LA-Z-BOY INC - Quarter Report: 2010 October (Form 10-Q)
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 23, 2010
COMMISSION
FILE NUMBER 1-9656
LA-Z-BOY
INCORPORATED
(Exact
name of registrant as specified in its charter)
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MICHIGAN
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38-0751137
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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1284
North Telegraph Road, Monroe, Michigan
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48162-3390
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(Address
of principal executive offices)
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(Zip
Code)
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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:
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Class
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Outstanding at November 17,
2010
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Common
Shares, $1.00 par value
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51,864,806
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LA-Z-BOY INCORPORATED
FORM 10-Q
SECOND QUARTER OF FISCAL 2011
TABLE OF
CONTENTS
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Page
Number(s)
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FINANCIAL
INFORMATION
Item
1. Financial Statements
LA-Z-BOY
INCORPORATED
CONSOLIDATED
STATEMENT OF OPERATIONS
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Second Quarter Ended
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||||||||
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(Unaudited, amounts in thousands, except per share
data)
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10/23/10
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10/24/09
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||||||
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Sales
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$ | 292,982 | $ | 300,707 | ||||
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Cost
of sales
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||||||||
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Cost
of goods sold
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207,938 | 205,602 | ||||||
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Restructuring
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(62 | ) | 663 | |||||
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Total
cost of sales
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207,876 | 206,265 | ||||||
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Gross
profit
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85,106 | 94,442 | ||||||
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Selling,
general and administrative
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79,657 | 84,619 | ||||||
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Restructuring
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110 | 520 | ||||||
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Operating
income
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5,339 | 9,303 | ||||||
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Interest
expense
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592 | 831 | ||||||
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Interest
income
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223 | 199 | ||||||
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Other
income (expense), net
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(418 | ) | 236 | |||||
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Earnings
before income taxes
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4,552 | 8,907 | ||||||
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Income
tax expense
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1,381 | 3,529 | ||||||
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Net
income
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3,171 | 5,378 | ||||||
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Net
loss attributable to noncontrolling interests
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774 | 588 | ||||||
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Net
income attributable to La-Z-Boy Incorporated
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$ | 3,945 | $ | 5,966 | ||||
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Basic
average shares
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51,855 | 51,527 | ||||||
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Basic
net income attributable to La-Z-Boy Incorporated per share
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$ | 0.07 | $ | 0.11 | ||||
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Diluted
average shares
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52,214 | 51,755 | ||||||
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Diluted
net income attributable to La-Z-Boy Incorporated per share
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$ | 0.07 | $ | 0.11 | ||||
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
LA-Z-BOY
INCORPORATED
CONSOLIDATED
STATEMENT OF OPERATIONS
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Six Months Ended
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||||||||
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(Unaudited, amounts in thousands, except per share
data)
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10/23/10
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10/24/09
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||||||
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Sales
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$ | 556,296 | $ | 563,378 | ||||
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Cost
of sales
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||||||||
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Cost
of goods sold
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398,439 | 387,715 | ||||||
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Restructuring
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(83 | ) | 1,399 | |||||
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Total
cost of sales
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398,356 | 389,114 | ||||||
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Gross
profit
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157,940 | 174,264 | ||||||
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Selling,
general and administrative
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153,976 | 162,535 | ||||||
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Restructuring
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275 | 821 | ||||||
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Operating
income
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3,689 | 10,908 | ||||||
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Interest
expense
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1,182 | 1,811 | ||||||
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Interest
income
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466 | 475 | ||||||
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Other
income (expense), net
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(69 | ) | 837 | |||||
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Earnings
before income taxes
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2,904 | 10,409 | ||||||
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Income
tax expense
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675 | 3,526 | ||||||
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Net
income
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2,229 | 6,883 | ||||||
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Net
loss attributable to noncontrolling interests
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1,500 | 660 | ||||||
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Net
income attributable to La-Z-Boy Incorporated
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$ | 3,729 | $ | 7,543 | ||||
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Basic
average shares
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51,820 | 51,503 | ||||||
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Basic
net income attributable to La-Z-Boy Incorporated per share
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$ | 0.07 | $ | 0.14 | ||||
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Diluted
average shares
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52,228 | 51,551 | ||||||
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Diluted
net income attributable to La-Z-Boy Incorporated per share
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$ | 0.07 | $ | 0.14 | ||||
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
CONSOLIDATED
BALANCE SHEET
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(Unaudited, amounts in
thousands)
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10/23/10
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04/24/10
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||||||
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Current
assets
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||||||||
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Cash
and equivalents
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$ | 83,656 | $ | 108,427 | ||||
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Receivables,
net of allowance of $22,596 at 10/23/10 and $20,258 at
04/24/10
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168,974 | 165,001 | ||||||
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Inventories,
net
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140,703 | 132,480 | ||||||
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Deferred
income taxes – current
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2,305 | 2,305 | ||||||
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Other
current assets
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20,807 | 18,862 | ||||||
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Total
current assets
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416,445 | 427,075 | ||||||
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Property,
plant and equipment, net
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131,070 | 138,857 | ||||||
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Trade
names
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3,100 | 3,100 | ||||||
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Deferred
income taxes – long-term
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464 | 458 | ||||||
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Other
long-term assets
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35,442 | 38,293 | ||||||
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Total
assets
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$ | 586,521 | $ | 607,783 | ||||
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Current
liabilities
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||||||||
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Current
portion of long-term debt
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$ | 5,143 | $ | 1,066 | ||||
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Accounts
payable
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46,773 | 54,718 | ||||||
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Accrued
expenses and other current liabilities
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77,626 | 91,523 | ||||||
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Total
current liabilities
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129,542 | 147,307 | ||||||
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Long-term
debt
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40,522 | 46,917 | ||||||
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Other
long-term liabilities
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69,518 | 70,445 | ||||||
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Contingencies
and commitments
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— | — | ||||||
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Equity
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||||||||
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La-Z-Boy
Incorporated shareholders’ equity:
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||||||||
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Common
shares, $1 par value
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51,865 | 51,770 | ||||||
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Capital
in excess of par value
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200,772 | 201,873 | ||||||
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Retained
earnings
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114,213 | 106,466 | ||||||
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Accumulated
other comprehensive loss
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(19,285 | ) | (20,284 | ) | ||||
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Total
La-Z-Boy Incorporated shareholders' equity
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347,565 | 339,825 | ||||||
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Noncontrolling
interests
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(626 | ) | 3,289 | |||||
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Total
equity
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346,939 | 343,114 | ||||||
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Total
liabilities and equity
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$ | 586,521 | $ | 607,783 | ||||
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
CONSOLIDATED
STATEMENT OF CASH FLOWS
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Second Quarter Ended
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Six Months Ended
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|||||||||||||||
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(Unaudited, amounts in
thousands)
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10/23/10
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10/24/09
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10/23/10
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10/24/09
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Cash
flows from operating activities
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Net
income
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$ | 3,171 | $ | 5,378 | $ | 2,229 | $ | 6,883 | ||||||||
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Adjustments
to reconcile net income to cash provided by (used for) operating
activities
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||||||||||||||||
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(Gain)
loss on sale of assets
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127 | (75 | ) | 154 | (88 | ) | ||||||||||
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Restructuring
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48 | 1,183 | 192 | 2,220 | ||||||||||||
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Provision
for doubtful accounts
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974 | 2,152 | 1,888 | 4,514 | ||||||||||||
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Depreciation
and amortization
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5,658 | 6,300 | 11,464 | 12,575 | ||||||||||||
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Stock-based
compensation expense
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1,329 | 1,621 | 2,356 | 2,628 | ||||||||||||
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Change
