Attached files
file | filename |
---|---|
EX-31.2 - EX-31.2 - FBI WIND DOWN, INC. | c61088exv31w2.htm |
EX-10.5 - EX-10.5 - FBI WIND DOWN, INC. | c61088exv10w5.htm |
EX-10.4 - EX-10.4 - FBI WIND DOWN, INC. | c61088exv10w4.htm |
EX-31.1 - EX-31.1 - FBI WIND DOWN, INC. | c61088exv31w1.htm |
EX-32.1 - EX-32.1 - FBI WIND DOWN, INC. | c61088exv32w1.htm |
EX-32.2 - EX-32.2 - FBI WIND DOWN, INC. | c61088exv32w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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 September 30, 2010
OR
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
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of
the Exchange Act).
o Yes þ No
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
55,010,759 shares as of October 31, 2010
FURNITURE BRANDS INTERNATIONAL, INC.
TABLE OF CONTENTS
TABLE OF CONTENTS
Page | ||||||||
Consolidated Financial Statements (unaudited): |
||||||||
3 | ||||||||
September 30, 2010 |
||||||||
December 31, 2009 |
||||||||
4 | ||||||||
Three Months Ended September 30, 2010 |
||||||||
Three Months Ended September 30, 2009 |
||||||||
Nine Months Ended September 30, 2010 |
||||||||
Nine Months Ended September 30, 2009 |
||||||||
6 | ||||||||
Nine Months Ended September 30, 2010 |
||||||||
Nine Months Ended September 30, 2009 |
||||||||
7 | ||||||||
17 | ||||||||
26 | ||||||||
26 | ||||||||
27 | ||||||||
27 | ||||||||
31 | ||||||||
31 | ||||||||
EX-10.4 | ||||||||
EX-10.5 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 |
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.
2
Table of Contents
PART I
Item 1. Financial Statements
FURNITURE BRANDS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(unaudited)
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(unaudited)
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 70,189 | $ | 83,872 | ||||
Receivables, less allowances of $14,761 ($26,225 at December 31, 2009) |
118,306 | 125,513 | ||||||
Income tax refunds receivable |
6,983 | 58,976 | ||||||
Inventories |
276,471 | 226,078 | ||||||
Prepaid expenses and other current assets |
11,940 | 9,274 | ||||||
Total current assets |
483,889 | 503,713 | ||||||
Property, plant, and equipment, net |
126,049 | 134,352 | ||||||
Trade names |
87,608 | 87,608 | ||||||
Other assets |
37,366 | 32,432 | ||||||
Total assets |
$ | 734,912 | $ | 758,105 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Current maturities of long-term debt |
$ | | $ | 17,000 | ||||
Accounts payable |
98,667 | 83,813 | ||||||
Accrued employee compensation |
18,278 | 21,036 | ||||||
Other accrued expenses |
39,487 | 54,912 | ||||||
Total current liabilities |
156,432 | 176,761 | ||||||
Long-term debt |
77,000 | 78,000 | ||||||
Deferred income taxes |
23,008 | 25,737 | ||||||
Pension liability |
91,382 | 135,557 | ||||||
Other long-term liabilities |
72,297 | 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
60,614,741 shares issued at September 30, 2010 and 56,482,541 shares
issued December 31, 2009 |
60,615 | 56,483 | ||||||
Paid-in capital |
210,728 | 224,133 | ||||||
Retained earnings |
273,480 | 267,829 | ||||||
Accumulated other comprehensive loss |
(104,419 | ) | (111,471 | ) | ||||
Treasury stock at cost 5,606,943 shares at September 30, 2010 and
7,797,319 shares at December 31, 2009 |
(125,611 | ) | (174,183 | ) | ||||
Total shareholders equity |
314,793 | 262,791 | ||||||
Total liabilities and shareholders equity |
$ | 734,912 | $ | 758,105 | ||||
See accompanying notes to consolidated financial statements.
3
Table of Contents
FURNITURE BRANDS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share information)
(unaudited)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share information)
(unaudited)
Three Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Net sales |
$ | 271,987 | $ | 293,662 | ||||
Cost of sales |
204,592 | 225,920 | ||||||
Gross profit |
67,395 | 67,742 | ||||||
Selling, general, and administrative expenses |
70,721 | 89,172 | ||||||
Operating loss |
(3,326 | ) | (21,430 | ) | ||||
Interest expense |
789 | 1,036 | ||||||
Other expense, net |
395 | 190 | ||||||
Loss before income tax expense (benefit) |
(4,510 | ) | (22,656 | ) | ||||
Income tax expense (benefit) |
(2,416 | ) | 880 | |||||
Net loss |
$ | (2,094 | ) | $ | (23,536 | ) | ||
Net loss per common share basic and diluted: |
$ | (0.04 | ) | $ | (0.49 | ) | ||
Weighted average shares of common stock outstanding: |
||||||||
Basic |
51,927 | 48,288 | ||||||
Diluted |
51,927 | 48,288 |
See accompanying notes to consolidated financial statements.
