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EXECUTIVE SUMMARY

Furniture Brands International Inc. was first established in 1911 as a corporation to manufacture, design, and sell furniture. The company distributes their products through wholesale and retail outlets. The majority of Furniture Brand’s products are wooden, upholstered, glass, or metal home and office furnishings. The company has diverse brand offerings including: Thomasville, Lane, Broyhill, Drexel Heritage, Henredon, Hickory, Maitland-Smith, Pearson, and Lane Venture. Prices across brands are competitive within the industry compared with mid-grade and high-end competition.

The company’s stock value has fallen steadily since 2002 when trading at nearly $300 to today’s price of $0.50 due to declining sales, mounting debt, lack of investor support, and other factors. Furniture Brands is to be removed from trading and has filed for Chapter 11 bankruptcy in hopes of addressing its current challenges and strengthening its operations. Our paper addresses two solutions the company may use in order to reduce liabilities and increase cash, in turn stabilizing and increasing the value of the company.

We recommend that Furniture Brands divest the Lane subsidiary in order to decrease liabilities and channel resources into better performing brands which will increase Furniture Brand’s overall profit margin. The following discussion demonstrates the benefits of divesting the Lane subsidiary which will strengthen FBNIQ’s long-term financial position.

To reduce other insolvent obligations, we recommend offering employees covered by the defined benefit plan the option of converting their pension to equity in the newly restructured company. After total equity available has converted a large portion of the outstanding pension, we suggest the company offer lump sum payments to employees to cover their pension liability, reducing the pension further as cash becomes available from profitable operations.

Both suggestions enable Furniture Brands International to decrease liabilities, increase operations, and increase overall profit margin. If recommendations are followed successfully, Furniture Brands will be well positioned for higher growth and higher returns in the future making it a more competitive company in the furniture industry.

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Introduction

Furniture Brands International is one of the world’s leaders in designing, manufacturing,

sourcing, and retailing home furnishings. They market products through different channels

including Broyhilll, Hickory, Thomasville, La Barge, Lane, Lane Venture, Maitland-Smith,

Pearson, Henredon, and Drextel Heritage. Some of its major competitors include La-Z-Boy Inc.,

Ethan Allen Interiors Inc., Ashley Furniture Industries Inc., Basset Furniture Industries Inc.,

Hooker Furniture Corporation, and Stanley Furniture Company Inc. Furniture Brands.

The furniture industry has faced many challenges since the housing market crash of 2007,

and many companies like Furniture Brands International have struggled to stay in business.

Many have failed. Though Furniture Brands has continued its operations, it has lost a significant

amount of market share.

Furniture Brands International has experienced a great decline in profits, including six

consecutive years of negative profits to date. The lack of profit has contributed to a major decline

in their stock price to the current trading price near $0.50. The company has recently filed for

Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of

Delaware.

After review of the company’s financial position, we recommend the divesture of the

Lane subsidiary and a reduction of the pension liability through equity and cash offerings. We

believe these suggestions will lead to increased operating and overall profit through the removal

of an unprofitable brand and through decreased liabilities.

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Recommendation 1: Divesting the Lane Subsidiary

Furniture Brands International (FBNIQ) and its competitors were hit hard with the

collapse of the housing market in 2007 all the way through 2009. Lack of consumer spending on

new furniture and appliances, as well as a lack of consumer confidence in the stock of these

companies led to increased inventory levels and declining stock prices. While many of the

companies with direct ties to the housing industry are starting to recover some of the financial

ground that was lost during the crisis, others, like Furniture Brands International, are still

laggards and cannot seem to find a foothold in the new competitive landscape. For the last eight

years FBNIQ has reported a negative EBITDA. FBNIQ’s wholesale business has fallen out of

favor with the consumer leading to buildups in inventory and deep discounting tactics leading to

FBNIQ’s compressed profit margin (Appendix B). The two subsidiary business lines that make

up FBNIQ’s wholesale business are the Lane and Broyhill brands.

