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 27, 2001 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 January 27, 2001
- ------------------------------ -------------------------------
Common Shares, $1.00 par value 60,258,537
LA-Z-BOY INCORPORATED
FORM 10-Q THIRD QUARTER OF FISCAL 2001
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
Basis of Presentation..........................................6
Interim Results................................................6
Recent Acquisitions............................................6-7
Other Income...................................................7
Earnings per Share.............................................7
Segment Information............................................8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Cautionary Statement Concerning Forward-Looking Statements....8-9
LADD Effects..................................................9
Results of Operations.........................................9-13
Liquidity and Capital Resources...............................13-14
Outlook.......................................................14-15
Item 3. Quantitative & Qualitative Disclosures About Market Risk...15
PART II Other Information
Item 6. Exhibits and Reports on Form 8-K..........................16
Signature Page............................................................16
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LA-Z-BOY INCORPORATED
CONSOLIDATED BALANCE SHEET
(Amounts in thousands, except par value)
Unaudited
---------------------------------------
Increase/(Decrease) Audited
Jan. 27, Jan. 22, ------------------ Apr. 29,
2001 2000 Dollars Percent 2000
------- ------- -------- -------- --------
Current assets
Cash & equivalents $20,409 $16,531 $3,878 23% $14,353
Receivables 365,469 268,165 97,304 36% 394,453
Inventories
Raw materials 103,044 58,711 44,333 76% 91,018
Work-in-process 67,074 47,181 19,893 42% 63,635
Finished goods 111,210 46,298 64,912 140% 98,623
------- ------- ------- ---- --------
FIFO inventories 281,328 152,190 129,138 85% 253,276
Excess of FIFO over LIFO (7,838) (23,405) 15,567 67% (7,473)
------- ------- ------- ---- --------
Total inventories 273,490 128,785 144,705 112% 245,803
Deferred income taxes 20,805 24,062 (3,257) -14% 22,374
Other current assets 11,103 10,176 927 9% 15,386
------- ------- ------- ---- --------
Total current assets 691,276 447,719 243,557 54% 692,369
Property, plant & equip., net 223,562 147,080 76,482 52% 227,883
Goodwill 113,486 102,301 11,185 11% 116,668
Trade names 134,545 - 134,545 N/M 135,340
Other long-term assets 48,768 43,805 4,963 11% 46,037
---------- -------- -------- ---- ----------
Total assets $1,211,637 $740,905 $470,732 64% $1,218,297
========== ======== ======== ==== ==========
Current liabilities
Current portion - long-term debt $1,604 $1,629 ($25) -2% $13,119
Current portion - capital leases 457 844 (387) -46% 457
Accounts payable 90,784 57,893 32,891 57% 90,392
Payroll/other compensation 55,667 44,261 11,406 26% 74,724
Income taxes 1,413 2,136 (723) -34% 5,002
Other current liabilities 47,875 28,201 19,674 70% 53,312
---------- -------- -------- ---- ----------
Total current liabilities 197,800 134,964 62,836 47% 237,006
Long-term debt 240,688 121,264 119,424 98% 233,938
Capital leases 2,739 1,983 756 38% 2,156
Deferred income taxes 52,488 5,380 47,108 876% 50,280
Other long-term liabilities 30,448 16,702 13,746 82% 31,825
Commitments & contingencies
Shareholders' equity
Common shares, $1 par 60,259 52,544 7,715 15% 61,328
Capital in excess of par 211,017 35,099 175,918 501% 211,450
Retained earnings 418,706 374,429 44,277 12% 392,458
Currency translation (2,508) (1,460) (1,048) -72% (2,144)
---------- -------- -------- ---- ----------
Total shareholders' equity 687,474 460,612 226,862 49% 663,092
Total liabilities and ---------- -------- -------- ---- ----------
