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 JANUARY 26, 2002 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 January 26, 2002
- ------------------------------ -------------------------------
Common Shares, $1.00 par value 60,870,368
Page 1 of 17
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. Divestiture........................................ 7
Note 5. Other Income: Insurance Recovery................... 7
Note 6. Earnings per Share................................. 7
Note 7. Accounting Change.................................. 8
Note 8. Segment Information................................ 8-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Cautionary Statement Concerning Forward-Looking Statements.. 10
Pilliod Divestiture......................................... 10
Results of Operations....................................... 11-14
Liquidity and Capital Resources............................. 14
Outlook..................................................... 15-16
Item 3. Quantitative & Qualitative Disclosures About Market Risk.... 16
PART II Other Information
Item 6. Exhibits and Reports on Form 8-K........................... 17
Signature................................................................ 17
Page 2 of 17
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LA-Z-BOY INCORPORATED
CONSOLIDATED BALANCE SHEET
(Amounts in thousands) Unaudited
------------------------------------------------------
Increase/(Decrease)
-------------------- Audited
1/26/02 1/27/01 Dollars Percent 4/28/01
----------- ----------- -------- -------- -----------
Current assets
Cash and equivalents $26,781 $20,409 $6,372 31% $23,565
Receivables - net 352,522 365,469 (12,947) -4% 380,867
Inventories
Raw materials 79,539 103,044 (23,505) -23% 90,381
Work-in-progress 59,544 67,074 (7,530) -11% 62,465
Finished goods 100,535 111,210 (10,675) -10% 115,425
----------- ----------- --------- ------- -----------
FIFO inventories 239,618 281,328 (41,710) -15% 268,271
Excess of FIFO over LIFO (12,480) (7,838) (4,642) -59% (10,384)
----------- ----------- --------- ------- -----------
Total inventories 227,138 273,490 (46,352) -17% 257,887
Deferred income taxes 27,251 20,805 6,446 31% 26,168
Income taxes - current 2,944 - 2,944 N/A 2,944
Other current assets 15,424 19,987 (4,563) -23% 17,345
----------- ----------- --------- -------- -----------
Total current assets 652,060 700,160 (48,100) -7% 708,776
Property, plant and equipment 214,952 223,562 (8,610) -4% 230,341
Goodwill 109,371 113,486 (4,115) -4% 112,755
Trade names 117,824 123,821 (5,997) -5% 120,981
Other long-term assets 57,808 59,492 (1,684) -3% 52,944
----------- ----------- --------- -------- -----------
Total assets $1,152,015 $1,220,521 ($68,506) -6% $1,225,797
=========== =========== ========= ======== ===========
Current liabilities
Lines of credit $700 $0 $700 N/A $10,380
Current portion of long-term debt 638 1,604 (966) -60% 5,304
Current portion of capital leases 546 457 89 19% 541
Accounts payable 73,198 90,784 (17,586) -19% 92,830
Payroll and other compensation 72,239 64,551 7,688 12% 78,550
Income taxes 1,716 1,413 303 21% 11,490
Other current liabilities 55,461 47,875 7,586 16% 50,820
----------- ----------- --------- -------- -----------
Total current liabilities 204,498 206,684 (2,186) -1% 249,915