4
Table of Contents
FURNITURE BRANDS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share information)
(unaudited)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share information)
(unaudited)
Nine Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Net sales |
$ | 883,841 | $ | 938,796 | ||||
Cost of sales |
657,606 | 729,085 | ||||||
Gross profit |
226,235 | 209,711 | ||||||
Selling, general, and administrative expenses |
225,751 | 248,401 | ||||||
Operating earnings (loss) |
484 | (38,690 | ) | |||||
Interest expense |
2,367 | 4,336 | ||||||
Other income, net |
346 | 1,497 | ||||||
Loss before income tax expense (benefit) |
(1,537 | ) | (41,529 | ) | ||||
Income tax expense (benefit) |
(7,188 | ) | 2,176 | |||||
Net earnings (loss) |
$ | 5,651 | $ | (43,705 | ) | |||
Net earnings (loss) per common share basic and diluted: |
$ | 0.11 | $ | (0.90 | ) | |||
Weighted average shares of common stock outstanding: |
||||||||
Basic |
49,871 | 48,296 | ||||||
Diluted |
49,887 | 48,296 |
See accompanying notes to consolidated financial statements.
5
Table of Contents
FURNITURE BRANDS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended September 30, |
||||||||
2010 | 2009 | |||||||
Cash flows from operating activities: |
||||||||
Net earnings (loss) |
$ | 5,651 | $ | (43,705 | ) | |||
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities: |
||||||||
Depreciation and amortization |
17,540 | 18,311 | ||||||
Compensation expense related to stock option
grants and restricted stock awards |
1,816 | (971 | ) | |||||
Provision (benefit) for deferred income taxes |
(3,018 | ) | 892 | |||||
Other, net |
(591 | ) | (317 | ) | ||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
7,206 | 45,727 | ||||||
Income tax refunds receivable |
51,993 | 35,808 | ||||||
Inventories |
(50,392 | ) | 70,100 | |||||
Prepaid expenses and other assets |
(2,006 | ) | (228 | ) | ||||
Accounts payable and other accrued expenses |
(3,040 | ) | (55,940 | ) | ||||
Other long-term liabilities |
(6,922 | ) | (7,852 | ) | ||||
Net cash provided by operating activities |
18,237 | 61,825 | ||||||
Cash flows from investing activities: |
||||||||
Additions to property, plant, equipment, and software |
(16,190 | ) | (7,846 | ) | ||||
Proceeds from the disposal of assets |
2,338 | 3,941 | ||||||
Net cash used in investing activities |
(13,852 | ) | (3,905 | ) | ||||
Cash flows from financing activities: |
||||||||
Payments of long-term debt |
(18,000 | ) | (88,000 | ) | ||||
Other |
(68 | ) | (10 | ) | ||||
Net cash used in financing activities |
(18,068 | ) | (88,010 | ) | ||||
Net decrease in cash and cash equivalents |
(13,683 | ) | (30,090 | ) | ||||
Cash and cash equivalents at beginning of period |
83,872 | 106,580 | ||||||
Cash and cash equivalents at end of period |
$ | 70,189 | $ | 76,490 | ||||
Supplemental disclosure: |
||||||||
Cash refunds for income taxes, net |
$ | (56,561 | ) | $ | (35,088 | ) | ||
Cash payments for interest expense |
$ | 2,177 | $ | 4,500 |
See accompanying notes to consolidated financial statements.
6
Table of Contents
FURNITURE BRANDS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands except per share data)
(unaudited)
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 nine months ended September 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 lines of business and
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 September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Restructuring charges: |
||||||||||||||||
Contract termination costs (credit) |
$ | (614 | ) | $ | | $ | | $ | | |||||||
Termination benefits |
194 | 1,912 | 1,049 | 4,242 | ||||||||||||
Closed store occupancy and lease costs |
1,610 | 3,278 | 3,530 | 5,283 | ||||||||||||
Gain on the sale of assets |
| (208 | ) | (928 | ) | (383 | ) | |||||||||
1,190 | 4,982 | 3,651 | 9,142 | |||||||||||||
Impairment charges |
1,847 | 628 | 2,034 | 628 | ||||||||||||
$ | 3,037 | $ | 5,610 | $ | 5,685 | $ | 9,770 | |||||||||
Statement of Operations classification: |
||||||||||||||||
Cost of sales |
$ | 175 | $ | 1,326 | $ | 208 | $ | 3,532 | ||||||||
Selling, general, and administrative expenses |
2,862 | 4,284 | 5,477 | 6,238 | ||||||||||||
$ | 3,037 | $ | 5,610 | $ | 5,685 | $ | 9,770 | |||||||||
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,
7
Table of Contents
(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 $9,909 at September 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 September 30, | ||||||||
2010 | 2009 | |||||||
Accrual for closed store lease liabilities at beginning of period |
$ | 22,136 | $ | 21,519 | ||||
Charges to expense |
257 | 1,645 | ||||||
Less cash payments |
1,481 | 1,753 | ||||||
Accrual for closed store lease liabilities at end of period |
$ | 20,912 | $ | 21,411 | ||||
At September 30, 2010, $4,847 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 September 30, 2010 are as
follows:
Minimum | ||||
Lease | ||||
Payments - | ||||
Year |
Closed Stores | |||
2010 |
$ | 1,969 | ||
2011 |
7,873 | |||
2012 |
8,046 | |||
2013 |
7,940 | |||
2014 |
6,828 | |||
thereafter |
5,111 | |||
$ | 37,767 | |||
Activity in the accrual for termination benefits was as follows:
Three Months Ended September 30, | ||||||||
2010 | 2009 | |||||||
Accrual for termination benefits at beginning of period |
$ | 998 | $ | 1,463 | ||||
Charges to expense |
194 | 1,912 | ||||||
Less cash payments |
822 | 1,305 | ||||||
Accrual for termination benefits at end of period |
$ | 370 | $ | 2,070 | ||||
The accrual for termination benefits at September 30, 2010 is classified as accrued
employee compensation.
