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 27, 2001 COMMISSION FILE NUMBER 1-9656
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LA-Z-BOY INCORPORATED
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(Exact name of registrant as specified in its charter)
MICHIGAN 38-0751137
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1284 North Telegraph Road, Monroe, Michigan 48162-3390
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (734) 241-4414
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None
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(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
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Indicate the number of shares outstanding of each issuer's classes of common
stock, as of the last practicable date:
Class Outstanding at October 27, 2001
------------------------------ -------------------------------
Common Shares, $1.00 par value 60,762,719
LA-Z-BOY INCORPORATED
FORM 10-Q SECOND QUARTER OF FISCAL 2002
TABLE OF CONTENTS
Page
Number(s)
PART I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet....................................3
Consolidated Statement of Income..............................4
Consolidated Statement of Cash Flows..........................5
Notes to Consolidated Financial Statements
Note 1. Basis of Presentation................................6
Note 2. Interim Results......................................6
Note 3. Restructuring........................................6-7
Note 4. Other Income..................... ...................7
Note 5. Earnings per Share...................................7
Note 6. Accounting Change....................................7
Note 7. Segment Information..................................7-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Cautionary Statement Concerning Forward-Looking Statements....8-9
Results of Operations.........................................9-11
Liquidity and Capital Resources...............................11-12
Outlook.......................................................12-13
Item 3. Quantitative & Qualitative Disclosures About Market Risk......13-14
PART II Other Information
Item 6. Exhibits and Reports on Form 8-K.............................14
Signature.................................................................15
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LA-Z-BOY INCORPORATED
CONSOLIDATED BALANCE SHEET
(Amounts in thousands) Unaudited
------------------------------------------------
Increase/(Decrease)
-------------------- Audited
10/27/01 10/28/00 Dollars Percent 4/28/01
------------- ------------ ----------- -------- ------------
Current assets
Cash and equivalents $24,797 $16,741 $8,056 48% $23,565
Receivables - net 377,744 402,603 (24,859) -6% 380,867
Inventories
Raw materials 82,045 100,948 (18,903) -19% 90,381
Work-in-progress 60,250 67,934 (7,684) -11% 62,465
Finished goods 113,010 114,199 (1,189) -1% 115,425
------------ ----------- ------------ ------ ------------
FIFO inventories 255,305 283,081 (27,776) -10% 268,271
Excess of FIFO over LIFO (10,850) (7,703) (3,147) -41% (10,384)
------------ ----------- ------------ ------ ------------
Total inventories 244,455 275,378 (30,923) -11% 257,887
Deferred income taxes 19,771 18,769 1,002 5% 26,168
Income taxes - current 2,944 5,655 (2,711) -48% 2,944
Other current assets 16,133 14,059 2,074 15% 17,345
------------ ------------ ------------ ------ ------------
Total current assets 685,844 733,205 (47,361) -6% 708,776
Property, plant and equipment 219,656 226,922 (7,266) -3% 230,341
Goodwill 110,497 116,224 (5,727) -5% 112,755
Trade names 118,876 124,101 (5,225) -4% 120,981
Other long-term assets 55,503 58,130 (2,627) -5% 52,944
------------ ------------ ------------ ------ ------------
Total assets $1,190,376 $1,258,582 ($68,206) -5% $1,225,797
