UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
FOR QUARTERLY PERIOD ENDED JANUARY 23, 2010
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 incorporation or organization)
(I.R.S. Employer 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
 
None
(Former name, former address and former fiscal year, if changed since last report.)
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
 
Yes  þ                                                       No ¨
 
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).
 
Yes ¨                                                        No ¨
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer ¨       Accelerated filer þ          Non-accelerated filer ¨        Smaller Reporting Company ¨
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes ¨                                                         No þ
 
The number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
 
Class
 
Outstanding at February 9, 2010
Common Shares, $1.00 par value
 
51,546,239

 
LA-Z-BOY INCORPORATED
FORM 10-Q THIRD QUARTER OF FISCAL 2010
 
TABLE OF CONTENTS
       
     Page     
Number(s)
PART I Financial Information (Unaudited)
   
 
Item 1.
Financial Statements
 
   
Consolidated Statement of Operations
 
3-4
   
Consolidated Balance Sheet
 
5
   
Consolidated Statement of Cash Flows
 
6
   
Consolidated Statement of Changes in Equity
 
7
   
Notes to Consolidated Financial Statements
   
   
Note 1. Basis of Presentation
 
8-9
   
Note 2. Interim Results
 
9
   
Note 3. Reclassification
 
9
   
Note 4. Restricted Cash
 
9
   
Note 5. Inventories
 
9
   
Note 6. Pension Plans
 
10
   
Note 7. Financial Guarantees and Product Warranties
 
10-11
   
Note 8. Stock-Based Compensation
 
11
   
Note 9. Total Comprehensive Income (Loss)
 
11
   
Note 10. Segment Information
 
11-12
   
Note 11. Restructuring
 
13-14
   
Note 12. Income Taxes
 
14-15
   
Note 13. Variable Interest Entities
 
15-16
   
Note 14. Income from Continued Dumping and Subsidy Offset Act
 
16
   
Note 15. Earnings per Share
 
16-17
   
Note 16. Fair Value Measurements
 
17-18
   
Note 17. Hedging Activities
 
18
   
Note 18. Recent Accounting Pronouncements
 
19-20
       
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
   
Cautionary Statement Concerning Forward-Looking Statements
 
21
   
Introduction
 
21-22
   
Results of Operations
 
23-34
   
Liquidity and Capital Resources
 
34-36
   
Restructuring
 
37-38
   
Critical Accounting Policies
 
38
   
Regulatory Developments
 
39
   
Recent Accounting Pronouncements
 
39
   
Business Outlook
 
39
       
 
Item 3. 
Quantitative and Qualitative Disclosures About Market Risk
 
39
 
Item 4. 
Controls and Procedures
 
40
         
PART II Other Information
   
 
Item 1A.
Risk Factors
 
40
 
Item 6.
Exhibits
 
40
         
Signature Page
 
41
2

 
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
 
LA-Z-BOY INCORPORATED 
CONSOLIDATED STATEMENT OF OPERATIONS
   
   
Third Quarter Ended
 
(Unaudited, amounts in thousands, except per share data)
 
01/23/10
   
01/24/09
 
Sales
  $ 305,094     $ 288,576  
Cost of sales
               
Cost of goods sold
    206,895       207,809  
Restructuring
    392       1,664  
Total cost of sales
    207,287       209,473  
Gross profit
    97,807       79,103  
Selling, general and administrative
    83,527       93,501  
Restructuring
    201       741  
Write-down of long-lived assets
          7,036  
Write-down of trade names
          5,541  
Write-down of goodwill
          40,436  
Operating income (loss)
    14,079       (68,152 )
Interest expense
    577       1,386  
Interest income
    140       323  
Income from Continued Dumping and Subsidy Offset Act, net
    4,436       8,124  
Other income (expense), net
    (593 )     (7,433 )
Earnings (loss) before income taxes
    17,485       (68,524 )
Income tax (benefit) expense
    6,547       (4,263 )
Net income (loss)
    10,938       (64,261 )
Net (income) loss attributable to noncontrolling interests
    38       (287 )
Net income (loss) attributable to La-Z-Boy Incorporated
  $ 10,976     $ (64,548 )
                 
Basic average shares
    51,546       51,475  
Basic net income (loss) attributable to La-Z-Boy Incorporated per share
  $ 0.21     $ (1.25 )
                 
Diluted average shares
    51,845       51,475  
Diluted net income (loss) attributable to La-Z-Boy Incorporated per share
  $ 0.21     $ (1.25 )
                 
Dividends paid per share
  $     $ 0.02  
 
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
3

 
LA-Z-BOY INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
  
   
Nine Months Ended
 
(Unaudited, amounts in thousands, except per share data)
 
01/23/10
   
01/24/09
 
Sales
  $ 868,472     $ 942,176  
Cost of sales
               
Cost of goods sold
    593,406       686,494  
Restructuring
    1,791       9,696  
Total cost of sales
    595,197       696,190  
Gross profit
    273,275       245,986  
Selling, general and administrative
    246,011       286,603  
Restructuring
    1,022       2,208  
Write-down of long-lived assets
          7,036  
Write-down of trade names
          5,541  
Write-down of goodwill
          42,136  
Operating income (loss)
    26,242       (97,538 )
Interest expense
    2,387       4,532  
Interest income
    615       1,885  
Income from Continued Dumping and Subsidy Offset Act, net
    4,436       8,124  
Other income (expense), net
    352       (7,974 )
Earnings (loss) before income taxes
    29,258       (100,035 )
Income tax expense
    10,747       27,388  
Net income (loss)
    18,511       (127,423 )
Net (income) loss attributable to noncontrolling interests
    355       (407 )
Net income (loss) attributable to La-Z-Boy Incorporated
  $ 18,866     $ (127,830 )
                 
Basic average shares
    51,517       51,454  
Basic net income (loss) attributable to La-Z-Boy Incorporated per share
  $ 0.36     $ (2.49 )
                 
Diluted average shares
    51,595       51,454  
Diluted net income (loss) attributable to La-Z-Boy Incorporated per share
  $ 0.36     $ (2.49 )
                 
Dividends paid per share
  $     $ 0.10  
 
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
4

 
LA-Z-BOY INCORPORATED
CONSOLIDATED BALANCE SHEET
 
(Unaudited, amounts in thousands)
 
01/23/10
   
04/25/09
 
Current assets
           
Cash and equivalents
  $ 79,511     $ 17,364  
Restricted cash
          18,713  
Receivables, net of allowance of $25,547 at 01/23/10 and $28,385 at 04/25/09
    158,656       147,858  
Inventories, net
    145,045       140,178  
Deferred income taxes—current
    795       795  
Other current assets
    16,435       22,872  
Total current assets
    400,442       347,780  
Property, plant and equipment, net
    135,928       146,896  
Trade names
    3,100       3,100  
Other long-term assets
    47,595       51,431  
Total assets
  $ 587,065     $ 549,207  
                 
Current liabilities
               
Current portion of long-term debt
  $ 1,848     $ 8,724  
Accounts payable
    48,247       41,571  
Accrued expenses and other current liabilities
    88,635       75,733  
Total current liabilities
    138,730       126,028  
Long-term debt
    46,679       52,148  
Deferred income taxes
    736       724  
Other long-term liabilities
    68,958       63,875  
Contingencies and commitments
           
Equity
               
La-Z-Boy Incorporated shareholders’ equity:
               
Common shares, $1 par value
    51,546       51,478  
Capital in excess of par value
    201,093       205,945  
Retained earnings
    94,925       67,431  
Accumulated other comprehensive loss
    (19,807 )     (22,698 )
Total La-Z-Boy Incorporated shareholders' equity
    327,757       302,156  
Noncontrolling interests
    4,205       4,276  
  Total equity
    331,962       306,432  
Total liabilities and equity
  $ 587,065     $ 549,207  
 
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
5

 
LA-Z-BOY INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
 
   
Third Quarter Ended
   
Nine Months Ended
 
(Unaudited, amounts in thousands)
 
