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
the quarterly period ended January 24,
2009





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




N/A(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.




þYes                   
                      
       ̈ 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 definition of “large accelerated filer”, “accelerated filer”,
“non-accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):




 ̈ Large accelerated
filer       þAccelerated
filer        ̈ Non-accelerated
filer*       ̈ Smaller Reporting
Company




(*Do not
check if a 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                                                þNo




Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date:




At
January 24, 2009, there were 51,477,935 shares, par value $1.00,
outstanding.





LA-Z-BOY
INCORPORATED


FORM
10-Q THIRD QUARTER OF FISCAL 2009




TABLE OF
CONTENTS


Page
                      Number(s)PART
      I Financial Information (Unaudited)Item
      1.
                    Financial
      StatementsConsolidated
      Statement of Operations
                    3-4Consolidated
      Balance Sheet
                    5Consolidated
      Statement of Cash Flows
                    6Consolidated
      Statement of Changes in Shareholders’ Equity
                    7Notes
      to Consolidated Financial StatementsNote
      1. Basis of Presentation
                    8Note
      2. Interim Results
                    8Note
      3. Reclassification
                    8Note
      4. Inventories
                    8Note
      5. Long-Lived Assets
                    8-9Note
      6. Goodwill and Other Intangible Assets
                    9-10Note
      7. Investments
                    10Note
      8. Pension Plans
                    10Note
      9. Financial Guarantees and Product Warranties
                    10-11Note
      10. Stock-Based Compensation
                    11Note
      11. Segment Information
                    11-12Note
      12. Restructuring
                    13-14Note
      13. Income Taxes
                    14-15Note
      14. Variable Interest Entities
                    15-16Note
      15. Discontinued Operations
                    16-17Note
      16. Income from Continued Dumping and Subsidy Offset Act
                    17Note
      17. Earnings per Share
                    17Note
      18. Fair Value Measurements
                    18-19Note
      19. Hedging Activities
                    19Note
      20. Recent Accounting Pronouncements
                    19-21Item
      2.
                    Management’s
      Discussion and Analysis of Financial Condition and Results of
      OperationsCautionary
      Statement Concerning Forward-Looking Statements
                    22Introduction
                    23-25Results
      of Operations
                    26-34Liquidity
      and Capital Resources
                    34-37Critical
      Accounting Policies
                    37Valuation
      of Goodwill and Intangible Assets
                    38Regulatory
      Developments
                    38-39Recent
      Accounting Pronouncements
                    39Item
      3.
                    Quantitative
      and Qualitative Disclosures About Market Risk
                    40Item
      4.
                    Controls
      and Procedures
                    40PART
      II Other InformationItem
      1A.
                    Risk
      Factors
                    41Item
      6.
                    Exhibits
                    41Signature
      Page
                    42










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)
                      
                      01/24/09
                      
                      
                      01/26/08Sales
                      
                      $
                      288,576
                      
                      
                      $
                      373,081Cost
      of salesCost
      of goods sold
                      
                      
                      207,356
                      
                      
                      
                      265,078Restructuring
                      
                      
                      1,664
                      
                      
                      
                      (632
                      )Total
      cost of sales
                      
                      
                      209,020
                      
                      
                      
                      264,446Gross
      profit
                      
                      
                      79,556
                      
                      
                      
                      108,635Selling,
      general and administrative
                      
                      
                      94,092
                      
                      
                      
                      104,672Write-down
      of long-lived assets
                      
                      
                      7,036
                      
                      
                      
                      —Write-down
      of intangibles
                      
                      
                      45,977
                      
                      
                      
                      —Restructuring
                      
                      
                      741
                      
                      
                      
                      877Operating
      income (loss)
                      
                      
                      (68,290
                      )
                      
                      
                      3,086Interest
      expense
                      
                      
                      1,386
                      
                      
                      
                      2,148Interest
      income
                      
                      
                      323
                      
                      
                      
                      1,134Income
      from Continued Dumping and Subsidy Offset Act, net
                      
                      
                      8,124
                      
                      
                      
                      7,147Other
      income (expense), net
                      
                      
                      (7,433
                      )
                      
                      
                      3,785Income
      (loss) from continuing operations before income taxes
                      
                      
                      (68,662
                      )
                      
                      
                      13,004Income
      tax (benefit) expense
                      
                      
                      (4,280
                      )
                      
                      
                      3,876Income
      (loss) from continuing operations
                      
                      
                      (64,382
                      )
                      
                      
                      9,128Income
      from discontinued operations (net of tax)
                      
                      
                      —
                      
                      
                      
                      384Net
      income (loss)
                      
                      $
                      (64,382
                      )
                      
                      $
                      9,512Basic
      average shares
                      
                      
                      51,475
                      
                      
                      
                      51,417Basic
      income (loss) from continuing operations per share
                      
                      $
                      (1.25
                      )
                      
                      $
                      0.18Discontinued
      operations per share (net of tax)
                      
                      
                      —
                      
                      
                      
                      0.01Basic
      net income (loss) per share
                      
                      $
                      (1.25
                      )
                      
                      $
                      0.19Diluted
      average shares
                      
                      
                      51,475
                      
                      
                      
                      51,590Diluted
      income (loss) from continuing operations per share
                      
                      $
                      (1.25
                      )
                      
                      $
                      0.18Discontinued
      operations per share (net of tax)
                      
                      
                      —
                      
                      
                      
                      —Diluted
      net income (loss) per share
                      
                      $
                      (1.25
                      )
                      
                      $
                      0.18Dividends
      paid per share
                      
                      $
                      0.02
                      
                      
                      $
                      0.12




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)
                      
                      01/24/09
                      
                      
                      01/26/08Sales
                      
                      $
                      942,176
                      
                      
                      $
                      1,082,911Cost
      of salesCost
      of goods sold
                      
                      
                      685,151
                      
                      
                      
                      790,879Restructuring
                      
                      
                      9,696
                      
                      
                      
                      2,447Total
      cost of sales
                      
                      
                      694,847
                      
                      
                      
                      793,326Gross
      profit
                      
                      
                      247,329
                      
                      
                      
                      289,585Selling,
      general and administrative
                      
                      
                      287,873
                      
                      
                      
                      297,278Write-down
      of long-lived assets
                      
                      
                      7,036
                      
                      
                      
                      —Write-down
      of intangibles
                      
                      
                      47,677
                      
                      
                      
                      5,809Restructuring
                      
                      
                      2,208
                      
                      
                      
                      2,446Operating
      loss
                      
                      
                      (97,465
                      )
                      
                      
                      (15,948
                      )Interest
      expense
                      
                      
                      4,532
                      
                      
                      
                      6,365Interest
      income
                      
                      
                      1,885
                      
                      
                      
                      3,039Income
      from Continued Dumping and Subsidy Offset Act, net
                      
                      
                      8,124
                      
                      
                      
                      7,147Other
      income (expense), net
                      
                      
                      (7,974
                      )
                      
                      
                      4,701Loss
      from continuing operations before income taxes
                      
                      
                      (99,962
                      )
                      
                      
                      (7,426
                      )Income
      tax expense (benefit)
                      
                      
                      26,708
                      
                      
                      
                      (4,359
                      )Loss
      from continuing operations
                      
                      
                      (126,670
                      )
                      
                      
                      (3,067
                      )Loss
      from discontinued operations (net of tax)
                      
                      
                      —
                      
                      
                      
                      (6,050
                      )Net
      loss
                      
                      $
                      (126,670
                      )
                      
                      $
                      (9,117
                      )Basic
      average shares
                      
                      
                      51,454
                      
                      
                      
                      51,402Basic
      loss from continuing operations per share
                      
                      $
                      (2.46
                      )
                      
                      $
                      (0.06
                      )Discontinued
      operations per share (net of tax)
                      
                      
                      —
                      
                      
                      
                      (0.12
                      )Basic
      net loss per share
                      
                      $
                      (2.46
                      )
                      
                      $
                      (0.18
                      )Diluted
      average shares
                      
                      
                      51,454
                      
                      
                      
                      51,402Diluted
      loss from continuing operations per share
                      
                      $
                      (2.46
                      )
                      
                      $
                      (0.06
                      )Discontinued
      operations per share (net of tax)
                      
                      
                      —
                      
                      
                      
                      (0.12
                      )Diluted
      net loss per share
                      
                      $
                      (2.46
                      )
                      
                      $
                      (0.18
                      )Dividends
      paid per share
                      
                      $
                      0.10
                      
                      
                      $
                      0.36




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)
                  
                  01/24/09
                  
                  
                  04/26/08Current
      assetsCash
      and equivalents
                  
                  $
                  18,686
                  
                  
                  $
                  14,982Receivables,
      net of allowance of $31,045 in 2009 and $17,942 in 2008
                  
                  
                  153,401
                  
                  
                  
                  200,422Inventories,
      net
                  
                  
                  172,259
                  
                  
                  
                  178,361Deferred
      income taxes—current
                  
                  
                  3,397
                  
                  
                  
                  12,398Other
      current assets
                  
                  
                  25,458
                  
                  
                  
                  21,325Total
      current assets
                  
                  
                  373,201
                  
                  
                  
                  427,488Property,
      plant and equipment, net
                  
                  
                  156,341
                  
                  
                  
                  171,001Deferred
      income taxes—long term
                  
                  
                  1,292
                  
                  
                  
                  26,922Goodwill
                  
                  
                  5,097
                  
                  
                  
                  47,233Trade
      names
                  
                  
                  3,100
                  
                  
                  
                  9,006Other
      long-term assets, net of allowance of $4,723 in 2009 and $2,801 in
      2008
                  
                  
                  66,912
                  
                  
                  
                  87,220Total
      assets
                  
                  $
                  605,943
                  
                  
                  $
                  768,870Current
      liabilitiesCurrent
      portion of long-term debt
                  
                  $
                  9,547
                  
                  
                  $
                  4,792Accounts
      payable
                  
                  
                  49,821
                  
                  
                  
                  56,421Accrued
      expenses and other current liabilities
                  
                  
                  89,263
                  
                  
                  
                  102,700Total
      current liabilities
                  
                  
                  148,631
                  
                  
                  
                  163,913Long-term
      debt
                  
                  
                  80,828
                  
                  
                  
                  99,578Deferred
      income taxes—long term
                  
                  
                  3,995
                  
                  
                  
                  —Other
      long-term liabilities
                  
                  
                  52,121
                  
                  
                  
                  54,783Shareholders'
      equityCommon
      shares, $1 par value
                  
                  
                  51,478
                  
                  
                  
                  51,428Capital
      in excess of par value
                  
                  
                  204,735
                  
                  
                  
                  209,388Retained
      earnings
                  
                  
                  65,693
                  
                  
                  
                  190,215Accumulated
      other comprehensive loss
                  
                  
                  (1,538
                  )
                  
                  
                  (435
                  )Total
      shareholders' equity
                  
                  
                  320,368
                  
                  
                  
                  450,596Total
      liabilities and shareholders' equity
                  
                  $
                  605,943
                  
                  
                  $
                  768,870




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)
                              
                              01/24/09
                              
                              
                              01/26/08
                              
                              
                              01/24/09
                              
                              
                              01/26/08Cash
      flows from operating activitiesNet
      income (loss)
                              
                              $
                              (64,382
                              )
                              
                              $
                              9,512
                              
                              
                              $
                              (126,670
                              )
                              
                              $
                              (9,117
                              )Adjustments
      to reconcile net income (loss) to cash provided by operating
      activitiesGain
      on sale of assets
                              
                              
                              (37
                              )
                              
                              
                              —
                              
                              
                              
                              (2,707
                              )
                              
                              
                              —(Gain)
      loss on the sale of discontinued operations (net of tax)
                              
                              
                              —
                              
                              
                              
                              (96
                              )
                              
                              
                              —
                              
                              
                              
                              3,894Write-down
      of businesses held for sale (net oftax)
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              2,159Write-down
      of long-lived assets
                              
                              
                              7,036
                              
                              
                              
                              —
                              
                              
                              
                              7,036
                              
                              
                              
                              —Write-down
      of intangibles
                              
                              
                              45,977
                              
                              
                              
                              —
                              
                              
                              
                              47,677
                              
                              
                              
                              5,809Write-down
      of investments
                              
                              
                              5,140
                              
                              
                              
                              —
                              
                              
                              
                              5,140
                              
                              
                              
                              —Restructuring
                              
                              
                              2,405
                              
                              
                              
                              245
                              
                              
                              
                              11,904
                              
                              
                              
                              4,893Provision
      for doubtful accounts
                              
                              
                              9,439
                              
                              
                              
                              2,754
                              
                              
                              
                              18,439
                              
                              
                              
                              6,373Depreciation
      and amortization
                              
                              
                              5,827
                              
                              
                              
                              6,193
                              
                              
                              
                              17,770
                              
                              
                              
                              18,506Stock-based
      compensation expense
                              
                              
                              1,012
                              
                              
                              
