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EX-32 - LA-Z-BOY INCv166329_ex32.htm
EX-10.1 - LA-Z-BOY INCv166329_ex10-1.htm
EX-31.2 - LA-Z-BOY INCv166329_ex31-2.htm
EX-31.1 - LA-Z-BOY INCv166329_ex31-1.htm
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
FOR QUARTERLY PERIOD ENDED OCTOBER 24, 2009
COMMISSION FILE NUMBER 1-9656

LA-Z-BOY INCORPORATED
(Exact name of registrant as specified in its charter)

MICHIGAN
 
38-0751137
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

1284 North Telegraph Road, Monroe, Michigan
 
48162-3390
(Address of principal executive offices)
 
(Zip Code)
 
Registrant's telephone number, including area code (734) 242-1444
 
None
(Former name, former address and former fiscal year, if changed since last report.)
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
 
Yes þ                                                   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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).
 
Yes ¨                                                   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 ¨        Accelerated filer þ        Non-accelerated filer ¨       Smaller Reporting Company ¨
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes ¨                                                   No þ
 
The number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
 
Class
 
Outstanding at November 10, 2009
Common Shares, $1.00 par value
 
51,546,055

 

 
 
LA-Z-BOY INCORPORATED
FORM 10-Q SECOND QUARTER OF FISCAL 2010
 
TABLE OF CONTENTS

     
Page
Number(s)
 
 
 
   
3-4
   
5
   
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9-10
   
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11-12
   
12-13
   
13-15
   
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15-16
   
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17-18
   
18-19
   
19-20
   
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21-22
   
23-30
   
30-33
   
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39

 
2

 

FINANCIAL INFORMATION
 
LA-Z-BOY INCORPORATED
 
   
Second Quarter Ended
 
             
(Unaudited, amounts in thousands, except per share data)
 
10/24/09
   
10/25/08
 
Sales
  $ 300,707     $ 331,948  
Cost of sales
               
Cost of goods sold
    204,962       243,090  
Restructuring
    663       2,236  
Total cost of sales
    205,625       245,326  
Gross profit
    95,082       86,622  
Selling, general and administrative
    84,697       101,499  
Write-down of goodwill
          408  
Restructuring
    520       687  
Operating income (loss)
    9,865       (15,972 )
Interest expense
    831       1,651  
Interest income
    199       630  
Other income (expense), net
    236       (685 )
Earnings (loss) before income taxes
    9,469       (17,678 )
Income tax expense
    3,762       36,032  
Net income (loss)
    5,707       (53,710 )
Net (income) loss attributable to noncontrolling interests
    200       (34 )
Net income (loss) attributable to La-Z-Boy Incorporated
  $ 5,907     $ (53,744 )
                 
Basic average shares
    51,527       51,458  
Basic net income (loss) attributable to La-Z-Boy Incorporated per share
  $ 0.11     $ (1.05 )
                 
Diluted average shares
    51,755       51,458  
Diluted net income (loss) attributable to La-Z-Boy Incorporated per share
  $ 0.11     $ (1.05 )
                 
Dividends paid per share
  $     $ 0.04  
 
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

 
3

 
 
LA-Z-BOY INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
 
   
Six Months Ended
 
             
(Unaudited, amounts in thousands, except per share data)
 
10/24/09
   
10/25/08
 
Sales
  $ 563,378     $ 653,600  
Cost of sales
               
Cost of goods sold
    386,511       478,685  
Restructuring
    1,399       8,032  
Total cost of sales
    387,910       486,717  
Gross profit
    175,468       166,883  
Selling, general and administrative
    162,153       192,770  
Write-down of goodwill
          1,700  
Restructuring
    821       1,467  
Operating income (loss)
    12,494       (29,054 )
Interest expense
    1,810       3,146  
Interest income
    475       1,562  
Other income (expense), net
    945       (541 )
Earnings (loss) before income taxes
    12,104       (31,179 )
Income tax expense
    4,201       30,988  
Net income (loss)
    7,903       (62,167 )
Net (income) attributable to noncontrolling interests
    (13 )     (121 )
Net income (loss) attributable to La-Z-Boy Incorporated
  $ 7,890     $ (62,288 )
                 
Basic average shares
    51,503       51,443  
Basic net income (loss) attributable to La-Z-Boy Incorporated per share
  $ 0.15     $ (1.21 )
                 
Diluted average shares
    51,551       51,443  
Diluted net income (loss) attributable to La-Z-Boy Incorporated per share
  $ 0.15     $ (1.21 )
                 
Dividends paid per share
  $     $ 0.08  
 
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

 
4

 
 
LA-Z-BOY INCORPORATED

(Unaudited, amounts in thousands)
 
10/24/09
   
4/25/09
 
Current assets
           
Cash and equivalents
  $ 59,037     $ 17,364  
Restricted cash
    500       18,713  
Receivables, net of allowance of $25,195 at 10/24/09 and $28,385 at 4/25/09
    162,878       147,858  
Inventories, net
    138,946       140,178  
Deferred income taxes—current
    795       795  
Other current assets
    15,956       22,872  
Total current assets
    378,112       347,780  
Property, plant and equipment, net
    142,704       150,234  
Trade names
    3,100       3,100  
Other long-term assets
    48,183       51,431  
Total assets
  $ 572,099     $ 552,545  
                 
Current liabilities
               
Current portion of long-term debt
  $ 2,067     $ 8,724  
Accounts payable
    46,318       41,571  
Accrued expenses and other current liabilities
    86,167       75,733  
Total current liabilities
    134,552       126,028  
Long-term debt
    46,911       52,148  
Deferred income taxes
    724       724  
Other long-term liabilities
    67,950       63,875  
Contingencies and commitments
           
Equity
               
La-Z-Boy Incorporated shareholders’ equity:
               
Common shares, $1 par value
    51,546       51,478  
Capital in excess of par value
    199,585       205,945  
Retained earnings
    87,342       70,769  
Accumulated other comprehensive loss
    (20,955 )     (22,698 )
Total La-Z-Boy Incorporated shareholders' equity
    317,518       305,494  
Noncontrolling interests
    4,444       4,276  
Total equity
    321,962       309,770  
Total liabilities and equity
  $ 572,099     $ 552,545  
 
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

 
5

 

LA-Z-BOY INCORPORATED

   
Second Quarter Ended
   
Six Months Ended
 
(Unaudited, amounts in thousands)
 
10/24/09
   
10/25/08
   
10/24/09
   
10/25/08
 
Cash flows from operating activities
                       
Net income (loss)
  $ 5,707     $ (53,710 )   $ 7,903     $ (62,167 )
Adjustments to reconcile net income (loss) to cash provided by (used for) operating activities
                               