01/23/10
   
01/24/09
   
01/23/10
   
01/24/09
 
Cash flows from operating activities
                       
Net income (loss)
  $ 10,938     $ (64,261 )   $ 18,511     $ (127,423 )
Adjustments to reconcile net income (loss) to cash provided by operating activities
                               
(Gain) loss on sale of assets
    38       (37 )     (50 )     (2,707 )
Write-down of long-lived assets
          7,036             7,036  
Write-down of trade names
          5,541             5,541  
Write-down of goodwill
          40,436             42,136  
Write-down of investments
          5,140             5,140  
Restructuring
    593       2,405       2,813       11,904  
Provision for doubtful accounts
    1,079       9,439       5,593       18,439  
Depreciation and amortization
    6,611       5,993       19,186       18,267  
Stock-based compensation expense
    1,454       1,012       4,082       2,867  
Change in receivables
    3,413       31,405       (14,173 )     23,314  
Change in inventories
    (6,098 )     (3,463 )     (4,867 )     7,380  
Change in other assets
    332       2,865       6,971       1,954  
Change in payables
    1,929       (8,351 )     6,676       (6,424 )
Change in other liabilities
    2,707       (2,512 )     14,258       (28,245 )
Change in deferred taxes
    (301 )     (4,658 )     (301 )     38,842  
Total adjustments
    11,757       92,251       40,188       145,444  
Net cash provided by operating activities
    22,695       27,990       58,699       18,021  
                                 
Cash flows from investing activities
                               
Proceeds from disposals of assets
    9       45       1,925       7,831  
Capital expenditures
    (2,929 )     (4,089 )     (5,708 )     (14,079 )
Purchases of investments
    (1,397 )     (1,630 )     (3,934 )     (10,595 )
Proceeds from sales of investments
    1,684       10,854       5,793       21,881  
Change in restricted cash
    500       (4,709 )     17,507       (7,664 )
Change in other long-term assets
    115       (575 )     129       (346 )
Net cash provided by (used for) investing activities
    (2,018 )     (104 )     15,712       (2,972 )
                                 
Cash flows from financing activities
                               
Proceeds from debt
    10,718       15,992       31,391       55,458  
Payments on debt
    (11,169 )     (43,752 )     (43,736 )     (69,039 )
Dividends paid
          (1,037 )           (5,188 )
Net cash used for financing activities
    (451 )     (28,797 )     (12,345 )     (18,769 )
                                 
Effect of exchange rate changes on cash and equivalents
    248       (228 )     81       (871 )
Change in cash and equivalents
    20,474       (1,139 )     62,147       (4,591 )
Cash acquired from consolidation of VIEs
          631             631  
Cash and equivalents at beginning of period
    59,037       11,024       17,364       14,476  
Cash and equivalents at end of period
  $ 79,511     $ 10,516     $ 79,511     $ 10,516  
                                 
Cash paid (net of refunds) during period – income taxes
  $ 5,429     $ (660 )   $ (7,653 )   $ (456 )
Cash paid during period - interest
  $ 557     $ 1,337     $ 1,845     $ 3,750  
 
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
6

 
LA-Z-BOY INCORPORATED
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(Unaudited, amounts in thousands)
 
Common
Shares
   
Capital in
Excess of Par
Value
   
Retained
Earnings
   
Accumulated
Other
Compre-
hensive Loss
   
Non-
Controlling
Interests
   
Total
 
At April 26, 2008
  $ 51,428     $ 209,388     $ 188,203     $ (227 )   $ 2,582     $ 451,374  
Comprehensive loss
                                               
Net income (loss)
                    (122,673 )             121          
Unrealized loss on marketable securities arising during the period (net of tax of $0.4 million)
                            (4,332 )                
Reclassification adjustment for loss on marketable securities included in net loss
                            5,180                  
Translation adjustment
                            (622 )     447          
Change in fair value of cash flow hedge
                            (723 )                
Net actuarial loss
                            (21,974 )                
Total comprehensive loss
                                            (144,576 )
Stock issued for stock and employee benefit plans, net of cancellations
    50       (7,262 )     7,078                       (134 )
Stock option, restricted stock and performance based stock expense
            3,819                               3,819  
Change in noncontrolling interest upon consolidation of VIE and other changes in noncontrolling interests
                                    1,126       1,126  
Dividends paid
                    (5,177 )                     (5,177 )
At April 25, 2009
    51,478       205,945       67,431       (22,698 )     4,276       306,432  
                                                 
Comprehensive income
                                               
Net income (loss)
                    18,866               (355 )        
Unrealized gain on marketable securities arising during the period
                            1,832                  
Reclassification adjustment for gain on marketable securities included in net income
                            304                  
Translation adjustment
                            (840 )     194          
Net pension amortization
                            1,582                  
Change in fair value of cash flow hedge
                            13                  
Total comprehensive income
                                            21,596  
Change in noncontrolling interest
                                    90       90  
Stock issued for stock and employee benefit plans, net of cancellations
    68       (8,922 )     8,628                       (226 )
Stock option, restricted stock and performance based stock expense
            4,070                               4,070  
At January 23, 2010
  $ 51,546     $ 201,093     $ 94,925     $ (19,807 )   $ 4,205     $ 331,962  
 
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
7

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
Note 1: Basis of Presentation
 
The accompanying financial statements include the consolidated accounts of La-Z-Boy Incorporated, our wholly-owned subsidiaries, and the Variable Interest Entities (“VIEs”) in which we are the primary beneficiary. The interim financial information is prepared in conformity with generally accepted accounting principles and such principles are applied on a basis consistent with those reflected in our fiscal 2009 Annual Report on Form 10-K, filed with the Securities and Exchange Commission, but does not include all the disclosures required by generally accepted accounting principles. In the opinion of management, the interim financial information includes all adjustments and accruals, consisting only of normal recurring adjustments (except as otherwise disclosed), which are necessary for a fair presentation of results for the respective interim period.
 
The April 25, 2009 balance sheet was derived from audited financial statements, adjusted for the amendment of accounting and reporting standards for a parent’s noncontrolling interest in a subsidiary and the accounting for future ownership changes with respect to the subsidiary, as well as the adjustments relating to one of our VIEs described below.
 
The new standard defines a noncontrolling interest, previously called a minority interest, as the portion of equity in a subsidiary that is not attributable, directly or indirectly, to a parent. This standard requires, among other things, that a noncontrolling interest be clearly identified, labeled and presented in the consolidated balance sheet as equity, but separate from the parent’s equity; and that the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of operations. Effective April 26, 2009, we adopted this standard and applied it retrospectively which affected only presentation and disclosure. As a result, we reclassified noncontrolling interests in the amount of $4.3 million from other long-term liabilities and accumulated other comprehensive loss to equity in the April 25, 2009 Consolidated Balance Sheet. Certain reclassifications to the Consolidated Statement of Operations have been made to prior period amounts to conform to the presentation of the current period under this standard. Recorded amounts for prior periods previously presented as Net income (loss), which are now presented as Net income (loss) attributable to La-Z-Boy Incorporated, have not changed as a result of this adoption.
 
During the third quarter of fiscal 2010, we corrected our historical financial statements related to one of our VIEs. This VIE previously amortized leasehold improvements over a period that exceeded the appropriate useful life in accordance with our accounting policy. The cumulative effect was a $3.3 million reduction to fixed assets and retained earnings as of April 25, 2009 to record the previously unrecognized amortization. The correction resulted in an increase in our net loss for the fiscal years ended April 29, 2006, April 26, 2008 and April 25, 2009 of $0.2 million, $0.4 million and $1.3 million, respectively, as well as a decrease in our net income for the fiscal year ended April 28, 2007 of $0.3 million. We determined that the cumulative impact of this correction was material to our projected fiscal 2010 year. However, we determined that the corrections were not material, either individually or in the aggregate, to any of our historical fiscal years or interim periods. Consequently, we will revise our historical financial statements for the prior periods when they are presented in future filings. Because our analysis concluded that these corrections were immaterial to any prior period, we will not amend our previous filings with the Securities and Exchange Commission.
 
