LZB

LA-Z-BOY INC 10-Q Summary: Quarter Ended July 25, 2009

Business Context and Reporting Period

This Form 10-Q covers the first quarter of fiscal 2010 ended July 25, 2009. LA-Z-BOY INC is a leading global producer of reclining chairs and upholstered furniture, operating through three segments: Upholstery Group, Casegoods Group, and Retail Group. The company operates 68 company-owned stores and consolidates certain independent dealers classified as Variable Interest Entities (VIEs). The reporting period reflects the adoption of SFAS No. 160, which reclassified noncontrolling interests to equity.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Consolidated sales decreased 18.3% year-over-year due to weak consumer confidence, a poor credit environment, and a challenging housing market. Segment declines included Upholstery (-17.0%), Casegoods (-25.5%), and Retail (-15.2%).
• Profitability Improvement: Despite lower sales, the company returned to profitability with a net income of $2.0 million compared to a net loss of $8.5 million in the prior year. Operating income improved from a $13.1 million loss to a $2.6 million gain.
• Margin Expansion: Gross margin expanded to 30.6% from 25.0%, driven by lower raw material costs, price increases, and manufacturing efficiencies from recent restructuring.
• Restructuring Costs: Restructuring charges dropped significantly to $1.0 million from $6.6 million in the prior year, reflecting the completion of major plant closures (Utah, Mississippi, UK) in previous periods.
• Liquidity Shift: Cash and equivalents increased to $38.3 million, aided by a $18.2 million release of restricted cash following the transfer of assets from the captive insurance company to the parent entity.

Guidance, Outlook, and Risks

• Outlook: Management expects the operating environment to remain challenging for the remainder of fiscal 2010. The company plans to manage aggressively, focusing on efficiency and aligning costs with sales volumes.
• Dividends: The quarterly dividend was suspended in the fourth quarter of fiscal 2009 to conserve cash; no dividends were paid in Q1 2010.
• Restructuring Outlook: The company expects to incur approximately $2.7 million in additional restructuring cash costs for the remainder of fiscal 2010 related to the consolidation of casegoods plants and the transition of cutting/sewing operations to Mexico.
• Capital Expenditures: Expected to range between $12 million and $14 million for fiscal 2010.
• Risks: Key risks include continued economic recession, volatility in credit markets affecting dealer financing, potential impacts of CDSOA legal appeals on anti-dumping duty distributions, and the ability to procure raw materials.

Investor Verification Checklist

• Restricted Cash Release: Verify the $18.2 million reduction in restricted cash and its impact on liquidity ratios.
• Restructuring Liabilities: Confirm the remaining $2.2 million restructuring liability and the timeline for settlement ($1.6 million in remainder of 2010).
• Casegoods Performance: Monitor the Casegoods segment, which reported an operating loss of $0.1 million and a 25.5% sales decline, driven by deep discounts on slow-moving inventory.
• Debt Covenants: Review the fixed charge coverage ratio (currently 1.05 to 1.00) and excess availability ($70.5 million) under the credit facility.
• Accounting Changes: Understand the impact of SFAS No. 160 on the presentation of noncontrolling interests and VIE losses.