The Lane brand includes case furniture like tables and wooden chairs, as well as motion

and stationary upholstered items like recliners and couches for a family room setting. All of

these goods are wholesale and aimed at the low and mid-range price point. The Broyhill brand is

also wholesale and includes both case goods and upholstered goods for every room in the house

or office and is targeted to more mid-range price points.

Because of falling demand for the wholesale products in the Lane and Broyhill lines,

FBNIQ has started a repositioning and redesigning of many of the collections to cater to the

currents trends and modern influences. These changes were instituted in the Broyhill line before

2008, and the effects are just now starting to take shape and transform the brand into something

that appeals to more price sensitive consumers. On the other hand, the changes that have been

made to the Lane brand are so recent that the benefits will not be realized for a few years.

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Management stated in their Q1 2013 earning call, “We’re in the process of dramatically

reconfiguring the merchandise assortment across key categories for both Lane and Broyhill.

…We’re much farther along in driving this strategy at Broyhill, where we’ve seen improved

performance in upholstery and some improvement in case goods.”

Due to the Lane brand’s negative weight on overall company margins and slow projected

turnaround, we recommend that Furniture Brands International divest the business to a strategic

buyer. Doing so would free up much overhead as over time rent and employee expenses related

to the Lane business would be eliminated. Also, the divesture would allow FBNIQ to reduce the

underfunded pension obligation by transferring the portion of the pension related to the workers

being divested to the buyer. By initiating a sale of the Lane brand, FBNIQ would no longer have

to pour money into expensive repositioning strategies that it has already begun by rebranding and

strategically positioning the line within the market. These expenditures would not be all loss, but

in fact, create an attractive asset for the potential buyer and result in an increased bid price since

the Lane business already invested in seed capital expenditures in order to transform the brand

into a profitable business.

Without the Lane wholesale brand, FBNIQ would be able to focus on developing the

Broyhill line as well as the better performing, upper end retail lines. The selloff would not

absolve FBNIQ of all aspects of the Lane brand that are currently reducing overall company

profit during the year of the sale, but once remaining costs are paid, FBNIQ would be freed to

start producing positive EBITDA numbers.

The possible consolidation of factory and manufacturing space would be another benefit

of the sale of the Lane brand, as would be the ability to increase their liquidity position from the

proceeds of the sale of the company. With this excess liquidity FBNIQ would have the

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flexibility of capital that all struggling companies need to either make strategic investments or to

pay off any obligations.

Similar plans can be seen in the works from companies like Shell. Recently Shell’s CEO

Peter Voser discussed plans to enter a “divestment phase” in order to decrease net capital

spending. Discoveries in Brazil, acquisitions, and investments led to increased net spending this

year, and the market’s recognition of the fact caused the stock price of Shell to drop. Because of

this and other reasons, Shell plans to sell off pieces of oil and gas production in Nigeria, the US,

and other regions in order to offset the increase. Bloomberg says the company needs to raise $15

billion through divestments in order to meet financial targets. In the same way, we suggest that

FBNIQ invest in successful areas of its business and sell off less profitable segments such as the

Lane brand.

Vale is another company that has been telling a similar story. The largest iron-ore

exporter has divested $3 billion worth of assets this year selling its low performing assets and

focusing on building the more profitable ones in order to enlarge its profit margins over all.

Share price for the company fell to a four-year low in July but has risen 1.1 percent since. With

continued divestment plans, we may see Vale continue to gain shareholder confidence and a

continued increase in stock price. We desire the same increase in confidence and stock price for

FBNIQ.

Brasil Foods (BRF), the largest food producer in Brazil, did not achieve its projected

third-quarter revenues by an extremely large margin and is now focusing on its more profitable

areas of expertise in addition to free up working capital by the divesture of the other areas. The

company has sold two beef plants and will continue to divest other assets in order to streamline

the company’s operations. The company is the world’s largest meat processor by market value is

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going to change focus from slaughterhouses and poultry farms to focus on its core business of

packaged and processed foods. The company also plans to focus on international expansion and

increasing sales of “in natura” products. BRF’s sale of the beef plants will help focus the

operations of the company and help enable it to move into specific markets that will help calm

stockholder fears regarding sales volume, pricing, and competition. Its decision to continue

divestment will enable the company to regain the measures it has failed to meet, improve its

ability to operate and gain shareholder confidence, as well as get a leg-up on competition by

channeling its energy into the successful areas of the company. We would like to see something

similar result for FBNIQ through the divestment of Lane brand and believe that the additional

resources gained from the sale of the brand would enable the company to focus energy in its

more profitable segments and increase overall profit margin.