The correction resulted an increase of $0.3 million to selling, general and administrative expense for the first nine months of fiscal 2010. The correction resulted in an overall increase to our net loss of $0.2 million and $1.2 million, respectively, for the third quarter and first nine months of fiscal 2009. The $1.2 million or $0.03 per share impact for the first nine months of fiscal 2009 includes $0.7 million of tax expense for the valuation allowance on the cumulative increase in deferred tax assets. There was no impact to our earnings per share for the third quarter of fiscal 2009. 
 
The following tables set forth the impact of the immaterial corrections to our consolidated statements of operations for the quarter and nine months ended January 24, 2009 and our consolidated balance sheet as of April 25, 2009:
 
   
Quarter Ended 01/24/09
 
(Unaudited, amounts in thousands, except per share data)
 
01/24/09
(as previously reported)
   
Adjustments
   
01/24/09
(as adjusted)
 
Net loss attributable to La-Z-Boy Incorporated
  $ (64,382 )   $ (166 )   $ (64,548 )
Diluted net loss attributable to La-Z-Boy Incorporated per share
  $ (1.25 )   $     $ (1.25 )


   
Nine Months Ended 01/24/09
 
(Unaudited, amounts in thousands, except per share data)
 
01/24/09
(as previously reported)
   
Adjustments
   
01/24/09
(as adjusted)
 
Net loss attributable to La-Z-Boy Incorporated
  $ (126,670 )   $ (1,160 )   $ (127,830 )
Diluted net loss attributable to La-Z-Boy Incorporated per share
  $ (2.46 )   $ (0.03 )   $ (2.49 )


   
As of 04/25/09
 
(Unaudited, amounts in thousands)
 
04/25/09
(as previously reported)
   
Adjustments
   
04/25/09
(as adjusted)
 
Property, plant and equipment, net
  $ 150,234     $ (3,338 )   $ 146,896  
Retained earnings
  $ 70,769     $ (3,338 )   $ 67,431  

 
8

 
We evaluated subsequent events through February 16, 2010, the date on which this Quarterly Report on Form 10-Q was filed with the Securities and Exchange Commission.
 
Note 2: Interim Results
 
The foregoing interim results are not necessarily indicative of the results of operations which will occur for the full fiscal year ending April 24, 2010.
 
Note 3: Reclassification
 
Certain prior year information has been reclassified to be comparable with the current year presentation.
 
Note 4: Restricted Cash
 
At January 23, 2010 we had no short-term restricted cash, compared to $18.7 million at April 25, 2009, related to our wholly-owned insurance company. Prior to April 25, 2009, restricted cash was primarily used to support our liability for workers’ compensation claims and premiums. In the first quarter of fiscal 2010 La-Z-Boy Incorporated assumed the obligations related to our workers’ compensation and obtained regulatory approval to transfer substantially all of the assets from our wholly-owned insurance company, to La-Z-Boy Incorporated. During the third quarter of fiscal 2010, the liability for the remaining insurance policy of our wholly-owned insurance company was transferred to La-Z-Boy Incorporated. As a result of these changes, our restricted cash was eliminated.
 
Note 5: Inventories
 
A summary of inventories is as follows:
 
(Unaudited, amounts in thousands)
 
01/23/10
   
04/25/09
 
Raw materials
  $ 67,122     $ 53,498  
Work in process
    12,129       11,281  
Finished goods
    91,542       101,147  
FIFO inventories
    170,793       165,926  
Excess of FIFO over LIFO
    (25,748 )     (25,748 )
Inventories, net
  $    145,045     $    140,178  
  
9

 
Note 6: Pension Plans
 
Net periodic pension costs were as follows:
     
Third Quarter Ended
   
Nine Months Ended
 
(Unaudited, amounts in thousands)
 
01/23/10
   
01/24/09
   
01/23/10
   
01/24/09
 
Service cost
  $ 261     $ 328     $ 783     $ 984  
Interest cost
    1,400       1,359       4,200       4,077  
Expected return on plan assets
    (1,206 )     (1,728 )     (3,618 )     (5,184 )
Net amortization
    527             1,581        
Net periodic pension cost (benefit)
  $ 982     $ (41 )   $ 2,946     $ (123 )
 
We did not make any contributions to the plans during the third quarter of fiscal 2010.  We are not required to make any contributions to the defined benefit plan in fiscal year 2010; however we have the discretion to make contributions. 
 
Note 7: Financial Guarantees and Product Warranties
 
We have provided financial guarantees relating to notes and leases in connection with certain La-Z-Boy Furniture Galleries® stores which are not operated by the company.  The guarantees are generally for real estate leases and have remaining terms of one to three years. These guarantees enhance the credit of these dealers. The dealer is required to make periodic fee payments to compensate us for our guarantees. We have recognized liabilities for the fair values of these agreements that we have entered into, but they are not material to our consolidated financial statements.
 
We would be required to perform under these agreements only if the dealer were to default on the lease or note. The maximum amount of potential future payments under these guarantees was $2.0 million as of January 23, 2010.
 
We have, from time to time, entered into agreements which resulted in indemnifying third parties against certain liabilities, mainly environmental obligations. We believe that judgments, if any, against us related to such agreements would not have a material effect on our business or financial condition.
 
Our accounting policy for product warranties is to accrue an estimated liability at the time the revenue is recognized. We estimate future warranty claims based on claim experience and any additional anticipated future costs on previously sold products.  Our liability incorporates the cost of repairs including materials consumed, labor and overhead amounts necessary to perform the repair and any costs associated with delivery of the repaired product to the customer.  Over 90% of our warranty liability relates to our Upholstery Group where we generally warrant our products against defects from one to five years for fabric and padding and up to a lifetime on certain mechanisms and frames.  Considerable judgment is used in the determination of our estimate.  If actual costs were to differ significantly from our estimates, we would record the impact of these unforeseen costs in subsequent periods.

During fiscal 2010, our warranty liability remained flat compared to fiscal 2009 in a period of declining sales due to changes in our claims experience indicating that the span in which we receive warranty requests is lengthening.  While the volume of claims has decreased in the past year resulting in a decrease in material costs, this decrease has been partially offset by higher shipping costs as we have modified how we ship parts to our customers in order to increase customer satisfaction.  In addition, the closure of our Tremonton, Utah plant and service center now requires us to ship warranty items across the country from other plants.
10

 
A reconciliation of the changes in our product warranty liability is as follows:
 
     
Third Quarter Ended
   
Nine Months Ended
 
(Unaudited, amounts in thousands)
 
01/23/10
   
01/24/09
   
01/23/10
   
01/24/09
 
Balance as of the beginning of the period
  $ 14,293     $ 14,437     $ 14,394     $ 14,334  
Accruals during the period
    3,663       3,491       10,383       11,588  
Settlements during the period
    (3,484 )     (3,496 )     (10,305 )     (11,490 )
Balance as of the end of the period
  $ 14,472     $ 14,432     $ 14,472     $ 14,432  
 
Note 8:  Stock-Based Compensation
 
Total compensation expense recognized in the Consolidated Statement of Operations for all equity based compensation was $1.5 million and $4.1 million, for the third quarter and first nine months of fiscal 2010, respectively.  For the third quarter and first nine months of fiscal 2009, we recorded compensation expense for all equity based compensation of $1.0 million and $2.9 million, respectively.
 