in receivables
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(18,983 | ) | (26,460 | ) | (2,034 | ) | (17,538 | ) | ||||||||
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Change
in inventories
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(3,783 | ) | 3,956 | (12,790 | ) | 2,075 | ||||||||||
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Change
in other assets
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(3,232 | ) | 11,075 | (3,528 | ) | 6,045 | ||||||||||
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Change
in payables
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3,474 | 7,073 | (7,193 | ) | 4,747 | |||||||||||
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Change
in other liabilities
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4,486 | 10,025 | (11,558 | ) | 11,944 | |||||||||||
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Change
in deferred taxes
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(30 | ) | (8 | ) | 7 | — | ||||||||||
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Total
adjustments
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(9,932 | ) | 16,842 | (21,042 | ) | 29,122 | ||||||||||
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Net
cash provided by (used for) operating activities
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(6,761 | ) | 22,220 | (18,813 | ) | 36,005 | ||||||||||
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Cash
flows from investing activities
|
||||||||||||||||
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Proceeds
from disposals of assets
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282 | 230 | 304 | 1,916 | ||||||||||||
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Capital
expenditures
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(2,552 | ) | (1,340 | ) | (4,987 | ) | (2,779 | ) | ||||||||
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Purchases
of investments
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(2,297 | ) | (1,338 | ) | (6,630 | ) | (2,537 | ) | ||||||||
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Proceeds
from sales of investments
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1,768 | 1,445 | 6,121 | 4,109 | ||||||||||||
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Change
in restricted cash
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— | — | — | 17,007 | ||||||||||||
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Other
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(31 | ) | 29 | (43 | ) | 14 | ||||||||||
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Net
cash provided by (used for) investing activities
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(2,830 | ) | (974 | ) | (5,235 | ) | 17,730 | |||||||||
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Cash
flows from financing activities
|
||||||||||||||||
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Proceeds
from debt
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10,218 | 10,213 | 20,456 | 20,673 | ||||||||||||
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Payments
on debt
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(10,316 | ) | (10,408 | ) | (20,882 | ) | (32,567 | ) | ||||||||
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Stock
issued from stock plans
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34 | — | 58 | — | ||||||||||||
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Net
cash used for financing activities
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(64 | ) | (195 | ) | (368 | ) | (11,894 | ) | ||||||||
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Effect
of exchange rate changes on cash and equivalents
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310 | (347 | ) | 277 | (168 | ) | ||||||||||
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Change
in cash and equivalents
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(9,345 | ) | 20,704 | (24,139 | ) | 41,673 | ||||||||||
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Cash
reduction upon deconsolidation of VIE
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— | — | (632 | ) | — | |||||||||||
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Cash
and equivalents at beginning of period
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93,001 | 38,339 | 108,427 | 17,370 | ||||||||||||
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Cash
and equivalents at end of period
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$ | 83,656 | $ | 59,043 | $ | 83,656 | $ | 59,043 | ||||||||
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Cash
paid (net of refunds) during period – income taxes
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$ | 3,395 | $ | (13,348 | ) | $ | 5,856 | $ | (13,082 | ) | ||||||
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Cash
paid during period – interest
|
$ | 538 | $ | 563 | $ | 1,075 | $ | 1,288 | ||||||||
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
CONSOLIDATED
STATEMENT OF CHANGES IN EQUITY
|
(Unaudited, amounts in thousands)
|
Common
Shares
|
Capital in
Excess of Par
Value
|
Retained
Earnings
|
Accumulated
Other
Compre-hensive Loss
|
Non-Controlling
Interests
|
Total
|
||||||||||||||||||
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At
April 25, 2009
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$ | 51,478 | $ | 205,945 | $ | 65,027 | $ | (23,168 | ) | $ | 4,138 | $ | 303,420 | |||||||||||
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Comprehensive
income
|
||||||||||||||||||||||||
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Net
income (loss)
|
32,701 | (1,342 | ) | |||||||||||||||||||||
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Unrealized
gain on marketable securities arising during the period
|
2,685 | |||||||||||||||||||||||
|
Reclassification
adjustment for gain on marketable securities included in net
income
|
(97 | ) | ||||||||||||||||||||||
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Translation
adjustment
|
(190 | ) | 403 | |||||||||||||||||||||
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Change
in fair value of cash flow hedge
|
146 | |||||||||||||||||||||||
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Net
pension amortization and net actuarial loss
|
340 | |||||||||||||||||||||||
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Total
comprehensive income
|
34,646 | |||||||||||||||||||||||
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Stock
issued for stock and employee benefit plans, net of
cancellations
|
292 | (9,294 | ) | 8,738 | (264 | ) | ||||||||||||||||||
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Stock
option, restricted stock and performance based stock
expense
|
5,222 | 5,222 | ||||||||||||||||||||||
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Change
in noncontrolling interest
|
90 | 90 | ||||||||||||||||||||||
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At
April 24, 2010
|
51,770 | 201,873 | 106,466 | (20,284 | ) | 3,289 | 343,114 | |||||||||||||||||
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Comprehensive
income
|
||||||||||||||||||||||||
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Net
income (loss)
|
3,729 | (1,500 | ) | |||||||||||||||||||||
|
Unrealized
loss on marketable securities arising during the period
|
(84 | ) | ||||||||||||||||||||||
|
Reclassification
adjustment for gain on marketable securities included in net
income
|
(181 | ) | ||||||||||||||||||||||
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Translation
adjustment
|
158 | 362 | ||||||||||||||||||||||
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Net
pension amortization
|
870 | |||||||||||||||||||||||
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Change
in fair value of cash flow hedge
|
236 | |||||||||||||||||||||||
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Total
comprehensive income
|
3,590 | |||||||||||||||||||||||
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Stock
issued for stock and employee benefit plans, net of
cancellations
|
95 | (3,457 | ) | 3,093 | (269 | ) | ||||||||||||||||||
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Stock
option and restricted stock expense
|
2,356 | 2,356 | ||||||||||||||||||||||
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Changes
in equity and noncontrolling interest upon deconsolidation of a
VIE
|
925 | (2,777 | ) | (1,852 | ) | |||||||||||||||||||
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At
October 23, 2010
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$ | 51,865 | $ | 200,772 | $ | 114,213 | $ | (19,285 | ) | $ | (626 | ) | $ | 346,939 | ||||||||||
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
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 24, 2010,
balance sheet was derived from audited financial statements. 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 2010 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. The interim results reflected in the
accompanying financial statements are not necessarily indicative of the results
of operations which will occur for the full fiscal year ending April 30, 2011.
Fiscal 2011 is a 53 week year as compared to fiscal 2010 with the additional
week falling in the fourth quarter of fiscal 2011.
In June
2009, the Financial Accounting Standards Board amended its guidance on
accounting for VIEs. The new accounting guidance resulted in a change in our
accounting policy effective April 25, 2010. Among other things, the new guidance
requires more qualitative than quantitative analyses to determine the primary
beneficiary of a VIE and requires continuous assessments of whether an
enterprise is the primary beneficiary of a VIE. Under the new guidance, a VIE
must be consolidated if the enterprise has both (a) the power to direct the
activities of the VIE that most significantly impact the entity's economic
performance, and (b) the obligation to absorb losses or the right to
receive benefits from the VIE that could potentially be significant to the VIE.
We adopted this new accounting guidance and it was effective for us on April 25,
2010, the first day of our current fiscal year. This guidance is being
applied prospectively.
We
consolidate entities that are VIEs when we are deemed to be the primary
beneficiary of the VIE. We are deemed to be the primary beneficiary of the
VIE if we have a significant variable interest in the VIE that provides us with
a controlling financial interest in the VIE. We will continuously evaluate
our VIEs’ primary beneficiaries as facts and circumstances change to determine
if such changes warrant a change in our status as primary
beneficiary.
On April
25, 2010, we deconsolidated our Toronto, Ontario, VIE as a result of the above
mentioned change in accounting policy. This entity is an independent La-Z-Boy
Furniture Galleries® dealer operating eight stores and had previously been
consolidated due to certain lease guarantees and other financial support we have
provided. Although these financial arrangements result in our holding a
majority of the variable interests in this VIE, they do not empower us to direct
the activities of the VIE that most significantly impact the VIE’s economic
performance. Consequently, subsequent to this change in accounting policy, we
deconsolidated this VIE.
The
impact of the deconsolidation on our Consolidated Statements of Operations was
minimal. Sales and operating income, net of eliminations, for our Toronto,
Ontario, VIE for the second quarter and first six months of fiscal 2010 were
$4.6 million (sales) and $0.4 million (operating income) and $8.3 million
(sales) and $1.3 million (operating income), respectively. The most
significant impacts on our Consolidated Balance Sheet were a decrease to current
assets of $6.9 million, a decrease to long-term assets of $5.0 million, and a
decrease to noncontrolling interest by $2.8 million. We recognized a non-cash
gain of $0.9 million at April 25, 2010. This gain is categorized as a cumulative
effect to retained earnings during the first six months of fiscal
2011.
We
currently consolidate two variable interest entities (VIEs) in our consolidated
financial statements. In late August 2010, we determined there were
errors relating to inventory and corresponding inter-company accounts payable
related to one of the VIEs, and also determined that the accounting for lease
expense, which requires rent expense to be recorded on a straight-line basis
over the life of the lease, was not being followed for the VIEs.
The total
amount of the additional charge for the inventory-related items was
approximately $2.7 million ($0.6 million related to the first quarter of fiscal
2011), and the impact of the rent expense totaled about $2.0 million, affecting
years beginning in fiscal 2004. As these adjustments related to the
VIE's for which we have no equity investment, there was no impact to net income
attributable to La-Z-Boy Incorporated on a per share basis for fiscal 2010 or
2011 related to these adjustments. Since the corrections did not materially
impact any of the previous periods affected, we concluded that these errors
are not material to our previously issued financial statements. These
adjustments, which relate to cost of sales, SG&A expenses, inventory,
accrued rent and other accrued liabilities will be corrected through revisions
of prior-period quarterly and annual financial statements when they are next
filed. Prior period amounts included in the consolidated financial statements as
of and for the three and six month periods ended October 23, 2010 have been
revised to reflect the effect of these corrections.
Additionally,
in the second quarter of fiscal 2011 it was determined that our tax rate for
fiscal 2010 did not reflect a deduction due to write-offs of certain inventory
when completing our tax provision for fiscal 2010, and that our tax
rate and corresponding tax expense were
therefore overstated. This correction resulted in a $0.2 million
increase in our net income attributable to La-Z-Boy Incorporated for the second
quarter and first six months of fiscal 2010. The cumulative result of
this correction was a $1.0 million increase to retained earnings and net income
attributable to La-Z-Boy Incorporated as of and for the year ended April 24,
2010, respectively.
As
previously disclosed in our first quarter of fiscal 2010 filing on Form 10-Q, we
recorded a $0.6 million out-of-period reduction to cost of goods sold during
that quarter. As a result of the above mentioned corrections, we
revised our historical financial statements to include the $0.6 million
reduction to cost of goods sold in fiscal 2009. This change resulted
in a $0.6 million decrease in our net income attributable to La-Z-Boy
Incorporated for the first six months of fiscal 2010, however, this did not
impact our fiscal 2010 second quarter net income attributable to La-Z-Boy
Incorporated.
The
corrections mentioned above resulted in a $0.01 decrease in our diluted net
income attributable to La-Z-Boy Incorporated per share for the first six months
of fiscal 2010, but did not impact our earnings per share for the second
quarter. These corrections did not impact our net income attributable to
La-Z-Boy Incorporated or our diluted earnings per share for the second quarter
and first six months of fiscal 2011.
We
determined that the cumulative impact of the corrections mentioned
above was material to our fiscal 2011 second quarter and first six months,
as well as to our projected full fiscal 2011 year. However, we determined
that the corrections were not material, either individually or in the aggregate,
to any of our historical fiscal years or interim periods. Consequently, we
will revise our historical financial statements for the prior periods when they
are presented in future filings. Because our analysis concluded that these
corrections were immaterial to any prior period, we will not amend our previous
filings with the Securities and Exchange Commission.