Gain on sale of assets
    (75 )     (604 )     (88 )     (2,670 )
Write-down of long-lived assets
    200             200        
Write-down of goodwill
          408             1,700  
Restructuring
    1,183       2,923       2,220       9,499  
Provision for doubtful accounts
    2,152       4,797       4,514       9,000  
Depreciation and amortization
    6,135       5,989       12,244       11,943  
Stock-based compensation expense
    1,621       986       2,628       1,855  
Change in receivables
    (26,484 )     (22,261 )     (17,586 )     (8,091 )
Change in inventories
    3,329       (63 )     1,231       10,843  
Change in other assets
    11,106       2,272       6,439       (529 )
Change in payables
    7,073       8,375       4,747       1,927  
Change in other liabilities
    10,282       (5,199 )     11,553       (26,117 )
Change in deferred taxes
    (8 )     41,677             42,838  
Total adjustments
    16,514       39,300       28,102       52,198  
Net cash provided by (used for) operating activities
    22,221       (14,410 )     36,005       (9,969 )
                                 
Cash flows from investing activities
                               
Proceeds from disposals of assets
    230       2,805       1,916       7,786  
Capital expenditures
    (1,340 )     (2,618 )     (2,779 )     (9,990 )
Purchases of investments
    (1,338 )     (3,516 )     (2,537 )     (8,965 )
Proceeds from sales of investments
    1,445       5,233       4,109       11,027  
Change in restricted cash
          (2,668 )     17,007       (2,956 )
Change in other long-term assets
    29       158       14       229  
Net cash provided by (used for) investing activities
    (974 )     (606 )     17,730       (2,869 )
                                 
Cash flows from financing activities
                               
Proceeds from debt
    10,213       24,831       20,673       39,466  
Payments on debt
    (10,408 )     (6,430 )     (32,567 )     (25,287 )
Dividends paid
          (2,074 )           (4,151 )
Net cash provided by (used for) financing activities
    (195 )     16,327       (11,894 )     10,028  
                                 
Effect of exchange rate changes on cash and equivalents
    (348 )     (604 )     (168 )     (643 )
Change in cash and equivalents
    20,704       707       41,673       (3,453 )
Cash and equivalents at beginning of period
    38,333       10,317       17,364       14,477  
Cash and equivalents at end of period
  $ 59,037     $ 11,024     $ 59,037     $ 11,024  
                                 
Cash paid (net of refunds) during period – income taxes
  $ (13,348 )   $ (719 )   $ (13,082 )   $ 204  
Cash paid during period - interest
  $ 563     $ 1,287     $ 1,288     $ 2,413  
 
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

 
6

 

LA-Z-BOY INCORPORATED

(Unaudited, amounts in thousands)
 
Common
Shares
   
Capital in
Excess of Par
Value
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Loss
   
Non-
Controlling
Interests
   
Total
 
At April 26, 2008
  $ 51,428     $ 209,388     $ 190,215     $ (227 )   $ 2,582     $ 453,386  
Comprehensive loss
                                               
Net income (loss)
                    (121,347 )             121          
Unrealized loss on marketable securities arising during the period (net of tax of $0.4 million)
                            (4,332 )                
Reclassification adjustment for loss on marketable securities included in net loss
                            5,180                  
Translation adjustment
                            (622 )     447          
Change in fair value of cash flow hedge
                            (723 )                
Net actuarial (loss)
                            (21,974 )                
Total comprehensive loss
                                            (143,250 )
Stock issued for stock and employee benefit plans, net of cancellations
    50       (7,262 )     7,078                       (134 )
Stock option, restricted stock and performance based stock expense
            3,819                               3,819  
Change in noncontrolling interest upon consolidation of VIE and other changes in noncontrolling interests
                                    1,126       1,126  
Dividends paid
                    (5,177 )                     (5,177 )
At April 25, 2009
    51,478       205,945       70,769       (22,698 )     4,276       309,770  
                                                 
Comprehensive income
                                               
Net income
                    7,890               13          
Unrealized gain on marketable securities arising during the period
                            1,626                  
Reclassification adjustment for gain on marketable securities included in net income
                            (88 )                
Translation adjustment
                            (850 )     155          
Net pension amortization
                            1,054                  
Change in fair value of cash flow hedge
                            1                  
Total comprehensive income
                                            9,801  
Stock issued for stock and employee benefit plans, net of cancellations
    68       (8,976 )     8,683                       (225 )
Stock option, restricted stock and performance based stock expense
            2,616                               2,616  
At October 24, 2009
  $ 51,546     $ 199,585     $ 87,342     $ (20,955 )   $ 4,444     $ 321,962  
 
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

 
7

 
 
 
 
The accompanying financial statements include the consolidated accounts of La-Z-Boy Incorporated, our wholly-owned subsidiaries, and the Variable Interest Entities (“VIEs”) in which we are the primary beneficiary.  The April 25, 2009 balance sheet was derived from audited financial statements, adjusted for the amendment of accounting and reporting standards for a parent’s noncontrolling interest in a subsidiary and the accounting for future ownership changes with respect to the subsidiary. This standard defines a noncontrolling interest, previously called a minority interest, as the portion of equity in a subsidiary that is not attributable, directly or indirectly, to a parent.  This standard requires, among other things, that a noncontrolling interest be clearly identified, labeled and presented in the consolidated balance sheet as equity, but separate from the parent’s equity; and that the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of operations. 

Effective April 26, 2009, we adopted this standard and applied it retrospectively which affected only presentation and disclosure.  As a result, we reclassified noncontrolling interests in the amount of $4.3 million from other long-term liabilities and accumulated other comprehensive loss to equity in the April 25, 2009 Consolidated Balance Sheet.  Certain reclassifications to the Consolidated Statement of Operations have been made to prior period amounts to conform to the presentation of the current period under this standard.  Recorded amounts for prior periods previously presented as Net income (loss), which are now presented as Net income (loss) attributable to La-Z-Boy Incorporated, have not changed as a result of this adoption.
 
The interim financial information is prepared in conformity with generally accepted accounting principles and such principles are applied on a basis consistent with those reflected in our fiscal 2009 Annual Report on Form 10-K, filed with the Securities and Exchange Commission, but does not include all the disclosures required by generally accepted accounting principles. In the opinion of management, the interim financial information includes all adjustments and accruals, consisting only of normal recurring adjustments (except as otherwise disclosed), which are necessary for a fair presentation of results for the respective interim period.  During the first quarter of fiscal 2010, we recorded income of approximately $0.6 million, primarily as a reduction of cost of goods sold, related to a correction of amounts recorded in fiscal 2009 as a foreign currency translation adjustment in shareholders’ equity.  We determined that the impact of this adjustment was not material to fiscal 2009 or the projected fiscal 2010 year.
 
We evaluated subsequent events through November 17, 2009, the date on which this Quarterly Report on Form 10-Q was filed with the Securities and Exchange Commission.
 
 
The foregoing interim results are not necessarily indicative of the results of operations which will occur for the full fiscal year ending April 24, 2010.
 