                              1,303
                              
                              
                              
                              2,867
                              
                              
                              
                              3,165Change
      in receivables
                              
                              
                              31,405
                              
                              
                              
                              53
                              
                              
                              
                              23,314
                              
                              
                              
                              9,241Change
      in inventories
                              
                              
                              (3,463
                              )
                              
                              
                              8,645
                              
                              
                              
                              7,380
                              
                              
                              
                              17,897Change
      in payables
                              
                              
                              (8,351
                              )
                              
                              
                              9,161
                              
                              
                              
                              (6,424
                              )
                              
                              
                              (5,107
                              )Change
      in other assets and liabilities
                              
                              
                              640
                              
                              
                              
                              147
                              
                              
                              
                              (25,885
                              )
                              
                              
                              (18,650
                              )Change
      in deferred taxes
                              
                              
                              (4,658
                              )
                              
                              
                              3,676
                              
                              
                              
                              38,180
                              
                              
                              
                              (2,470
                              )Total
      adjustments
                              
                              
                              92,372
                              
                              
                              
                              32,081
                              
                              
                              
                              144,691
                              
                              
                              
                              45,710Net
      cash provided by operating activities
                              
                              
                              27,990
                              
                              
                              
                              41,593
                              
                              
                              
                              18,021
                              
                              
                              
                              36,593Cash
      flows from investing activitiesProceeds
      from disposals of assets
                              
                              
                              45
                              
                              
                              
                              456
                              
                              
                              
                              7,831
                              
                              
                              
                              7,738Proceeds
      from sale of discontinued operations
                              
                              
                              —
                              
                              
                              
                              150
                              
                              
                              
                              —
                              
                              
                              
                              4,169Capital
      expenditures
                              
                              
                              (4,089
                              )
                              
                              
                              (5,239
                              )
                              
                              
                              (14,079
                              )
                              
                              
                              (20,838
                              )Purchases
      of investments
                              
                              
                              (1,630
                              )
                              
                              
                              (15,807
                              )
                              
                              
                              (10,595
                              )
                              
                              
                              (29,077
                              )Proceeds
      from sales of investments
                              
                              
                              10,854
                              
                              
                              
                              15,649
                              
                              
                              
                              21,881
                              
                              
                              
                              30,242Change
      in other long-term assets
                              
                              
                              (575
                              )
                              
                              
                              1,701
                              
                              
                              
                              (346
                              )
                              
                              
                              2,086Net
      cash provided by (used for) investing activities
                              
                              
                              4,605
                              
                              
                              
                              (3,090
                              )
                              
                              
                              4,692
                              
                              
                              
                              (5,680
                              )Cash
      flows from financing activitiesProceeds
      from debt
                              
                              
                              15,992
                              
                              
                              
                              574
                              
                              
                              
                              55,458
                              
                              
                              
                              1,391Payments
      on debt
                              
                              
                              (43,752
                              )
                              
                              
                              (974
                              )
                              
                              
                              (69,039
                              )
                              
                              
                              (2,212
                              )Stock
      issued/canceled for stock and employee benefit plans
                              
                              
                              —
                              
                              
                              
                              (13
                              )
                              
                              
                              —
                              
                              
                              
                              (129
                              )Dividends
      paid
                              
                              
                              (1,037
                              )
                              
                              
                              (6,229
                              )
                              
                              
                              (5,188
                              )
                              
                              
                              (18,670
                              )Net
      cash used for financing activities
                              
                              
                              (28,797
                              )
                              
                              
                              (6,642
                              )
                              
                              
                              (18,769
                              )
                              
                              
                              (19,620
                              )Effect
      of exchange rate changes on cash and equivalents
                              
                              
                              (228
                              )
                              
                              
                              (1,378
                              )
                              
                              
                              (871
                              )
                              
                              
                              161Change
      in cash and equivalents
                              
                              
                              3,570
                              
                              
                              
                              30,483
                              
                              
                              
                              3,073
                              
                              
                              
                              11,454Cash
      acquired from consolidation of VIEs
                              
                              
                              631
                              
                              
                              
                              —
                              
                              
                              
                              631
                              
                              
                              
                              —Cash
      and equivalents at beginning of period
                              
                              
                              14,485
                              
                              
                              
                              32,692
                              
                              
                              
                              14,982
                              
                              
                              
                              51,721Cash
      and equivalents at end of period
                              
                              $
                              18,686
                              
                              
                              $
                              63,175
                              
                              
                              $
                              18,686
                              
                              
                              $
                              63,175Cash
      paid (net of refunds) during period – income taxes
                              
                              $
                              (660
                              )
                              
                              $
                              (4,336
                              )
                              
                              $
                              (456
                              )
                              
                              $
                              (443
                              )Cash
      paid during period - interest
                              
                              $
                              1,337
                              
                              
                              $
                              2,652
                              
                              
                              $
                              3,750
                              
                              
                              $
                              6,057




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


6


LA-Z-BOY
INCORPORATED


CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY





(Unaudited,
      amounts in thousands)
                    
                    Common
                      Shares
                    
                    
                    Capital in
                      Excess of
                      Par Value
                    
                    
                    Retained
                      Earnings
                    
                    
                    Accumulated
                      Other Compre-
                      hensive
                      Income(Loss)
                    
                    
                    TotalAt
      April 28, 2007
                    
                    $
                    51,377
                    
                    
                    $
                    208,283
                    
                    
                    $
                    223,896
                    
                    
                    $
                    1,792
                    
                    
                    $
                    485,348Stock
      issued for stock and employee benefit plans, net of
      cancellations
                    
                    
                    51
                    
                    
                    
                    (3,422
                    )
                    
                    
                    3,102
                    
                    
                    
                    
                    
                    
                    
                    (269
                    )Stock
      option, performance-based and restricted stock expense
                    
                    
                    
                    
                    
                    
                    4,527
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    4,527Dividends
      paid
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (20,746
                    )
                    
                    
                    
                    
                    
                    
                    (20,746
                    )Comprehensive
      lossNet
      loss
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (13,537
                    )Unrealized
      loss on marketable securities (net of tax of $0.1 million) arising during
      the period
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (222
                    )Reclassification
      adjustment for gain on marketable securities (net of tax of $1.4
      million) included in net loss
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (2,420
                    )Translation
      adjustment
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (117
                    )Net
      actuarial gain (net of tax of $0.2 million)
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    532Total
      comprehensive loss
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (15,764
                    )Impact
      of adoption of FIN 48
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (2,500
                    )
                    
                    
                    
                    
                    
                    
                    (2,500
                    )At
      April 26, 2008
                    
                    $
                    51,428
                    
                    
                    $
                    209,388
                    
                    
                    $
                    190,215
                    
                    
                    $
                    (435
                    )
                    
                    $
                    450,596Stock
      issued for stock and employee benefit plans, net of
      cancellations
                    
                    
                    50
                    
                    
                    
                    (7,520
                    )
                    
                    
                    7,336
                    
                    
                    
                    
                    
                    
                    
                    (134
                    )Stock
      option, performance-based and restricted stock expense
                    
                    
                    
                    
                    
                    
                    2,867
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2,867Dividends
      paid
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (5,188
                    )
                    
                    
                    
                    
                    
                    
                    (5,188
                    )Comprehensive
      lossNet
      loss
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (126,670
                    )Unrealized
      loss on marketable securities arising during the period
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (4,707
                    )Reclassification
      adjustment for loss on marketable securities included in net loss
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    4,767Translation
      adjustment
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (356
                    )Change
      in fair value of cash flow hedges
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (807
                    )Total
      comprehensive loss
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (127,773
                    )At
      January 24, 2009
                    
                    $
                    51,478
                    
                    
                    $
                    204,735
                    
                    
                    $
                    65,693
                    
                    
                    $
                    (1,538
                    )
                    
                    $
                    320,368




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
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 2008 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, which are necessary
for a fair presentation of results for the respective interim
period.




During
our first quarter of fiscal 2009, our largest division revised certain shipping
agreements with third-party carriers such that risk of loss transfers to our
customers upon shipment rather than upon delivery.  Accordingly,
substantially all of our shipments with third-party carriers for this division
are now recognized upon shipment of the product.




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 25,
2009.




Note
3: Reclassification




Certain
prior year information has been reclassified to be comparable with the current
year presentation.




Note
4: Inventories




A summary
of inventory follows:




(Unaudited,
      amounts in thousands)
                    
                    01/24/09
                    
                    
                    04/26/08Raw
      materials
                    
                    $
                    66,785
                    
                    
                    $
                    71,346Work
      in process
                    
                    
                    13,215
                    
                    
                    
                    14,624Finished
      goods
                    
                    
                    120,101
                    
                    
                    
                    119,270FIFO
      inventories
                    
                    
                    200,101
                    
                    
                    
                    205,240Excess
      of FIFO over LIFO
                    
                    
                    (27,842
                    )
                    
                    
                    (26,879
                    )Inventories,
      net
                    
                    $
                    172,259
                    
                    
                    $
                    178,361




Note
5: Long-Lived Assets




Fixed
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 in accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets.  During the quarter ended
January 24, 2009, economic conditions further deteriorated, which led to reduced
volumes and continued operating losses. In addition, we experienced a
significant decline in our stock price, resulting in a significant reduction in
our market capitalization. Accordingly, we performed an assessment of our fixed
assets to test for recoverability in accordance with SFAS No. 144.The assessment of
recoverability was based on management’s best estimates.  The fair
value was determined by using quoted current market prices, as well as an
analysis of the undiscounted cash flows by key asset group.  Our key
asset groups consisted of our operating units in our Upholstery and Casegoods
Group (La-Z-Boy, England, Bauhaus, Kincaid, Hammary, American Drew and Lea) and
each of our retail stores.


8





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
a result of our review we recorded an impairment charge of $7.0 million,
relating to our Retail Group, in the third quarter of fiscal
2009.  Additionally, based on the results of the review it was
determined that the fair value of the long-lived assets in our Upholstery and
Casegoods Groups exceeded their carrying value and therefore no impairment
existed.





Note
6: Goodwill and Other Intangible Assets




In
accordance with SFAS No. 142, Goodwill and Other Intangible
Assets,goodwill and trade names are tested at least annually for
impairment by comparing their fair value to their carrying values. The fair
value for each trade name is established based upon a royalty savings approach.
Additionally, goodwill is tested for impairment by comparing the fair value of
our operating units to their carrying values. The fair value for each operating
unit is established based upon the discounted cash flows.  In
situations where the fair value is less than the carrying value, indicating a
potential impairment, a second comparison is performed using a calculation of
implied fair value of goodwill to determine the monetary value of
impairment.




Our
business has been impacted by significant declines in consumer demand and in the
last three months, our average market capitalization was below the book value of
the company.  As a result of the low market capitalization, we
reviewed the valuations of the goodwill for our Upholstery and Retail operating
segments, in advance of our normal fourth quarter testing and we recorded an
impairment charge of $40.4 million in the third quarter of fiscal
2009.




In the
third quarter of fiscal 2009, we completed a valuation of the tax reserves
relating to the acquisitions of the operating units in the Casegoods segment,
and a reduction of the tax reserves was required.  This reduction was
recorded as a reduction in trade names and totaled $0.4
million.  Additionally, as a result of the continued decline in
consumer confidence and challenging economic environment, we reviewed the
valuations of our trade names.  It was determined that the carrying
value of trade names exceeded their fair value and an impairment loss
of $5.5 million was recorded as a component of operating income.




During
the second quarter of fiscal 2009, we committed to a plan to reorganize our
Toronto, Ontario market which we consolidated as a VIE.  As a result
of this plan, we recorded an impairment charge of $0.4 million which represented
the entire goodwill amount of this market.




During
the first quarter of fiscal 2009, we committed to a plan to close the operations
of our La-Z-Boy U.K. subsidiary.  As a result of this plan, we
recorded an impairment charge of $1.3 million which represented the entire
goodwill amount of the operating unit.




9




The
following table summarizes the changes to goodwill and trade names during the
first nine months of fiscal 2009:




(Unaudited,
      amounts in thousands)
                
                Balance as
                  of 04/26/08
                
                
                Impairments/
                  Other
                
                
                Balance as
                  of 01/24/09GoodwillUpholstery
      Group
                
                $
                19,632
                
                
                $
                (19,632
                )
                
                $
                —Retail
      Group
                
                
                22,096
                
                
                
                (22,096
                )
                
                
                —Corporate
      and Other*
                
                
                5,505
                
                
                
                (408
                )
                
                
                5,097Consolidated
                
                $
                47,233
                
                
                $
                (42,136
                )
                
                $
                5,097Trade
      namesCasegoods
      Group
                
                $
                9,006
                
                
                $
                (5,906
                )
                
                $
                3,100*
      Corporate and Other includes goodwill from our VIEs.