Long-term debt 141,451 240,688 (99,237) -41% 196,923
Capital leases 2,083 2,739 (656) -24% 2,496
Deferred income taxes 46,545 52,488 (5,943) -11% 45,709
Other long-term liabilities 41,365 30,448 10,917 36% 35,608
Contingencies and commitments
Shareholders' equity
Common shares, $1 par value 60,870 60,259 611 1% 60,501
Capital in excess of par value 211,375 211,017 358 0% 210,924
Retained earnings 451,793 418,706 33,087 8% 427,616
Accum. other comprehensive loss (7,965) (2,508) (5,457) -218% (3,895)
----------- ----------- --------- -------- -----------
Total shareholders' equity 716,073 687,474 28,599 4% 695,146
Total liabilities and ----------- ----------- --------- -------- -----------
shareholders' equity $1,152,015 $1,220,521 ($68,506) -6% $1,225,797
=========== =========== ========= ======== ===========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
Page 3 of 17
LA-Z-BOY INCORPORATED
CONSOLIDATED STATEMENT OF INCOME
(Amounts in thousands, except per share data)
(UNAUDITED)
THIRD QUARTER ENDED
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Percent of Sales
1/26/02 1/27/01 % Over -----------------
(13 Weeks) (13 Weeks) (Under) 1/26/02 1/27/01
---------- ---------- ------- ------- -------
Sales $544,980 $552,019 -1% 100.0% 100.0%
Cost of sales 406,324 428,945 -5% 74.6% 77.7%
---------- ---------- ------- ------- -------
Gross profit 138,656 123,074 13% 25.4% 22.3%
S, G & A 101,298 95,855 6% 18.6% 17.4%
Loss on divestiture 11,689 0 N/A 2.1% 0.0%
---------- ---------- ------- ------- -------
Operating income 25,669 27,219 -6% 4.7% 4.9%
Interest expense 3,004 4,821 -38% 0.6% 0.9%
Interest income 370 502 -26% 0.1% 0.1%
Other income, net 576 2,623 -78% 0.1% 0.5%
---------- ---------- ------- ------- -------
Pretax income 23,611 25,523 -7% 4.3% 4.6%
Income tax expense 1,948 9,406 -79% 8.2%* 36.9%*
---------- ---------- ------- ------- -------
Net income $21,663 $16,117 34% 4.0% 2.9%
========== ========== ======= ======= =======
Basic EPS $0.35 $0.27 30%
Diluted avg. shares 61,062 60,399 1%
Diluted EPS $0.35 $0.27 30%
Dividends paid $0.09 $0.09 0%
per share
(UNAUDITED)
NINE MONTHS ENDED
- -------------------------------------------------------------------------------
Percent of Sales
1/26/02 1/27/01 % Over -----------------
(39 Weeks) (39 Weeks) (Under) 1/26/02 1/27/01
---------- ---------- ------- ------- -------
Sales $1,563,150 $ 1,661,426 -6% 100.0% 100.0%
Cost of sales 1,202,951 1,279,880 -6% 77.0% 77.0%
---------- ---------- ------- ------- -------
Gross profit 360,199 381,546 -6% 23.0% 23.0%
S, G & A 294,258 284,911 3% 18.8% 17.2%
Loss on divestiture 11,689 0 N/A 0.7% 0.0%
---------- ---------- ------- ------- -------
Operating income 54,252 96,635 -44% 3.5% 5.8%
Interest expense 8,004 13,670 -41% 0.5% 0.8%
Interest income 1,115 1,284 -13% 0.0% 0.1%
Other income, net 1,202 9,099 -87% 0.1% 0.5%
---------- ---------- ------- ------- -------
Pretax income 48,565 93,348 -48% 3.1% 5.6%
Income tax expense 11,680 35,312 -67% 24.1%* 37.8%*
---------- ---------- ------- ------- -------
Net income $36,885 $58,036 -36% 2.4% 3.5%
========== ========== ======= ======= =======
Basic EPS $0.60 $0.96 -38%
Diluted avg. shares 61,000 60,769 0%
Diluted EPS $0.60 $0.96 -38%
Dividends paid $0.27 $0.26 4%
per share
* As a percent of pretax income, not sales.
