax expense (benefit)		2,973			(18,873	)

Income tax expense (benefit)		(4,772	)		1,296


Net earnings (loss)	$	7,745		$	(20,169	)


Net earnings (loss) per common share — basic and diluted:	$	0.16		$	(0.42	)

Weighted average shares of common stock outstanding:
Basic		48,826			48,301
Diluted		48,828			48,301

See accompanying notes to consolidated financial statements.

FURNITURE BRANDS INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Six Months Ended June 30,
	2010			2009
Cash flows from operating activities:
Net earnings (loss)	$	7,745		$	(20,169	)
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Depreciation and amortization		12,025			12,675
Compensation expense related to stock option grants and restricted stock awards		893			(1,414	)
Provision (benefit) for deferred income taxes		(520	)		717
Other, net		(1,978	)		(1,639	)
Changes in operating assets and liabilities:
Accounts receivable		3,874			40,947
Income tax refunds receivable		51,993			35,808
Inventories		(25,376	)		45,069
Prepaid expenses and other assets		(808	)		(2,527	)
Accounts payable and other accrued expenses		3,472			(62,771	)
Other long-term liabilities		(5,013	)		(11,159	)

Net cash provided by operating activities		46,307			35,537


Cash flows from investing activities:
Additions to property, plant, equipment, and software		(11,371	)		(6,003	)
Proceeds from the disposal of assets		2,050			2,159

Net cash used in investing activities		(9,321	)		(3,844	)


Cash flows from financing activities:
Payments of long-term debt		(18,000	)		(61,000	)
Other		(68	)		(10	)

Net cash used in financing activities		(18,068	)		(61,010	)


Net increase (decrease) in cash and cash equivalents		18,918			(29,317	)
Cash and cash equivalents at beginning of period		83,872			106,580

Cash and cash equivalents at end of period	$	102,790		$	77,263


Supplemental disclosure:

Cash refunds for income taxes, net	$	(56,488	)	$	(35,224	)
Cash payments for interest expense	$	1,434		$	3,686

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. and its subsidiaries (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 2009 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, 2009. The consolidated financial statements consist of the accounts of our company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Financial information reported in prior periods is reflected in a manner consistent with the current period presentation. The results for the three and six months ended June 30, 2010 are not necessarily indicative of the results which will occur for the full fiscal year ending December 31, 2010.

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 licensing arrangements. In addition, we have been executing plans to reduce our workforce and to centralize certain functions, including accounting, human resources, and supply chain management, to a shared services function.

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


	Three Months Ended June 30,					Six Months Ended June 30,
	2010		2009			2010			2009
Restructuring charges:
Contract termination costs	$	—	$	—		$	614		$	—
Termination benefits		822		1,912			855			2,330
Closed store occupancy and lease costs		988		610			1,920			2,005
Gain on the sale of assets		—		(175	)		(928	)		(175	)

		1,810		2,347			2,461			4,160
Impairment charges		120		—			187			—

	$	1,930	$	2,347		$	2,648		$	4,160


Statement of Operations classification:
Cost of sales	$	—	$	1,788		$	33		$	2,206
Selling, general, and administrative expenses		1,930		559			2,615			1,954

	$	1,930	$	2,347		$	2,648		$	4,160

Asset impairment charges were recorded to reduce the carrying value of idle facilities and related machinery and equipment to their net realizable value. The determination of the impairment charges were 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 $10,139 at June 30, 2010 and $9,675 at December 31, 2009.

Closed store occupancy and lease costs include occupancy costs associated with closed retail locations, early contract termination settlements for retail leases, and adjustments to 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 June 30,
	2010			2009
Accrual for closed store lease liabilities at beginning of period	$	24,574		$	26,669
Charges (credit) to expense		(336	)		(1,502	)
Less cash payments		2,102			3,648

Accrual for closed store lease liabilities at end of period	$	22,136		$	21,519

In the second quarter of 2009, we approved a plan to open two previously closed company-owned retail stores during 2009. As a result of this decision, the closed store lease liability of $1,879 previously recorded for these company-owned stores was reversed in the second quarter of 2009.

At June 30, 2010, $5,760 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 June 30, 2010 are as follows:


	Minimum
	Lease
	Payments -
Year	Closed Stores
2010	$	4,223
2011		7,873
2012		8,046
2013		7,940
2014		6,828
thereafter		5,111

	$	40,021

Activity in the accrual for termination benefits was as follows:


	Three Months Ended June 30,
	2010		2009
Accrual for termination benefits at beginning of period	$	1,945	$	2,608
Charges to expense		822		1,912
Less cash payments		1,769		3,057

Accrual for termination benefits at end of period	$	998	$	1,463

The accrual for termination benefits at June 30, 2010 is classified as accrued employee compensation.

3. INVENTORIES

Inventories are summarized as follows:


	June 30,		December 31,
	2010		2009
Finished products	$	155,027	$	142,982
Work-in-process		16,919		15,320
Raw materials		79,508		67,776

	$	251,454	$	226,078

4. PROPERTY, PLANT, AND EQUIPMENT

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


	June 30,		December 31,
	2010		2009
Land	$	11,375	$	11,442
Buildings and improvements		190,136		190,760
Machinery and equipment		221,381		251,046

		422,892		453,248
Less accumulated depreciation		295,199		318,896

	$	127,693	$	134,352

Depreciation expense was $4,799 and $5,543 for the three months ended June 30, 2010 and June 30, 2009, respectively, and $9,793 and $10,834 for the six months ended June 30, 2010 and June 30, 2009, respectively.

5. LONG-TERM DEBT

Long-term debt consists of the following:


	June 30,		December 31,
	2010		2009
Asset-based loan	$	77,000	$	95,000
Less: current maturities		77,000		17,000

Long-term debt	$	-	$	78,000

On August 9, 2007, we refinanced our revolving credit facility with a group of financial institutions. The facility is a five-year asset-based loan (“ABL”) with commitments to lend up to $450,000. The facility is secured by our accounts receivable, inventory and cash and is guaranteed by all of our domestic subsidiaries.

The ABL provides for the issuance of letters of credit and cash borrowings. 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. As of June 30, 2010, there were $77,000 of cash borrowings and $15,693 in letters of credit outstanding.