============ ============ ============ ====== ============
Current liabilities
Lines of credit $0 $0 $0 N/M $10,380
Current portion of long-term debt 6,559 1,622 4,937 304% 5,304
Current portion of capital leases 488 457 31 7% 541
Accounts payable 88,604 108,305 (19,701) -18% 92,830
Payroll and other compensation 69,694 67,139 2,555 4% 78,550
Income taxes 10,423 9,808 615 6% 11,490
Other current liabilities 56,816 51,282 5,534 11% 50,820
------------ ----------- ----------- ------ ------------
Total current liabilities 232,584 238,613 (6,029) -3% 249,915
Long-term debt 171,477 255,818 (84,341) -33% 196,923
Capital leases 2,278 2,868 (590) -21% 2,496
Deferred income taxes 46,236 52,493 (6,257) -12% 45,709
Other long-term liabilities 39,380 32,385 6,995 22% 35,608
Contingencies and commitments
Shareholders' equity
Common shares, $1 par value 60,763 60,227 536 1% 60,501
Capital in excess of par value 211,138 211,035 103 0% 210,924
Retained earnings 434,348 408,221 26,127 6% 427,616
Accum. other comprehensive loss (7,828) (3,078) (4,750) -154% (3,895)
------------ ----------- ----------- ------ ------------
Total shareholders' equity 698,421 676,405 22,016 3% 695,146
Total liabilities and ------------ ----------- ----------- ------ ------------
shareholders' equity $1,190,376 $1,258,582 ($68,206) -5% $1,225,797
============ =========== =========== ====== ============
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
LA-Z-BOY INCORPORATED
CONSOLIDATED STATEMENT OF INCOME
(Amounts in thousands, except per share data)
(UNAUDITED)
SECOND QUARTER ENDED
-----------------------------------------------------------------------------
Percent of Sales
10/27/01 10/28/00 % Over ------------------
(13 Weeks) (13 Weeks) (Under) 10/27/01 10/28/00
------------- ------------- ------- -------- --------
Sales $559,189 $592,700 -6% 100.0% 100.0%
Cost of sales 435,510 450,569 -3% 77.9% 76.0%
------------- ------------- ------- -------- --------
Gross profit 123,679 142,131 -13% 22.1% 24.0%
S, G & A 102,073 97,295 5% 18.2% 16.4%
------------- ------------- ------- -------- --------
Operating profit 21,606 44,836 -52% 3.9% 7.6%
Interest expense 2,044 4,497 -55% 0.4% 0.8%
Interest income 387 329 18% 0.1% 0.1%
Other income, net 363 5,860 -94% 0.0% 1.0%
------------- ------------- ------- -------- --------
Pretax income 20,312 46,528 -56% 3.6% 7.9%
Income tax expense 7,921 17,612 -55% 39.0% * 37.9% *
------------- ------------- ------- -------- --------
Net income $12,391 $28,916 -57% 2.2% 4.9%
============= ============= ======= ======== ========
Basic EPS $0.20 $0.48 -58%
Diluted avg. shares 61,052 60,684 1%
Diluted EPS $0.20 $0.48 -58%
Dividends paid $0.09 $0.09 0%
per share
(UNAUDITED)
SIX MONTHS ENDED
-----------------------------------------------------------------------------
Percent of Sales
10/27/01 10/28/00 % Over ------------------
(26 Weeks) (26 Weeks) (Under) 10/27/01 10/28/00
------------- ------------- ------- -------- --------
Sales $1,018,170 $ 1,109,407 -8% 100.0% 100.0%
Cost of sales 796,627 850,935 -6% 78.2% 76.7%
------------- ------------- ------- -------- --------
Gross profit 221,543 258,472 -14% 21.8% 23.3%
S, G & A 192,960 189,056 2% 19.0% 17.0%
------------- ------------- ------- -------- --------
Operating profit 28,583 69,416 -59% 2.8% 6.3%
Interest expense 5,000 8,849 -43% 0.5% 0.8%
Interest income 745 782 -5% 0.1% 0.1%
Other income, net 626 6,476 -90% 0.1% 0.5%
------------- ------------- ------- -------- --------
Pretax income 24,954 67,825 -63% 2.5% 6.1%
Income tax expense 9,732 25,906 -62% 39.0% * 38.2% *
------------- ------------- ------- -------- --------
Net income $15,222 $41,919 -64% 1.5% 3.8%
============= ============= ======= ======== ========
Basic EPS $0.25 $0.69 -64%
Diluted avg. shares 60,994 60,957 0%
Diluted EPS $0.25 $0.69 -64%
Dividends paid $0.18 $0.17 6%
per share
* As a percent of pretax income, not sales.
