Unassociated Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended April 30, 2011

COMMISSION FILE NUMBER 1-9656

LA-Z-BOY INCORPORATED
(Exact name of registrant as specified in its charter)
  
MICHIGAN
38-0751137
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)

1284 North Telegraph Road, Monroe, Michigan
48162-3390
(Address of principal executive offices)
(Zip Code)

Registrant's telephone number, including area code (734) 242-1444

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Name of each exchange on which registered
Common Shares, $1.00 Par Value
New York Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in rule 405 of the Securities Act.
 
 
Yes  ¨
No  x
 
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.
 
 
Yes  ¨
No  x
 
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  x
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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.      x
 
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 x
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  x
 
Based on the closing price on the New York Stock Exchange on October 22, 2010, the aggregate market value of Registrant’s common shares held by non-affiliates of the Registrant on that date was $409.7 million.
 
The number of common shares outstanding of the Registrant was 51,920,161 as of June 14, 2011.
 
DOCUMENTS INCORPORATED BY REFERENCE:
 
 
(1)
Portions of the Registrant’s Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A for its 2011 Annual Meeting of Shareholders are incorporated by reference into Part III.
 
 
 

 

LA-Z-BOY INCORPORATED
FORM 10-K ANNUAL REPORT FISCAL 2011

TABLE OF CONTENTS
 
 
Page
Number(s)
Cautionary Statement Concerning Forward-Looking Statements
 
   
PART I
 
Item 1.           Business
3
Item 1A.        Risk Factors
9
Item 1B.        Unresolved Staff Comments
12
Item 2.           Properties
12
Item 3.           Legal Proceedings
12
Item 4.           [Removed and Reserved]
13
Executive Officers of the Registrant
13
   
PART II
 
Item 5.          Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
14
Item 6.           Selected Financial Data
17
Item 7.           Management's Discussion and Analysis of Financial Condition and Results of Operations
21
Item 7A.        Quantitative and Qualitative Disclosures About Market Risk
38
Item 8.           Financial Statements and Supplementary Data
39
Item 9.           Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
73
Item 9A.        Controls and Procedures
73
Item 9B.        Other Information
73
   
PART III
 
Item 10.         Directors, Executive Officers, and Corporate Governance
73
Item 11.         Executive Compensation
74
Item 12.         Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
74
Item 13.         Certain Relationships and Related Transactions, and Director Independence
74
Item 14.         Principal Accountant Fees and Services
74
   
PART IV
 
Item 15.         Exhibits and Financial Statement Schedules
75
 
Note: The responses to Items 10 through 14 will be included in the Company’s definitive proxy statement to be filed pursuant to Regulation 14A for the 2011 Annual Meeting of Shareholders.  The required information is incorporated into this Form 10-K by reference to that document and is not repeated herein.
 
 
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Cautionary Statement Concerning Forward-Looking Statements
 
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 or the emergence of a second wave of the 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) volatility in energy and other commodities prices; (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 or product recalls; (i) restructuring actions; (j) changes in the domestic or international regulatory environment; (k) adoption of new accounting principles; (l) severe weather or other natural events such as hurricanes, earthquakes, tornadoes and tsunamis; (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; (p) effects of our brand awareness and marketing programs; (q) our ability to locate new La-Z-Boy Furniture Galleries® stores owners and negotiate favorable lease terms for new or existing locations; and (r) those matters discussed in Item 1A of this Annual Report and other factors identified from time-to-time in our reports filed with the Securities and Exchange Commission. We undertake no obligation to update or revise any forward-looking statements, whether to reflect new information or new developments or for any other reason.

PART I

ITEM 1. BUSINESS.
Edward M. Knabusch and Edwin J. Shoemaker started Floral City Furniture in 1927, and in 1928 the newly formed company introduced its first recliner. In 1941, we were incorporated as La-Z-Boy Chair Company in the state of Michigan, and in 1996 the name was changed to La-Z-Boy Incorporated.  Our La-Z-Boy brand is the most recognized brand in the furniture industry. 

La-Z-Boy Incorporated manufactures, markets, imports, distributes and retails upholstery products, accessories and casegoods (wood) furniture products.  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 304 La-Z-Boy Furniture Galleries® stores and 526 Comfort Studios®, each dedicated to marketing our La-Z-Boy branded products.  We own 83 of the La-Z-Boy Furniture Galleries® stores.  The rest of the La-Z-Boy Furniture Galleries® stores, as well as all 526 Comfort Studies®, are independently owned and operated, including eight La-Z-Boy Furniture Galleries® stores owned by our single remaining consolidated Variable Interest Entity (VIE). 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.  Comfort Studios® are defined spaces within larger independent retailers that are dedicated to displaying La-Z-Boy branded products.  In addition to the La-Z-Boy Comfort Studios®, our Kincaid, England and Lea operating units have their own dedicated in-store gallery programs with over 700 outlets and 1.8 million square feet of floor space.

 
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Principal Products and Industry Segments
Our reportable 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 manufactures or imports 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 directly to La-Z-Boy Furniture Galleries® stores, operators of Comfort Studios®, general dealers and department stores.

Casegoods Group.  Our Casegoods Group is an importer, marketer, manufacturer 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.  The Casegoods Group primarily sells to proprietary stores and general dealers. 

Retail Group.  Our Retail Group consists of 83 company-owned La-Z-Boy Furniture Galleries® stores located in nine markets ranging from the Midwest to the east coast of the United States and also including southeastern Florida and southern California.  During the fourth quarter of fiscal 2011, we acquired 15 stores in southern California that were previously operated by one of our consolidated VIEs'.  The Retail Group primarily sells upholstered furniture, as well as some casegoods and other accessories, to end consumers through the retail network.

Additional detailed information regarding our segments and the products which compose the segments is contained in Note 14 to our consolidated financial statements and our “Management’s Discussion and Analysis” section, both of which are included in this report.

Raw Materials and Parts
The principal raw materials for the Upholstery Group are purchased cover (primarily fabrics and leather), polyester batting and non-chlorofluorocarbonated polyurethane foam for cushioning and padding, lumber and plywood for frames and steel for motion mechanisms which total about 83% of our total raw material costs.  We purchase about 69% of our polyurethane foam from one supplier, although this supplier has several facilities across the United States that ship to our plants.

The largest raw material cost of the Upholstery Group is purchased cover, which represents about 40% of the group’s total material costs. Although we purchase cover from a variety of sources, we do rely on a limited number of major suppliers.  If one of these major suppliers experienced financial or other difficulties we could experience temporary disruptions in our manufacturing process until an alternate supplier could be found. 

Our cover is purchased either in a raw state (a roll or hide), then cut and sewn into parts in our plants or as cut-and-sewn parts from third-party offshore suppliers.  Our cover material costs are evenly divided between fabric rolls and hides and cut-and-sewn parts. There are four primary suppliers of cut-and-sewn leather and fabric products.  One supplier manufactures the majority of the leather cut-and-sewn sets we receive from China.

For fiscal 2012, we expect raw material costs to rise due to increased global demand for steel, leather, wood, yarn and polyurethane, as well as other materials used in our upholstery manufacturing processes.  Additionally, costs associated with our shipping and transportation activities are expected to increase due to anticipated increases in the cost of crude oil.

 
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As the Casegoods Group is an importer, marketer, manufacturer and distributor of casegoods furniture, raw materials represent only about 12% of the total inventory of this group.  The principal raw materials used by our manufacturing facility within our Casegoods Group are hardwoods, plywood and chip wood, veneers and liquid stains, paints and finishes and decorative hardware.  Hardwood lumber and purchased hardwood components represent about 43% of this segment’s total raw material costs.  

Finished Goods Imports
The majority of finished wood furniture marketed and distributed by our Casegoods Group is imported.  This import model for our Casegoods Group is effective primarily due to the low labor and overhead costs associated with manufacturing casegoods product overseas.  We have continued to make changes to our model in order to improve our service performance levels by improving our supply chain management and distribution networks, which includes the merger of our Hammary operations with our American Drew/Lea operations.

During fiscal 2011, prices on imported casegoods were flat compared to the fiscal 2010.  For fiscal 2012, we expect increases in prices on imported casegoods due to inflationary pressures in Asia resulting in increases in labor and raw material costs, as well as increased transportation costs.

Our imported casegoods finished goods sales represented about 77% and 71% for fiscal 2011 and fiscal 2010, respectively of our total casegoods sales.  Imported finished goods, for all our segments, represented approximately 12% of our fiscal 2011 consolidated sales.

Seasonal Business
We believe that the demand for furniture generally reflects sensitivity to overall economic conditions, including, but not limited to, unemployment rates, housing market conditions and consumer confidence.  Historically, our Upholstery Group and Retail Group has experienced lower levels of sales during the first half of our fiscal year and higher levels of sales during the second half of our fiscal year.  Our Casegoods Group historically has experienced a lower level of sales during the first quarter of our fiscal year and a higher level of sales during our fourth fiscal quarter.  We believe variations to these historical patterns are a result of economic conditions during those periods and not a change in our historical patterns.

During fiscal 2011, all of our segments experienced their highest level of sales during our fourth fiscal quarter.  A substanstial portion of this increase was due to the extra week in that quarter versus fiscal 2010.  While our fiscal 2011 year contained 53 weeks versus only 52 weeks in the other fiscal years presented in this report, our fiscal 2012 year will include 52 weeks.

When possible, we schedule production to maintain uniform manufacturing activity throughout the year.  However, we shut down our domestic plants for a week in July to perform routine maintenance on our equipment.

Economic Cycle and Purchasing Cycle
In terms of our product segments, upholstered furniture has a shorter life cycle and exhibits a less volatile sales pattern over an economic cycle than does casegoods.  This is because upholstered furniture is typically more fashion and design oriented, and is often purchased one or two pieces at a time.  In contrast, casegoods products are longer-lived and frequently purchased in groupings or “suites,” resulting in a much larger cost to the consumer.

Practices Regarding Working Capital Items
The following describes our significant practices regarding working capital items.

 
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Inventory: We do not carry significant amounts of upholstered finished goods in inventory at our manufacturing locations as these goods are usually built to order.  However, we generally build or import casegoods inventory to stock, in order to attain manufacturing efficiencies and/or to meet delivery requirements of customers.  This results in higher levels of finished goods inventory for our casegoods products than our upholstery products.  Our company-owned La-Z-Boy Furniture Galleries® stores maintain finished goods inventory at the stores for display purposes.

Over the past few years we have created five regional distribution centers.  We created these distribution centers to streamline the warehousing and distribution processes for our La-Z-Boy Furniture Galleries® store network, including both company-owned stores and independently owned stores.  Our move to distribution centers allowed us to reduce the number of individual warehouses needed to supply our retail outlets and helped us manage our inventory levels.  As of April 30, 2011, our five regional distribution centers had eliminated 27 smaller warehouses, some of which were company operated and some of which were independently operated.

During fiscal 2011 our inventory levels, primarily for raw materials for our Upholstery Group and finished goods for our Casegoods Group, increased with the majority of the increase due to our focus on being in a better service position for our customers.  We will continue to manage our inventory levels to make sure they are in line with sales levels, while maintaining our focus on service to our customers.

Accounts Receivable: During fiscal 2011 our accounts receivables decreased slightly compared to fiscal 2010.  Improvements in the economy during fiscal 2010 and fiscal 2011 have resulted in improved liquidity and financial performance of some of our customers.  We continue to monitor our customers’ accounts and limit our exposure and credit support to certain independent dealers.

Accounts Payable: During fiscal 2011 our accounts payable decreased slightly compared to fiscal 2010.  Due to our 53rd week in fiscal 2011, our fiscal year end corresponded with the calendar month end, which resulted in a larger number of payables being paid before the end of the fiscal 2011 year end.

Customers
We sell to a significant number of furniture retailers primarily throughout the United States and Canada.  Additionally, we sell to a number of furniture retailers outside of North America.  We also sell to consumers through our company-owned La-Z-Boy Furniture Galleries® stores.  We did not have any single customer whose purchases amounted to more than 6% of our fiscal year 2011 consolidated sales for either the Upholstery Group or the Casegoods Group.  Sales in our Upholstery and Casegoods Groups are almost entirely to furniture retailers.  The Retail Group sales are to end-consumers.