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 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 $75,000 of availability, we are subject to cash dominion and weekly borrowing base reporting. If we fall below $62,500 of availability, we are also subject to the fixed charge coverage ratio, which we currently do not meet. As of June 30, 2010, excess availability was $79,584. Therefore, we have $4,584 of availability without being subject to the cash dominion and weekly reporting covenants of the agreement and $17,084 of availability before we would be subject to the fixed charge coverage ratio.

We manage our excess availability to remain above the $75,000 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 2010. In addition to our borrowing capacity described above, we had $102,790 of cash and cash equivalents at June 30, 2010.

The borrowing base is 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 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.

Cash borrowings under the ABL will be at either (i) a base rate (the greater of the prime rate or the Federal Funds Effective Rate plus 1/2%) or (ii) an adjusted Eurodollar rate plus an applicable margin, depending upon the type of loan selected. The applicable margin over the adjusted Eurodollar rate is 1.50% as of June 30, 2010 and will fluctuate with excess availability. As of June 30, 2010, loans outstanding under the ABL consisted of $65,000 based on the adjusted Eurodollar rate at a weighted average interest rate of 2.09% and $12,000 based on the adjusted prime rate at an interest rate of 3.25%. The weighted average interest rate for all loans outstanding as of June 30, 2010 was 2.27%.

Under the terms of the ABL, we are required to comply with certain operating covenants and provide certain representations to the financial institutions, including a representation after each annual report is filed with the Securities and Exchange Commission that our pension underfunded status does not exceed $50,000 for any plan. After the filing of our Form 10-K for the year ended December 31, 2008, we would not have been in compliance with this representation. However, we obtained a waiver (the “waiver”) to this required representation (the “representation”) until the earlier of January 1, 2011 or such date that the pension relief, under the Worker, Retiree, and Employer Recovery Act of 2008, signed into law on December 23, 2008, ceases to be applicable to our plan. As consideration for the waiver, we agreed to the modification of certain administrative clauses in the ABL agreement, and as a result we agreed to 1) submit condensed mid-month borrowing base information and 2) increase the frequency, from quarterly to monthly, at which we submit certain financial information to the financial institutions.

At the December 31, 2009 measurement date, the underfunded status of our qualified pension plan was $115,488, which exceeds the $50,000 threshold by $65,488. We considered the underfunded status of our qualified pension plan in determining the classification of amounts outstanding under the ABL. Because the waiver from our requirement to produce the representation regarding our pension underfunded status expires within a period less than one year from the balance sheet date, and as the debt will become callable at the discretion of the financial institutions if this covenant is not satisfied in January 2011, we have classified all amounts outstanding under the ABL as current maturities as of June 30, 2010. The classification of our outstanding debt will likely remain current until the pension underfunded status, which was $115,488 at December 31, 2009, is reduced to an amount less than $50,000; the waiver is extended to a period greater than one year from the balance sheet date; the terms of the ABL are modified to remove the representation requirement; or the outstanding debt of $77,000 is repaid. Our future pension underfunded status may change significantly and is dependent on several factors including contributions to the plan, which may be in the form of cash, company common stock, or a combination of both; changes in bond yields and the resulting effect on the discount rate used to measure the pension obligation; and changes in the market value of plan assets. For additional information regarding the funded status of our pension plan and required future contributions, see Note 7. Employee Benefits below.

6. LIQUIDITY

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 under our ABL, pension funding requirements, and, in 2010, receipt of income tax refunds.

We are focused on effective cash management. However, if we do not have sufficient cash reserves, cash flow from our operations, or our borrowing capacity under our ABL is insufficient, we may need to raise additional funds through equity or debt financings in the future in order to meet our operating and capital needs. If additional funds were to be needed, we may not be able to secure adequate debt or equity financing on favorable terms, or at all, at the time when we need such funding. In the event that we are unable to raise additional funds, our liquidity will be adversely impacted and our business could suffer. If we are able to secure additional financing, these funds could be costly to secure and maintain, which could significantly impact our earnings and our liquidity.

At June 30, 2010, we had $102,790 of cash and cash equivalents, $77,000 of debt outstanding, and excess availability to borrow up to an additional $17,084 subject to certain provisions, including those provisions described in Note 5. Long-Term Debt. The breach of any of these provisions could result in a default under the ABL and could trigger acceleration of repayment, which could have a significant adverse impact to our liquidity and our business. While we expect to comply with the provisions of the agreement throughout 2010, deterioration in the economy and our results could cause us to not be in compliance with our ABL 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 to our liquidity and our business.

We considered the underfunded status of our qualified pension plan in determining the classification of amounts outstanding under the ABL. Because the waiver from our requirement to produce the representation regarding our pension underfunded status expires within a period less

than one year from the balance sheet date and as the debt will become callable at the discretion of the financial institutions if this covenant is not satisfied in January 2011, we have classified all amounts outstanding under the ABL as current maturities as of June 30, 2010. The classification of our outstanding debt will likely remain current until the pension underfunded status, which was $115,488 at December 31, 2009, is reduced to an amount less than $50,000; the waiver is extended to a period greater than one year from the balance sheet date; the terms of the ABL are modified to remove the representation requirement; or the outstanding debt of $77,000 is repaid. For additional information regarding the waiver and the classification of our long-term debt, see Note 5. Long-Term Debt above. For additional information regarding the funded status of our pension plan and required future contributions, see Note 7. Employee Benefits below.

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 June 30,				Six Months Ended June 30,
	2010		2009		2010		2009
Defined benefit plans	$	2,714	$	1,727	$	5,428	$	3,454
Defined contribution plan (401k plan) – company		1,691		2,278		3,364		4,259
Other		140		150		270		262

	$	4,545	$	4,155	$	9,062	$	7,975

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Service cost	$	605		$	725		$	1,210		$	1,450
Interest cost		6,464			6,436			12,928			12,872
Expected return on plan assets		(6,227	)		(6,538	)		(12,454	)		(13,076	)
Net amortization and deferral		1,872			1,104			3,744			2,208

Net periodic pension expense	$	2,714		$	1,727		$	5,428		$	3,454

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 will continue to accrue until December 31, 2010 for participants who had attained age 50 and had completed 10 years of service as of December 31, 2005.