Note 9:  Total Comprehensive Income (Loss)
 
The components of total comprehensive income (loss) are as follows:
 
     
Third Quarter Ended
   
Nine Months Ended
 
(Unaudited, amounts in thousands)
 
01/23/10
   
01/24/09
   
01/23/10
   
01/24/09
 
Net income (loss)
  $ 10,938     $ (64,261 )   $ 18,511     $ (127,423 )
Other comprehensive income (loss):
                               
Currency translation adjustment
    49       (265 )     (646 )     (356 )
Change in fair value of cash flow hedge
    12       (583 )     13       (807 )
Net unrealized gains on marketable securities arising during the period
    598       4,840       2,136       60  
Net pension amortization
    528             1,582        
Total other comprehensive income (loss)
    1,187       3,992       3,085       (1,103 )
Total comprehensive income (loss) before allocation to noncontrolling interest
    12,125       (60,269 )     21,596       (128,526 )
Comprehensive (income) loss attributable to noncontrolling interest
    (1 )     297       161       (1,034 )
Comprehensive income (loss) attributable to La-Z-Boy Incorporated
  $ 12,124     $ (59,972 )   $ 21,757     $ (129,560 )
 
Note 10: Segment Information
 
Our reportable operating segments are the Upholstery Group, the Casegoods Group and the Retail Group. 
 
Upholstery Group.  The operating units in the Upholstery Group are La-Z-Boy, England, and Bauhaus. This group primarily manufactures and sells upholstered furniture to furniture retailers. Upholstered furniture includes recliners and motion furniture, sofas, loveseats, chairs, ottomans and sleeper sofas.
 
Casegoods Group. The operating units in the Casegoods Group are American Drew/Lea, Kincaid, and Hammary. This group primarily sells manufactured or imported wood furniture to furniture retailers.  Casegoods product includes tables, chairs, entertainment centers, headboards, dressers, accent pieces and some upholstered furniture. 
 
11

 
Retail Group. The Retail Group consists of 68 company-owned La-Z-Boy Furniture Galleries® stores in eight primary markets.  The Retail Group sells upholstered furniture to end consumers, as well as casegoods and other accessories. 
 
   
Third Quarter Ended
   
Nine Months Ended
 
(Unaudited, amounts in thousands)
 
01/23/10
(13 weeks)
   
01/24/09
(13 weeks)
   
01/23/10
(39 weeks)
   
01/24/09
(39 weeks)
 
Sales
                       
Upholstery Group
  $ 234,262     $ 199,200     $ 663,734     $ 684,252  
Casegoods Group
    36,029       42,116       109,196       138,710  
Retail Group
    40,411       40,497       114,387       122,408  
VIEs
    15,629       13,430       39,616       39,301  
Corporate and Other
    603       1,084       4,143       3,362  
Eliminations
    (21,840 )     (7,751 )     (62,604 )     (45,857 )
Consolidated
  $ 305,094     $ 288,576     $ 868,472     $ 942,176  
                                 
Operating income (loss)
                               
Upholstery Group
  $ 26,102     $ (1,652 )   $ 67,751     $ 16,542  
Casegoods Group
    292       (313 )     (13 )     1,819  
Retail Group
    (4,135 )     (7,108 )     (15,104 )     (27,509 )
VIEs
    350       (1,381 )     (118 )     (5,422 )
Corporate and Other
    (7,937 )     (2,280 )     (23,461 )     (16,351 )
Long-lived asset write-down
          (7,036 )           (7,036 )
Goodwill write-down
          (40,436 )           (42,136 )
Trade name write-down
          (5,541 )           (5,541 )
Restructuring
    (593 )     (2,405 )     (2,813 )     (11,904 )
Consolidated
  $ 14,079     $ (68,152 )   $ 26,242     $ (97,538 )
 
During the third quarter of fiscal 2009, the reporting of the retail warehouse operations was changed to the Upholstery Group from the Retail 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 the third quarter of fiscal 2009 that reduced inter-company sales for the Upholstery Group by $12.1 million and reduced inter-company profit by $3.3 million for the third quarter and first nine months of fiscal 2009. A corresponding offset was recorded in our Elimination sales line and our Corporate and Other operating loss line, relating to the one-time adjustment, during the third quarter and first nine months of fiscal 2009.  The adjustment did not affect our consolidated operating results.
12

 
Note 11: Restructuring
 
During the past several years, we have committed to various restructuring plans to rationalize our manufacturing facilities, consolidate warehouse distribution centers and close underperforming retail facilities. With these restructuring plans, we have written-down various fixed assets. Additionally, we recorded charges for severance and benefits, contract terminations and other transition costs related to relocating and closing facilities.

In the fourth quarter of fiscal 2009, we committed to a restructuring plan to consolidate our casegoods manufacturing plants in North Carolina related to our Kincaid and American Drew/Lea operations and to convert another facility into a distribution center. The consolidation of these plants occurred in the first quarter of fiscal 2010.  The conversion of the distribution center is expected to be completed by the end of the fourth quarter of fiscal 2010. In connection with these activities, we have incurred $2.5 million in restructuring charges since the inception of this plan for severance and benefits, write-down of fixed assets and other restructuring charges.  In the third quarter and first nine months of fiscal 2010 we recorded pre-tax restructuring charges of $0.6 million and $2.3 million, respectively, covering severance and benefits and other restructuring costs in connection with this plan. We expect to incur approximately $0.3 million in additional charges in fiscal 2010 related to severance and benefits and other restructuring costs under this plan. During fiscal 2009, the plan resulted in restructuring charges of $0.2 million, covering severance and benefits and the write-down of fixed assets.  These changes, once fully completed, are expected to result in annual cost savings of approximately $5.0 million based on current volume.

During fiscal 2008, we committed to a restructuring plan to consolidate all of our North American cutting and sewing operations in Mexico and 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 and production was shifted to our remaining manufacturing facilities. At the end of the third quarter of fiscal 2010, we had about 1,050 employees at our Mexican facility. Because our Mexican facility is still in the beginning stages of production, about 65% of our domestic cutting and sewing operations have been transferred to our Mexican facility. By the end of fiscal 2010 we expect 100% of our domestic fabric cutting and sewing operations to be shifted to our Mexican facility. In connection with these activities, we have recorded $9.8 million in restructuring charges, net of reversals since the inception of this plan for severance and benefits, write-down of certain fixed assets, and other restructuring costs. We expect to incur additional pre-tax restructuring charges of $0.8 million during the next twelve months. During the third quarter and first nine months of fiscal 2010, we had net restructuring reversals of $0.2 million and $0.5 million, respectively, covering severance and benefits under this plan.  The reversal of restructuring charges relate to a decrease in our estimated healthcare costs for this plan.  During fiscal 2009, the plan resulted in restructuring charges of $7.7 million, covering severance and benefits ($3.1 million) and other restructuring costs ($4.6 million).  Other restructuring costs include transportation, freight surcharges and other transition costs as we moved production to other plants. These changes are expected to result in annual cost savings of approximately $20 million, once fully completed.

During fiscal 2007 and 2008, several of our warehouse distribution centers were consolidated into larger facilities and several underperforming stores were closed. In the third quarter and first nine months of fiscal 2010, we had restructuring charges of $0.2 million and $1.0 million, respectively, related to contract terminations.  We expect to incur approximately $0.3 million of additional charges in the remainder of fiscal 2010.  During fiscal 2009, we had restructuring charges of $1.6 million related to contract terminations.
13

 
During fiscal 2009, we committed to restructuring plans to close a plant in Sherman, Mississippi related to our Bauhaus operations, to reduce our company-wide employment to be more in line with our sales volume, and to close the operations of our La-Z-Boy U.K. subsidiary. The closure of the plant in Sherman, Mississippi was completed in the fourth quarter of fiscal 2009.  The closure of our La-Z-Boy U.K. subsidiary occurred in the second quarter of fiscal 2009.  In connection with these plans, we recorded pre-tax restructuring charges of $3.5 million in fiscal 2009, covering severance and benefits ($1.2 million), the write-down of inventory ($1.2 million) and the write-down of fixed assets and other restructuring charges ($1.1 million).  We do not expect to incur any additional charges related to these restructuring plans.

Additionally, during fiscal 2009 we had reversals of $0.5 million relating to our restructuring plans in fiscal 2007.  The reversal of restructuring charges relate to a decrease in our estimated healthcare costs for this plan.
 
