LA-Z-BOY INC - Quarter Report: 2008 July (Form 10-Q)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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 JULY 26, 2008
COMMISSION FILE NUMBER 1-9656
FOR QUARTERLY PERIOD ENDED JULY 26, 2008
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 o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of
the latest practicable date:
| Class | Outstanding at July 26, 2008 | |
| Common Shares, $1.00 par value | 51,428,120 |
LA-Z-BOY INCORPORATED
FORM 10-Q FIRST QUARTER OF FISCAL 2009
FORM 10-Q FIRST QUARTER OF FISCAL 2009
TABLE OF CONTENTS
Table of Contents
PART I
FINANCIAL INFORMATION
FINANCIAL INFORMATION
Item 1. Financial Statements
LA-Z-BOY INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
CONSOLIDATED STATEMENT OF OPERATIONS
| First Quarter Ended | ||||||||
| (Unaudited, amounts in thousands, except per share data) | 7/26/08 | 7/28/07 | ||||||
Sales |
$ | 321,652 | $ | 344,396 | ||||
Cost of sales |
||||||||
Cost of goods sold |
235,115 | 259,143 | ||||||
Restructuring |
5,795 | 2,561 | ||||||
Total cost of sales |
240,910 | 261,704 | ||||||
Gross profit |
80,742 | 82,692 | ||||||
Selling, general and
administrative |
91,837 | 94,508 | ||||||
Write-down of intangibles |
1,292 | — | ||||||
Restructuring |
781 | 1,120 | ||||||
Operating loss |
(13,168 | ) | (12,936 | ) | ||||
Interest expense |
1,495 | 2,097 | ||||||
Interest income |
932 | 882 | ||||||
Other income, net |
143 | 566 | ||||||
Loss from continuing operations before income taxes |
(13,588 | ) | (13,585 | ) | ||||
Income tax benefit |
(5,044 | ) | (5,043 | ) | ||||
Loss from continuing operations |
(8,544 | ) | (8,542 | ) | ||||
Loss from discontinued operations (net of tax) |
— | (152 | ) | |||||
Net loss |
$ | (8,544 | ) | $ | (8,694 | ) | ||
Basic average shares |
51,428 | 51,380 | ||||||
Basic loss from
continuing operations per share |
$ | (0.17 | ) | $ | (0.17 | ) | ||
Discontinued operations per share (net of tax) |
— | — | ||||||
Basic net loss per share |
$ | (0.17 | ) | $ | (0.17 | ) | ||
Diluted average shares |
51,428 | 51,380 | ||||||
Diluted loss from continuing operations per share |
$ | (0.17 | ) | $ | (0.17 | ) | ||
Discontinued operations per share (net of tax) |
— | — | ||||||
Diluted net loss per share |
$ | (0.17 | ) | $ | (0.17 | ) | ||
Dividends paid per share |
$ | 0.04 | $ | 0.12 | ||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these
statements.
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LA-Z-BOY INCORPORATED
CONSOLIDATED BALANCE SHEET
CONSOLIDATED BALANCE SHEET
| (Unaudited, amounts in thousands) | 7/26/08 | 4/26/08 | ||||||
Current assets |
||||||||
Cash and equivalents |
$ | 11,110 | $ | 14,982 | ||||
Receivables, net |
180,311 | 200,422 | ||||||
Inventories, net |
167,455 | 178,361 | ||||||
Deferred income taxes—current |
12,306 | 12,398 | ||||||
Other current assets |
25,907 | 21,325 | ||||||
Total current assets |
397,089 | 427,488 | ||||||
Property, plant and equipment, net |
170,235 | 171,001 | ||||||
Deferred income taxes—long term |
25,853 | 26,922 | ||||||
Goodwill |
45,941 | 47,233 | ||||||
Trade names |
9,006 | 9,006 | ||||||
Other long-term assets, net |
84,805 | 87,220 | ||||||
Total assets |
$ | 732,929 | $ | 768,870 | ||||
Current liabilities |
||||||||
Current portion of long-term debt |
$ | 9,086 | $ | 4,792 | ||||
Accounts payable |
49,973 | 56,421 | ||||||
Accrued expenses and other current liabilities |
88,655 | 102,700 | ||||||
Total current liabilities |
147,714 | 163,913 | ||||||
Long-term debt |
90,618 | 99,578 | ||||||
Other long-term liabilities |
54,553 | 54,783 | ||||||
Contingencies and commitments |
— | — | ||||||
Shareholders’ equity |
||||||||
Common shares, $1 par value |
51,428 | 51,428 | ||||||
Capital in excess of par value |
202,562 | 209,388 | ||||||
Retained earnings |
187,289 | 190,215 | ||||||
Accumulated other comprehensive income |
(1,235 | ) | (435 | ) | ||||
Total shareholders’ equity |
440,044 | 450,596 | ||||||
Total liabilities and shareholders’ equity |
$ | 732,929 | $ | 768,870 | ||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
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LA-Z-BOY INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
CONSOLIDATED STATEMENT OF CASH FLOWS
| First Quarter Ended | ||||||||
| (Unaudited, amounts in thousands) | 7/26/08 | 7/28/07 | ||||||
Cash flows from operating activities |
||||||||
Net loss |
$ | (8,544 | ) | $ | (8,694 | ) | ||
Adjustments
to reconcile net loss to
cash provided by (used for) operating activities |
||||||||
(Gain)/loss on sale of assets |
(2,066 | ) | 52 | |||||
Write-down of intangibles |
1,292 | — | ||||||
Restructuring |
6,576 | 3,681 | ||||||
Provision for doubtful accounts |
4,203 | 2,114 | ||||||
Depreciation and amortization |
5,954 | 6,220 | ||||||
Stock-based compensation expense |
869 | 861 | ||||||
Change in receivables |
14,170 | 22,597 | ||||||
Change in inventories |
10,906 | (6,071 | ) | |||||
Change in payables |
(6,448 | ) | (15,473 | ) | ||||
Change in other assets and liabilities |
(23,632 | ) | (23,298 | ) | ||||
Change in deferred taxes |
1,161 | (1,475 | ) | |||||
Total adjustments |
12,985 | (10,792 | ) | |||||
Net cash provided by (used for) operating activities |
4,441 | (19,486 | ) | |||||
Cash flows from investing activities |
||||||||
Proceeds from disposals of assets |
4,981 | 6,415 | ||||||
Capital expenditures |
(7,372 | ) | (9,629 | ) | ||||
Purchases of investments |
(5,449 | ) | (6,622 | ) | ||||
Proceeds from sales of investments |
5,794 | 6,792 | ||||||
Change in other long-term assets |
71 | 20 | ||||||
Net cash used for investing activities |
(1,975 | ) | (3,024 | ) | ||||
Cash flows from financing activities |
||||||||
Proceeds from debt |
14,635 | 705 | ||||||
Payments on debt |
(18,857 | ) | (900 | ) | ||||
Stock issued for stock and employee benefit plans |
(2 | ) | (22 | ) | ||||
Dividends paid |
(2,075 | ) | (6,209 | ) | ||||
Net cash used for financing activities |
(6,299 | ) | (6,426 | ) | ||||
Effect of exchange rate changes on cash and
equivalents |
(39 | ) | 1,001 | |||||
Change in cash and equivalents |
(3,872 | ) | (27,935 | ) | ||||
Cash and equivalents at beginning of period |