Note
7:  Investments





Included
in other long-term assets were investments of $21.1 million and $34.0 million at
January 24, 2009 and April 26, 2008, respectively, of available-for-sale
marketable securities to fund future obligations of one our non-qualified
retirement plans and our captive insurance company. All unrealized gains or
losses which have not been recognized as other than temporary losses are
included in accumulated other comprehensive loss within Shareholders’
Equity.  The net unrealized loss was $0.6 million and $0.9 million at
January 24, 2009 and April 26, 2008, respectively.  In the third quarter of
fiscal 2009 we recognized $5.1 million of losses, recorded in Other income
(expense), net,  related to the previously mentioned investments due
to our intent to sell those assets in the near term and the losses being
considered other than temporary.





Note
8: Pension Plans





Net
periodic pension costs were as follows:


Third Quarter Ended
                        
                        
                        Nine Months Ended(Unaudited, amounts in
      thousands)
                        
                        01/24/09
                        
                        
                        01/26/08
                        
                        
                        01/24/09
                        
                        
                        01/26/08Service
      cost
                        
                        $
                        328
                        
                        
                        $
                        441
                        
                        
                        $
                        984
                        
                        
                        $
                        1,323Interest
      cost
                        
                        
                        1,359
                        
                        
                        
                        1,346
                        
                        
                        
                        4,077
                        
                        
                        
                        4,038Expected
      return on plan assets
                        
                        
                        (1,728
                        )
                        
                        
                        (1,839
                        )
                        
                        
                        (5,184
                        )
                        
                        
                        (5,517
                        )Net
      periodic pension cost (benefit)
                        
                        $
                        (41
                        )
                        
                        $
                        (52
                        )
                        
                        $
                        (123
                        )
                        
                        $
                        (156
                        )




We did
not make any contributions to the plans during the first nine months of fiscal
2009.  We are not required to make any contributions to the defined benefit
plans in fiscal year 2009; however we may make contributions to meet future
funding requirements as necessary.




Note
9: 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 lease guarantees are generally for real estate leases and
have remaining terms of one to three years. These lease 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 the lease agreements that we have entered into, but they are not
material to our financial position.




10




We would
be required to perform under these agreements only if the dealer were to default
on the lease. The maximum amount of potential future payments under lease
guarantees was $2.1 million at the end of the third quarter of fiscal
2009.  During the third quarter of fiscal 2009, we assumed the lease
obligation on two stores as a result of a change in the Michigan
market.  Additionally, as a result of the change in the VIE for our
Toronto market, we now include an additional Toronto store in our lease
obligations.  These changes led to the $8.7 million decrease in our
lease guarantees in the third quarter of fiscal 2009 and a corresponding
increase in our lease obligations.




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. This estimate is based on historical claims
and adjusted for currently known warranty issues.




A
reconciliation of the changes in our product warranty liability is as
follows:




Third Quarter Ended
                        
                        
                        Nine Months Ended(Unaudited, amounts in
      thousands)
                        
                        01/24/09
                        
                        
                        01/26/08
                        
                        
                        01/24/09
                        
                        
                        01/26/08Balance
      as of the beginning of the period
                        
                        $
                        14,437
                        
                        
                        $
                        14,258
                        
                        
                        $
                        14,334
                        
                        
                        $
                        14,283Accruals
      during the period
                        
                        
                        3,491
                        
                        
                        
                        4,620
                        
                        
                        
                        11,588
                        
                        
                        
                        12,999Settlements
      during the period
                        
                        
                        (3,496
                        )
                        
                        
                        (4,411
                        )
                        
                        
                        (11,490
                        )
                        
                        
                        (12,815
                        )Balance
      as of the end of the period
                        
                        $
                        14,432
                        
                        
                        $
                        14,467
                        
                        
                        $
                        14,432
                        
                        
                        $
                        14,467





Note
10:  Stock-Based Compensation





Total
compensation expense recognized in the Consolidated Statement of Operations for
all equity based compensation was $1.0 million and $2.9 million, for the third
quarter and first nine months of fiscal 2009, respectively.  For the
third quarter and first nine months of fiscal 2008, we recorded total
stock-based compensation expense of approximately $1.3 million and $3.2 million,
respectively.




Note
11: 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 Bauhaus, England, and La-Z-Boy. 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, Hammary and
Kincaid. 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.




Retail Group. The Retail
Group consists of 69 company-owned La-Z-Boy Furniture Galleries® stores in eight
primary markets.  The Retail Group sells mostly upholstered furniture to
end consumers.




11




Third Quarter Ended
                  
                  
                  Nine Months Ended(Unaudited, amounts in thousands)
                  
                  01/24/09
                    (13 weeks)
                  
                  
                  01/26/08
                    (13 weeks)
                  
                  
                  01/24/09
                    (39 weeks)
                  
                  
                  01/26/08
                    (39 weeks)SalesUpholstery
      Group
                  
                  $
                  199,200
                  
                  
                  $
                  282,453
                  
                  
                  $
                  684,252
                  
                  
                  $
                  806,959Casegoods
      Group
                  
                  
                  42,116
                  
                  
                  
                  52,660
                  
                  
                  
                  138,710
                  
                  
                  
                  165,126Retail
      Group
                  
                  
                  40,497
                  
                  
                  
                  49,884
                  
                  
                  
                  122,408
                  
                  
                  
                  141,278VIEs/Eliminations
                  
                  
                  6,763
                  
                  
                  
                  (11,916
                  )
                  
                  
                  (3,194
                  )
                  
                  
                  (30,452
                  )Consolidated
                  
                  $
                  288,576
                  
                  
                  $
                  373,081
                  
                  
                  $
                  942,176
                  
                  
                  $
                  1,082,911Operating
      income (loss)Upholstery
      Group
                  
                  $
                  (1,938
                  )
                  
                  $
                  19,467
                  
                  
                  $
                  16,037
                  
                  
                  $
                  47,370Casegoods
      Group
                  
                  
                  (313
                  )
                  
                  
                  2,222
                  
                  
                  
                  1,819
                  
                  
                  
                  8,399Retail
      Group
                  
                  
                  (7,108
                  )
                  
                  
                  (8,507
                  )
                  
                  
                  (27,509
                  )
                  
                  
                  (27,700
                  )Corporate
      and Other*
                  
                  
                  (3,513
                  )
                  
                  
                  (9,851
                  )
                  
                  
                  (21,195
                  )
                  
                  
                  (33,315
                  )Long-lived
      asset write-down
                  
                  
                  (7,036
                  )
                  
                  
                  —
                  
                  
                  
                  (7,036
                  )
                  
                  
                  —Intangible
      write-down
                  
                  
                  (45,977
                  )
                  
                  
                  —
                  
                  
                  
                  (47,677
                  )
                  
                  
                  (5,809
                  )Restructuring
                  
                  
                  (2,405
                  )
                  
                  
                  (245
                  )
                  
                  
                  (11,904
                  )
                  
                  
                  (4,893
                  )Consolidated
                  
                  $
                  (68,290
                  )
                  
                  $
                  3,086
                  
                  
                  $
                  (97,465
                  )
                  
                  $
                  (15,948
                  )





*Variable
Interest Entities ("VIEs") are included in corporate and other.




The
following table is provided to evaluate segment assets for the third quarter of
fiscal 2009 and the end of the year for fiscal 2008.




(Unaudited,
      amounts in thousands)
                    
                    01/24/09
                    
                    
                    04/26/08Upholstery
      Group
                    
                    $
                    348,261
                    
                    
                    $
                    428,177Casegoods
      Group
                    
                    
                    107,994
                    
                    
                    
                    107,338Retail
      Group
                    
                    
                    63,924
                    
                    
                    
                    107,835Unallocated
      assets*
                    
                    
                    85,764
                    
                    
                    
                    125,520Consolidated
                    
                    $
                    605,943
                    
                    
                    $
                    768,870




*The
unallocated assets includes mainly the corporate assets and
eliminations.




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.  This reporting change affected the timing of inter-company
revenue and profit recognition for the Upholstery Group.  This
resulted in a reduction in inter-company sales for the Upholstery Group of $12.1
million and a decrease in inter-company profit of $3.3 million with a
corresponding offset recorded in VIEs/Eliminations sales and Corporate and Other
operating income.  The adjustments did not affect our consolidated
operating results.




12




Note
12: Restructuring




During
the past several years, we have entered into various restructuring plans to
rationalize our manufacturing facilities and to consolidate retail distribution
centers and close underperforming retail facilities.  The majority of
our restructuring charges related to our manufacturing and wholesale
distribution facilities were reported as a component of Cost of Sales on our
Consolidated Statement of Operations, while restructuring charges related to our
retail operations were reported as a line item within our Selling, General and
Administrative expenses section of our Consolidated Statement of
Operations.  With these restructuring plans, we have written-down
various fixed assets which were accounted for in accordance with
SFAS No. 144.  Additionally, we recorded charges for
severance and benefits, contract terminations and other transition costs related
to relocating manufacturing and closing facilities, in accordance with
SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities.





In the
third quarter of fiscal 2009, we committed to a restructuring plan to close our
plant in Sherman, Mississippi related to our Bauhaus operations.  The
closure of this plant will be completed at the beginning of the fiscal 2009
fourth quarter.  In connection with this plant closure, we recorded
pre-tax restructuring charges of $0.6 million in the third quarter of fiscal
2009, covering severance and benefits and the write-down of fixed
assets.





In the
third quarter of fiscal 2009, we announced a plan to reduce our company-wide
employment to be more in line with today’s sales volume.  In
connection with this plan, we recorded pre-tax restructuring charges of $1.1
million in the third quarter of fiscal 2009, covering severance and
benefits.





In the
first quarter of fiscal 2009, we committed to a restructuring plan to close the
operations of our La-Z-Boy U.K. subsidiary due to a change in our strategic
direction for this operation.  The closure of this operation occurred
in the second quarter of fiscal 2009 and impacted about 17
employees.  In connection with this closure, we recorded pre-tax
restructuring charges of about $0.1 million and $1.9 million, in the third
quarter and first nine months of fiscal 2009, respectively, covering the
write-down of inventory ($1.3 million), the write-down of fixed assets and other
restructuring charges ($0.6 million).





During
the fourth quarter of 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.  The transition
of our cutting and sewing operations to Mexico will impact approximately 700
La-Z-Boy employees at the five remaining facilities.  Our Utah
facility, which employed 630 people, ceased operations during the first quarter
of fiscal 2009 and production was shifted to our remaining manufacturing
facilities.  We began start up production at our Mexican facility in
January 2009.  By the end of fiscal 2010 we expect 70% of our domestic
cutting and sewing operations to be shifted to our Mexican facility, with the
remainder in fiscal 2011.  In connection with these activities, we
have incurred $10.3 million 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
$5 to $7 million.   During the third quarter and first nine
months of fiscal 2009, we had restructuring charges of $0.3 million and $7.7
million, respectively, 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 move
production to other plants.





In the
fourth quarter of fiscal 2007, we committed to a restructuring plan which
included the closures of two upholstery manufacturing facilities, the closure of
a rough mill lumber operation, the consolidation of operations at a another
upholstery operation and the elimination of a number of positions throughout the
remainder of the organization. This plan impacted approximately 500 employees
and occurred in the fourth quarter of fiscal 2007 and the first quarter of
fiscal 2008.  During the first nine months of fiscal 2009, we had
restructuring reversals of $0.5 million relating to these activities due to
lower benefit costs than originally estimated.


13





During
fiscal 2007 and 2008, several of our retail warehouses were consolidated into
larger facilities and several underperforming stores were
closed.  Approximately 130 jobs were eliminated as a result of these
changes.  In the third quarter and first nine months of fiscal 2009,
we had restructuring charges of $0.3 million and $1.1 million, respectively, due
to contract terminations relating to these actions.




As of the
end of the third quarter of fiscal 2009, we had a remaining restructuring
liability of $3.5 million which is expected to be settled as follows:
$1.3 million in the fourth quarter of fiscal 2009, $1.9 million in fiscal
2010, and $0.3 million thereafter.  Contract terminations
resulting from the closure of several of our retail stores and warehouses result
in our restructuring liability being paid out over an extended length of
time.






Restructuring liabilities along with
charges to expense, cash payments or asset write-downs for all of our
restructuring actions were as follows:







Fiscal
      2009(Unaudited,
      amounts in thousands)
                  
                  04/26/08
                    Balance
                  
                  
                  Charges
      to
                    Expense
      *
                  
                  
                  Cash
                    Payments
                    or
      Asset
                    Write-Offs
                  
                  
                  01/24/09
                    BalanceSeverance
      and benefit-related costs
                  
                  $
                  2,842
                  
                  
                  $
                  4,230
                  
                  
                  $
                  (4,226
                  )
                  
                  $
                  2,846Fixed
      asset write-downs, net of gains
                  
                  
                  —
                  
                  
                  
                  398
                  
                  
                  
                  (398
                  )
                  
                  
                  —Contract
      termination costs
                  
                  
                  939
                  
                  
                  
                  1,126
                  
                  
                  
                  (1,427
                  )
                  
                  
                  638Other
                  
                  
                  —
                  
                  
                  
                  6,150
                  
                  
                  
                  (6,150
                  )
                  
                  
                  —Total
      restructuring
                  
                  $
                  3,781
                  
                  
                  $
                  11,904
                  
                  
                  $
                  (12,201
                  )
                  
                  $
                  3,484





* Charges
to expense include $1.9 million of non-cash charges for contract termination
costs, fixed asset and inventory write-downs.