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
Page 4 of 17
LA-Z-BOY INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in thousands)
(Unaudited) (Unaudited)
Third Quarter Ended Nine Months Ended
------------------------ --------------------
1/26/02 1/27/01 1/26/02 1/27/01
--------- --------- --------- ---------
Cash flows from operating activities
Net income $21,663 $16,117 $36,885 $58,036
Adjustments to reconcile net income to
cash provided by operating activities
Loss on divestiture 11,689 - 11,689 -
Depreciation and amortization 11,122 11,601 32,743 33,639
Change in receivables 20,008 34,274 23,610 27,623
Change in inventories 7,936 1,889 21,368 (27,686)
Change in payables (14,409) (17,521) (18,635) 392
Change in other assets and liabilities (7,709) (13,283) (7,631) (35,921)
Proceeds from insurance recovery - - - 5,116
Change in deferred taxes (7,171) (2,041) (247) 3,777
--------- --------- --------- ---------
Total adjustments 21,466 14,919 62,897 6,940
--------- --------- --------- ---------
Cash provided by operating activities 43,129 31,036 99,782 64,976
Cash flows from investing activities
Proceeds from disposals of assets 1,365 221 2,208 660
Capital expenditures (11,386) (5,986) (23,342) (23,059)
Proceeds from divestiture 6,048 - 6,048 -
Change in other long-term assets 2,617 (2,145) 1,879 185
--------- --------- --------- ---------
Cash used for investing activities (1,356) (7,910) (13,207) (22,214)
Cash flows from financing activities
Proceeds from debt 50,700 - 92,276 77,000
Payment of debt (85,947) (15,148) (162,094) (81,765)
Capital leases (137) (129) (408) 583
Stock issued for stock options & 401(k) plans 2,070 887 11,598 6,802
Repurchase of common stock (473) (151) (7,059) (23,400)
Dividends paid (5,471) (5,424) (16,427) (15,762)
--------- --------- --------- ---------
Cash used for financing activities (39,258) (19,965) (82,114) (36,542)
Effect of exchange rate changes on cash (531) 507 (1,245) (164)
--------- --------- --------- ---------
Change in cash and equivalents 1,984 3,668 3,216 6,056
Cash and equivalents at beginning of period 24,797 16,741 23,565 14,353
--------- --------- --------- ---------
Cash and equivalents at end of period $26,781 $20,409 $26,781 $20,409
========= ========= ========= =========
Cash paid during period -Income taxes $14,366 $21,430 $22,866 $46,156
-Interest $1,822 $6,490 $7,038 $12,739
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
Page 5 of 17
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
7 and 8, 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 consolidated 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 January 26, 2002 and January 27,
2001 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 of this year we recorded an expense of $13.2 million
in cost of sales as a result of a restructuring plan. This plan involved
closing down three of our manufacturing facilities and converting two
others to warehousing, sub-assembly and import service operations. In the
fourth quarter of last fiscal year, we recorded a restructuring expense of
$11.2 million in cost of sales as a result of strategic decisions to
rationalize production capacity to achieve more efficient production
utilization and exit certain unprofitable product lines. Restructuring
liabilities along with charges to expense, cash payments or asset
write-offs were as follows:
Fiscal 2002
-----------------------
Cash
Payments
4/28/01 Charges to or Asset 1/26/02
(Amounts in thousands) Balance Expense* Write-offs Balance
- ----------------------- -------- ---------- ---------- -------
Fixed asset write-downs -- $6,200 ($6,200) --
Severance and benefit
related costs $1,200 4,000 (1,479) $3,721
Inventory write-downs -- 1,500 (1,500) --
Other 2,700 1,500 (1,750) 2,450
-------- ---------- ---------- --------
Total restructuring $3,900 $13,200 ($10,929) $6,171
======== ========== ========== ========
* All additions in this year are due to the restructuring announced in the
second quarter.
Page 6 of 17
Fiscal 2001
-----------------------
Cash
Payments
4/29/00 Charges to or Asset 4/28/01
(Amounts in thousands) Balance Expense Write-offs Balance
- ---------------------- -------- ---------- ---------- -------
Fixed asset write-downs -- $4,000 ($4,000) --
Severance and benefit
related costs -- 1,200 -- $1,200
Inventory write-downs -- 3,300 (3,300) --
Other -- 2,700 -- 2,700
-------- ---------- ---------- -------
Total restructuring -- $11,200 ($7,300) $3,900
======== ========== ========== =======
Note 4: Divestiture
Effective November 30, 2001, we sold the assets of our Pilliod Furniture
subsidiary to Michels South Carolina Incorporated. Pilliod, which produces
promotionally-priced bedroom and occasional furniture, was part of our
January 2000 acquisition of Greensboro, NC-based LADD Furniture, Inc. The
transaction generated a pretax loss of $11.7 million. Tax expense, however,
was favorably impacted with a tax benefit of $11.8 million resulting in a
small net gain with no earnings per share effect.
Note 5: Other Income: Insurance Recovery
Other income in the nine months ended January 27, 2001 included $4.9
million resulting from a business interruption insurance recovery.
Note 6: 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)
Third Quarter Ended Nine Months Ended
------------------- -----------------
(Amounts in thousands) 1/26/02 1/27/01 1/26/02 1/27/01
- ---------------------- ------- ------- ------- -------
Weighted average common
shares outstanding (basic) 60,827 60,240 60,837 60,615
Effect of options 235 159 163 154
------- ------- ------- -------
Weighted average common
shares outstanding (diluted) 61,062 60,399 61,000 60,769
======= ======= ======= =======
Page 7 of 17
Note 7: Accounting Change
Beginning with our 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 8: 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 units 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 units that comprise the Casegoods Group are Alexvale,
American Drew, American of Martinsville, Hammary, Kincaid, Lea and
Pennsylvania House. 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.