We currently provide retirement benefits to our employees through a defined contribution plan which covers all domestic employees. Participating employees may contribute a percentage of their compensation to the plan, subject to limitations imposed by the Internal Revenue Service. We match a portion of the employee’s contribution and employees vest immediately in the company match.

On April 5, 2010, we made cash contributions of $5,400 to the trust funds of our defined benefit plans. In addition, on May 21, 2010, we contributed 2,300,000 shares of our common stock to the trust funds. The fair value of the shares was $7.20 per share, or $16,560 in the aggregate, as of June 3, 2010, the effective date of the registration statement. The contribution of shares is a non-cash transaction and thus is not reflected in the Consolidated Statements of Cash Flows for the six months ended June 30, 2010. We may voluntarily choose to make additional contributions to the trust funds during 2010. 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.

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 may provide additional relief from the funding requirements of the Pension Protection Act of 2006. The act may provide 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. We are assessing the potential benefits and conditions of the act and have not yet determined whether we will elect the provisions of the act.

The projected benefit obligation of our qualified defined benefit pension plan exceeded the fair value of plan assets by $115,488 at December 31, 2009, the measurement date. In December 2008, the federal government passed legislation that provides relief through 2010 from the funding requirements under the Pension Protection Act of 2006. Due to this legislation, our minimum required pension contributions for 2010 are not significant. However, if the relief provided by the federal government 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.

In addition, the funded status of our pension plan also impacts our compliance with the terms of our ABL. For additional information on this, see Note 5. Long-Term Debt above.

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

A summary of option activity for the six months ended June 30, 2010 is presented below:


				Weighted
				Average
				Exercise
	Shares			Price
Outstanding at December 31, 2009		3,072,717		$	18.06
Granted		608,720			6.75
Exercised		—			—
Forfeited or expired		(880,500	)		16.22

Outstanding at June 30, 2010		2,800,937		$	16.18

The weighted average exercise price and the weighted average fair value per share for stock options granted during the six months ended June 30, 2010 was $6.75 and $4.41, respectively. The fair value of each stock option is estimated on the date of grant using the Black-Scholes option pricing model. The following weighted-average assumptions were used to determine the fair value of options granted in the six months ended June 30, 2010:


Risk-free interest rate	1.8	%
Expected dividend yield	0	%
Expected life (in years)	4.0
Expected volatility	91.8	%

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. Expected life is equal to the average expected term from the grant date until exercise. Expected volatility is calculated based upon the historical volatility over a period equal to the expected life of the option grant.

A summary of non-vested restricted stock activity for the six months ended June 30, 2010 is presented below:


				Weighted
				Average
				Grant-Date
	Shares			Fair Value
Outstanding at December 31, 2009		197,553		$	9.48
Granted		746,875			7.96
Vested		(62,021	)		11.08
Forfeited		(18,427	)		10.64

Outstanding at June 30, 2010		863,980		$	8.02

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. For awards with a $6.26 share price objective, the service-based retention period is the later of i) December 19, 2010 or ii) the date upon which the trailing 10 day average price of our common stock reaches the share price objective. For awards with a $9.39 share price objective, the service retention period 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.

A summary of restricted stock unit activity for the six months ended June 30, 2010 is presented below:


	Units with		Units with
	Share Price		Share Price
	Objective of		Objective of
	$6.26		$9.39
Outstanding at December 31, 2009		1,259,958		1,259,958
Granted		—		30,000
Vested		—		—
Forfeited		—		—


Outstanding at June 30, 2010		1,259,958		1,289,958

Compensation expense of $4,463 and $854 was recorded for the six months ended June 30, 2010 and 2009, respectively, for restricted stock unit awards. Compensation expense recorded in the six months ended June 30, 2010 is attributable to performance during the period, increases in the estimated fair value of the awards, and, for certain awards, a reduction in the derived service period over which compensation expense is recognized. Compensation expense recorded in the six months ended June 30, 2009 is attributable to performance during the period and increases in the estimated fair value of the awards, partially offset by forfeiture activity.

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 periods. For the awards with a share price objective of $6.26, the share price objective was achieved in the first quarter of 2010. The achievement of the share price objective prior to the end of the original derived service period necessitated a reduction in the derived service period to a period equal to the remaining service retention period. This reduction in the derived service period resulted in accelerated recognition of compensation expense in the six months ended June 30, 2010. At June 30, 2010, the remaining durations of the derived service periods are 0.5 years and 1.6 years for the awards with $6.26 and $9.39 share price objectives, respectively. The following assumptions were used to determine the fair value of the restricted stock units as of June 30, 2010:


Risk-free interest rate	1.2	%
Expected dividend yield	0.0	%
Expected volatility	97.2	%

The risk-free interest rate is based upon U.S. Treasury Securities with a term similar to that of the remaining term of the grant. The dividend yield is calculated based upon the dividend rate at June 30, 2010. Expected volatility is calculated based upon the historical volatility over a period equal to the remaining term of the grant.

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 June 30,				Six Months Ended June 30,
	2010		2009		2010		2009
Weighted average shares used for basic earnings (loss) per common share		49,350,000		48,282,000		48,826,000		48,301,000
Effect of dilutive stock options and restricted stock		64,000		—		2,000		—

Weighted average shares used for diluted earnings (loss) per common share		49,414,000		48,282,000		48,828,000		48,301,000

Excluded from the computation of diluted earnings (loss) per common share for the three and six months ended June 30, 2010 were options to purchase 2,195,937 and 2,200,937 shares, respectively, at an average price of $19.25 and $19.22 per share, respectively, and 674,632 shares of restricted stock for which vesting is contingent upon certain performance conditions. The options have been excluded from the diluted earnings (loss) per share calculation because their inclusion would be antidilutive. The shares of restricted stock have been excluded from the diluted earnings (loss) per share calculation because the performance conditions would not have been met had the performance period ended on June 30, 2010.