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
LA-Z-BOY INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in thousands)
(Unaudited) (Unaudited)
Second Quarter Ended Six Months Ended
-------------------------- --------------------------
10/27/01 10/28/00 10/27/01 10/28/00
------------ ------------ ------------ ------------
Cash flows from operating activities
Net income $12,391 $28,916 $15,222 $41,919
Adjustments to reconcile net income to
cash provided by operating activities
Depreciation and amortization 10,700 11,473 21,621 22,038
Change in notes and accounts receivables (72,396) (52,267) 3,602 (6,651)
Change in inventories 15,723 (9,407) 13,432 (29,575)
Change in payables 11,759 25,098 (4,226) 17,913
Change in other assets and liabilities 33,257 4,350 77 (22,638)
Proceeds from insurance recovery 5,116 5,116
Change in deferred taxes 3,465 2,412 6,924 5,818
------------ ----------- ------------ -----------
Total adjustments 2,508 (13,225) 41,430 (7,979)
------------ ----------- ------------ -----------
Cash provided by operating activities 14,899 15,691 56,652 33,940
Cash flows from investing activities
Proceeds from disposals of assets 304 253 843 439
Capital expenditures (5,871) (9,678) (11,956) (17,073)
Change in other long-term assets (3,973) (818) (737) 2,330
------------ ----------- ------------ -----------
Cash used for investing activities (9,540) (10,243) (11,850) (14,304)
Cash flows from financing activities
Proceeds from debt 6,206 15,000 41,576 77,000
Payment of debt (21,050) (7,857) (76,147) (66,617)
Capital leases (134) (134) (271) 712
Stock issued for stock options & 401(k) plans, net 4,580 3,495 9,528 5,915
Repurchase of common stock (6,586) (11,241) (6,586) (23,249)
Dividends paid (5,492) (5,432) (10,956) (10,338)
------------ ----------- ------------ -----------
Cash used for financing activities (22,476) (6,169) (42,856) (16,577)
Effect of exchange rate changes on cash (533) (563) (714) (671)
------------ ----------- ------------ -----------
Change in cash and equivalents (17,650) (1,284) 1,232 2,388
Cash and equivalents at beginning of period 42,447 18,025 23,565 14,353
------------ ----------- ------------ -----------
Cash and equivalents at end of period $24,797 $16,741 $24,797 $16,741
============ =========== ============ ===========
Cash paid during period -Income taxes $5,437 $18,278 $8,500 $24,726
-Interest $2,954 $3,992 $5,216 $6,249
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Basis of Presentation
The unaudited interim financial information is prepared in conformity with
generally accepted accounting principles and, except as indicated in Notes
6 and 7, such principles are applied on a basis consistent with those
reflected in our 2001 Annual Report on Form 10-K, filed with the Securities
and Exchange Commission. Management has prepared the financial information
included in these financial statements. The consolidated balance sheet as
of April 28, 2001 has been audited by our independent certified public
accountants. The unaudited interim financial information as of and for the
interim periods ended October 27, 2001 and October 28, 2000 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 28, 2001. The unaudited interim financial information
includes all adjustments and accruals, consisting only of normal recurring
adjustments, which are, in our opinion, necessary for a fair presentation
of results for the respective interim period. Certain prior year
information has been reclassified to be comparable to the current year
presentation.
Note 2: Interim Results
The foregoing interim results are not necessarily indicative of the results
of operations for the full fiscal year ending April 27, 2002.
Note 3: Restructuring
In the second quarter ended October 27, 2001, an expense of $13.2 million
was recognized relating to a restructuring plan announced on October 25,
2001. $3.7 million of the expense related to our Upholstery Group and $9.5
million related to our Casegoods Group. The plan involves closing down
three of our manufacturing facilities and converting two others to
warehousing, sub-assembly and import service operations. The impact will be
a reduction of manufacturing space of 1.25 million square feet and 933
production and management positions with an estimated net reduction across
the company of 570 employees. The $13.2 million charge, which is included
in cost of sales, was made up of fixed asset writedowns of $6.2 million,
severance and benefit related costs of $4.0 million, inventory writedowns
of $1.5 million and other restructuring related costs of $1.5 million. At
October 27, 2001, the associated liability was $5.5 million. This amount
consists of severance and benefit related costs of $4.0 million and other
restructuring related costs of $1.5 million. This plan is expected to be
completed by the end of the fiscal year.
At April 28, 2001, a liability of $3.9 million existed relating to a
restructuring plan announced on April 19, 2001. This amount consisted of
$1.2 million for severance and benefit related expenses and $2.7 million
for other restructuring related costs. At October 27, 2001, the liability
was $2.3 million. This amount consists of severance and benefit related
costs of $0.6 million and other restructuring related costs of $1.7
million. No restructuring charges or credits were recognized in the income
statement in the second quarter ended October 27, 2001 related to this
restructuring announcement.
We believe the existing restructuring liability will be adequate to cover
future severance, benefits, fixed assets or other restructuring costs
relating to the announcements on April 19, 2001 and October 25, 2001.