8
Table of Contents
3. | INVENTORIES |
Inventories are summarized as follows:
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Finished products |
$ | 176,055 | $ | 142,982 | ||||
Work-in-process |
17,514 | 15,320 | ||||||
Raw materials |
82,902 | 67,776 | ||||||
$ | 276,471 | $ | 226,078 | |||||
4. | PROPERTY, PLANT, AND EQUIPMENT |
Major classes of property, plant, and equipment consist of the following:
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Land |
$ | 11,375 | $ | 11,442 | ||||
Buildings and improvements |
191,275 | 190,760 | ||||||
Machinery and equipment |
219,510 | 251,046 | ||||||
422,160 | 453,248 | |||||||
Less accumulated depreciation |
296,111 | 318,896 | ||||||
$ | 126,049 | $ | 134,352 | |||||
Depreciation expense was $4,379 and $4,621 for the three months ended September 30, 2010 and
September 30, 2009, respectively, and $14,172 and $15,455 for the nine months ended September 30,
2010 and September 30, 2009, respectively.
5. | LONG-TERM DEBT |
Long-term debt consists of the following:
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Asset-based loan |
$ | 77,000 | $ | 95,000 | ||||
Less: current maturities |
| 17,000 | ||||||
Long-term debt |
$ | 77,000 | $ | 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 September 30, 2010, there were $77,000 of cash borrowings
and $15,123 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 September 30, 2010, excess availability was $84,804.
Therefore, we have $9,804 of availability without being subject to the cash dominion and weekly
reporting covenants of the agreement and $22,304 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. In addition to our borrowing capacity
described above, we had $70,189 of cash and cash equivalents as of September 30, 2010.
9
Table of Contents
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 September 30, 2010 and will fluctuate with excess availability. As
of September 30, 2010, loans outstanding under the ABL consisted of $65,000 based on the adjusted
Eurodollar rate at a weighted average interest rate of 1.98% 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 September 30, 2010 was 2.18%.
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 have obtained
waivers to this required representation (the representation). The most recent waiver (the
waiver) was received on September 24, 2010 and extends until January 1, 2012 . We provided no
consideration for this waiver.
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 it is appropriate to classify amounts outstanding
under the ABL as long-term debt as of September 30, 2010. This classification is appropriate
because the waiver prevents us from being required to make the representation regarding our pension
underfunded status, for a period greater than one year from the balance sheet date. Because we may
not be able to produce the representation upon the expiration of the waiver on January 1, 2012, we
may be required to reclassify all amounts outstanding under the ABL to current maturities in our
Form 10-Q for the period ended March 31, 2011. The classification of our outstanding debt would
then 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 September 30, 2010, we had $70,189 of cash and cash equivalents, $77,000 of debt outstanding,
and excess availability to borrow up to an additional $22,304 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 it is appropriate
to classify amounts outstanding under the ABL as long-term debt as of September 30, 2010. This
classification is appropriate because the waiver prevents us from being required to make the
representation regarding our pension underfunded status, for a period greater than one year from
the balance sheet date. Because we may not be able to produce the representation upon the
expiration of the waiver on January 1, 2012, we may be
10
Table of Contents
required to reclassify all amounts
outstanding under the ABL to current maturities in our Form 10-Q for the period ended March 31,
2011. The classification of our outstanding debt would then 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 | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Defined benefit plans |
$ | 2,714 | $ | 1,743 | $ | 8,142 | $ | 5,197 | ||||||||
Defined contribution
plan (401k plan)
company match |
1,550 | 1,363 | 4,914 | 5,622 | ||||||||||||
Other |
174 | 85 | 444 | 347 | ||||||||||||
$ | 4,438 | $ | 3,191 | $ | 13,500 | $ | 11,166 | |||||||||
The components of net periodic pension expense for Company-sponsored defined benefit plans are
as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Service cost |
$ | 605 | $ | 282 | $ | 1,815 | $ | 1,732 | ||||||||
Interest cost |
6,464 | 6,582 | 19,392 | 19,454 | ||||||||||||
Expected return on plan assets |
(6,227 | ) | (6,529 | ) | (18,681 | ) | (19,605 | ) | ||||||||
Net amortization and deferral |
1,872 | 1,408 | 5,616 | 3,616 | ||||||||||||
Net periodic pension expense |
$ | 2,714 | $ | 1,743 | $ | 8,142 | $ | 5,197 | ||||||||
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 employees 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. 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. In addition, on September 2, 2010, we contributed
4,132,000 shares of our common stock to the trust funds. The fair value of the shares was $5.08 per
share, or $20,991 in the aggregate, as of September 15, 2010, the effective date of the
registration statement. The contributions of shares are non-cash transactions and thus are not
reflected in the Consolidated Statements of Cash Flows for the nine months ended September 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 Companys Board of
Directors and are subject to certain limitations or penalties, including those established by the
Employee Retirement Income Security Act, based on the percentage of plan assets held in company
common stock.