Excluded from the computation of diluted earnings (loss) per common share for both the three and six months ended June 30, 2009 were options to purchase 3,146,542 shares at an average price of $20.12 per share and 422,972 shares of restricted stock. The options and shares of restricted stock 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 benefit of $5,295 and $4,772 in the three and six months ended June 30, 2010, respectively. We recognized income tax expense of $855 and $1,296 in the three and six months ended June 30, 2009, respectively. The increase in income tax benefit in the three and six months ended June 30, 2010 was driven by additional net operating loss carry backs created from contributions to our pension plans in the second quarter of 2010. These contributions allowed us to utilize remaining carry back capacity from previous tax years and increase our income tax refund receivable. In all periods presented, income tax expense (benefit) 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.

As of June 30, 2010 and December 31, 2009, the total amount of unrecognized tax benefits was $8,176 and $8,301 respectively. We recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. As of June 30, 2010 and December 31, 2009, the liability for unrecognized tax benefits included accrued interest of $3,646 and $3,227, and accrued penalties of $969 and $968, respectively. In the six months ended June 30, 2010 and 2009, we recognized interest expense of $493 and $559 and penalty expense of $2 and $163 in the statement of operations, respectively, related to unrecognized tax benefits. In the three months ended June 30, 2010 and 2009, we recognized interest expense of $239 and $215 in the statement of operations, respectively, related to unrecognized tax benefits. The total amount of unrecognized tax benefits at June 30, 2010 that, if recognized, would affect the effective tax rate is $6,577.

At June 30, 2010, the deferred tax assets attributable to federal net operating loss carry forwards were $20,499, state net operating loss carry forwards were $23,472, federal tax credit carry forwards were $3,093, and state tax credit carry forwards were $3,630. 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 Standards Codification section 740. As such, we maintain a valuation allowance for these deferred tax assets which decreased $4,349 and $11,650 in the three and six months ended June 30, 2010, respectively, to $158,325 as of June 30, 2010. The decrease in the valuation allowance in the three and six months ended June 30, 2010 is primarily attributable to decreases in net deferred tax assets, driven by a decrease in certain accrued expenses and the utilization of certain deferred tax assets.

As a result of the valuation allowance established in prior periods for specific deferred tax assets, including certain net operating loss carry forwards, any utilization of these specific assets will result in the recognition of income tax benefit in the period the assets are utilized. In the six months ended June 30, 2010, we utilized net operating loss carry forwards as we realized earnings before income tax expense. The utilization of certain net operating loss carry forwards resulted in a reduction of the valuation allowance which offset income tax expense.

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 June 30,						Six Months Ended June 30,
	2010			2009			2010		2009
Net earnings (loss)	$	4,248		$	(15,993	)	$	7,745	$	(20,169	)
Other comprehensive income:
Pension liability		1,870			1,104			3,740		2,208
Foreign currency translation		(310	)		932			470		261

		1,560			2,036			4,210		2,469
Income tax expense		—			28			—		55

Other comprehensive income		1,560			2,008			4,210		2,414

Total comprehensive income (loss)	$	5,808		$	(13,985	)	$	11,955	$	(17,755	)

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


	June 30,			December 31,
	2010			2009
Pension liability	$	(108,700	)	$	(112,440	)
Foreign currency translation		1,439			969

	$	(107,261	)	$	(111,471	)

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.

We are the prime tenant on operating leases that we have subleased to independent furniture dealers. In addition, we guarantee leases of company-brand 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 six 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 June 30, 2010, the total future payments under lease guarantees were $14,255 and total minimum payments under subleases were $14,277. We considered certain of these independent parties with lease guarantees to be at risk of default and we recorded a lease termination liability of $161 to cover estimated losses on these guaranteed leases.

14. CHANGES IN ESTIMATE

In the fourth quarter of 2009, we recorded a charge of $9,134 which reflected our best estimate of the probable cost to resolve certain international tax and trade compliance matters. As a result of favorable settlements and actions taken by the Company as well as other conditions in the second quarter of 2010, our potential exposure and our estimate of the probable cost to resolve these matters decreased and we recognized a corresponding reduction in selling, general, and administrative expenses of $4,105 in the second quarter of 2010. Our remaining liability for these matters is $4,493 as of June 30, 2010.


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 Operation (“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, and retailers of home furnishings. We market through a wide range of retail channels, from mass merchant stores to single-brand 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, and Maitland-Smith.

Through these brands, we design, manufacture, source, market, and distribute (i) case goods, consisting of bedroom, dining room, and living room 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 promotional-priced case goods and ready-to-assemble furniture.

• Drexel Heritage markets both casegoods and upholstered furniture under the brand names Heritage, Drexel, and dh, 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 a premium-priced brand of 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.

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

Business Trends and Strategy

Sales trended flat in the second quarter of 2010 compared to the second quarter of 2009, but declined 5.2% in the six months ended June 30, 2010 compared to the six months ended June 30, 2009. We believe sales continue to be depressed primarily 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, 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 two quarters of 2010, we have experienced benefits from these measures including increased gross profit as a percentage of sales, decreased selling, general, and administrative expenses, and reduced debt.

In 2010, 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:

	§		Development of 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.

	§		Supporting our retail partners with national advertising, innovative promotions and a web presence that drives consumer traffic to their locations.

	§		Reducing 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 economy and consumer retail environment will remain weak.

Results of Operations

As an aid to understanding our results of operations on a comparative basis, the following tables have been prepared to set forth certain statement of operations and other data for the three and six months ended June 30, 2010 and 2009:


	Three Months Ended June 30,
	2010						2009
				% of						% of
(in millions, except per share data)	Dollars			Net Sales			Dollars			Net Sales
Net sales	$	289.5			100.0	%	$	288.3			100.0	%
Cost of sales		215.1			74.3			226.7			78.6


Gross profit		74.4			25.7			61.6			21.4
Selling, general, and administrative expenses		75.2			26.0			76.0			26.4


Loss from operations		(0.8	)		(0.3	)		(14.4	)		(5.0	)
Interest expense		0.7			0.2			1.5			0.5
Other income, net		0.5			0.2			0.8			0.3


Loss before income tax expense (benefit)		(1.0	)		(0.3	)		(15.1	)		(5.2	)
Income tax expense (benefit)		(5.3	)		(1.8	)		0.9			0.3


Net earnings (loss)	$	4.2			1.5	%	$	(16.0	)		(5.5	)%


Net earnings (loss) per common share — basic and diluted	$	0.09					$	(0.33	)