The
following tables set forth the significant impacts of the corrections to our
Consolidated Statements of Operations for the quarter and six months ended
October 24, 2009, and our Consolidated Balance Sheet as of April 24,
2010:
|
Quarter Ended 10/24/09
|
||||||||||||
|
(Unaudited, amounts in thousands, except per share data)
|
10/24/09
(as previously
reported)
|
Adjustments
|
10/24/09
(as adjusted)
|
|||||||||
|
Net
income attributable to La-Z-Boy Incorporated
|
$ | 5,907 | $ | 59 | $ | 5,966 | ||||||
|
Diluted
net income attributable to La-Z-Boy Incorporated per share
|
$ | 0.11 | $ | — | $ | 0.11 | ||||||
|
Six Months Ended 10/24/09
|
||||||||||||
|
(Unaudited, amounts in thousands, except per share data)
|
10/24/09
(as previously
reported)
|
Adjustments
|
10/24/09
(as adjusted)
|
|||||||||
|
Net
income attributable to La-Z-Boy Incorporated
|
$ | 7,890 | $ | (347 | ) | $ | 7,543 | |||||
|
Diluted
net income attributable to La-Z-Boy Incorporated per share
|
$ | 0.15 | $ | (0.01 | ) | $ | 0.14 | |||||
|
As of 04/24/10
|
||||||||||||
|
(Unaudited, amounts in thousands)
|
04/24/10
(as previously
reported)
|
Adjustments
|
04/24/10
(as adjusted)
|
|||||||||
|
Inventories,
net
|
$ | 134,187 | $ | (1,707 | ) | $ | 132,480 | |||||
|
Other
current assets
|
$ | 18,159 | $ | 703 | $ | 18,862 | ||||||
|
Other
long-term liabilities
|
$ | 68,381 | $ | 2,064 | $ | 70,445 | ||||||
|
Retained
earnings
|
$ | 108,707 | $ | (2,241 | ) | $ | 106,466 | |||||
|
Noncontrolling
interests
|
$ | 4,141 | $ | (852 | ) | $ | 3,289 | |||||
As a
result of the revisions made to our historical financial statements, our net
income attributable to La-Z-Boy Incorporated decreased by $0.6 million or $0.01
per diluted share for the fiscal year ended April 28, 2007. Our net loss
attributable to La-Z-Boy Incorporated decreased by less than $0.1 million for
the fiscal years ended April 26, 2008, and April 25, 2009. These revisions
did not impact our earnings per share for the fiscal years ended April 26, 2008,
or April 25, 2009.
A summary
of inventories is as follows:
|
(Unaudited, amounts in
thousands)
|
10/23/10
|
04/24/10
|
||||||
|
Raw
materials
|
$ | 64,860 | $ | 60,913 | ||||
|
Work
in process
|
11,475 | 11,018 | ||||||
|
Finished
goods
|
89,075 | 85,256 | ||||||
|
FIFO
inventories
|
165,410 | 157,187 | ||||||
|
Excess
of FIFO over LIFO
|
(24,707 | ) | (24,707 | ) | ||||
|
Inventories,
net
|
$ | 140,703 | $ | 132,480 | ||||
As a
result of the corrections to one of our VIE’s accounting for inventory
transactions as discussed in Note 1, our net inventory balance as of April 24,
2010, decreased by $1.7 million.
Net
periodic pension costs were as follows:
|
Second Quarter Ended
|
Six Months Ended
|
|||||||||||||||
|
(Unaudited, amounts in
thousands)
|
10/23/10
|
10/24/09
|
10/23/10
|
10/24/09
|
||||||||||||
|
Service
cost
|
$ | 291 | $ | 261 | $ | 582 | $ | 522 | ||||||||
|
Interest
cost
|
1,356 | 1,400 | 2,712 | 2,800 | ||||||||||||
|
Expected
return on plan assets
|
(1,478 | ) | (1,206 | ) | (2,956 | ) | (2,412 | ) | ||||||||
|
Net
amortization
|
435 | 527 | 870 | 1,054 | ||||||||||||
|
Net
periodic pension cost
|
$ | 604 | $ | 982 | $ | 1,208 | $ | 1,964 | ||||||||
We did
not make any contributions to the plans during the first six months of fiscal
2011. We are not statutorily required to make any contributions to the
defined benefit plan in fiscal year 2011; however, we expect to make a $2.5
million contribution during the second half of fiscal 2011. We also have
the discretion to make additional 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 two years. These guarantees enhance the credit of
these dealers.
We would
be required to perform under these agreements only if the dealer were to default
on the guaranteed lease or note. The maximum amount of potential future payments
under these guarantees was $2.1 million as of October 23, 2010, and April 24,
2010.
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. We estimate future warranty claims based on
claim experience and any additional anticipated future costs on previously sold
products. Our liability estimates incorporate the cost of repairs
including materials consumed, labor and overhead amounts necessary to perform
the repair and any costs associated with delivery of the repaired product to the
customer. Over 90% of our warranty liability relates to our Upholstery
Group where we generally warrant our products against defects from one to five
years for fabric and padding and up to a lifetime on certain mechanisms and
frames. Considerable judgment is used in the determination of our
estimate. If actual costs were to differ significantly from our estimates,
we would record the impact of these unforeseen costs in subsequent
periods.
A
reconciliation of the changes in our product warranty liability is as
follows:
|
Second Quarter Ended
|
Six Months Ended
|
|||||||||||||||
|
(Unaudited, amounts in
thousands)
|
10/23/10
|
10/24/09
|
10/23/10
|
10/24/09
|
||||||||||||
|
Balance
as of the beginning of the period
|
$ | 14,715 | $ | 14,297 | $ | 14,773 | $ | 14,394 | ||||||||
|
Accruals
during the period
|
3,499 | 3,367 | 6,710 | 6,704 | ||||||||||||
|
Settlements
during the period
|
(3,355 | ) | (3,371 | ) | (6,624 | ) | (6,805 | ) | ||||||||
|
Balance
as of the end of the period
|
$ | 14,859 | $ | 14,293 | $ | 14,859 | $ | 14,293 | ||||||||
During
the second quarter of fiscal 2011, our shareholders approved the La-Z-Boy
Incorporated 2010 Omnibus Incentive Plan. This plan provides for the grant
of stock options, stock appreciation rights, restricted stock, stock units
(including deferred stock units), unrestricted stock, dividend equivalent
rights, and short-term cash incentive awards. Under this plan, the
aggregate number of common shares that may be issued through awards of any form
is 4.6 million shares.
Stock Options. In the second
quarter of fiscal 2011, we granted 0.2 million stock options to employees.
Compensation expense for stock options is equal to the fair value on the date
the award was approved and is recognized over the service period. The
vesting period for our stock options ranges from one to four years. The
fair value for the employee stock options granted was estimated at the date of
the grant using the Black-Scholes option-pricing model, which requires
management to make certain assumptions. Expected volatility was estimated
based on the historical volatility of our common shares. The average
expected life was based on the contractual term of the stock option and expected
employee exercise and post-vesting employment termination trends. The
risk-free rate was based on U.S. Treasury issues with a term equal to the
expected life assumed at the date of the grant. The turnover rate was
estimated at the date of the grant based on historical experience. The
fair value of stock options granted during the second quarter of fiscal 2011 was
calculated using the following assumptions:
|
(Unaudited)
|
10/23/10
|
|||
|
Risk-free
interest rate
|
0.75 | % | ||
|
Dividend
rate
|
— | |||
|
Expected
life in years
|
3.0 | |||
|
Stock
price volatility
|
86.6 | % | ||
|
Turnover
rate
|
3.0 | % | ||
|
Fair
value per share
|
$ | 4.27 | ||
Restricted Shares. We granted
0.2 million restricted shares to employees during the second quarter of fiscal
2011. Compensation expense for restricted stock is equal to the market
value of our common shares on the date the award was approved and is recognized
over the service period. The vesting period for our restricted shares is
three years.
Performance Awards. We
granted 0.4 million performance awards in the second quarter of fiscal 2011.
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
awards is expensed over the service period based on the probability that the
performance goals will be obtained.
Restricted Stock Units. We
granted 0.1 million restricted stock units to our non-employee directors. These
awards will be paid in shares of our common stock upon exercise and,
consequently, we account for them as equity based awards. Compensation expense
for these awards is measured and recognized based on the market price of our
common shares at the date the grant was approved.
Total
compensation expense recognized in the Consolidated Statement of Operations for
all equity based compensation was $1.3 million and $2.4 million, for the second
quarter and first six months of fiscal 2011, respectively. For the second
quarter and first six months of fiscal 2010, we recorded compensation expense
for all equity based compensation of $1.6 million and $2.6 million,
respectively.
Previously Granted Deferred Stock
Units. Expense relating to previously granted deferred stock units, which
are accounted for as liability based awards because upon exercise these awards
will be paid in cash, was recorded in selling, general and administrative
expense as a net reduction in expense of $0.2 million and $1.1 million, for the
second quarter and first six months of fiscal 2011, respectively. For the
second quarter and first six months of fiscal 2010, expense relating to deferred
stock units was $0.9 million and $1.3 million, respectively.