14,982 | 51,721 | ||||||
Cash and equivalents at end of period |
$ | 11,110 | $ | 23,786 | ||||
Cash paid (net of refunds) during period — income
taxes |
$ | 923 | $ | 3,135 | ||||
Cash paid during period — interest |
$ | 1,126 | $ | 1,910 | ||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
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LA-Z-BOY INCORPORATED
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
| Accumulated Other | ||||||||||||||||||||
| Common | Capital in Excess | Retained | Comprehensive | |||||||||||||||||
| (Unaudited, amounts in thousands) | Shares | of Par Value | Earnings | Income(Loss) | Total | |||||||||||||||
At April 28, 2007 |
$ | 51,377 | $ | 208,283 | $ | 223,896 | $ | 1,792 | $ | 485,348 | ||||||||||
Stock issued for stock and employee benefit
plans, net of cancellations |
51 | (3,422 | ) | 3,102 | (269 | ) | ||||||||||||||
Stock option, performance-based and restricted
stock expense |
4,527 | 4,527 | ||||||||||||||||||
Dividends paid |
(20,746 | ) | (20,746 | ) | ||||||||||||||||
Comprehensive income (loss) |
||||||||||||||||||||
Net loss |
(13,537 | ) | ||||||||||||||||||
Unrealized loss on marketable securities (net
of tax of $0.1 million) |
(222 | ) | ||||||||||||||||||
Realized gain on marketable securities (net of
tax of $1.4 million) |
(2,420 | ) | ||||||||||||||||||
Translation adjustment |
(117 | ) | ||||||||||||||||||
Net actuarial gain (net of tax of $0.2 million) |
532 | |||||||||||||||||||
Total comprehensive income (loss) |
(15,764 | ) | ||||||||||||||||||
Impact of adoption of FIN 48 |
(2,500 | ) | (2,500 | ) | ||||||||||||||||
At April 26, 2008 |
$ | 51,428 | $ | 209,388 | $ | 190,215 | $ | (435 | ) | $ | 450,596 | |||||||||
Stock issued for stock and employee benefit
plans, net of cancellations |
(7,695 | ) | 7,693 | (2 | ) | |||||||||||||||
Stock option, performance-based and restricted
stock expense |
869 | 869 | ||||||||||||||||||
Dividends paid |
(2,075 | ) | (2,075 | ) | ||||||||||||||||
Comprehensive income (loss) |
||||||||||||||||||||
Net loss |
(8,544 | ) | ||||||||||||||||||
Unrealized loss on marketable securities (net
of tax of $0.4 million) |
(754 | ) | ||||||||||||||||||
Realization of losses on marketable securities
(net of tax) |
8 | |||||||||||||||||||
Translation adjustment |
(332 | ) | ||||||||||||||||||
Change in fair value of cash flow hedges (net
of tax of $0.1 million) |
278 | |||||||||||||||||||
Total comprehensive income (loss) |
(9,344 | ) | ||||||||||||||||||
At July 26, 2008 |
$ | 51,428 | $ | 202,562 | $ | 187,289 | $ | (1,235 | ) | $ | 440,044 | |||||||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1: Basis of Presentation
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
2008 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, which are necessary for a fair presentation of results for
the respective interim period.
During our first quarter of fiscal 2009, our largest division revised
certain shipping agreements with third-party carriers such that risk of
loss transfers to our customers upon shipment rather than upon
delivery. Accordingly, substantially all of our shipments with
third-party carriers for this division are now recognized upon
shipment of the product.
Note 2: Interim Results
The foregoing interim results are not necessarily indicative of the results of operations which
will occur for the full fiscal year ending April 25, 2009.
Note 3: Reclassification
Certain prior year information has been reclassified to be comparable with the current year
presentation.
Note 4: Inventories
A summary of inventory follows:
| (Unaudited, amounts in thousands) | 7/26/08 | 4/26/08 | ||||||
Raw materials |
$ | 65,002 | $ | 71,346 | ||||
Work in process |
13,780 | 14,624 | ||||||
Finished goods |
115,552 | 119,270 | ||||||
FIFO inventories |
194,334 | 205,240 | ||||||
Excess of FIFO over LIFO |
(26,879 | ) | (26,879 | ) | ||||
Inventories, net |
$ | 167,455 | $ | 178,361 | ||||
Note 5: Goodwill and Other Intangible Assets
In accordance with SFAS No. 142, trade names are tested at least annually for impairment by
comparing their fair value to their carrying values. The fair value for each trade name is
established based upon a royalty savings approach. Additionally, goodwill is tested for impairment
by comparing the fair value of our operating units to their carrying values. The fair value for
each operating unit is established based upon the discounted cash flows. In situations where the
fair value is less than the carrying value, indicating a potential impairment, a second
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comparison
is performed using a calculation of implied fair value of goodwill to determine the monetary value
of impairment.
In fiscal 2009, we committed to a plan to close the operations of our La-Z-Boy U.K. subsidiary. As
a result of this plan, we recorded an impairment charge of $1.3 million which represented the
entire goodwill amount of the operating unit.
The following table summarizes the changes to goodwill and trade names during the first quarter of
fiscal 2009:
| Acquisitions, | ||||||||||||
| Balance as of | Dispositions and | Balance as of | ||||||||||
| (Unaudited, amounts in thousands) | 4/26/08 | Other | 7/26/08 | |||||||||
Goodwill |
||||||||||||
Upholstery Group |
$ | 19,632 | $ | (1,292 | ) | $ | 18,340 | |||||
Retail Group |
22,096 | — | 22,096 | |||||||||
Corporate and Other |
5,505 | — | 5,505 | |||||||||
Consolidated |
$ | 47,233 | $ | (1,292 | ) | $ | 45,941 | |||||
Tradenames |
||||||||||||
Casegoods Group |
$ | 9,006 | $ | — | $ | 9,006 | ||||||
Note 6: Pension Plans
Net periodic pension costs were as follows:
| First Quarter Ended | ||||||||
| (Unaudited, amounts in thousands) | 7/26/08 | 7/28/07 | ||||||
Service cost |
$ | 328 | $ | 441 | ||||
Interest cost |
1,359 | 1,346 | ||||||
Expected return on plan assets |
(1,728 | ) | (1,839 | ) | ||||
Net periodic pension cost (benefit) |
$ | (41 | ) | $ | (52 | ) | ||
We did not make any contributions to the plans during the first quarter of fiscal 2009. We are not
required to make any contributions to the defined benefit plans in fiscal year 2009; however we may
make discretionary contributions.