 
Certain prior year information has been reclassified to be comparable with the current year presentation.

 
8

 
 
 
At October 24, 2009 and April 25, 2009, we had short-term restricted cash of $0.5 million and $18.7 million, respectively, related to our wholly-owned insurance company.  Prior to April 25, 2009, restricted cash was primarily used to support our liability for workers’ compensation claims and premiums.  In the first quarter of fiscal 2010 La-Z-Boy Incorporated assumed the obligations related to our workers’ compensation and obtained regulatory approval to transfer substantially all of the assets from our wholly-owned insurance company, to La-Z-Boy Incorporated.  As a result of these changes, restricted cash was reduced to $0.5 million, representing the remaining invested capital in our wholly-owned insurance company.
 
 
A summary of inventories is as follows:
 
(Unaudited, amounts in thousands)
 
10/24/09
   
4/25/09
 
Raw materials
  $ 60,804     $ 53,498  
Work in process
    11,702       11,281  
Finished goods
    92,188       101,147  
FIFO inventories
    164,694       165,926  
Excess of FIFO over LIFO
    (25,748 )     (25,748 )
Inventories, net
  $ 138,946     $ 140,178  


Net periodic pension costs were as follows:
   
Second Quarter Ended
   
Six Months Ended
 
(Unaudited, amounts in thousands)
 
10/24/09
   
10/25/08
   
10/24/09
   
10/25/08
 
Service cost
  $ 261     $ 328     $ 522     $ 656  
Interest cost
    1,400       1,359       2,800       2,718  
Expected return on plan assets
    (1,206 )     (1,728 )     (2,412 )     (3,456 )
Net amortization
    527             1,054        
Net periodic pension cost (benefit)
  $ 982     $ (41 )   $ 1,964     $ (82 )
 
We did not make any contributions to the plans during the second quarter of fiscal 2010.  We are not required to make any contributions to the defined benefit plan in fiscal year 2010; however we have the discretion to make contributions. 
 
 
We have provided financial guarantees relating to notes and leases in connection with certain La-Z-Boy Furniture Galleries® stores which are not operated by the company.  The guarantees are generally for real estate leases and have remaining terms of one to three years. These guarantees enhance the credit of these dealers. The dealer is required to make periodic fee payments to compensate us for our guarantees. We have recognized liabilities for the fair values of these agreements that we have entered into, but they are not material to our consolidated financial statements.

 
9

 
 
We would be required to perform under these agreements only if the dealer were to default on the lease or note. The maximum amount of potential future payments under these guarantees was $2.3 million as of October 24, 2009.
 
We have, from time to time, entered into agreements which resulted in indemnifying third parties against certain liabilities, mainly environmental obligations. We believe that judgments, if any, against us related to such agreements would not have a material effect on our business or financial condition.
 
Our accounting policy for product warranties is to accrue an estimated liability at the time the revenue is recognized. This estimate is based on historical claims and adjusted for currently known warranty issues.  While our claims in fiscal 2010 declined, our experience indicated that the time from when the products shipped until a claim was settled has increased, so we did not see a corresponding decrease in our outstanding liability.
 
A reconciliation of the changes in our product warranty liability is as follows:
 
   
Second Quarter Ended
   
Six Months Ended
 
(Unaudited, amounts in thousands)
 
10/24/09
   
10/25/08
   
10/24/09
   
10/25/08
 
Balance as of the beginning of the period
  $ 14,297     $ 14,645     $ 14,394     $ 14,334  
Accruals during the period
    3,383       3,993       6,720       8,097  
Settlements during the period
    (3,387 )     (4,201 )     (6,821 )     (7,994 )
Balance as of the end of the period
  $ 14,293     $ 14,437     $ 14,293     $ 14,437  
 
 
Total compensation expense recognized in the Consolidated Statement of Operations for all equity based compensation was $1.6 million and $2.6 million, for the second quarter and first six months of fiscal 2010, respectively.  For the second quarter and first six months of fiscal 2009, we recorded compensation expense for all equity based compensation of $1.0 million and $1.9 million, respectively.

In the second quarter of fiscal 2010 we granted 0.1 million deferred stock units to our non-employee directors.  We account for deferred stock units as liability-based awards; the compensation expense is initially measured and recognized based on the market price of our common stock at the grant date.  The liability is re-measured and adjusted based on our stock price at the end of each reporting period until paid.  Expense relating to the deferred stock units recorded in Selling, General and Administrative expense was $0.9 million and $1.3 million, for the second quarter and first six months of fiscal 2010, respectively.  For the second quarter and first six months of fiscal 2009, expense relating to deferred stock units was $0.4 million.

 
10

 
 
 
The components of total comprehensive income (loss) are as follows:
 
   
Second Quarter Ended
 
   
10/24/09
   
10/25/08
 
(Unaudited, amounts in thousands)
 
Attributable
to La-Z-Boy
Incorporated
   
Non-
controlling
Interest
   
Total
   
Attributable
to La-Z-Boy
Incorporated
   
Non-
controlling
Interest
   
Total
 
Net income (loss)
  $ 5,907     $ (200 )   $ 5,707     $ (53,744 )   $ 34     $ (53,710 )
Other comprehensive income (loss):
                                               
Translation adjustment
    (130 )     41       (89 )     (1,129 )     1,370       241  
Change in fair value of cash flow hedge
    15             15       (502 )           (502 )
Net pension amortization
    527             527                    
Unrealized gains/(losses) on marketable securities arising during the period
    692             692       (4,034 )           (4,034 )
Total comprehensive income (loss)
  $ 7,011     $ (159 )   $ 6,852     $ (59,409 )   $ 1,404     $ (58,005 )

 
11

 

   
Six Months Ended
 
   
10/24/09
   
10/25/08
 
(Unaudited, amounts in thousands)
 
Attributable
to La-Z-Boy
Incorporated
   
Non-
controlling
Interest
   
Total
   
Attributable
to La-Z-Boy
Incorporated
   
Non-
controlling
Interest
   
Total
 
Net income (loss)
  $ 7,890     $ 13     $ 7,903     $ (62,288 )   $ 121     $ (62,167 )
Other comprehensive income (loss):
                                               
Translation adjustment
    (850 )     155       (695 )     (1,302 )     1,211       (91 )
Change in fair value of cash flow hedge
    1             1       (224 )           (224 )
Net pension amortization
    1,054             1,054                    
Unrealized gains/(losses) on marketable securities arising during the period
    1,538             1,538       (4,780 )           (4,780 )
Total comprehensive income (loss)
  $ 9,633     $ 168     $ 9,801     $ (68,594 )   $ 1,332     $ (67,262 )
 
 
Our reportable operating segments are the Upholstery Group, the Casegoods Group and the Retail Group. 
 