The
components of total comprehensive income are as follows:
|
Second Quarter Ended
|
Six Months Ended
|
|||||||||||||||
|
(Unaudited, amounts in
thousands)
|
10/23/10
|
10/24/09
|
10/23/10
|
10/24/09
|
||||||||||||
|
Net
income
|
$ | 3,171 | $ | 5,378 | $ | 2,229 | $ | 6,883 | ||||||||
|
Other
comprehensive income (loss):
|
||||||||||||||||
|
Currency
translation adjustment
|
649 | (105 | ) | 520 | (98 | ) | ||||||||||
|
Change
in fair value of cash flow hedge
|
123 | 15 | 236 | 1 | ||||||||||||
|
Net
unrealized gains (losses) on marketable securities arising during the
period
|
493 | 692 | (265 | ) | 1,538 | |||||||||||
|
Net
pension amortization
|
435 | 527 | 870 | 1,054 | ||||||||||||
|
Total
other comprehensive income
|
1,700 | 1,129 | 1,361 | 2,495 | ||||||||||||
|
Total
comprehensive income before allocation to noncontrolling
interest
|
4,871 | 6,507 | 3,590 | 9,378 | ||||||||||||
|
Comprehensive
loss attributable to noncontrolling interest
|
408 | 548 | 1,138 | 507 | ||||||||||||
|
Comprehensive
income attributable to La-Z-Boy Incorporated
|
$ | 5,279 | $ | 7,055 | $ | 4,728 | $ | 9,885 | ||||||||
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 consist of two groups, one including
American Drew, Lea, and Hammary, the second being Kincaid. These groups
primarily sell U.S. manufactured or imported wood furniture to furniture
retailers. Casegoods product includes bedroom, dining room, entertainment
centers, accent pieces and some coordinated 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 primarily sells upholstered furniture,
as well as some casegoods and other accessories, to end consumers through the
retail network.
|
Second Quarter Ended
|
Six Months Ended
|
|||||||||||||||
|
(Unaudited, amounts in
thousands)
|
10/23/10
|
10/24/09
|
10/23/10
|
10/24/09
|
||||||||||||
|
Sales
|
||||||||||||||||
|
Upholstery
Group
|
$ | 224,878 | $ | 232,780 | $ | 426,812 | $ | 429,472 | ||||||||
|
Casegoods
Group
|
39,509 | 37,302 | 76,359 | 73,167 | ||||||||||||
|
Retail
Group
|
39,246 | 38,014 | 74,553 | 73,976 | ||||||||||||
|
VIEs
|
7,744 | 12,248 | 15,286 | 23,987 | ||||||||||||
|
Corporate
and Other
|
449 | 1,679 | 826 | 3,540 | ||||||||||||
|
Eliminations
|
(18,844 | ) | (21,316 | ) | (37,540 | ) | (40,764 | ) | ||||||||
|
Consolidated
Sales
|
$ | 292,982 | $ | 300,707 | $ | 556,296 | $ | 563,378 | ||||||||
|
Operating
Income (Loss)
|
||||||||||||||||
|
Upholstery
Group
|
$ | 17,055 | $ | 25,328 | $ | 27,112 | $ | 41,051 | ||||||||
|
Casegoods
Group
|
1,376 | (184 | ) | 2,951 | (305 | ) | ||||||||||
|
Retail
Group
|
(4,360 | ) | (5,301 | ) | (9,284 | ) | (10,969 | ) | ||||||||
|
VIEs
|
(1,104 | ) | (933 | ) | (2,712 | ) | (1,126 | ) | ||||||||
|
Corporate
and Other
|
(7,580 | ) | (8,424 | ) | (14,186 | ) | (15,523 | ) | ||||||||
|
Restructuring
|
(48 | ) | (1,183 | ) | (192 | ) | (2,220 | ) | ||||||||
|
Consolidated
Operating Income
|
$ | 5,339 | $ | 9,303 | $ | 3,689 | $ | 10,908 | ||||||||
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, as well as recorded charges
for severance and benefits, contract terminations and other transition costs
related to relocating and closing facilities.
During
fiscal 2008, we committed to a restructuring plan to consolidate all of our
North American cutting and sewing operations in Mexico. During the second
quarter and first six months of fiscal 2011, we had a net reduction of estimated
restructuring liabilities of $0.1 million, under this plan. We expect to
incur additional pre-tax restructuring charges of $0.2 million during the
remainder of fiscal 2011. During the second quarter and first six months
of fiscal 2010, we had a net reduction in estimated restructuring liabilities of
$0.4 million and $0.3 million, respectively, under this plan.
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 2011, we had
pre-tax restructuring charges of $0.1 million and $0.3 million, respectively,
related to contract terminations. We expect to incur approximately $0.3
million of additional charges in the remainder of fiscal 2011. During the
second quarter and first six months of fiscal 2010, we had pre-tax restructuring
charges of $0.5 million and $0.8 million, respectively, related to contract
terminations.
During
fiscal 2009, we committed to a restructuring plan to consolidate our casegoods
manufacturing plants and convert another facility into a distribution
center. During the second quarter and first six months of fiscal 2010, we
had pre-tax restructuring charges of $1.1 million and $1.7 million,
respectively, covering severance and benefits and other restructuring
costs.
For the current fiscal year through
October 23, 2010, restructuring liabilities along with pre-tax charges to
expense, cash payments or asset write-downs were as follows:
|
Fiscal 2011
|
||||||||||||||||
|
(Unaudited, amounts in
thousands)
|
04/24/10
Balance
|
Charges to
Expense *
|
Cash
Payments
or Asset
Write-Downs
|
10/23/10
Balance
|
||||||||||||
|
Severance
and benefit-related costs
|
$ | 492 | $ | (83 | ) | $ | (222 | ) | $ | 187 | ||||||
|
Contract
termination costs
|
292 | 275 | (401 | ) | 166 | |||||||||||
|
Total
restructuring
|
$ | 784 | $ | 192 | $ | (623 | ) | $ | 353 | |||||||
* Charges
to expense include $0.1 million of non-cash charges for contract termination
costs.
Our
effective tax rates for the second quarter and first six months of fiscal
2011 were 30.3% and 23.2%, respectively, compared to 39.6% and 33.9% for
the second quarter and first six months of fiscal 2010, respectively. The
effective tax rates for the second quarter and first six months of fiscal 2011
and fiscal 2010 were impacted by routine discrete items that resulted in a
rate reduction of 11.2% and 17.6% for the second quarter and first six months of
fiscal 2011, respectively.
Realization
of our deferred tax assets is dependent on generating sufficient future taxable
income. Valuation allowances of $46.5 million associated with certain U.S.
federal and state deferred tax assets could be reduced in fiscal 2012 based on,
among other factors, the level of taxable income generated in fiscal
2012.
We had
two consolidated VIEs during the second quarter and first six months of fiscal
2011 representing 22 stores and three consolidated VIEs during the second
quarter and first six months of fiscal 2010 representing 31 stores. As of
April 25, 2010, the first day of our current fiscal year, we deconsolidated our
Toronto, Ontario, VIE. This resulted in a decrease of eight stores for our
VIEs when comparing the second quarter and first six months of fiscal 2011 to
the second quarter and first six months of fiscal 2010. We deconsolidated
our Toronto, Ontario, VIE based on a change to our accounting policy as
discussed in Note 1.
The table
below shows the amount of assets and liabilities from VIEs included in our
Consolidated Balance Sheet as of October 23, 2010, and April 24,
2010:
|
As of
|
||||||||
|
(Unaudited, amounts in
thousands)
|
10/23/10
|
04/24/10
|
||||||
|
Cash
and equivalents
|
$ | 1,253 | $ | 2,075 | ||||
|
Receivables,
net
|
103 | 114 | ||||||
|
Inventories,
net
|
5,565 | 11,884 | ||||||
|
Other
current assets
|
612 | 1,745 | ||||||
|
Property,
plant and equipment, net
|
3,410 | 8,940 | ||||||
|
Other
long-term assets, net
|
163 | 148 | ||||||
|
Total
assets
|
$ | 11,106 | $ | 24,906 | ||||
|
Current
portion of long-term debt
|
$ | — | $ | 128 | ||||
|
Accounts
payable
|
465 | 1,048 | ||||||
|
Accrued
expenses and other current liabilities
|
4,700 | 7,776 | ||||||
|
Long-term
debt
|
2 | 1,770 | ||||||
|
Other
long-term liabilities
|
2,777 | 2,852 | ||||||
|
Total
liabilities
|
$ | 7,944 | $ | 13,574 | ||||
The
overall decrease in total assets and total liabilities of our VIEs shown in the
table above was impacted by the deconsolidation of our Toronto, Ontario,
VIE.
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 $3.5 million which consists of past due accounts receivable as well as notes
receivable, net of reserves and collateral on inventory and real estate.
We have not provided additional financial or other support to these dealers
during the second quarter and first six months of fiscal 2011, and have no
obligations or commitments to provide further support.
A
reconciliation of the numerators and denominators used in the computations of
basic and diluted earnings per share is as follows:
|
Second Quarter
Ended
|
Six Months
Ended
|
|||||||||||||||
|
(Unaudited, amounts in thousands)
|
10/23/10
|
10/24/09
|
10/23/10
|
10/24/09
|
||||||||||||
|
Numerator
(basic and diluted):
|
||||||||||||||||
|
Net
income attributable to La-Z-Boy Incorporated
|
$ | 3,945 | $ | 5,966 | $ | 3,729 | $ | 7,543 | ||||||||
|
Income
allocated to participating securities
|
(77 | ) | (123 | ) | (72 | ) | (134 | ) | ||||||||
|
Net
income available to common shareholders
|
$ | 3,868 | $ | 5,843 | $ | 3,657 | $ | 7,409 | ||||||||
|
Second Quarter
Ended
|
Six Months
Ended
|
|||||||||||||||
|
(Unaudited, amounts in thousands)
|
10/23/10
|
10/24/09
|
10/23/10
|
10/24/09
|
||||||||||||
|
Denominator:
|
||||||||||||||||
|
Basic
common shares (based upon weighted average)
|
51,855 | 51,527 | 51,820 | 51,503 | ||||||||||||
|
Add:
|
||||||||||||||||
|
Stock
option dilution
|
359 | 228 | 408 | 48 | ||||||||||||
|
Diluted
common shares
|
52,214 | 51,755 | 52,228 | 51,551 | ||||||||||||
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.
The
effect of options to purchase 1.3 million and 1.9 million shares for the
quarters ended October 23, 2010, and October 24, 2009, with a weighted average
exercise price of $15.30 and $14.97, respectively, was excluded from the diluted
share calculation as the exercise prices of these options were higher than the
weighted average share price for the quarters and including them 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.
|
|
|
·
|
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.