Note 4: Other Income: Insurance Recovery
Other income in last year's six months and second quarter included $4.9
million resulting from a business interruption insurance recovery.
Note 5: Earnings per Share
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 issuable under employee stock options were issued.
(Unaudited) (Unaudited)
Second Quarter Ended Six Months Ended
-------------------- ------------------
(Amounts in thousands) 10/27/01 10/28/00 10/27/01 10/28/00
---------------------- -------- -------- -------- --------
Weighted average common
shares outstanding (basic) 60,914 60,527 60,842 60,802
Effect of options 138 157 152 155
-------- -------- -------- --------
Weighted average common
shares outstanding (diluted) 61,052 60,684 60,994 60,957
======== ======== ======== ========
Note 6: Accounting Change
Beginning with the first quarter ended July 28, 2001, we implemented
Financial Accounting Standards Board Statement (SFAS) No. 133 "Accounting
for Derivative Instruments and Hedging Activities," as amended. Interest
rate swap arrangements have been formally designated as hedges and the
effect of marking these contracts to market as of April 29, 2001 was
recorded in "Accum. other comprehensive loss" on the balance sheet in the
amount of $1.2 million, net of taxes.
Note 7: Segment Information
Our reportable operating segments are the Upholstery Group and the
Casegoods Group. These segments are different from the segments used in our
fiscal 2001 annual report. The new segments reflect the organizational
change announced July 23, 2001 that realigned our top management team.
The operating divisions that comprise the Upholstery Group are Bauhaus,
Centurion, Clayton Marcus, England, HickoryMark, La-Z-Boy, La-Z-Boy
Contract Furniture and Sam Moore. The primary products produced and sold in
the Upholstery Group are recliners, sofas, occasional chairs and reclining
sofas. These products are mostly or fully covered with fabric, leather or
vinyl, although exposed wood and other materials are used as well.
The operating divisions that comprise the Casegoods Group are Alexvale,
American Drew, American of Martinsville, Hammary, Kincaid, Lea,
Pennsylvania House and Pilliod. The primary products produced or sold in
the Casegoods Group are casegoods, business furniture and upholstered
furniture. Casegoods include dining room tables and chairs, chinas, beds,
dressers, chests, youth furniture and other case pieces for both the dining
room and bedroom, as well as coffee tables, end tables, and entertainment
centers for the living room and great room area.
Restated comparable segment information for all quarters in fiscal 2000 and
fiscal 2001 can be found in our first quarter Form 10-Q filed September 7,
2001.
The financial results of our operating segments were as follows:
(Unaudited) (Unaudited)
Second Quarter Ended Six months Ended
--------------------- ----------------------
(Amounts in thousands) 10/27/01 10/28/00 10/27/01 10/28/00
- ---------------------- --------------------- ----------------------
Sales
Upholstery Group $390,344 $389,115 $699,958 $712,558
Casegoods Group 169,118 203,631 318,631 397,073
Eliminations (273) (46) (419) (224)
---------- --------- ---------- ----------
Consolidated $559,189 $592,700 $1,018,170 $1,109,407
========== ========= =========== ===========
Operating Profit
Upholstery Group $32,215 $39,148 $44,181 $60,610
Casegoods Group (5,019) 11,014 (5,046) 19,235
Corp. exps. & other (5,590) (5,326) (10,552) (10,429)
---------- --------- ----------- -----------
Consolidated $21,606 $44,836 $28,583 $69,416
========== ========= =========== ===========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Cautionary Statement Concerning Forward-Looking Statements
We are making forward-looking statements in this item. 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 and margins future economic performance
future growth industry trends
adequacy and cost of financial resources management plans
Forward-looking statements also include those preceded or followed by the words
"anticipates," "believes," "estimates," "hopes," "plans," " intends" and
"expects" or similar expressions. With respect to all forward-looking
statements, we claim the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995.
Many important factors, including future economic, political and industry
conditions (for example, changes in interest rates, changes in consumer demand,
changes in currency exchange rates, changes in demographics and consumer
preferences, e-commerce developments, oil price changes, terrorism impacts and
changes in the availability and cost of capital); competitive factors (such as
the competitiveness of foreign-made products, new manufacturing technologies, or
other actions taken by current or new competitors); operating factors (for
example, supply, labor, or distribution disruptions, changes in operating
conditions or costs, effects of restructuring actions and changes in regulatory
environment); and factors relating to acquisitions, could affect our future
results and could cause those results or other outcomes to differ materially
from what may be expressed or implied in our forward-looking statements. We
undertake no obligation to update or revise any forward-looking statements for
new developments or otherwise.