As of January 23, 2010, we had a remaining restructuring liability of $1.4 million which is expected to be settled as follows: $0.8 million in the remainder of fiscal 2010 and $0.6 million thereafter.
 
For the current fiscal year to date, restructuring liabilities along with charges to expense, cash payments or asset write-downs for all of our restructuring actions were as follows:
 
         
Fiscal 2010
       
(Unaudited, amounts in thousands)
 
04/25/09
Balance
   
Charges to
Expense *
   
Cash
Payments
or Asset
Write-Offs
   
01/23/10
Balance
 
Severance and benefit-related costs
  $ 2,022     $ (202 )   $ (816 )   $ 1,004  
Contract termination costs
    530       1,022       (1,175 )     377  
Other
          1,993       (1,993 )      
Total restructuring
  $ 2,552     $ 2,813     $ (3,984 )   $ 1,381  
* Charges to expense include $0.2 million of non-cash charges for contract termination costs.
 
 
         
Fiscal 2009
       
(Unaudited, amounts in thousands)
 
04/26/08
Balance
   
Charges to
Expense **
   
Cash
Payments
or Asset
Write-Offs
   
04/25/09
Balance
 
Severance and benefit-related costs
  $ 2,842     $ 4,149     $ (4,969 )   $ 2,022  
Fixed asset write-downs, net of gains
          512       (512 )      
Contract termination costs
    939       1,528       (1,937 )     530  
Other
          6,271       (6,271 )      
Total restructuring
  $ 3,781     $ 12,460     $ (13,689 )   $ 2,552  
 
**
Charges to expense include $1.8 million of non-cash charges for contract termination costs, fixed asset and inventory write-downs. Inventory write-downs of $1.2 million are included in “Other.”
 
Note 12: Income Taxes
 
Our effective tax rates for the first nine months of fiscal 2010 and fiscal 2009 were 36.7% and 27.4%, respectively.  For fiscal 2010, a higher estimated effective tax rate was offset by an additional federal tax refund.  The effective tax rate for the first nine months of fiscal 2009 resulted primarily from the recording of a $52.8 million valuation allowance against our deferred tax assets.
14

 
On November 6, 2009 the federal government signed into law the Work, Home Ownership and Business Assistance Act of 2009 (H.R.3548).  The law includes provisions allowing businesses with federal net operating losses in tax years 2008 and 2009 to carry back those losses for a period of five years and receive refunds of income taxes paid in those years. Previously, federal net operating losses could only be carried back for a period of two years. We are still in the process of evaluating our options relating to this new law. Regardless of whether we elect to utilize the extended carry back opportunity or not the net impact on our tax provision is expected to be relatively nominal.
 
Note 13: 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.   In general, a VIE is a corporation, partnership, limited-liability company, trust or any other legal structure used to conduct activities or hold assets that either (a) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (b) has a group of equity owners that are unable to make significant decisions about its activities, or (c) has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations.

La-Z-Boy Furniture Galleries® stores that are not operated by us are operated by independent dealers. These stores sell La-Z-Boy manufactured products as well as various accessories purchased from approved La-Z-Boy vendors.  Most of these independent dealers have sufficient equity to carry out their principal operating activities without subordinated financial support.  However, there are certain independent dealers that we have determined may not have sufficient equity.  In some cases we have extended credit beyond normal trade terms to the independent dealers, made direct loans, entered into leases and/or guaranteed certain loans or leases.

We evaluate our transactions and relationships with our La-Z-Boy Furniture Galleries® dealers on a quarterly basis to determine if any of our independent dealers qualify as a variable interest entity and additionally whether we are the primary beneficiary for any of the dealers who do qualify as a variable interest entity. We also evaluate our current VIEs on a quarterly basis to determine if they no longer qualify as a variable interest entity.

Based on the criteria for consolidation of VIEs, we have consolidated dealers where we were the primary beneficiary based on the fair value of our variable interests.  All of our consolidated VIEs were recorded at fair value on the date we became the primary beneficiary.  In fiscal 2010, all earnings and losses attributed to these 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 these VIEs to the extent of recouping the losses were recorded as Net income (loss).  Earnings in excess of losses were attributed to equity owners of the dealers and were recorded as minority interest.

We had three consolidated VIEs during the third quarter and first nine months of fiscal 2010 representing 31 stores and four consolidated VIEs during the third quarter and first nine months of fiscal 2009 representing 37 stores.  Beginning in the fourth quarter of fiscal 2009, we stopped consolidating our Cleveland VIE.  This, along with the addition of one store by our California VIE resulted in a decrease of six stores for VIEs when comparing the third quarter and first nine months of fiscal 2010 to fiscal 2009.
15

 
The table below shows information concerning our consolidated VIEs during fiscal 2010 and fiscal 2009:
 
   
As of
 
(Unaudited, amounts in thousands)
 
01/23/10
   
04/25/09
 
Current assets
  $ 18,447     $ 16,220  
Other long-term assets
    9,040       9,794  
Total assets
  $ 27,487     $ 26,014  
                 
Current liabilities
  $ 8,180     $ 5,983  
Other long-term liabilities
    3,012       3,085  
Total liabilities
  $ 11,192     $ 9,068  
 
   
Third Quarter Ended
   
Nine Months Ended
 
(Unaudited, amounts in thousands )
 
01/23/10
   
01/24/09
   
01/23/10
   
01/24/09
 
Net sales, net of inter-company eliminations
  $ 15,629     $ 13,430     $ 39,616     $ 39,301  
Net loss
  $ (381 )   $ (4,098 )   $ (1,122 )   $ (8,594 )
 
In addition to our consolidated VIEs, we had significant interests in three independent La-Z-Boy Furniture Galleries® dealers for which we were not the primary beneficiary.  Our total exposure to losses related to these dealers was $2.5 million which consists of past due accounts receivable as well as notes receivable, net of reserves and collateral on inventory and real estate.  We do not have any obligations or commitments to provide additional financial support to these dealers for the remainder of fiscal 2010.

Note 14: Income from Continued Dumping and Subsidy Offset Act

We recorded $4.4 million and $8.1 million as Income from the Continued Dumping and Subsidy Offset Act, net of legal expenses, during the third quarter of fiscal 2010 and fiscal 2009, respectively, from the receipt of funds under the Continued Dumping and Subsidy Offset Act (“CDSOA”) of 2000 in connection with the case involving wooden bedroom furniture from China.  The 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.

Note 15: Earnings per Share
 
A reconciliation of the numerators and denominators used in the computations of basic and diluted earnings per share were as follows:
 
   
Third Quarter Ended
   
Nine Months Ended
 
(Unaudited, amounts in thousands)
 
01/23/10
   
01/24/09
   
01/23/10
   
01/24/09
 
Numerator (basic and diluted):
                       
Net income (loss) attributable to La-Z-Boy Incorporated
  $ 10,976     $ (64,548 )   $ 18,866     $ (127,830 )
Income allocated to participating securities
    (222 )           (351 )      
Dividends on participating securities
          (15 )           (69 )
Net income (loss) available to common shareholders
  $ 10,754     $ (64,563 )   $ 18,515     $ (127,899 )
16

   
Third Quarter Ended
   
Nine Months Ended
 
(Unaudited, amounts in thousands)
 
01/23/10
   
01/24/09
   
01/23/10
   
01/24/09
 
Denominator:
                       
Basic common shares (based upon weighted average)
    51,546       51,475       51,517       51,454  
Add:
                               
Stock option dilution
    299             78        
Diluted common shares
    51,845       51,475       51,595       51,454  
 
Share-based payment awards that entitle their holders to receive non-forfeitable dividends prior to vesting are considered participating securities.  We granted restricted stock awards that contain non-forfeitable rights to dividends on unvested shares; such stock awards are considered participating securities.  As participating securities, the unvested shares are required to be included in the calculation of our basic earnings per common share, using the “two-class method.”  The two-class method of computing earnings per common share is an allocation method that calculates earnings per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings.  Unvested restricted stock awards were previously included in our diluted share calculation using the treasury stock method.  Due to their anti-dilutive effect, we did not allocate any loss to the unvested stock awards (participating securities) for the third quarter and first nine months ended January 24, 2009.