We have formal agreements with many of our retailers for them to display and merchandise products from one or more of our operating units and sell them to consumers in dedicated retail space, either in stand-alone stores or dedicated galleries or studios within their stores.  We consider these stores, as well as our own retail stores, to be “proprietary.” For our Upholstery and Casegoods Groups, our 2011 customer mix was about 55% proprietary, 17% major dealers (for example, Art Van Furniture, Berkshire Hathaway, Havertys Furniture, Raymour & Flanigan Furniture) and 28% other independent retail customers.

As of April 30, 2011, we operated 83 stand-alone La-Z-Boy Furniture Galleries® stores.  Additionally, we have agreements with independent dealers for 221 stand-alone La-Z-Boy Furniture Galleries® stores, of which eight stores are owned by our sole remaining consolidated Variable Interest Entity (VIE).  The success of our product distribution relies heavily on having retail floor space that is dedicated to displaying and marketing our product.  This distribution system originated with our La-Z-Boy Furniture Galleries® stores network, which continues to have the largest number of proprietary stores and galleries among our other operating units. According to the May 2011 Top 100 ranking by Furniture Today, an industry trade publication, the La-Z-Boy Furniture Galleries® stores retail network is the second largest retailer of single-brand upholstered furniture in North America.  In addition to the stand-alone La-Z-Boy Furniture Galleries® stores, the La-Z-Boy brand also has a distribution model known as Comfort Studios®.  Comfort Studios® are defined spaces within a larger independent retailer that are dedicated to displaying La-Z-Boy branded furniture with the average size of the space being about 5,000 square feet.  Currently there are 526 Comfort Studios® in our distribution system.  Our “proprietary” distribution also includes over 700 in-store galleries for England, Kincaid and Lea’s La-Z-Boy Kidz™. Total “proprietary” floor space is approximately 9.0 million square feet.

 
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Maintaining, updating, and expanding, when appropriate, our proprietary distribution network is a key part of our marketing strategy.  As we continue to maintain and update our current stores, the La-Z-Boy Furniture Galleries® store network plans to open 5 to 10 new stores during fiscal 2012 but anticipates closures to offset this leaving our overall store count unchanged.  We select independent dealers for our proprietary distribution network based on factors such as the management and financial qualifications of those potential dealers as well as the potential for distribution in a specific geographical area. This proprietary method of distribution is beneficial to La-Z-Boy, our dealers and the consumer. For La-Z-Boy, it allows us to have a concentration of marketing of our product by sales personnel dedicated to our entire product line, and only that line. For dealers who join this proprietary group, it allows them to take advantage of practices that have proven successful based on past experiences of other proprietary dealers.  As a part of this, we facilitate forums and communications for these dealers to share best practices among their peers.  For our consumers, these stores provide a full-service shopping experience with knowledgeable sales associates and in-home design consultants to support their purchasing process.  The La-Z-Boy Furniture Galleries® stores’ independent dealers and the Comfort Studios® retailers are responsible for displaying and merchandising our product within the dedicated retail space.

Orders and Backlog
The measure of backlog at a point in time may not be indicative of our future sales performance, therefore we do not rely entirely on backlogs to predict future sales. For most operating units, an order cannot be canceled after it has been selected for production. Upholstery orders are primarily built to a specific dealer order (stock order) or a special order with a down payment from a consumer (sold orders). Casegoods are primarily produced to our internal order (not a customer or consumer order), which results in higher finished goods inventory on hand.

As of April 30, 2011 and April 24, 2010, our Upholstery Group backlogs were approximately $71.8 million and $65.5 million, respectively.  Our Casegoods Group backlogs as of April 30, 2011, and April 24, 2010, were approximately $11.7 million and $19.3 million, respectively.  The increase in our Upholstery Group’s backlog was due primarily to our positive sales trend experienced in the fourth quarter of fiscal 2011 compared to the fourth quarter of fiscal 2010.  The decrease in our Casegoods Group’s backlog was primarily a result of the timing of our spring furniture market and new introductions to our product line during fiscal 2010.

Competitive Conditions
According to Furniture Today, we are currently the third largest manufacturer/distributor of residential (living and family room, bedroom, and dining room) furniture in the United States, as measured by annual sales volume.
 
In the Upholstery Group, the largest competitors are Ashley, Bassett Furniture, Bernhardt, Ethan Allen, Flexsteel, Furniture Brands International, Klaussner, Natuzzi, and Palliser. 

In the Casegoods Group, our main competitors are Ashley, Bernhardt, Ethan Allen, Furniture Brands International, Hooker Furniture, Stanley Furniture, and Universal.  Additionally, there are market pressures related to foreign manufacturers entering the United States market, as well as by increased direct purchasing from overseas by some of the larger United States retailers.

The La-Z-Boy Furniture Galleries® stores operate in the retail furniture industry throughout North America; consequently, they have different competitors.  La-Z-Boy Furniture Galleries® stores competitors include: Ashley, Bassett Furniture Direct, Ethan Allen, Thomasville Home Furnishings Stores, several other regional competitors (for example Art Van Furniture, Raymour & Flanigan Furniture, and Havertys Furniture), and family-owned independent furniture stores.

 
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In addition to the larger competitors listed above, a substantial number of small and medium-sized firms operate within our business segments, all of which are highly competitive.

Over the past decade there has been an increase in alternative distribution affecting our retail markets.  Companies such as Costco, Home Depot, IKEA, Sam’s Club, Target, Wal-Mart, Williams Sonoma, and others are now offering products that compete with some of our product lines.  Also, increased ability to purchase furniture products on-line through various furniture manufacturers’ and retailers’ websites has increased competition.

We believe the home furnishings industry competes primarily on the basis of product styling and quality, customer service (product availability and delivery), and price.  We believe La-Z-Boy Incorporated competes on the basis of each of these factors, specifically through our distribution models, marketing and customization capabilities.

We compete primarily by emphasizing our brand and the value, comfort, quality, and styling of our products.  In addition, we remain committed to innovation within the furniture industry while striving to provide outstanding customer service, exceptional dealer support, and efficient on-time delivery. Also, maintaining, updating and expanding as appropriate our proprietary distribution system is a key initiative for us in striving to remain competitive with others in the furniture industry.  We compete in the mid-to-upper price point in the furniture industry.  A shift in consumer taste and trends to lower price point products could negatively affect our competitive conditions.

Research and Development Activities
We provide information regarding our research and development activities in Note 1 to our consolidated financial statements, which is included in Item 8 of this report.

Trademarks, Licenses and Patents
We own several trademarks including La-Z-Boy, our most valuable.  The La-Z-Boy trademark is essential to the upholstery and retail segments of our business. To protect our trademarks we have registered them in the United States and various other countries where our products are sold.  These trademarks have a perpetual life, subject to renewal every ten years.  We license the use of the La-Z-Boy trademark on furniture sold outside the United States.  We also license the use of the La-Z-Boy trademark on contract office furniture, outdoor furniture and on non-furniture products in the United States for the purpose of enhancing brand awareness.  In addition, we license to our proprietary dealers the right to use our La-Z-Boy trademark in connection with the sale of our products and related services, on their signs, and in other ways, which we consider to be a key part of our marketing strategies.  We provide more information about those dealers above, under “Customers.”

We hold a number of patents that we actively enforce, but we believe that the loss of any single patent or group of patents would not significantly impact our business.

Compliance with Environmental Regulations
Our manufacturing operations involve the use and disposal of certain substances regulated under environmental protection laws, and we are involved in a small number of remediation actions and site investigations concerning such substances.  Based on a review of all currently known facts and our experience with previous environmental matters, we believe we have adequate reserves in respect of probable and reasonably estimable losses arising from environmental matters and currently do not anticipate any significant loss.

 
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Employees
We employed about 7,910 full-time equivalent persons as of April 30, 2011.  The Upholstery Group employed about 6,620, the Casegoods Group employed about 430, the Retail Group employed about 590, with the remainder being corporate and VIE personnel. The majority of our employees are employed on a full-time basis. As of April 24, 2010, we had about 8,290 full-time equivalent employees.

Financial Information About Foreign and Domestic Operations and Export Sales
In fiscal 2011, our direct export sales, including sales in Canada, were approximately 13% of our total sales.  We have a manufacturing joint venture in Thailand, which distributes furniture in Australia, New Zealand, the United Kingdom, Thailand and other countries in Asia.  In addition, we have a sales and marketing joint venture in Asia, which sells and distributes furniture in China, Japan and Korea, among other Asian countries.

We also have a facility in Mexico which provides cut-and-sewn fabric sets for our domestic upholstery manufacturing facilities. Information about sales in the United States, Canada, and other countries is contained in Note 14 to our consolidated financial statements, which is included in Item 8 of this report.  Our net property, plant, and equipment in the United States were $110.2 million and $123.4 million at the end of fiscal 2011 and fiscal 2010, respectively.  Our net property, plant, and equipment in foreign countries were $10.4 million and $15.5 million in fiscal 2011 and fiscal 2010, respectively.  The decrease in our property, plant, and equipment in foreign countries was primarily a result of the deconsolidation in fiscal 2011 of our prior Toronto, Ontario VIE.
See Item 1A of this report for information about the risks related to our foreign operations.

Internet Availability
Available free of charge through our internet website are links to our Forms 10-K, 10-Q, 8-K, proxy statements on Schedule 14A and amendments to those reports. These reports can be found on our internet website www.la-z-boy.com as soon as reasonably practicable after being electronically filed with, or furnished to, the Securities and Exchange Commission (SEC).  Copies of any materials we file with the SEC can also be obtained free of charge through the SEC’s website at www.sec.gov. The information on our website is not part of this report.

ITEM 1A. RISK FACTORS.
Our business is subject to a variety of risks.  You should carefully consider the risk factors detailed below in conjunction with the other information contained in this report.  Interest rates, consumer confidence, housing starts and the overall housing market, increased unemployment, tightening of the financial and consumer credit markets, downturns in the economy and other general economic factors that affect many other businesses are particularly significant to us because our principal products are consumer goods.

The risks and uncertainties described below are those that we currently believe may significantly affect our business.  Additional risks and uncertainties of which we are unaware of or that we do not currently deem significant may also become important factors that affect us at a later date.  You should carefully consider the risks and uncertainties described below in addition to all other information provided to you in this document and our subsequent filings with the Securities and Exchange Commission.  Any of the following risks could significantly and adversely affect our business, results of operations, and financial condition.

 
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The prolonged economic downturn could have a negative material impact on our sales, results of operations and cash flows.
Our business is impacted by international, national and regional economic conditions.  The global economy experienced a major recession and continued to be affected by wavering consumer confidence and lower home values, prolonged foreclosure activity and a weak housing market throughout the country, high levels of unemployment and reduced access to consumer credit.  While these factors are outside of our control, they could have a negative impact on our sales, results of operations and cash flows.  The prolonged economic downturn may cause our current and potential customers to delay their purchases or affect their ability to pay, which could have a negative long-term impact on our sales, results of operations and cash flows.

Our current retail markets and other markets which we may enter into or acquire in the future may not achieve the growth and profitability we anticipated when we acquired them. We could incur charges for the impairment of long-lived assets if we cannot meet our earnings expectations for these markets.
We may remodel and relocate existing stores, as well as close underperforming stores.  Profitability will depend on increased retail sales justifying the cost of remodeling and relocating these stores to support the lease carrying costs and our ability to reduce support costs as a percent of sales in advertising, selling and administration.  In addition, we may acquire additional retail markets in the future, and if we do, they may be subject to many of the same risks.  We may also incur unforeseen costs upon entry into new markets that could negatively impact our results of operations.

Availability of foreign sourcing and economic uncertainty in countries outside of the United States in which we operate or purchase product from could adversely affect our business and results of operations.
We have operations in countries outside the United States, some of which are located in emerging markets.  Long-term economic and political uncertainty in some of the countries in which we operate, such as Mexico and Thailand, could result in the disruption of markets and negatively affect our business.  We do not believe the natural disaster experienced in Japan will have a significant impact on our business.  We have been increasing our offshore capabilities to provide flexibility in product offerings and pricing to meet competitive pressures. Our Casegoods Group is primarily an importer of products manufactured by foreign sources.  In addition, our Upholstery Group purchases cut-and-sewn fabric and leather sets and some finished goods from foreign sourced vendors.  Our sourcing partners may not be able to produce these goods in a timely fashion, or the quality of their product may be rejected by us, causing delays in shipping to our customers for casegoods and manufacturing disruptions in our upholstery plants due to not receiving rolled fabric, leather hides, and fabric and leather cut-and-sewn sets.  The majority of our cut-and-sewn leather sets purchased in China are purchased from one supplier.  Additionally we receive cut-and-sewn sets from our facility located in Mexico.