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
11
Table of Contents
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 nine months ended September 30, 2010 is presented below:
Weighted | ||||||||
Average | ||||||||
Exercise | ||||||||
Shares | Price | |||||||
Outstanding at December 31, 2009 |
3,072,717 | $ | 18.06 | |||||
Granted |
623,720 | 6.72 | ||||||
Exercised |
| | ||||||
Forfeited or expired |
(949,875 | ) | 16.64 | |||||
Outstanding at September 30, 2010 |
2,746,562 | $ | 15.98 | |||||
The weighted average exercise price and the weighted average fair value per share for stock
options granted during the nine months ended September 30, 2010 was $6.72 and $4.38, 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 nine months ended September 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 nine months ended September 30, 2010 is
presented below:
Weighted | ||||||||
Average | ||||||||
Grant-Date | ||||||||
Shares | Fair Value | |||||||
Outstanding at December 31, 2009 |
197,553 | $ | 9.48 | |||||
Granted |
767,267 | 7.91 | ||||||
Vested |
(63,931 | ) | 11.06 | |||||
Forfeited |
(18,427 | ) | 10.64 | |||||
Outstanding at September 30, 2010 |
882,462 | $ | 7.97 | |||||
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 Companys 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.
12
Table of Contents
A summary of restricted stock unit activity for the nine months ended September 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 September 30, 2010 |
1,259,958 | 1,289,958 | ||||||
Compensation expense of $6,064 and $2,808 was recorded for the nine months ended September 30,
2010 and 2009, respectively, for restricted stock unit awards. Compensation expense recorded in the
nine months ended September 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 nine
months ended September 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 nine months ended
September 30, 2010. As of September 30, 2010, the remaining durations of the derived service
periods are 0.25 years and 1.35 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 September 30, 2010:
Risk-free interest rate |
0.8 | % | ||
Expected dividend yield |
0.0 | % | ||
Expected volatility |
101.9 | % |
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 as
of September 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 | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Weighted average
shares used for
basic earnings
(loss) per common
share |
51,926,978 | 48,288,495 | 49,871,294 | 48,295,685 | ||||||||||||
Effect of dilutive
stock options and
restricted stock |
| | 16,096 | | ||||||||||||
Weighted
average shares used
for diluted
earnings (loss) per
common share |
51,926,978 | 48,288,495 | 49,887,390 | 48,295,685 | ||||||||||||
Excluded from the computation of diluted earnings (loss) per common share for the nine months
ended September 30, 2010 were options to purchase 2,145,562 shares at an average price of $19.04
per share 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
13
Table of Contents
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 September 30, 2010.
Excluded from the computation of diluted earnings (loss) per common share for the three months
ended September 30, 2010 were options to purchase 2,746,562 shares at an average price of $15.98
per share and 674,632 shares of restricted stock for which vesting is contingent upon certain
performance conditions. The options and shares of restricted stock have been excluded from the
diluted earnings (loss) per share calculation because their inclusion would be antidilutive.
Excluded from the computation of diluted earnings (loss) per common share for both the three and
nine months ended September 30, 2009 were options to purchase 3,239,542 shares at an average price
of $18.34 per share and 408,129 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 $2,416 and $7,188 in the three and nine months ended September
30, 2010, respectively. We recognized income tax expense of $880 and $2,176 in the three and nine
months ended September 30, 2009, respectively. The increase in income tax benefit in the three and
nine months ended September 30, 2010 was driven by additional net operating loss carry backs
created from contributions to our pension plans in 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 September 30, 2010 and December 31, 2009, the total amount of unrecognized tax benefits was
$8,137 and $8,301 respectively. We recognize interest and penalties related to unrecognized tax
benefits as a component of income tax expense. As of September 30, 2010 and December 31, 2009, the
liability for unrecognized tax benefits included accrued interest of $3,881 and $3,227, and accrued
penalties of $969 and $968, respectively. In the nine months ended September 30, 2010 and 2009, we
recognized interest expense of $728 and $831 and penalty expense of $2 and $164 in the statement of
operations, respectively, related to unrecognized tax benefits. In the three months ended September
30, 2010 and 2009, we recognized interest expense of $236 and $272 in the statement of operations,
respectively, related to unrecognized tax benefits. The total amount of unrecognized tax benefits
at September 30, 2010 that, if recognized, would affect the effective tax rate is $6,535.
As of September 30, 2010, the deferred tax assets attributable to federal net operating loss carry
forwards were $31,421, state net operating loss carry forwards were $24,471, federal tax credit
carry forwards were $3,101, and state tax credit carry forwards were $2,686. 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 $5,429 and $17,079 in
the three and nine months ended September 30, 2010, respectively, to $152,896 as of September 30,
2010. The decrease in the valuation allowance in the three and nine months ended September 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.
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.
