LZB

LA-Z-BOY INCORPORATED - 10-Q Summary

Business Context and Reporting Period

This filing covers the second quarter and first six months of fiscal 2009, ended October 25, 2008. LA-Z-BOY INC is a leading global producer of reclining chairs and upholstered furniture, operating through Upholstery, Casegoods, and Retail segments. The company operates 70 company-owned stores and consolidates certain independent dealers as Variable Interest Entities (VIEs). The reporting period was significantly impacted by a severe economic downturn, declining consumer confidence, and a tightening credit market.

Key Financial Metrics

Note: Total Debt includes $7.0M short-term borrowings, $10.2M current portion of long-term debt, and $99.8M long-term debt as of Oct 25, 2008.

Material Changes vs. Prior Period

• Revenue Decline: Consolidated sales decreased 9.2% in Q2 and 7.9% for the six months, driven by weak consumer demand, a collapsing housing market, and reduced credit availability. All three segments (Upholstery, Casegoods, Retail) reported significant sales declines.
• Profitability Deterioration: The company reported a net loss of $53.7M for Q2, a sharp increase from the $9.9M loss in the prior year. This was primarily due to a $38.2M valuation allowance recorded against deferred tax assets, reflecting uncertainty in realizing future tax benefits.
• Restructuring Costs: Restructuring charges increased to $2.9M in Q2 (from $1.0M prior year) and $9.5M for the six months (from $4.6M prior year). These costs relate to facility closures (Tremonton, Utah; La-Z-Boy U.K.) and retail consolidations.
• Intangible Write-downs: The company recorded $1.7M in goodwill impairments for the six months, related to the closure of the U.K. subsidiary and reorganization of the Toronto market. This compares to $5.8M in the prior year period.
• Bad Debt Expense: Increased significantly due to the anticipated closure of dealer-owned stores struggling in the economic environment, adding $1.9M to bad debt expense for the six months.

Guidance, Outlook, and Risks

• Guidance Suspended: Due to the instability of the macroeconomic environment and lack of visibility on incoming orders, the company has suspended its yearly guidance.
• Cost Reduction Initiatives: Management announced a corporate initiative to cut costs, including a 10% headcount reduction (approx. 850 employees), closure of 15-20 dealer-owned stores, and a reduction in planned capital expenditures from $27M to $18M-$20M.
• Dividend Reduction: The quarterly dividend was reduced from $0.04 to $0.02 per share to preserve liquidity.
• Liquidity Position: The company maintains $58.3M in excess availability under its credit facility. However, management warns that further deterioration in market conditions could harm cash flows and financial position.
• Risks: Key risks include continued decline in consumer confidence, housing market instability, credit market tightening, and potential future impairment of goodwill if cost-cutting measures fail to improve profitability.

Investor Verification Checklist

• Deferred Tax Valuation Allowance: Verify the $38.2M charge and the assumptions regarding the realizability of deferred tax assets given the current loss trajectory.
• Restructuring Liability: Confirm the remaining $3.8M restructuring liability and the timeline for cash outflows ($3.3M in fiscal 2009).
• Dealer Solvency: Assess the impact of the 15-20 anticipated dealer store closures on future bad debt provisions and receivables.
• Goodwill Impairment Risk: Monitor the Retail segment's performance, as management noted potential future goodwill impairment if cost-cutting measures do not yield results by the fourth quarter.
• Cash Flow Sustainability: Review the ability to generate positive operating cash flow in the third quarter, which is historically the strongest period, amidst reduced sales volumes.