Recommendation 2: Reducing Pension Liability through Stock and

Lump Sum Offerings

One of the biggest burdens on FBNIQ’s credit rating and balance sheet is the company’s

underfunded $191 million pension liability. This amount represents the difference in the

company’s $519 million projected benefit obligation and the plan’s assets of $327 million

(Appendix C). According to FBNIQ CEO Ralph Scozzafava, the company is contributing

between $6 million to $6.5 million toward their pension liabilities (Appendix B), which is well

under the amount that is necessary to cover the majority of benefits plans that are an essential to

employee retirement security. At this rate, the company will not be able to meet pension

obligations in the near future.

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The defined benefit plan was terminated in 2005 (Appendix B), meaning that all

employees hired after this date became part of a new defined contribution 401(k) plan. Defined

pension plans are important to employees in guaranteeing them retirement security and are a

motivation for company loyalty. Many employees have the potential to lose a large portion of

their retirement funds once the company’s defined benefit pension plan is insolvent, which

would place employees in an unfair situation and hurt FBNIQ’s reputation. As an alternative, we

recommend that the company negotiate away some of its current pension liabilities related to the

benefit plan by allowing FBNIQ to restructure these liabilities into an equity offering of the post-

bankruptcy stock of Furniture Brands International.

The first step would be to negotiate with the owner of FBNIQ’s restructured debt a

percentage of the newly issued common stock to allocate to the pension employees. The next

step of implementation would be to mail out a survey to the employees covered by the defined

benefit pension to gain a sense of the interest in the pension conversion plan based on the

allocated equity pool. Based on the interest in the conversion plan, FBNIQ will convert up to the

dollar amount of allocated shares based on an employee’s tenure. The amount of stock that

would be awarded to each employee would be determined by actuaries and would equal the

amount represented by the present value of the future pension payments based on the employee’s

age and time with the company. This method of valuing pension benefits has been used by the

likes of GM and Ford (Motley Fool, 2010). For the employees that did not convert to new equity

or chose not to convert we recommend FBNIQ wait until the cash flow improves and offer the

employees with the longest FBNIQ tenure lump sum payments as excess cash becomes available

after payment of normal operational obligations. Once again, the lump sum amount will be

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determined by actuaries based on the present value of the future pension payments and the

employee’s age among other factors.

These actions will not relieve FBNIQ of all previously accrued obligations due to

provisions in the Employee Retirement Income Security Act (ERISA); however, it will greatly

reduce the amount of pension benefit obligation. This will allow management to focus on

growing the underlying plan assets in order to reduce its underfunded obligations.

Currently, the Pension Guaranty Benefit Corporation (PBGC), which is a government

entity that insures pension obligations, is taking part in recommending solutions to handle the

situation (2). The PBGC acts as a safeguard for failed plans and will relieve a company of all its

pension liabilities (up to a certain amount per plan), given that the company proves it cannot

continue operations unless the pension liabilities are removed from the balance sheet. While it

may be a hindrance to cash flows, FBINQ’s pension obligation does not suggest that operations

will cease if the company maintains responsibility for it. Therefore, it is not reasonable to assume

that the company can relieve itself of all pension liabilities by means of a PBGC takeover of

payments.

As part of company restructuring, we concede that there will be a high likelihood of

employee layoffs. This is regrettable given that the greatest asset to a company is its people.

However, we see a common stock offering to remaining employees as a motivation for helping

the company succeed. The recommendation gives personnel the chance to create wealth for

themselves in the terms of stock price appreciation and future dividend payouts. With a potential

to reap rewards from successful operations, employees will contribute to growing FBNIQ’s

profitability. Additionally the personal stake and sense of ownership employees will possess

have the potential to help quickly align them to new management ideals. This solution provides

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an opportunity to mitigate the losses suffered by employees while allowing the company to stop

some of its current financial problems.