14
Table of Contents
12. | COMPREHENSIVE INCOME (LOSS) |
Comprehensive income (loss) consists of the following:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net earnings (loss) |
$ | (2,094 | ) | $ | (23,536 | ) | $ | 5,651 | $ | (43,705 | ) | |||||
Other comprehensive income: |
||||||||||||||||
Pension liability |
1,870 | (2,466 | ) | 5,610 | (258 | ) | ||||||||||
Foreign currency translation |
972 | 1,146 | 1,442 | 1,407 | ||||||||||||
2,842 | (1,320 | ) | 7,052 | 1,149 | ||||||||||||
Income tax expense (benefit) |
| (7 | ) | | 48 | |||||||||||
Other comprehensive income |
2,842 | (1,313 | ) | 7,052 | 1,101 | |||||||||||
Total comprehensive income (loss) |
$ | 748 | $ | (24,849 | ) | $ | 12,703 | $ | (42,604 | ) | ||||||
The components of accumulated other comprehensive loss, presented net of tax, are as follows:
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Pension liability |
$ | (106,830 | ) | $ | (112,440 | ) | ||
Foreign currency translation |
2,411 | 969 | ||||||
$ | (104,419 | ) | $ | (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,
managements 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 managements 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, managements 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 managements 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 September 30, 2010, the total future payments under lease guarantees were $12,105 and total
minimum payments under subleases were $12,894. Our estimate of probable future losses on these
guaranteed leases is not material.
15
Table of Contents
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 nine
months ended September 30, 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 $1,130 and $5,235 in the three and nine months ended September 30,
2010, respectively. Our remaining liability for these matters is $3,206 as of September 30, 2010.
16
Table of Contents
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
AND RESULTS OF OPERATIONS
Forward-Looking Statements
Our Managements 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 worlds 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
Drexel and Heritage 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. |
17
Table of Contents
Business Trends and Strategy
Sales declined 7.4% in the third quarter of 2010 compared to the third quarter of 2009 and 5.9% in
the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009. We
believe depressed sales are primarily the result of 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 three 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 companys 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.
18
Table of Contents
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
nine months ended September 30, 2010 and 2009:
Three Months Ended September 30, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
% of | % of | |||||||||||||||
(in millions, except per share data) | Dollars | Net Sales | Dollars | Net Sales | ||||||||||||
Net sales |
$ | 272.0 | 100.0 | % | $ | 293.7 | 100.0 | % | ||||||||
Cost of sales |
204.6 | 75.2 | 225.9 | 76.9 | ||||||||||||
Gross profit |
67.4 | 24.8 | 67.7 | 23.1 | ||||||||||||
Selling, general, and administrative expenses |
70.7 | 26.0 | 89.2 | 30.4 | ||||||||||||
Loss from operations |
(3.3 | ) | (1.2 | ) | (21.4 | ) | (7.3 | ) | ||||||||
Interest expense |
0.8 | 0.3 | 1.0 | 0.4 | ||||||||||||
Other expense, net |
0.4 | 0.1 | 0.2 | 0.1 | ||||||||||||
Loss before income tax expense (benefit) |
(4.5 | ) | (1.7 | ) | (22.7 | ) | (7.7 | ) | ||||||||
Income tax expense (benefit) |
(2.4 | ) | (0.9 | ) | 0.9 | 0.3 | ||||||||||
Net loss |
$ | (2.1 | ) | (0.8) | % | $ | (23.5 | ) | (8.0) | % | ||||||
Net loss per common share basic and diluted |
$ | (0.04 | ) | $ | (0.49 | ) |
Nine Months Ended September 30, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
% of | % of | |||||||||||||||
(in millions, except per share data) | Dollars | Net Sales | Dollars | Net Sales | ||||||||||||
Net sales |
$ | 883.8 | 100.0 | % | $ | 938.8 | 100.0 | % | ||||||||
Cost of sales |
657.6 | 74.4 | 729.1 | 77.7 | ||||||||||||
Gross profit |
226.2 | 25.6 | 209.7 | 22.3 | ||||||||||||
Selling, general, and administrative expenses |
225.8 | 25.5 | 248.4 | 26.5 | ||||||||||||
Earnings (loss) from operations |
0.5 | 0.1 | (38.7 | ) | (4.1 | ) | ||||||||||
Interest expense |
2.4 | 0.3 | 4.3 | 0.5 | ||||||||||||
Other income, net |
0.3 | 0.0 | 1.5 | 0.2 | ||||||||||||
Loss before income tax expense (benefit) |
(1.5 | ) | (0.2 | ) | (41.5 | ) | (4.4 | ) | ||||||||
Income tax expense (benefit) |
(7.2 | ) | (0.8 | ) | 2.2 | 0.2 | ||||||||||
Net earnings (loss) |
$ | 5.7 | 0.6 | % | $ | (43.7 | ) | (4.7) | % | |||||||
Net earnings (loss) per common share
basic and diluted |
$ | 0.11 | $ | (0.90 | ) |
19
Table of Contents
Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009
Net sales for the three months ended September 30, 2010 were $272.0 million compared to $293.7
million in the three months ended September 30, 2009, a decrease of $21.7 million, or 7.4%. The
decrease in net sales was primarily the result of continued weak retail conditions and decisions to
abandon unprofitable products, customers, and programs, partially offset by lower price discounts.
Gross profit for the three months ended September 30, 2010 decreased $0.3 million to $67.4 million
compared to $67.7 million in the three months ended September 30, 2009. The decrease in gross
profit is primarily attributable to lower sales ($5.0 million), partially offset by increased
efficiencies in our supply chain ($4.7 million). Gross profit as a percentage of net sales for the
three months ended September 30, 2010 increased to 24.8% compared to 23.1% in the three months
ended September 30, 2009.