The effect of options to purchase 1.8 million and 2.5 million shares for the quarters ended January 23, 2010 and January 24, 2009 with a weighted average exercise price of $14.99 and $15.46 respectively, were excluded from the diluted share calculation because the exercise prices of these options were higher than the weighted average share price for the quarters and would have been anti-dilutive.

Note 16: Fair Value Measurements

Accounting standards require the categorization of financial assets and liabilities, based on the inputs to the valuation technique, into a three-level fair value hierarchy. The various levels of the fair value hierarchy are described as follows:

 
·
Level 1 — Financial assets and liabilities whose values are based on unadjusted quoted market prices for identical assets and liabilities in an active market that we have the ability to access.
 
·
Level 2 — Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable for substantially the full term of the asset or liability.
 
 
·
Level 3 — Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. 
 
Accounting standards require the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.

In addition to assets and liabilities that are recorded at fair value on a recurring basis, we are required to record assets and liabilities at fair value on a non-recurring basis.  Non-financial assets such as trade names and long-lived assets are measured at fair value when there is an indicator of impairment and recorded at fair value only when an impairment is recognized.  We adopted the accounting standards for non-financial assets and liabilities as of the beginning of fiscal 2010.  We did not measure any material assets or liabilities at fair value on a nonrecurring basis during fiscal 2010.
17

 
The following table presents the fair value hierarchy for those assets measured at fair value on a recurring basis as of January 23, 2010:
 
   
Fair Value Measurements
 
(Unaudited, amounts in thousands)
 
Level 1
   
Level 2
   
Level 3
 
Assets
                 
Available-for-sale securities
  $ 7,935     $ 2,394     $  
                         
Liabilities
                       
Interest rate swap
          (710 )      
Total
  $ 7,935     $ 1,684     $  
 
We hold available-for-sale marketable securities to fund future obligations of one of our non-qualified retirement plans.  The fair value measurements for our available-for-sale securities are based upon quoted prices in active markets, as well as through broker quotes and independent valuation providers, multiplied by the number of shares owned exclusive of any transaction costs and without any adjustments to reflect discounts that may be applied to selling a large block of the securities at one time.

We entered into a three year interest rate swap agreement in order to fix a portion of our floating rate debt.  The fair value of the swap agreement was measured as the present value of all expected future cash flows based on the LIBOR-based swap yield curve as of the date of the valuation and considered counterparty non-performance risk. These assumptions can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.

Note 17:  Hedging Activities

During the first quarter of fiscal 2009, we entered into an interest rate swap agreement which we accounted for as a cash flow hedge.  This swap hedges the interest on $20 million of floating rate debt.  Under the swap, we are required to pay 3.33% through May 16, 2011 and we receive three month LIBOR from the counterparty. This offsets the three month LIBOR component of interest which we are required to pay under $20 million of floating rate debt.  Interest under this debt as of January 23, 2010 was three month LIBOR plus 1.75%.

We executed this interest rate cash flow hedge in order to mitigate our exposure to variability in cash flows for the future interest payments on a designated portion of borrowings.  The gains and losses are reflected in accumulated other comprehensive loss (with an offset to the hedged item in other long-term liabilities) until the hedged transaction impacts our earnings.  Our interest rate swap agreement was tested for ineffectiveness during the first quarter of fiscal 2009 and was determined to be effective.  Our agreement also qualified for the “short cut” method of accounting. We believe that our agreement continues to be effective and therefore no gains or losses have been recorded in our earnings.

For the third quarter and first nine months of fiscal 2010, we deferred gains of less than $0.1 million into accumulated other comprehensive loss.  For the third quarter and first nine months of fiscal 2009, we deferred losses of $0.6 million and $0.8 million, respectively, into accumulated other comprehensive loss.  The fair value of our interest rate swap at January 23, 2010 and at April 25, 2009 was $0.7 million, which was included in other long-term liabilities.
18

 
Note 18:  Recent Accounting Pronouncements
 
In December 2008, the Financial Accounting Standards Board (FASB) issued authoritative guidance for employers’ disclosures about postretirement benefit plan assets.  This guidance expands the disclosures related to postretirement benefit plan assets to include disclosures concerning a company’s investment policies for benefit plan assets and categories of plan assets.  This guidance further expands the disclosure requirements to include the fair value of plan assets, including the levels within the fair value hierarchy and any concentrations of risk related to the plan assets.  This guidance will be effective for our fiscal 2010 year end and will require expanded disclosures.  The adoption of this guidance will not have a material impact on our consolidated financial statements.

In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for transfers of financial assets.  This amendment requires greater transparency and additional disclosures for transfers of financial assets and the entity's continuing involvement with them and changes the requirements for derecognizing financial assets.  In addition, this amendment eliminates the concept of a qualifying special-purpose entity (“QSPE”). This amendment is effective for our fiscal 2011 year end and interim periods within that year.  We are currently evaluating the impact this amendment will have on our consolidated financial statements and disclosures.

In June 2009 and December 2009, the FASB issued amendments to the consolidation guidance applicable to variable interest entities (“VIEs”). The guidance affects all entities currently within the scope of FASB ASC 810, Consolidation, as well as qualifying special-purpose entities (“QSPEs”) that are currently excluded from the scope of FASB ASC 810, Consolidation.  Accordingly, we will need to reconsider our previous FASB ASC 810, Consolidation, conclusions, including (1) whether an entity is a VIE, (2) whether we are the VIE’s primary beneficiary, and (3) what type of financial statement disclosures are required.  This amendment is effective for our fiscal 2011 year end and interim periods within that year.  We are currently evaluating the impact this amendment will have on our consolidated financial statements and disclosures.

In July 2009, the FASB issued the Accounting Standards Codification (“Codification”), which became the single source of authoritative generally accepted accounting principles (GAAP) in the United States, other than rules and interpretive releases issued by the Securities and Exchange Commission (SEC).  The Codification is a reorganization of current GAAP into a topical format that eliminates the current GAAP hierarchy and instead establishes two levels of guidance – authoritative and non-authoritative.  All non-grandfathered, non-SEC accounting literature that is not included in the Codification will become non-authoritative.  All references to authoritative accounting literature in our financial statements beginning in the second quarter of fiscal 2010 are referenced in accordance with the Codification.  There were no changes to the content of our financial statements or disclosures as a result of implementing the Codification.

In August 2009, the FASB issued amendments for the fair value measurement of liabilities.  This amendment provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, an entity is required to measure fair value using specified techniques.  This amendment also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability.  Additionally, this amendment clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements.  We adopted these amendments in our third quarter of fiscal 2010.  These amendments did not have a material impact on our consolidated financial statements and disclosures.
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In October 2009, the FASB issued amendments to the criteria for separating consideration in multiple-deliverable arrangements.  These amendments will establish a selling price hierarchy for determining the selling price of a deliverable.  The amendments will require that a vendor determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a standalone basis.  These amendments will eliminate the residual method of allocation and require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method.  These amendments will expand disclosures related to vendor’s multiple-deliverable revenue arrangements.  These amendments will be effective for our fiscal 2012 year end.  We are currently evaluating the impact these amendments will have on our consolidated financial statements and disclosures.

In January 2010, the FASB issued amendments to the accounting and reporting for decreases in ownership of a subsidiary.  This amendment provides guidance in regards to how an entity is required to account for a decrease in its ownership interest of a subsidiary that does not result in a change of control of the subsidiary as an equity transaction.  This amendment also requires expanded disclosures about the deconsolidation of a subsidiary.  This amendment was effective for and we adopted in our third quarter of fiscal 2010.  This amendment did not have a material impact on our consolidated financial statements and disclosures.
  