Upholstery Group.  The operating units in the Upholstery Group are La-Z-Boy, England, and Bauhaus. This group primarily manufactures and sells upholstered furniture to furniture retailers. Upholstered furniture includes recliners and motion furniture, sofas, loveseats, chairs, ottomans and sleeper sofas.
 
Casegoods Group. The operating units in the Casegoods Group are American Drew/Lea, Kincaid, and Hammary. This group primarily sells manufactured or imported wood furniture to furniture retailers.  Casegoods product includes tables, chairs, entertainment centers, headboards, dressers, accent pieces and some upholstered furniture. 
 
Retail Group. The Retail Group consists of 68 company-owned La-Z-Boy Furniture Galleries® stores in eight primary markets.  The Retail Group sells upholstered furniture to end consumers, as well as casegoods and other accessories. 

 
12

 
 
   
Second Quarter Ended
   
Six Months Ended
(Unaudited, amounts in thousands)
 
10/24/09
(13 weeks)
   
10/25/08
(13 weeks)
   
10/24/09
(26 weeks)
   
10/25/08
(26 weeks)
 
Sales
                       
Upholstery Group
  $ 232,780     $ 247,934     $ 429,472     $ 485,052  
Casegoods Group
    37,302       48,473       73,167       96,594  
Retail Group
    38,014       39,484       73,976       81,911  
VIEs
    12,248       11,793       23,987       25,871  
Other/eliminations
    (19,637 )     (15,736 )     (37,224 )     (35,828 )
Consolidated
  $ 300,707     $ 331,948     $ 563,378     $ 653,600  
                                 
Operating income (loss)
                               
Upholstery Group
  $ 25,359     $ 8,338     $ 41,649     $ 18,194  
Casegoods Group
    (184 )     755       (305 )     2,132  
Retail Group
    (5,301 )     (10,391 )     (10,969 )     (20,401 )
VIEs
    (402 )     (2,621 )     (137 )     (3,709 )
Corporate and Other
    (8,424 )     (8,722 )     (15,524 )     (14,071 )
Goodwill write-down
          (408 )           (1,700 )
Restructuring
    (1,183 )     (2,923 )     (2,220 )     (9,499 )
    $ 9,865     $ (15,972 )   $ 12,494     $ (29,054 )
 
 
During the past several years, we have committed to various restructuring plans to rationalize our manufacturing facilities, consolidate warehouse distribution centers and close underperforming retail facilities. With these restructuring plans, we have written-down various fixed assets. Additionally, we recorded charges for severance and benefits, contract terminations and other transition costs related to relocating and closing facilities.

In the fourth quarter of fiscal 2009, we committed to a restructuring plan to consolidate our casegoods manufacturing plants in North Carolina related to our Kincaid and American Drew/Lea operations and to convert another facility into a distribution center. The consolidation of these plants occurred in the first quarter of fiscal 2010.  The conversion of the distribution center is expected to be completed by the end of the fourth quarter of fiscal 2010. In connection with these activities, we have incurred $1.9 million in restructuring charges since the inception of this plan for severance and benefits, write-down of fixed assets and other restructuring charges.  In the second quarter and first six months of fiscal 2010, we recorded pre-tax restructuring charges of $1.1 million and $1.7 million, respectively, covering severance and benefits and other restructuring costs in connection with this plan. We expect to incur approximately $0.7 million in additional charges in fiscal 2010 related to severance and benefits and other restructuring costs under this plan. During fiscal 2009, the plan resulted in restructuring charges of $0.2 million, covering severance and benefits and the write-down of fixed assets.  These changes, once fully completed, are expected to result in annual cost savings of approximately $5 to $6 million based on current volume.

 
13

 

During fiscal 2008, we committed to a restructuring plan to consolidate all of our North American cutting and sewing operations in Mexico and transfer production from our Tremonton, Utah plant, to our five remaining La-Z-Boy branded upholstery manufacturing facilities. Our Utah facility ceased operations during the first quarter of fiscal 2009 and production was shifted to our remaining manufacturing facilities. At the end of the second quarter of fiscal 2010, we had about 840 employees at our Mexican facility. Because our Mexican facility is still in the beginning stages of production, only about 33% of our domestic cutting and sewing operations have been transferred to our Mexican facility. By the end of fiscal 2010 we expect 100% of our domestic fabric cutting and sewing operations to be shifted to our Mexican facility. We plan to begin shifting the domestic leather cutting and sewing operations in the second quarter of fiscal 2011. In connection with these activities, we have recorded $10.0 million in restructuring charges, net of reversals since the inception of this plan for severance and benefits, write-down of certain fixed assets, and other restructuring costs. We expect to incur additional pre-tax restructuring charges of $1.0 million to $1.5 million during the next twelve months. During the second quarter and first six months of fiscal 2010, we had restructuring charges, net of reversals of $(0.4) million and $(0.3) million, respectively, covering severance and benefits under this plan.  The reversal of restructuring charges relate to a decrease in our estimated healthcare costs for this plan.  During fiscal 2009, the plan resulted in restructuring charges of $7.7 million, covering severance and benefits ($3.1 million) and other restructuring costs ($4.6 million).  Other restructuring costs include transportation, freight surcharges and other transition costs as we moved production to other plants. These changes, once fully completed are expected to result in annual cost savings of approximately $20 million.

During fiscal 2007 and 2008, several of our warehouse distribution centers were consolidated into larger facilities and several underperforming stores were closed. In the second quarter and first six months of fiscal 2010, we had restructuring charges of $0.5 million and $0.8 million, respectively, related to contract terminations.  We expect to incur approximately $0.5 million of additional charges in the remainder of fiscal 2010.  During fiscal 2009, we had restructuring charges of $1.6 million related to contract terminations.

During fiscal 2009, we committed to restructuring plans to close a plant in Sherman, Mississippi related to our Bauhaus operations, to reduce our company-wide employment to be more in line with our sales volume, and to close the operations of our La-Z-Boy U.K. subsidiary. The closure of the plant in Sherman, Mississippi was completed in the fourth quarter of fiscal 2009.  The closure of our La-Z-Boy U.K. subsidiary occurred in the second quarter of fiscal 2009.  In connection with these plans, we recorded pre-tax restructuring charges of $3.5 million in fiscal 2009, covering severance and benefits ($1.2 million), the write-down of inventory ($1.2 million) and the write-down of fixed assets and other restructuring charges ($1.1 million).  We do not expect to incur any additional charges related to these restructuring plans.

Additionally, during fiscal 2009 we had reversals of $0.5 million relating to our restructuring plans in fiscal 2007.
 
As of October 24, 2009, we had a remaining restructuring liability of $1.9 million which is expected to be settled as follows: $1.3 million in the remainder of fiscal 2010 and $0.6 million thereafter.
 