Results of Operations
Second Quarter Ended October 27, 2001 Compared to Second Quarter Ended October
28, 2000.
See page 4 for the consolidated statement of income with analysis of percentages
and calculations.
Unaudited Second Quarter Ended
------------------------------------------------------
Sales Operating Profit
-------------------------- -------------------------
FY02 FY02
$ Over Percent of Total $ Over Percent of Sales
(Under) ---------------- (Under) ----------------
FY01 FY02 FY01 FY01 FY02 FY01
-------- ------ ------- -------- ------ --------
Upholstery Group 0% 70% 66% -18% 8.3% 10.1%
Casegoods Group -17% 30% 34% -146% -3.0% 5.4%
Other N/A 0% 0% -5% N/A N/A
-------- ------ ------- -------- ----- --------
Consolidated -6% 100% 100% -52% 3.9% 7.6%
======== ====== ======= ======== ===== ========
Second quarter sales declined 6% from the prior year's second quarter ended
October 28, 2000 primarily due to continued weak furniture industry demand and
impacts of retailers going out of business or experiencing financial
difficulties. The Upholstery Group sales were unchanged from the prior year. We
believe that our Upholstery Group sales performance was better than the industry
and most of our major competitors. Based on industry data available to us,
furniture industry sales of casegoods declined by double digit percentages
across the country. Our Casegoods Group sales also were adversely affected by
this industry downturn. Sales in our Casegoods Group were impacted by stronger
competition from imported products as well.
Gross profit as a percent of sales for the second quarter ended October 27, 2001
decreased from 24.0% to 22.1%. The primary reason for the drop was due to the
$13.2 million of restructuring expenses described further in Note 3 to the
interim consolidated financial statements included in this report. Most of the
restructuring expenses related to our Casegoods Group segment. Without the
restructuring expenses our gross profit margin would have improved to 24.5% of
sales from last year's 24.0%. This improvement, despite the 6% sales decline,
primarily reflects the results of management's effort to adjust capacity and
fixed costs in response to declining unit sales volume. In particular, the
restructuring and other productivity improvements announced in April 2001 are
now positively impacting gross profit margins. Healthcare expenses were also up
from the prior year's quarter, which also occurred last quarter. Our healthcare
cost increases are similar to national trends.
Selling, General & Administrative (S, G & A) expenses increased 5% or about $4.8
million. As a percent of sales, SG&A increased from 16.4% to 18.2% in part
because of lower sales volume. One reason for the increase as a percent of sales
was our decision to continue most of our advertising expenses at levels
necessary to support full year marketing objectives. Continuation of advertising
and other promotional support has been consistent throughout the last few
quarters through this weak retail environment. Research and development expenses
were also up as a percent of sales, similar to last quarter.
Interest expense declined 55% and as a percent of sales declined from 0.8% last
year to 0.4%. This decline was due to reduced debt levels and lower interest
rates.
Other income decreased 94% or $5.5 million from last year's second quarter. Last
year's quarter included a one-time $4.9 million business interruption insurance
recovery.
Six Months Ended October 27, 2001 Compared to Six Months Ended October 28, 2000.
Unaudited Six Months Ended 10/27/01
------------------------------------------------------
Sales Operating Profit
------------------------- --------------------------
FY02 FY02
$ Over Percent of Total $ Over Percent of Sales
(Under) ---------------- (Under) ----------------
FY01 FY02 FY01 FY01 FY02 FY01
-------- ------- ------- -------- ------ ------
Upholstery Group -2% 69% 64% -27% 6.3% 8.5%
Casegoods Group -20% 31% 36% -126% -1.6% 4.8%
Other N/A 0% 0% -1% N/A N/A
-------- ------- ------- -------- ------ ------
Consolidated -8% 100% 100% -59% 2.8% 6.3%
======== ======= ======= ======== ====== ======
First half sales declined 8% from the prior year's first half ended October 28,
2000 primarily due to continued weak furniture industry demand and impacts of
retailers going out of business or experiencing financial difficulties. Although
our Upholstery Group sales decreased 2% from last year, we believe this was
better than the industry and most of our major competitors. Based on industry
data available to us, furniture industry sales of casegoods declined by
double-digit percentages across the country. Our Casegoods Group sales also were
adversely affected by this industry downturn. Sales in our Casegoods Group were
impacted by stronger competition from imported products as well.
