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Executives

Steven G. Rolls – Senior Vice President and Chief Financial Officer

Ralph P. Scozzafava – Chairman and Chief Executive Officer

Analysts

Todd Schwartzman – Sidoti & Company

Budd Bugatch – Raymond James

Barry Vogel – Barry Vogel & Associates

Brad Thomas – Keybanc Capital Markets

Frank Stewart – Fastening Solutions, Inc.

John Baugh – Stifel Nicolaus

Furniture Brands International, Inc. (FBN) Q3 2011 Earnings Call November 3, 2011 8:30 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Q3, 2011 Furniture Brands International, Inc. Earnings Conference Call. My name is Sandra, and I will be your operator today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

And I’d now like to turn the call over to your Steve Rolls, Chief Financial Officer. Please go ahead, sir.

Steven G. Rolls

Thank you, operator. Good morning, everyone, and thanks for joining us today. I’ll take a moment to read the Safe Harbor statement before I go over the financial results for our third quarter. Ralph Scozzafava, our Chairman and Chief Executive Officer will then follow with a discussion of the highlights of the quarter.

I need to remind you that certain comments made during this call may contain forward-looking statements within the meaning of Section 21(e) of the Securities Exchange Act of 1934. Our actual results and future financial condition may differ materially from those expressed in any such forward-looking statements as a result of many factors that may be outside of our control. Please refer to our SEC filings, including our Annual Report filed on Form 10-K for discussion of the major risks and uncertainties that may affect our business. The forward-looking statements made today are as of the date of this call, and we do not undertake any obligation to update our forward-looking statements.

If you have a copy of yesterday’s press release, you may obtain one, if you do not have a copy, you may obtain one along with copies of prior press releases and past SEC filings by linking through to the Investor Relations page of our website, furniturebrands.com.

Now, on to our financial results. As reported in last evening’s financial results press release, total sales were $258 million for the third, a decrease of 5.1% over the same period last year. Gross margin for the quarter was 22.3%, down compared to the 24.8% reported last year.

Cost of goods sold of $200.5 million for the quarter included $2.8 million in charges associated with our cost reduction actions. A decrease in gross margin on a year-over-year basis excluding the $2.8 million in charges was driven largely by a timing difference between raw material cost increases, and the initiatives put in place to mitigate their impact.

SG&A expenses totaled $75 million for the third quarter, and included $4.7 million in charges associated with the cost reduction actions. Excluding the charges, this was relatively flat to the $70.7 million in SG&A reported in the third quarter of 2010. About 70% of the approximately $30 million in future annual cost savings we announced will be realized in the SG&A line. We will only realize a partial benefit from these savings in the fourth quarter reflecting the timing of the impact of these actions.

Beginning next year, we expect a quarterly base SG&A run rate of approximately $73 million to $77 million that fully reflects the impact of these cost savings. The base SG&A run rate will flex depending on items like brand support activities and increases or decreases in incentive compensation.

On the retail side of our business, the 45 Thomasville stores that we have operated for more than 15 months showed a same-store sales increase of 5% this quarter as compared to 22% same-store sales increase in the third quarter of 2010.

We ended the third quarter with 67 total company-owned retail stores and showrooms as compared to 70 stores and showrooms at the end of the third quarter of 2010.

Inventory at quarter end was $249 million versus $276 million in the third quarter of 2010. We continue to expect the end of the year with inventory levels down approximately $10 million to $20 billion from the current level. Cash at quarter end totaled $21.2 million, and long-term debt totaled $77 million.

At the end of the quarter, the excess availability to borrow under our asset base loan agreement was approximately $39.3 million above the $35 million fixed charge coverage threshold for total liquidity of $60.5 million. The decrease in our cash balance compared to the end of the second quarter largely reflects the investments being made in Indonesia and Mexico and an extra week of payroll in the third quarter of 2011, compared to the second quarter.

Year-to-date capital spend came in at $24 million, we expect our capital expenditure for the full year to be within our previously issued $25 million to $29 million guidance range, and this depreciation expense for 2011 to be approximately $22 million.

Our required 2011 pension contribution is $3.1 million, we made a $600,000 cash contribution during the third quarter and we made the final $2.5 million cash contribution to our plan after the quarter ended in October to fulfill our 2011 funding requirements.