In
addition to assets and liabilities that are recorded at fair value on a
recurring basis, we are required to record assets and liabilities at fair value
on a non-recurring basis. Non-financial assets such as trade names and
long-lived assets are measured at fair value when there is an indicator of
impairment and recorded at fair value only when an impairment is
recognized. We did not measure any material assets or liabilities at fair
value on a nonrecurring basis during fiscal 2011 or fiscal
2010.
The
following table presents the fair value hierarchy for those assets measured at
fair value on a recurring basis as of October 23, 2010:
|
Fair Value Measurements
|
||||||||||||
|
(Unaudited, amounts in
thousands)
|
Level 1
|
Level 2
|
Level 3
|
|||||||||
|
Assets
|
||||||||||||
|
Available-for-sale
securities
|
$ | 8,313 | $ | 2,153 | $ | — | ||||||
|
Liabilities
|
||||||||||||
|
Interest
rate swap
|
— | (341 | ) | — | ||||||||
|
Total
|
$ | 8,313 | $ | 1,812 | $ | — | ||||||
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
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 $20.0 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 on $20.0 million of floating rate debt. The interest rate on this debt as
of October 23, 2010, 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 current
liabilities) until the hedged transaction impacts our earnings. Our
interest rate swap agreement was tested for ineffectiveness during 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.
For the
second quarter and first six months of fiscal 2011, we deferred gains of $0.2
million and $0.3 million, respectively, into accumulated other comprehensive
loss, compared to losses of $0.7 million in the second quarter and first six
months of fiscal 2010. The fair value of our interest rate swap at October
23, 2010, was $0.3 million, which was included in other current liabilities. The
fair value of our interest rate swap at April 24, 2010, was $0.6 million, which
was included in other long-term liabilities. We expect to reclassify $0.3
million of losses into earnings in the next seven months.
Recently
Adopted Accounting Pronouncements
In
June 2009 and December 2009, the Financial Accounting Standards Board
(“FASB”) issued amendments to the consolidation guidance applicable to VIEs. The
guidance affects all entities currently within the scope of FASB ASC 810, Consolidation. We
adopted these amendments as of April 25, 2010, the first day of our fiscal
year. As a result of the adoption of these amendments, one of our VIEs,
with assets of $11.9 million as of April 24, 2010, and sales and operating
income of $4.6 million and $0.4 million, net of eliminations, respectively, in
the second quarter of fiscal 2010 and $8.3 million and $1.3 million, net of
eliminations, respectively, in the first six months of fiscal 2010 was
deconsolidated during fiscal 2011.
Recently
Issued Accounting Pronouncements
In
October 2009, the Financial Accounting Standards Board 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.
In July
2010, the Financial Accounting Standards Board issued amendments to the
disclosures about the credit quality of financing receivables and the allowances
for credit losses. This amendment is intended to provide additional
information to assist financial statement users in assessing an entity’s credit
risk exposures and evaluating the adequacy of its allowance for credit
losses. This amendment will expand disclosures related to credit quality
of financing receivables and the allowances for credit losses. This
amendment will be effective for our third quarter of fiscal 2011. The
adoption of this amendment will not have a material impact on our consolidated
financial statements as it only impacts our disclosures.
We have
prepared this Management’s Discussion and Analysis to help you better understand
our financial results.
You should read it in conjunction with the accompanying Consolidated Financial
Statements and related Notes to Consolidated Financial Statements. After a
cautionary note about forward-looking statements, we begin with an introduction
to our key businesses and strategies. We then provide discussions of our results
of operations, liquidity and capital resources, and critical accounting
policies.
We are
making forward-looking statements in this report, and our representatives may
make oral forward-looking statements from time to time. Generally,
forward-looking statements include information concerning possible or assumed
future actions, events or results of operations. More specifically,
forward-looking statements may include information 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 we anticipate or project due to a
number of factors, including: (a) changes in consumer confidence and
demographics; (b) speed of recovery from the recent economic recession; (c)
changes in the real estate and credit markets and their effects on our customers
and suppliers; (d) international political unrest, terrorism or war; (e)
continued energy and other commodity price changes; (f) the impact of logistics
on imports; (g) interest rate and currency exchange rate changes; (h) operating
factors, such as supply, labor or distribution disruptions, product recalls or
costs; (i) restructuring actions; (j) changes in the domestic or international
regulatory environment; (k) adopting new accounting principles; (l) severe
weather or other natural events such as hurricanes, earthquakes and tornadoes;
(m) our ability to procure fabric rolls and leather hides or cut and sewn fabric
and leather sets domestically or abroad; (n) fluctuations in our stock price;
(o) information technology system failures; and (p) the matters discussed in
Item 1A of our fiscal 2010 Annual Report on Form 10-K and other factors
identified from time-to-time in our reports filed with the Securities and
Exchange Commission. We undertake no obligation to, and expressly disclaim any
such obligation to, update or revise any forward-looking statements, whether to
reflect new information or new developments or for any other
reason.
Our
Business
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 sell
our products, primarily in the United States and Canada, to furniture retailers
and directly to consumers through company-owned stores. The centerpiece of
our retail distribution strategy is our network of 305 La-Z-Boy Furniture
Galleries® stores, each dedicated to marketing our La-Z-Boy branded
products. We own 68 of those stores and the rest are independently
owned and operated, which include 22 stores owned by our consolidated
VIEs. La-Z-Boy Furniture Galleries® stores help consumers furnish their
homes by combining the style, comfort and quality of La-Z-Boy furniture with our
in-home design service. Taken together, the 305 stores in our La-Z-Boy
Furniture Galleries® network make up the largest single-branded upholstered
furniture retailer in North America.
We also
distribute our products through Comfort Studios®, defined spaces within larger
independent retailers that are dedicated to displaying La-Z-Boy branded
products. On average, these independent retailers dedicate approximately
5,000 square feet of floor space to the Comfort Studios® located within their
stores. As of October 23, 2010, there were 532 Comfort Studios®. In
addition to the Comfort Studios® dedicated to La-Z-Boy branded products, our
Kincaid, England and Lea operating units have their own dedicated in-store
gallery programs.
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, as well as the Bauhaus and
England operating units. The Upholstery Group primarily manufactures
and sells upholstered furniture such as recliners and motion furniture,
sofas, loveseats, chairs, ottomans and sleeper sofas to furniture
retailers and proprietary stores. It sells mainly to La-Z-Boy
Furniture Galleries® stores, operators of Comfort Studios®, general
dealers and department stores.
|
|
|
·
|
Casegoods Group.
Our Casegoods Group is primarily an importer, marketer and distributor of
casegoods (wood) furniture such as bedroom sets, dining room sets,
entertainment centers, and accent pieces, as well as some coordinated
upholstered furniture. The operating units in the Casegoods Group
consist of two subgroups: one consisting of American Drew, Lea, and
Hammary, and the second being
Kincaid.
|
|
|
·
|
Retail Group. Our
Retail Group consists of the 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 primarily sells upholstered furniture, as
well as some casegoods and other accessories, to end consumers through the
retail network.
|
Financial
Highlights
In
addition to a general tightening of consumer discretionary spending as it
relates to the furniture industry and other big ticket items, our business has
been significantly impacted by the challenging global economic conditions.
High unemployment, low consumer confidence and a declining housing market have
all resulted in negative pressure on the economy. We have also seen a
growing consumer preference for lower-priced promotional products which has
decreased our average selling price. Over the past few years we have made
significant changes to all of our operating segments in order to meet the
changing consumer demand. Our Upholstery Group has had higher raw material
costs so far this year compared to fiscal 2010, though we have experienced some
improvement since the first quarter of fiscal 2011. Our Casegoods Group
has seen improved results due to the consolidation of manufacturing facilities,
as well as the consolidation of administrative functions completed at the end of
fiscal 2010. Our Retail Group has continued to focus on reducing costs and
increasing sales volumes through improving selling processes and improving sales
conversion rates on the consumer traffic in our stores.
Variable
Interest Entities
We have
special operating agreements in place with two independent dealers that are VIEs
which cause us to be considered their primary beneficiary. For the second
quarter and first six months of fiscal 2011 we included these two VIEs,
operating 22 La-Z-Boy Furniture Galleries® stores, in our Consolidated Statement
of Operations. In the second quarter and first six months of fiscal 2010
we consolidated three VIEs, operating 31 stores.
Fiscal
2011 Second Quarter Compared to Fiscal 2010 Second Quarter
La-Z-Boy
Incorporated
|
(Unaudited, amounts in thousands,
except percentages)
|
10/23/10
|
10/24/09
|
Percent
change
|
|||||||||
|
Consolidated
sales
|
$ | 292,982 | $ | 300,707 | (2.6 | )% | ||||||
|
Consolidated
operating income
|
5,339 | 9,303 | (42.6 | )% | ||||||||
|
Consolidated
operating margin
|
1.8 | % | 3.1 | % | ||||||||
Consolidated
sales decreased $7.7 million in the second quarter of fiscal 2011 compared to
the second quarter of fiscal 2010. The deconsolidation of our Toronto,
Ontario, VIE resulted in a decrease of $4.6 million, net of eliminations, in our
consolidated sales when comparing the second quarter of fiscal 2011 to the
second quarter of fiscal 2010. Additionally, the challenging economic
conditions continued to negatively impact our sales volume.