For the current fiscal year to date, restructuring liabilities along with charges to expense, cash payments or asset write-downs for all of our restructuring actions were as follows:
 
         
Fiscal 2010
       
(Unaudited, amounts in thousands)
 
4/25/09
Balance
   
Charges to
Expense *
   
Cash
Payments
or Asset
Write-Offs
   
10/24/09
Balance
 
Severance and benefit-related costs
  $ 2,022     $ (30 )   $ (777 )   $ 1,215  
Contract termination costs
    530       821       (669 )     682  
Other
          1,429       (1,429 )      
Total restructuring
  $ 2,552     $ 2,220     $ (2,875 )   $ 1,897  
*
 Charges to expense include $0.1 million of non-cash charges for contract termination costs.

 
14

 
 
         
Fiscal 2009
       
(Unaudited, amounts in thousands)
 
4/26/08
Balance
   
Charges to
Expense **
   
Cash
Payments
or Asset
Write-Offs
   
4/25/09
Balance
 
Severance and benefit-related costs
  $ 2,842     $ 4,149     $ (4,969 )   $ 2,022  
Fixed asset write-downs, net of gains
          512       (512 )      
Contract termination costs
    939       1,528       (1,937 )     530  
Other
          6,271       (6,271 )      
Total restructuring
  $ 3,781     $ 12,460     $ (13,689 )   $ 2,552  
**
 Charges to expense include $1.8 million of non-cash charges for contract termination costs, fixed asset and inventory write-downs.  Inventory write-downs of $1.2 million are included in “Other.”
 
 
Our effective tax rates for the first six months of fiscal 2010 and fiscal 2009 were 34.7% and 99.0%, respectively.  For fiscal 2010, a higher estimated effective tax rate was offset by an additional federal tax refund.  The significantly higher rate for the first six months of fiscal 2009 resulted primarily from the recording of a $38.2 million valuation allowance against our deferred tax assets.
 
 
Financial accounting standards require the “primary beneficiary” of a VIE to include the VIE’s assets, liabilities and operating results in its consolidated financial statements.   In general, a VIE is a corporation, partnership, limited-liability company, trust or any other legal structure used to conduct activities or hold assets that either (a) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (b) has a group of equity owners that are unable to make significant decisions about its activities, or (c) has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations.

La-Z-Boy Furniture Galleries® stores that are not operated by us are operated by independent dealers. These stores sell La-Z-Boy manufactured products as well as various accessories purchased from approved La-Z-Boy vendors.  Most of these independent dealers have sufficient equity to carry out their principal operating activities without subordinated financial support.  However, there are certain independent dealers that we have determined may not have sufficient equity.  In some cases we have extended credit beyond normal trade terms to the independent dealers, made direct loans, entered into leases and/or guaranteed certain loans or leases.

We evaluate our transactions and relationships with our La-Z-Boy Furniture Galleries® dealers on a quarterly basis to determine if any of our independent dealers qualify as a variable interest entity and additionally whether we are the primary beneficiary for any of the dealers who do qualify as a variable interest entity. We also evaluate our current VIEs on a quarterly basis to determine if they no longer qualify as a variable interest entity.

 
15

 

Based on the criteria for consolidation of VIEs, we have consolidated dealers where we were the primary beneficiary based on the fair value of our variable interests.  All of our consolidated VIEs were recorded at fair value on the date we became the primary beneficiary.  In fiscal 2010, all earnings and losses attributed to these VIEs are recorded as Net income (loss) attributable to noncontrolling interests.  Prior to fiscal 2010, all losses of the VIEs in excess of their equity were recorded as Net income (loss) and all earnings of these VIEs to the extent of recouping the losses were recorded as Net income (loss).  Earnings in excess of losses were attributed to equity owners of the dealers and were recorded as minority interest.

We had three consolidated VIEs during the second quarter and first six months of fiscal 2010 representing 31 stores and four consolidated VIEs during the second quarter and first six months of fiscal 2009 representing 34 stores.  The decrease was the result of our Cleveland VIE no longer being consolidated during fiscal 2010 which resulted in a decrease of 7 stores.  This was offset by an increase of 4 stores relating to the changes we made with our Toronto VIE during the second half of fiscal 2009.

The table below shows information concerning our consolidated VIEs during fiscal 2010 and fiscal 2009:

   
As of
     
(Unaudited, amounts in thousands)
 
10/24/09
   
4/25/09
     
Current assets
  $ 17,967     $ 16,220      
Other long-term assets
    13,427       13,132      
Total assets
  $ 31,394     $ 29,352      
                     
Current liabilities
  $ 7,898     $ 5,983      
Other long-term liabilities
    2,969       3,085      
Total liabilities
  $ 10,867     $ 9,068      
                     
   
Second Quarter Ended
   
Six Months Ended
 
(Unaudited, amounts in thousands )
 
10/24/09
   
10/25/08
   
10/24/09
   
10/25/08
 
Net sales, net of inter-company eliminations
  $ 12,248     $ 11,793     $ 23,987     $ 25,871  
Net loss
  $ (514 )   $ (2,444 )   $ (411 )   $ (3,503 )
                                 

In addition to our consolidated VIEs, we had significant interests in three independent La-Z-Boy Furniture Galleries® dealers for which we were not the primary beneficiary.  Our total exposure to losses related to these dealers was $2.2 million which consists of past due accounts receivable as well as notes receivable, net of reserves and collateral on inventory and real estate.  We do not have any obligations or commitments to provide additional financial support to these dealers for the remainder of fiscal 2010.

 
16

 

 
A reconciliation of the numerators and denominators used in the computations of basic and diluted earnings per share were as follows:
 
   
Second Quarter
Ended
   
Six Months 
Ended
 
(Unaudited, amounts in thousands)
 
10/24/09
   
10/25/08
   
10/24/09
   
10/25/08
 
Numerator (basic and diluted):
                       
Net income (loss) attributable to La-Z-Boy Incorporated
  $ 5,907     $ (53,744 )   $ 7,890     $ (62,288 )
Income allocated to participating securities
    (122 )           (141 )      
Dividends on participating securities
          (32 )           (53 )
Net income (loss) available to common shareholders
  $ 5,785     $ (53,776 )   $ 7,749     $ (62,341 )

   
Second Quarter
Ended
   
Six Months 
Ended
 
(Unaudited, amounts in thousands)
 
10/24/09
   
10/25/08
   
10/24/09
   
10/25/08
 
Denominator:
                       
Basic common shares (based upon weighted average)
    51,527       51,458       51,503       51,443  
Add:
                               
Stock option dilution
    228             48        
Diluted common shares
    51,755       51,458       51,551       51,443  

Share-based payment awards that entitle their holders to receive non-forfeitable dividends prior to vesting are considered participating securities.  We granted restricted stock awards that contain non-forfeitable rights to dividends on unvested shares; such stock awards are considered participating securities.  As participating securities, the unvested shares are required to be included in the calculation of our basic earnings per common share, using the “two-class method.”  The two-class method of computing earnings per common share is an allocation method that calculates earnings per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings.  Unvested restricted stock awards were previously included in our diluted share calculation using the treasury stock method.  For the second quarter and first six months ended October 25, 2008, we did not allocate any loss to the unvested stock awards (participating securities), due to their anti-dilutive effect.
 