There are other risks that are inherent in our non-U.S. operations, including the potential for changes in socio-economic conditions, changes in laws and regulations, including import, export, labor and environmental laws, tariffs and trade barriers, monetary and fiscal policies, investments, taxation, and exchange controls.  Additionally, unsettled political conditions, possible terrorist attacks, organized crime and public health concerns present a risk to our non-U.S. operations.  All of these items could make it more difficult to service our customers or cause disruptions in our plants that could reduce our sales, earnings, or both in the future.

Changes in regulation of our international operations could adversely affect our business and results of operations.
Because we have operations outside of the United States and because we sell product in various countries, we are subject to many laws governing international relations, including those that prohibit improper payments to government officials and restrict where we can do business, what information or products we can supply to certain countries and what information we can provide to a non-U.S. government, including the Foreign Corrupt Practices Act and the U.S. Export Administration Act.  Violations of these laws, which are complex, may result in criminal penalties or sanctions that could have a significant adverse effect on our business and results of operations.  Although we have implemented policies and procedures designed to ensure compliance with these laws, there can be no assurance that our employees, contractors, or agents will not violate our policies.

 
10

 

Fluctuations in the price, availability and quality of raw materials could cause delays that could result in our inability to provide goods to our customers or could increase our costs, either of which could decrease our earnings.
We use various types of wood, fabrics, leathers, upholstered filling material, steel, and other raw materials in manufacturing furniture. Because we are dependent on outside suppliers for our raw material needs, fluctuations in the price, availability and quality of the raw materials we use could have a negative effect on our cost of sales and our ability to meet our customers’ demands. Inability to meet our customers’ demands could result in the loss of future sales, and we may not always be able to pass along price increases to our customers due to competitive and marketing pressures. Since we have a higher concentration in upholstery sales (70%) than most of our competitors, the effects of steel, polyurethane foam, leather and fabric price increases or quantity shortages are more significant for our business than for most other furniture companies.  About 69% of our polyurethane foam comes from one supplier, although this supplier has several facilities across the United States.  A natural disaster or severe weather that affects this supplier could result in delays in shipments of polyurethane foam to our plants.  We have attempted to minimize this risk by requiring a minimum of 60 days’ worth of production of the principal raw material to be stored at an off-site facility. 

A change in the financial condition of some of our domestic and foreign fabric suppliers could impede their ability to provide these products to us in a timely manner.  In addition, upholstered furniture is highly fashion oriented, and if we are not able to acquire sufficient fabric variety, or if we are unable to predict or respond to changes in fashion trends, we may lose sales and have to sell excess inventory at reduced prices.  This would lower our earnings as well as reduce our sales.

Business failures of large dealers or customers could result in a decrease in our future sales and earnings.
Although we have no customer who individually represents 6% or more of the annual sales of any of our segments, business failures or consolidation of large dealers or customers could result in a decrease in our future sales and earnings.

The consolidation of manufacturing and warehousing operations into fewer sites may increase our exposure to business disruptions and could result in higher transportation costs.
We have reduced the number of manufacturing sites and consolidated some warehouse operations.  If any of these operations experience significant business interruptions, our ability to manufacture and deliver products in a timely manner, would likely be negatively impacted.  Additionally, our consolidation of warehouse operations has resulted in longer distances for delivery and could result in higher transportation costs if there are significant increases in fuel costs.

Healthcare reform legislation could have an impact on our business.
While the true cost of the healthcare legislation enacted in the previous year will occur after 2013 due to provisions of the legislation being phased in over time, changes to our healthcare costs structure could have a significant impact on our business.  The Patient Protection and Affordable Care Act as well as other healthcare reform legislation being considered by Congress and state legislatures may have an impact on our business.  While we are continuing to evaluate the effects of these legislative developments on our business, the impact on the healthcare industry is extensive and includes, among other things, having the federal government assume a greater role in the health care system, expanding healthcare coverage in the United States, mandating basic healthcare benefits and imposing regulations on businesses who provide or do not provide healthcare insurance to their employees.  Our current assessment is that this legislation will most likely continue to increase our employee healthcare-related costs.

 
11

 

Inability to maintain and enhance our brand and respond to changes in our current and potential customers’ tastes and trends in a timely manner could adversely affect our business and operating results.
The success of our business depends on our ability to maintain and enhance our brands to grow our business by retaining current customers and attracting new ones.  Additionally, because furniture product is extremely fashion oriented, changes in consumers’ tastes and trends and the resultant change in our product mix could adversely impact our business and operating results.  We attempt to minimize these risks by maintaining a strong advertising and marketing campaign promoting both our brands and our current product designs, styles, quality and prices.  If these efforts are unsuccessful, or we incur substantial costs in connection with these efforts, our business, operating results and financial or competitive condition could be adversely affected.

We rely extensively on computer systems to process transactions, summarize results and manage our business.  Disruptions in both our primary and back-up systems could adversely affect our business and operating results.
Our primary and back-up computer systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, security breaches, natural disasters and usage errors by employees.  Though some of these issues would be covered by insurance, interruptions of our critical business computer systems and/or failure of our back-up systems could negatively impact our sales or result in longer production times.  Additionally, if our critical business computer systems or our back-up systems are damaged or cease to function properly, we may have to make a significant investment to fix or replace them.

ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.

ITEM 2. PROPERTIES.
We owned or leased approximately 10.5 million square feet of manufacturing, warehousing and distribution centers, office, showroom, and retail facilities, and had approximately 1.6 million square feet of idle facilities at the end of fiscal 2011.  Of the 10.5 million square feet occupied at the end of fiscal 2011, our Upholstery Group occupied approximately 6.3 million square feet, our Casegoods Group occupied approximately 2.1 million square feet, our Retail Group occupied approximately 1.5 million square feet and our non-segmented operations occupied the balance. 

Our active facilities are located in Arkansas, California, Connecticut, Delaware, Florida, Georgia, Illinois, Indiana, Kansas, Maryland, Massachusetts, Michigan, Mississippi, Missouri, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, Tennessee, Virginia, Washington D.C., Coahuila (Mexico) and Bangkok (Thailand).  All of our plants are well maintained and insured. We do not expect any major land or building additions will be needed to increase capacity in the foreseeable future for our manufacturing operations.  We own all of our domestic plants, some of which have been financed under long-term industrial revenue bonds, and our Thailand plant.  We lease the majority of our retail stores and regional distribution centers, as well as our manufacturing facility in Mexico.  For information on terms of operating leases for our properties, see Note 8 to our consolidated financial statements, which is included in Item 8 of this report.

ITEM 3. LEGAL PROCEEDINGS.
We are involved in various legal proceedings arising in the ordinary course of our business.  Based on a review of all currently known facts and our experience with previous legal matters, we have recorded expense in respect of probable and reasonably estimable losses arising from legal matters and currently do not anticipate any significant additional loss.

 
12

 

ITEM 4. [REMOVED AND RESERVED.]

EXECUTIVE OFFICERS OF REGISTRANT
Listed below are the names, ages and current positions of our executive officers and, if they have not held those positions for at least five years, their former positions during that period with us or other companies.  All executive officers serve at the pleasure of the board of directors.

Kurt L. Darrow, age 56
President and Chief Executive Officer since September 2003

Steven M. Kincaid, age 62
Senior Vice President of La-Z-Boy and President of Casegoods since November 2003
President, Kincaid Furniture Company, Incorporated since June 1983

Louis M. Riccio, Jr., age 48
Senior Vice President of La-Z-Boy and Chief Financial Officer since July 2006
Treasurer from April 2007 through August 2007 and February 2010 through April 2010

Otis S. Sawyer, age 53
Senior Vice President of La-Z-Boy and President of Non-Branded Upholstery since February 2008
President, England, Incorporated since February 2008
Senior Vice President Corporate Operations from May 2006 through February 2008

Mark S. Bacon, Sr., age 48
Senior Vice President of La-Z-Boy and Chief Retail Officer since October 2008
Executive Vice President of Sales, Commercial and Operations of The Pep Boys - Manny, Moe & Jack from March 2004 through September 2007

 
13

 

PART II
 
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
 
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
We did not purchase any of our common shares during the fourth quarter of fiscal year 2011. 

Recent Sales of Unregistered Securities
There were no sales of unregistered securities during fiscal year 2011.

Equity Plans
 
The table below provides information concerning our compensation plans under which common shares may be issued.
 
Equity Compensation Plan Information as of April 30, 2011
 
Plan category 
 
Number of
securities to be
issued upon
exercise of
outstanding 
options
(i)
   
Weighted-
average
exercise
price of
outstanding
options
(ii)
   
Number of 
securities
remaining
available for
future issuance 
under
equity 
compensation
plans (excluding
securities 
reflected in
column (i)) 
(iii)
 
Equity compensation plans approved by shareholders
    2,575,955 (1)   $ 9.54       3,080,947 (2)

Note 1: These options were issued under our 2010 Omnibus Incentive Plan, 2004 Long-Term Equity Award Plan and 1997 Incentive Stock Option Plan.  No additional options can be awarded under the 2004 or 1997 plans, but 2,049,563 and 370,345 options are still outstanding under the 2004 and 1997 plans, respectively. 

Note 2: This amount is the aggregate number of shares available for future issuance under our 2010 Omnibus Incentive Plan.  The omnibus incentive plan provides for awards of stock options, restricted stock, and performance awards (awards of our common stock based on achievement of pre-set goals over a performance period) to selected key employees and non-employee directors. 

 
14

 

Performance Graph

The graph below shows the cumulative total return for our last five fiscal years that would have been realized (assuming reinvestment of dividends) by an investor who invested $100 on April 30, 2006 in our common shares, in the S&P 500 Composite Index and in the Dow Jones U.S. Furnishings Index.


Company/Index/Market
 
2006
   
2007
   
2008
   
2009
   
2010
   
2011
 
La-Z-Boy Incorporated
  $ 100     $ 81.53     $ 49.62     $ 16.30     $ 110.80     $ 88.34  
S&P 500 Composite Index
  $ 100     $ 116.15     $ 110.81     $ 70.51     $ 101.17     $ 115.65  
Dow Jones U.S. Furnishings Index
  $ 100     $ 97.97     $ 67.96     $ 44.87     $ 77.87     $ 92.79  
                                                 

 
15

 

Dividend and Market Information

The New York Stock Exchange is the principal market in which our common stock is traded.  The tables below show the high and low sale prices of our common stock on the New York Stock Exchange during each quarter of our last two fiscal years.

   
Market Price
 
Fiscal 2011
 Quarter Ended
 
High
   
Low
   
Close
 
July 24
  $ 14.93     $ 6.44     $ 8.65  
October 23
  $ 9.15     $ 6.47     $ 7.90  
January 22
  $ 9.50     $ 7.28     $ 8.21  
April 30
  $ 11.79     $ 7.77     $ 11.76  

   
Market Price
 
Fiscal 2010 
Quarter Ended
 
High
   
Low
   
Close
 
July 25
  $ 6.60     $ 1.81     $ 6.59  
October 24
  $ 10.29     $ 6.11     $ 8.90  
January 23
  $ 11.63     $ 6.57     $ 11.35  
April 24
  $ 15.46     $ 9.04     $ 14.75  

No dividends were paid during fiscal 2011 or fiscal 2010.  Our credit agreement prohibits us from paying dividends if our “excess availability,” as defined in the credit agreement, falls below $30 million.  As of April 30, 2011, we had $108.2 million of excess availability under the credit agreement.  Refer to Note 7 of the consolidated financial statements in Item 8 for further discussion of our credit agreement.  The payment of future cash dividends is within the discretion of our Board of Directors and will depend, among other factors, on our earnings, capital requirements and operating and financial condition, as well as excess availability under the credit agreement.

Shareholders
We had about 13,900 shareholders of record at June 14, 2011.