Fiscal
      2008(Unaudited,
      amounts in thousands)
                  
                  04/28/07
                    Balance
                  
                  
                  Charges
      to
                    Expense
      **
                  
                  
                  Cash
                    Payments
                    or
      Asset
                    Write-Offs
                  
                  
                  04/26/08
                    BalanceSeverance
      and benefit-related costs
                  
                  $
                  2,177
                  
                  
                  $
                  3,253
                  
                  
                  $
                  (2,588
                  )
                  
                  $
                  2,842Fixed
      asset write-downs, net of gains
                  
                  
                  —
                  
                  
                  
                  364
                  
                  
                  
                  (364
                  )
                  
                  
                  —Contract
      termination costs
                  
                  
                  1,257
                  
                  
                  
                  2,019
                  
                  
                  
                  (2,337
                  )
                  
                  
                  939Other
                  
                  
                  —
                  
                  
                  
                  2,499
                  
                  
                  
                  (2,499
                  )
                  
                  
                  —Total
      restructuring
                  
                  $
                  3,434
                  
                  
                  $
                  8,135
                  
                  
                  $
                  (7,788
                  )
                  
                  $
                  3,781





**
Charges to expense include $1.1 million of non-cash charges for contract
termination costs, fixed asset and inventory write-downs.





Note
13:  Income Taxes





In
accordance with SFAS No. 109, Accounting for Income Taxes,
we evaluate our deferred taxes to determine if a valuation allowance is
required.  SFAS No. 109 requires that companies assess whether a
valuation allowance should be established based on the consideration of all
available evidence using a “more likely than not” standard with significant
weight being given to evidence that can be objectively verified.  Our
current and prior year losses present the most significant negative evidence as
to whether we need to record a valuation allowance against our net deferred tax
assets. Given the current economic climate and the losses that we have
sustained, we have recorded a valuation allowance against the deferred tax
assets of the U.S. operations.


14





At
January 24, 2009 and April 26, 2008, we had deferred tax assets of $65.6 million
and $51.4 million, respectively, offset by valuation allowances of
$64.9 million and $12.1 million, respectively.  The accounting
for deferred taxes is based upon an estimate of future results. Differences
between the anticipated and actual outcome of these future tax consequences
could have a material impact on our consolidated results of operations or
financial position. Changes in existing tax laws could also affect actual tax
results and the valuation of deferred tax assets over time.





Our
income tax benefit for the third quarter of fiscal 2009 was $4.3 million,
compared with a provision for income tax expense of $3.9 million in the
corresponding prior year period. Our effective income tax rate was approximately
6.2% for the quarter ended January 24, 2009, compared to an effective income tax
rate of 29.8% for the quarter ended January 26, 2008. The difference in our
effective tax rate primarily results from the recording of valuation allowances
against the majority of our U.S. deferred tax assets beginning in the second
quarter of fiscal year 2009.  The current period tax benefit results
primarily from the reversal of deferred tax liabilities associated with trade
names and goodwill that were written off during the current quarter which
exceeded the income tax expense on certain operations with taxable income
conducted in certain U.S. states.  At January 24, 2009, we had a
federal income tax receivable of $11.8 million relating to a net operating loss
carry-back from fiscal year 2009.  We expect to receive this amount in
the form of a refund when we file, early in fiscal 2010, our fiscal 2009 tax
return and claim the tax loss against taxable income in fiscal
2007.




Note
14: Variable Interest Entities




Financial
Accounting Standards Board Interpretation No. 46R, Consolidation of Variable Interest
Entities (“FIN 46”), requires 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
primary beneficiary for any of the dealers who do qualify as a variable interest
entity.


15





Based on
the criteria for consolidation of VIEs, we have consolidated several 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.  Because these entities
are accounted for as if the entities were consolidated based on voting
interests, we absorb all net losses of the VIEs in excess of their
equity.  We recognize all net earnings of these VIEs to the extent of
recouping the losses previously recorded.  Earnings in excess of our
losses are attributed to equity owners of the dealers and are recorded as
minority interest.  During the third quarter of fiscal 2009, we
terminated our relationship with our Toronto VIE.  However, four of
the stores operated by the former dealer were assumed by another dealer in the
Toronto market and one was closed.  As a result this dealer became a
VIE.  With this change in ownership, the total markets remain the
same; however the store count did increase by three.  We had four
consolidated VIEs for fiscal 2009 representing 37 stores and four VIEs for
fiscal 2008 representing 34 stores.





The table
below shows the impact the VIEs had on our financial statements during the third
quarter and first nine months of fiscal 2009 and fiscal 2008:





Third
      Quarter Ended(Unaudited,
      amounts in thousands)
                        
                        01/24/09
                        
                        
                        04/26/08Current
      assets
                        
                        $
                        18,234
                        
                        
                        $
                        21,202Non-current
      assets
                        
                        
                        19,994
                        
                        
                        
                        17,591Total
      assets
                        
                        $
                        38,228
                        
                        
                        $
                        38,793Current
      liabilities
                        
                        $
                        6,673
                        
                        
                        $
                        9,705Non-current
      liabilities
                        
                        
                        5,381
                        
                        
                        
                        3,408Total
      liabilities
                        
                        $
                        12,054
                        
                        
                        $
                        13,113
  Third
      Quarter Ended
                        
                        
                        Nine
      Months Ended(Unaudited,
      amounts in thousands )
                        
                        01/24/09
                        
                        
                        01/26/08
                        
                        
                        01/24/09
                        
                        
                        01/26/08Net
      sales, net of inter-company eliminations
                        
                        $
                        13,430
                        
                        
                        $
                        14,874
                        
                        
                        $
                        39,301
                        
                        
                        $
                        38,896Pre-tax
      loss
                        
                        $
                        (3,932
                        )
                        
                        $
                        (1,928
                        )
                        
                        $
                        (7,435
                        )
                        
                        $
                        (7,529
                        )




As of the
end of the third quarter of fiscal 2009, we had significant interests in four
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 $1.5 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 the fiscal
year.




Note
15: Discontinued Operations




During
the second quarter of fiscal 2008, we completed the sale of our Clayton Marcus
operating unit and our Pennsylvania House trade name.  These
dispositions were accounted for as discontinued operations.





The
results of the discontinued operations for Clayton Marcus and Pennsylvania House
for the third quarter and first nine months of fiscal 2008 were as
follows:


16





Third Quarter
                  Ended
                
                
                Nine Months
                  Ended(Unaudited, amounts in
      thousands)
                
                01/26/08
                
                
                01/26/08Net
      sales
                
                $
                1,563
                
                
                $
                22,622Income
      (loss) from discontinued operations, net of tax
                
                $
                384
                
                
                $
                (1,916
                )Loss
      on the sale of discontinued operations, net of tax
                
                $
                —
                
                
                $
                (4,134
                )





In the
Consolidated Statement of Cash Flows, the activity of these operating units was
included along with the activity from our continuing operations.





Note
16: Income from Continued Dumping and Subsidy Offset Act





We
recorded $8.1 million and $7.1 million as Income from the Continued Dumping and
Subsidy Offset Act, net of legal expenses, during the third quarter of fiscal
2009 and fiscal 2008, respectively, from the receipt of funds under the
Continued Dumping and Subsidy 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
17: Earnings per Share




Basic net
income (loss) per share is computed using the weighted average number of shares
outstanding during the period. Diluted net income (loss) per share uses the
weighted average number of shares outstanding during the period plus the
additional common shares that would be outstanding if the dilutive potential
common shares issuable under employee stock options and unvested restricted
stock were issued.




A
reconciliation of basic and diluted weighted average common shares outstanding
follows:




Third
      Quarter Ended
                  
                  
                  Nine
      Months Ended(Unaudited, amounts in
      thousands)
                  
                  01/24/09
                  
                  
                  01/26/08
                  
                  
                  01/24/09
                  
                  
                  01/26/08Weighted
      average common shares outstanding (basic)
                  
                  
                  51,475
                  
                  
                  
                  51,417
                  
                  
                  
                  51,454
                  
                  
                  
                  51,402Effect
      of options and unvested restricted stock
                  
                  
                  —
                  
                  
                  
                  173
                  
                  
                  
                  —
                  
                  
                  
                  —Weighted
      average common shares outstanding (diluted)
                  
                  
                  51,475
                  
                  
                  
                  51,590
                  
                  
                  
                  51,454
                  
                  
                  
                  51,402





The
weighted average common shares outstanding (diluted) for third quarter of fiscal
2009 exclude outstanding stock options of 0.6 million because the net loss in
third quarter ended January 24, 2009 would cause the effect of options to be
anti-dilutive.  The weighted average common shares outstanding
(diluted) for the nine months ended January 24, 2009 and January 26, 2008
exclude outstanding stock options of 0.5 million and 0.2 million, respectively,
because the net loss in the first nine months of fiscal 2009 and fiscal 2008,
respectively, would cause the effect of options to be
anti-dilutive.





The
effect of options to purchase 2.5 million and 2.7 million shares for the
quarters ended January 24, 2009 and January 26, 2008 with a weighted average
exercise price of $15.46 and $15.50 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.


17





Note
18: Fair Value Measurements





We
adopted FASB Statement of Financial Accounting Standards No. 157
(“SFAS No. 157”), Fair
Value Measurements, effective April 27, 2008 for our financial assets and
liabilities.  Adoption of SFAS No. 157 did not have a material effect
on our financial position, results of operations or cash
flows.





In
February 2008, the Financial Accounting Standards Board issued FASB Staff
Position FAS 157-1, Application of FASB Statement No.
157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address
Fair Value Measurements for Purposes of Lease Classification or Measurement
under Statement 13 (“FSP 157-1”). FSP FAS 157-1 amended SFAS No. 157 to
exclude from its scope SFAS No. 13, Accounting for Leases, and
its related interpretive accounting pronouncements that address leasing
transactions. Also in February 2008, the FASB issued FASB Staff Position FAS
157-2, Effective Date of FASB
Statement No. 157 (“FSP 157-2”). FSP 157-2amended
SFAS No. 157 to defer the effective date of SFAS No. 157 until fiscal years
beginning after November 15, 2008 for non-financial assets and non-financial
liabilities, except for items that are recognized or disclosed at fair value in
the financial statements on a recurring basis, at least annually. We are
currently assessing the impact of SFAS No. 157 on our non-financial assets and
non-financial liabilities measured at fair value on a nonrecurring
basis.




SFAS No.
157 requires the categorization of financial assets and liabilities, based on
the inputs to the valuation technique, into a three-level fair value hierarchy.
The fair value hierarchy gives the highest priority to the quoted prices in
active markets for identical assets and liabilities and lowest priority to
unobservable inputs. The various levels of the SFAS No. 157 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 the company has 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.




SFAS No.
157 requires 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.


18





The
following table presents the fair value hierarchy for those assets measured at
fair value on a recurring basis as of January 24, 2009:





Fair
      Value Measurements(Unaudited,
      amounts in thousands)
                    
                    Level
      1
                    
                    
                    Level
      2
                    
                    
                    Level
      3AssetsAvailable-for-sale
      securities
                    
                    $
                    8,932
                    
                    
                    $
                    12,119
                    
                    
                    $
                    —LiabilitiesInterest
      rate swap
                    
                    
                    —
                    
                    
                    
                    (807
                    )
                    
                    
                    —Total
                    
                    $
                    8,932
                    
                    
                    $
                    11,312
                    
                    
                    $
                    —





We hold
available-for-sale marketable securities to fund future obligations of one of
our non-qualified retirement plans and our captive insurance
company.  The fair value measurements for these 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
19:  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 24, 2009 was three month
LIBOR plus 2.0%.




Note
20:  Recent Accounting Pronouncements




FASB
Statement of Financial Accounting Standards No. 159





The FASB
issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS No. 159”), which allows a company
to choose to measure selected financial assets and financial liabilities at fair
value. Unrealized gains and losses on items for which the fair value option has
been elected are reported in earnings. SFAS No. 159 is effective for fiscal
years beginning after November 15, 2007.





We
adopted SFAS No. 159 on April 27, 2008 and have not elected the permitted fair
value measurement provisions of this statement.


19


FASB
Statement of Financial Accounting Standards No. 160





The FASB
issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51 (“SFAS No.
160”).  It is effective for financial statements issued for fiscal
years beginning after December 15, 2008, and interim periods within those fiscal
years.  Earlier application is prohibited. SFAS No. 160 requires that
accounting and reporting for minority interests will be re-characterized as
non-controlling interests and classified as a component of
equity.  SFAS No. 160 also establishes reporting requirements that
provide disclosures that clearly identify and distinguish between the interests
of the parent and the interests of the non-controlling owners.