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Our Management’s Discussion and Analysis is an integral part of understanding our financial results. This Management’s Discussion and Analysis should be read in conjunction with the accompanying Consolidated Financial Statements and related Notes to Consolidated Financial Statements. We begin the Management’s Discussion and Analysis with an introduction to La-Z-Boy Incorporated’s key businesses and strategies. We then provide a discussion of our results of operations, liquidity and capital resources, quantitative and qualitative disclosures about market risk, and critical accounting policies.
 
Cautionary Statement Concerning Forward-Looking Statements
 
We are making forward-looking statements in this report. Generally, forward-looking statements include information concerning possible or assumed future actions, events or results of operations. More specifically, forward-looking statements include the information in this document 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 anticipated or projected due to a number of factors. These factors include, but are not limited to: (a) changes in consumer confidence and demographics; (b) continued economic recession in certain parts of the country and fluctuations in our stock price; (c) changes in the real estate and credit markets and the potential impacts on our customers and suppliers; (d) the impact of terrorism or war; (e) continued energy and other commodity price changes; (f) the impact of logistics on imports; (g) the impact of interest rate and currency exchange rate changes; (h) operating factors, such as supply, labor or distribution disruptions including changes in operating conditions, product recalls or costs; (i) effects of restructuring actions; (j) changes in the domestic or international regulatory environment; (k) the impact of adopting new accounting principles; (l) the impact from natural events such as hurricanes, earthquakes and tornadoes; (m) the ability to procure fabric rolls and leather hides or cut and sewn fabric and leather sets domestically or abroad; (n) those matters discussed in Item 1A of our fiscal 2009 Annual Report on Form 10-K and factors relating to acquisitions 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, either to reflect new developments or for any other reason.

Introduction

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 own 68 La-Z-Boy Furniture Galleries® stores, which are retail locations dedicated to marketing our La-Z-Boy branded product. These 68 stores are part of the larger store network of La-Z-Boy Furniture Galleries® stores which includes a total of 308 stores, the balance of which are independently owned and operated. The network constitutes the industry’s largest single-branded upholstered furniture retailer in North America. These stores combine the style, comfort and quality of La-Z-Boy furniture with our in-home design service to help consumers furnish their homes.  In addition to our La-Z-Boy Furniture Galleries® store network, 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.  As of January 23, 2010, we had 502 Comfort Studios®.  We expect to open approximately 12 new Comfort Studios® during the remainder of fiscal 2010.  Kincaid, England and Lea also have in-store gallery programs.
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We consolidate certain of our independent dealers who do not have sufficient equity to carry out their principal business activities without our financial support. These dealers are referred to as Variable Interest Entities (“VIEs”). During the third quarter and first nine months of fiscal 2010 we had three VIEs, operating 31 stores, included in our Consolidated Statement of Operations.   During the third quarter and first nine months of fiscal 2009 we had four VIEs, operating 37 stores, included in our Consolidated Statement of Operations.

Our reportable operating segments are the Upholstery Group, the Casegoods Group and the Retail Group.

Upholstery Group.  In terms of revenue, our largest segment is the Upholstery Group, which includes La-Z-Boy, our largest operating unit. Also included in the Upholstery Group are the operating units Bauhaus and England.  This group primarily manufactures and sells upholstered furniture to proprietary stores.  Upholstered furniture includes recliners and motion furniture, sofas, loveseats, chairs, ottomans and sleeper sofas.

Casegoods Group.  Our Casegoods Group is primarily an importer, marketer and distributor of casegoods (wood) furniture.  The operating units in the Casegoods Group are American Drew/Lea, Hammary and Kincaid.  Casegoods product includes tables, chairs, entertainment centers, headboards, dressers, accent pieces and some coordinated upholstered furniture. 

Retail Group.  The Retail Group consists of 68 company-owned La-Z-Boy Furniture Galleries® stores located in eight markets ranging from the Midwest to the East Coast of the United States and also including Southeastern Florida.  The Retail Group sells upholstered furniture, as well as casegoods and other accessories to end consumers through the retail network.

The furniture industry and our business in particular were negatively impacted by the challenging economic conditions during our fiscal 2009 year and the first nine months of our fiscal 2010 year.  As a result we have experienced year-over-year sales declines when comparing the first nine months of fiscal 2009 to the first nine months of fiscal 2010, although, we have seen an increase in our consolidated sales when comparing the third quarter of fiscal 2010 to the third quarter of fiscal 2009.  Additionally, with the sudden decline in the economic climate during the third quarter of fiscal 2009 we also experienced increased net operating losses and a steep decline in our stock price resulting in a lower market capitalization.  As a result, during the second and third quarter of fiscal 2009 we recorded impairment charges against our intangible assets and long-lived assets and valuation allowances against our deferred tax assets.

We made significant changes to our business model during the second half of fiscal 2009 in order to offset the impact of the challenging economic conditions.  During the first nine months of fiscal 2010 we have continued to reduce costs by consolidating our casegoods manufacturing facilities and continuing the transition of our cut and sew operations to Mexico.  Additionally, we continued to focus on increasing our sales volume through various initiatives.  As a result, we have had positive earnings for the first nine months of fiscal 2010, as well as an increase in sales volume for the third quarter of fiscal 2010 compared to the third quarter of fiscal 2009.  In particular each of our operating units within our Upholstery Group recorded an increase in sales volume and net operating income during the third quarter of fiscal 2010 compared to the third quarter of fiscal 2009.  Our Retail Group experienced minimal decreases in sales volume in the second and third quarter and decreases in net operating losses during the first three quarters of fiscal 2010 compared to fiscal 2009 due to changes made in the second half of fiscal 2009.  Offsetting these positive trends was the continued decline in the sales volume of our Casegoods Group, which we believe is a result of consumers continuing to postpone or forego purchases of casegoods products to a greater extent than upholstered furniture because casegoods product is typically priced higher than upholstered furniture.
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Results of Operations
Analysis of Operations: Quarter Ended January 23, 2010
(Third Quarter 2010 compared with 2009)
 
   
Quarter Ended
       
(Unaudited, amounts in thousands, except per share amounts and percentages)
 
01/23/10
   
01/24/09
   
Percent
change
 
Upholstery sales
  $ 234,262     $ 199,200       17.6 %
Casegoods sales
    36,029       42,116       (14.5 )%
Retail sales
    40,411       40,497       (0.2 )%
VIE sales
    15,629       13,430       16.4 %
Corporate and Other sales
    603       1,084       (44.4 )%
Eliminations
    (21,840 )     (7,751 )     (181.8 )%
Consolidated sales
  $ 305,094     $ 288,576       5.7 %
                         
Consolidated gross profit
  $ 97,807     $ 79,103       23.6 %
Consolidated gross margin
    32.1 %     27.4 %        
                         
Consolidated S,G&A
  $ 83,527     $ 93,501       (10.7 )%
S,G&A as a percent of sales
    27.4 %     32.4 %        
                         
Upholstery operating income (loss)
  $ 26,102     $ (1,652 )     N/M  
Casegoods operating income (loss)
    292       (313 )     193.3 %
Retail operating loss
    (4,135 )     (7,108 )     41.8 %
VIE operating income (loss)
    350       (1,381 )     125.3 %
Corporate and other
    (7,937 )     (2,280 )     (248.1 )%
Restructuring
    (593 )     (2,405 )     75.3 %
Long-lived asset write-down
          (7,036 )     100.0 %
Trade name write-down
          (5,541 )     100.0 %
Goodwill write-down
          (40,436 )     100.0 %
Consolidated operating income (loss)
  $ 14,079     $ (68,152 )     120.7 %
                         
Upholstery operating margin
    11.1 %     (0.8 )%        
Casegoods operating margin
    0.8 %     (0.7 )%        
Retail operating margin
    (10.2 )%     (17.6 )%        
Consolidated operating margin
    4.6 %     (23.6 )%        
                         
Net income (loss) attributable to La-Z-Boy Incorporated
  $ 10,976     $ (64,548 )        
                         
Net income (loss) per share attributable to La-Z-Boy Incorporated
  $ 0.21     $ (1.25 )        
                         
N/M – not meaningful
 
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Sales
 
Consolidated sales increased 5.7% when compared with the third quarter of fiscal 2009.  We believe the strength of the La-Z-Boy brand and the inherent quality associated with the brand have allowed us to gain market share in this challenging economic climate.  We have continued to focus on various sales initiatives and maintained a strong advertising presence throughout this period.
 