 
16

 

ITEM 6. SELECTED FINANCIAL DATA.
The following table presents our selected financial data. The table should be read in conjunction with Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. This information is derived from our audited financial statements and should be read in conjunction with those statements, including the related notes.

Consolidated Five-Year Summary of Financial Data
(Dollar amounts in thousands, except per share data)
 
(53 weeks)
   
(52 weeks)
   
(52 weeks)
   
(52 weeks)
   
(52 weeks)
 
Fiscal Year Ended
 
4/30/2011
   
4/24/2010
   
4/25/2009
   
4/26/2008
   
4/28/2007
 
Sales
  $ 1,187,143     $ 1,179,212     $ 1,226,674     $ 1,459,874     $ 1,621,460  
Cost of sales
                                       
Cost of goods sold
    832,962       803,945       878,967       1,060,982       1,192,020  
Restructuring
    (163 )     2,141       9,818       5,057       3,371  
Total cost of sales
    832,799       806,086       888,785       1,066,039       1,195,391  
Gross profit
    354,344       373,126       337,889       393,835       426,069  
Selling, general and administrative
    323,314       331,405       373,125       399,305       387,769  
Restructuring
    650       1,293       2,642       3,078       7,662  
Write-down of long-lived assets
    4,471             7,503              
Write-down of trade names
                5,541              
Write-down of goodwill
                42,136       8,426        
Operating income (loss)
    25,909       40,428       (93,058 )     (16,974 )     30,638  
Interest expense
    2,346       2,972       5,581       13,899       10,206  
Interest income
    944       724       2,504       3,614       3,952  
Income from Continued Dumping and Subsidy Offset Act, net
    1,054       4,436       8,124       7,147       3,430  
Other income (expense), net
    405       480       (7,888 )     5,393       728  
Income (loss) from continuing operations before income taxes
    25,966       43,096       (95,899 )     (14,719 )     28,542  
Income tax expense (benefit)
    8,593       11,737       26,514       (7,168 )     9,605  
Income (loss) from continuing operations
    17,373       31,359       (122,413 )     (7,551 )     18,937  
Loss from discontinued operations (net of tax)
                      (6,000 )     (15,629 )
Net income (loss)
    17,373       31,359       (122,413 )     (13,551 )     3,308  
Net (income) loss attributable to noncontrolling interests
    6,674       1,342       (252 )     (277 )     (29 )
Net income (loss) attributable to La-Z-Boy Incorporated
  $ 24,047     $ 32,701     $ (122,665 )   $ (13,828 )   $ 3,279  
                                         
Diluted weighted average shares
    52,279       51,732       51,460       51,408       51,475  
Diluted income (loss) per share from continuing operations
  $ 0.33     $ 0.61     $ (2.38 )   $ (0.15 )   $ 0.37  
Diluted net income (loss) per share attributable to La-Z-Boy Incorporated
  $ 0.45     $ 0.62     $ (2.39 )   $ (0.27 )   $ 0.06  
Dividends declared per share
  $     $     $ 0.10     $ 0.40     $ 0.48  
Book value of year-end shares outstanding
  $ 6.96     $ 6.56     $ 5.81     $ 8.67     $ 9.36  

 
17

 

Consolidated Five-Year Summary of Financial Data (continued)

(Dollar amounts in thousands)
 
(53 weeks)
   
(52 weeks)
   
(52 weeks)
   
(52 weeks)
   
(52 weeks)
 
Fiscal Year Ended
 
4/30/2011
   
4/24/2010
   
4/25/2009
   
4/26/2008
   
4/28/2007
 
Return on average total equity (1)
    4.9 %     9.7 %     (32.5 )%     (1.6 )%     3.8 %
Gross profit as a percent of sales
    29.8 %     31.6 %     27.5 %     27.0 %     26.3 %
Operating profit (loss) as a percent of sales
    2.2 %     3.4 %     (7.6 )%     (1.2 )%     1.9 %
Effective tax rate (1)
    33.1 %     27.2 %     (27.6 )%     48.7 %     33.7 %
Return on sales (1)
    1.5 %     2.7 %     (10.0 )%     (0.5 )%     1.2 %
                                         
Depreciation and amortization
  $ 24,302     $ 25,246     $ 24,142     $ 25,323     $ 27,678  
Capital expenditures
  $ 10,540     $ 10,986     $ 15,625     $ 27,386     $ 25,811  
Property, plant and equipment, net
  $ 120,603     $ 138,857     $ 146,896     $ 168,325     $ 181,170  
                                         
Working capital
  $ 300,119     $ 279,768     $ 220,401     $ 263,245     $ 312,966  
Current ratio (2)
 
3.3 to 1
   
2.9 to 1
   
2.7 to 1
   
2.6 to 1
   
2.4 to 1
 
Total assets
  $ 593,455     $ 607,783     $ 548,330     $ 767,021     $ 875,548  
                                         
Long-term debt, excluding current portion
  $ 29,937     $ 46,917     $ 52,148     $ 99,578     $ 113,172  
Total debt
  $ 35,057     $ 47,983     $ 60,872     $ 104,370     $ 151,248  
Total equity
  $ 364,140     $ 343,114     $ 303,419     $ 448,957     $ 483,588  
Debt to equity ratio (3)
    9.6 %     14.0 %     20.1 %     23.2 %     31.3 %
Debt to capitalization ratio (4)
    8.8 %     12.3 %     16.7 %     18.9 %     23.8 %
                                         
Shareholders
    13,900       17,400       16,700       20,200       23,900  
Employees
    7,910       8,290       7,730       10,060       11,700  

(1) Based on income (loss) from continuing operations
(2) Equal to total current assets divided by total current liabilities
(3) Equal to total debt divided by total equity
(4) Equal to total debt divided by total debt plus total equity

 
18

 

Unaudited Quarterly Financial Information Fiscal 2011

(Dollar amounts in thousands, except per share data)
 
(13 weeks)
   
(13 weeks)
   
(13 weeks)
   
(14 weeks)
 
Fiscal Quarter Ended
 
7/24/2010
   
10/23/2010
   
1/22/2011
   
4/30/2011
 
Sales
  $ 263,313     $ 292,982     $ 291,943     $ 338,905  
Cost of sales
                               
Cost of goods sold
    190,500       207,938       203,662       230,862  
Restructuring
    (21 )     (62 )     (65 )     (15 )
Total cost of sales
    190,479       207,876       203,597       230,847  
Gross profit
    72,834       85,106       88,346       108,058  
Selling, general and administrative
    74,320       79,657       78,057       91,280  
Restructuring
    165       110       297       78  
Write-down of long-lived assets
                      4,471  
Operating income (loss)
    (1,651 )     5,339       9,992       12,229  
Interest expense
    590       592       561       603  
Interest income
    243       223       250       228  
Income from Continued Dumping and Subsidy Offset Act, net
                903       151  
Other income (expense), net
    351       (418 )     251       221  
Income (loss) before income taxes
    (1,647 )     4,552       10,835       12,226  
Income tax expense (benefit)
    (705 )     1,381       2,451       5,466  
Net income (loss)
    (942 )     3,171       8,384       6,760  
Net loss attributable to noncontrolling interests
    726       774       1,626       3,548  
Net income (loss) attributable to La-Z-Boy Incorporated
  $ (216 )   $ 3,945     $ 10,010     $ 10,308  
                                 
Diluted weighted average shares
    51,785       52,214       52,270       52,359  
                                 
Diluted net income per share attributable to La-Z-Boy Incorporated
  $     $ 0.07     $ 0.19     $ 0.19  
 
 
19

 
Unaudited Quarterly Financial Information Fiscal 2010

(Dollar amounts in thousands, except per share data)
 
(13 weeks)
   
(13 weeks)
   
(13 weeks)
   
(13 weeks)
 
Fiscal Quarter Ended
 
7/25/2009
   
10/24/2009
   
1/23/2010
   
4/24/2010
 
Sales
  $ 262,671     $ 300,707     $ 305,094     $ 310,740  
Cost of sales
                               
Cost of goods sold
    182,113       205,602       206,930       209,300  
Restructuring
    736       663       392       350  
Total cost of sales
    182,849       206,265       207,322       209,650  
Gross profit
    79,822       94,442       97,772       101,090  
Selling, general and administrative
    77,916       84,619       83,811       85,059  
Restructuring
    301       520       201       271  
Operating income
    1,605       9,303       13,760       15,760  
Interest expense
    980       831       577       584  
Interest income
    276       199       140       109  
Income from Continued Dumping and Subsidy Offset Act, net
                4,436        
Other income (expense), net
    601       236       (593 )     236  
Income before income taxes
    1,502       8,907       17,166       15,521  
Income tax expense (benefit)
    (3 )     3,529       6,502       1,709  
Net income
    1,505       5,378       10,664       13,812  
Net loss attributable to noncontrolling interests
    73       588       489       192  
Net income attributable to La-Z-Boy Incorporated
  $ 1,578     $ 5,966     $ 11,153     $ 14,004  
                                 
Diluted weighted average shares
    51,479       51,755       51,845       52,101  
                                 
Diluted net income per share attributable to La-Z-Boy Incorporated
  $ 0.04     $ 0.11     $ 0.21     $ 0.26  

 
20

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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. We begin with an introduction to our key businesses, strategies and significant operational events in fiscal 2011. We then provide discussions of our results of operations, liquidity and capital resources, and critical accounting policies.
 
Introduction

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 304 La-Z-Boy Furniture Galleries® stores, each dedicated to marketing our La-Z-Boy branded products.   We own 83 of those stores. The rest are independently owned and operated, including eight stores owned by our single remaining consolidated VIE.  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 304 stores in our La-Z-Boy Furniture Galleries® network make up the second 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 April 30, 2011, there were 526 Comfort Studios®.  In addition to the Comfort Studios®, our Kincaid, England and Lea operating units have their own dedicated in-store gallery programs.

Our reportable 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 manufactures or imports 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 directly to La-Z-Boy Furniture Galleries® stores, operators of Comfort Studios®, general dealers and department stores.

 
·
Casegoods Group.  Our Casegoods Group is an importer, marketer, manufacturer 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. The Casegoods Group sells to proprietary stores and general dealers. 

 
·
Retail Group.  Our Retail Group consists of the 83 company-owned La-Z-Boy Furniture Galleries® stores located in nine markets ranging from the Midwest to the east coast of the United States and also including southeastern Florida and southern California.  During the fourth quarter of fiscal 2011, we acquired 15 stores in southern California that were previously operated by one of our consolidated VIEs.  The Retail Group primarily sells upholstered furniture, as well as some casegoods and other accessories, to end consumers through the retail network.

 
21

 

Variable Interest Entities

We have a special operating agreement in place with one independent dealer that is a VIE which causes us to be considered its primary beneficiary.  Through January 31, 2011, we consolidated a second independent dealer because of a similar special operating agreement.  During the fourth quarter of fiscal 2011 we acquired the fifteen stores of this VIE, and those stores are now included in our Retail Group.  As a result, our VIEs’ results included 23 stores through January 31, 2011 and 8 stores for the full fiscal year 2011.  In comparison, we had three VIEs operating 29 stores during fiscal 2010.

Significant Operational Events in Fiscal 2011

Our consolidated operating results were negatively impacted during fiscal 2011 due to increased raw material costs, coupled with a slight decrease in sales level experienced by our Upholstery Group when taking out the extra week in fiscal 2011 compared to fiscal 2010.  We believe the decrease in sales level for our Upholstery Group was a result of weaker demand and a shift to more promotional products decreasing our average selling price.

Our Casegoods Group operating results were positively impacted by our decision to vacate a leased warehouse and convert an owned facility to a warehouse.   Efficiencies realized in our remaining casegoods manufacturing facility due to the closure of another facility completed at the end of fiscal 2010 also positively impacted our operating results for this group.  Additionally, the combining of our Hammary operations with our American Drew/Lea operations eliminated duplicate selling, general and administrative functions, which had a positive impact on this segment’s operating results.

We continued to improve the operating results of our Retail Group.  Increased sales levels for this segment, which we attribute to an effective promotional plan and improved conversion rates on the customer traffic in our stores, combined with solid expense control, resulted in improved operating results for this segment.