Note 7: Financial Guarantees and Product Warranties
We have provided financial guarantees relating to leases in connection with certain La-Z-Boy
Furniture Galleries® stores which are not operated by the company. The lease guarantees are
generally for real estate leases and have remaining terms of one to nine years. These lease
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
the lease agreements that we have entered into, but they are not material to our financial
position.
We would be required to perform under these agreements only if the dealer were to default on the
lease. The maximum amount of potential future payments under lease guarantees was $12.7 million as
of July 26, 2008.
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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.
A reconciliation of the changes in our product warranty liability is as follows:
| First Quarter Ended | ||||||||
| (Unaudited, amounts in thousands) | 7/26/08 | 7/28/07 | ||||||
Balance as of the beginning of the period |
$ | 14,334 | $ | 14,283 | ||||
Accruals during the period |
4,104 | 4,190 | ||||||
Settlements during the period |
(3,793 | ) | (4,206 | ) | ||||
Balance as of the end of the period |
$ | 14,645 | $ | 14,267 | ||||
Note 8: Stock-Based Compensation
In the first quarter of fiscal 2009, we granted 0.4 million restricted shares to employees.
Compensation expense for restricted stock is equal to the market value of our common shares on the
date of the award and is recognized over the service period.
We also granted 0.7 million performance awards in the first quarter of fiscal 2009. These awards
allow for the potential award of common shares to employees based on the attainment of certain
financial goals over a specific performance period. The shares are offered at no cost to the
employees. The cost of performance-based awards is expensed over the service period based on the
probability that the performance goals will be obtained. For the performance shares which were
granted in fiscal 2008, the targets were met such that 0.3 million shares were earned and will be
issued to employees who are still with the company as of the end of our fiscal 2010.
Total compensation expense recognized in the Consolidated Statement of Operations for all equity
based compensation was $0.9 million, for the first quarter of fiscal 2009 and fiscal 2008.
Note 9: Segment Information
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 Bauhaus, England, and La-Z-Boy.
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, Hammary and
Kincaid. 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 69 company-owned La-Z-Boy Furniture Galleries® stores in
eight primary markets. The Retail Group sells mostly upholstered furniture to end consumers.
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| First Quarter Ended | ||||||||
| 7/26/08 | 7/28/07 | |||||||
| (Unaudited amounts in thousands) | (13 weeks) | (13 weeks) | ||||||
Sales |
||||||||
Upholstery Group |
$ | 237,118 | $ | 254,757 | ||||
Casegoods Group |
48,121 | 53,574 | ||||||
Retail Group |
42,427 | 45,231 | ||||||
VIEs/Eliminations |
(6,014 | ) | (9,166 | ) | ||||
Consolidated |
$ | 321,652 | $ | 344,396 | ||||
Operating income (loss) |
||||||||
Upholstery Group |
$ | 9,857 | $ | 8,867 | ||||
Casegoods Group |
1,377 | 2,600 | ||||||
Retail Group |
(10,010 | ) | (10,074 | ) | ||||
Corporate and Other* |
(6,524 | ) | (10,648 | ) | ||||
Restructuring |
(6,576 | ) | (3,681 | ) | ||||
Intangible Write-down |
(1,292 | ) | — | |||||
| $ | (13,168 | ) | $ | (12,936 | ) | |||
| * | Variable Interest Entities (“VIEs”) are included in corporate and other. |
Note 10: Restructuring
During the past several years, we have entered into various restructuring plans to rationalize our
manufacturing facilities and to consolidate retail distribution centers and close underperforming
retail facilities. The majority of our restructuring charges related to our manufacturing and
wholesale distribution facilities were reported as a component of Cost of Sales on our Consolidated
Statement of Operations, while restructuring charges related to our retail operations were reported
as a line item within our Selling, General and Administrative expenses section of our Consolidated
Statement of Operations. With these restructuring plans, we have written-down various fixed assets
which were accounted for in accordance with SFAS No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets. Additionally, we recorded charges for severance and benefits, contract
terminations and other transition costs related to relocating manufacturing and closing facilities.
These other costs were expensed as incurred and accounted for in accordance with SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities.
During fiscal 2009, we committed to a restructuring plan to close the operations of our La-Z-Boy
U.K. subsidiary due to a change in our strategic direction for this operation. The closure of this operation
is expected to occur in the second quarter of fiscal 2009 and will impact about 17 La-Z-Boy
employees. In connection with this closure, we have recorded pre-tax restructuring charges of
about $1.3 million, covering the write-down of inventory ($0.8 million) and the write-down of fixed
assets and other restructuring charges ($0.5 million).
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During the fourth quarter of fiscal 2008, we committed to a restructuring plan to consolidate all
of our domestic 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. The
transition of our cutting and sewing operations to Ramos Arizpe, Mexico, in the state of Coahuila,
will impact approximately 1,050 La-Z-Boy employees at the five remaining facilities and will take
place over a period of 18 to 24 months. We expect to begin production at our Mexican facility in
early calendar 2009. Our Utah facility, which employed 630 people, ceased operations during the first quarter of fiscal 2009 and production was shifted to our
remaining manufacturing facilities. As a result of this transition, we expect to add approximately
400 positions to our other plants. In connection with these activities, we expect to record
pre-tax restructuring and related asset impairment charges of $17 to $20 million for severance and
benefits, write-down of certain fixed assets, and other restructuring costs. In the first quarter
of fiscal 2009, we had restructuring charges of $5.5 million
covering severance and benefits ($3.2 million) and other restructuring costs ($2.3 million). Other restructuring costs include
transportation, freight surcharges and other transition costs as we move production to other
plants.
In the fourth quarter of fiscal 2007, we committed to a restructuring plan which included the
closures of our Lincolnton, North Carolina and Iuka, Mississippi upholstery manufacturing
facilities, the closure of our rough mill lumber operation in North Wilkesboro, North Carolina, the
consolidation of operations at our Kincaid Taylorsville, North Carolina upholstery operation and
the elimination of a number of positions throughout the remainder of the organization. The
Lincolnton and Iuka facility closures occurred in the first quarter of fiscal 2008 and impacted
approximately 250 and 150 employees, respectively. The closure of our North Wilkesboro lumber
operation, the consolidation of operations at Kincaid’s Taylorsville operation and the remaining
activities occurred in the fourth quarter of fiscal 2007 and impacted approximately 100 positions.
These decisions were made to help align our company with the current business environment and
strengthen our positioning going forward. In the first quarter of fiscal 2009, we had
restructuring reversals of $0.5 million relating to lower benefit costs then originally estimated.
During fiscal 2007 and 2008, several of our Retail warehouses were consolidated into larger
facilities and several underperforming stores were closed. Approximately 130 jobs were eliminated
as a result of these closures. In the first quarter of fiscal 2009, we had restructuring charges
of $0.3 million related to contract terminations.