Gross profit as a percent of sales for the first half ended October 27, 2001
decreased from 23.3% to 21.8%. The primary reason for the drop was due to the
$13.2 million restructuring expenses recorded in the second quarter as described
in Note 3. Most of the restructuring expenses related to our Casegoods Group
segment. The decline in sales along with our decision to control inventory
levels also contributed to the reduction in gross margins due to fixed
manufacturing costs not being reduced in proportion to sales reductions.
Healthcare expenses were also up from the prior year's first half; similar to
nationwide healthcare cost trends. Without the restructuring expenses the gross
profit margin would have been almost equal to last year's 23.3%.
Selling, General & Administrative (S, G & A) expenses increased 2% or about $3.9
million. As a percent of sales, SG&A increased from 17.0% to 19.0% in part due
to reduced sales volume. One reason for the increase was our decision to
continue most of our advertising expenses at levels necessary to support full
year marketing objectives. Continuation of advertising and other promotional
support has been consistent throughout the last few quarters through this weak
retail environment. Research and development expenses were also up as a percent
of sales.
Interest expense declined 43% and as a percent of sales declined from 0.8% last
year to 0.5%. This decline was due to reduced debt levels and lower interest
rates.
Other income decreased $5.8 million. Last year's quarter included a one-time
$4.9 million business interruption insurance recovery.
Liquidity and Capital Resources
Cash flows from operations amounted to $57 million in the first six months of
fiscal year 2002 compared to $34 million in the prior year. In the aggregate,
capital expenditures, dividends and stock repurchases totaled approximately $29
million during the first six month period, which is down from about $51 million
in the first six months of fiscal 2001. Cash and cash equivalents increased by
$1 million during the six month period compared to an increase of $2 million in
the prior year.
Inventories declined 10% or $28 million from last year on a FIFO basis.
Inventories also declined 6% or $15 million compared to last quarter (our first
quarter) whereas at the end of October last year they increased 3% from the
first to the second quarter. These declines were primarily the result of efforts
to reduce inventories as sales levels declined. The largest reductions in
inventory were in our Casegoods segment that also had our largest reduction in
sales.
We believe we have a very strong capital structure as evidenced by a low debt to
capitalization ratio of 20.6% as well as a strong current ratio and interest
coverage ratio. As of October 27, 2001, we had line of credit availability of
approximately $314 million under several credit agreements.
Capital expenditures were $6 million during the three months ended October 27,
2001 and $12 million for the six months compared to last year's $10 million for
the quarter and $17 million for the six months.
During the second quarter we repurchased 418,000 shares of our common stock, at
an average price of $15.76 per share. As of October 27, 2001, 847,000 La-Z-Boy
shares authorized for purchase on the open market were still available for
purchase by us.
Outlook
We believe the longer-term outlook for our industry remains very positive -
especially for a company such as La-Z-Boy, operating under the umbrella of
powerful consumer brand names and a strong and growing proprietary distribution
system. We expect recent and projected declines in U.S. interest rates to
ultimately rejuvenate consumer spending and strengthen housing turnover and home
remodeling - both strong drivers of retail furniture demand.
Nevertheless, current consumer sentiment remains highly unsettled, and we
anticipate challenging conditions in our third fiscal quarter. Our sales are
expected to decline in mid single digit percentages in the third quarter
compared to last year's third quarter. We expect our Upholstery Group segment
sales to show a small percentage improvement over the prior year. We expect our
Casegoods Group segment to have a double-digit percentage decline in sales but
not quite as deep as the 17% decline experienced in this year's second quarter.
Casegoods Group sales trends (percent decreases vs. prior year comparable
quarters) are improving and we expect them to continue to improve from the 23%
decline in the first quarter. But we are not anticipating that Casegoods' dollar
level of sales will reach comparable year earlier levels this fiscal year or in
the first half of next fiscal year.
We expect interest expense to continue to be substantially less next quarter
than in the prior year quarter. It also should be less than this second
quarter's amount.