As discussed above, we acquired the La-Z-Boy Furniture Galleries® stores operation in Southern California, which we previously consolidated as a VIE.  In addition to the change in store count for our Retail Group, the results of operations for these 15 stores are included in our net income attributable to La-Z-Boy Incorporated starting in the fourth quarter of fiscal 2011, instead of our net loss attributable to noncontrolling interests.

 
22

 

Results of Operations
Fiscal Year 2011 Compared to Fiscal Year 2010

La-Z-Boy Incorporated
(Amounts in thousands, except  percentages)
 
(53 weeks)
4/30/2011
   
(52 weeks)
4/24/2010
   
Percent
change
 
Consolidated sales
  $ 1,187,143     $ 1,179,212       0.7 %
Consolidated operating income
    25,909       40,428       (35.9 )%
Consolidated operating margin
    2.2 %     3.4 %        
 
Sales
 
Consolidated sales increased $7.9 million compared to fiscal 2010.  All of our segments experienced an increase in sales during fiscal 2011, mainly due to the additional week in fiscal 2011.  This was offset by the deconsolidation of our Toronto, Ontario VIE, which resulted in a decrease of $20.4 million, net of eliminations.

Operating Margin

Our consolidated operating margin decreased by 1.2 percentage points in fiscal 2011.

 
·
Our gross margin decreased by 1.8 percentage points in fiscal 2011 mainly due to the following:
 
o
Increases in raw material costs resulted in a 1.6 percentage point decrease in our consolidated gross margin.
 
o
Changes in our product mix resulted in a 0.4 percentage point decrease in gross margin.
 
o
Cost reductions partially offset the raw material and product mix changes.
 
·
Our fiscal 2011 operating margin included less than 0.1 percentage points of restructuring charges and 0.4 percentage points for the write-down of long-lived assets, whereas our fiscal 2010 operating margin included 0.3 percentage points of restructuring charges.

Upholstery Group
(Amounts in thousands, except  percentages)
 
(53 weeks)
4/30/2011
   
(52 weeks)
4/24/2010
   
Percent
change
 
Sales
  $ 916,867     $ 904,871       1.3 %
Operating income
    72,743       95,732       (24.0 )%
Operating margin
    7.9 %     10.6 %        
 
Sales
 
Our Upholstery Group’s sales increased $12.0 million compared to fiscal 2010.  This was a result of the additional week in fiscal 2011.
 
Operating Margin

Our Upholstery Group’s operating margin decreased 2.7 percentage points in fiscal 2011 mainly due to the following:

 
·
The segment’s gross margin decreased by 2.1 percentage points during fiscal 2011 due to increased raw material costs.
 
·
Decreases in selling prices and changes in the product mix of this segment resulted in a 0.7 percentage point decrease in the segment’s operating margin.
 
·
Increases in our warehousing expense resulted in a 0.3 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.

 
23

 

 
·
Increased advertising expense as a result of the focus on our brand platform resulted in a 0.3 percentage point decrease in the segment’s operating margin.
 
·
Somewhat offsetting the negative impacts to this segment’s operating margin were ongoing cost reductions and a decrease in warranty expense due to the redesign of a mechanism that had historically experienced high claims activity, which resulted in a 0.2 percentage point, improvement in the segment’s operating margin.

Casegoods Group
(Amounts in thousands, except  percentages)
 
(53 weeks)
4/30/2011
   
(52 weeks)
4/24/2010
   
Percent
change
 
Sales
  $ 152,534     $ 146,706       4.0 %
Operating income (loss)
    6,698       (243 )     N/M  
Operating margin
    4.4 %     (0.2 )%        
N/M – not meaningful
                       
 
Sales
 
Our Casegoods Group’s sales increased $5.8 million compared to fiscal 2010. In addition to the extra week during fiscal 2011, the increase in sales was a result of broader placement of our various product lines at independent dealers.  Changes in discounting during fiscal 2011 also generated an improvement in sales for this segment.
 
Operating Margin
 
Our Casegoods Group’s operating margin increased 4.6 percentage points in fiscal 2011 mainly due to the following:

 
·
The segment’s gross margin increased 2.4 percentage points in fiscal 2011 mainly due to our decision to vacate a leased warehouse and convert an owned facility to a warehouse, as well as efficiencies realized in its manufacturing facility due to the changes completed at the end of fiscal 2010.
 
·
A decrease in employee expenses for this segment resulted in a 1.5 percentage point increase in operating margin.  The combining of our Hammary operations with our American Drew/Lea operations resulted in a reduction in headcount and elimination of duplicate selling, general and administrative functions.

 Retail Group
(Amounts in thousands, except  percentages)
 
(53 weeks)
4/30/2011
   
(52 weeks)
4/24/2010
   
Percent
change
 
Sales
  $ 176,987     $ 153,620       15.2 %
Operating loss
    (15,078 )     (19,825 )     23.9 %
Operating margin
    (8.5 )%     (12.9 )%        
 
Sales
 
Our Retail Group’s sales increased $23.4 million in fiscal 2011.  We believe the increase in sales was a result of an effective promotional plan, which led to improved conversion on the customer traffic in our stores, as well as the additional week in fiscal 2011.  The segment’s sales were also positively impacted by the acquisition of 15 stores from our previously consolidated California VIE, which increased sales by $9.4 million for our Retail Group.
 
Operating Margin
 
Our Retail Group’s operating margin increased 4.4 percentage points in fiscal 2011 mainly due to the following:

 
24

 

 
·
The segment experienced a 1.0 percentage point improvement in gross profit margin during fiscal 2011 due to changes in the segment’s sales initiatives and merchandising.
 
·
The improved operating margin for this segment was primarily a result of the increased sales volume.  Additionally, this segment continued to focus on cost containment, which resulted in lower selling, general and administrative expenses as a percent of sales.

VIEs/Corporate and Other

Our VIEs’ sales decreased $24.1 million in fiscal 2011, compared to fiscal 2010.  This was mainly the result of deconsolidating our Toronto, Ontario VIE, which reduced the number of stores for our VIEs by 8 during fiscal 2011.  Also, our Retail Group’s acquisition in the fourth quarter of fiscal 2011 of 15 stores that had previously been operated by our California VIE resulted in a $5.1 million, net of eliminations, decrease in our VIEs sales during fiscal 2011.  Our VIEs’ operating loss was $4.9 million in fiscal 2011, compared to an operating loss of $0.8 million in fiscal 2010.  The increased operating loss was mainly due to our Toronto, Ontario VIE, which was a profitable VIE, no longer being consolidated in fiscal 2011.

Our Corporate and Other operating loss decreased by $2.5 million in fiscal 2011.  The decrease in operating loss was primarily a result of a decrease in employee incentive compensation expenses as a result of our lower operating performance and stock price in fiscal 2011 compared to fiscal 2010.

Income from Continued Dumping and Subsidy Offset Act

The Continued Dumping and Subsidy Offset Act (“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.  We received $1.1 million and $4.4 million in payments and funds related to the anti-dumping order on wooden bedroom furniture from China during fiscal 2011 and fiscal 2010, respectively, for duties collected on imports entered into the United States before October 1, 2007.  The decrease in CDSOA funds we received was a result of the smaller total amount available for distribution.  The percentage of total distributions allocated to our divisions that supported the petition was similar to prior years.  In view of the uncertainties associated with this program, we are unable to predict the amounts, if any; we may receive in the future.

Interest Expense

Interest expense for fiscal 2011 was $0.6 million less than fiscal 2010 due to a $3.2 million decrease in our average debt.  Our weighted average interest rate decreased 0.2 percentage points in fiscal 2011 compared to fiscal 2010.  Additionally, our interest expense was positively impacted by the deconsolidation of our Toronto, Ontario VIE.

Income Taxes

Our effective tax rate for fiscal 2011 was 33.1% compared to 27.2% for fiscal 2010.  The fiscal 2011 effective rate was impacted by changes in the valuation reserve for deferred taxes due to current year temporary differences that resulted in a rate increase of 13.5 percentage points.  Offsetting this rate increase was a tax benefit associated with our southern California VIE that resulted in a rate reduction of 17.6 percentage points.  This tax benefit related primarily to the amount of accounts receivable written off in excess of the fair value of the assets received from this VIE.

 
25

 

Results of Operations
Fiscal Year 2010 Compared to Fiscal Year 2009

La-Z-Boy Incorporated
(Amounts in thousands, except  percentages)
 
(52 weeks)
4/24/2010
   
(52 weeks)
4/25/2009
   
Percent
Change
 
Consolidated sales
  $ 1,179,212     $ 1,226,674       (3.9 )%
Consolidated operating income (loss)
    40,428       (93,058 )     143.4 %
Consolidated operating margin
    3.4 %     (7.6 )%        

Consolidated sales decreased $47.5 million due to the continued challenging economic climate.  The challenging conditions coupled with our decision to limit our exposure and credit support to certain independent dealers was reflected in our overall decrease in sales for fiscal 2010 compared to fiscal 2009.

 
·
Our fiscal 2010 gross margin increased by 4.1 percentage points mainly due to the efficiencies gained in our upholstery plants, the restructurings completed in our Casegoods Group and improved pricing and merchandising in our retail stores.
 
·
Our fiscal 2010 operating margin included 0.3 percentage points of restructuring charges, whereas our fiscal 2009 operating margin included 3.9 percentage points for the write-down of goodwill and trade names, 1.0 percentage points of restructuring charges and 0.6 percentage points for the write-down of long-lived assets.
 
·
A decrease in our bad debt expense resulted in a 1.5 percentage point improvement in our operating margin.  The decrease in bad debt expense was a result of the stabilization of the financial performance of our dealers during fiscal 2010 compared to fiscal 2009.  The sudden deterioration in economic conditions during fiscal 2009 affected the liquidity of some of our customers and their ability to pay outstanding past due balances, which resulted in increased bad debt expense during that time period.

Upholstery Group
(Amounts in thousands, except  percentages)
 
(52 weeks)
4/24/2010
   
(52 weeks)
4/25/2009
   
Percent
Change
 
Sales
  $ 904,871     $ 899,204       0.6 %
Operating income
    95,732       36,367       163.2 %
Operating margin
    10.6 %     4.0 %        
 
Sales
 
Our Upholstery Group’s sales were flat compared to fiscal 2009.  We believe the strength of the La-Z-Boy brand and the inherent quality associated with the brand allowed us to gain market share during this time of economic distress.  Additionally, we continued to focus on various sales initiatives and maintained a strong advertising presence throughout the challenging economic climate.
 
 
·
While our Upholstery Group’s sales were flat for the full fiscal 2010 year compared with the full fiscal 2009 year, sales comparisons trended upward in the second half of our fiscal year.  Sales for our Upholstery Group increased by 14.8% in the second half of fiscal 2010, compared with the second half of fiscal 2009.

 
26

 
 
 
·
In fiscal 2009 the reporting of the retail warehouse operations was changed from the Retail Group to the Upholstery Group.  Since the warehouse operations were expanded to incorporate the warehousing, staging and delivery of independent La-Z-Boy Furniture Galleries® dealers’ products as well as for our Retail Group, the reporting of those warehouses was more appropriately included in our La-Z-Boy wholesale operating unit which is a part of our Upholstery Group.  As a result of this change, sales and operating profit that were previously recorded within our Upholstery Group for product sold to our Retail Group and still in inventory were reversed.  A one-time adjustment was recorded in fiscal 2009 that reduced inter-company sales for the Upholstery Group by $12.1 million during that period, with a corresponding offset recorded in our eliminations line.  This adjustment did not affect our consolidated sales.
 
 
·
The adjustment mentioned above was partially offset by an increase in sales resulting from a change in contractual relationships with our third party carriers as reported in our Form 10-K for the fiscal year ended April 26, 2008.  This change resulted in an increase of $11.0 million of sales for our Upholstery Group in fiscal 2009.

Operating Margin

Our Upholstery Group’s operating margin increased 6.6 percentage points in fiscal 2010.

 
·
Efficiencies realized in our domestic upholstery manufacturing facilities resulted in an increase in our operating margin of 3.3 percentage points.  Our conversion to cellular manufacturing and our various restructurings completed in recent years resulted in more efficient capacity utilization.
 
·
Although we incurred rising raw material costs in the fourth quarter of fiscal 2010, for the full fiscal year, decreases in raw material costs for our Upholstery Group resulted in a 2.1 percentage point improvement in our operating margin.
 