Restructuring costs relating to the manufacturing plants and the majority of the costs for our
La-Z-Boy U.K. operations were reported as a component of Cost of Sales. Restructuring costs
related to our Retail operations and the remaining costs related to our La-Z-Boy U.K. operations
were reported as a line item in our S,G&A section of the Consolidated Statement of Operations.
As of July 26, 2008, we had a remaining restructuring liability of $4.7 million which is expected
to be settled as follows: $4.1 million in fiscal 2009, $0.4 million in fiscal 2010,
$0.1 million in fiscal 2011 and $0.1 million thereafter. Contract terminations resulting from the
closure of several of our retail stores and warehouses resulted in our restructuring liability
being paid out over an extended length of time.
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Restructuring liabilities along with charges to expense, cash payments or asset write-downs for all
of our restructuring actions were as follows:
| Fiscal 2009 | ||||||||||||||||
| Cash | ||||||||||||||||
| Payments | ||||||||||||||||
| 4/26/08 | Charges to | or Asset | 7/26/08 | |||||||||||||
| (Unaudited, amounts in thousands) | Balance | Expense | Write-Offs | Balance | ||||||||||||
Severance and benefit-related costs |
$ | 2,842 | $ | 2,712 | $ | (1,681 | ) | $ | 3,873 | |||||||
Fixed asset write-downs, net of gains |
— | 29 | (29 | ) | — | |||||||||||
Contract termination costs |
939 | 313 | (410 | ) | 842 | |||||||||||
Other |
— | 3,522 | (3,522 | ) | — | |||||||||||
Total restructuring |
$ | 3,781 | $ | 6,576 | $ | (5,642 | ) | $ | 4,715 | |||||||
| Fiscal 2008 | ||||||||||||||||
| Cash | ||||||||||||||||
| Payments | ||||||||||||||||
| 4/28/07 | Charges to | or Asset | 4/26/08 | |||||||||||||
| (Unaudited, amounts in thousands) | Balance | Expense | Write-Offs | Balance | ||||||||||||
Severance and benefit-related costs |
$ | 2,177 | $ | 3,253 | $ | (2,588 | ) | $ | 2,842 | |||||||
Fixed asset write-downs, net of gains |
— | 364 | (364 | ) | — | |||||||||||
Contract termination costs |
1,257 | 2,019 | (2,337 | ) | 939 | |||||||||||
Other |
— | 2,499 | (2,499 | ) | — | |||||||||||
Total restructuring |
$ | 3,434 | $ | 8,135 | $ | (7,788 | ) | $ | 3,781 | |||||||
Note 11: Uncertain Tax Positions
We adopted FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes — an
interpretation of FASB 109, effective as of April 29, 2007. The total amount of unrecognized tax
benefits as of April, 2008 was $7.1 million, which included $1.7 million attributable to timing
differences that once resolved would have no impact on our effective tax rate. During the first
quarter of fiscal year 2009 various issues were resolved which reduced this amount to $6.3 million.
We believe that it is reasonably possible that the amount of unrecognized tax benefits will
decrease by $0.6 million within the next 12 months. This decrease relates to anticipated
settlements of several outstanding issues with several taxing authorities.
Note 12: Variable Interest Entities
Financial Accounting Standards Board Interpretation No. 46R, Consolidation of Variable Interest
Entities (“FIN 46”), requires 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.
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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.
Based on the criteria for consolidation of VIEs, we have consolidated several 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. Because these
entities are accounted for as if the entities were consolidated based on voting interests, we
absorb all net losses of the VIEs in excess of their equity. We recognize all net earnings of
these VIEs to the extent of recouping the losses previously recorded. Earnings in excess of our
losses are attributed to equity owners of the dealers and are recorded as minority interest. We
had four consolidated VIEs for fiscal 2009 and 2008.
Our consolidated VIEs recognized $14.1 million and $11.9 million of sales, net of intercompany
eliminations, in the first quarter of fiscal 2009 and the first quarter of fiscal 2008,
respectively. Additionally, we recognized a net loss per share of $0.01 and $0.03 in the first
quarter of fiscal 2009 and fiscal 2008, respectively, resulting from the operating results of these
VIEs. The VIEs, after the elimination of intercompany activity, had the impact of reducing our
assets by $6.5 million in the first quarter of fiscal 2009 and reducing our assets by $3.8 million
at the end of fiscal 2008.
Note 13: Discontinued Operations
During the second quarter of fiscal 2008, we completed the sale of our Clayton Marcus operating
unit and our Pennsylvania House trade name. These dispositions were accounted for as discontinued
operations.
The results of the discontinued operations for Clayton Marcus and Pennsylvania House for the first
quarter of fiscal 2008 were as follows:
| First | ||||
| Quarter | ||||
| Ended | ||||
| (Unaudited, amounts in thousands) | 7/28/07 | |||
Net sales |
$ | 10,735 | ||
Loss from discontinued operations, net of tax |
$ | (152 | ) | |
In the Consolidated Statement of Cash Flows, the activity of these operating units was included
along with the activity from our continuing operations.
Note 14: Earnings per Share
Basic earnings per share is computed using the weighted average number of shares outstanding during
the period. Diluted net income per share uses the weighted average number of shares outstanding
during the period plus the additional common shares that would be outstanding if the dilutive
potential common shares issuable under employee stock options and unvested restricted stock were
issued. A reconciliation of basic and diluted weighted average common shares outstanding follows:
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| First Quarter Ended | ||||||||
| (Unaudited, amounts in thousands) | 7/26/08 | 7/28/07 | ||||||
Weighted average common shares outstanding (basic) |
51,428 | 51,380 | ||||||
Effect of options and unvested restricted stock |
— | — | ||||||
Weighted average common shares outstanding
(diluted) |
51,428 | 51,380 | ||||||
The weighted average common shares outstanding (diluted) at July 26, 2008 and July 28, 2007 exclude
outstanding stock options of 0.3 million and 0.2 million, respectively, because the net loss from
continuing operations would cause the effect of options to be anti-dilutive.
The effect of options to purchase 2.7 million and 2.2 million shares for the quarters ended July
26, 2008 and July 28, 2007 with a weighted average exercise price of $15.45 and $16.59
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.
Note 15: Fair Value Measurements
We adopted FASB Statement of Financial Accounting Standards No. 157 (“SFAS No. 157”), Fair Value
Measurements, effective April 27, 2008 for our financial assets and liabilities. Adoption of SFAS No. 157 did not have a material effect on our financial position,
results of operations or cash flows.
In February 2008, the Financial Accounting Standards Board issued FASB Staff Position FAS 157-1,
Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements
That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under
Statement 13 (“FSP 157-1”). FSP FAS 157-1 amended SFAS No. 157 to exclude from its scope SFAS No.