Our
second quarter fiscal 2011 operating margin decreased by 1.3 percentage points
compared to the second quarter of fiscal 2010. Our Casegoods and Retail
segments’ operating margins increased during the second quarter of fiscal 2011,
but this was somewhat offset by a decrease in our Upholstery segment’s operating
margin.
|
|
·
|
Our
gross margin decreased 2.4 percentage points in the second quarter of
fiscal 2011 compared to the second quarter of fiscal
2010.
|
|
|
o
|
Increases
in raw material costs resulted in a 2.1 percentage point decrease in our
consolidated gross margin.
|
|
|
o
|
Decreases
in sales pricing and changes in the product mix resulted in a 0.9
percentage point decrease in gross
margin.
|
|
|
o
|
Offsetting
the raw material, sales pricing and changes in the product mix were
ongoing cost reductions.
|
|
|
·
|
Decreases
in incentive compensation expenses during the second quarter of fiscal
2011 compared to the second quarter of fiscal 2010 resulted in a 0.9
percentage point increase in our operating
margin.
|
Upholstery
Group
|
(Unaudited, amounts in thousands,
except percentages)
|
10/23/10
|
10/24/09
|
Percent
Change
|
|||||||||
|
Sales
|
$ | 224,878 | $ | 232,780 | (3.4 | )% | ||||||
|
Operating
income
|
17,055 | 25,328 | (32.7 | )% | ||||||||
|
Operating
margin
|
7.6 | % | 10.9 | % | ||||||||
Sales
Our
Upholstery Group’s sales decreased $7.9 million in the second quarter of fiscal
2011 compared to the second quarter of fiscal 2010. Sales price changes
and product mix changes resulted in a 1.2 percentage point decrease in
sales. We believe this was the result of a shift in the overall market
demand to more promotional products decreasing our average selling
price.
Operating
Margin
Our
Upholstery Group’s operating margin decreased 3.3 percentage points in the
second quarter of fiscal 2011 compared to the second quarter of fiscal
2010.
|
|
·
|
The
segment’s gross margin decreased 2.7 percentage points during the second
quarter of fiscal 2011 compared to the second quarter of fiscal 2010 due
to increased raw material costs.
|
|
|
·
|
Decreases
in sales pricing and changes in the product mix of this segment resulted
in a 1.1 percentage point decrease in the segment’s operating
margin.
|
|
|
·
|
Offsetting
the raw material, sales pricing and product mix changes mentioned above
were ongoing cost reductions, as well as decreases in the segment’s
employee incentive compensation
expenses.
|
Casegoods
Group
|
(Unaudited, amounts in thousands,
except percentages)
|
10/23/10
|
10/24/09
|
Percent
change
|
|||||||||
|
Sales
|
$ | 39,509 | $ | 37,302 | 5.9 | % | ||||||
|
Operating
income (loss)
|
1,376 | (184 | ) | 847.8 | % | |||||||
|
Operating
margin
|
3.5 | % | (0.5 | )% | ||||||||
Sales
Our
Casegoods Group’s sales increased $2.2 million in the second quarter of fiscal
2011 compared to the second quarter of fiscal 2010. The majority of the
change was a result of broader placement of our various product lines at
independent dealers.
Operating
Margin
Our
Casegoods Group’s operating margin increased 4.0 percentage points in the second
quarter of fiscal 2011 compared to the second quarter of fiscal
2010.
|
|
·
|
The
segment’s gross margin increased 2.0 percentage points in the second
quarter of fiscal 2011 compared to the second quarter of fiscal 2010
mainly due to efficiencies realized in its manufacturing facility and
warehousing operations as a result of the restructuring plan completed at
the end of fiscal 2010.
|
|
|
·
|
A
decrease in employee expenses and incentive compensation expenses for this
segment resulted in a 1.2 percentage point increase in operating
margin. The consolidation of our Hammary operations with our
American Drew/Lea operations positively impacted this segment’s operating
margin due to the reduction in headcount and elimination of duplicate
selling, general and administrative
functions.
|
|
|
·
|
In
the second quarter of fiscal 2010 our Hammary operating unit recorded a
reserve related to a product recall at that time. A portion of this
reserve was reversed during the second quarter of fiscal 2011, positively
impacting this segment’s operating
margin.
|
Retail
Group
|
(Unaudited, amounts in thousands,
except percentages)
|
10/23/10
|
10/24/09
|
Percent
change
|
|||||||||
|
Sales
|
$ | 39,246 | $ | 38,014 | 3.2 | % | ||||||
|
Operating
loss
|
(4,360 | ) | (5,301 | ) | 17.8 | % | ||||||
|
Operating
margin
|
(11.1 | )% | (13.9 | )% | ||||||||
Sales
Our
Retail Group’s sales increased $1.2 million in the second quarter of fiscal 2011
compared to the second quarter of fiscal 2010. The increase in sales was a
result of improved sales conversion rates on the consumer traffic in our stores
during the quarter.
Operating
Margin
Our
Retail Group’s operating margin increased 2.8 percentage points in the second
quarter of fiscal 2011 compared to the second quarter of fiscal 2010. Our
Retail Group continues to experience negative margins due to our high lease
expense to sales volume ratio.
|
|
·
|
The
segment experienced a 0.4 percentage point improvement in gross margin
during the second quarter of fiscal 2011 compared to the second quarter of
fiscal 2010 due to changes in the segment’s sales initiatives and
merchandising.
|
|
|
·
|
A
decrease in employee incentive compensation expenses for this segment
resulted in a 1.0 percentage point increase in operating
margin.
|
|
|
·
|
The
remainder of the improvement in our Retail Group’s operating margin was a
result of the overall decrease in selling, general and administrative
expenses coupled with the increase in sales for this
segment.
|
VIEs
Our VIEs’
sales decreased $4.5 million in the second quarter of fiscal 2011 compared to
the second quarter of fiscal 2010. This was mainly the result of
deconsolidating our Toronto, Ontario, VIE, which reduced the number of stores
for our VIEs to 22 for the second quarter of fiscal 2011, compared to 31 for the
second quarter of fiscal 2010. Our VIEs had an operating loss of $1.1 million in
the second quarter of fiscal 2011, compared to $0.9 million in the second
quarter of fiscal 2010. The increase in operating loss was mainly due to
our Toronto, Ontario, VIE, which was a profitable VIE, no longer being
consolidated in the second quarter of fiscal 2011.
Interest
Expense
Interest
expense for the second quarter of fiscal 2011 was less than the second quarter
of fiscal 2010 due to a $0.8 million decrease in our average debt. Our
weighted average interest rate decreased 0.2 percentage points in the second
quarter of fiscal 2011 compared to the second quarter of fiscal 2010.
Additionally, our interest expense was positively impacted by our Toronto,
Ontario, VIE no longer being consolidated in the second quarter of fiscal
2011.
Income
Taxes
Our
effective tax rate for the second quarter of fiscal 2011 was 30.3% compared to
39.6% for the second quarter of fiscal 2010. The effective tax rate for
the second quarter of fiscal 2011 and fiscal 2010 was impacted by routine
discrete items that resulted in a rate reduction of 11.2% for the second quarter
of fiscal 2011.
Results of
Operations
Fiscal
2011 Six Months Compared to Fiscal 2010 Six Months
La-Z-Boy
Incorporated
|
(Unaudited, amounts in thousands,
except percentages)
|
10/23/10
|
10/24/09
|
Percent
change
|
|||||||||
|
Consolidated
sales
|
$ | 556,296 | $ | 563,378 | (1.3 | )% | ||||||
|
Consolidated
operating income
|
3,689 | 10,908 | (66.2 | )% | ||||||||
|
Consolidated
operating margin
|
0.7 | % | 1.9 | % | ||||||||
Consolidated
sales decreased $7.1 million in the first six months of fiscal 2011 compared to
the first six months of fiscal 2010. Sales volume of our operating
segments experienced a slight increase during the first six months of fiscal
2011. However, the deconsolidation of our Toronto, Ontario, VIE resulted
in a decrease of $8.3 million, net of eliminations, in our consolidated
sales.
Our
operating margin decreased by 1.2 percentage points in the first six months of
fiscal 2011 compared to the first six months of fiscal 2010. Our Casegoods and
Retail segments’ operating margins increased during the first six months of
fiscal 2011, but this was somewhat offset by a decrease in our Upholstery
segment’s operating margin.
|
|
·
|
Our
gross margin decreased by 2.5 percentage points during the first six
months of fiscal 2011 compared to the first six months of fiscal
2010.
|
|
|
o
|
Increases
in raw material costs resulted in a 2.1 percentage point decrease in our
consolidated gross margin.
|
|
|
o
|
Decreases
in sales pricing and changes in the product mix resulted in a 0.6
percentage point decrease in gross
margin.
|
|
|
o
|
Offsetting
the raw material, sales pricing and product mix changes were ongoing costs
reductions.
|
|
|
·
|
Decreases
in incentive compensation expenses during the first six months of fiscal
2011 compared to the first six months of fiscal 2010 resulted in a 0.6
percentage point improvement in our operating
margin.
|
Upholstery
Group
|
(Unaudited, amounts in thousands,
except percentages)
|
10/23/10
|
10/24/09
|
Percent
change
|
|||||||||
|
Sales
|
$ | 426,812 | $ | 429,472 | (0.6 | )% | ||||||
|
Operating
income
|
27,112 | 41,051 | (34.0 | )% | ||||||||
|
Operating
margin
|
6.4 | % | 9.6 | % | ||||||||
Sales
Our
Upholstery Group’s sales decreased $2.7 million in the first six months of
fiscal 2011 compared to the first six months of fiscal 2010. Sales price
changes and changes in our product mix resulted in a 1.2 percentage point
decrease in sales. We believe this was the result of a shift in the
overall market demand to more promotional products decreasing our average
selling price.