·
A decrease in our bad debt expense for our Upholstery Group resulted in a 1.8 percentage point improvement in our operating margin.
 
·
In fiscal 2009, the Upholstery Group’s operating income was reduced by $3.3 million due to the one-time adjustment for inter-company profit resulting from the previously mentioned change in reporting of the retail warehouse operations.  This adjustment did not affect our consolidated operating results.
 
·
This segment’s operating profit increased by $1.5 million during fiscal 2009 as a result of the change in third party freight carrier contracts as noted previously in our sales discussion.

Casegoods Group
(Amounts in thousands, except  percentages)
 
(52 weeks)
4/24/2010
   
(52 weeks)
4/25/2009
   
Percent
change
 
Sales
  $ 146,706     $ 178,000       (17.6 )%
Operating income (loss)
    (243 )     554       (143.9 )%
Operating margin
    (0.2 )%     0.3 %        
 
Sales
 
The $31.3 million decrease in sales volume occurred across all of our casegoods operating units due to weak consumer demand.  The challenging economic climate had a negative impact on consumers’ discretionary spending.  We believe that consumers are postponing purchases of casegoods product to a greater extent than upholstered furniture because casegoods product tends to be a higher ticket purchase compared to upholstered furniture.  In spite of reduced demand, we were able to reduce our sales discounts, which resulted in a 1.6 percentage point increase in sales for our Casegoods Group.
 
Operating Margin
 
Our Casegoods Group basically broke even on a 17.6% decrease in sales volume.  The 0.5 percentage point decrease in operating margin in fiscal 2010 was a result of the overall decrease in sales volume experienced across all of our casegoods operating units.  The decrease in sales volume outpaced our reduction in operating costs and improvement in gross margin.

 
27

 

Retail Group
(Amounts in thousands, except  percentages)
 
(52 weeks)
4/24/2010
   
(52 weeks)
4/25/2009
   
Percent
change
 
Sales
  $ 153,620     $ 160,838       (4.5 )%
Operating loss
    (19,825 )     (34,841 )     43.1 %
Operating margin
    (12.9 )%     (21.7 )%        
 
 Sales
 
 
·
The $7.2 million decrease in sales was mostly the result of a 15.2% decrease in sales in the first quarter of fiscal 2010 compared to the first quarter of fiscal 2009.  There were only slight decreases in sales for the second and third quarter of fiscal 2010 compared to the second and third quarter of fiscal 2009, with a slight increase in sales in the fourth quarter of fiscal 2010 compared to fiscal 2009.
 
·
The improvement in sales for our Retail Group in the latter part of fiscal 2010 was due to increased traffic and a 10% increase in our average ticket, as well as better product merchandising.
 
Operating Margin
 
Our Retail Group’s operating margin increased 8.8 percentage points in fiscal 2010.

 
·
Our Retail Group experienced a 1.1 percentage point improvement in gross profit margin.
 
·
Changes made to our selling structure resulted in a 4.7 percentage point improvement in our Retail Group’s operating margin.
 
·
A decrease in occupancy related expenses for our Retail Group resulted in a 0.9 percentage point improvement in our Retail Group’s operating margin.  This was mainly a result of improved utility management and a decrease in common area maintenance charges for our leased facilities.
 
·
A decrease in advertising expense for our Retail Group resulted in a 0.7 percentage point improvement in the segment’s operating margin, as we continued to focus on cost effectiveness of our advertising expenses.

VIEs/Corporate and Other

Our VIEs’ sales increased to $53.2 million in fiscal 2010, compared to $50.9 million in fiscal 2009.  Additionally, our VIEs’ operating loss improved to $0.8 million in fiscal 2010, compared to an operating loss of $4.9 million in fiscal 2009 mainly due to operational improvements made at our Toronto, Ontario VIE.

Our Corporate and Other operating loss increased $8.4 million due in part to a $2.7 million decrease in realized gains on property sales.  Additionally, a $6.3 million increase in costs for bonus and stock incentives as a result of our improved performance and higher stock price, resulted in an increase in our Corporate and Other operating loss.

Income from Continued Dumping and Subsidy Offset Act

We received $4.4 million and $8.1 million in payments and funds related to an anti-dumping order on wooden bedroom furniture from China during fiscal 2010 and fiscal 2009, respectively, for duties collected on imports entered into the United States before October 1, 2007.

 
28

 

Interest Expense

Interest expense for fiscal 2010 was $2.6 million less than fiscal 2009 due to a $56.8 million decrease in our average debt.  Our weighted average interest rate increased 1.5 percentage points in fiscal 2010 compared to fiscal 2009 due to fees associated with the unused portion of our credit facility weighing the overall effective interest rate more heavily.

Other Income/ (Expense)

Other income (expense), net, was income of $0.5 million for fiscal 2010, compared to expense of $7.9 million for fiscal 2009.  During fiscal 2010, we recognized $0.1 million related to gains on the sale of investments, compared to $5.3 million of losses during fiscal 2009.  Of the $5.3 million for fiscal 2009, $5.1 million was an impairment charge related to available-for-sale marketable securities used to fund future obligations of one of our non-qualified retirement plans.  The impairment charge was recorded because those losses were considered other-than-temporary.

Income Taxes

Our effective tax rate for fiscal 2010 was 27.2%.  During fiscal 2010 we realized a reduction of our tax asset valuation reserves which lowered our tax rate by 5.3 percentage points.  The reduction in our valuation reserves was due to the utilization of some tax assets which were previously reserved in addition to reversals of reserves as a result of improved operating performance in certain state tax jurisdictions during fiscal 2010.

Our effective tax rate for fiscal 2009 was (27.6)%.  During fiscal 2009 we recorded a substantial valuation reserve against our federal, state, and foreign deferred tax assets, which more than offset the tax benefit of our losses and reduced our effective tax rate from 35.0% to (12.5)%.  Our rate was further reduced as a result of a non-deductible goodwill impairment charge and other adjustments.

Restructuring

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.  We had a net reduction of estimated restructuring liabilities of $0.2 million and $0.7 million during fiscal 2011 and fiscal 2010, respectively, classified in total cost of sales, covering severance and benefits.  During fiscal 2009, we had restructuring charges of $7.7 million classified in total cost of sales, covering severance and benefits and other restructuring charges.

During fiscal 2007 and fiscal 2008, several of our retail warehouses were consolidated into larger facilities and several underperforming stores were closed.  In fiscal 2011, fiscal 2010, and fiscal 2009 we had restructuring charges of $0.7 million, $1.3 million, and $1.6 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 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 $2.8 million and $0.2 million in fiscal 2010 and fiscal 2009, respectively, classified in total cost of sales, covering severance and benefits and other restructuring costs.

Additionally, during fiscal 2009 we committed to restructuring plans to close our plant in Sherman, Mississippi, related to our Bauhaus operations, to reduce our company-wide employment to be more in line with sales volume and to close the operations of our La-Z-Boy U.K. subsidiary due to a change in the strategic direction for this operation.  In connection with these plans, during fiscal 2009, we recorded $1.8 million in restructuring charges classified in total cost of sales and $1.7 million classified as an operating expense line item below selling, general and administrative, covering severance and benefits, the write-down of fixed assets, the write-down of inventory and other restructuring

 
29

 

Our restructuring charges during fiscal 2009 also included a $0.5 million reduction of estimated restructuring liabilities, classified as an operating expense line item below selling, general and administrative, related to a restructuring plan that took place in fiscal 2007.

Long-lived Asset Write-down

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable.  While our Retail Group's operating results have improved significantly over the past several years, certain of our locations generate operating losses.  As a result, the estimated undiscounted cash flows (based upon, among other things, our annual forecasting process) related to certain locations are less than the carrying value of the underlying assets.  For those locations, we have concluded that the estimated fair values approximate only the levels of working capital due primarily to the continuing levels of historic operating losses.  Consequently, we concluded that the leasehold improvements at these locations were fully impaired and therefore recorded an impairment charge of $1.8 million for several locations owned by our California VIE and $1.3 million for various company owned stores.  In addition, during fiscal 2011 we decided to vacate one of our facilities and recorded an impairment charge of $1.3 million representing the full carrying value of leasehold improvements at that location.  We did not have any long-lived asset impairments during fiscal 2010.

Based on the results of our fiscal 2009 asset impairment analysis it was determined that the expected future undiscounted cash flows of the assets of our Upholstery Group and Casegoods Group exceeded their carrying value and therefore no impairment existed.  Because of the historical operating losses of our Retail Group and the decline in real estate values in fiscal 2009, we recorded an impairment charge of $7.0 million on some of the long-lived assets of our Retail Group.  In addition, during fiscal 2009 we recorded an impairment charge of $0.5 million relating to two of our retail properties that were held for sale.

Write-down of Intangibles

We performed our annual fourth quarter testing of our remaining trade names in fiscal 2011 and fiscal 2010 and found no impairments.  As of the end of fiscal 2009 we had no goodwill remaining.

During fiscal 2009, we closed the operations of our La-Z-Boy U.K. subsidiary, we reorganized the Toronto, Ontario retail market and we evaluated the remaining goodwill of our Upholstery and Retail Groups and the remaining trade names of our Casegoods Group.  As a result of changes made to the above mentioned business and the steep decline in our stock price and its negative impact on our market capitalization at that time, we recognized a $42.1 million non-cash impairment charge relating to the goodwill in our Upholstery and Retail Groups and our VIEs during fiscal 2009.  Additionally, we recognized a $5.5 million non-cash impairment charge relating to the trade names in our Casegoods Group during fiscal 2009.

Business Outlook

In light of the difficult operating environment, we are encouraged by the sales performance for the fourth quarter in each of our three operating segments as well as our same-store sales improvement.  Importantly, our efficient operating structure will allow us to achieve improved profitability on any increase in volume.  Going forward, we believe our industry-leading brand, coupled with our network of La-Z-Boy Furniture Galleries® stores and Comfort Studios®, position us well to further capitalize on a strengthening of the economy, particularly as it relates to consumer confidence and housing.   We believe our new brand platform will continue to drive qualified traffic to our dealer network and, importantly, we will continue to invest in our business.

 
30

 

Although the spring period showed some strength, from a seasonality perspective, the industry experiences weaker demand throughout the summer period and, as a result, our plants will shut down for one week of vacation and maintenance during the first quarter, which ends in July.  Accordingly, our first quarter is typically the weakest in terms of sales and profits because we ship product for 12 weeks instead of the normal 13 weeks.

Liquidity and Capital Resources

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 $115.3 million at April 30, 2011, compared to $108.4 million at April 24, 2010.

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 April 30, 2011, we had $20.0 million outstanding on our credit facility and $108.2 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.  The increase in our excess availability was mainly the result of the decrease in the amount outstanding on our credit facility during fiscal 2011.

Our borrowing capacity is based on eligible trade accounts receivables and inventory.  During fiscal 2011 we reduced the total commitment under our credit facility to $175.0 million.  We made this reduction because we expect our borrowing capacity to remain at or below $175.0 million, and the reduction resulted 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 fiscal 2011 were $10.5 million compared with $11.0 million during fiscal 2010.  We have no material purchase commitments for capital expenditures.  Capital expenditures are expected to be in the range of $15.0 million to $20.0 million in fiscal 2012.
 
We expect restructuring costs from all our remaining plans to impact our operating cash flows by approximately $0.2 million during fiscal 2012.
 
We believe our present cash and equivalents balance of $115.3 million, cash flows from operations and current availability under our credit facility of $108.2 million will be sufficient to fund our business needs, including our fiscal 2012 contractual obligations of $53.1 million as presented in our contractual obligations table.

 
31

 

The following table illustrates the main components of our cash flows:

Cash Flows Provided By (Used For)
 
Year Ended
 
(Amounts in thousands)
 
4/30/2011
   
4/24/2010
 
Operating activities
           
Net income
  $ 17,373     $ 31,359  
Non-cash add backs and changes in deferred taxes
    39,771       33,787  
Restructuring
    487       3,434  
Change in working capital
    (29,785 )     21,079  
Cash provided by operating activities
    27,846       89,659  
                 
Investing activities
    (10,260 )     14,009  
                 
Financing activities
               
Net decrease in debt
    (11,033 )     (12,890 )
Other financing activities
    270       1,035  
Cash used for financing activities
    (10,763 )     (11,855 )
                 
Exchange rate effects
    12       (756 )
Net increase in cash and equivalents
  $ 6,835     $ 91,057  

Operating Activities

During fiscal 2011, net cash provided by operating activities was $27.8 million.  Our net income and depreciation and amortization were $41.7 million and our change in working capital primarily consisted of the following:

 
·
Decrease in accounts payable of $4.4 million.
 