We are anticipating our full year income tax rate to be similar to last year's
39.0%.
Because most of our recent restructuring actions in both April and October
applied to our Casegoods Group segment we are expecting improved operating
margins for this segment in future quarters.
We estimate that our diluted net income per share for the third quarter ending
January 2002 will be between $0.26 -$0.30 compared to $0.27 last year. Our
tentative estimate for the fiscal year ended April 2002 is presently $1.05 -
$1.12 excluding restructuring charges.
We expect capital expenditures of approximately $30 million for the full year of
fiscal 2002, down from the $35 million we estimated on July 28, 2001. This
compares to $37 million actual capital expenditures in fiscal 2001. We have a
commitment to purchase about $7 million of equipment by the end of fiscal 2002.
We expect to continue to be in the open market for purchasing our shares from
time to time as changes in our stock price and other factors present appropriate
opportunities.
We expect to meet our cash needs for capital expenditures, stock repurchases and
dividends during fiscal year 2002 from cash generated by operations and
borrowings under available lines of credit.
Recently the Financial Accounting Standards Board issued SFAS No. 142 "Goodwill
and Other Intangible Assets" which must be implemented no later than the
beginning of our next fiscal year. We believe there will be at least two
probable effects of implementing SFAS 142, although we have not yet determined
other possible effects including potential impairment charges upon adoption. One
effect would be to cause goodwill amortization to cease. Our goodwill
amortization expense last year (fiscal 2001) was $4.4 million. Goodwill
amortization is not deductible for our tax expense purposes. We estimate that
goodwill amortization expense will be similar this year to the expense of last
year. If so, and assuming dilutive shares outstanding also are similar, then the
cessation of goodwill amortization expense would favorably impact fiscal 2003
earnings per share by about $0.07. We believe that another probable effect of
SFAS 142 would be to eliminate the amortization expense related to our
indefinite-lived trade names for financial reporting purposes. Our trade names
amortization expense last year was $4.7 million. Trade names amortization is
deductible for our tax expense accounting purposes. Given similar dilutive
shares assumptions and assuming a similar tax rate to this year, next year's
earnings per share would be about $0.05 higher than this year's due to the
cessation of trade names amortization expense.
Recently the Financial Accounting Standards Board issued SFAS No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets". We have
not yet determined the impact of this SFAS, if any, on our financial statements.
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 floating rate $300 million revolving credit
facility under which we had $100 million borrowed at October 27, 2001. We have
entered into several interest rate swap agreements with counter-parties that are
participants in the revolving credit facility to reduce the impact of changes in
interest rates on a portion of this floating rate debt. We believe that
potential credit loss from counter-party non-performance is minimal. The purpose
of these swaps is to fix interest rates on a notional amount of $70 million for
a three year period at 6.095% plus our applicable borrowing spread under the
revolving credit facility, which can range from .475% to .800%. Management
estimates that a 1% change in interest rates would not have a material impact on
the results of operations for fiscal 2002 based upon the quarter-end levels of
exposed liabilities.
We are exposed to market risk from changes in the value of foreign currencies.
Our exposure to changes in the value of foreign currencies is reduced through
our use of foreign currency forward contracts. Substantially all of our imported
purchased parts are denominated in U.S. dollars. Thus, we believe that gains or
losses resulting from changes in the value of foreign currencies will not be
material to our results of operations in fiscal year 2002.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(10.1) Form of Change in Control Agreement (Note 1). Executive officers
currently covered; Patrick H. Norton, Gerald L. Kiser, David M.
Risley.
(10.2) La-Z-Boy Incorporated 1986 Incentive Stock Option Plan (Note 2)
(11) Statement of Computation of Earnings
See note 5 to the financial statements included in this report.
(b) Reports on Form 8-K
We filed a Form 8-K on August 15, 2001 containing a press release and
financial information about our actual first quarter fiscal year 2002
financial results.
We filed a Form 8-K on October 25, 2001 containing a press release
about our expected second quarter financial results and a new
restructuring charge.
Notes to Exhibits
Note 1. Incorporated by reference to an exhibit to Form 8-K dated February 6,
1995.
Note 2. Incorporated by reference to an exhibit to definitive proxy statement
dated June 29, 2001.
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: November 14, 2001 /s/James J. Korsnack
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James J. Korsnack
Chief Accounting Officer