	Six Months Ended June 30,
	2010						2009
				% of						% of
(in millions, except per share data)	Dollars			Net Sales			Dollars			Net Sales
Net sales	$	611.9			100.0	%	$	645.1			100.0	%
Cost of sales		453.0			74.0			503.2			78.0


Gross profit		158.9			26.0			142.0			22.0
Selling, general, and administrative expenses		155.0			25.3			159.2			24.7


Earnings (loss) from operations		3.8			0.6			(17.3	)		(2.7	)
Interest expense		1.6			0.3			3.3			0.5
Other income, net		0.7			0.1			1.7			0.3


Earnings (loss) before income tax expense (benefit)		3.0			0.5			(18.9	)		(2.9	)
Income tax expense (benefit)		(4.8	)		(0.8	)		1.3			0.2


Net earnings (loss)	$	7.7			1.3	%	$	(20.2	)		(3.1	)%


Net earnings (loss) per common share — basic and diluted	$	0.16					$	(0.42	)

Three Months Ended June 30, 2010 Compared to Three Months Ended June 30, 2009

Net sales for the three months ended June 30, 2010 were $289.5 million compared to $288.3 million in the three months ended June 30, 2009, an increase of $1.2 million, or 0.4%. The increase in net sales was primarily the result of lower price discounts and increased retail sales, partially offset by decisions to abandon unprofitable products, customers, and programs, resulting in lower sales volume.

Gross profit for the three months ended June 30, 2010 increased to $74.4 million compared to $61.6 million in the three months ended June 30, 2009. Gross margin for the three months ended June 30, 2010 increased to 25.7% compared to 21.4% in the three months ended June 30, 2009. The increases in gross profit and gross margin are primarily due to lower price discounts proportionate to sales, increased efficiencies in our supply chain, and improved capacity utilization, partially offset by lower sales.

Selling, general, and administrative expenses decreased to $75.2 million in the three months ended June 30, 2010 from $76.0 million in the three months ended June 30, 2009. The decrease in selling, general, and administrative expenses was primarily due to lower headcount, lower employee benefit costs, reduced exposure to certain international trade compliance matters, lower bad debt expenses, and lower rent expense, partially offset by higher incentive compensation costs and professional fees.

Interest expense for the three months ended June 30, 2010 totaled $0.7 million compared to $1.5 million in the three months ended June 30, 2009. The decrease in interest expense resulted from a reduction in outstanding debt and lower interest rates.

Income tax benefit for the three months ended June 30, 2010 totaled $5.3 million compared to income tax expense of $0.9 million in the three months ended June 30, 2009. The increase in income tax benefit in the three months ended June 30, 2010 was driven by additional net operating loss carry backs created from contributions to our pension plans in the second quarter of 2010. These contributions allowed us to utilize remaining carry back capacity from previous tax years and increase our income tax refund receivable.

Net earnings (loss) per common share were $0.09 and ($0.33) for the three months ended June 30, 2010 and 2009, 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 were 49.4 million for the three months ended June 30, 2010 and 48.3 million for the three months ended June 30, 2009.

Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009

Net sales for the six months ended June 30, 2010 were $611.9 million compared to $645.1 million in the six months ended June 30, 2009, a decrease of $33.3 million, or 5.2%. The decrease in net sales was primarily the result of continued weak retail conditions and decisions to abandon unprofitable products, customers, and programs, resulting in lower sales volume, and was partially offset by lower price discounts and increased retail sales.

Gross profit for the six months ended June 30, 2010 increased to $158.9 million compared to $142.0 million in the six months ended June 30, 2009. Gross margin for the six months ended June 30, 2010 increased to 26.0% compared to 22.0% in the six months ended June 30, 2009. The increases in gross profit and gross margin are primarily due to lower price discounts proportionate to sales, increased efficiencies in our supply chain, and improved capacity utilization, partially offset by lower sales.

Selling, general, and administrative expenses decreased to $155.0 million in the six months ended June 30, 2010 from $159.2 million in the six months ended June 30, 2009. The decrease in selling, general, and administrative expenses was primarily due to lower headcount, lower employee benefit costs, reduced exposure to certain international trade compliance matters, lower bad debt expenses, lower advertising expense, and lower rent expense, partially offset by higher incentive compensation costs and professional fees. The reduction in advertising expense is attributable to a shift in our promotional efforts from direct advertising to other cooperative arrangements with our customers.

Interest expense for the six months ended June 30, 2010 totaled $1.6 million compared to $3.3 million in the six months ended June 30, 2009. The decrease in interest expense resulted from a reduction in outstanding debt and lower interest rates.

Income tax benefit for the six months ended June 30, 2010 totaled $4.8 million compared to income tax expense of $1.3 million in the six months ended June 30, 2009. The increase in income tax benefit in the six months ended June 30, 2010 was driven by additional net operating loss carry backs created from contributions to our pension plans in the second quarter of 2010. These contributions allowed us to utilize remaining carry back capacity from previous tax years and increase our income tax refund receivable.

Net earnings (loss) per common share were $0.16 and ($0.42) for the six months ended June 30, 2010 and 2009, 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 were 48.8 million for the six months ended June 30, 2010 and 48.3 million for the six months ended June 30, 2009.

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 June 30,						Three Months Ended June 30,
(Dollars in millions)	2010			2009			2010			2009
Net sales	$	26.4		$	19.5		$	10.0		$	10.2

Cost of sales		14.8			11.4			6.4			6.7


Gross profit		11.6			8.2			3.6			3.5

Selling, general and administrative expenses – open stores		15.8			12.8			5.6			7.0


Operating loss – open stores (c)		(4.2	)		(4.6	)		(2.0	)		(3.5	)

Selling, general and administrative expenses – closed stores		-			-			1.0			0.6


Operating loss (c)	$	(4.2	)	$	(4.6	)	$	(3.0	)	$	(4.1	)


Number of open stores and showrooms at end of period		52			46			19			23
Number of closed locations at end of period		-			-			27			26
Same-store-sales (d):
Percentage increase (decrease)		21	%		(31	)%		(e	)		(e	)
Number of stores		40			20

	a)		This supplemental data includes company-owned Thomasville retail store locations that were open during the period.