·
Increase in inventory levels of $10.5 million due to our focus on being in a better service position for our customers.
 
·
Decrease in other liabilities of $10.8 million due to payments of accrued benefits and decreases in our estimate income tax liability.
 
·
$4.5 million for pension contributions.

During fiscal 2010, net provided by operating activities was $89.7 million.  Our net income and depreciation and amortization were $56.6 million and our change in working capital primarily consisted of the following:

 
·
Increase in accounts receivable of $17.3 million due to improved sales volume at the end of fiscal 2010.
 
·
Increase in accounts payable of $13.1 million.
 
·
Increase in other liabilities of $14.9 million due to an increase in accrued benefit payments and customer deposits.
 
·
Decrease in inventory levels of $7.1 million due to our focus on keeping inventory levels in-line with expected near term sales levels.

Investing Activities

During fiscal 2011, net cash used for investing activities was $10.3 million, which consisted primarily of $10.5 million in capital expenditures.  During fiscal 2010, net cash provided by investing activities was $14.0 million, which consisted primarily of the following:

 
32

 

 
·
$17.5 million decrease in restricted cash.
 
·
Capital expenditures of $11.0 million.
 
·
Proceeds from the sale of investments and disposal of assets of $12.2 million.
 
·
Purchases of investments of $4.9 million.

Financing Activities

We used $10.8 million of cash for financing activities in fiscal 2011, compared to $11.9 million during fiscal 2010.  Our financing activities in fiscal 2011 included a net repayment of debt of $11.0 million, compared to a net repayment of debt of $12.9 million in fiscal 2010.

Other

The following table summarizes our contractual obligations of the types specified:

         
Payments Due by Period
 
(Amounts in thousands)
 
Total
   
Less than
1 Year
   
1-3 Years
   
4-5 Years
   
More than
5 Years
 
Long-term debt obligations
  $ 34,586     $ 4,844     $ 22,334     $ 7,393     $ 15  
Capital lease obligations
    471       276       195              
Operating lease obligations
    323,167       42,873       75,071       66,270       138,953  
Interest obligations*
    2,068       1,134       860       56       18  
Pension contribution obligations**
    3,946       3,946                    
Total contractual obligations
  $ 364,238     $ 53,073     $ 98,460     $ 73,719     $ 138,986  

*
For our variable interest rate obligations, the interest rate projected for future periods is the average rate for the current fiscal quarter projected over such future fiscal periods.  For our fixed rate obligations, it is the fixed rate over the term of such obligation.  We have assumed that the debt outstanding at the end of our current fiscal period will be outstanding over the entire term of the various agreements, however this amount could significantly increase or decrease based on the amount of debt we borrow or pay in future periods.
**
For our pension contribution obligations, we are statutorily required to make a contribution at various times during fiscal 2012. Funding projections beyond that are not practical to estimate.

Our balance sheet at the end of fiscal 2011 reflected a $4.5 million liability for uncertain income tax positions.  We expect that a portion of this liability will be settled within the next twelve months.  The amount to be resolved within the next twelve months is composed of gross unrecognized tax benefits of $0.4 million and interest of $0.1 million, net of deferred tax benefits of less than $0.1 million and penalties of less than $0.1 million.  The remaining balance, to the extent it is ever paid, will be paid as tax audits are completed or settled; and as such, were not included in our obligations table above because the timing of when they will be settled is difficult to estimate.
 
Realization of our deferred tax assets is dependent on generating sufficient future taxable income.  Valuation allowances of $54.9 million associated with certain U.S. federal, state and foreign deferred tax assets could be reduced in fiscal 2012 based on, among other factors, the level of taxable income expected to be generated in fiscal 2012 and beyond.
 
Our debt-to-capitalization ratio was 8.8% at April 30, 2011, 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 April 30, 2011, 5.4 million additional shares could be purchased pursuant to this authorization. We did not purchase any shares during fiscal 2011.

 
33

 
 
We have guaranteed various leases of dealers with proprietary stores. The total amount of these guarantees was $1.4 million at April 30, 2011. Of this, $1.1 million will expire within one year and $0.3 million in one to two years. At the end of fiscal 2011, we had $40.9 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 made $4.5 million in contributions to our defined benefit plan.  We are required to make $3.9 million in contributions during fiscal 2012.
 
Continuing compliance with existing federal, state and local statutes dealing with protection of the environment is not expected to have a significant effect upon our capital expenditures, earnings, competitive position or liquidity.
 
Critical Accounting Policies
 
Our consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles.  In some cases, these principles require management to make difficult and subjective judgments regarding uncertainties and, as a result, such estimates and assumptions may significantly impact our financial results and disclosures.   Estimates are based on currently known facts and circumstances, prior experience and other assumptions believed to be reasonable.  We use our best judgment in valuing these estimates and may, as warranted, use external advice.  Actual results could differ from these estimates, assumptions, and judgments and these differences could be significant.  Adjustments are recorded when our actual experience differs from the assumptions underlying the estimates. These adjustments could be significant. We make frequent comparisons of actual experience to our assumptions in order to mitigate the likelihood of significant adjustments.  The following critical accounting policies affect our consolidated financial statements.

Revenue Recognition and Related Allowances

Substantially all of our shipping agreements with third-party carriers transfer the risk of loss to our customers upon shipment.  Accordingly, our shipments using third-party carriers are recognized as revenue upon shipment of the product.  In all cases, for product shipped on our company-owned trucks, revenue is recognized upon delivery. This revenue includes amounts billed to customers for shipping. Provisions are made at the time revenue is recognized for estimated product returns and warranties, as well as other incentives that may be offered to customers. We also recognize revenue for amounts received from our customers in connection with our shared advertising cost arrangement.  We import certain products from foreign ports, which are shipped directly to our domestic customers.  In this case, revenue is not recognized until title is assumed by our customer, which is normally after the goods pass through U.S. Customs.
 
Incentives offered to customers include cash discounts, advertising agreements and other sales incentive programs. Estimated cash discounts and other sales incentives are recorded as a reduction of revenues when the revenue is recognized.  Our advertising agreements give customers advertising allowances based on revenues and such allowances are recorded as a reduction to revenue when earned.

Trade accounts receivable arise from the sale of products on trade credit terms.  On a quarterly basis, our management team reviews all significant accounts as to their past due balances, as well as collectability of the outstanding trade accounts receivable for possible write off.  It is our policy to write off the accounts receivable against the allowance account when we deem the receivable to be uncollectible.  Additionally, for those dealers that are significantly past due, we review their sales orders and ship product when collectability of the incremental sale is reasonably assured.

 
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We have notes receivable balances due to us from various customers.  These notes receivable generally relate to past due accounts receivable which were replaced by a note receivable in order to secure further collateral from the customer.  The collateral from the customer is generally in the form of inventory or real estate.  Additionally, we have personal guarantees from some of these customers on these notes receivable.  In cases where we do not have sufficient collateral to support the carrying value of the note receivable, our policy is to recognize an allowance for credit losses for this difference.

The allowance for credit losses reflects our best estimate of probable losses inherent in the accounts and notes receivable balances. We determine the allowance based on known troubled accounts, historical experience and other currently available evidence.
 
Investments
 
We evaluate our available for sale investments periodically for possible other-than-temporary impairments by reviewing factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and our ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery of market value.  If the impairment is determined to be other-than-temporary, the amount of the impairment is recognized as part of earnings.  If the impairment is determined to be temporary, then the resulting change in market value is recorded as part of other comprehensive income/(loss) in our statement of changes in equity.
 
Long-lived Assets
 
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable.  Our assessment of recoverability is based on our best estimates using either quoted market prices or an analysis of the undiscounted projected future cash flows by asset groups in order to determine if the fair value of our long-lived assets exceed their carrying value.  Our asset groups consist of our operating units in our Upholstery and Casegoods Group (La-Z-Boy, England, Bauhaus, American Drew and Lea, Hammary, Kincaid) and each of our retail stores (including those of our sole remaining consolidated VIE).  As described elsewhere, during fiscal 2011 we recorded impairment charges at certain stores in our retail operations.
 
Other Loss Reserves
 
We have various other loss exposures arising from the ordinary course of business, including inventory obsolescence, health insurance, litigation, environmental claims, and self-insured workers’ compensation and product liabilities. Establishing loss reserves requires estimates and the judgment of management with respect to risk and ultimate liability. We use legal counsel or other experts, including actuaries as appropriate, to assist in developing estimates. Due to the uncertainties and potential changes in facts and circumstances, additional charges related to these reserves could be required in the future.
 
We have various excess loss coverages for auto, product liability and workers’ compensation.  Our deductibles generally do not exceed $1.0 million.
 
Income Taxes
 
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards.  Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.  In periods when deferred tax assets are recorded, we are required to estimate whether recoverability is more likely than not, based on forecasts of taxable earnings in the related tax jurisdiction. We consider historical and projected future operating results, the eligible carry-forward period, tax law changes, tax planning opportunities and other relevant considerations when making judgments about realizing the value of our deferred tax assets.

 
35

 

Pensions
 
We maintain a defined benefit pension plan for eligible factory hourly employees at some operating units.  The plan does not allow new participants. Active participants at some operating units continue to earn service credits.  Annual net periodic expense and benefit liabilities under our defined benefit plan is determined on an actuarial basis using various assumptions and estimates including discount rates, long-term rates of return, estimated remaining years of service and estimated life expectancy.  Each year, we compare the actual experience to the more significant assumptions used, and if warranted, we make adjustments to the assumptions.
 
Our pension plan discount rate assumption is evaluated annually. The discount rate is based upon a single rate developed after matching a pool of high quality bond payments to the plan’s expected future benefit payments.  We utilized a discount rate of 5.55% at April 30, 2011, compared with a rate of 5.85% at April 24, 2010, and 7.15% at April 25, 2009.  The same methodology was utilized for fiscal 2011, fiscal 2010 and fiscal 2009.
 
Pension benefits are funded through deposits with trustees and satisfy, at a minimum, the applicable funding regulations.
 
Besides evaluating the discount rate used to determine our pension obligation, we also evaluate our assumption relating to the expected return on plan assets annually. In selecting the expected long-term rate of return on assets, we considered the average rate of earnings expected on the funds invested or to be invested to provide the benefits of this plan. This included considering the trust’s asset allocation, investment strategy, and the expected returns likely to be earned over the life of the plan. The rate of return assumption as of April 30, 2011, and April 24, 2010, was 8.0%.  The expected rate of return assumption as of April 30, 2011, will be used to determine pension expense for fiscal 2012.
 
Our long-term stated investment objective is to maximize the investment return with the least amount of risk through a combination of capital appreciation and income. The strategic asset allocation targets are 65% equities and 35% fixed income within a range of 5% of the target.
 
We are required to make $3.9 million in contributions to our qualified defined benefit plan in fiscal 2012.  We expect that the fiscal 2012 pension expense for the defined benefit pension plan, after considering all relevant assumptions will be $1.5 million compared with $2.5 million in fiscal 2011.  A 25 basis point change in our discount rate or our expected return on plan assets would not have a significant impact on our financial statements.
 
Financial Guarantees and Product Warranties
 
We have provided financial guarantees relating to leases in connection with certain La-Z-Boy Furniture Galleries® stores which are not operated by the company.  The guarantees are generally for real estate leases and have remaining terms from 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.
 
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 significant 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 product.  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.  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.

 
36

 
 
Variable Interest Entities
 
Financial accounting standards require the “primary beneficiary” of a VIE to include the VIE’s assets, liabilities and operating results in its consolidated financial statements.   Among other things, the 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 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 consolidate entities that are VIEs when we are deemed to be the primary beneficiary of the VIE and we continuously evaluate our VIEs’ primary beneficiaries as facts and circumstances change to determine if our status as primary beneficiary has changed.  As of the beginning of fiscal 2011, we deconsolidated our Toronto, Ontario VIE, and during the fourth quarter of fiscal 2011, we acquired our California VIE.  As a result, we had only one remaining VIE with eight stores at April 30, 2011.