shareholders' equity $1,211,637 $740,905 $470,732 64% $1,218,297
========== ======== ======== ==== ==========
<FN>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
</FN>
LA-Z-BOY INCORPORATED
CONSOLIDATED STATEMENT OF INCOME
(Amounts in thousands, except per share data)
(UNAUDITED)
THIRD QUARTER ENDED
-----------------------------------------------------
Percent of Sales
Jan. 27, Jan. 22, % Over -----------------
2001 2000 (Under) 2001 2000
----------- ----------- ----- ------ ------
Sales $531,392 $376,872 41% 100.0% 100.0%
Cost of sales 408,386 281,358 45% 76.9% 74.7%
----------- ----------- ----- ------ ------
Gross profit 123,006 95,514 29% 23.1% 25.3%
S, G & A 95,787 62,226 54% 18.0% 16.5%
----------- ----------- ----- ------ ------
Operating profit 27,219 33,288 -18% 5.1% 8.8%
Interest expense 4,821 2,128 127% 0.9% 0.6%
Interest income 502 320 57% 0.1% 0.1%
Other income 2,623 1,317 99% 0.5% 0.4%
----------- ----------- ----- ------ ------
Pretax income 25,523 32,797 -22% 4.8% 8.7%
Income tax expense 9,406 11,460 -18% 36.9% * 34.9% *
----------- ----------- ----- ------ ------
Net income $16,117 $21,337 -24% 3.0% 5.7%
=========== =========== ===== ====== ======
Basic EPS $0.27 $0.41 -34%
Diluted average shares 60,399 52,274 16%
Diluted EPS $0.27 $0.41 -34%
Dividends paid per share $0.09 $0.08 13%
(UNAUDITED)
NINE MONTHS ENDED
-------------------------------------------------------
Percent of Sales
Jan. 27, Jan. 22, % Over ----------------
2001 2000 (Under) 2001 2000
----------- ----------- ----- ------ ------
Sales $1,600,882 $1,086,267 47% 100.0% 100.0%
Cost of sales 1,220,062 808,904 51% 76.2% 74.5%
----------- ----------- ----- ------ ------
Gross profit 380,820 277,363 37% 23.8% 25.5%
S, G & A 284,185 184,122 54% 17.8% 16.9%
----------- ----------- ----- ------ ------
Operating profit 96,635 93,241 4% 6.0% 8.6%
Interest expense 13,670 5,433 152% 0.9% 0.5%
Interest income 1,284 1,526 -16% 0.1% 0.1%
Other income 9,099 3,025 201% 0.6% 0.3%
----------- ----------- ----- ------ ------
Pretax income 93,348 92,359 1% 5.8% 8.5%
Income tax expense 35,312 34,459 2% 37.8% * 37.3% *
----------- ----------- ----- ------ ------
Net income $58,036 $57,900 0% 3.6% 5.3%
=========== =========== ===== ====== ======
Basic EPS $0.96 $1.11 -14%
Diluted average shares** 60,769 52,498 16%
Diluted EPS $0.96 $1.10 -13%
Dividends per share $0.26 $0.24 8%
* 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)
Third Quarter Ended Nine Months Ended
------------------- -------------------
Jan. 27, Jan. 22, Jan. 27, Jan. 22,
2001 2000 2001 2000
--------- -------- -------- -------
Cash flows from operating activities
Net income $16,117 $21,337 $58,036 $57,900
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 8,981 6,833 31,019 18,961
Change in receivables 34,274 16,172 27,623 8,241
Change in inventories 1,889 (1,091) (27,686) (19,070)
Change in other assets and liabilities (27,253) (12,915) (31,978) (12,654)
Proceeds from insurance recovery - - 5,116 -
Change in deferred taxes (2,041) (563) 3,777 (3,117)
--------- -------- -------- -------
Total adjustments 15,850 8,436 7,871 (7,639)
--------- -------- -------- -------
Cash provided by operating activities 31,967 29,773 65,907 50,261
Cash flows from investing activities
Proceeds from disposals of assets 221 240 660 790
Capital expenditures (5,986) (6,849) (23,059) (28,801)
Acquisition of operating division, net of cash
acquired - (2,099) - (60,780)
Change in other investments (2,145) (3,726) 185 (6,039)
--------- -------- -------- -------
Cash used by investing activities (7,910) (12,434) (22,214) (94,830)
Cash flows from financing activities
Long term debt - - 77,000 57,000
Retirements of debt (15,148) (792) (81,765) (3,598)
Capital leases - 722 1,162 1,657
Capital lease principal payments (129) (440) (579) (642)
Stock for stock option plans 493 219 5,206 4,402
Stock for 401(k) employee plans 394 612 1,596 1,811