Operating
Margin
Our
Upholstery Group’s operating margin decreased 3.2 percentage points in the first
six months of fiscal 2011 compared to the first six months of fiscal
2010.
|
|
·
|
The
segment’s gross margin decreased by 3.2 percentage points during the first
six months of fiscal 2011 compared to the first six months of fiscal 2010,
mainly due to increased raw material costs. Raw material price
increases caused a 2.8 percentage point decrease in the segment’s
operating margin.
|
|
|
·
|
Decreases
in sales pricing and changes in the product mix of this segment resulted
in a 1.2 percentage point decrease in the segment’s operating
margin.
|
|
|
·
|
Increases
in our warehousing expense resulted in a 0.6 percentage point decrease in
the segment’s operating margin. This increase was the result of the
addition of our new regional distribution center opened at the end of
fiscal 2010.
|
|
|
·
|
Offsetting
the raw material, sales pricing and product mix changes mentioned above
were ongoing cost reductions, as well as decreases in the segment’s
employee incentive compensation
costs.
|
Casegoods
Group
|
(Unaudited, amounts in thousands,
except percentages)
|
10/23/10
|
10/24/09
|
Percent
change
|
|||||||||
|
Sales
|
$ | 76,359 | $ | 73,167 | 4.4 | % | ||||||
|
Operating
income (loss)
|
2,951 | (305 | ) | N/M | ||||||||
|
Operating
margin
|
3.9 | % | (0.4 | )% | ||||||||
Sales
Our
Casegoods Group’s sales increased $3.2 million in the first six months of fiscal
2011 compared to the first six months of fiscal 2010. The majority of the
increase in sales volume was the result of broader placement of our various
product lines at independent dealers. Additionally, we offered higher than
normal discounts on casegoods during the first six months of fiscal 2010 in
order to sell slow moving and obsolete inventory. This was not continued
in the first six months of fiscal 2011. The changes in discounting for our
Casegoods Group resulted in a 1.9 percentage point improvement in sales for the
first six months of fiscal 2011 compared to the first six months of fiscal
2010.
Operating
Margin
Our
Casegoods Group’s operating margin increased 4.3 percentage points in the first
six months of fiscal 2011 compared to the first six months of fiscal
2010.
|
|
·
|
The
segment’s gross margin increased 2.9 percentage points in the first six
months of fiscal 2011 compared to the first six months of fiscal 2010
mainly due to efficiencies realized in its manufacturing facility and
warehousing operations as a result of the restructuring plan completed at
the end of fiscal 2010.
|
|
|
·
|
A
decrease in employee expenses and incentive compensation expenses for this
segment resulted in a 1.0 percentage point increase in operating
margin. The consolidation of our Hammary operations with our
American Drew/Lea operations positively impacted this segment’s operating
margin due to the reduction in headcount and elimination of duplicate
selling, general and administrative
functions.
|
|
|
·
|
In
the first six months of fiscal 2010 our Hammary operating unit recorded a
reserve related to a product recall at that time. A portion of this
reserve was reversed during the first six months of fiscal 2011,
positively impacting this segment’s operating
margin.
|
Retail
Group
|
(Unaudited, amounts in thousands,
except percentages)
|
10/23/10
|
10/24/09
|
Percent
change
|
|||||||||
|
Sales
|
$ | 74,553 | $ | 73,976 | 0.8 | % | ||||||
|
Operating
loss
|
(9,284 | ) | (10,969 | ) | 15.4 | % | ||||||
|
Operating
margin
|
(12.5 | )% | (14.8 | )% | ||||||||
Sales
Our
Retail Group’s sales increased $0.6 million in the first six months of fiscal
2011 compared to the first six months of fiscal 2010. The increase in
sales was a result of improved sales conversion rates on the consumer traffic in
our stores during the first six months.
Operating
Margin
Our
Retail Group’s operating margin increased 2.3 percentage points in the first six
months of fiscal 2011 compared to the first six months of fiscal 2010. Our
Retail Group continues to experience negative margins due to our high lease
expense to sales volume ratio.
|
|
·
|
The
segment experienced a 2.0 percentage point improvement in gross margin
during the first six months of fiscal 2011 compared to the first six
months of fiscal 2010 due to changes in the segment’s sales initiatives
and merchandising.
|
|
|
·
|
Increased
advertising expense caused a 0.5 percentage point decrease in the
segment’s operating margin as we continue to focus on driving additional
traffic into our stores.
|
|
|
·
|
This
segment’s operating margin improved due to decreases in their overall
administrative expenses as we continue to focus on reducing
costs.
|
VIEs
Our VIEs’
sales decreased $8.7 million in the first six months of fiscal 2011 compared to
the first six months of fiscal 2010. This was mainly the result of
deconsolidating our Toronto, Ontario, VIE, which reduced the number of stores
for our VIEs to 22 for the first six months of fiscal 2011, compared to 31 for
the first six months of fiscal 2010. Our VIEs had an operating loss of $2.7
million in the first six months of fiscal 2011, compared to $1.1 million in the
first six months of fiscal 2010. The increase in operating loss was mainly
due to our Toronto, Ontario, VIE, which was a profitable VIE, no longer being
consolidated in the first six months of fiscal 2011.
Interest
Expense
Interest
expense for the first six months of fiscal 2011 was less than the first six
months of fiscal 2010 due to a $5.5 million decrease in our average debt.
Our weighted average interest rate was flat in the first six months of fiscal
2011 compared to the first six months of fiscal 2010 and therefore had no impact
on the change in interest expense. Additionally, our interest expense was
positively impacted by our Toronto, Ontario, VIE no longer being consolidated in
the first six months of fiscal 2011.
Income
Taxes
Our
effective tax rate for the first six months of fiscal 2011 was 23.2% compared to
33.9% for the first six months of fiscal 2010. The effective tax rate for
the first six months of fiscal 2011 and fiscal 2010 was impacted by routine
discrete items that resulted in a rate reduction of 17.6% for the first six
months of fiscal 2011.
During
fiscal 2008, we committed to a restructuring plan to consolidate all of our
North American cutting and sewing operations in Mexico and to 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. During the second
quarter and first six months of fiscal 2011, we had a net reduction of estimated
restructuring liabilities of $0.1 million, classified in total cost of sales,
covering severance and benefits. During the second quarter and first six
months of fiscal 2010 we had a net reduction of estimated restructuring
liabilities of $0.4 million and $0.3 million, respectively, classified in total
cost of sales, covering severance and benefits.
During
fiscal 2007 and fiscal 2008, several of our retail warehouses were consolidated
into larger facilities and several underperforming stores were closed. In
the second quarter and first six months of fiscal 2011 we had restructuring
charges of $0.1 million and $0.3 million, respectively, classified as an
operating expense line item below selling, general and administrative, due to
contract terminations relating to these actions. During the second quarter
and first six months of fiscal 2010 we had restructuring charges of $0.5 million
and $0.8 million, respectively, classified as an operating expense line item
below selling, general and administrative, due to contract terminations relating
to these actions.
In 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 one of the facilities into a distribution
center. The consolidation of these plants was completed in the first
quarter of fiscal 2010 and the conversion of the distribution center was
completed in the fourth quarter of fiscal 2010. In connection with this
plan, we recorded restructuring charges of $1.1 million and $1.7 million during
the second quarter and first six months of fiscal 2010, respectively, classified
in total cost of sales, covering severance and benefits and other restructuring
costs.
Our
sources of cash liquidity include cash and equivalents, cash from operations and
amounts available under our credit facility. We believe these sources remain
adequate to meet our short-term and long-term liquidity requirements, finance
our long-term growth plans, meet debt service, and fulfill other cash
requirements for day-to-day operations and capital expenditures. We had
cash and equivalents of $83.7 million at October 23, 2010, compared to $108.4
million at April 24, 2010. The decrease in cash and equivalents in the
first six months of fiscal 2011 was primarily a result of accrued benefit
payments and a decrease in accounts payable, as well as an increase in our
inventory levels.
Under our
credit agreement we have certain covenants and restrictions, including a 1.05 to
1.00 fixed charge coverage ratio requirement which would become effective if our
excess availability fell below $30.0 million. Excess availability is the
difference between our eligible accounts receivable and inventory less the total
of our outstanding letters of credit, other reserves as denoted in our credit
agreement and our outstanding borrowings on our revolving credit
agreement. We do not expect to fall below the required excess availability
threshold in the next twelve months. As of October 23, 2010, we had $30.0
million outstanding on our credit facility and $97.2 million of excess
availability, compared to $30.0 million outstanding on our credit facility and
$90.6 million of excess availability as of April 24, 2010.
Our
borrowing capacity is based on eligible trade accounts receivables and
inventory. During the first six months of fiscal 2011, our accounts
receivable and inventory increased while the amount outstanding on our credit
facility remained flat. As a result, our capacity to borrow under the
credit facility increased during the first six months of fiscal 2011. Subsequent
to the second quarter of fiscal 2011 a reduction in the credit commitment on our
credit facility to $175.0 million became effective. We made this reduction
because we expect our borrowing capacity to remain at or below $175.0
million. This reduction in the credit commitment will also result in lower
commitment fees on the unused portion of the credit facility. This
reduction had no impact on our overall availability to borrow on our credit
facility.
Capital
expenditures for the first six months of fiscal 2011 were $5.0 million compared
with $2.8 million during the first six months of fiscal 2010. We have no
material commitments for capital expenditures. Capital expenditures are
expected to be in the range of $12.0 million to $14.0 million in fiscal
2011. We expect that paying restructuring costs from transitioning our
domestic cutting and sewing operations to Mexico and our ongoing costs for
closed retail facilities will require approximately $0.6 million of cash during
the remainder of fiscal 2011.
We expect
to pay our contractual obligations due in the remainder of fiscal 2011 using our
cash flow from operations, our $83.7 million of cash on hand as of October 23,
2010, and the $97.2 million of availability under our credit
agreement.