13, Accounting for Leases, and its related interpretive accounting pronouncements that address
leasing transactions. Also in February 2008, the FASB issued FASB Staff Position FAS 157-2,
Effective Date of FASB Statement No. 157 (“FSP 157-2”). FSP 157-2 amended SFAS No. 157 to defer the
effective date of SFAS No. 157 until fiscal years beginning after November 15, 2008 for
non-financial assets and non-financial liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis, at least annually. We are
currently assessing the impact of SFAS No. 157 on our non-financial assets and non-financial
liabilities measured at fair value on a nonrecurring basis.
SFAS No. 157 requires the categorization of financial assets and liabilities, based on the inputs
to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives
the highest priority to the quoted prices in active markets for identical assets and liabilities
and lowest priority to unobservable inputs. The various levels of the SFAS No. 157 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 the Company has 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. | ||
| • | 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. |
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SFAS No. 157 requires 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 July 26, 2008:
| Fair Value Measurements | ||||||||||||
| (Unaudited, amounts in thousands) | Level 1 | Level 2 | Level 3 | |||||||||
Assets |
||||||||||||
Available-for-sale securities |
$ | 14,091 | $ | 17,998 | $ | — | ||||||
Interest rate swap |
— | 267 | — | |||||||||
Total |
$ | 14,091 | $ | 18,265 | $ | — | ||||||
We hold available-for-sale marketable securities to fund future obligations of one of our
non-qualified retirement plans and our captive insurance company. 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.
Note 16: Hedging Activities
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 July 26,
2008 was three month LIBOR plus 2.0%.
Note 17: Recent Accounting Pronouncements
FASB Statement of Financial Accounting Standards No. 159
The FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities (“SFAS No. 159”), which allows a company to choose to
measure selected financial assets and financial liabilities at fair value. Unrealized gains and
losses on items for which the fair value option has been elected are
reported in earnings. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007.
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We adopted SFAS No. 159 on April 27, 2008 and have not elected the permitted fair value measurement
provisions of this statement.
FASB Statement of Financial Accounting Standards No. 160
The FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in
Consolidated Financial Statements — an amendment of ARB No. 51 (“SFAS No. 160”). It is effective
for financial statements issued for fiscal years beginning after December 15, 2008, and interim
periods within those fiscal years. Earlier application is prohibited. SFAS No. 160 requires that
accounting and reporting for minority interests will be re-characterized as non-controlling
interests and classified as a component of equity. SFAS No. 160 also establishes reporting
requirements that provide disclosures that clearly identify and distinguish between the interests
of the parent and the interests of the non-controlling owners. This statement applies to all
entities that prepare consolidated financial statements, but will affect only those entities that
have an outstanding non-controlling interest in one or more subsidiaries or that deconsolidate a
subsidiary.
We are currently evaluating the impact SFAS No. 160 will have on our financial statements. This
statement will be effective for interim periods beginning in fiscal 2010.
FASB Statement of Financial Accounting Standards No. 141(R)
The FASB issued Statement of Financial Accounting Standards No. 141 (Revised 2007), Business
Combinations, (“SFAS No. 141(R)”), which replaces FASB Statement No. 141. SFAS No. 141(R)
establishes principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling
interest in the acquiree and the goodwill acquired. The Statement also establishes disclosure
requirements that will enable users to evaluate the nature and financial effects of the business
combination. SFAS No. 141(R) is effective for business combinations that occur during or after
fiscal years that begin after December 15, 2008.
We are currently evaluating the impact SFAS No. 141(R) will have on our financial statements. This
statement will be effective in fiscal 2010.
FASB Statement of Financial Accounting Standards No. 161
The FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative
Instruments and Hedging Activities, (“SFAS No. 161”). It is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008, with early adoption
encouraged. The objective of this statement is to require enhanced disclosures about an entity’s
derivative and hedging activities and to improve the transparency of financial reporting. Entities
are required to provide enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are accounted for under
Statement 133 and its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity’s financial position, financial performance, and cash flows requires
disclosure of the fair values of derivative instruments and their gains and losses in tabular
format and derivative features that are credit risk related.
We are currently determining the impact this pronouncement will have on our financial statements.
This statement will be effective for the fourth quarter of fiscal 2009.
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FASB Statement of Financial Accounting Standards No. 163
The FASB issues Statement of Financial Accounting Standards No. 163, Accounting for Financial
Guarantee Insurance Contracts — an interpretation of Statement No. 60 (“SFAS No. 163”). SFAS No.
163 provides
insurance enterprises clarification for recognizing and measuring claim liabilities related to
financial guarantee insurance contracts. This statement is effective for financial statements
issued for fiscal years beginning after December 15, 2008, except for some disclosures on the
insurance enterprise’s risk-management activities. This statement requires that disclosures about
the risk-management activities of the insurance enterprise be effective for the first period
(including interim periods) beginning after issuance of this Statement. Except for those
disclosures, earlier application is not permitted.
We are currently determining the impact, if any, SFAS No. 163 will have on our financial
statements. This statement will be effective for interim periods beginning in fiscal 2010.
FASB Staff Position EITF 03-6-1: Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities
In June 2008, the FASB issued FASB Staff Position No. EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating Securities, (“FSP EITF 03-6-1”). FSP
EITF 03-6-1 requires that unvested share-based payment awards containing non-forfeited rights to
dividends be included in the computation of earnings per common share. The adoption of FSP EITF
03-6-1 is effective January 1, 2009 and retrospective application is required.
We are currently determining the impact, if any, FSP EITF 03-6-1 will have on our financial
statements. This statement will be effective beginning with our third quarter of this fiscal year.
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| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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, strategies and significant operational events in fiscal 2009. 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.
Cautionary Statement Concerning Forward-Looking Statements
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; (b)
changes in demographics; (c) further changes in housing market; (d) the impact of terrorism or war;
(e) continued energy price changes; (f) the impact of logistics on imports; (g) the impact of
interest rate changes; (h) changes in currency exchange rates; (i) competitive factors; (j)
operating factors, such as supply, labor or distribution disruptions including changes in operating
conditions or costs; (k) effects of restructuring actions; (l) changes in the domestic or
international regulatory environment; (m) ability to implement global sourcing organization
strategies; (n) fair value changes to our intangible assets due to actual results differing from
projected; (o) the impact of adopting new accounting principles; (p) the impact from natural events
such as hurricanes, earthquakes and tornadoes; (q) the ability to procure fabric rolls and leather
hides or cut and sewn fabric and leather sets domestically or abroad; (r) continued decline in the
credit market and potential impacts on our customers; (s) those matters discussed in Item 1A of our
fiscal 2008 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.
Introduction
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 69 La-Z-Boy
Furniture Galleries® stores, which are retail locations dedicated to marketing our La-Z-Boy branded
product. These 69 stores are part of the larger store network of La-Z-Boy Furniture Galleries®
stores which includes a total of 333 stores, the balance of which are independently owned and
operated. The network constitutes the industry’s largest single-
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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 certain rooms in their homes.
