LZB

LA-Z-BOY INC - 10-Q Summary (Period Ended Jan 24, 2009)

Business Context and Reporting Period

This filing covers the third quarter and first nine months of fiscal 2009 ended January 24, 2009. LA-Z-BOY INC is a leading global producer of reclining chairs and upholstered furniture, operating through Upholstery, Casegoods, and Retail segments. The company reported significant financial deterioration driven by a severe recession, collapsing consumer confidence, and a 90% decline in stock price over the preceding four months.

Key Financial Metrics

Key Margins (Q3 2009 vs Q3 2008): Gross Margin declined from 29.1% to 27.6%. Operating Margin swung from 0.8% to -23.7%.

Material Changes vs. Prior Period

• Revenue Decline: Consolidated sales dropped 22.7% in Q3 and 13.0% for the nine months, driven by weak housing markets and credit tightening. Upholstery sales fell 29.5% in Q3.
• Asset Impairments: The company recorded significant non-cash charges due to a steep decline in market capitalization:
  • Goodwill Impairment: $40.4 million (Retail and Upholstery segments).
  • Intangible/Trade Name Impairment: $5.5 million (Casegoods segment).
  • Long-Lived Asset Write-down: $7.0 million (Retail Group).
• Restructuring Costs: Total restructuring charges were $2.4 million in Q3 and $11.9 million for the nine months, related to plant closures (Sherman, MS; Tremonton, UT), UK subsidiary closure, and workforce reductions (approx. 2,500 employees or 24% reduction).
• Bad Debt Provision: Allowance for doubtful accounts increased by $6.7 million in Q3 due to deteriorating customer creditworthiness.
• Dividend Suspension: The company suspended its quarterly cash dividend to preserve liquidity.

Guidance, Outlook, and Risks

• Outlook: Management expects continued challenging economic conditions. Plans include aggressively reducing operating expenses (targeting $25M-$30M annual savings), reducing inventory by 10% in Q4, and lowering capital expenditures to $18M-$20M for fiscal 2009.
• Liquidity: Cash provided by operating activities was $18.0 million for the nine months. The company has $57.2 million in excess availability under its credit facility. Management does not expect to fall below required excess availability thresholds in the next 12 months.
• Tax Position: A valuation allowance of $38.2 million was recorded against deferred tax assets in Q2, with an additional $14.6 million in Q3, due to the uncertainty of realizing future tax benefits. A federal income tax receivable of $11.8 million is expected from a net operating loss carry-back.
• Risks: Key risks include further deterioration in the credit market, potential closure of 15-20 dealer-owned stores, and the impact of the Continued Dumping and Subsidy Offset Act (CDSOA) legal appeals on future revenue.

Investor Verification Checklist

• Impairment Methodology: Verify the assumptions used for the $45.9 million in intangible and goodwill write-downs, specifically the increase in the weighted average cost of capital from 11% to 16%.
• Receivables Quality: Review the $35.8 million allowance for doubtful accounts and the specific exposure to dealers in Florida, Michigan, and the West Coast.
• Restructuring Execution: Monitor the timeline and cost realization for the Mexico cutting/sewing consolidation and the closure of the Sherman, MS plant.
• CDSOA Revenue: Assess the sustainability of the $8.1 million CDSOA income given the legal challenges and repeal of distributions for duties collected after Sept 30, 2007.
• Debt Covenants: Confirm compliance with the fixed charge coverage ratio, noting it would be triggered if excess availability falls below $30.0 million.