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 are shown below. Results
for the Casegoods Group include Pilliod through November 30, 2001.
Page 8 of 17
(Unaudited) (Unaudited)
(Amounts in thousands) Third Quarter Ended Nine Months Ended
- ---------------------- ------------------- -------------------
1/26/02 1/27/01 1/26/02 1/27/01
-------- -------- ------- ---------
Sales
- -----
Upholstery Group $397,388 $372,443 $1,097,346 $1,085,001
Casegoods Group 147,872 180,275 466,503 577,348
Eliminations (280) (699) (699) (923)
--------- --------- ---------- ----------
Consolidated $544,980 $552,019 $1,563,150 $1,661,426
========= ========= ========== ==========
Operating Income
- ----------------
Upholstery Group
Without restructuring $37,277 $30,767 $85,193 $91,377
Restructuring 0 0 (3,735) 0
--------- --------- ---------- ----------
Net Upholstery Group 37,277 30,767 81,458 91,377
Casegoods Group
W/O restructuring & divestiture 7,441 1,441 11,847 20,676
Restructuring 0 0 (9,452) 0
Loss on divestiture (11,689) 0 (11,689) 0
--------- --------- ---------- ----------
Net Casegoods Group (4,248) 1,441 (9,294) 20,676
Corporate expenses & other (7,360) (4,989) (17,912) (15,418)
--------- --------- ---------- ----------
Consolidated $25,669 $27,219 $54,252 $96,635
========= ========= ========== ==========
Page 9 of 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
Pilliod Divestiture
Effective November 30, 2001 we sold the assets of our Pilliod subsidiary that
operated in our Casegoods Group segment. Results of operations prior to November
30, 2001 are fully included in results of operations. You can find more
information on the Pilliod divestiture in Note 4 on page 7 as well as in the
various comments or analysis that follow.
Page 10 of 17
Results of Operations
Sales
Unaudited
-----------------------------------------------------------
Third Quarter Nine Months
--------------------------- -------------------------
FY02 FY02
$ Over Percent of Total $ Over Percent of Total
(Under) ---------------- (Under) ----------------
FY01 FY02 FY01 FY01 FY02 FY01
------- ------- ------- ------- ------- -------
Upholstery Group 7% 73% 67% 1% 70% 65%
Casegoods Group -18% 27% 33% -19% 30% 35%
Other N/A 0% 0% N/A 0% 0%
------- ------- ------- ------- ------- -------
Consolidated -1% 100% 100% -6% 100% 100%
======= ======= ======= ======= ======= =======
Operating Income
Unaudited
------------------------------------------------------
Third Quarter Nine Months
--------------------------- ------------------------
FY02 FY02
$ Over Percent of Sales $ Over Percent of Sales
(Under) ----------------- (Under) ----------------
FY01 FY02 FY01 FY01 FY02 FY01
------- ------ -------- ------- ------ -------
Upholstery Group
Without restructuring 21% 9.4% 8.3% -7% 7.8% 8.4%
Restructuring N/A N/A N/A N/M -0.3% 0.0%
------- ------ -------- ------- ------ -------
Net Upholstery Group 21% 9.4% 8.3% -11% 7.4% 8.4%
Casegoods Group
W/O restructuring
& divestiture 416% 5.0% 0.8% -43% 2.5% 3.6%
Restructuring N/A N/A N/A N/M -2.0% 0.0%
Loss on divestiture N/M -7.9% 0.0% N/M -2.5% 0.0%
------- ------ -------- ------- ------ -------
Net Casegoods Group -395% -2.9% 0.8% -145% -2.0% 3.6%
Corporate expenses & other 48% -1.4% -0.9% 16% -1.1% -0.9%
------- ------ -------- ------- ------ -------
Consolidated -6% 4.7% 4.9% -44% 3.5% 5.8%
======= ====== ======== ======= ====== =======
Also, see page 4 for the consolidated statement of income with analysis of
percentages and calculations.
Page 11 of 17
Third Quarter Ended January 26, 2002 Compared to Third Quarter Ended January 27,
2001.