After the quarter ended, we also received $5.9 million in proceeds from the sale of our Morganton facility. With respect to next year, assuming no deterioration in the macro environment from current levels, we expect to be free cash flow positive as CapEx comes down from the elevated levels of 2011. Anticipated inventory reductions help generate some cash from working capital, and savings from cost reduction actions are fully realized. While it's too early to be precise, we are anticipating the pension contribution level in 2012 about $14 million, which has been factored into our expectation for positive free cash flow generation in 2012.

Now, I’ll turn the call over to Ralph to discuss our results in more detail.

Ralph P. Scozzafava

Thanks, Steve. As you know summer is seasonally the weakest period for our industry, and also at our company. Early July is also when we take one of our two one-week shutdowns in our factories. This quarter the seasonal weakness appears to have been intensified a bit by some macro headwinds. With respect to sales came through the quarter, we saw our sales franking around the July 4 holiday, and relative weakness in the August period. We regained our sales momentum around Labor Day with sales in September roughly flat against the year ago period. As has been our recent pattern, our higher end brands outperformed the mid tier ones, and upholstery continue to outperform case goods.

We continue to focus on strengthening our competitive position in introducing new products that’s both compelling and relevant. You’ve heard us talk about consumer test product and the discipline that lends to our new product development work. The key step in this process is input and feedback on the product from our sales team and our dealers. Over the course of last few quarters, this has resulted in a new product introductions that include more updated and contemporary collections, and also more recently some product introduced at lower price points, this new lower priced product has been designed to be delivered at these price points at the right margin.

As an example, in one of our brands, we now have an opening price point that is about $200 lower retail than a year ago, and this allows us the opportunity to access new volume at a new price tier that we had not previously been participating in. This is just one example, but it illustrates our commitment to deliver strong product, styles and values that resonate with our dealers and our customers in today's changing marketplace.

At the recent high point market, we saw a strong response from our customers across our brands. In particular, the initiatives on our Broyhill, Lane and Thomasville products were well received by our dealers.

On the Broyhill side, our recent introduction of more contemporary looks, more value oriented lumber and colors and newer sectional programs have all helped to drive the relative strength of our Broyhill upholstery business. On the case good side of Broyhill, we recently announced a direct container shipping option that will allow our dealers to have a range of mixed product to be shipped directly to them in a single container. This will begin in Q1, 2012 from our new mixing center in Asia. This will allow us to provide a larger list of dealers, significant value and volume potential.

At Lane, we’ve ramped up our new product offerings across recliners and in motion business, as well as going much deeper in home theater. Our new introductions were a blend of cleaner more contemporary looks, but also include the traditional Lane products that our customer identify us with. And all of our new products have the excellent comfort levels that our customers know they can rely on us for.

In addition at Lane, we offer dealers our Lane’s best program, where we can deliver special order product with rapid turnaround times for our dealers directly from our plants. This becomes particularly important in the fourth quarter as many of our customers look to reduce their inventories, but maintain adequate in-stock levels in order to service their sales in retail through the holidays. For these customers, Lane has the solution.

With respect to Thomasville, our new updated and contemporary products that were introduced in April are hitting showroom floors right now and the initial response has been very good. At our own Thomasville stores, this quarter, we posted a same store sales increase of 5%, which was on top of very strong plus 22 comp in the third quarter of 2010. We have seen solid sales momentum in our Thomasville retail business over the past couple of years, but we know we still have much work to do.

Year-to-date, we’ve opened two new Thomasville stores and have done one relocation. And in 2012, we anticipate opening between two and five new Thomasville stores.

Moving on to cost, as you saw in our release, we initiated some cost reduction programs like any decision to right size our cost structure, this was difficult, but necessary to improve our cost and importantly to enable us to make the important investments for our future.

The anticipated benefits associated with these programs are expected to be in excess of $30 million on an annualized basis with November, right now being the first month where we see the majority of the impact of reductions on our expense base.

The personnel related portion of these programs affected about 3.5% of our workforce with almost all of it being in back-office functions. On the cost of good side, we like others in our industry has seen inflation in material costs across our brands, although, the good news is that this has been stabilizing. As we said before, our intention is to offset any inbound cost increases with a combination of productivity initiatives and pricing adjustments where appropriate.

These offsetting actions will have more of an impact on our fourth quarter and beyond with minimal impact in our just reported third quarter, as Steve explained, this timing gap drove substantial portion of the year-on-year decline in our gross margin.

Recapping the benefits from our previously announced cost initiatives, we said that the combined cost savings from our Mexico and Indonesia factories are expected to be in the $10 million to $12 million range and fully realized in 2014. As a reminder, both of these plants, which we open this year are still ramping up production and therefore currently represent a drag on earnings. We expect both facilities to become positive contributors starting in the second half of 2012.

Our Appomattox plant was closed at the end of the first quarter and a large portion of the production has been shifted to another domestic facility. As this plant ramps up, as it’s doing now, there is a near-term cost that we expect to begin to realize the positive impact of this production consolidation later in our current fourth quarter. We expect the annual run rate of associated savings relative to 2010 to be in the $3.5 million range, and once we sell the plant, we expect those savings to be about $4 million as we eliminate cost like insurance, taxes, and other carrying costs.

Moving on to dark stores, these leases represent a drag of about $6 million on our profitability and will drop off rapidly in 2014 as their terms mature. But sooner, as we continue to increase our sublet to negotiate acceptable buyout offers from some landlords.

In addition, a large portion of the above market Thomasville leases come due in the 2013 to 2015 timeframe and we are beginning to renegotiate some of those leases right now. As you recall, we have a number of excess properties, and we’ll be opportunistic with the sale of these over time with any of these sales reducing our ongoing expenses and contributing to cash.

As an example in early October, we closed on the sale of our Morganton plant with the proceeds of $5.9 million and that’s reflected in our quarter end balance sheet. We currently have five significant facilities for sale that cost us $1.3 million in expenses annually.

We also have a leased warehouse on the West Coast that cost us $4 million in expenses annually, we’ll net lease fronts out at the end of 2012, we’ll exit the facility saving about $3 million once we take into account the consideration for some transportation cost to our West Coast customers.

Moving on to the balance sheet, Steve went over the balance sheet and cash flow. And as he said, 2011 has been an investment year for Furniture Brands as we invest in our future. We’ll soon start to reap the benefits of these investments as soon as 2012. We’re working down inventory at the same time while maintaining customer service levels and carefully managing our receivables. We’re opportunistically selling any excess properties as illustrated by the sale of our Morganton facility that was completed after the quarter ended.

Now as we look forward to 2012, many of the significant investments to strengthen the company's competitive position will be behind, and we’ll begin to see the benefits to our company. So we expect CapEx to be in the range of $16 million to $18 million next year as we get to more normative levels. We’ll benefit from a cost base that’s at least $30 million lower next year as a result of the recent cost reduction actions, and we’ll continue to manage working capital tightly.

Importantly, we expect to be free cash flow positive next year. In addition, the previously announced initiatives that are reviewed like Indonesia, Mexico, dark store lease explorations in the West Coast warehouse closure will result in a full run rate cost reduction of about $15 million to $19 million on an annualized basis, when they are fully realized around the 2014 timeframes.

But most importantly, and this is where all of our energy is every day. We’ll continue to focus on developing compelling products that our customers want to buy, to focus and work hard against driving our distribution to make our dealers successful and our business with those dealers even more successful; also in improving our retail store business, and by being good operators by managing out capital wisely, investing for the future at the same time to build our capability, and to continue on our progress towards profitability.

At some point, the micro environment changes and becomes more favorable, but as I said before many times, we’re not sitting around and waiting for that. We’re working every single day, and we’ll improve our results as we have been, and we are going to do that in the current environment.

So that concludes our comments for this morning. We’re going to open up the line for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Todd Schwartzman. Please go ahead, Todd.

Todd Schwartzman – Sidoti & Company

Hi, good morning, gentleman.

Ralph P. Scozzafava

Good morning, Todd.

Todd Schwartzman – Sidoti & Company

What was the third quarter written sales at the Thomasville stores?

Ralph P. Scozzafava

We haven't given our written numbers in the past, but I can tell you, things are tracking pretty similarly to way our deliveries have tracked. And across the whole company, if you look at our written sales, our delivered sales total company wide year-to-date are minus 3.6%, our orders year-to-date are right on that number, and have trended a little bit better from an order perspective over the past, call it, 30 to 60 days. I think we can move on to the next question.

Steven G. Rolls

Operator?

Ralph P. Scozzafava

Hello

Operator

Can you hear me?

Steven G. Rolls

Yes.

Operator

I do apologize about that, my line went mute and I do apologize. Your next question comes from Budd Bugatch. Please go ahead, Budd, that’s from Raymond James.

Budd Bugatch – Raymond James

Thank you. Good morning, I’m relieved about the liquidity clarification and thank you for making that on the call because I had misread the release, so thank you to Steve for doing that.

Steven G. Rolls

No problem, thank you.

Budd Bugatch – Raymond James

Secondly, Ralph, I think you said or Steve you said that the run rate for SG&A would be, I think next year $73 million, $77 million a more normative run rate after the giving effect to the 70% of the $30 million annual savings, is that correct?

Steven G. Rolls

Yes.

Budd Bugatch – Raymond James

Okay. I think so far this year, the run rate per quarter has been about $75.6 million a quarter on a normalized basis, can you kind of help us reconcile that to the savings, you had $5 million a quarter, how do we get their or what have you mentioned on that explanation?

Ralph P. Scozzafava

So probably the biggest difference is, going into next year we would be accruing incentive compensation as there are both short-term and long-term programs in companies. So we’d be accruing those at a expected 100% target level, they were lower than that this year.

Budd Bugatch – Raymond James

I see, okay, thank you. That’s helpful. And can you explain, I think on the last call you had said that the run rate for this quarter on SG&A would be, if I remember right, something about $79 million or so, and it came in at 71 on an adjusted basis, what caused that difference, is there something that, can you explain that differential to what all your expectations might have been?

Ralph P. Scozzafava

Yeah, there is one piece, Budd, similar to what Steve had talked about. We do have an element of conflict that is attached to the stock price, and when the stock price goes down to where it sits today, you reverse that accrual back out and that, that was the chunk of it.

Budd Bugatch – Raymond James

Will that also impact the fourth quarter, Ralph?

Ralph P. Scozzafava

It really depends on where the stock price goes during the quarter, so at the end of the quarter we’ll monitor that and make adjustments up or down, so it’s too hard to forecast, unfortunately.

Budd Bugatch – Raymond James

Okay. Finally, I know it's been a difficult time, and obviously we all do a feel for the actions you thought you needed to take, I assume that affected about 215 or 220 people, if my math is right from what was disclosed in the K last year?

Ralph P. Scozzafava

We haven't given a number, but the number that we’re comfortable with is 3.5% of our workforce, most of that in back office functions, a lot of support functions, the HR, IT and Finance. When we went to shared services, a lot of what we tried to do was to get ourselves to one place, to one platform and then to try and be more economical from there.

It wasn’t 100%, but it was a good portion of it. We don't like making decisions like that, but we have to get our company to a point where we are both efficient and effective. And I think, we run now from a benchmark perspective in SG&A at a pretty good place. But we’re a lean company, we want to really have a lean culture and we are going to look at lots of things to reduce costs. So all of these costs weren’t 100% people related at all. We've got a lot of other initiatives to take unnecessary costs out. Simple things around travel and how we operate, overnight shipping and just these things that you would do normally as you run your own business. When you're a part of a company, you have to think the same way, we want to drill that down throughout our organization, and our folks really understand it pretty well.

Budd Bugatch – Raymond James

The disclosure in the K was 6,200 people in the workforce, and I assume that hadn’t changed very much, which is how I got the math that I did?

Ralph P. Scozzafava

No, we’ve got a total in our company of about 8,700 and that includes North America and what we have in Mexico and Asia, and that's the number that we work from.

Budd Bugatch – Raymond James

I see, okay. And finally, SAP is to be implemented, is that included in your cost of CapEx expenditures expected for next year, that $16 million to $18 million number or is that a later expenditure?

Steven G. Rolls

No, that's included. It's a phased approach overtime. So we’ll be moving into our first phase next year, and that's included.

Budd Bugatch – Raymond James

Okay. Thank you very much. Good luck on the upcoming quarter and year.

Steven G. Rolls

Thanks.

Ralph P. Scozzafava

Thanks. I appreciate it.

Operator

Thank you for your question. Your next question comes from Barry Vogel from Barry Vogel and Associates. Please go ahead.

Barry Vogel – Barry Vogel & Associates

Good morning, gentlemen.

Ralph P. Scozzafava

Good morning, Barry.

Steven G. Rolls

Good morning, Barry.

Barry Vogel – Barry Vogel & Associates

I know you’ve been cutting cost enormously for many years now, and it just doesn’t seem to stop. And so, I'm going to ask you this question about, so bear with me. As far as additional actions to lower the breakeven levels of the company notwithstanding what you’ve already talked about, do you have another plan beyond the current plan that you’ve talked about or is that it basically?

Ralph P. Scozzafava

Let me answer at this way, Barry. We’re doing everything we can, and we’re seeing traction particularly, at Thomasville as an example to drive top line sales. We’re seeing good performance on our higher end brands, we’re seeing good performance across most of our upholstery business. So we spend the bulk of our time trying to drive top line and build margin, and that’s what you’re seeing with the work in Indonesia and Mexico in the lean cellular work across all of our domestic facilities, so that’s primary. The efforts against costs, and this is again part of being a lean organization and a lean culture is, we have to look to be more effective and efficient, and really own what we do here every single day. And if there is a more economical way of doing things, that can give us as good or better effectiveness, we’re going to go ahead and do that.

So as we take our company forward, we’re going to continue to be as lean as we can be, we’re going to continue to push on the top line as hard as we can. So we look at this as a process, so we can continue to get better every single year. And if you look at us over the last four years or so, and what you saw this company deliver in ’08, and the improvement to ’09 and the improvement to ’10; and this year we’ll be better, next year we’ll be better than that. We’re on track towards continuos improvement, and from a breakeven perspective, if we chose not to invest this year in the factories that we needed in Mexico and in Indonesia, we’d certainly be a lot closer or budded, but we’re taking a long term approach.

Barry Vogel – Barry Vogel & Associates

Okay. Now as far as Indonesia and Mexico, obviously they are affecting your costs this year, can you give just an estimated guess of what the positive swing would be in 2012 as the ramping up calms down and you start to deliver more goods out of that what’s planned. What kind of swing could we have in 2012 versus 2011 from those topics?

Steven G. Rolls

Well, we’ve mentioned it when we get to 2014 combined, we are looking at $10 million to $12 million and we're going to ramp to that, and you're going to see the lines cross if you will in the second half of 2012 as we fill those factories out. But you can imagine, they’re big buildings, I mean you’ve got to put volume in to get them to be productive. And when we get to the June, July and August period, I expect to see those lines crossed at some point, and then does it make the whole year positive? Not sure, not sure yet.

Barry Vogel – Barry Vogel & Associates

Okay. Now as far as that $30 million in cost savings, if we look at 2012, let's say everything is being equal, everything was the same, are you going to actually save $30 million in cost savings in ‘12, versus ’11?

Steven G. Rolls

Yes.

Ralph P. Scozzafava

Yes.

Barry Vogel – Barry Vogel & Associates

All right, so that’s a plus $30 million in operating profits in 2012 versus 2011 from those initiatives?

Ralph P. Scozzafava

Yeah, that’s right.

Barry Vogel – Barry Vogel & Associates

The other thing I wanted to ask you, Steve, I was a little bit surprised that you had a $9 million trademark write-off, and obviously those trademarks went on to your books in other time for the furniture industry, somewhat $77 million remaining. Can you tell us what triggered that $9 million trademark in the third quarter, and what’s likely to happen for the remaining $77 million of trademark?

Ralph P. Scozzafava

I can’t tell you what's likely to happen, and we evaluate that very mathematically if you will every year. So currently our sales have come down from last year, and that kind of is the bigger trigger, plus the discount rate affects it, and we all know interest rates have been changing. So it's just a combination of things, it’s just a very routine calculation.

Barry Vogel – Barry Vogel & Associates

Okay. Good luck. I know you've got a hard road ahead of you. You do need the headwinds reserving and become tailwinds, there’s no question.

Steven G. Rolls

Yeah. We look forward to that. Thanks.

Ralph P. Scozzafava

Thank you.

Operator

Thank you for your question. Your next question comes from Todd Schwartzman, Sidoti & Company. Please go ahead.

Todd Schwartzman – Sidoti & Company

I just have to follow-up on Barry’s question. On which trade name or names were affected in that impairment charge?

Steven G. Rolls

Well, we really have never sort of talked about. I don't think there is a problem. I means it’s not all trade names actually, not all brands have intangible trade name values on our balance sheet, but it was lying in Broyhill and Drexel Heritage.

Todd Schwartzman – Sidoti & Company

Okay. Thanks, Steve. Also on your free cash flow guidance, can you may be share with us perhaps even a range, what are you expecting as far as a full year inflow?

Steven G. Rolls

Yeah. We really haven't given that other than as you know just to say cash flow positive next year given how we are looking at the year and our spending patterns and our savings, cost-reduction actions.

Todd Schwartzman – Sidoti & Company

Fair enough. And final question with the moving parts, with respect to the timing difference of the raw material hikes of Q3 vis-à-vis some of your efforts to offset, considering all that, how should we think about the fourth quarter gross margin versus the third?

Steven G. Rolls

Well, we’ll have made progress against offsetting those raw material cost increases in the fourth quarter as frankly all of, everybody in our industry is doing that, so that will help. As we ramp up the new Appomattox facility, if you will it’s not Appomattox, but having moved up production, that will help as Ralph talked about both Mexico and Indonesia, we start to bleed off some of the negative pressure as more and more volume goes through those plant. So it’s not any one thing, Todd, there were a lot of things that will help that will build our gross margins. And as I’ve said many times to investors, we don’t look at each quarter as that important, it’s really the long term view, and we’ve made a lot of progress in gross margins, some of that’s backed off for a variety of reasons, but we expect to continue overtime to improve our gross margins, but they are not where they can be and will be.

Todd Schwartzman – Sidoti & Company

Got it. I understand. Thank you.

Steven G. Rolls

Thank you.

Operator

Thank you for question. Your next question comes from Brad Thomas, Keybanc Capital Markets.

Brad Thomas – Keybanc Capital Markets

Hey, good morning, Ralph. Good morning, Steve.

Ralph P. Scozzafava

Good morning, Brad.

Steven G. Rolls

Good morning, Brad.

Brad Thomas – Keybanc Capital Markets

Just a follow-up on sales in the quarter, Ralph, was low; anymore color you can provide in terms of what you saw during the quarter directionally in terms of price points just any additional color would be great?

Ralph P. Scozzafava

Sure. I think during the quarter what we saw was good performance around the holidays, July 4 holiday, Labor Day holiday. Good traction against those dealer events in our own instore events. The month of August was a difficult month demand wise, and really that was the bulk of our struggle in the quarter. That said, what we’ve seen coming out of September in order rates of late things certainly getting better, and I comeback from the high point market just about a week and a half ago, and the new product introductions that we’ve been able to put into the marketplace particularly on our big three brands are things that we’re really excited about. And I wouldn’t want to try and oversell what direct containers from our mixing center means on case goods for Broyhill coming out of Asia, I mean that’s got a lot of potential. We are very pleased about it, lean being able to access some new price points. And then the product that Thomasville has, it’s updated traditional little more contemporary. We are excited about the traffic we got was up at market and the order trends were as well.

So that bodes well for us and now we got to execute, we got good product, we are able to deliver it at a good margin, and now we needed into distribution, and we need to perform better and merchandise better at retail.

Brad Thomas – Keybanc Capital Markets

And then in terms of some of the efforts that you’ve got in place to mitigate increase in raw materials. Can you just talk a little bit more about the timing of that in the quarter and what kind of benefit we could see going forward?

Ralph P. Scozzafava

There are couple of pieces to it and some of that is how we work with our suppliers and a lot of the materials that had peaked in quality, July, August timeframe, and I'm talking about materials like cotton for example, steel, foam. We are seeing some favorability on those today and it's a matter of getting in materials with a new price and letting it flow through your income statement.

So there is a little bit of a lag from that standpoint, but in our factories what can we do to become more efficient and one of the big things that we have to do this year and we knew it was the right thing to do, was to get ourselves into a cotton sale facility in Mexico. Where we could shorten the Asia supply chain and do it at a similar cost and frankly take some products that we and kits that we sold here in the U.S. and sold some of them in Mexico and do it more economically.

So when Mexico ramps up you will see that product, those materials flow through our building materials into our cost of goods and then you will see some favorability and that’s starting to flow through right now. So that's kind of an example of one of the initiatives.

Brad Thomas – Keybanc Capital Markets

What has been the reaction from retailers and consumers, where there have been price increases and what’s your appetite for trying to do more price increases going forward?

Ralph P. Scozzafava

I think the pricing actions that we’ve taken and that the industry has taken are pretty much stabilized today. Now it's a matter of just getting your top line to move and to cover your overhead and that's really what we are focused on today. We are not interested in lots of pricing actions, but that’s something that we will continue to evaluate if that's necessary, we don't see that today.

Brad Thomas – Keybanc Capital Markets

Great. Thank you so much.

Ralph P. Scozzafava

Sure. Thank you.

Operator

Thank you. Your next question comes from Frank Stewart from Fastening Solutions.

Frank Stewart – Fastening Solutions, Inc.

Good morning, guys. How are you?

Ralph P. Scozzafava

We’re well. How are you doing?

Steven G. Rolls

Fine.

Frank M. Stewart – Fastening Solutions, Inc.

I appreciate the call and forgive me if I ask some questions that I’m not up to speed, I just started looking at Furniture Brands about 5 o'clock yesterday afternoon when I became aware of this call. One thing the move in operations or some operations to Mexico and Indonesia will that have any effect on the action Lane plants in Mississippi?

Ralph P. Scozzafava

Well, I think when we have got two very good facilities in Mississippi and they are two of our biggest and best plants. We’ve got some very good operators there, they are very productive, they are low-cost and we like them at time. The thing that we’ve got to do and I know that the entire Lane sales force is energized around is how do you feel those facilities and the best thing we can do is to fill those up, to create overtime, to have them run on Saturdays, to have them run at night and that’s what we’re anxious to do. So we like what we have there, we think they are very good high-quality, high-speed, they allow us to be custom, they allow us to be quick and we think those are all part of the equation that enables Lane to win.

Frank M. Stewart – Fastening Solutions, Inc.

Okay. Great.

Operator

Thank you for your question. Your next question comes from Budd Bugatch from Raymond James. Please go ahead.

Budd Bugatch – Raymond James

Hi, I just had a follow-up on the free cash flow expectation for next year, is there any help you can give us with a bit of roadmap of kind of the elements to get there with the $16 million to $18 million of CapEx, and the $14 million of additional pension contribution that you face next year.

Steven G. Rolls

So it’s all based on operations on top of that as well as working capital management. We expect that will bring inventories down a bit more next year. So it’s early just all in, Budd.

Budd Bugatch – Raymond James

Okay. So you are expecting additional working capital improvement next year above those, the $20 million of inventory reduction that you see by the fourth quarter?

Steven G. Rolls

But we’ve said $10 million to $20 million for the fourth quarter.

Budd Bugatch – Raymond James

Fair enough.

Steven G. Rolls

All right, and you’ll see inventories as they always do fluctuate, they tend to build a little on the first quarter, because of Chinese New Year, but we’re always focused on trying to become more efficient in managing the inventory, and working those down.

Budd Bugatch – Raymond James

Okay. And the offset to the pension contribution, Steve, is that other long-term liabilities or how will that book, and where will it show in the both the cash flow and the balance sheet side of the business?

Steven G. Rolls

Well, it shows up, as you know the expenses are lower than that cash contribution amount, so it just flows through both the income statement as well as other parts of the balance sheet, it’s…

Budd Bugatch – Raymond James

That’s on the expense side, but as you said, the liability is larger than just the current expense reduction, you have – I think as I’ve booked in other long-term liabilities, and that would be the offset of pension contribution and hope that's not their current expense?

Ralph P. Scozzafava

Right.

Budd Bugatch – Raymond James

Okay. All right, thank you. And just finally, the depreciation of next year, we are getting about $20 million estimate, would that be a fair estimate for next year?

Ralph P. Scozzafava

It's a little higher.

Steven G. Rolls

Maybe $22 million.

Budd Bugatch – Raymond James

$22 million was this year, right?

Ralph P. Scozzafava

It will be a little higher than that.

Steven G. Rolls

It might be $22 million to $24 million.

Budd Bugatch – Raymond James

Okay. Thank you very much.

Operator

Thank you for the questions. Your next question is from John Baugh from Stifel Nicolaus. Please go ahead.

John Baugh – Stifel Nicolaus

Yeah, I was just following up on the pension number and missed part of that response, I apologize, but I wanted to be clear, the 14 million that we are looking at in ’12, is that a cash number or is there an ability to fund that some other way?

Ralph P. Scozzafava

Well, our assumption in our sort of positive free cash flow is that that’s all cash. There is always the option of using stock for some combination of cash and stock.

John Baugh – Stifel Nicolaus

Okay. And see, I know it's very difficult (inaudible) is difficult and there are a number of things was going into the forecast, but is there anyway to think about beyond ’12 as it relates to this issue?

Ralph P. Scozzafava

Let me just step back to be clear, the 14 is an estimate right now, because until you’ve hit year end and you cement in what’s your asset values are, you don't know that exactly, but I think it's probably not going to be too far off of that. To go beyond that, it depends on what happens with interest rates and of course asset values. Interest rates being the biggest impact or so, if interest rates don't increase then we can't project forward what it looks like? But I’m willing to kind of do that at this point. Eventually, interest rates will increase which helps bring down your required contributions.

John Baugh – Stifel Nicolaus

Okay. And then can you refresh my memory on the liquidity confidence as it relates to reporting to banks monthly and are there key covenant numbers, I think you mentioned one of them and just update us where the numbers are maybe even post October here with the cash inflows you have where you are in those key numbers.

Ralph P. Scozzafava

So the ABL agreement, one of us extended our kind of redundant earlier this year brought the thresholds down to $42 million and $35 million. So the $42 million is the level that avoids kind of weekly reporting and cash dominion and $35 million is the level where you have to have a fixed charge coverage ratio, you have to meet that, we don't meet that. So we can't go below $35 million today, which we have always talked about. But we certainly can go below the $42 million. And the $39 million plus million that we talked about is excess availability is above that $35 million level.

Steven G. Rolls

You know, John, what we used to do as you know, is we go up close to the limit of our easy comfortable borrowing capacity and leave all the cash on the balance sheet and people were happy to see $50 million on the balance sheet, we don't do that because just extra cost for interest and we are going to hold on the balance sheet in cash what we want to use to operate the company and leave the availability where it sits and that's what we have been doing. So we are more interested in total liquidity of $60 million today and we think that's plenty and we are going to be cash flow positive next year. We have got the bulk of our big factory builds, which frankly we should have done a long time ago behind us. And we are going to continue to operate from here we like where we are headed.

John Baugh – Stifel Nicolaus

So the key numbers, the $16 million in total liquidity relates to the say $35 million fixed charge, so your $25 million above, is that the right way to think about that?

Steven G. Rolls

Yeah, yeah.

John Baugh – Stifel Nicolaus

And that as quarter end, that’s not inclusive of the recent asset sales?

Steven G. Rolls

No. That’s quarter end, yes.

John Baugh – Stifel Nicolaus

Okay. Thank you very much.

Ralph P. Scozzafava

Thanks, John.

Steven G. Rolls

Welcome.

Ralph P. Scozzafava

Okay. I think that’s our last question. I want to thank everybody for being with us today and being on the call. If anybody has any other questions with us, please give Steve Rolls or myself a call. And we are going to get back to work and we look forward talking everybody in February at the end of our current quarter. Have a great day.

Operator

Thank you for your participation in today’s call. That concludes your conference call. You may now disconnect and have a good day.

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