Purchase of La-Z-Boy stock (151) (9,916) (23,400) (20,862)
Payment of cash dividends (6,355) (4,170) (16,693) (12,544)
--------- -------- -------- -------
Cash provided/(used) by financing activities (20,896) (13,765) (37,473) 27,224
Effect of exchange rate changes on cash 507 188 (164) 326
--------- -------- -------- -------
Net change in cash and equivalents 3,668 3,762 6,056 (17,019)
Cash and equivalents at beginning of period 16,741 12,769 14,353 33,550
--------- -------- -------- -------
Cash and equivalents at end of period $20,409 $16,531 $20,409 16,531
========= ======== ======== =======
Cash paid during period -Income taxes $21,430 $15,957 $46,156 $39,264
-Interest $6,490 $1,478 $12,739 $4,144
<FN>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
</FN>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The interim financial information is prepared in conformity with generally
accepted accounting principles and such principles are applied on a basis
consistent with those reflected in our 2000 Annual Report on Form 10-K,
filed with the Securities and Exchange Commission. The financial
information included in these financial statements has been prepared by
management. The consolidated balance sheet as of April 29, 2000, has been
audited by our independent certified public accountants. The interim
financial information as of and for the interim periods ended January 27,
2001 and January 22, 2000 have been prepared on a basis consistent with,
but do not include all the disclosures contained in, the audited
consolidated financial statements for the year ended April 29, 2000. The
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.
2. Interim Results
The foregoing interim results are not necessarily indicative of the results
of operations for the full fiscal year ending April 28, 2001.
3. Recent Acquisitions
On January 29, 2000, we acquired LADD Furniture, Inc., then a publicly
traded furniture manufacturer, in a stock-for-stock merger, at which time
LADD became our wholly owned subsidiary. The holders of LADD stock received
approximately 9.2 million shares of La-Z-Boy common stock in consideration
for their LADD shares. In addition, LADD employee stock options then
outstanding were replaced with about 1 million La-Z-Boy stock options.
Total consideration, including acquisition costs, was about $190 million.
Annual sales for LADD's 1999 calendar year were over $600 million.
Additional information about the LADD acquisition is contained in the form
S-4 registration statement that we filed with the SEC to register the stock
to be issued to LADD shareholders as merger consideration.
On December 28, 1999, we acquired all of the outstanding equity securities
of the businesses now comprising Alexvale Furniture, Inc., a manufacturer
of medium-priced upholstered furniture, for a combination of cash and
La-Z-Boy common stock totaling about $17 million. Alexvale's calendar year
1999 sales were about $60 million.
We acquired Bauhaus USA, Inc., a manufacturer of upholstered furniture
primarily marketed to department stores, on June 1, 1999 for approximately
$59 million in cash. Bauhaus' annual calendar year 1999 sales were in
excess of $100 million.
The above acquisitions have been accounted for as purchases. The operations
of the above companies were included in our financial statements following
the acquisition dates.
The following unaudited pro forma financial information presents combined
results of operations of the above companies as if the acquisitions had
occurred as of the beginning of fiscal 2000. The pro forma financial
information gives effect to certain adjustments resulting from the
acquisitions and related financing. The pro forma financial information
does not necessarily reflect the results of operations that would have
occurred had the separate operations of each company constituted a single
entity during the periods presented.