We are
currently evaluating the impact SFAS No. 160 will have on our financial
statements.  This statement will be effective for interim periods
beginning in fiscal 2010.





FASB
Statement of Financial Accounting Standards No. 141(R)





The FASB
issued Statement of Financial Accounting Standards No. 141 (Revised 2007), Business Combinations, (“SFAS
No. 141(R)”), which replaces FASB Statement No. 141.  SFAS No. 141(R)
establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any non-controlling interest in the acquiree and the
goodwill acquired. SFAS No. 141(R) also establishes disclosure requirements that
will enable users to evaluate the nature and financial effects of the business
combination. SFAS No. 141(R) is effective for business combinations that occur
during or after fiscal years that begin after December 15, 2008.





We are
currently evaluating the impact SFAS No. 141(R) will have on our financial
statements.  This statement will be effective in fiscal
2010.





FASB
Statement of Financial Accounting Standards No. 161




The FASB
issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative
Instruments and Hedging Activities, (“SFAS No. 161”). It is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early adoption encouraged.  The objective of
this statement is to require enhanced disclosures about an entity’s derivative
and hedging activities and to improve the transparency of financial
reporting. Entities are required to provide enhanced disclosures about (a)
how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under Statement 133 and
its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity’s financial position, financial performance, and
cash flows requires disclosure of the fair values of derivative instruments and
their gains and losses in tabular format and derivative features that are credit
risk related.




This
statement will be effective for the fourth quarter of fiscal 2009 and it will
require expanded disclosure of our hedging activities.




FASB
Staff Position EITF 03-6-1:Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities





In
June 2008, the FASB issued FASB Staff Position No. EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating Securities,
(“FSP EITF 03-6-1”). FSP EITF 03-6-1 requires that unvested share-based payment
awards containing non-forfeited rights to dividends be included in the
computation of earnings per common share. The adoption of FSP EITF 03-6-1 is
effective for fiscal years beginning after December 15, 2008 and interim periods
within those years, retrospective application is required.


20





This
statement will be effective beginning with our first quarter of fiscal 2010 and
will require us to include unvested shares of our share-based payment awards
into our calculation of earnings per share.   This is expected to
increase our basic shares outstanding by about 0.6 million and 0.2 million for
the periods ending January 24, 2009 and January 26, 2008,
respectively.





FASB
Staff Position FAS 140-4 and FIN 46(R)-8: Disclosures by Public Entities
(Enterprises) about Transfers of Financial Assets and Interests in Variable
Interest Entities





In
December 2008, the FASB issued FASB Staff Position ("FSP") FAS 140-4 and FIN
46(R)-8, Disclosures by Public
Entities (Enterprises) about Transfers of Financial Assets and Interests in
Variable Interest Entities. This document increases disclosure
requirements for public companies and is effective for reporting periods
(interim and annual) that end after December 15, 2008. The purpose of this
FSP is to promptly improve disclosures by public entities and enterprises until
the pending amendments to FASB Statement No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, and
FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest
Entities, are finalized and approved by the Board. The FSP amends
Statement 140 to require public entities to provide additional disclosures
about transferors' continuing involvements with transferred financial assets. It
also amends Interpretation 46(R) to require public enterprises, including
sponsors that have a variable interest in a variable interest entity, to provide
additional disclosures about their involvement with variable interest
entities.





We have
implemented the requirements of FSP FAS 140-4 and FIN 46(R)-8 for this reporting
period.  As the requirements of this literature only impact our
disclosures, there was no impact to our financial results.





FASB
Staff Position FAS 132R-1: Employers’ Disclosures about Postretirement Benefit
Plan Assets




In
December 2008, FASB issued FASB Staff Position (“FSP”) FAS 132R-1, Employers’ Disclosures about
Postretirement Benefit Plan Assets.This document 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 document further expands the
disclosure requirements to include fair value of plan assets, including the
levels within the fair value hierarchy and other related disclosures under SFAS
No. 157, Application of FASB
Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements
That Address Fair Value Measurements for Purposes of Lease Classification or
Measurement under Statement 13, and any concentrations of risk related to
the plan assets.




This
statement is effective for our fiscal 2010 year end.  We are currently
determining the impact, if any, this statement will have on our consolidated
financial statements and disclosures.




21




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, strategies and significant operational events in
fiscal 2009. 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 performancefuture
      growth
                
                industry
      and importing trendsadequacy
      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; (b) changes in demographics; (c) further changes in
residential housing and commercial real estate market; (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 changes; (h)
changes in currency exchange rates; (i) competitive factors; (j) operating
factors, such as supply, labor or distribution disruptions including changes in
operating conditions or costs; (k) effects of restructuring actions; (l) changes
in the domestic or international regulatory environment; (m) ability to
implement global sourcing organization strategies; (n) continued economic
recession and decline in the equity market; (o) the impact of adopting new
accounting principles; (p) the impact from natural events such as hurricanes,
earthquakes and tornadoes; (q) the ability to procure fabric rolls and leather
hides or cut and sewn fabric and leather sets domestically or abroad; (r)
continued decline in the credit market and potential impacts on our customers
and suppliers; (s) unanticipated labor/industrial actions; (t) those matters
discussed in Item 1A of our fiscal 2008 Annual Report 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.


22


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 69 La-Z-Boy Furniture Galleries® stores,
which are retail locations dedicated to marketing our La-Z-Boy branded product.
These 69 stores are part of the larger store network of La-Z-Boy Furniture
Galleries® stores which includes a total of 328 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 certain rooms in their
homes.





In
addition to our company-owned stores, we consolidate certain of our independent
dealers who did 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 of fiscal 2009 we
had four VIEs, operating 37 stores consolidated into our Statement of
Operations.  During the third quarter of fiscal 2009, we terminated
our relationship with our Toronto VIE.  However, four of the stores
operated by the former dealer were assumed by another dealer in the Toronto
market and one was closed.  As a result this dealer became a
VIE.  With this change in ownership, the total markets remain the
same; however the store count did increase by three.  At the end of
the fiscal 2008 third quarter, we had four VIEs, operating 34 stores, 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 and other
furniture retailers.  Upholstered furniture includes recliners and
motion furniture, sofas, loveseats, chairs, ottomans and sleeper
sofas.





Casegoods Group.  Our
Casegoods Group today is primarily an importer, marketer and distributor of
casegoods (wood) furniture.  It also operates two manufacturing
facilities in North Carolina.  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 69 company-owned La-Z-Boy Furniture Galleries® stores
located in eight markets.  These markets range from the Midwest to the
East Coast of the United States and also include Southeastern Florida.  The
Retail Group sells mostly upholstered furniture to end consumers through the
retail network.





The chart
below shows the current structure of the La-Z-Boy Furniture Galleries® store
network.


23








During
the first quarter of fiscal 2008, we began rolling out a new proprietary
distribution model referred to as Comfort Studios.  Comfort Studios
are typically smaller and more adaptable than the former in-store gallery
model.  At the end of the third quarter of fiscal 2009, we had 449
Comfort Studios, of which some were new studios and the rest were conversions of
former in-store galleries and general dealers.  We expect to open or
convert approximately 35 more Comfort Studios during the remainder of fiscal
2009.  Kincaid, England and Lea also have in-store gallery
programs.





Impact
of Current Market Conditions





Towards
the end of the fiscal 2009 second quarter, we realized significant declines in
consumer demand brought on by a weak job market, declining home prices and
tightening consumer credit which were factors in the failure of several
prominent financial institutions.  These events intensified concerns
about credit and liquidity risks in the financial markets and had a major impact
on the economy and our business.  The collapse of the credit markets,
the related tightening of access to capital and the ensuing write-downs of
troubled loans by financial institutions had a significant impact on the decline
in consumer confidence and the discretionary spending on home furnishing
purchases. As a direct result of the recessionary economic climate, we took the
following actions to align our operating structure with the resulting level of
business:





·
            We
      reduced employment by about 24% or 2,500 employees across all levels of
      the company since the third quarter of fiscal
  2008.





·
            We
      reduced our exposure to the overall tightening of the financial markets by
      our decision to withdraw credit support to certain independent dealers. As
      a result we anticipate the closure of about 15 to 20 primarily dealer
      owned, La-Z-Boy Furniture Galleries® stores in calendar
    2009.





·
            We
      significantly reduced our planned fiscal 2009 capital expenditures from
      approximately $27 million to approximately $18 million to $20
      million.





·
            We
      suspended our bonus and profit sharing plan, as well as suspending the
      company match portion of our 401(k)
plan.





·
            We
      will close a plant in Sherman, Mississippi during February 2009, which
      will reduce our capacity and increase our efficiencies for our Bauhaus
      operations.


24





In
addition to these initiatives we plan to aggressively reduce overall operating
expenses and inventories to be in alignment with today’s volumes.  We
believe the reduction in employment alone will result in savings of $25 million
to $30 million annually.  We continue to focus on cash flow and
liquidity to ensure that our balance sheet remains strong enough to withstand
this current recession.  We plan to reduce our inventory balances by
10% during the fourth quarter as we have significantly reduced our overseas
purchases.





As a
result of our fiscal 2009 losses, the impact of the restructuring actions we
have taken over the past two years, the significant decline in current and
projected demand for consumer domestic furniture purchases and resulting
uncertainty in the economic climate, we reassessed the likelihood that we will
be able to realize the benefit of our deferred tax assets.   As a
result, we recorded a valuation allowance of $38.2 million against the deferred
tax assets, or $0.74 per share in the 2009 fiscal second quarter.  In
the third quarter of fiscal 2009, a valuation allowance of $14.6 million was
recorded against the current quarter’s tax benefit due to the pre-tax losses
incurred.





Over the
past four months, our stock price has declined nearly 90%, negatively impacting
our market capitalization which is now significantly below our company’s book
value.  As a result, we have had to analyze the overall valuation of
the company, our fixed assets and our intangible assets.  Although we
tested the valuation of our Retail segment’s goodwill during the second quarter,
the major decline in the stock market and the freezing of money in the capital
markets resulted in an increase in our weighted average cost of capital from 11%
at the end of the second quarter of fiscal 2009 to 16% at the end of the third
quarter of fiscal 2009.  This increase in the weighted average cost of
capital had the effect of reducing our fair value estimates and resulted in
significant write-downs in our intangible assets.  We recorded a
non-cash impairment charge of $40.4 million relating to the goodwill in our
Retail and Upholstery segments and a non-cash impairment charge of $5.5 million
relating to the trade names of operating units in our Casegoods
segment.


25





Results
of Operations


Analysis of Operations: Quarter Ended
January 24, 2009


(Third Quarter 2009 compared with
2008)





Quarter
      Ended(Amounts
      in thousands, except per share amounts and percentages)
                      
                      01/24/09
                      
                      
                      01/26/08
                      
                      
                      Percent
                        changeUpholstery
      sales
                      
                      $
                      199,200
                      
                      
                      $
                      282,453
                      
                      
                      
                      (29.5
                      )%Casegoods
      sales
                      
                      
                      42,116
                      
                      
                      
                      52,660
                      
                      
                      
                      (20.0
                      )%Retail
      sales
                      
                      
                      40,497
                      
                      
                      
                      49,884
                      
                      
                      
                      (18.8
                      )%Other/eliminations*
                      
                      
                      6,763
                      
                      
                      
                      (11,916
                      )
                      
                      
                      156.7
                      %Consolidated
      sales
                      
                      $
                      288,576
                      
                      
                      $
                      373,081
                      
                      
                      
                      (22.7
                      )%Consolidated
      gross profit
                      
                      $
                      79,556
                      
                      
                      $
                      108,635
                      
                      
                      
                      (26.8
                      )%Consolidated
      gross margin
                      
                      
                      27.6
                      %
                      
                      
                      29.1
                      %Consolidated
      S,G&A
                      
                      $
                      94,092
                      
                      
                      $
                      104,672
                      
                      
                      
                      (10.1
                      )%S,G&A
      as a percent of sales
                      
                      
                      32.6
                      %
                      
                      
                      28.1
                      %Upholstery
      operating income
                      
                      $
                      (1,938
                      )
                      
                      $
                      19,467
                      
                      
                      
                      (110.0
                      )%Casegoods
      operating income
                      
                      
                      (313
                      )
                      
                      
                      2,222
                      
                      
                      
                      (114.1
                      )%Retail
      operating loss
                      
                      
                      (7,108
                      )
                      
                      
                      (8,507
                      )
                      
                      
                      16.4
                      %Corporate
      and other
                      
                      
                      (3,513
                      )
                      
                      
                      (9,851
                      )
                      
                      
                      64.3
                      %Long-lived
      asset write-down
                      
                      
                      (7,036
                      )
                      
                      
                      —
                      
                      
                      
                      N/MIntangible
      write-down
                      
                      
                      (45,977
                      )
                      
                      
                      —
                      
                      
                      
                      N/MRestructuring
                      
                      
                      (2,405
                      )
                      
                      
                      (245
                      )
                      
                      
                      (881.6
                      )%Consolidated
      operating income (loss)
                      
                      $
                      (68,290
                      )
                      
                      $
                      3,086
                      
                      
                      
                      N/MUpholstery
      operating margin
                      
                      
                      (1.0
                      )%
                      
                      
                      6.9
                      %Casegoods
      operating margin
                      
                      
                      (0.7
                      )%
                      
                      
                      4.2
                      %Retail
      operating margin
                      
                      
                      (17.6
                      )%
                      
                      
                      (17.1
                      )%Consolidated
      operating margin
                      
                      
                      (23.7
                      )%
                      
                      
                      0.8
                      %Income
      (loss) from continuing operations
                      
                      $
                      (64,382
                      )
                      
                      $
                      9,128Income
      (loss) from discontinued operations
                      
                      $
                      —
                      
                      
                      $
                      384Diluted
      income (loss) per share from continuing operations
                      
                      $
                      (1.25
                      )
                      
                      $
                      0.18


*
Includes sales from our VIEs.


N/M = non
meaningful


26


Sales





Consolidatedsales were down
22.7% or $84.5 million when compared with the third quarter of fiscal 2008 due
in large part to the challenging economic conditions including the weak retail
environment, record low consumer confidence, an uncertain housing market and a
deteriorating consumer credit environment.





Upholstery Group sales were
down 29.5% or $83.3 million compared with the third quarter of fiscal 2008.
Sales price increases resulted in a 2.9% increase in sales; however this was
offset by a decrease in sales volume due to the challenging economic
conditions.  Additionally, the change in reporting of the Retail
distribution centers to the Upholstery Group affected the timing of
inter-company sales resulting in a reduction in inter-company sales for the
Upholstery Group of $12.1 million when compared to the third quarter of the
prior year.





Casegoods Groupsales
decreased 20.0% or $10.5 million compared with the third quarter of fiscal 2008.
The decrease in sales volume occurred across all of our Casegoods operating
units and directly related to the challenging economic conditions.





Retail Group sales decreased
18.8% or $9.4 million when compared with the third quarter of fiscal
2008.  The decrease in sales was related to the challenging economic
conditions, which had an extremely negative effect on the home furnishings
market.





Included
in Other/eliminations
are the sales by our VIEs and the elimination of sales from our Upholstery and
Casegoods Groups to our Retail Group.  Due to the previously mentioned
change in reporting of the Retail distribution centers, this elimination was
adjusted by $12.1 million during the quarter, which decreased the eliminations
for this quarter.  In addition, the decrease in the sales between our
Upholstery Group and Retail Group reduced our elimination of sales by $7.3
million. The addition of the three stores in our Toronto market did not occur
until the end of the third quarter of fiscal 2009 and therefore did not have an
impact on the third quarter sales.





Gross
Margin





Gross
margin decreased 1.5 percentage points in the third quarter of fiscal 2009 in
comparison to the third quarter of fiscal 2008.  Gross margin was
positively impacted by selling price increases, net of discounts, which
increased our gross margin by 3.1 percentage points.  Raw material cost
increases had a 2.5 percentage point negative impact on gross
margin.   Additionally, restructuring costs negatively impacted gross
margin by 0.6 percentage points.  The remainder of the decrease in gross
margin during the quarter related to under absorption of overhead costs due to
the reduction in sales volume as a result of the current economic
environment.





Selling,
General and Administrative Expenses





Selling,
general and administrative expenses (S,G&A)decreased $10.6 million
when compared to the prior year’s third quarter, but increased as a percent of
sales by 4.5 percentage points due to the decline in our overall sales
volume.  During fiscal 2009, the Florida, Michigan, and the West Coast
markets were impacted to a greater extent by the weak retail environment than
other markets.  Accordingly we revised our estimates of amounts
expected to be collected on past due accounts and increased our allowance for
bad debts by $6.7 million when compared with the third quarter of fiscal
2008.  Our reserve balance against accounts receivable as of January 24,
2009 was $35.8 million.


27





This
increase was offset by an $8.0 million decrease in advertising in our Retail and
Wholesale segments during the third quarter of fiscal 2009 as compared to the
third quarter of fiscal 2008 due to sales volume declines and our attempt to
keep our expenditures in line with our volume, as well as reducing production of
new advertisements.  Advertising expense was 4.8% of sales in the
third quarter of fiscal 2009, compared to 5.9% in the third quarter of fiscal
2008.  Due to the weak retail environment and the uncertainty in our
sales volume for the remainder of the fiscal year, we expect advertising expense
to continue to be lower for the fourth quarter of fiscal 2009, while staying in
line as a percent of sales. Additionally, other variable selling expenses
declined as a result of the decline in sales.





Restructuring





Restructuring
costs totaled $2.4 million for the third quarter of fiscal 2009 as compared with
$0.2 million in restructuring expenses for the same period the prior year. 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. subsidiary, 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.  The restructuring costs in the third quarter of fiscal
2008 related to the closure of several of our manufacturing facilities,
consolidation of retail warehouses and the closure of underperforming retail
stores.





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.  Due to our operating
losses and a deterioration of economic conditions which reduced our estimated
future cash flows for certain asset groups, we recognized a $7.0 million
non-cash impairment charge relating to the long-lived assets of our Retail
Group.





Intangible
Write-down





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





Operating
Margin





Our
consolidated operating margin was (23.7)% for the third quarter of fiscal 2009
and included 15.9 percentage points for the intangible write-down, 2.4
percentage points for the long-lived asset write-down and 0.8 percentage points
of restructuring charges.  Operating margin for the third quarter of
fiscal 2008 was 0.8% and included 0.1 percentage points for restructuring costs.
With a decrease in our gross margin as a percent of sales, the effect of sales
volume declines out-paced the impact of our cost reduction efforts thus reducing
our operating margins.





The Upholstery Group operating
margin decreased 7.9 percentage points to (1.0)% when compared with the third
quarter of fiscal 2008.  Selling price increases positively impacted
our operating margin.  However, this increase was offset by an
increase in bad debt expense and an increase in raw material costs in the third
quarter of fiscal 2009 as compared to the third quarter of fiscal
2008.  Additionally, in the third quarter of fiscal 2009, the
Upholstery Group operating income was reduced by $3.3 million for the
inter-company profit resulting from the previously mentioned change in reporting
of the retail warehouse operations.  The remainder of the decrease
during the quarter related to under absorption of overhead costs due to the
reduction in sales volume.


28





Our Casegoods Group operating
margin decreased by 4.9 percentage points to (0.7)% in the third quarter of
fiscal 2009 versus the third quarter of fiscal 2008.  With a 20.0%
decrease in sales volume, we were unable to reduce our costs quickly enough to
maintain our operating margin.





Our Retail Group operating margin
decreased by 0.5 percentage points to (17.6)% during the third quarter of fiscal
2009 when compared with the third quarter of fiscal 2008.  The
reduction primarily resulted from the fixed occupancy costs of our Retail
operations coupled with the continued decline in sales, partially offset by
selling price increases, reduced advertising expense and reduced warehousing
costs.





Corporate and Otheroperating
loss decreased $6.3 million during the third quarter of fiscal 2009 in
comparison to the third quarter of fiscal 2008.  Our VIEs’ losses for
the third quarter of fiscal 2009 were $0.1 million more than the same quarter
the prior year.   The previously mentioned reporting change for
the retail warehouse operations resulted in a $3.3 million increase in
inter-company operating income eliminations.





Interest
Expense





Interest
expense for the third quarter of fiscal 2009 was $0.8 million less than the
third quarter of fiscal 2008 due to a $37.3 million decrease in our average debt
and a 1.1 percentage point decrease in our weighted average interest
rate.





Income
Taxes





Our
effective tax rate was 6.2% in the third quarter of fiscal 2009 compared to
29.8% in the third quarter of fiscal 2008. The change in our tax rate during
fiscal 2009 was primarily attributable to the recording of valuation allowances
against the majority of our U.S. deferred tax assets in the second quarter of
fiscal 2009, as well as additional valuation allowances recorded in the third
quarter of fiscal 2009 against our deferred tax assets resulting from our
current period losses.





The
current period tax benefit results primarily from the reversal of deferred tax
liabilities associated with trade names and goodwill that were written off in
the third quarter of fiscal 2009, offset by income taxes on operations conducted
by subsidiaries that are profitable on a separate entity basis.





Discontinued
Operations





During
the third quarter of fiscal 2008, our discontinued operations recognized income
of $0.4 million after tax as we completed the liquidation of the remaining
assets of Pennsylvania House.


29


Results
of Operations


Analysis of Operations: Nine Months
Ended January 24, 2009


(First Nine Months of 2009 compared
with 2008)





Nine
      Months Ended(Amounts
      in thousands, except per share amounts and percentages)
                      
                      01/24/09
                      
                      
                      01/26/08
                      
                      
                      Percent
                        changeUpholstery
      sales
                      
                      $
                      684,252
                      
                      
                      $
                      806,959
                      
                      
                      
                      (15.2
                      )%Casegoods
      sales
                      
                      
                      138,710
                      
                      
                      
                      165,126
                      
                      
                      
                      (16.0
                      )%Retail
      sales
                      
                      
                      122,408
                      
                      
                      
                      141,278
                      
                      
                      
                      (13.4
                      )%Other/eliminations*
                      
                      
                      (3,194
                      )
                      
                      
                      (30,452
                      )
                      
                      
                      89.5
                      %Consolidated
      sales
                      
                      $
                      942,176
                      
                      
                      $
                      1,082,911
                      
                      
                      
                      (13.0
                      )%Consolidated
      gross profit
                      
                      $
                      247,329
                      
                      
                      $
                      289,585
                      
                      
                      
                      (14.6
                      )%Consolidated
      gross margin
                      
                      
                      26.3
                      %
                      
                      
                      26.7
                      %Consolidated
      S,G&A
                      
                      $
                      287,873
                      
                      
                      $
                      297,278
                      
                      
                      
                      (3.2
                      )%S,G&A
      as a percent of sales
                      
                      
                      30.6
                      %
                      
                      
                      27.5
                      %Upholstery
      operating income
                      
                      $
                      16,037
                      
                      
                      $
                      47,370
                      
                      
                      
                      (66.1
                      )%Casegoods
      operating income
                      
                      
                      1,819
                      
                      
                      
                      8,399
                      
                      
                      
                      (78.3
                      )%Retail
      operating loss
                      
                      
                      (27,509
                      )
                      
                      
                      (27,700
                      )
                      
                      
                      0.7
                      %Corporate
      and other
                      
                      
                      (21,195
                      )
                      
                      
                      (33,315
                      )
                      
                      
                      36.4
                      %Long-lived
      asset write-down
                      
                      
                      (7,036
                      )
                      
                      
                      —
                      
                      
                      
                      N/MIntangible
      write-down
                      
                      
                      (47,677
                      )
                      
                      
                      (5,809
                      )
                      
                      
                      (720.7
                      )%Restructuring
                      
                      
                      (11,904
                      )
                      
                      
                      (4,893
                      )
                      
                      
                      (143.3
                      )%Consolidated
      operating loss
                      
                      $
                      (97,465
                      )
                      
                      $
                      (15,948
                      )
                      
                      
                      (511.1
                      )%Upholstery
      operating margin
                      
                      
                      2.3
                      %
                      
                      
                      5.9
                      %Casegoods
      operating margin
                      
                      
                      1.3
                      %
                      
                      
                      5.1
                      %Retail
      operating margin
                      
                      
                      (22.5
                      )%
                      
                      
                      (19.6
                      )%Consolidated
      operating margin
                      
                      
                      (10.3
                      )%
                      
                      
                      (1.5
                      )%Loss
      from continuing operations
                      
                      $
                      (126,670
                      )
                      
                      $
                      (3,067
                      )Loss
      from discontinued operations
                      
                      $
                      —
                      
                      
                      $
                      (6,050
                      )Diluted
      loss per share from continuing operations
                      
                      $
                      (2.46
                      )
                      
                      $
                      (0.06
                      )Diluted
      loss per share from discontinued operations
                      
                      $
                      —
                      
                      
                      $
                      (0.12
                      )


*
Includes sales from our VIEs.


N/M = non
meaningful


30





Sales





Consolidatedsaleswere down 13.0% or
$140.7 million when compared with the first nine months of fiscal 2008 due in
large part to the challenging economic conditions including the weak retail
environment, record low consumer confidence, an uncertain housing market and a
deteriorating consumer credit environment.





Upholstery Group sales were
down 15.2% or $122.7 million compared with the first nine months of fiscal 2008.
Sales price increases resulted in a 3.0% increase in sales; however this was
offset by the challenging economic conditions. Additionally, the change in
reporting of the Retail distribution centers to the Upholstery Group affected
the timing of inter-company sales resulting in a reduction in inter-company
sales for the Upholstery Group of $12.1 million when compared to the first nine
months of fiscal 2008.  In addition, the decline in sales volume was
partially offset by a change in contractual relationships with our third party
carriers, which resulted in revenue recognition at shipping point.  As
reported in our Form 10-K for the fiscal year ended April 26, 2008, revenue for
our largest upholstery operation had previously been recognized upon
delivery.





Casegoods Groupsales
decreased 16.0% or $26.4 million compared with the first nine months of fiscal
2008. The decrease in sales volume occurred across all of our Casegoods
operating units due to the challenging economic
conditions.  Additionally, with the Casegoods product typically priced
higher than upholstered furniture, we believe consumers are postponing or
foregoing these purchases to a greater extent than they are upholstery
products.





Retail Group sales decreased
13.4% or $18.9 million when compared with the first nine months of fiscal
2008.  The decrease in sales was related to the challenging economic
conditions.





Included
in Other/eliminations
are the sales by our VIEs and the elimination of sales from our Upholstery and
Casegoods Groups to our Retail Group.  The majority of the change in
Other/eliminations was attributable to a $12.2 million decrease in sales from
our Upholstery Group to our Retail Group during the first nine months of fiscal
2009 in comparison to the first nine months of fiscal 2008.  Due to
the previously mentioned change in reporting of the Retail distribution centers,
this elimination was adjusted by $12.1 million during the quarter, which
decreased the eliminations for this quarter.  Additionally, sales from
VIEs increased $0.4 million during the first nine months of fiscal 2009 when
compared to the first nine months of fiscal 2008.





Gross
Margin





Gross
margin decreased 0.4 percentage points in the first nine months of fiscal 2009
when compared with the same period a year ago.  Gross margin was positively
impacted by selling price increases, net of discounts, which increased our gross
margin by 2.7 percentage points.  Raw material cost increases had a 2.1
percentage point negative impact on gross margin.   Additionally,
restructuring costs negatively impacted gross margin by 1.0 percentage
points.  The remainder of the decrease in gross margin during the first
nine months of fiscal 2009 related to under absorption of overhead costs due to
the reduction in sales volume as a result of the current economic
environment.


31


Selling,
General and Administrative Expenses





Selling,
general and administrative expenses (S,G&A)decreased when compared
to the prior year’s first nine months.  During fiscal 2009, the Florida,
Michigan, and the West Coast markets were impacted to a greater extent by the
weak retail environment than other markets.  Accordingly we revised
our estimates of amounts expected to be collected on past due accounts and
increased our allowance for bad debts by $12.1 million when compared with the
first nine months of fiscal 2008.  Our reserve balance against
accounts receivable as of January 24, 2009 was $35.8 million.





This
increase was offset by a $4.2 million decrease in advertising in our Retail and
Wholesale segments during the first nine months of fiscal 2009 as compared to
the first nine months of fiscal 2008 due to sales volume declines and our
attempt to keep our expenditures in line with our volume, as well as reducing
production of new advertisements.  Advertising expense was 4.7% of sales in
the first nine months of fiscal 2009, compared to 4.4% in the first nine months
of fiscal 2008.  Due to the weak retail environment and the
uncertainty in our sales volume for the remainder of the fiscal year, we expect
advertising expense to continue to be lower for the fourth quarter of fiscal
2009, while staying in line as a percent of sales.  Other variable selling
expenses declined as a result of the decline in sales.





Additionally,
we realized gains on property sales of $2.7 million compared to an insignificant
gain in the first nine months of fiscal 2008 which decreased
S,G&A.





Restructuring





Restructuring
costs totaled $11.9 million for the nine months ended January 24, 2009 as
compared with $4.9 million in restructuring expenses in the nine months ended
January 26, 2008.  The restructuring costs in the first nine months 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.
subsidiary, 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.  The restructuring costs in
fiscal 2008 related to the closure of several manufacturing facilities, the
consolidation of retail warehouses and the closure of underperforming retail
stores.  The expense relating to the closure of several manufacturing
facilities was partially offset by a gain on the sale of a property held for
sale relating to a previous restructuring.





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.  Due to our operating
losses and a deterioration of economic conditions which reduced our estimated
future cash flows for certain asset groups, we recognized a $7.0 million
non-cash impairment charge relating to the long-lived assets of our Retail
Group.





Intangible
Write-down





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


32





During
the second quarter of fiscal 2009, we committed to a plan to reorganize the
Toronto, Ontario retail market which we consolidate as a VIE.  As a
result of this plan we recorded a non-cash impairment charge of $0.4 million
which represented the entire goodwill balance of this market.





In the
first quarter of fiscal 2009, we committed to a plan to close the operations of
our La-Z-Boy U.K. subsidiary due to a change in our strategic direction for this
operation.  As a result of this plan, we recorded a non-cash
impairment charge of $1.3 million which represented the entire goodwill amount
of the operating unit.





During
the second quarter of fiscal 2008, we evaluated the goodwill at our South
Florida retail market as a result of a decision to delay our planned store
openings in this market.  This delay was the result of a slow housing
market causing double-digit declines in sales in the market over the previous
twelve months.  We recognized a $5.8 million non-cash impairment
charge for the full amount of the goodwill of this retail market in the second
quarter of fiscal 2008.





Operating
Margin





Our
consolidated operating margin was (10.3)% or $(97.5) million for the first nine
months of fiscal 2009 and included 5.1 percentage points for the intangible
write-down, 1.3 percentage points for restructuring charges and 0.7 percentage
points for the long-lived asset write-down.  Operating margin for the
first nine months of fiscal 2008 was (1.5)% or $(15.9) million and included 0.5
percentage points for the intangible write-down and 0.5 percentage points for
restructuring costs.





The Upholstery Group operating
margin decreased 3.6 percentage points to 2.3% when compared with the first nine
months of fiscal 2008.  With a $122.7 million decrease in sales volume
and $11.6 million increase in bad debt expense, we were unable to maintain our
operating margin.  Additionally, our upholstery margin was negatively
impacted due to increased costs associated with steel, polyurethane foam,
plywood, fabric and leather.  Additionally, in the third quarter of
fiscal 2009, the Upholstery Group operating income was reduced by $3.3 million
for the inter-company profit resulting from the previously mentioned change in
reporting of the retail warehouse operations.  However, selling price
increases positively impacted our operating margin.  Additionally, the
upholstery operating income benefited from the change in third party freight
carrier contracts as noted previously in our sales discussion.





Our Casegoods Group operating
margin decreased by 3.8 percentage points to 1.3% in the nine months ended
January 24, 2009 when compared to the nine months ended January 26,
2008.  With a 16.0% decrease in sales volume, we were unable to reduce
our costs enough to maintain our operating margin.





Our Retail Group operating margin
decreased by 2.9 percentage points to (22.5)% during the first nine months of
fiscal 2009 in comparison to the same period the prior year.  The
decrease primarily resulted from the fixed occupancy costs of our Retail
operations coupled with the continued decline in sales, partially offset by
selling price increases, reduced advertising expense and reduced warehousing
costs.





Corporate and Otheroperating
loss decreased $12.1 million to $(21.2) million during the first nine months of
fiscal 2009 when compared with the first nine months of fiscal
2008.  Our VIEs’ losses for the first nine months of fiscal 2009 were
$0.1 million less than the same period the prior year and realized gains on
property sales for the first nine months were $2.7 million as compared to an
insignificant gain in the first nine months of fiscal 2008.   The
previously mentioned reporting change for the retail warehouse operations
resulted in a $3.3 million increase in inter-company operating income
eliminations.  Additionally, during the first six months of fiscal
2008, we continued a retail test market program which increased our fiscal 2008
expenses by $2.5 million.  This program was not repeated in fiscal
2009.


33





Interest
Expense





Interest
expense for the first nine months of fiscal 2009 was $1.8 million less than the
first nine months of fiscal 2008 due to a $39.1 million decrease in our average
debt and a 0.6 percentage point decrease in our weighted average interest
rate.





Income
Taxes





Our
effective tax rate was 26.7% in the first nine months of fiscal 2009 compared to
58.7% in the first nine months of fiscal 2008. The change in our tax rate during
fiscal 2009 was primarily attributable to the recording of valuation allowances
against the majority of our U.S. deferred tax assets in the second and third
quarter of fiscal 2009.  As a result of the recording of the valuation
allowances, we had tax expense of $26.7 million for the first nine months of
fiscal 2009 compared to a tax benefit of $4.4 million for the first nine months
of fiscal 2008.  The fiscal 2009 tax expense was offset by a federal
income tax receivable of $11.8 million relating to the carryback of federal tax
losses expected to be generated in fiscal 2009.  We expect to receive
this amount in the form of a refund when we file, early in fiscal 2010, our
fiscal 2009 tax return and claim the tax loss against taxable income in fiscal
2007.





Additionally,
the reversal of deferred tax liabilities associated with trade names and
goodwill that were written off in the third quarter resulted in a benefit in the
third quarter fiscal 2009.





Discontinued
Operations





In the
first nine months of fiscal 2009 we had no discontinued
operations.  During the first nine months of fiscal 2008, our
discontinued operations recognized a loss of $6.1 million
after-tax.  During the second quarter of fiscal 2008, we completed the
sale of our Clayton Marcus operating unit and we completed the sale of our
Pennsylvania House trade name.  The stock of Clayton Marcus was sold
to Rowe Fine Furniture, Incorporated, resulting in a loss of about $5.8 million
or $3.6 million after-tax.  Of this loss, about $3.4 million pre-tax
related to the intangible assets of Clayton Marcus.  The Pennsylvania
House trade name was sold to Universal Furniture for $1.7 million, resulting in
a pre-tax charge of about $0.6 million ($0.4 million net of
taxes).  We also recorded an additional loss of $3.0 million to adjust
the inventory to fair value due to the liquidation of the remaining inventory at
discounted prices.





Liquidity
and Capital Resources





Our total
assets at the end of the third quarter of fiscal 2009 decreased $162.9 million
compared with the end of fiscal 2008.  The majority of this decline
was attributed to an increase in our deferred tax valuation allowance, the
write-down of intangibles, the write-down of long-lived assets, decreases in
inventory and accounts receivable associated with our sales volume and the
decline in fair value of investments due to the instability in the financial
markets.





Our
sources of cash liquidity include cash and equivalents, cash from operations and
amounts available under our credit facility.  These sources have been
adequate for day-to-day operations and capital expenditures.  Further
deterioration of market conditions resulting in a sustained adverse impact on
the global retail sector could reduce our sales further and negatively impact
our results of operations, cash flows and financial position including, but not
limited to, significant operating losses, and reduced availability under
asset-backed credit arrangements.  Additionally, with the further
deterioration of the economic climate, the company made the decision to suspend
its quarterly dividend to shareholders.


34





Under our
credit agreement we have certain covenants and restrictions, including a fixed
charge coverage ratio which would become effective if excess availability fell
below $30.0 million.  We do not expect to fall below the required
excess availability thresholds in the next twelve months.  As of
January 24, 2009 we had $62.0 million outstanding on our credit facility and
$57.2 million of excess availability.  If our excess availability
would have been below $30.0 million at January 24, 2009, we would not have been
able to meet our 1.05 to 1.00 fixed charge coverage ratio.  Our
borrowing capacity is based on eligible trade accounts receivables and inventory
of the company.  Since our accounts receivable decreased at about the
same level as our debt, the capacity to borrow on the line remained somewhat
flat during the third quarter.  While our accounts receivable declined
during the quarter, $9.4 million was the result of an additional reserve
recorded during the fiscal 2009 third quarter on receivables which were not
included in our eligible accounts receivable, therefore they had virtually no
impact on our availability during the quarter.  However the current
economic conditions could impact the credit worthiness of our customers and
could negatively impact our availability.





Our plans
to manage liquidity in the remainder of fiscal 2009 include: aggressively
reducing our operating expenses based on our announcement last quarter, reducing
capital expenditures to be below planned levels, reducing inventory levels to
current sales trends during the fourth quarter, suspending our quarterly cash
dividend and potentially liquidating certain financial investments.





Capital
expenditures for the first nine months of fiscal 2009 were $14.1 million
compared with $20.8 million in the first nine months of fiscal
2008.  Included in the first nine months of fiscal 2008 was $6.4
million related to an option to purchase property that was exercised, which we
subsequently sold and leased back.There are no material
purchase commitments for capital expenditures, which are expected to be in the
range of $18 to $20 million in fiscal 2009.  We expect restructuring
costs from our plan to consolidate the cutting and sewing operations in Mexico
and the corporate initiatives announced in the third quarter to impact cash by
$1.1 million during the remainder of fiscal 2009, $5.3 million during fiscal
2010 and $1.7 million during fiscal 2011.





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





Cash
      Flows Provided By (Used For)
                        
                        Nine
      Months Ended(Unaudited,
      amounts in thousands)
                        
                        01/24/09
                        
                        
                        01/26/08Operating
      activitiesNet
      loss, depreciation, stock expense and deferred taxes
                        
                        $
                        (67,853
                        )
                        
                        $
                        10,084Write-down
      of long-lived assets
                        
                        
                        7,036
                        
                        
                        
                        —Write-down
      of intangibles
                        
                        
                        47,677
                        
                        
                        
                        5,809Write-down
      of investments
                        
                        
                        5,140
                        
                        
                        
                        —Restructuring
                        
                        
                        11,904
                        
                        
                        
                        4,893Working
      capital and other
                        
                        
                        14,117
                        
                        
                        
                        15,807Cash
      provided by operating activities
                        
                        
                        18,021
                        
                        
                        
                        36,593Investing
      activities
                        
                        
                        4,692
                        
                        
                        
                        (5,680
                        )Financing
      activitiesNet
      decrease in debt
                        
                        
                        (13,581
                        )
                        
                        
                        (821
                        )Other
      financing activities, mainly dividends
                        
                        
                        (5,188
                        )
                        
                        
                        (18,799
                        )Cash
      used for financing activities
                        
                        
                        (18,769
                        )
                        
                        
                        (19,620
                        )Exchange
      rate changes
                        
                        
                        (871
                        )
                        
                        
                        161Net
      increase in cash and equivalents
                        
                        $
                        3,073
                        
                        
                        $
                        11,454




35




Operating
Activities





During
the first nine months of fiscal 2009, net cash provided by operating activities
was $18.0 million, and $36.6 million was provided by operating activities for
the first nine months of fiscal 2008.  The cash provided by operating
activities was generated primarily through collections of accounts receivable
and the $8.1 million in anti-dumping duties received on bedroom furniture
imported from China.





Investing
Activities





During
the first nine months of fiscal 2009, net cash provided by investing activities
was $4.7 million, whereas $5.7 million was used for investing activities during
the same period the prior year. In the first nine months of fiscal 2009, $7.8
million in proceeds were received from the sale of several properties, offset by
$14.1 million of capital expenditures.  In the first nine months of
fiscal 2009, $21.9 million in proceeds were received from the sale of
investments, offset by investment purchases of $10.6 million.  During
the first nine months of fiscal 2008, $6.4 million in proceeds was generated by
a sale-leaseback transaction we entered into with a third party.  We
exercised an option to purchase a property, sold it to a third party and then
subsequently leased it back.  Capital expenditures in the first nine
months of fiscal 2008 were $20.8 million.





Financing
Activities





Our
financing activities included borrowings and payments on our debt facilities and
dividend payments.  We used $18.8 million of cash in financing
activities during the first nine months of fiscal 2009 compared to $19.6 million
in the first nine months of fiscal 2008.  In the first nine months of
fiscal 2009, we had a net pay down of debt of $13.6 million, compared to $0.8
million in the same period of fiscal 2008.  This was offset by a
reduction in the amount of dividends paid in the first nine months of fiscal
2009 compared to the first nine months of fiscal 2008.





In the
first quarter of fiscal 2008, we adopted FIN 48 and as a consequence, the
balance sheet at the end of the third quarter of fiscal 2009 reflected a $3.5
million liability for uncertain income tax positions.  Of this amount
only $0.9 million will be settled within the next 12 months.  The
remaining balance, to the extent it is ever paid, will be paid as tax audits are
completed or settled.


36





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





Payments by Period(Amounts in thousands)
                
                Total
                
                
                Less than
                  1 Year
                
                
                1-3
                  Years
                
                
                4-5 Years
                
                
                More than
                  5 YearsLong-term
      debt obligations
                
                $
                89,655
                
                
                $
                9,059
                
                
                $
                30,462
                
                
                $
                43,002
                
                
                $
                7,132Capital
      lease obligations
                
                
                720
                
                
                
                488
                
                
                
                232
                
                
                
                —
                
                
                
                —Operating
      lease obligations
                
                
                385,964
                
                
                
                46,710
                
                
                
                84,363
                
                
                
                69,448
                
                
                
                185,443Interest
      obligations
                
                
                11,190
                
                
                
                3,066
                
                
                
                5,359
                
                
                
                2,717
                
                
                
                48Other
      long-term liabilities not reflected on our balance sheet
                
                
                131
                
                
                
                105
                
                
                
                26
                
                
                
                —
                
                
                
                —Total
      contractual obligations
                
                $
                487,660
                
                
                $
                59,428
                
                
                $
                120,442
                
                
                $
                115,167
                
                
                $
                192,623




Our
debt-to-capitalization ratio was 22.0% at January 24, 2009 and 18.8% at April
26, 2008.  The debt-to-capitalization ratio decreased from the last
quarter as a result of the change in shareholders’ equity, driven primarily by
the write-down of intangibles and write-down of long-lived assets, offset by the
net decrease in debt.




Our Board
of Directors has authorized the repurchase of company stock.  As of
January 24, 2009, 5.4 million additional shares could be purchased pursuant to
this authorization. We did not purchase any shares during the first nine months
of fiscal 2009.




We have
guaranteed various leases of dealers with proprietary stores. The total amount
of these guarantees is $2.1 million. Of this, $1.0 million will expire within
one year and $1.1 million in one to three years.  During the third
quarter of fiscal 2009, we assumed the lease obligation on two stores as a
result of a change in the Michigan market.  Additionally, as a result
of the change in the VIE for our Toronto market, we now include an additional
Toronto store in our lease obligations.  These changes led to the $8.7
million decrease in our lease guarantees in the third quarter of fiscal 2009 and
a corresponding increase in our lease obligations.




In recent
years, we have increased our imports of casegoods product and leather and fabric
for upholstery product. At the end of the third quarter of fiscal 2009, we had
$24.4 million in open purchase orders with foreign casegoods, leather and fabric
sources. Some of these open purchase orders are cancelable. We are not required
to make any contributions to our defined benefit plans; however, we may make
contributions.




Continuing
compliance with existing federal, state and local statutes dealing with
protection of the environment is not expected to have a material effect upon our
capital expenditures, earnings, competitive position or liquidity.




Critical
Accounting Policies




Our
critical accounting policies are disclosed in our Form 10-K for the year ended
April 26, 2008.


37




Valuation of Goodwill and Intangible
Assets




We assess
our goodwill and trade names for impairment annually as well as whenever events
or changes in circumstances indicate that the carrying value may not be
recoverable. Our annual evaluation of goodwill and trade names is completed
during the fourth fiscal quarter of each year; however, we concluded that the
significant decline in the fair value of our common stock and related reduction
in market capitalization indicated that the carrying value of our goodwill and
trade names may not be recoverable. Accordingly, we evaluated our goodwill and
trade names for impairment during the third quarter of fiscal 2009, except for
approximately $5.1 million of goodwill related to one of our consolidated VIEs
which continues to meet its performance expectations and for which we concluded
no event or changes in circumstances occurred which would require the evaluation
of the recoverability of its goodwill.




Our
impairment evaluation of goodwill was based on comparing the fair value of our
reporting units to their carrying value. Fair value was determined using an
income approach, as this was deemed to be the most indicative of our reporting
unit fair values in an orderly transaction between market
participants.  Under the income approach, we determined the fair value
based on estimated future cash flows of each reporting unit, discounted by an
estimated weighted-average cost of capital, which reflects the overall level of
inherent risk of a reporting unit and the rate of return an outside investor
would expect to earn. Determining the fair value of a reporting unit is
judgmental in nature and requires the use of significant estimates and
assumptions, including revenue growth rates and operating margins, discount
rates and future market conditions, among others.




Solely
for purposes of establishing inputs for the fair value calculations described
above related to goodwill impairment testing, we used a 16% discount rate to
calculate the fair value of our reporting units, which is higher than the 11%
discount rate we used in our previous calculations given the continued declining
market conditions.  The increase in our discount rate was primarily
due to deteriorating market conditions during the third quarter of fiscal
2009.  As a result of our recently completed goodwill impairment
testing, we wrote off all $40.4 million of the goodwill associated with our
Retail and Upholstery segments.




Our
impairment evaluation of our trade names was based on management’s estimates
using a royalty savings approach which was based on the principle that, if the
business did not own the asset, it would have to license it in order to earn the
returns that it was earning. The fair value was calculated based on the present
value of the royalty stream that the business was saving by owning the
asset.  Based on the assessment, we recorded a non-cash impairment
charge of $5.5 million during the third quarter of fiscal 2009.




If our
assumptions regarding forecasted revenue or margin growth rates of certain
reporting units are not achieved, we may be required to record additional
goodwill or trade name related impairment charges in future
periods.  It is not possible at this time to determine if any such
future impairment charges would result or, if it does, whether such charges
would be material.





Regulatory
Developments





The
Continued Dumping and Subsidy Offset Act of 2000 (“CDSOA”) provides for
distribution of monies collected by U.S. Customs and Border Protection (“CBP”)
from anti-dumping cases to domestic producers that supported the anti-dumping
petition. The Dispute Settlement Body of the World Trade Organization (“WTO”)
ruled that such payments violate the United States’ WTO obligations. In response
to that ruling, on February 8, 2006, the President signed legislation passed by
Congress that repeals CDSOA distributions to eligible domestic producers for
duties collected on imports entered into the United States after September 30,
2007.  The government set aside CDSOA funds in connection with two
lower court cases involving the CDSOA that were decided against the government
on constitutional grounds and that have been appealed.  The resolution
of these legal appeals will have a significant impact on the amount of
additional CDSOA funds we receive.


38





We
received $8.1 million and $7.1 million in payments and funds related to the
anti-dumping order on wooden bedroom furniture from China during fiscal 2009 and
fiscal 2008, respectively, for duties collected on imports entered into the
United States before September 30, 2007.  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 material depending on the
results of legal appeals and administrative reviews and our actual percentage
allocation.





Recent
Accounting Pronouncements




Refer to
Note 20 for updates on recent accounting pronouncements since the filing of our
Form 10-K for the year ended April 26, 2008.


39


ITEM 3. 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 $62.1 million
of borrowings at January 24, 2009.  In May 2008, we entered into an
interest rate swap agreement to mitigate the impact of changes in interest rates
on a portion of our floating rate debt.  Management estimates that a
one percentage point change in interest rates would not have a material impact
on our results of operations for fiscal 2009 based upon the current levels
of exposed liabilities.






We are
exposed to market risk from changes in the value of foreign currencies.
Substantially all of our imports purchased outside of North America are
denominated in U.S. dollars. Therefore, we believe that gains or losses
resulting from changes in the value of foreign currencies will not be material
to our results from operations in fiscal year 2009.




ITEM
4. CONTROLS AND PROCEDURES




We
maintain a system of disclosure controls and procedures that are designed to
provide reasonable assurance that information that is required to be timely
disclosed is accumulated and communicated to management in a timely fashion. An
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange
Act of 1934, as amended) was performed as of the end of the period covered by
this report. This evaluation was performed under the supervision and with the
participation of management, including our Chief Executive Officer and Chief
Financial Officer. Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures
are effective to provide reasonable assurance that information we are required
to disclose in the reports that we file or submit under the Exchange Act is
accumulated and communicated to management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure and are effective to provide reasonable assurance
that such information is recorded, processed, summarized and reported within the
time periods specified by the SEC’s rules and forms.




During
the third quarter of fiscal 2009, we implemented a new purchasing and accounts
payable system for our largest operating company and our corporate
headquarters.  We have assessed the internal controls over the key
processes affected by the implementation of this system and concluded that we
have maintained adequate internal control over financial reporting.




There was
no other change in our internal controls over financial reporting that occurred
during the quarter covered by this report that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.


40




PART
II — OTHER INFORMATION




ITEM
1A.  RISK FACTORS




There
have been no material changes to our risk factors during the first nine months
of fiscal 2009.  Our risk factors are disclosed in our Form 10-K for the
year ended April 26, 2008.




ITEM
6. EXHIBITS




Exhibit
                    Number
                  
                  Description(10.1
                  )*
                  
                  Form
      of Indemnity Agreement with each of our directors (Incorporated by
      reference to an exhibit to Form 8-K dated January 22,
  2009)(31.1
                  )
                  
                  Certifications
      of Chief Executive Officer pursuant to Rule 13a-14(a)(31.2
                  )
                  
                  Certifications
      of Chief Financial Officer pursuant to Rule 13a-14(a)(32
                  )
                  
                  Certifications
      of Executive Officers pursuant to 18 U.S.C. Section
  1350(b)*
                  
                  Indicates
      a management contract or compensatory plan or arrangement under which a
      director or executive officer may receive
  benefits.


41




SIGNATURE




Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.




LA-Z-BOY
      INCORPORATED(Registrant)Date:
      February 18, 2009BY: 
      /s/ Margaret L. MuellerMargaret
      L. MuellerCorporate
      ControllerOn
      behalf of the registrant and asChief
      Accounting Officer




42