	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 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 eight Drexel stores, two Lane stores, one Henredon store, one Broyhill store, and seven designer showrooms at June 30, 2010; and it is not one of our long-term strategic initiatives to grow company-owned retail store locations for these non-Thomasville brands.

Sales increased for open company-owned Thomasville retail store locations for the three months ended June 30, 2010 as compared to the three months ended June 30, 2009 due to increased same-store-sales of 21% and the operation of additional company-owned stores since June 30, 2009. In addition to the above company-owned stores, there were 73 and 85 Thomasville dealer-owned stores at June 30, 2010 and 2009, respectively.


	Thomasville Stores (a)						All Other Retail Locations (b)
	Six Months Ended June 30,						Six Months Ended June 30,
(Dollars in millions)	2010			2009			2010			2009
Net sales	$	52.0		$	39.1		$	20.0		$	20.5

Cost of sales		29.4			22.8			12.4			13.2


Gross profit		22.6			16.3			7.7			7.3

Selling, general and administrative expenses – open stores		31.1			26.5			11.4			14.2


Operating loss – open stores (c)		(8.5	)		(10.2	)		(3.8	)		(6.9	)

Selling, general and administrative expenses – closed stores		-			-			1.9			2.0


Operating loss (c)	$	(8.5	)	$	(10.2	)	$	(5.7	)	$	(8.9	)


Same-store-sales (d):
Percentage increase (decrease)		18	%		(28	)%		(e	)		(e	)
Number of stores		40			20

Sales increased for open company-owned Thomasville retail store locations for the six months ended June 30, 2010 as compared to the six months ended June 30, 2009 due to increased same-store-sales of 18% and the operation of additional company-owned stores since June 30, 2009.

Financial Condition and Liquidity

Liquidity

Cash and cash equivalents at June 30, 2010 totaled $102.8 million, compared to $83.9 million at December 31, 2009. Net cash provided by operating activities totaled $46.3 million in the six months ended June 30, 2010 compared with $35.5 million in the six months ended June 30, 2009. Increased earnings from operations, higher receipt of income tax refunds receivable, and lower payments of long-term incentive compensation contributed increased cash flow from operations in the six months ended June 30, 2010 as compared to the six months ended June 30, 2009, partially offset by lower cash generated from working capital. Net cash used in investing activities for the six months ended June 30, 2010 totaled $9.3 million compared with $3.8 million in the six months ended June 30, 2009. The increase in cash used in investing activities is primarily the result of greater additions to software, partially offset by fewer additions to property, plant, and equipment. Net cash used in financing activities totaled $18.1 million in the six months ended June 30, 2010 compared with $61.0 million in the six months ended June 30, 2009. Net cash used in financing activities in both periods consisted of payment of long-term debt.

Working capital was $252.1 million at June 30, 2010, compared to $327.0 million at December 31, 2009. The current ratio was 2.0-to-1 at June 30, 2010, compared to 2.8-to-1 at December 31, 2009. The decrease in working capital primarily resulted from the reclassification of long-term debt from non-current liabilities to current liabilities in the first quarter of 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 under our asset-based loan (“ABL”), pension funding requirements, and, in 2010, receipt of income tax refunds.

At June 30, 2010, we had $102.8 million of cash and cash equivalents, $77.0 million of debt outstanding, and excess availability to borrow up to an additional $17.1 million subject to certain provisions, including those provisions described in “Financing Arrangements” below. The breach of any of these provisions could result in a default under the ABL and could trigger acceleration of repayment, which could have a significant adverse impact on our liquidity and our business. While we expect to comply with the provisions of the agreement throughout 2010, deterioration in the economy and our results could cause us to not be in compliance with our ABL 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 to our liquidity and our business.

As described in “Financing Arrangements” below, we obtained a waiver from our requirement to provide a representation concerning our pension underfunded status to the financial institutions from which we obtained the ABL. Absent this waiver, we would not have been able to satisfy this requirement at June 30, 2010. The waiver expires upon the earlier of January 1, 2011 or such date that the pension relief, under the Worker, Retiree, and Employer Recovery Act of 2008, signed into law on December 23, 2008, ceases to be applicable to our plan. Because the waiver expires within a period less than one year from the balance sheet date and as the debt will become callable at the discretion of the financial institutions if this covenant is not satisfied in January 2011, we have classified all amounts outstanding under the ABL as current maturities as of June 30, 2010. The classification of our outstanding debt will likely remain current until the pension underfunded status, which was $115.5 million at December 31, 2009, is reduced to an amount less than $50.0 million; the waiver is extended to a period greater than one year from the balance sheet date; the terms of the ABL are modified to remove the representation requirement; or the outstanding debt of $77.0 million is repaid. Our future pension underfunded status may change significantly and is dependent on several factors including contributions to the plan, which may be in the form of cash, company common stock, or a combination of both; changes in bond yields and the resulting effect on the discount rate used to measure the pension obligation; and changes in the market value of plan assets. For example, at our December 31, 2009 measurement date, we used a discount rate of 6% to measure the projected benefit obligation. If we had used a discount rate of 6.25% or 5.75%, the projected benefit obligation and underfunded status of our pension plan would have decreased or increased by approximately $13.3 million, respectively. For additional information regarding the waiver and the classification of our long-term debt, see “Financing Arrangements” below. For information regarding the funded status of our pension plan and required future contributions, see “Funded Status of Qualified Defined Benefit Pension Plan” below.

Financing Arrangements

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


	June 30,		December 31,
	2010		2009
Asset-based loan	$	77.0	$	95.0
Less: current maturities		77.0		17.0

Long-term debt	$	-	$	78.0

On August 9, 2007, we refinanced our revolving credit facility with a group of financial institutions. The facility is a five-year asset-based loan (“ABL”) with commitments to lend up to $450.0 million. The facility is secured by our accounts receivable, inventory and cash and is guaranteed by all of our domestic subsidiaries.

The ABL provides for the issuance of letters of credit and cash borrowings. 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. As of June 30, 2010, there were $77.0 million of cash borrowings and $15.7 million in letters of credit outstanding.

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 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 $75.0 million of availability, we are subject to cash dominion and weekly borrowing base reporting. If we fall below $62.5 million of availability, we are also subject to the fixed charge coverage ratio, which we currently do not meet. As of June 30, 2010, excess availability was $79.6 million. Therefore, we have $4.6 million of availability without being subject to the cash dominion and weekly reporting covenants of the agreement and $17.1 million of availability before we would be subject to the fixed charge coverage ratio.