Conclusion

From the research of Furniture Brands International’s situation, we feel that FBNIQ still

cannot seem to find a foothold in the new competitive landscape after the crisis. Our

recommendation is that Furniture Brands International divests the Lane brand to a strategic buyer

which will reduce overhead, rent, and employee expenses and liabilities related to the business.

By initiating a sale of the Lane brand, FBNIQ would no longer have to pour money into

expensive repositioning strategies. In addition, FBNIQ would be able to focus the freed capital to

develop the Broyhill line as well as the upper end retail lines. We would like to see FBNIQ focus

its efforts into its more profitable segments and increase overall profit margin through the

divestment of Lane brand and believe that the additional resources gained from the sale of the

brand.

We also recommend that the company reduce its pension liability by offering employees

equity conversion of their outstanding pension. The pension liability is a large burden on

FBNIQ’s credit rating, and reducing the liability before allowing the PBGC to take it over would

mitigate the losses suffered by employees. The recommendation allows FBNIQ to strengthen its

financial position by reducing outstanding obligations.

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WORKS CITED

Wall Street Journal. (September 9, 2013). Furniture Brands International Voluntarily Files for Chapter11 Bankruptcy Protection. Retrieved from The Wall Street Journal website: http://online.wsj.com Lexicon. (2013). Corporate divestiture. Retrieved from Financial Times Lexicon website: http://www.lexicon.ft.com Mitch Frazer. (May 22-25, 2011). Pension issues in Mergers and Acquisitions. Retrieved from Torys website: http://www.torys.com Eduard Gismatullin. (November 13, 2013). Shell to sell off $15B in assets to offset spending. Retrieved from Fuelfix website: http://www.fuelfix.com Juan Spinetto. (November 14, 2013). Vale steps up divestments as Brazil Tax Deadline Looms. Retrieved from Bloomberg website: http://www.bloomberg.com Julia Leite. (November 5, 2013). Bid: Corporate Brazil. Retrieved from Bloomberg BusinessWeek website: http://www.businesswek.com Steve Wilhelm. (January 11, 2013). Why Boeing’s fighting to retire pensions. Retrieved from Business Journal website: http://bizjournals.com Richard Craver. (November 5, 2013). Furniture Brands’ top stakeholder to enter bid for bankrupt manufacturer. Retrieved from Winston-Salem Journal website: http://www.journalnow.com Richard Craver. (September 23, 2013). Government pension agency takes wait-and-see approach on Furniture Brands’ bankruptcy. Retrieved from Winston-Salem Journal website: http://www.journalnow.com Allen Cook. Personal Communication. November 3, 2013. Funding universe. (2013). Furniture Brands International, Inc. History. Retrieved from Funding Universe website: http://www.fundinguniverse.com Bloomberg. (November 15, 2013). Furniture Brands International Inc. Retrieved from Bloomberg website: http://www.bloomberg.com Furniture brands. (2012). Furniture brands 2012 Annual Report. Retrieved from Furniture brands website: http://www.furniturebrands.com Furniture brands. (2012). Careers and benefits. Retrieved from Furniture brands website: http://www.furniturebrands.com

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Furniture brands. (August 6, 2013). Furniture Brands Earnings Call. Retrieved from Bloomberg website: http://www.bloomberg.com Susan Tompor. (July 12, 2012). GM, Ford hope lump-sum pensions ease obligations. Retrieved from Us today website: http://www.usatoday30.usatoday.com Dan Caplinger. (December 3, 2010). Don’t flub this million-dollar decision. Retrieved from Fool website: http://www.fool.com Wikipedia. (November 2, 2013). Chapter 11, Title 11, United States Code. Retrieved from Wikipedia website: http://www.en.wikipedia.org

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APPENDIX A

Furniture Brands International Overview

Furniture Brands International Inc. is a residential furniture manufacturer and distributor

(Funding universe, 2013). The company was founded in 1911 as International Shoe Company

and is based in St. Louis, Missouri. International Shoe Company moved its business segment to

furniture during 1980s and in 1996 the company changed its name to Furniture Brands

International (Funding universe, 2013). The Company's products include stationary upholstery

products, occasional furniture, recliners, and sleep sofas. (Bloomberg, 2013)

Products

Furniture Brands International has some of the best known and most respected furniture

lines in the industry. Among these brands, the company offers case goods, stationary upholstery

products, motion upholstery products, occasional furniture and decorative accessories and accent

pieces.