The effect of options to purchase 1.9 million and 2.6 million shares for the quarters ended October 24, 2009 and October 25, 2008 with a weighted average exercise price of $14.97 and $15.44 respectively, were excluded from the diluted share calculation because the exercise prices of these options were higher than the weighted average share price for the quarters and would have been anti-dilutive.
 

Accounting standards require the categorization of financial assets and liabilities, based on the inputs to the valuation technique, into a three-level fair value hierarchy. The various levels of the fair value hierarchy are described as follows:

 
·
Level 1 — Financial assets and liabilities whose values are based on unadjusted quoted market prices for identical assets and liabilities in an active market that we have the ability to access.
 
·
Level 2 — Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable for substantially the full term of the asset or liability.

 
17

 
 
 
·
Level 3 — Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. 
 
Accounting standards require the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.

The following table presents the fair value hierarchy for those assets measured at fair value on a recurring basis as of October 24, 2009:

   
Fair Value Measurements
 
(Unaudited, amounts in thousands)
 
Level 1
   
Level 2
   
Level 3
 
Assets
                 
Available-for-sale securities
  $ 8,230     $ 2,266     $  
                         
Liabilities
                       
Interest rate swap
          (721 )      
Total
  $ 8,230     $ 1,545     $  

We hold available-for-sale marketable securities to fund future obligations of one of our non-qualified retirement plans.  The fair value measurements for our available-for-sale securities are based upon quoted prices in active markets, as well as through broker quotes and independent valuation providers, multiplied by the number of shares owned exclusive of any transaction costs and without any adjustments to reflect discounts that may be applied to selling a large block of the securities at one time.

We entered into a three year interest rate swap agreement in order to fix a portion of our floating rate debt.  The fair value of the swap agreement was measured as the present value of all expected future cash flows based on the LIBOR-based swap yield curve as of the date of the valuation and considered counterparty non-performance risk. These assumptions can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.


During the first quarter of fiscal 2009, we entered into an interest rate swap agreement which we accounted for as a cash flow hedge.  This swap hedges the interest on $20 million of floating rate debt.  Under the swap, we are required to pay 3.33% through May 16, 2011 and we receive three month LIBOR from the counterparty. This offsets the three month LIBOR component of interest which we are required to pay under $20 million of floating rate debt.  Interest under this debt as of October 24, 2009 was three month LIBOR plus 1.75%.

We executed this interest rate cash flow hedge in order to mitigate our exposure to variability in cash flows for the future interest payments on a designated portion of borrowings.  The gains and losses are reflected in accumulated other comprehensive loss (with an offset to the hedged item in other long-term liabilities) until the hedged transaction impacts our earnings.  Our interest rate swap agreement was tested for ineffectiveness during the first quarter of fiscal 2009 and was determined to be effective.  Our agreement also qualified for the “short cut” method of accounting. We believe that our agreement continues to be effective and therefore no gains or losses have been recorded in our earnings.

 
18

 

For the second quarter and first six months of fiscal 2010, we deferred losses of $0.7 million into accumulated other comprehensive loss.  For the second quarter and first six months of fiscal 2009, we deferred gains of less than $0.1 million into accumulated other comprehensive loss.  The fair value of our interest rate swap at October 24, 2009 and at April 25, 2009 was $0.7 million, which was included in other long-term liabilities.
 
 
In December 2008, the Financial Accounting Standards Board (FASB) issued authoritative guidance for employers’ disclosures about postretirement benefit plan assets.  This guidance expands the disclosures related to postretirement benefit plan assets to include disclosures concerning a company’s investment policies for benefit plan assets and categories of plan assets.  This guidance further expands the disclosure requirements to include the fair value of plan assets, including the levels within the fair value hierarchy and any concentrations of risk related to the plan assets.  This guidance will be effective for our fiscal 2010 year end and will require expanded disclosures.  The adoption of this guidance will not have a material impact on our consolidated financial statements.

In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for transfers of financial assets.  This amendment requires greater transparency and additional disclosures for transfers of financial assets and the entity's continuing involvement with them and changes the requirements for derecognizing financial assets.  In addition, this amendment eliminates the concept of a qualifying special-purpose entity (“QSPE”). This amendment is effective for our fiscal 2011 year end and interim periods within that year.  We are currently evaluating the impact this amendment will have on our consolidated financial statements and disclosures.

In June 2009, the FASB issued an amendment to the consolidation guidance applicable to variable interest entities (“VIEs”). The guidance affects all entities currently within the scope of FASB ASC 810, Consolidation, as well as qualifying special-purpose entities (“QSPEs”) that are currently excluded from the scope of FASB ASC 810, Consolidation.  Accordingly, we will need to reconsider our previous FASB ASC 810, Consolidation, conclusions, including (1) whether an entity is a VIE, (2) whether we are the VIE’s primary beneficiary, and (3) what type of financial statement disclosures are required.  This amendment is effective for our fiscal 2011 year end and interim periods within that year.

In July 2009, the FASB issued the Accounting Standards Codification (“Codification”), which became the single source of authoritative generally accepted accounting principles (GAAP) in the United States, other than rules and interpretive releases issued by the Securities and Exchange Commission (SEC).  The Codification is a reorganization of current GAAP into a topical format that eliminates the current GAAP hierarchy and instead establishes two levels of guidance – authoritative and non-authoritative.  All non-grandfathered, non-SEC accounting literature that is not included in the Codification will become non-authoritative.  All references to authoritative accounting literature in our financial statements beginning in the second quarter of fiscal 2010 are referenced in accordance with the Codification.  There were no changes to the content of our financial statements or disclosures as a result of implementing the Codification.

In August 2009, the FASB issued amendments for the fair value measurement of liabilities.  This amendment provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, an entity is required to measure fair value using specified techniques.  This amendment also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability.  Additionally, this amendment clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements.  These amendments are effective for our third quarter of fiscal 2010.  These amendments will not have a material impact on our consolidated financial statements and disclosures.

 
19

 

In October 2009, the FASB issued amendments to the criteria for separating consideration in multiple-deliverable arrangements.  These amendments will establish a selling price hierarchy for determining the selling price of a deliverable.  The amendments will require that a vendor determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a standalone basis.  These amendments will eliminate the residual method of allocation and require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method.  These amendments will expand disclosures related to vendor’s multiple-deliverable revenue arrangements.  These amendments will be effective for our fiscal 2012 year end.  We are currently evaluating the impact these amendments will have on our consolidated financial statements and disclosures.
 