We manage our excess availability to remain above the $75.0 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 2010. In addition to our borrowing capacity described above, we had $102.8 million of cash and cash equivalents at June 30, 2010.

Cash borrowings under the ABL will be at either (i) a base rate (the greater of the prime rate or the Federal Funds Effective Rate plus 1/2%) or (ii) an adjusted Eurodollar rate plus an applicable margin, depending upon the type of loan selected. The applicable margin over the adjusted Eurodollar rate is 1.50% as of June 30, 2010 and will fluctuate with excess availability. As of June 30, 2010, loans outstanding under the ABL consisted of $65.0 million based on the adjusted Eurodollar rate at a weighted average interest rate of 2.09% and $12.0 million based on the adjusted prime rate at an interest rate of 3.25%. The weighted average interest rate for all loans outstanding as of June 30, 2010 was 2.27%.

Under the terms of the ABL, we are required to comply with certain operating covenants and provide certain representations to the financial institutions, including a representation after each annual report is filed with the Securities and Exchange Commission that our pension underfunded status does not exceed $50.0 million for any plan. After the filing of our Form 10-K for the year ended December 31, 2008, we would not have been in compliance with this representation. However, we obtained a waiver (the “waiver”) to this required representation (the “representation”) until the earlier of January 1, 2011 or such date that the pension relief, under the Worker, Retiree, and Employer Recovery Act of 2008, signed into law on December 23, 2008, ceases to be applicable to our plan. As consideration for the waiver, we agreed to the modification of certain administrative clauses in the ABL agreement, and as a result we agreed to 1) submit condensed mid-month borrowing base information and 2) increase the frequency, from quarterly to monthly, at which we submit certain financial information to the financial institutions.

At the December 31, 2009 measurement date, the underfunded status of our qualified pension plan was $115.5 million, which exceeds the $50.0 million threshold by $65.5 million. We considered the underfunded status of our qualified pension plan in determining the classification of amounts outstanding under the ABL. Because the waiver from our requirement to produce the representation regarding our pension underfunded status expires within a period less than one year from the balance sheet date and as the debt will become callable at the discretion of the financial institutions if this covenant is not satisfied in January 2011, we have classified all amounts outstanding under the ABL as current maturities as of June 30, 2010. The classification of our outstanding debt will likely remain

current until the pension underfunded status, which was $115.5 million at December 31, 2009, is reduced to an amount less than $50.0 million; the waiver is extended to a period greater than one year from the balance sheet date; the terms of the ABL are modified to remove the representation requirement; or the outstanding debt of $77.0 million is repaid. Our future pension underfunded status may change significantly and is dependent on several factors including contributions to the plan, which may be in the form of cash, company common stock, or a combination of both; changes in bond yields and the resulting effect on the discount rate used to measure the pension obligation; and changes in the market value of plan assets. For additional information regarding the funded status of our pension plan and required future contributions, see “Funded Status of Qualified Defined Benefit Pension Plan” below.

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

Funded Status of Qualified Defined Benefit Pension Plan

On April 5, 2010, we made cash contributions of $5.4 million to the trust funds of our defined benefit plans. In addition, on May 21, 2010, we contributed 2,300,000 shares of our common stock to the trust funds. The fair value of the shares was $7.20 per share, or $16.6 million in the aggregate, as of June 3, 2010, the effective date of the registration statement. The contribution of shares is a non-cash transaction and thus is not reflected in the Consolidated Statements of Cash Flows for the six months ended June 30, 2010. We may voluntarily choose to make additional contributions to the trust funds in 2010. 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.

The projected benefit obligation calculations performed at our December 31 measurement date are dependent on various assumptions, including discount rate. The discount rate is selected based on yields of high quality bonds with cash flows matching the timing and amount of expected future benefit payments. The plans’ projected cash flow is matched to a yield curve comprised of over 500 bonds rated Aa by Moody’s as of the measurement date. 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, 2009 measurement date, we used a discount rate of 6% to measure the projected benefit obligation. If we had used a discount rate of 6.25% or 5.75%, the projected benefit obligation and underfunded status of our pension plan would have decreased or increased by approximately $13.3 million, respectively.

The projected benefit obligation of our qualified defined benefit pension plan exceeded the fair value of plan assets by $115.5 million at December 31, 2009, the measurement date. In December 2008, the federal government passed legislation that provides relief through 2010 from the funding requirements under the Pension Protection Act of 2006. Due to this legislation, our minimum required pension contributions for 2010 are not significant. However, if the relief provided by the federal government 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. Assuming 1) that the discount rate decreases 100 basis points from our previous measurement date to 5.25% at December 31, 2010, 2) that plan asset values remain unchanged from June 30, 2010 to December 31, 2010, 3) that we choose to avoid benefit restrictions, which would require us to maintain an 80% funded status, and there are no changes in applicable regulations or minimum funding requirements to avoid benefit restrictions, 4) that we do not elect the provisions of the Pension Act of 2010, and 5) there are no other changes in the assumptions affecting the funded status of the pension plan, we estimate we would be required to contribute approximately $45 million to the plan by September 15, 2011 in the form of cash, company common stock, or a combination of both. These assumptions and the resulting estimate are intended for illustrative purposes only and are highly dependent on certain factors and market conditions that are outside of our control. Actual funding requirements in 2011 could be significantly more or significantly less.

In addition, the funded status of our pension plan also impacts our compliance with the terms of our ABL. For additional information on this, see ”Financing Arrangements” above.

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-brand 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 six 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 June 30, 2010, the total future payments under lease guarantees were $14.3 million and total minimum payments under subleases were $14.3 million. We considered certain of these independent parties with lease guarantees to be at risk of default and we recorded a lease termination liability of $0.2 million to cover estimated losses on these guaranteed leases.

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, 2009.

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 $0.1 million annually. We have no derivative financial instruments at June 30, 2010.

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 June 30, 2010, 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 June 30, 2010.