The
following table illustrates the main components of our cash flows:
|
Cash
Flows Provided By (Used For)
|
Six Months Ended
|
|||||||
|
(Unaudited, amounts in
thousands)
|
10/23/10
|
10/24/09
|
||||||
|
Operating
activities
|
||||||||
|
Net
income
|
$ | 2,229 | $ | 6,883 | ||||
|
Non-cash
add backs and changes in deferred taxes
|
15,869 | 19,629 | ||||||
|
Restructuring
|
192 | 2,220 | ||||||
|
Working
capital
|
(37,103 | ) | 7,273 | |||||
|
Cash
provided by (used for) operating activities
|
(18,813 | ) | 36,005 | |||||
|
Investing
activities
|
(5,235 | ) | 17,730 | |||||
|
Financing
activities
|
||||||||
|
Net
decrease in debt
|
(426 | ) | (11,894 | ) | ||||
|
Stock
issued from stock plans
|
58 | — | ||||||
|
Cash
used for financing activities
|
(368 | ) | (11,894 | ) | ||||
|
Exchange
rate changes
|
277 | (168 | ) | |||||
|
Net
increase (decrease) in cash and equivalents
|
$ | (24,139 | ) | $ | 41,673 | |||
Operating
Activities
During
the first six months of fiscal 2011, net cash used for operating activities was
$18.8 million, compared with $36.0 million provided by operating activities in
the first six months of fiscal 2010. The main reasons for our decrease in
cash flows from operating activities was the decrease in cash flow from working
capital, as well as the decrease in net income during the first six months of
fiscal 2011 compared to the first six months of fiscal 2010. The majority
of working capital cash used for operations in the first six months of fiscal
2011 was accrued benefit payments and a decrease in accounts payable, as well as
an increase in inventory levels due to the improvement in some of our supply
chain issues. Our net income in the first six months of fiscal 2010, as
well as positive cash flow from working capital were the main reasons for the
positive cash flow from operating activities in the first six months of fiscal
2010.
Investing
Activities
During
the first six months of fiscal 2011, net cash used for investing activities was
$5.2 million, compared with $17.7 million of cash provided by investing
activities during the first six months of fiscal 2010. The majority of the
net cash used for investing activities during the first six months of fiscal
2011 was $5.0 million in capital expenditures. The net cash provided by
investing activities during the first six months of fiscal 2010 resulted
primarily from a $17.0 million change in restricted cash during the first six
months of fiscal 2010.
Financing
Activities
During
the first six months of fiscal 2011, net cash used for financing activities was
$0.4 million, compared to $11.9 million in the first six months of fiscal
2010. The net cash used for financing activities during the first six
months of fiscal 2011 and fiscal 2010 primarily related to the repayment of
debt.
Other
Our
balance sheet at the end of the second quarter of fiscal 2011 reflected a $1.9
million liability for uncertain income tax positions. We expect that a
portion of this liability 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.
During
the first six months of fiscal 2011 there were no material changes to the
information about our contractual obligations shown in the table contained in
our fiscal 2010 Annual Report on Form 10-K.
Realization
of our deferred tax assets is dependent on generating sufficient future taxable
income. Valuation allowances of $46.5 million associated with certain U.S.
federal and state deferred tax assets could be reduced in fiscal 2012 based on,
among other factors, the level of taxable income generated in fiscal
2012.
Our
debt-to-capitalization ratio was 11.6% at October 23, 2010, and 12.3% at April
24, 2010. Capitalization is defined as total debt plus total
equity.
Our board
of directors has authorized the repurchase of company stock. As of October
23, 2010, 5.4 million additional shares could be purchased pursuant to this
authorization. We did not purchase any shares during the first six months of
fiscal 2011.
We have
guaranteed various leases and notes of dealers with proprietary stores. The
total amount of these guarantees was $2.1 million at October 23, 2010. Of this,
$1.6 million will expire within one year and $0.5 million in one to two
years. At the end of the second quarter of fiscal 2011, we had $34.5
million in open purchase orders with foreign casegoods, leather and fabric
sources. Our open purchase orders that have not begun production are
cancelable.
During
fiscal 2011, we are not statutorily required to make any contributions to our
defined benefit plan. However, in order to receive tax benefits we expect
to make a $2.5 million contribution to our defined benefit plan during the
second half of fiscal 2011, although this contribution is not required until
fiscal 2012.
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.
Our
critical accounting policies are disclosed in our Form 10-K for the year ended
April 24, 2010. There were no material changes, except as disclosed in
Note 1, to our critical accounting policies during the first six months of
fiscal 2011.
Continued
Dumping and Subsidy Offset Act of 2000
The
Continued Dumping and Subsidy Offset Act of 2000 (“CDSOA”) provides for
distribution of monies collected by U.S. Customs and Border Protection from
anti-dumping cases to domestic producers that supported the anti-dumping
petition. There have been numerous cases before the U.S. Court of International
Trade and the Federal Circuit that have been stayed. The resolution of
these cases will have a significant impact on the amount of additional CDSOA
funds we receive.
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. We received $4.4 million during fiscal 2010,
$8.1 million during fiscal 2009, $7.1 million during fiscal 2008 and $3.4
million during fiscal 2007 in CDSOA payments and funds related to the
antidumping order on wooden bedroom furniture from China.
Refer to
Note 14 for updates on recent accounting pronouncements since the filing of our
Form 10-K for the year ended April 24, 2010.
Although
we remain concerned about the macroeconomic environment with consumer confidence
and housing turnover remaining at low levels, we are making moves to position
La-Z-Boy to take full advantage of an upturn in consumer spending for furniture.
We have the strongest brand in the business and believe our new marketing
campaign, featuring Brooke Shields, and a targeted message will enhance our
market penetration and reach. Additionally, we are making investments
across other areas of the business which will strengthen our operating platform
to fuel growth and build market share while capitalizing on our strong balance
sheet and vast network of branded distribution.
During
the first six months of fiscal 2011 there were no material changes from the
information contained in Item 7A of our Annual Report on Form 10-K for fiscal
2010.
Disclosure
Controls and Procedures. As of the end of the period covered by this
report, we carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures, as such term is defined in Rule 13a-15(e) of
the Exchange Act. Based upon that evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that such disclosure controls and
procedures as of October 23, 2010, were not effective due to a material weakness
in our internal controls over financial reporting identified during the second
quarter of fiscal 2011, as described below. Notwithstanding this
material weakness, based on additional procedures performed after its discovery,
management believes that the financial statements included in this report fairly
present in all material respects our financial condition, results of operations,
and cash flows for the periods presented.
Material Weakness
– Accounting Oversight of our VIEs. During the quarter we identified
deficiencies in the effectiveness of our internal control over financial
reporting related to our VIEs. Specifically, our controls related to the
account analysis and consolidation process for the VIEs did not operate at the
same level of precision as the more rigorous controls used with respect to the
consolidation and analysis of the various company-owned businesses in order for
timely detection of any possible misstatements of the consolidated financial
statements. We discovered that these control deficiencies had resulted in errors
in some of our previously issued financial statements, none of which was
material to any of the periods presented in those financial statements, but
which will require us to revise our prior period account balances as we report
them in future filings for cost of goods sold, selling, general and
administrative expenses, inventory, accrued rent and other accrued
liabilities. Additionally, this control deficiency could have resulted in
material misstatements to the annual or interim consolidated financial
statements that would not have been prevented or detected. Accordingly,
management has determined that these control deficiencies when aggregated
constitute a material weakness.
Our
internal controls relating to VIEs will incorporate the processes and financial
reporting controls that have been established for our various company-owned
businesses. We believe that this material weakness will be remediated
by the end of fiscal 2011, subject to testing as part of our annual assessment
of the effectiveness of internal control over financial reporting.
There
were no changes in our internal controls over financial reporting that occurred
during the fiscal quarter ended October 23, 2010 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
There
have been no material changes to our risk factors during the first six months of
fiscal 2011. Our risk factors are disclosed in our Form 10-K for the year
ended April 24, 2010.
|
Exhibit
Number
|
Description
|
|
|
(3.1
|
)
|
La-Z-Boy
Incorporated Restated Articles of Incorporation (Incorporated by reference
to an exhibit to Form 10-Q for the quarter ended October 26,
1996)
|
|
(3.2
|
)
|
Amendment
to Restated Articles of Incorporation (Incorporated by reference to an
exhibit to Form 10-K/A filed September 27, 1999)
|
|
(3.3
|
)
|
La-Z-Boy
Incorporated Amendment to Restated Articles of Incorporation effective
August 22, 2008 (Incorporated by reference to an exhibit to Form 10-Q for
the quarter ended October 25, 2008)
|
|
(3.4
|
)
|
La-Z-Boy
Incorporated Amended and Restated Bylaws (as of January 18, 2010)
(Incorporated by reference to an exhibit to Form 8-K filed January 20,
2010)
|
|
(4.1
|
)
|
Credit
Agreement dated as of February 6, 2008, among La-Z-Boy Incorporated,
certain of its subsidiaries, the lenders named therein, and Wachovia
Capital Finance Corporation (Central), as administrative agent for the
lenders (Incorporated by reference to an exhibit to Form 8-K filed
February 12, 2008)
|
|
(4.2
|
)
|
First
Amendment to Credit Agreement dated April 1, 2008 among La-Z-Boy
Incorporated, certain of its subsidiaries, the lenders named therein, and
Wachovia Capital Finance Corporation (Central), as administrative agent
for the lenders (Incorporated by reference to an exhibit to Form 10-Q for
the quarter ended July 25, 2009)
|
|
(4.3)
|
Second
Amendment to Credit Agreement dated July 13, 2009 among La-Z-Boy
Incorporated, certain of its subsidiaries, the lenders named therein, and
Wachovia Capital Finance Corporation (Central), as administrative agent
for the lenders (Incorporated by reference to an exhibit to Form 10-Q for
the quarter ended July 25, 2009)
|
|
|
(10.1
|
)
|
La-Z-Boy
Incorporated 2010 Omnibus Incentive Plan (incorporated by reference to
Annex A to definitive proxy statement for annual meeting of shareholders
held August 18, 2010)
|
|
(10.2
|
)
|
La-Z-Boy
Incorporated 2010 Omnibus Incentive Plan Sample Award
Agreement
|
|
(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)
|
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:
November 23, 2010
|
||
|
BY:
/s/ Margaret L. Mueller
|
||
|
Margaret
L. Mueller
|
||
|
Corporate
Controller
|
||
|
On
behalf of the Registrant and as
|
||
|
Chief
Accounting Officer
|
34