Third quarter sales declined 1% from the prior year's third quarter. Upholstery
Group sales were up 7% while Casegoods Group sales declined 18%. Excluding
Pilliod from both periods, our Casegoods Group sales declined 13% vs. the
reported 18% decline including Pilliod.
We believe that our Upholstery Group sales performance was better than the
industry and most of our major competitors. Last quarter, the Upholstery Group's
sales were flat with the second quarter of the prior year. Therefore, the
current 7% third quarter increase compared to the prior year's third quarter
indicates positive sales momentum. The third quarter Upholstery Group
improvement occurred in large part at La-Z-Boy Furniture Galleries, which are a
major proprietary distribution channel for the Upholstery Group. Same store
retail sales at La-Z-Boy Furniture Galleries were up 16% from last year's third
quarter. Also, there were strong sales at our England and Bauhaus operating
units.
Based on industry data, residential furniture industry sales of casegoods
declined by double digit percentages across the country. Our Casegoods Group
sales were adversely affected by this residential industry downturn and the
impact of stronger competition from imported products. A more severe industry
decline in the U.S. hospitality (hotel/motel) market was particularly impacted
by the September 11, 2001 terrorist attack.
Gross profit as a percent of sales for the third quarter ended January 26, 2002
increased from 22.3% to 25.4%. This improvement, despite a 1% sales decline,
primarily reflects the results of management's efforts to adjust capacity and
fixed costs in response to a weak sales environment. In particular,
restructuring and other productivity improvements announced in April and October
are now positively impacting gross profit margins.
Selling, General & Administrative (S, G & A) expenses increased 6% or about $5.4
million. As a percent of sales, S, G & A increased from 17.4% to 18.6%.
Warehousing, research and development, employee benefits and information
technology expenses were up as a percent of sales.
Operating income margins declined from 4.9% of sales to 4.7%. Excluding the
effect of the pretax loss on the Pilliod divestiture, our consolidated profit
margin increased from 4.9% to 6.9%. We improved our margin in both of our
segments. The Upholstery Group's margin of 9.4% was higher than last year's
third quarter margin of 8.3%. Reasons for the Upholstery Group improvement
Page 12 of 17
include the 7% sales increase, higher productivity and reductions in plywood and
leather costs. The Casegoods Group's margin (excluding the loss on divestiture)
improved from 0.8% to 5.0%. The 5.0% margin was almost double the margin of the
second quarter. The Casegoods Group improvement compared to last year's third
quarter was due to major retailer bankruptcies which adversely affected the
prior year, a lower operating loss at Pilliod, and two restructurings and other
cost cutting measures to reflect reduced demand.
Income tax expense declined from 36.9% of pretax income to 8.2% due to the
effects of the Pilliod divestiture. Without the $11.8 million divestiture tax
benefit, the third quarter income tax rate would have been 39.0%, which is
comparable to the rate of the first six months of the year.
Nine Months Ended January 26, 2002 Compared to Nine Months Ended January 27,
2001.
Nine months sales declined 6% from the prior year primarily due to continued
weak furniture industry demand and impacts of retailers going out of business or
experiencing financial difficulties. Upholstery Group sales increased 1% while
Casegoods Group sales declined 19%. Excluding Pilliod from both periods, our
Casegoods Group sales declined 16% vs. the 19% reported decline.
Our Upholstery Group sales increased 1% from last year. We believe this was
better than the industry and most of our major competitors.
Based on industry data, furniture industry sales of casegoods declined by
double-digit percentages across the country. Our Casegoods Group sales were
adversely affected by this severe downturn in the casegoods segment of the
U.S. furniture industry and the impact of stronger competition from imported
products.
Selling, General & Administrative (S, G & A) expenses increased 3% or about $9.3
million. As a percent of sales, S, G & A increased from 17.2% to 18.8% in part
due to reduced sales volume. Warehousing, research and development, employee
benefits, advertising and information technology expenses were up as a percent
of sales.
Operating income margins declined from 5.8% of sales to 3.5%. Excluding the
effect of restructurings and the loss on the Pilliod divestiture, our profit
margin decreased from 5.8% to 5.1%. The Upholstery Group's margin of 7.8% was
less than last year's 8.4% primarily due to first quarter sales volume being
Page 13 of 17
below plan and higher health care expenses for the first six months of the year.