Selling, general, and administrative expenses decreased to $70.7 million in the three months ended
September 30, 2010 from $89.2 million in the three months ended September 30, 2009. The decrease in
selling, general, and administrative expenses was primarily due to lower incentive compensation
costs ($4.5 million), lower headcount and benefit costs ($5.8 million), lower bad debt expenses
($2.3 million), lower rent expense ($1.8 million), lower
professional fees ($1.4 million), and
reduced exposure to certain international trade compliance matters ($1.1 million).
Interest expense for the three months ended September 30, 2010 totaled $0.8 million compared to
$1.0 million in the three months ended September 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 September 30, 2010 totaled $2.4 million compared to
income tax expense of $0.9 million in the three months ended September 30, 2009. The increase in
income tax benefit in the three months ended September 30, 2010 was driven by additional net
operating loss carry backs created from contributions to our pension plans.
Net loss per common share were $0.04 and $0.49 for the three months ended September 30, 2010 and
2009, respectively, on both a basic and diluted basis. Weighted average shares outstanding used in
the calculation of net loss per common share on both a basic and diluted basis were 51.9 million
for the three months ended September 30, 2010 and 48.3 million for the three months ended September
30, 2009.
Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009
Net sales for the nine months ended September 30, 2010 were $883.8 million compared to $938.8
million in the nine months ended September 30, 2009, a decrease of $55.0 million, or 5.9%. The
decrease in net sales was primarily the result of continued weak retail conditions leading to lower
sales and decisions to abandon unprofitable products, customers, and programs, partially offset by
lower price discounts.
Gross profit for the nine months ended September 30, 2010 increased to $226.2 million compared to
$209.7 million in the nine months ended September 30, 2009. The increase in gross profit is
primarily attributable to increased efficiencies in our supply chain ($28.8 million), partially
offset by lower sales ($12.3 million). Gross profit as a percentage of net sales for the nine
months ended September 30, 2010 increased to 25.6% compared to 22.3% in the nine months ended
September 30, 2009.
Selling, general, and administrative expenses decreased to $225.8 million in the nine months ended
September 30, 2010 from $248.4 million in the nine months ended September 30, 2009. The decrease in
selling, general, and administrative expenses was primarily due to lower headcount and benefit
costs ($13.1 million), lower bad debt expenses ($7.2 million), reduced exposure to certain
international trade compliance matters ($5.2 million), lower advertising expense ($2.0 million),
and lower rent expense ($1.9 million), partially offset by higher incentive compensation costs
($9.7 million) and professional fees ($1.4 million). 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 nine months ended September 30, 2010 totaled $2.4 million compared to $4.3
million in the nine months ended September 30, 2009. The decrease in interest expense resulted from
a reduction in outstanding debt ($1.5 million) and lower interest rates ($0.4 million).
Income tax benefit for the nine months ended September 30, 2010 totaled $7.2 million compared to
income tax expense of $2.2 million in the nine months ended September 30, 2009. The increase in
income tax benefit in the nine months ended September 30, 2010 was driven by additional net
operating loss carry backs created from contributions to our pension plans in 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 $0.11 and ($0.90) for the nine months ended September 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 49.9
million for the nine months ended September 30, 2010 and 48.3 million for the nine months ended
September 30, 2009.
20
Table of Contents
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 | Three Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(Dollars in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Net sales |
$ | 27.0 | $ | 21.2 | $ | 9.9 | $ | 11.6 | ||||||||
Cost of sales |
16.4 | 12.6 | 6.2 | 7.7 | ||||||||||||
Gross profit |
10.5 | 8.6 | 3.8 | 3.9 | ||||||||||||
Selling, general and administrative
expenses open stores |
15.3 | 14.2 | 5.3 | 6.3 | ||||||||||||
Operating
loss open stores (c) |
(4.7 | ) | (5.6 | ) | (1.5 | ) | (2.4 | ) | ||||||||
Selling, general and administrative
expenses closed stores |
- | - | 1.6 | 3.3 | ||||||||||||
Operating loss (c) |
$ | (4.7 | ) | $ | (5.6 | ) | $ | (3.1 | ) | $ | (5.7 | ) | ||||
Number of open stores and showrooms at end
of period |
51 | 48 | 19 | 23 | ||||||||||||
Number of closed locations at end of period |
- | - | 26 | 29 | ||||||||||||
Same-store-sales (d): |
||||||||||||||||
Percentage increase (decrease) |
22 | % | (18) | % | (e | ) | (e | ) | ||||||||
Number of stores |
42 | 23 |
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 September 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 September 30, 2010 as compared to the three months ended September 30, 2009 due to increased
same-store-sales of 22% and the operation of additional company-owned stores since September 30,
2009. In addition to the above company-owned stores, there were 71 and 78 Thomasville dealer-owned
stores at September 30, 2010 and 2009, respectively.