We have a special operating agreement in place with an independent dealer that is a VIE which causes us to be considered their primary beneficiary.  Based on the guidance mentioned above for consolidation of VIEs, we have consolidated this dealer.  Our consolidated VIEs were recorded at fair value on the date we became the primary beneficiary.  All earnings and losses attributed to our VIEs are recorded as Net income (loss) attributable to noncontrolling interests.  Prior to fiscal 2010, all losses of the VIEs in excess of their equity were recorded as Net income (loss) and all earnings of our VIEs to the extent of recouping the losses were recorded as Net income (loss).  Earnings in excess of losses were attributed to equity owners and were recorded as minority interest.

Stock-Based Compensation

Stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period. Determining the fair value of stock-based awards at the grant date requires judgment, including estimating expected dividends, future stock-price volatility, expected option lives and the amount of share-based awards that are expected to be forfeited. We do not expect that changes in these assumptions would have a significant impact on our results of operations.

The fair value of each option grant was estimated using a Black-Scholes option-pricing model. 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 grant. Forfeitures were estimated at the date of grant based on historical experience.

Regulatory Developments

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.

 
37

 

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 significant depending on the results of legal appeals and administrative reviews and our actual percentage allocation.  We received $1.1 million during fiscal 2011, $4.4 million during fiscal 2010 and $8.1 million during fiscal 2009 in CDSOA payments and funds related to the anti-dumping order on wooden bedroom furniture from China.

Climate Change Legislation

Except for the potential effects of severe weather, which we discuss in Item 1A in regard to foreign sourcing and the availability of raw materials, we do not believe that future climate change or existing or pending laws, regulations, international accords, or business trends relating to climate change are reasonably likely to have a significant effect on our business or financial condition.  We currently utilize trucking to transport goods to our distribution centers and in some instances to our customers.  In most cases, our customers utilize trucking to obtain goods from us.  New laws or regulations resulting in steep increases in the cost of fuel, or new technologies resulting in steep decreases in such costs, would affect our costs and the cost to our customers purchasing from us.  If our costs increased, we might not always be able to pass along such increases to our customers due to competitive and marketing pressures, but we would expect our competitors to be similarly affected.

Recent Accounting Pronouncements

Refer to Note 1 of the consolidated financial statements in Item 8 for detailed information regarding accounting pronouncements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
We are exposed to market risk from changes in interest rates. Our exposure to interest rate risk results from our variable rate debt under which we had $13.0 million of borrowings at April 30, 2011.  In May 2008, we entered into an interest rate swap agreement to mitigate the impact of changes in interest rates on $20.0 million of our floating rate debt.  This interest rate swap agreement expired in May 2011 and was not renewed.  Management estimates that a one percentage point change in interest rates would not have a significant impact on our results of operations for fiscal 2012 based upon our current levels of exposed liabilities.
 
We are exposed to market risk from changes in the value of foreign currencies primarily related to our plant in Mexico, as substantially all purchases of imported parts and finished goods are denominated in U.S. dollars.  As a result, gains and losses resulting from market changes in the value of foreign currencies have not had and are not expected to have a significant effect on our consolidated results of operations.  A decrease in the value of foreign currencies in relation to the U.S. dollar could impact the profitability of some of our vendors, but we believe any impact would be similar for our competitors.

 
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Management’s Report to our Shareholders

Management’s Responsibility for Financial Information
Management of La-Z-Boy Incorporated is responsible for the preparation, integrity and objectivity of La-Z-Boy Incorporated’s consolidated financial statements and other financial information contained in this Annual Report on Form 10-K. Those consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America. In preparing those consolidated financial statements, Management was required to make certain estimates and judgments, which are based upon currently available information and Management’s view of current conditions and circumstances.

The Audit Committee of the Board of Directors, which consists solely of independent directors, oversees our process of reporting financial information and the audit of our consolidated financial statements. The Audit Committee is informed of the financial condition of La-Z-Boy Incorporated and regularly reviews Management’s critical accounting policies, the independence of our independent auditors, our internal controls and the objectivity of our financial reporting. Both the independent auditors and the internal auditors have free access to the Audit Committee and meet with the Audit Committee periodically, both with and without Management present.

On September 17, 2010, La-Z-Boy Incorporated’s Chief Executive Officer submitted his annual certification to the New York Stock Exchange stating that he was not aware of any violation by the corporation of the Exchange’s corporate governance listing standards. La-Z-Boy filed the certifications by its Chief Executive Officer and Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002 as exhibits to this Annual Report on Form 10-K for the fiscal year ended April 30, 2011.

Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal controls over financial reporting based upon the framework in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of April 30, 2011.  The effectiveness of the Company’s internal control over financial reporting as of April 30, 2011, has been audited by PricewaterhouseCoopers, LLP, an independent registered public accounting firm, as stated in their report which appears herein.
 
/s/ Kurt L. Darrow
Kurt L. Darrow
President and Chief Executive Officer

/s/ Louis M. Riccio, Jr.
Louis M. Riccio, Jr.
Senior Vice President and Chief Financial Officer

 
39

 

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of La-Z-Boy Incorporated:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations,  of changes in equity and of cash flows present fairly, in all material respects, the financial position of La-Z-Boy Incorporated and its subsidiaries at April 30, 2011 and April 24, 2010, and the results of their operations and their cash flows for each of the three years in the period ended April 30, 2011 in conformity with accounting principles generally accepted in the United States of America.  Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of April 30, 2011, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting on the preceding page.  Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits.  We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects.  Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP
 
Detroit, Michigan
 
June 21, 2011
 
 
 
40

 

LA-Z-BOY INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS

   
Fiscal Year Ended
 
(Amounts in thousands, except per share data)
 
(53 weeks)
4/30/2011
   
(52 weeks)
4/24/2010
   
(52 weeks)
4/25/2009
 
Sales
  $ 1,187,143     $ 1,179,212     $ 1,226,674  
Cost of sales
                       
Cost of goods sold
    832,962       803,945       878,967  
Restructuring
    (163 )     2,141       9,818  
Total cost of sales
    832,799       806,086       888,785  
Gross profit
    354,344       373,126       337,889  
Selling, general and administrative
    323,314       331,405       373,125  
Restructuring
    650       1,293       2,642  
Write-down of long-lived assets
    4,471             7,503  
Write-down of trade names
                5,541  
Write-down of goodwill
                42,136  
Operating income (loss)
    25,909       40,428       (93,058 )
Interest expense
    2,346       2,972       5,581  
Interest income
    944       724       2,504  
Income from Continued Dumping and Subsidy Offset Act, net
    1,054       4,436       8,124  
Other income (expense), net
    405       480       (7,888 )
Income (loss) before income taxes
    25,966       43,096       (95,899 )
Income tax expense
    8,593       11,737       26,514  
Net income (loss)
    17,373       31,359       (122,413 )
Net (income) loss attributable to noncontrolling interests
    6,674       1,342       (252 )
Net income (loss) attributable to La-Z-Boy Incorporated
  $ 24,047     $ 32,701     $ (122,665 )
                         
Basic average shares
    51,849       51,533       51,460  
                         
Basic net income (loss) per share attributable to La-Z-Boy Incorporated
  $ 0.46     $ 0.63     $ (2.39 )
                         
Diluted average shares
    52,279       51,732       51,460  
                         
Diluted net income (loss) per share attributable to La-Z-Boy Incorporated
  $ 0.45     $ 0.62     $ (2.39 )
                         
Dividends declared per share
  $     $     $ 0.10  

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

 
41

 

LA-Z-BOY INCORPORATED
CONSOLIDATED BALANCE SHEET

   
As of
 
 (Amounts in thousands, except par value)
 
4/30/2011
   
4/24/2010
 
Current assets
           
Cash and equivalents
  $ 115,262     $ 108,427  
Receivables, net of allowance of $23,937 in 2011 and $20,258 in 2010
    161,299       165,001  
Inventories, net
    138,444       132,480  
Deferred income taxes – current
          2,305  
Other current assets
    17,218       18,862  
Total current assets
    432,223       427,075  
Property, plant and equipment, net
    120,603       138,857  
Trade names
    3,100       3,100  
Deferred income taxes – long term
    2,883       458  
Other long-term assets
    34,646       38,293  
Total assets
  $ 593,455     $ 607,783  
                 
Current liabilities
               
Current portion of long-term debt
  $ 5,120     $ 1,066  
Accounts payable
    49,537       54,718  
Accrued expenses and other current liabilities
    77,447       91,523  
Total current liabilities
    132,104       147,307  
Long-term debt
    29,937       46,917  
Other long-term liabilities
    67,274       70,445  
Contingencies and commitments
           
Shareholders' equity
               
Common shares, $1 par value – 150,000 authorized; 51,909 outstanding in 2011 and 51,770 outstanding in 2010
    51,909       51,770  
Capital in excess of par value
    201,589       201,873  
Retained earnings
    126,622       106,466  
Accumulated other comprehensive loss
    (18,804 )     (20,284 )
Total La-Z-Boy Incorporated shareholders’ equity
    361,316       339,825  
Noncontrolling interests
    2,824       3,289  
Total equity
    364,140       343,114  
Total liabilities and equity
  $ 593,455     $ 607,783  

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

 
42

 

LA-Z-BOY INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS

   
Fiscal Year Ended
 
(Amounts in thousands)
 
4/30/2011
   
4/24/2010
   
4/25/2009
 
Cash flows from operating activities
                 
Net income (loss)
  $ 17,373     $ 31,359     $ (122,413 )
Adjustments to reconcile net income (loss) to cash provided by operating activities
                       
(Gain) loss on sale of assets
    201       (538 )     (2,813 )
Write-down of long-lived assets
    4,471             7,503  
Write-down of trade names
                5,541  
Write-down of goodwill
                42,136  
Write-down of investments
                5,140  
Deferred income tax expense/(benefit)
    (120 )     (2,693 )     39,233  
Restructuring
    487       3,434       12,460  
Provision for doubtful accounts
    7,197       6,535       25,254  
Depreciation and amortization
    24,302       25,246       24,142  
Stock-based compensation expense
    3,720       5,236       3,819  
Pension plan contributions
    (4,495 )            
Change in receivables
    1,599       (17,250 )     27,223  
Change in inventories
    (10,531 )     7,074       37,631  
Change in other assets
    (1,092 )     3,225       2,967  
Change in payables
    (4,429 )     13,147       (14,544 )
Change in other liabilities
    (10,837 )     14,884       (40,571 )
Total adjustments
    10,473       58,300       175,121  
    Net cash provided by operating activities
    27,846       89,659       52,708  
 
                       
Cash flows from investing activities
                       
Proceeds from disposals of assets
    506       3,338       9,060  
Capital expenditures
    (10,540 )     (10,986 )     (15,625 )
Purchases of investments
    (10,200 )     (4,933 )     (11,330 )
Proceeds from sales of investments
    10,655       8,833       34,675  
Change in restricted cash
          17,507       (18,207 )
   Cash effects upon consolidation/(deconsolidation) of VIE
    (632 )           631  
Other
    (49 )     250       (581 )
Net cash provided by (used for) investing activities
    (10,260 )     14,009       (1,377 )
 
                       
Cash flows from financing activities
                       
Proceeds from debt
    30,585       41,817       50,794  
Payments on debt
    (41,618 )     (54,707 )     (92,139 )
Stock issued for stock and employee benefit plans
    270       1,035        
Dividends paid
                (5,177 )
Net cash used for financing activities
    (10,763 )     (11,855 )     (46,522 )

 
43

 

Consolidated Statement of Cash Flows (continued)

   
Fiscal Year Ended
 
(Amounts in thousands)
 
4/30/2011
   
4/24/2010
   
4/25/2009
 
Effect of exchange rate changes on cash and equivalents
    12       (756 )     (901 )
Change in cash and equivalents
    6,835       91,057       3,908  
Cash and equivalents at beginning of period
    108,427       17,370       13,462  
Cash and equivalents at end of period
  $ 115,262     $ 108,427     $ 17,370  

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

 
44

 

LA-Z-BOY INCORPORATED
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY