SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
FOR QUARTER ENDED October 24, 1998 COMMISSION FILE NUMBER 1-9656
LA-Z-BOY INCORPORATED
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MICHIGAN 38-0751137
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1284 North Telegraph Road, Monroe, Michigan 48162-3390
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (734) 241-4414
None
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each issuer's classes of common
stock, as of the last practicable date:
Class Outstanding at October 24, 1998
- ----------------------------------------- -------------------------------
Common Shares, $1.00 par value 52,908,743
Part 1. Financial Information
The Consolidated Balance Sheet and Consolidated Statement of Income required
for Part 1 are contained in the Registrant's Financial Information Release
dated November 4, 1998 and are incorporated herein by reference.
-----------------------------------------------------------
LA-Z-BOY INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(Unaudited, amounts in thousands)
Three Months Ended Six Months Ended
------------------------- ------------------------
Oct 24, Oct 25, Oct 24, Oct 25,
1998 1997 1998 1997
------------ ---------- ---------- ----------
Cash Flows from Operating Activities
Net income $ 18,447 $ 16,822 $ 25,631 $ 18,548
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 5,936 5,195 11,353 10,068
Change in receivables (60,025) (52,888) (17,454) (3,986)
Change in inventories 1,393 6,416 (7,975) (7,742)
Change in other assets and liabilities 31,233 25,967 21,424 10,744
Change in deferred taxes (2,815) (1,960) (2,742) (1,960)
-------- -------- -------- --------
Total adjustments (24,278) (17,270) 4,606 7,124
-------- -------- -------- --------
Cash Provided (Used) by Operating Activities (5,831) (448) 30,237 25,672
Cash Flows from Investing Activities
Proceeds from disposals of assets 88 76 293 392
Capital expenditures (4,128) (5,775) (8,233) (11,343)
Change in other investments (537) 159 (2,427) (288)
-------- -------- -------- --------
Cash Used for Investing Activities (4,577) (5,540) (10,367) (11,239)
Cash Flows from Financing Activities
Retirements of debt (120) (116) (3,211) (2,041)
Capital lease principal payments (361) (513) (803) (1,040)
Stock for stock option plans 3,237 1,091 4,688 3,103
Stock for 401(k) employee plans 458 283 837 686
Purchase of La-Z-Boy stock (11,160) (6,973) (18,763) (9,397)
Payment of cash dividends (4,263) (3,775) (8,006) (7,543)
-------- -------- -------- --------
Cash Used for Financing Activities (12,209) (10,003) (25,258) (16,232)
Effect of exchange rate changes on cash (281) 62 (591) 98
-------- -------- -------- --------
Net change in cash and equivalents (22,898) (15,929) (5,979) (1,701)
Cash and equivalents at beginning of period 45,619 39,610 28,700 25,382
-------- -------- -------- --------
Cash and equivalents at end of period $ 22,721 $ 23,681 $ 22,721 $ 23,681
======== ======== ======== ========
Cash paid during period -Income taxes $7,403 $6,222 $7,878 $7,663
-Interest $588 $955 $1,131 $1,794
For purposes of the Statement of Cash Flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
LA-Z-BOY INCORPORATED AND OPERATING DIVISIONS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The financial information is prepared in conformity with generally accepted
accounting principles and such principles are applied on a basis consistent
with those reflected in the 1998 Annual Report filed with the Securities
and Exchange Commission. The financial information included herein, other
than the consolidated balance sheet as of April 25, 1998, has been prepared
by management without audit by independent certified public accountants.
The consolidated balance sheet as of October 24, 1998 has been prepared on
a basis consistent with, but does not include all the disclosures contained
in, the audited consolidated financial statements for the year ended April
25, 1998. The information furnished includes all adjustments and accruals
consisting only of normal recurring accrual adjustments which are, in the
opinion of management, necessary for a fair presentation of results for the
interim period.
2. Interim Results
The foregoing interim results are not necessarily indicative of the results
of operations for the full fiscal year ending April 24, 1999.
3. Forward-Looking Information
Any forward-looking statements contained in this report represent
management's current expectations based on present information and current
assumptions. These statements can be identified by the use of
forward-looking terminology such as "believes", "expects", "may", "should",
or "anticipates". Forward-looking statements are inherently subject to
risks and uncertainties. Actual results could differ materially from those
which are anticipated or projected due to a number of factors. These
factors include, but are not limited to, anticipated growth in sales;
success of product introductions; fluctuations of interest rates, changes
in consumer confidence/demand and other risks and factors identified from
time to time in the Company's reports filed with the Securities and
Exchange Commission.
4. Earnings per Share
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings per Share" in 1998. The Statement requires both basic and
diluted earnings per share to be presented. Basic earnings per share is
computed using the weighted-average number of shares outstanding during the
period. Diluted earnings 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 were issued.
This includes employee stock options. Prior period earnings per share
information has been restated to be in compliance with SFAS No. 128.
Three Months Ended Six Months Ended
--------------------- --------------------
Oct. 24, Oct. 25, Oct. 24, Oct. 25,
(Amounts in thousands) 1998 1997* 1998 1997*
- ---------------------- ------ ------ ------ ------
Weighted average common
shares outstanding (basic) . 53,121 53,665 53,250 53,759
Effect of options ............. 308 170 296 152
------ ------ ------ ------
Weighted average common
shares outstanding (diluted) 53,429 53,835 53,546 53,911
====== ====== ====== ======
*Restated to reflect a three-for-one stock split, in the form of a 200%
stock dividend effective September 1998.
LA-Z-BOY INCORPORATED MANAGEMENT DISCUSSION AND ANALYSIS
Due to the cyclical nature of the Company's business, comparison of operations
between the most recently completed quarter and the immediate preceding quarter
would not be meaningful and could be misleading to the reader of these financial
statements.
For further Management Discussion, see attached Exhibit 99.(a)
Financial Position
The Company's strong financial position is reflected in the debt to capital
percentage of 15% and a current ratio of 3.1 to 1 at the end of the second
quarter. At April 25, 1998, the debt to capital percentage was 16% and the
current ratio was 3.5 to 1. At the end of the preceding year's second quarter,
the debt to capital percentage was 14% and the current ratio was 3.2 to 1. As of
October 24, 1998, there was $116 million of unused lines of credit available
under several credit arrangements.
Stock Repurchase Program
Approximately 18% of the 12 million shares of Company stock authorized for
purchase on the open market are still available for purchase by the Company. The
Company plans to be in the market for its shares as changes in its stock price
and other factors present appropriate opportunities.
Year 2000
The Year 2000 issue arises from the use of two-digit date fields used in
computer programs which may cause problems as the year changes from 1999 to
2000. These problems could cause disruptions of operations or processing of
transactions.
To address the Year 2000 challenge, the Company established a Year 2000 Program
Office guided by a steering committee consisting of senior executive management.
This office serves as the central coordination point for all Year 2000
compliance efforts of the Company. The Company has included IT (Information
Technologies) systems and non-IT systems as well as third party readiness in the
scope of its Year 2000 project. The Company is on schedule with regards to its
internal plan.
The Company is in the process of having an independent verification and
assessment completed to assure that the Company has adequately identified
possible areas of risk. This is expected to be complete in February, 1999.
Management believes that the Company is taking the steps necessary to minimize
the impact of the Year 2000 challenge.
The challenges the Company faces with regards to its IT systems include
upgrading of operating systems, hardware and software, and modifying order entry
and invoicing programs. For the IT challenges, the Company has completed the
inventory and assessment phases. The Company is presently in the remediation
(defined as repairing, replacing, or retiring) phase of the project with
expected completion by February, 1999. The Company expects to have its critical
IT systems compliant and compatible, with the appropriate testing completed, by
September, 1999.
The primary challenges the Company faces with regards to its non-IT systems
include plant floor machinery and facility related items. For these systems, the
inventory and assessment phases have been completed. The Company believes these
systems to be compliant and compatible. The Company is presently in the testing
phase of its non-IT project with expected completion by September, 1999.
With respect to third party readiness, the Company continues to work with
customers, suppliers, and service providers in order to prevent disruption of
business activities. Based on communications with these third parties, the
Company believes that all material third parties will be sufficiently prepared
for the Year 2000. For critical third parties, testing will be performed as
deemed necessary.
While the Company believes that it is preparing adequately for all Year 2000
concerns, there is no guarantee against internal or external systems failures.
Such failures could have a material adverse effect on the Company's results of
operations, liquidity and financial condition. The Company believes that its
most likely worst case scenario would be business interruptions caused by third
party failures. The Company expects to have contingency plans in place prior to
the Year 2000 for IT and non-IT systems, as well as for areas of concern with
relation to third parties.
At the present time, the total Year 2000 related costs are estimated to be
$12 to $16 million. To date, the Company has spent approximately $5 million.
Included in the total estimated expenditures are both remediation and, in some
cases, enhancement or improvement related costs that cannot easily be separated
from remediation costs. Some of these enhancements or improvements were
previously planned and were merely accelerated as a means to address Year 2000
challenges.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K (a) (27) Financial Data Schedule (EDGAR
only).
(99) News Releases and Financial Information Release: re Actual second
quarter results and Management Discussion dated November 4, 1998.
(b) An 8-K was filed on July 27, 1998 to disclose a three-for-one stock split
to be effected as a 200% stock dividend effective September 14, 1998.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused the Quarterly Report on Form 10-Q for the quarter
ended October 24, 1998 to be signed on its behalf by the undersigned thereunto
duly authorized.
LA-Z-BOY INCORPORATED
(Registrant)
Date November 4, 1998 /s/Gene M. Hardy
-----------------------
Gene M. Hardy
Secretary and Treasurer
(Principal Accounting Officer)
5
1,000
6-mos
APR-24-1999
OCT-24-1998
22,721
0
256,328
0
99,880
404,214
119,660
187,252
601,738
128,957
0
0
0
52,909
338,887
601,738
603,711
603,711
450,493
450,493
110,798
0
2,351
42,337
16,706
25,631
0
0
0
25,631
0.48
0.48
News Release
LA-Z-BOY REPORTS RECORD SECOND QUARTER
NYSE & PCX: LZB Contact: Gene Hardy (734) 241-4306
MONROE, MI., November 4, 1998: La-Z-Boy Incorporated, one of the world's
largest producers of furniture, continued reaching record levels of quarterly
sales and profit.
Financial Details
For the second quarter ended 10/24/98 of La-Z-Boy's 1999 fiscal year, sales
reached $334.8 million, up 14% from last year's second quarter of $293.2
million. Net income was up 10% to $18.4 million vs. $16.8 million. Diluted EPS
(Earnings Per Share) increased at a faster rate than net income due to stock
repurchases and was up 13% to $0.35 vs. $0.31.
For the six months ended 10/24/98 of La-Z-Boy's 1999 fiscal year, sales
reached $603.7 million, up 19% from last year's first half of $505.5 million.
Net income was up 38% to $25.6 million vs. $18.5 million. Diluted EPS was up 41%
to $0.48 vs. $0.34.
President Comments
La-Z-Boy President and Chief Operating Officer, Gerald L. Kiser said "We
expect our sales momentum to carry over into the third quarter. We look for an
overall growth rate of 7%, and perhaps as much as 10% if consumer demand for
furniture remains good. La-Z-Boy's rate of sales growth continues to outpace the
furniture industry as a whole.
"Our Chairman, Patrick Norton, was honored at an all-industry dinner as the
1998 City of Hope Spirit of Life Honoree. As co-honoree with Bill Child of R. C.
Willey, Pat helped raise over $1.2 million for cancer research during this
year's campaign. The Company extends its congratulations to Pat and Bill." (The
City of Hope is a cancer research hospital in Los Angeles, California.)
Marketing
The recently held High Point Furniture Market was very successful for all
residential product divisions. The England/Corsair, Sam Moore and Hammary
divisions reported strong, positive dealer reaction to their product
introductions and the joint introduction of the Thomas Kinkade Home Furnishings
Collection by the La-Z-Boy Residential and Kincaid Divisions was a success by
all measures. The collection was the largest single collection launch in
Kincaid's history and garnered a great deal of press coverage at market.
Demonstrating the Company's design prowess, three separate divisions were
awarded the American Society of Furniture Designers' 1998 Pinnacle Design
Achievement Awards. Kincaid's LeBistro collection won for casual dining;
La-Z-Boy Residential captured the motion upholstery award for its 407 Metro
design and Hammary took home the prize in Occasional furniture for its Cadence
group.
Company Overview
La-Z-Boy manufactures quality upholstered and casegoods home furniture as
well as office furniture. In addition to the La-Z-Boy brand name, which is the
most recognized home furniture brand name in North America, four other major
brands are part of La-Z-Boy Incorporated: Kincaid, England/Corsair, Hammary and
Sam Moore.
More Information
La-Z-Boy Incorporated's second quarter 10-Q filing including an income
statement, balance sheet, cash flow statement and additional management
discussion is available now at the Company's internet site (www.lazboy.com).
This press release is just one part of La-Z-Boy Incorporated's disclosures and
should be read in conjunction with all other 10-Q information. About 48 hours
after this release, this second quarter 10-Q information should be available on
the SEC's internet site (www.sec.gov.)
11/4/98 Page 1 of 3
La-Z-Boy Incorporated Financial Information Release
CONSOLIDATED STATEMENT OF INCOME
(Amounts in thousands, except per share data)
SECOND QUARTER ENDED (UNAUDITED)
--------------------------------------------------------
October 24, October 25, % Over Percent of Sales
------------------
1998 1997 (Under) 1998 1997
----------- ----------- -------- -------- --------
Sales ............... $334,831 $293,208 14% 100.0% 100.0%
Cost of sales ....... 245,062 215,370 14% 73.2% 73.5%
-------- -------- -- ----- -----
Gross profit ... 89,769 77,838 15% 26.8% 26.5%
S, G & A ............ 59,510 50,400 18% 17.8% 17.1%
-------- -------- -- ----- -----
Operating profit 30,259 27,438 10% 9.0% 9.4%
Interest expense .... 1,164 1,027 13% 0.3% 0.4%
Interest income ..... 471 512 -8% 0.1% 0.2%
Other income ........ 865 527 64% 0.3% 0.2%
-------- -------- -- ----- -----
Pretax income .. 30,431 27,450 11% 9.1% 9.4%
Income tax expense .. 11,984 10,628 13% 39.4%* 38.7%*
-------- -------- -- ----- -----
Net income ..... $ 18,447 $ 16,822 10% 5.5% 5.7%
======== ======== == ===== =====
Diluted EPS ** $0.35 $0.31 13%
Basic EPS ** $0.35 $0.31 13%
Dividends per share ** $0.08 $0.07 14%
SIX MONTHS ENDED (UNAUDITED)
----------------------------------------------------------
October 24, October 25, % Over Percent of Sales
--------------------
1998 1997 (Under) 1998 1997
----------- ----------- -------- ---------- --------
Sales ............... $603,711 $505,534 19% 100.0% 100.0%
Cost of sales ....... 450,493 379,554 19% 74.6% 75.1%
-------- -------- -------- ----- -----
Gross profit ... 153,218 125,980 22% 25.4% 24.9%
S, G & A ............ 110,798 95,757 16% 18.4% 18.9%
-------- -------- -------- ----- -----
Operating profit 42,420 30,223 40% 7.0% 6.0%
Interest expense .... 2,351 2,051 15% 0.4% 0.4%
Interest income ..... 1,048 994 5% 0.2% 0.2%
Other income ........ 1,220 1,277 -4% 0.2% 0.2%
-------- -------- -------- ----- -----
Pretax income .. 42,337 30,443 39% 7.0% 6.0%
Income tax expense .. 16,706 11,895 40% 39.5%* 39.1%*
-------- -------- -------- ----- -----
Net income ..... $ 25,631 $ 18,548 38% 4.2% 3.7%
======== ======== ======== ===== =====
Diluted EPS ** $0.48 $0.34 41%
Basic EPS ** $0.48 $0.35 37%
Dividends per share ** $0.15 $0.14 7%
* As a percent of pretax income, not sales
** Restated to reflect three-for-one stock split, in the form of a 200% stock
dividend effective September 1998.
11/4/98 Page 2 of 3
La-Z-Boy Incorporated Financial Information Release
CONSOLIDATED BALANCE SHEET
(Amounts in thousands, except par value)
Unaudited Increase Audited
--------------------------
October 24, October 25, (Decrease) Apr. 25,
-------------------
1998 1997 Dollars Percent 1998
------------ ----------- ---------- ------- -----------
Current assets
Cash & equivalents ..................... $ 22,721 $ 23,681 ($ 960) -4% $ 28,700
Receivables ............................ 256,328 216,989 39,339 18% 238,260
0
Inventories
Raw materials ...................... 47,847 40,672 7,175 18% 43,883
Work-in-process .................... 39,118 36,652 2,466 7% 40,640
Finished goods ..................... 35,627 33,110 2,517 8% 30,193
-------- --------- -------- ------- ---------
FIFO inventories ............... 122,592 110,434 12,158 11% 114,716
Excess of FIFO over LIFO (22,712) (21,513) (1,199) -6% (22,812)
-------- --------- -------- ------- ---------
Total inventories ......... 99,880 88,921 10,959 12% 91,904
Deferred income taxes .................. 19,396 22,395 (2,999) -13% 16,679
Income taxes ........................... -- -- N/M N/M 936
Other current assets ................... 5,889 427 5,462 N/M 6,549
-------- --------- -------- ------- ---------
Total current assets ............... 404,214 352,413 51,801 15% 383,028
Property, plant & equipment ................ 119,660 119,247 413 0% 121,762
Goodwill ................................... 48,017 41,755 6,262 15% 49,413
Other long-term assets ..................... 29,847 31,169 (1,322) -4% 26,148
--------- --------- -------- ------- ---------
Total assets ................... $ 601,738 $ 544,584 $ 57,154 10% $ 580,351
========= ========= ======== ======= =========
Current liabilities
Current portion - l/t debt ............. $ 4,726 $ 5,118 ($ 392) -8% $ 4,822
Current portion - capital leases ....... 1,099 1,778 (679) -38% 1,383
Accounts payable ....................... 50,693 37,579 13,114 35% 36,703
Payroll/other comp ..................... 39,063 32,362 6,701 21% 39,617
Income taxes ........................... 6,885 11,132 (4,247) -38% --
Other current liabilities .............. 26,491 23,659 2,832 12% 25,764
--------- -------- ------- ------ ---------
Total current liabilities .......... 128,957 111,628 17,329 16% 108,289
Long-term debt ............................. 63,319 52,522 10,797 21% 66,434
Capital leases ............................. 300 1,401 (1,101) -79% 819
Deferred income taxes ...................... 5,454 5,814 (360) -6% 5,478
Other long-term liabilities ................ 11,912 10,343 1,569 15% 11,122
Commitments & contingencies ................ -- -- N/M N/M --
Shareholders' equity
Common shares, $1 par * ................ 52,909 53,485 (576) -1% 53,551
Capital in excess of par ............... 30,328 28,378 1,950 7% 29,262
Retained earnings * .................... 310,417 281,969 28,448 10% 306,445
Currency translation ................... (1,858) (956) (902) -94% (1,049)
--------- --------- -------- ------- ---------
Total shareholders' equity ......... 391,796 362,876 28,920 8% 388,209
Total liabilities and --------- --------- -------- ------- ---------
shareholders' equity ........... $ 601,738 $ 544,584 $ 57,154 10% $ 580,351
========= ========= ======== ======= =========
* Restated to reflect three-for-one stock split, in the form of a 200%
stock dividend effective September 1998.
11/4/98 Page 3 of 3
La-Z-Boy Incorporated Financial Information Release
COMMENTS AND ANALYSIS
Overall:
Refer to today's press release for additional information.
Gross profit margins:
Gross profit margins increased to 26.8% of sales from 26.5% in last year's
second quarter on a 14% increase in sales dollars and a 10% increase in sales
units. The absence of hardwood and plywood supply chain disruptions and casegood
operation relocation costs favorably impacted this year's gross profit margin.
The absence of these items along with volume related reductions in costs more
than offset unfavorable Canadian currency exchange effects.
Gross profit margin was unfavorably affected by currency exchange impacts
associated with inventory purchased by La-Z-Boy's Canadian upholstery plant from
various La-Z-Boy plants in the U.S. La-Z-Boy Canada purchases stationary and
other finished goods from La-Z-Boy U.S. plants to supplement its motion
upholstery production enabling a full complement of La-Z-Boy products to be sold
in Canada. In addition, many component parts (e.g. fabric, wood parts, and metal
parts) for the motion upholstery products are purchased from the U.S. Management
has been evaluating options for minimizing costs and risks associated with
changes in currency exchange rates.
Inventories:
Raw materials inventories were up 18% over the same period last year
primarily as a result of air dried lumber stocks being increased to reduce the
dependence on kiln dried lumber purchases and leather hides inventories being
increased to support new leather upholstery programs.
S,G & A:
Second quarter S, G & A increased to 17.8% of sales vs. 17.1% last year.
The largest cause was due to an increase in Information Technology (I.T.)
expenses relating to Year 2000 projects. As expected, performance bonus related
expenses increased due to higher sales and profits. La-Z-Boy held many other S,
G & A expenses at a growth rate consistent or lower than the sales growth rate,
thus somewhat offsetting the higher I.T. related and performance bonus
increases. Higher I.T. related and bonus expenses are expected to continue
throughout the year.