21
Table of Contents
Thomasville Stores (a) | All Other Retail Locations (b) | |||||||||||||||
Nine Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(Dollars in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Net sales |
$ | 79.0 | $ | 60.3 | $ | 30.0 | $ | 32.1 | ||||||||
Cost of sales |
45.9 | 35.3 | 18.5 | 20.9 | ||||||||||||
Gross profit |
33.1 | 24.9 | 11.4 | 11.2 | ||||||||||||
Selling, general and
administrative expenses open
stores |
46.4 | 40.7 | 16.7 | 20.4 | ||||||||||||
Operating
loss open stores (c) |
(13.3 | ) | (15.8 | ) | (5.3 | ) | (9.3 | ) | ||||||||
Selling, general and
administrative expenses closed
stores |
- | - | 3.5 | 5.3 | ||||||||||||
Operating loss (c) |
$ | (13.3 | ) | $ | (15.8 | ) | $ | (8.8 | ) | $ | (14.5 | ) | ||||
Same-store-sales (d): |
||||||||||||||||
Percentage increase (decrease) |
21 | % | (24) | % | (e | ) | (e | ) | ||||||||
Number of stores |
42 | 23 |
Sales increased for open company-owned Thomasville retail store locations for the nine months ended
September 30, 2010 as compared to the nine months ended September 30, 2009 due to increased
same-store-sales of 21% and the operation of additional company-owned stores since September 30,
2009.
22
Table of Contents
Financial Condition and Liquidity
Liquidity
Cash and cash equivalents at September 30, 2010 totaled $70.2 million, compared to $83.9 million at
December 31, 2009. Net cash provided by operating activities totaled $18.2 million in the nine
months ended September 30, 2010 compared with $61.8 million in the nine months ended September 30,
2009. Lower cash generated from inventory, accounts receivable, and other working capital led to
decreased cash flow from operations in the nine months ended September 30, 2010 as compared to the
nine months ended September 30, 2009, partially offset by increased earnings from operations,
higher receipt of income tax refunds receivable, and lower payments of long-term incentive
compensation. In the nine months ended September 30, 2010, we elected to increase stocks of
essential raw materials and finished products to protect against any potential disruptions in the
Asian supply chain, to meet current consumer demand for recently introduced products as well as
support our commitments to dealers at the October High Point Market. Net cash used in investing
activities for the nine months ended September 30, 2010 totaled $13.9 million compared with $3.9
million in the nine months ended September 30, 2009. The increase in cash used in investing
activities is primarily the result of greater additions to software and lower proceeds from the
disposition of assets, partially offset by fewer additions to property, plant, and equipment. Net
cash used in financing activities totaled $18.1 million in the nine months ended September 30, 2010
compared with $88.0 million in the nine months ended September 30, 2009. Net cash used in financing
activities in both periods consisted of payment of long-term debt.
Working capital was $327.5 million at September 30, 2010, compared to $326.9 million at December
31, 2009. The current ratio was 3.1-to-1 at September 30, 2010, compared to 2.8-to-1 at December
31, 2009.
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.
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 September 30, 2010, we had $70.2 million of cash and cash equivalents, $77.0 million of debt
outstanding, and excess availability to borrow up to an additional $22.3 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 through 2011, 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 more fully in Financing Arrangements below, we obtained a waiver, until January 1,
2012, 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 September 30, 2010. Because we may not be able to produce
the representation upon the expiration of the waiver on January 1, 2012, we may be required to
reclassify all amounts outstanding under the ABL to current maturities in our Form 10-Q for the
period ended March 31, 2011. The classification of our outstanding debt would then 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.
23
Table of Contents
Financing Arrangements
Long-term debt consists of the following (in millions):
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Asset-based loan |
$ | 77.0 | $ | 95.0 | ||||
Less: current maturities |
- | 17.0 | ||||||
Long-term debt |
$ | 77.0 | $ | 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 September 30, 2010, there were $77.0 million of cash
borrowings and $15.1 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 September 30, 2010, excess availability was
$84.8 million. Therefore, we have $9.8 million of availability without being subject to the cash
dominion and weekly reporting covenants of the agreement and $22.3 million of availability before
we would be subject to the fixed charge coverage ratio. As of September 30, 2010 we were in
compliance with all such covenants and we anticipate compliance with all covenants for at least the
next twelve months. However, the ability to comply with these provisions may be affected by events
beyond our control.
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 $70.2 million of
cash and cash equivalents as of September 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 September 30, 2010 and will fluctuate with excess availability. As
of September 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 1.98% 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 September 30, 2010 was 2.18%.
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 have
obtained waivers to this required representation (the representation). The most recent waiver
(the waiver) was received on September 24, 2010 and extends until January 1, 2012. We provided no
consideration for this waiver.
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 it is appropriate to classify
amounts outstanding under the ABL as long-term debt as of September 30, 2010. This classification
is appropriate because the waiver prevents us from being required to make the representation
regarding our pension underfunded status, for a period greater than one year from the balance sheet
date. Because we may not be able to produce the representation upon the expiration of the waiver on
January 1, 2012, we may be required to reclassify all amounts outstanding under the ABL to current
maturities in our Form 10-Q for the period ended March 31, 2011. The classification of our
outstanding debt would then likely remain
24
Table of Contents
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. 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. In addition, on September 2, 2010,
we contributed 4,132,000 shares of our common stock to the trust funds. The fair value of the
shares was $5.08 per share, or $21.0 million in the aggregate, as of September 15, 2010, the
effective date of the registration statement. The contributions of shares are non-cash transactions
and thus are not reflected in the Consolidated Statements of Cash Flows for the nine months ended
September 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 Companys
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. Our election will be definitive upon
the filing of the annual report for the plan with the Department of Labor, which is expected to
occur in the third quarter of 2011.