Distribution

The company services retailers ranging in size from small, independently owned furniture

stores to national and regional department stores and chains. The residential furniture retail

industry has consolidated in recent years, displacing many small local and regional furniture

retailers with larger chains and specialty stores.

There are four main way provide the company competitive advantages.

A diverse network of independently owned, full-line furniture retailers: The network is

the distribution base of the company and also the main source of income.

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Gallery programs: Retail stores provides the model rooms, which accessorized by

furniture instead of showing pieces by pieces. By viewing the models, customers will have a

perceptual intuition of the entire room’s decoration.

Distribution channel of Thomasville Home Furnishings Stores: This is a single brand

store for Thomasville brand in order to increase the brand awareness and lead the trend in the

industry.

Relationships worth large national department stores and specialty stores: This

breakthrough became the essential part of company’s distribution base. As a multinational

company, Furniture Brands International is still seeking corporate opportunities with

international sales and stores to explore its business.

Manufacturing and Sourcing

As a manufacturing and distributing company, Furniture Brands International takes a mix

manufacturing strategy of domestic production, non-domestic production and products from

offshore. North Carolina and Mississippi are responsible for domestic production. Offshore

manufacturers are in Asia, such as China, Philippines and Vietnam. The Company also provides

the sourcing group in Asia to control the qualities of the production process. The offshore

operations with foreign manufacturers also helps company save manufacturing cost and also

explores its brands in different countries.

Suppliers

Furniture Brands International has no long-term contract with particular supplier and uses

a wide variety of suppliers that vary depending on the cost and location.

Management and Employees

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On December 29, 2012, there are approximately 5,600 full time domestic employees and

3,500 non-domestic employees all around the world. All full time employees are covered by

comprehensive healthcare plan and also other benefits for working for the company (Furniture

Brands, 2012).

Environmental Matters

Abiding by the federal, state, local and international laws and regulations, the company

closely monitors the environmental performance of production facilities, and tests the raw

materials to produce the furniture to ensure the quality and safety of products in order to protect

environment and workers and customers’ health.

Competition

Furniture Brands International is in a highly competitive industry. The company’s

products compete with both domestic and foreign furniture producers. Competitors include

Ashley Furniture Industries Inc., La-Z-Boy Inc., and Stanley Furniture Company Inc. and many

other companies within furniture industry (10k).

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APPENDIX B

Excerpts from Q2 2013 Earnings Call Transcript

“The year-over-year decline in gross margin excluding the aforementioned charge was primarily due to additional clearances of older inventory and product that is being replaced; as well as lower plant utilization, the majority of which was concentrated in our wholesale businesses.” “One, we continue to expect to contribute $6 million to $6.5 million to our pension plan in 2013. Number two, we now expect to spend around $9 million in CapEx in 2013. And three, we expect D&A to be approximately $17 million to $19 million in 2013.”

Excerpts from 2012 Annual Report “We currently provide retirement benefits to our domestic employees through a defined contribution plan. Participating employees may contribute a percentage of their compensation to the plan, subject to limitations imposed by the Internal Revenue Service. We match a portion of the employee's contribution and employees vest immediately in the company match.” “Through 2005, domestic employees were covered primarily by noncontributory plans, funded by company contributions to trust funds held for the sole benefit of employees. We amended the defined benefit plans, freezing and ceasing future benefits as of December 31, 2005. Certain transitional benefits were provided to certain participants, but ceased accruing when the plan became inactive on December 31, 2010.”

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APPENDIX C Funded status of the Company-sponsored qualified and non-qualified defined benefit plans:

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

Source: Furniture brands. (2012)

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APPENDIX D

Source: Furniture brands. (2012)

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APPENDIX D (Continued)

Source: Furniture brands. (2012)