 
On November 6, 2009, the Work, Home Ownership and Business Assistance Act of 2009 (H.R. 3548) federal law was enacted.  The law includes provisions allowing businesses with federal net operating losses in tax years 2008 and 2009 to carry back those losses for a period of five years and receive refunds of income taxes paid in those years.  Previously, federal net operating losses could only be carried back for a period of two years.  This new law is likely to impact our effective tax rate in the third quarter of fiscal 2010; however as of November 17, 2009, we are still in the process of evaluating the effect of this new law on our income tax position.

 
20

 
 
 
Our Management’s Discussion and Analysis is an integral part of understanding our financial results. This Management’s Discussion and Analysis should be read in conjunction with the accompanying Consolidated Financial Statements and related Notes to Consolidated Financial Statements. We begin the Management’s Discussion and Analysis with an introduction to La-Z-Boy Incorporated’s key businesses and strategies. We then provide a discussion of our results of operations, liquidity and capital resources, quantitative and qualitative disclosures about market risk, and critical accounting policies.
 
 
We are making forward-looking statements in this report. Generally, forward-looking statements include information concerning possible or assumed future actions, events or results of operations. More specifically, forward-looking statements include the information in this document regarding:

future income, margins and cash flows
 
future economic performance
future growth
 
industry and importing trends
adequacy and cost of financial resources
  
management plans

Forward-looking statements also include those preceded or followed by the words "anticipates," "believes," "estimates," "hopes," "plans," "intends" and "expects" or similar expressions. With respect to all forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Actual results could differ materially from those anticipated or projected due to a number of factors. These factors include, but are not limited to: (a) changes in consumer confidence and demographics; (b) continued economic recession and fluctuations in our stock price; (c) changes in the real estate and credit markets and the potential impacts on our customers and suppliers; (d) the impact of terrorism or war; (e) continued energy and other commodity price changes; (f) the impact of logistics on imports; (g) the impact of interest rate and currency exchange rate changes; (h) operating factors, such as supply, labor or distribution disruptions including changes in operating conditions, product recalls or costs; (i) effects of restructuring actions; (j) changes in the domestic or international regulatory environment; (k) the impact of adopting new accounting principles; (l) the impact from natural events such as hurricanes, earthquakes and tornadoes; (m) the ability to procure fabric rolls and leather hides or cut and sewn fabric and leather sets domestically or abroad; (n) those matters discussed in Item 1A of our fiscal 2009 Annual Report and factors relating to acquisitions and other factors identified from time-to-time in our reports filed with the Securities and Exchange Commission. We undertake no obligation to update or revise any forward-looking statements, either to reflect new developments or for any other reason.


La-Z-Boy Incorporated manufactures, markets, imports, distributes and retails upholstery products and casegoods (wood) furniture products. Our La-Z-Boy brand is the most recognized brand in the furniture industry, and we are the leading global producer of reclining chairs. We own 68 La-Z-Boy Furniture Galleries® stores, which are retail locations dedicated to marketing our La-Z-Boy branded product. These 68 stores are part of the larger store network of La-Z-Boy Furniture Galleries® stores which includes a total of 311 stores, the balance of which are independently owned and operated. The network constitutes the industry’s largest single-branded upholstered furniture retailer in North America. These stores combine the style, comfort and quality of La-Z-Boy furniture with our in-home design service to help consumers furnish their homes.  In addition to our La-Z-Boy Furniture Galleries® store network, the La-Z-Boy brand also has a distribution model known as ComfortStudios®.  ComfortStudios® are defined spaces within a larger independent retailer that are dedicated to displaying La-Z-Boy branded furniture with the average size of the space being about 5,000 square feet.  As of October 24, 2009, we had 487 ComfortStudios®.  We expect to open approximately 10 new ComfortStudios® during the remainder of fiscal 2010.  Kincaid, England and Lea also have in-store gallery programs.

 
21

 

We consolidate certain of our independent dealers who do not have sufficient equity to carry out their principal business activities without our financial support. These dealers are referred to as Variable Interest Entities (“VIEs”). During the second quarter and first six months of fiscal 2010 we had three VIEs, operating 31 stores, included in our Consolidated Statement of Operations.   During the second quarter and first six months of fiscal 2009 we had four VIEs, operating 34 stores, included in our Consolidated Statement of Operations.

Our reportable operating segments are the Upholstery Group, the Casegoods Group and the Retail Group.

Upholstery Group.  In terms of revenue, our largest segment is the Upholstery Group, which includes La-Z-Boy, our largest operating unit. Also included in the Upholstery Group are the operating units Bauhaus and England.  This group primarily manufactures and sells upholstered furniture to proprietary stores.  Upholstered furniture includes recliners and motion furniture, sofas, loveseats, chairs, ottomans and sleeper sofas.

Casegoods Group.  Our Casegoods Group is primarily an importer, marketer and distributor of casegoods (wood) furniture.  During fiscal 2010, our remaining two casegoods manufacturing facilities are being consolidated.  The operating units in the Casegoods Group are American Drew/Lea, Hammary and Kincaid.  Casegoods product includes tables, chairs, entertainment centers, headboards, dressers, accent pieces and some coordinated upholstered furniture. 

Retail Group.  The Retail Group consists of 68 company-owned La-Z-Boy Furniture Galleries® stores located in eight markets ranging from the Midwest to the East Coast of the United States and also including Southeastern Florida.  The Retail Group sells upholstered furniture, as well as casegoods and other accessories to end consumers through the retail network.

Challenging economic conditions have continued to have a negative impact on consumers’ discretionary spending.  As a result we have continued to experience a decline in our sales volume during the second quarter and first six months of fiscal 2010.  During the second half of fiscal 2009, we made significant changes to our business in order to offset the impact of these challenging economic conditions and the anticipated corresponding decline in sales volume.  We reduced employment across all levels of the company, closed a plant related to our Bauhaus operations, continued to transition our cut and sew operations to our new facility in Mexico and removed costs by suspending certain employee benefits and made changes to our overall operating expenses to be more in line with our sales volume.  During the first half of fiscal 2010 we have continued to reduce costs by consolidating our casegoods manufacturing facilities and continuing the transition of our cut and sew operations to Mexico.  As a result of the changes we made during the second half of fiscal 2009 and the first half of fiscal 2010, we were able to produce positive net income for three consecutive quarters on declining sales volumes.

While we believe that these cost savings measures will positively impact our earnings, we remain cautious about future economic conditions, and as a result we will continue to focus on controlling our costs and managing our operating expenses based on current sales trends.
 