Upholstery Group sales increased 17.6% compared with the third quarter of fiscal 2009. In the third quarter of 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 the third quarter of 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.  Somewhat offsetting the effect the change in reporting of the retail warehouse operations had on inter-company sales was a decrease in sales prices resulting in a 0.8 percentage point decrease in sales when comparing the third quarter of fiscal 2010 to the third quarter of fiscal 2009.  As we mentioned above, we believe the strength of the La-Z-Boy brand and the inherent quality associated with the brand have allowed us to gain market share in this challenging economic climate.

Casegoods Group sales decreased 14.5% compared with the third quarter of fiscal 2009. The decrease in sales volume occurred due to weak consumer demand related to casegoods product.  The challenging economic climate has 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.

Retail Group sales were flat when compared with the third quarter of fiscal 2009, even with a decrease of one store compared to the third quarter of fiscal 2009.  We believe this was a result of our decision to maintain a strong advertising presence in the marketplace during these challenging economic conditions. Additionally, our Retail Group focused on various sales model changes implemented in the second half of fiscal 2009 to drive sales.

VIE sales increased 16.4% when compared with the third quarter of fiscal 2009.  The increase in sales was a result of changes we made to our Toronto VIE, which included allowing another Toronto dealer to assume the operations of these four stores, which added to the four that they were already operating.  These changes resulted in an increase in the number of stores included by our VIE for the Toronto market. Additionally, sales for our California VIE were positively impacted by the addition of one store in the second quarter of fiscal 2010.  Beginning in the fourth quarter of fiscal 2009 we stopped consolidating our Cleveland VIE, which somewhat offset the overall increase in sales by our VIEs during the third quarter of fiscal 2010.

Gross Margin

Gross margin increased 4.7 percentage points in the third quarter of fiscal 2010 in comparison to the third quarter of fiscal 2009. Our gross margin was positively impacted by the following factors:

 
·
Efficiencies realized in our domestic upholstery manufacturing facilities resulted in an increase in our gross margin of 2.6 percentage points. Our conversion to cellular manufacturing and our various restructurings completed in recent years resulted in more efficient capacity utilization.  These restructurings eliminated redundant costs by closing plants and reducing our workforce to enable our operations to run more efficiently.

 
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·
Raw material costs decreases resulted in a 2.1 percentage point increase in our gross margin.
 
·
Restructuring charges included in gross profit decreased by $1.3 million resulting in a 0.5 percentage point increase in our gross margin.

Selling, General and Administrative Expenses

Selling, general and administrative expenses (S,G&A) decreased by $10.0 million or 5.0 percentage points when compared to the prior year’s third quarter.  Bad debt expense decreased $8.4 million or 2.9 percentage points in the third quarter of fiscal 2010 compared to the third quarter of fiscal 2009.  The deteriorating economic conditions in the third quarter of fiscal 2009 affected the ability of some of our customers to pay outstanding past due amounts which resulted in a significant charge to bad debts.  Advertising costs as a percent of sales decreased 0.7 percentage points or $1.3 million in the third quarter of fiscal 2010 compared to the third quarter of fiscal 2009.  Our decrease in advertising costs was mainly a result of a shift in the timing of our advertising spend to specific promotional time periods.  Additionally, the overall decline in the economic climate has decreased the cost of purchasing advertising.  We believe these changes have allowed us to maintain a strong presence in the marketplace, while decreasing our costs.

Restructuring

Restructuring costs, net of reversals totaled $0.6 million for the third quarter of fiscal 2010 as compared with $2.4 million in the third quarter of fiscal 2009. The restructuring costs in the third quarter of fiscal 2010 related to the consolidation of our casegoods manufacturing plants and conversion to a distribution center, in addition to ongoing severance as we transition our domestic cut and sew operations to our Mexico facility and the ongoing costs for our closed retail facilities.  These costs were offset by the reversal of restructuring charges due to a decrease in our estimated healthcare costs for these plans.  The restructuring costs in the third quarter of fiscal 2009 related to the closure of our Tremonton, Utah facility, the closure of our Sherman, Mississippi facility, the restructuring of our La-Z-Boy U.K. facility, the restructuring of our company-wide employment and the ongoing costs for the closure of retail facilities.  These costs were comprised mainly of severance and benefits, fixed asset and inventory impairments, transition costs for the Utah plant closure and the ongoing lease cost for our closed retail facilities.

Long-lived Asset Write-down

During the third quarter of fiscal 2009, we evaluated the recoverability of our long-lived assets of our key asset groups.  Based on the results of the review it was determined that the expected future undiscounted cash flows of the assets of our Upholstery Group and Casegoods Group substantially exceeded their carrying value in fiscal 2009 and therefore no impairment existed.  Based on the assessment of undiscounted projected future operating cash flows of our retail stores, the undiscounted cash flows did not exceed the net book value of leasehold improvements, furniture, fixtures, and office equipment at some stores, indicating that a permanent impairment had occurred.

As of the end of the third quarter of fiscal 2009, we had $39.9 million in long-lived assets for our Retail Group.  Of this $39.9 million, fair value exceeded carrying value for $20.4 million of these assets.  For the remaining $19.5 million, we recorded an impairment charge of $7.0 million.

 
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For the seven retail facilities that we owned, which accounted for $17.9 million in value as of the end of fiscal 2009, third party appraisals were utilized to determine the fair value of the stores.  For the remaining retail facilities we utilized a discounted cash flow model over the remaining life of the lease, as well as comparable market data, to determine fair value.  Our cash flow model assumed an economic recovery in our fiscal 2011 and used a 16% discount rate based on the market participant’s view of our industry’s weighted average cost of capital.  The impairment charge recorded in the third quarter of fiscal 2009 was based on current market conditions and the current fair value of those assets.  Changes in economic conditions could result in a need to evaluate whether the fair value of the long-lived assets of our retail stores has deteriorated further which could result in additional impairment charges. The net book value of our retail fixed assets was $29.3 million as of January 23, 2010.

Trade Name and Goodwill Write-Down

During the third quarter of fiscal 2009, we evaluated the goodwill of our Upholstery Group and Retail Group and the trade names of our Casegoods Group.  Due to the steep decline in our stock price during the third quarter of fiscal 2009 and its negative impact on our market capitalization at that time, we recognized a $40.4 million non-cash impairment charge relating to the goodwill in our Upholstery Group and Retail Group and a $5.5 million non-cash impairment charge relating to the trade names in our Casegoods Group.

Operating Margin

Our consolidated operating margin increased 28.2 percentage points to 4.6% for the third quarter of fiscal 2010 compared to the third quarter of fiscal 2009.  Our third quarter of fiscal 2010 operating margin included 0.2 percentage points of restructuring charges.  Operating margin for the third quarter of fiscal 2009 was (23.6)% and included 15.9 percentage points for the goodwill and trade name write-down, 2.4 percentage points for the long-lived asset write-down and 0.8 percentage points for restructuring charges.

The Upholstery Group operating margin increased 11.9 percentage points when compared with the third quarter of fiscal 2009.  Our Upholstery Group operating margin was positively impacted by the following factors:

 
·
A decrease in bad debt expense for our Upholstery Group resulted in a 4.2 percentage point improvement in our operating margin.
 
·
Efficiencies realized in our domestic upholstery manufacturing facilities resulted in an increase in our operating margin of 2.9 percentage points. Our conversion to cellular manufacturing and our various restructurings completed in recent years resulted in mor