In addition to our company-owned stores, we consolidate certain of our independent dealers who did
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 first
quarter of fiscal 2009 we had four VIEs, operating 34 stores, consolidated into our Statement of
Operations. At the end of the fiscal 2008 first quarter, we had four VIEs, operating 31 stores, 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 and other furniture retailers. Upholstered furniture includes recliners and
motion furniture, sofas, loveseats, chairs, ottomans and sleeper sofas.
Casegoods Group. Our Casegoods Group today is primarily an importer, marketer and distributor of
casegoods (wood) furniture. It also operates two manufacturing facilities in North Carolina. 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 69 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 mostly upholstered furniture to end
consumers through the retail network.
The chart below shows the current structure of the La-Z-Boy Furniture Galleries® store network.
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During the first quarter of fiscal 2008, we began rolling out a new proprietary distribution model
referred to as Comfort Studios. Comfort Studios can be smaller and more adaptable than the former
in-store gallery model. At the end of the first quarter of fiscal 2009, we had 387 Comfort
Studios, of which some were new studios and
the rest were conversions of in-store galleries and general dealers. We expect to open or convert
approximately 86 more Comfort Studios during the remainder of fiscal 2009. Kincaid, England and
Lea also have in-store gallery programs.
Results of Operations
Analysis of Operations: Quarter Ended July 26, 2008
(First Quarter 2009 compared with 2008)
Analysis of Operations: Quarter Ended July 26, 2008
(First Quarter 2009 compared with 2008)
| Quarter Ended | Percent | |||||||||||
| (Amounts in thousands, except per share amounts and percentages) | 7/26/08 | 7/28/07 | change | |||||||||
Upholstery sales |
$ | 237,118 | $ | 254,757 | (6.9 | )% | ||||||
Casegoods sales |
48,121 | 53,574 | (10.2 | )% | ||||||||
Retail sales |
42,427 | 45,231 | (6.2 | )% | ||||||||
Other/eliminations* |
(6,014 | ) | (9,166 | ) | 34.4 | % | ||||||
Consolidated sales |
$ | 321,652 | $ | 344,396 | (6.6 | )% | ||||||
Consolidated gross profit |
$ | 80,742 | $ | 82,692 | (2.4 | )% | ||||||
Consolidated gross margin |
25.1 | % | 24.0 | % | ||||||||
Consolidated S,G&A |
$ | 91,837 | $ | 94,508 | (2.8 | )% | ||||||
S,G&A as a percent of sales |
28.6 | % | 27.4 | % | ||||||||
Upholstery operating income |
$ | 9,857 | $ | 8,867 | 11.2 | % | ||||||
Casegoods operating income |
1,377 | 2,600 | (47.0 | )% | ||||||||
Retail operating loss |
(10,010 | ) | (10,074 | ) | 0.6 | % | ||||||
Corporate and other |
(6,524 | ) | (10,648 | ) | 38.7 | % | ||||||
Intangible write-down |
(1,292 | ) | — | — | ||||||||
Restructuring |
(6,576 | ) | (3,681 | ) | (78.6 | )% | ||||||
Consolidated operating loss |
$ | (13,168 | ) | $ | (12,936 | ) | (1.8 | )% | ||||
Upholstery operating margin |
4.2 | % | 3.5 | % | ||||||||
Casegoods operating margin |
2.9 | % | 4.9 | % | ||||||||
Retail operating margin |
(23.6 | )% | (22.3 | )% | ||||||||
Consolidated operating margin |
(4.1 | )% | (3.8 | )% | ||||||||
Loss from continuing operations |
$ | (8,544 | ) | $ | (8,542 | ) | — | |||||
Diluted loss per share from continuing operations |
$ | (0.17 | ) | $ | (0.17 | ) | — | |||||
| * | Includes sales from our VIEs. |
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Sales
Consolidated sales were down 6.6% when compared with the first quarter of fiscal 2008 due in large
part to a weak retail environment attributable to current economic factors, such as high energy
costs, an uncertain housing market and a deteriorating consumer credit environment.
Upholstery Group sales were down 6.9% compared with the first quarter of fiscal 2008. Sales price
increases resulted in a 2.4% increase in sales; however this was offset by a decrease in sales
volume due to an overall weak consumer demand, which we associate with the significant decline in
consumer confidence and the uncertainty in the housing and mortgage
markets. In addition, the decline in sales volume was partially
offset by a change in contractual relationships with our third party
carriers, which resulted in revenue recognition at shipping point. As reported
in our Form 10-K for the fiscal year ended April 28, 2008, revenue for our largest upholstery operation had previously been recognized upon delivery.
Casegoods Group sales decreased 10.2% compared with the first quarter of fiscal 2008. The decrease
in sales volume occurred across all of our Casegoods operating units and directly related to the
overall weakness at retail. Additionally, with the Casegoods product typically priced higher than
upholstered furniture, we believe the consumer is postponing these purchases to a greater extent
than they are upholstery.
Retail Group sales decreased 6.2% when compared with the first quarter of fiscal 2008. The
decrease in sales was related to the significant decrease in new housing starts and sales of
already existing homes, which has had a negative effect on the home furnishings market and the
overall weakness at retail for furniture.
Included in Other/eliminations are the sales by our VIEs and the elimination of sales from our
Upholstery and Casegoods Groups to our Retail Group. The majority of the change in
Other/eliminations was attributable to a $2.2 million increase in the sales of our VIEs. Sales of
our VIEs increased in fiscal 2009 when compared to fiscal 2008 as the result of having three
additional stores in fiscal 2009.
Gross Margin
Gross margin increased 1.1 percentage points in the first quarter of fiscal 2009 in comparison to
the first quarter of fiscal 2008. Although our sales declined $22.7 million quarter over quarter,
our gross profit dollars were relatively flat during this same period. Selling price increases,
mainly for our La-Z-Boy branded product, increased our gross margin by 1.7 percentage points; which
was offset by a 1.0 percentage point increase in restructuring charges in fiscal 2009 as compared
to fiscal 2008. In addition, with the completion of our cellular conversion and the closure of the
Tremonton plant, the overall efficiency in our La-Z-Boy branded manufacturing increased our gross
margin 1.3 percentage points, which was negatively impacted by the 1.0 percentage point reduction
in gross margin due to steel, polyurethane foam, plywood and fabric and leather cost increases.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (S,G&A) decreased when compared to the prior year’s
first quarter, however as a percent of sales, S,G&A increased by about 1.2 percentage points.
During the first quarter of fiscal 2009, we realized gains on property sales of $2.1 million
compared to no gains in the first quarter of fiscal 2008 which decreased S,G&A. In addition, our
6.6% decline in sales attributed to the decrease in S,G&A dollars as well. However, advertising
expenses increased $1.7 million in fiscal 2009 as compared to fiscal 2008 due to the national
advertising campaign which began in the fall of 2007.
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Also, our charges for bad debts increased by about $2.1 million when compared with the first
quarter of fiscal 2008 due to the continuing weakness in the overall retail environment. During
the first quarter of fiscal 2009, the Florida, Michigan, Southern California and Nevada markets
were impacted to a greater extent by the weak retail environment than other markets. As a result,
we anticipate several store closures (mainly in Florida) and other credit issues leading to the increased charge for
bad debts.
Restructuring
Restructuring costs totaled $6.6 million for the first quarter of fiscal 2009 as compared with $3.7
million in restructuring expenses in the first quarter of fiscal 2008. The restructuring costs in
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. The
restructuring costs in fiscal 2008 related to the closure of our Lincolnton, NC facility in
addition to contract termination and ongoing lease costs for our closed retail facilities.
Operating Margin
Our consolidated operating margin was (4.1)% for the first quarter of fiscal 2009 and included 2.1
percentage points of restructuring charges. Operating margin for the first quarter of fiscal 2008
was (3.8)% and included 1.1 percentage points of restructuring.
The Upholstery Group operating margin increased 0.7 percentage points when compared with the first
quarter of fiscal 2008. The change in our manufacturing footprint from assembly to cellular as
well as selling price increases positively impacted our operating
margin. The upholstery operating income also benefited somewhat from
the change in third party freight carrier contracts as noted above. However, this increase
was slightly offset by higher advertising in the first quarter of fiscal 2009 as compared to the
first quarter of fiscal 2008 as a result of our national campaign which did not begin until the
fall of 2007. This campaign is a shared advertising program with La-Z-Boy Furniture Galleries®
stores from which we receive a partial reimbursement. The costs for the program are a component of
S,G&A and the reimbursements are a component of net sales. Increased bad debt expense also
negatively impacted our operating margin in the first quarter of fiscal 2009.
Our Casegoods Group operating margin decreased by 2.0 percentage points in the first quarter of
fiscal 2009 versus the first quarter of fiscal 2008. With the 10.2% decrease in sales volume; we
were unable to reduce our costs quickly enough to maintain our operating margin.
Our Retail Group operating margin decreased by 1.3 percentage points during the first quarter of
fiscal 2009 in comparison to the first quarter of fiscal 2008. While we were able to increase the
gross margin of this operating unit as a result of selling price increases, the continued decline
in sales resulted in a lower operating margin due to the fixed occupancy costs of our Retail
operations.
Corporate and Other operating loss decreased $4.1 million during the first quarter of fiscal 2009
when compared with the first quarter of fiscal 2008. Our VIEs losses for the first quarter of
fiscal 2009 were $0.5 million less than the same quarter the prior year and realized gains on
property sales for the quarter were $2.1 million as compared to a loss of $0.1 million in the first
quarter of fiscal 2008.
Interest Expense
Interest expense for the first quarter of fiscal 2009 was less than the first quarter of fiscal
2008 due to a $44.0 million decrease in our average debt and a 0.4 percentage point decrease in our
weighted average interest rate.
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Income Taxes
Our
effective tax rate remained flat at 37.1% in the first quarter of
fiscal 2009 and 2008. In fiscal 2009, our expected tax rate of 39% was impacted by several
discrete items, the most significant being the recording of a valuation reserve against the net
operating losses of our La-Z-Boy U.K. subsidiary. In addition, the adverse impact of this new
valuation reserve was partially offset by the favorable resolution of several outstanding issues
involving certain state taxing authorities.
Discontinued Operations
In the first quarter of fiscal 2009 we had no discontinued operations. In the prior year first
quarter our discontinued operations experienced a net operating loss of $0.2 million after-tax.
Liquidity and Capital Resources
Our total assets at the end of the first quarter of fiscal 2009 decreased $35.9 million compared
with the end of fiscal 2008. The majority of this decline was attributed to decreases in inventory
and trade accounts receivable related to the consolidation of our retail warehouses and the decline
in overall sales volumes.
Our sources of cash liquidity include cash and equivalents, cash from operations and amounts
available under credit facilities. These sources have been adequate for day-to-day operations,
dividends to shareholders and capital expenditures. We expect these sources of liquidity to
continue to be adequate for the foreseeable future. Capital expenditures for the first quarter of
fiscal 2009 were $7.4 million compared with $9.6 million during the first quarter of fiscal 2008.
We expect restructuring costs from our plan to consolidate the cutting and sewing operations in
Mexico to impact cash by $1.5 million during the remainder of fiscal 2009, $7.1 million during
fiscal 2010 and $0.6 million during fiscal 2011. During the first quarter of fiscal 2008 we
exercised a $5.2 million option to purchase property, which we subsequently sold and leased back.
There are no material purchase commitments for capital expenditures, which are expected to be in
the range of $26 to $28 million in fiscal 2009.
Our credit agreement would prohibit us from paying dividends if “excess availability”, as defined
in the credit agreement, fell below $30 million. Certain covenants and restrictions, including a
fixed charge coverage ratio, also would become effective if excess availability fell below $30
million. As of July 26, 2008 we had $71 million outstanding and $56.1 million of excess
availability under the credit agreement. The main cause for the
decline in our excess availability from April 26, 2008 was the
cyclical nature of our business. During our first quarter, we
generally experience lower sales than other quarters during the year. As a
result of this seasonality, our receivables and inventory generally
decline during our first quarter ($31.0
million in the first quarter of fiscal 2009). Since our availability is
generated from eligible trade accounts receivable and inventory, this
decline reduced the amount of assets supporting our availability. In
our first quarter of fiscal 2009, the cash generated by reducing
inventory and accounts receivable was mainly utilized to pay various
liabilities. With the cyclical nature of our business, we expect an
increase in our availability for the second quarter of fiscal 2009 due to
increased eligible accounts receivable and inventory balances offset
by increases in current liabilities that will reduce the need for
additional borrowings.
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The following table illustrates the main components of our cash flows:
| Cash Flows Provided By (Used For) | Quarter Ended | |||||||
| (Amounts in thousands) | 7/26/08 | 7/28/07 | ||||||
Operating activities |
||||||||
Net loss, depreciation and deferred taxes |
$ | (1,429 | ) | $ | (3,949 | ) | ||
Restructuring |
6,576 | 3,681 | ||||||
Working capital and other |
(706 | ) | (19,218 | ) | ||||
Cash provided by (used for) operating activities |
4,441 | (19,486 | ) | |||||
Investing activities |
(1,975 | ) | (3,024 | ) | ||||
Financing activities |
||||||||
Net decrease in debt |
(4,222 | ) | (195 | ) | ||||
Other financing activities |
(2,077 | ) | (6,231 | ) | ||||
Cash used for financing activities |
(6,299 | ) | (6,426 | ) | ||||
Exchange rate changes |
(39 | ) | 1,001 | |||||
Net decrease in cash and equivalents |
$ | (3,872 | ) | $ | (27,935 | ) | ||
Operating Activities
During the
first quarter of fiscal 2009, net cash provided by operating
activities was $4.4
million, compared with $19.5 million used for the first quarter of fiscal 2008. The increase in
2009 operating cash flows was due mainly to changes in inventory and accounts payable offset
somewhat by the smaller decrease in accounts receivable which related to our overall reduction in
business. If business returns to historical levels, we believe these liabilities and accounts
receivable would change proportionately. Discontinued operations did not have a significant impact
on the cash provided by operating activities for the first quarter of fiscal 2009 or fiscal 2008.