22

 
Analysis of Operations: Quarter Ended October 24, 2009
(Second Quarter 2010 compared with 2009)

   
Quarter Ended
       
(Unaudited, amounts in thousands, except per share amounts and percentages)
 
10/24/09
   
10/25/08
   
Percent
change
 
Upholstery sales
  $ 232,780     $ 247,934       (6.1 )%
Casegoods sales
    37,302       48,473       (23.0 )%
Retail sales
    38,014       39,484       (3.7 )%
VIE sales
    12,248       11,793       3.9 %
Other/eliminations
    (19,637 )     (15,736 )     (24.8 )%
Consolidated sales
  $ 300,707     $ 331,948       (9.4 )%
                         
Consolidated gross profit
  $ 95,082     $ 86,622       9.8 %
Consolidated gross margin
    31.6 %     26.1 %        
                         
Consolidated S,G&A
  $ 84,697     $ 101,499       (16.6 )%
S,G&A as a percent of sales
    28.2 %     30.6 %        
                         
Upholstery operating income
  $ 25,359     $ 8,338       204.1 %
Casegoods operating income (loss)
    (184 )     755       (124.4 )%
Retail operating loss
    (5,301 )     (10,391 )     49.0 %
VIE operating loss
    (402 )     (2,621 )     84.7 %
Corporate and other
    (8,424 )     (8,722 )     3.4 %
Goodwill write-down
          (408 )     100.0 %
Restructuring
    (1,183 )     (2,923 )     59.5 %
Consolidated operating income (loss)
  $ 9,865     $ (15,972 )     161.8 %
                         
Upholstery operating margin
    10.9 %     3.4 %        
Casegoods operating margin
    (0.5 )%     1.6 %        
Retail operating margin
    (13.9 )%     (26.3 )%        
Consolidated operating margin
    3.3 %     (4.8 )%        
                         
Net income (loss) attributable to La-Z-Boy Incorporated
  $ 5,907     $ (53,744 )        
                         
Net income (loss) per share attributable to La-Z-Boy Incorporated
  $ 0.11     $ (1.05 )        

 
23

 

Sales
 
Consolidated sales were down 9.4% when compared with the second quarter of fiscal 2009 due to the continued challenging economic climate which included a weak retail environment, low consumer confidence, an uncertain housing market and a poor credit environment.  The challenging conditions coupled with our decision to limit our exposure and credit support to certain independent dealers was reflected in our overall decrease in sales.
 
Upholstery Group sales were down 6.1% compared with the second quarter of fiscal 2009. Sales price increases resulted in a 1.8% increase in sales; however this was offset by the overall decrease in sales volume due to the continued challenging economic conditions.

Casegoods Group sales decreased 23.0% compared with the second quarter of fiscal 2009. The decrease in sales volume occurred across all of our casegoods operating units due to weak consumer demand.  The challenging economic climate has had a negative impact on consumers’ discretionary spending. Because casegoods product tends to be a higher ticket purchase compared to upholstered furniture, we believe consumers are postponing these purchases to a greater extent than they are upholstery.

Retail Group sales decreased 3.7% when compared with the second quarter of fiscal 2009.  We believe the minimal decrease in sales was a result of our decision to maintain a strong advertising presence in the marketplace during these challenging economic conditions. Additionally, our Retail Group focused on various sales model changes implemented in the second half of fiscal 2009 to drive sales.

VIE sales increased 3.9% when compared with the second quarter of fiscal 2009.  The slight increase in sales was result of changes we made to our Toronto VIE.  Additionally, sales for our California VIE were positively impacted by the addition of one store in the second quarter of fiscal 2010.  This was somewhat offset by a decrease in sales as a result of our Cleveland VIE no longer being consolidated during the second quarter of fiscal 2010.

Gross Margin

Gross margin increased 5.5 percentage points in the second quarter of fiscal 2010 in comparison to the second quarter of fiscal 2009.   Selling price increases in early fiscal 2009, including changes in our discounts resulted in a 1.0 percentage point increase in our gross margin and raw material costs decreases resulted in a 3.0 percentage point increase in our gross margin.  Additionally, our gross margin increased 2.3 percentage points due to efficiencies realized in our domestic upholstery manufacturing facilities as a result of the many changes we made in our conversion to cellular manufacturing and more efficient capacity utilization due to the various restructurings we completed in recent years.  These restructurings eliminated redundant costs by closing plants and reducing our workforce to enable our operations to run more efficiently.  Restructuring charges included in gross profit decreased by $1.6 million or 0.5 percentage points in the second quarter of fiscal 2010, when compared to the second quarter of fiscal 2009.  Somewhat offsetting the positive trend mentioned above was a 2.4 percentage point decrease in our gross margin due to a change in the product mix of our sales shifting to lower margin products.

 
24

 

Selling, General and Administrative Expenses

Selling, general and administrative expenses (S,G&A) decreased by $16.8 million when compared to the prior year’s second quarter, or 2.4 percentage points.  Advertising costs, bad debt expense and commissions expense decreased $11.6 million or 35.5% in the second quarter of fiscal 2010, compared to the second quarter of fiscal 2009.  Advertising costs as a percent of sales decreased 1.6 percentage points or $6.4 million in the second quarter of fiscal 2010 compared to the second quarter of fiscal 2009.  Our decrease in advertising costs was mainly a result of a shift in the timing of our advertising spend as a result of an increased focus on specific promotional time periods.  Additionally, the overall decline in the economic climate has decreased the cost of purchasing advertising.  We believe these changes, along with some purchasing strategy shifts, have allowed us to maintain a strong presence in the marketplace, while decreasing our costs.  The remainder of the decrease in selling, general and administrative expenses was a result of our overall reduction in operating expenses to be more in alignment with the current sales volumes.

Goodwill Write-Down

The goodwill write-down of $0.4 million in the second quarter of fiscal 2009 was the result of our plan to reorganize the Toronto, Ontario retail market which we consolidated as a VIE.

Restructuring

Restructuring costs, net of reversals totaled $1.2 million for the second quarter of fiscal 2010 as compared with $2.9 million in the second quarter of fiscal 2009. The restructuring costs, net of reversals in the second quarter of fiscal 2010 related to the consolidation of our casegoods manufacturing plants, in addition to ongoing severance as we transition our domestic cut and sew operations to our Mexico facility and the ongoing costs for our closed retail facilities.  The reversal of restructuring charges relate to a decrease in our estimated healthcare costs for these plans.  The restructuring costs in the second quarter of fiscal 2009 related to the closure of our Tremonton, Utah facility, the restructuring of our La-Z-Boy U.K. facility and the ongoing costs for the closure of retail facilities.  These costs were comprised mainly of severance and benefits, fixed asset and inventory impairments, transition costs for the Utah plant closure and the ongoing lease cost for our closed retail facilities.

Operating Margin

Our consolidated operating margin increased 8.1 percentage points to 3.3% for the second quarter of fiscal 2010 compared to the second quarter of fiscal 2009.  Our second quarter of fiscal 2010 operating margin included 0.4 percentage points of restructuring charges.  Operating margin for the second quarter of fiscal 2009 was (4.8)% and included 0.9 percentage points of restructuring charges and 0.1 percentage points for the write-down of goodwill.

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