	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 June 30, 2010, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

Item 1. Legal Proceedings

Furniture Brands International, Inc. (as nominal defendant) and certain current and former directors and executive officers of the company entered into a Stipulation of Settlement on February 18, 2010, settling all claims asserted in two shareholder derivative suits filed in the Circuit Court of St. Louis County, Missouri in 2009. On May 24, 2010, the Court granted final approval of the settlement.

For additional information, 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, 2009. 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, 2009, 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.

The continued economic downturn could result in a decrease in our future sales, earnings, and liquidity.

Economic conditions have deteriorated significantly in the United States, and worldwide, and may remain depressed for the foreseeable future. These conditions have resulted in a decline in our sales and earnings and could continue to impact our sales and earnings in the future. Sales of residential furniture are impacted by downturns in the general economy primarily due to decreased discretionary spending by consumers. The general level of consumer spending is affected by a number of factors, including, among others, general economic conditions, inflation, and consumer confidence, all of which are generally beyond our control. The economic downturn also impacts retailers, our primary customers, potentially resulting in the inability of our customers to pay amounts owed to us. In addition, if our retail 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.

Depressed 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 disruption in recent years. As a result of this disruption in the domestic and international equity and bond markets, the asset values of our pension plans decreased 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 $115.5 million at December 31, 2009. In December 2008, the federal government passed legislation that provides relief through 2010 from the funding requirements under the Pension Protection Act of 2006. Due to this legislation, our minimum funding requirements for 2010 are not significant. However, if the relief provided by the federal government is not extended or is no longer applicable to our qualified pension plan, if there is continued downward pressure on the asset values of the plan, if the assets fail to recover in value, or if the present value of the benefit obligation of the plan increases, as would occur in the event of a decrease in the discount rate used to measure the obligation, significantly increased funding of our 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 earnings.

A failure to achieve our projected 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-brand 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 2009, we incurred charges of $33.0 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 near-term 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.

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 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 marketing 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 2009, we tested our trade names for impairment under this methodology and recorded an impairment charge of $39.1 million, driven primarily by an increase in discount rate, resulting in a remaining trade name balance of $87.6 million at December 31, 2009.

Provisions in our certificate of incorporation and our shareholders’ rights plan could discourage a takeover and could result in a decrease in a potential acquirer’s valuation 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. One provision in our certificate of incorporation allows us to issue stock without shareholder approval. Such issuances could make it more difficult for a third party to acquire us.

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

At June 30, 2010, we had $102.8 million of cash and cash equivalents, $77.0 million of debt outstanding, and excess availability to borrow up to an additional $17.1 million subject to certain provisions, including those provisions 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 asset-based loan (“ABL”) and could trigger acceleration of repayment, which would have a significant adverse impact to our liquidity and our business. In addition, further deterioration in the economy and our results could cause us to not be in compliance with our ABL 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 under our ABL is insufficient, we may need to raise additional funds through equity or debt financings in the future in order to meet our operating and capital needs. 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.

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

(c) Issuer Purchases of Equity Securities

Information concerning our stock repurchases during the quarter ended June 30, 2010 is below. All stock was withheld to satisfy tax withholding obligations upon vesting of restricted stock awards.




				Maximum Number (or
			Total Number of Shares	Approximate Dollar Value) of
			Purchased as Part of	Shares that May Yet Be
	Total Number of	Average Price Paid	Publicly Announced Plans	Purchased Under the Plans or
	Shares Purchased	per Share (1)	or Programs	Programs
April 1 to April 30, 2010	1,707	6.80	—	—
May 1 to May 31, 2010	6,837	8.25	—	—
June 1 to June 30, 2010	—	—	—	—
Total	8,544	7.96	—	—

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

Item 6.Exhibits

Incorporated by Reference

Filed

with

Exhibit

the

Index

Form

Filing Date

Exhibit

No.

Exhibit Description

10-Q

Form

with the SEC

No.

3.1

Restated Certificate of Incorporation of the Company, as amended

10-Q

May 14, 2002

3.2

By-Laws of the Company, as amended effective as of August 7, 2008

8-K

August 13, 2008

3.1

3.3

Certificate of Designation of Series B Junior Participating Preferred Stock

8-K

August 4, 2009

3.1

4.1

Amended and Restated Stockholders Rights Agreement, dated as of February 26, 2010, between the Company and American Stock Transfer and Trust Company, LLC, as Rights Agent

8-K

March 1, 2010

4.1

10.1*

Furniture Brands International, Inc. 2010 Omnibus Incentive Plan

S-8

May 6, 2010

4.1

10.2*

Form of Restricted Stock Award Agreement under 2010 Omnibus Incentive Plan

8-K

May 11, 2010

10.2

10.3*

Form of Restricted Stock Unit Agreement under 2010 Omnibus Incentive Plan

8-K

May 11, 2010

10.3

10.4*

Form of Nonqualified Stock Option Agreement under 2010 Omnibus Incentive Plan

8-K

May 11, 2010

10.4

10.5*

Form of Incentive Stock Option Agreement under 2010 Omnibus Incentive Plan

8-K

May 11, 2010

10.5

10.6*

Form of Performance Share Agreement under 2010 Omnibus Incentive Plan

8-K

May 11, 2010

10.6

10.7*

Furniture Brands International, Inc. 2010 Employee Stock Purchase Plan

S-8

May 6, 2010

4.2

10.8

Registration Rights Agreement dated May 21, 2010, between the Company and Evercore Trust Company, N.A

8-K

May 24, 2010

10.1

31.1

Certification of Chief Executive Officer of the Company, Pursuant to Rule 13a-14(a)/15d-14(a)

31.2

Certification of Chief Financial Officer (Principal Financial Officer) of the Company, Pursuant to Rule 13a-14(a)/15d-14(a)

32.1

Certification of Chief Executive Officer of the Company, Pursuant to 18 U.S.C. Section 1350

32.2

Certification of Chief Financial Officer (Principal Financial Officer) of the Company, Pursuant to 18 U.S.C. Section 1350

* Exhibit is a management contract or compensatory plan, contract or arrangement.

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 G. Rolls

				Steven G. Rolls
				Chief Financial Officer
				(On behalf of the registrant and as Principal Financial Officer)

				Date: August 6, 2010

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Readability	H.S. sophomore Good

Fbi Wind Down (FBN) Inactive 10-Q2010 Q2 Quarterly report

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