Investing Activities
During the
first quarter of fiscal 2009, net cash used for investing activities
was $2.0 million,
whereas $3.0 million was used for investing activities during fiscal 2008. During the first quarter
of fiscal 2008, $6.4 million in proceeds was generated by a sale-leaseback transaction we entered
into with a third party. We exercised an option to purchase a property, sold it to a third party
and then subsequently leased it back. In the first quarter of fiscal 2009, $5.0 million in
proceeds were received from the sale of several properties, offset by $7.2 million of capital
expenditures.
Financing Activities
Our financing activities included borrowings and payments on our debt facilities and dividend
payments. We used $6.3 million of cash in financing activities in the first quarter of fiscal 2009
compared with $6.4 million of cash used in financing activities during the first quarter of fiscal
2008.
In the first quarter of fiscal 2008 we adopted FIN 48 and as a consequence, the balance sheet at
the end of the first quarter of fiscal 2009 reflected a $3.4 million liability for uncertain income
tax positions. Of this amount only $0.9 million will be settled within the next 12 months. The
remaining balance, to the extent it is ever paid, will be paid as tax audits are completed or settled. There were no material changes to our contractual obligations table during the quarter.
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Our debt-to-capitalization ratio was 18.5% at July 26, 2008 and 18.8% at April 26, 2008.
Our Board of Directors has authorized the repurchase of company stock. As of July 26, 2008, 5.4
million additional shares could be purchased pursuant to this authorization. We did not purchase
any shares during the first quarter of fiscal 2009.
We have guaranteed various leases of dealers with proprietary stores. The total amount of these
guarantees is $12.7 million. Of this, $2.6 million will expire within one year, $4.0 million in one
to three years, $2.3 million in four to five years, and $3.8 million thereafter. In recent years,
we have increased our imports of casegoods product and leather and fabric for upholstery product.
At the end of the first quarter of fiscal 2009, we had $49.4 million in open purchase orders with
foreign casegoods, leather and fabric sources. Some of these open purchase orders are cancelable.
We are not required to make any contributions to our defined benefit plans; however, we may make
discretionary contributions.
Continuing compliance with existing federal, state and local statutes dealing with protection of
the environment is not expected to have a material effect upon our capital expenditures, earnings,
competitive position or liquidity.
Critical Accounting Policies
Our critical accounting policies are disclosed in our Form 10-K for the year ended April 26, 2008.
Regulatory Developments
The Continued Dumping and Subsidy Offset Act of 2000 (“CDSOA”) provides for distribution of monies
collected by U.S. Customs and Border Protection (“CBP”) from anti-dumping cases to domestic
producers that supported the anti-dumping petition. The Dispute Settlement Body of the World Trade
Organization (“WTO”) ruled that such payments violate the United States’ WTO obligations. In
response to that ruling, on February 8, 2006, the President signed legislation passed by Congress
that repeals CDSOA distributions to eligible domestic producers for duties collected on imports
entered into the United States after September 30, 2007.
The CDSOA provides for distribution of monies collected by CBP from anti-dumping cases to domestic
producers that supported the anti-dumping petition. We received $7.1 million of CDSOA payments
during fiscal 2008 and $3.4 million during fiscal 2007. In view of the uncertainties associated
with this program, we are unable to predict the amounts, if any, we may receive in the future under
CDSOA. However, assuming CDSOA distributions continue, these distributions could be material
depending on the results of legal appeals and administrative reviews and our actual percentage
allocation.
Recent Accounting Pronouncements
Refer to Note 17 for updates on recent accounting pronouncements since the filing of our Form 10-K
for the year ended April 26, 2008.
Business Outlook
The
overall macroeconomic environment continues to be challenging.
Increased oil prices, higher interest rates and a depressed housing
market, combined with low consumer confidence levels, are having an
effect on the home furnishings industry across the board. We remain
committed to running our business with the greatest efficiency
possible and believe we have the opportunity to improve our
performance. As we announced last quarter, due to seasonality issues
and the way in which our fiscal year (May through April) rolls out,
we anticipate the second half of our fiscal year to be operationally
stronger than the first half.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates. Our exposure to interest rate risk
results from our lines of credit and revolving credit facility under which we had $71 million of
borrowings at July 26, 2008. In May, 2008, we entered into an interest rate swap agreement to
mitigate the impact of changes in interest rates on a portion of our floating rate debt.
Management estimates that a one percentage point change in interest rates would not have a material
impact on our results of operations for fiscal 2009 based upon the current levels of exposed
liabilities.
We are exposed to market risk from changes in the value of foreign currencies. Our exposure to
changes in the value of foreign currencies is reduced through our use of foreign currency forward
contracts from time to time. At July 26, 2008, we had no foreign exchange forward contracts
outstanding. Substantially all of our imports purchased outside of North America are denominated in
U.S. dollars. Therefore, we believe that gains or losses resulting from changes in the value of
foreign currencies will not be material to our results from operations in fiscal year 2009.
ITEM 4. CONTROLS AND PROCEDURES
We maintain a system of disclosure controls and procedures that are designed to provide reasonable
assurance that information that is required to be timely disclosed is accumulated and communicated
to management in a timely fashion. An evaluation of the effectiveness of the design and operation
of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange
Act of 1934, as amended) was performed as of the end of the period covered by this report. This
evaluation was performed under the supervision and with the participation of management, including
our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures
are effective to provide reasonable assurance that information we are required to disclose in the
reports that we file or submit under the Exchange Act is accumulated and communicated to
management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosure and are effective to provide reasonable
assurance that such information is recorded, processed, summarized and reported within the time
periods specified by the SEC’s rules and forms.
There was no change in the Company’s internal controls over financial reporting that occurred
during the quarter covered by this report that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
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PART II — OTHER INFORMATION
ITEM 1A. RISK FACTORS
There have been no material changes to our risk factors during the first quarter of fiscal 2009.
Our risk factors are disclosed in our Form 10-K for the year ended April 26, 2008.
ITEM 6. EXHIBITS
| Exhibit | ||
| Number | Description | |
(31.1)
|
Certifications of Chief Executive Officer pursuant to Rule 13a-14(a) | |
(31.2)
|
Certifications of Chief Financial Officer pursuant to Rule 13a-14(a) | |
(32)
|
Certifications of Executive Officers pursuant to 18 U.S.C. Section 1350(b) | |
(99.1)
|
Press Release dated August 19, 2008 |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
| LA-Z-BOY INCORPORATED | ||||
| (Registrant) | ||||
Date: August 19, 2008
| BY: | /s/ Margaret L. Mueller | |||
| Margaret L. Mueller | ||||
| Corporate Controller On behalf of the registrant and as Chief Accounting Officer |
||||
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