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 Moodys 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 150 basis points from our previous
measurement date to 4.75% at December 31, 2010, 2) that plan asset values remain unchanged from
September 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 $12 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.
25
Table of Contents
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 September 30, 2010, the total future payments under lease guarantees were $12.1 million and
total minimum payments under subleases were $12.9 million. Our estimate of probable future losses
on these guaranteed leases is not material.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations is based upon the
Consolidated Financial Statements and Notes to the Consolidated Financial Statements, which have
been prepared in accordance with accounting principles generally accepted in the United States
(U.S. GAAP). The preparation of financial statements in accordance with U.S. GAAP requires us to
make estimates, judgments, and assumptions, which we believe to be reasonable, based on the
information available. These estimates and assumptions affect the reported amounts of assets,
liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities.
Actual results could differ from those estimates. The consolidated financial statements consist of
the accounts of our company and its subsidiaries. All intercompany balances and transactions have
been eliminated in consolidation.
We have chosen accounting policies we believe are appropriate to accurately and fairly report our
operating results and financial position, and we apply those accounting policies in a consistent
manner. Accounting policies we consider most critical are described in Item 7, Managements
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 September 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 September 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 SECs 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 September 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 September 30, 2010, that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting. |
26
Table of Contents
PART II
Item 1. Legal Proceedings
For a discussion of legal proceedings, refer to Part I, Note 13 to the Consolidated Financial
Statements in this Form 10-Q, which is incorporated herein by reference.
Item 1A. Risk Factors
We describe the risk factors associated with our business below. This description includes any
material changes to and supersedes the description of the risk factors associated with our business
previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended
December 31, 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.
27
Table of Contents
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.
28
Table of Contents
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
29
Table of Contents
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 acquirers 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 acquirers 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 acquirers 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 September 30, 2010, we had $70.2 million of cash and cash equivalents, $77.0 million of debt
outstanding, and excess availability to borrow up to an additional $22.3 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.
30
Table of Contents
Item 5. Other Information
On November 3, 2010, our companys Human Resources Committee approved amendments (Amendments) to
the Companys Deferred Compensation Plan (the Plan), which are effective as of January 1, 2011.
The principal Amendments to the Plan limit deferrals to payments of base salary and annual
incentive plan payments and simplify the payment options under the Plan.
The foregoing is only a summary of the principal Amendments and is qualified in its entirety by
reference to the amended and restated Deferred Compensation Plan, which is filed as Exhibit 10.5 to
this Form 10-Q and incorporated herein by reference.
Item 6. Exhibits
Incorporated by Reference | ||||||||||||
Filed | ||||||||||||
with | ||||||||||||
Exhibit | the | |||||||||||
Index | Form | Filing Date with the | Exhibit | |||||||||
No. | Exhibit Description | 10-Q | Form | SEC | No. | |||||||
3.1
|
Restated Certificate of Incorporation of the Company, as amended | 10-Q | May 14, 2002 | 3 | ||||||||
3.2
|
By-Laws of the Company, as amended effective as of August 5,2010 | 8-K | August 10, 2010 | 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*
|
Form of Change in Control Agreement effective January 1, 2011 | 8-K | August 10, 2010 | 10.1 | ||||||||
10.2
|
Registration Rights Agreement dated September 2, 2010, between the Company and Evercore Trust Company, N.A. | 8-K | September 3, 2010 | 10.1 | ||||||||
10.3
|
Waiver, dated as of September 24, 2010, among the Company, Broyhill Furniture Industries, Inc., HDM Furniture Industries, Inc., Lane Furniture Industries, Inc., and Thomasville Furniture Industries, Inc., the other Loan Parties named therein, the Lenders party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent | 8-K | September 27, 2010 | 10.1 | ||||||||
10.4+
|
Credit Agreement, dated August 9, 2007, among the Company, Broyhill Furniture Industries, Inc., HDM Furniture Industries, Inc., Lane Furniture Industries, Inc., and Thomasville Furniture Industries, Inc, the Loan Parties named therein, the Lender Parties thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent | X | ||||||||||
10.5*
|
Deferred Compensation Plan, restated effective as of January 1, 2011 | X | ||||||||||
31.1
|
Certification of Chief Executive Officer of the Company, Pursuant to Rule 13a-14(a)/15d-14(a) | X | ||||||||||
31.2
|
Certification of Chief Financial Officer (Principal Financial Officer) of the Company, Pursuant to Rule 13a-14(a)/15d-14(a) | X | ||||||||||
32.1
|
Certification of Chief Executive Officer of the Company, Pursuant to 18 U.S.C. Section 1350 | X | ||||||||||
32.2
|
Certification of Chief Financial Officer (Principal Financial Officer) of the Company, Pursuant to 18 U.S.C. Section 1350 | X |
* Exhibit is a management contract or compensatory plan, contract or arrangement.
+ A request for confidential treatment has been submitted with respect to this exhibit. The
copy filed as an exhibit omits the information subject to the request for confidential
treatment.
31
Table of Contents
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: November 5, 2010 |
||||
32