The Casegoods Group's margin (excluding restructuring expenses and the loss on
divestiture) declined from 3.6% of sales to 2.5%. The primary reason for the
decline was a 16% decline in sales (excluding Pilliod from both periods).
Interest expense declined 41%. As a percent of sales it declined from 0.8% last
year to 0.5%. This decline was due to reduced debt levels and lower interest
rates.
Other income decreased $7.9 million. Last year's second quarter included a $4.9
million business interruption insurance recovery.
Liquidity and Capital Resources
Cash flows from operations amounted to $100 million in the first nine months of
fiscal year 2002 compared to $65 million in the prior year. In the aggregate,
capital expenditures, dividends and stock repurchases totaled approximately $47
million during the first nine months, which was down from $62 million in the
first nine months of fiscal 2001.
Inventories declined 17% or $46 million from last year on a LIFO basis.
Inventories also declined 6% or $17 million compared to last quarter (our second
quarter) whereas at the end of January last year they decreased 1% from the
second to the third quarter. These declines were primarily due to the Pilliod
divestiture and 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 continued to pay down debt. In the third quarter of this year we paid down
$35 million, which brings our nine months net cash debt reductions to $70
million.
We believe we have a strong capital structure as evidenced by a low debt to
capitalization ratio of 16.9% as well as a strong current ratio and interest
coverage ratio. As of January 26, 2002, we had line of credit availability of
approximately $361 million under several credit agreements.
Capital expenditures were $11 million during the three months ended January 26,
2002 and $23 million for the nine months compared to last year's $6 million for
the quarter and $23 million for the nine months.
During the third quarter we repurchased approximately 24,000 shares of our
common stock, at an average price of $19.80 per share. On February 12, 2002, our
board of directors authorized the repurchase of up to an additional four million
shares of our stock at such times and prices deemed opportune by corporate
management. The previous three million shares repurchase authorization, approved
by the directors in February 2000, still had 590,000 shares remaining at
February 12, 2002.
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Outlook
We remain cautiously positive regarding the longer-term outlook for our industry
- - 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 the low U.S. interest rates and other more localized economic
forces to strengthen housing turnover and home remodeling - both strong drivers
of retail furniture demand.
In the shorter term we expect fourth quarter sales to decline a low single
digit percentage amount. We expect our Upholstery Group segment sales to show
low to mid single digit percentage improvements over the prior year driven in
part by much better sales order backlogs at the end of January this year than
last year. Backlogs are stronger in part due to many retailers raising their
lean current level of inventories to support higher current sales rates. We
expect our Casegoods Group segment to continue to have a double-digit percentage
decline in sales. The divestiture of the Pilliod operating unit is expected to
adversely affect Casegoods Group prior year sales comparisons for the next three
quarters. Casegoods Group sales backlogs at the end of January, similar to the
end of October, were measurably less than at the same period of the prior year.
We expect interest expense to continue to be substantially less next quarter
than in the prior year quarter.
We are anticipating the income tax rate in the upcoming fourth quarter to be
39.0% of pretax income. Excluding the tax effects of the divestiture of Pilliod,
the tax rate for the first nine months of this fiscal year was also 39.0%.
Because most of our April and October restructuring actions and the November
Pilliod disposition applied to our Casegoods Group segment, we are expecting
improved operating income margins for this segment in future quarters.
We estimate that our diluted net income per share (EPS) for the fourth quarter
ending April 2002 will be between $0.42 -$0.46 compared to $0.17 last year. Last
year's fourth quarter EPS included an $0.11 restructuring charge. EPS for the
year would be $1.02 - $1.06 or $1.15 -$1.19 exclusive of restructuring charges.
Last year EPS was $1.13 or $1.19 excluding restructuring charges and an
insurance gain.
We expect capital expenditures of approximately $30 million for the full year of
fiscal 2002. Last year we spent $37 million.
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 at 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
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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 indefinite-lived
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 $70 million borrowed at January 26, 2002. 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
until December 2003 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.
Page 16 of 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(11) Statement of Computation of Earnings per Share
See note 6 to the financial statements included in this
report.
(b) Reports on Form 8-K
We filed Forms 8-K on December 3 and 4, 2001 containing a press release
about the divestiture of Pilliod.
We filed a Form 8-K on January 18, 2002 containing a press release
about our expected third quarter financial results.
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 13, 2002 /s/ James J. Korsnack
---------------------
James J. Korsnack
Chief Accounting Officer
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