(Unaudited) (Unaudited)
Third Quarter Ended Nine Months Ended
------------------- -----------------------
Actual Pro forma Actual Pro forma
(Amounts in thousands, Jan. 27, Jan. 22, Jan. 27, Jan. 22,
except per share data) 2001 2000 2001 2000
- ---------------------- -------- --------- ---------- ----------
Sales $531,392 $540,049 $1,600,882 $1,595,183
Net income $16,117 $23,878 $58,036 $69,198
Diluted earnings per share $0.27 $0.39 $0.96 $1.11
4. Other Income: Insurance Recovery
Other income in the nine months included $4.9 million resulting from a
business interruption insurance recovery associated with Hurricane Floyd.
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)
Third Quarter Ended Nine Months Ended
------------------- -------------------
Jan. 27, Jan. 22, Jan. 27, Jan. 22,
(Amounts in thousands) 2001 2000 2001 2000
- ---------------------- --------- -------- -------- ---------
Weighted average common
Shares outstanding (basic) 60,240 52,088 60,615 52,232
Effect of options 159 186 154 266
--------- -------- -------- ---------
Weighted average common
Shares outstanding (diluted) 60,399 52,274 60,769 52,498
========= ======== ======== =========
6. Segment Information
Our reportable operating segments are Residential upholstery, Residential
casegoods, and Contract. Financial results of our operating segments are as
follows:
(Unaudited) (Unaudited)
Third Quarter Ended Nine Months Ended
---------------------- --------------------
Jan. 27, Jan. 22, Jan. 27, Jan. 22,
(Amounts in thousands) 2001 2000 2001 2000
- ---------------------- ---------- --------- ---------- --------
Sales
Residential upholstery $356,352 $310,191 $1,041,190 $879,465
Residential casegoods 125,336 50,488 406,271 154,550
Contract 49,704 16,193 153,421 52,252
---------- --------- ---------- ---------
Consolidated $531,392 $376,872 $1,600,882 $1,086,267
========== ========= ========== =========
Operating profit
Residential upholstery $28,970 $30,358 $87,258 $83,433
Residential casegoods (82) 3,596 16,654 13,223
Contract 748 (109) 6,031 794
Unallocated corporate
costs & other (2,417) (557) (13,308) (4,209)
---------- --------- ---------- ---------
Consolidated $27,219 $33,288 $96,635 $93,241
========== ========= ========== ========
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
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 and industry conditions (for
example, changes in interest rates, changes in demographics and consumer
preferences, e-commerce developments, oil price changes 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, and changes in regulatory environment), and factors
relating to recent or future 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 forward-looking statements. We undertake no
obligation to update or revise any forward-looking statements for new
developments or otherwise.
LADD Effects
As a result of the LADD acquisition, most of our assets, liabilities and results
of operations for our first, second, and third quarters differed substantially
from those in comparable prior periods.
Results of Operations
Third Quarter Ended Jan. 27, 2001 Compared to Third Quarter Ended Jan. 22, 2000.
See page 4 for the consolidated statement of income with analysis of percentages
and calculations. In addition, see page 7 for pro forma analysis and comments.
(Unaudited)
Segment Analysis
Third Quarter Ended
-----------------------------------------------------
Sales Operating Profit
-------------------- -----------------------------
FY01 Over/
(Under) FY00 FY01 Percent of Sales
-------------------- Over ----------------
Pro (Under)
Actual forma FY00 FY01 FY00
---------- -------- ----- ---- ----
Residential upholstery 15% 1% (5%) 8.1% 9.8%
Residential casegoods 148% (6%) (102%) (0.1%) 7.1%
Contract 207% (19%) 786% 1.5% (0.7%)
Unallocated corp.
costs & eliminations N/A N/A 334% N/A N/A
--------- ------ ------ ---- ----
Consolidated 41% (2%) (18%) 5.1% 8.8%
========= ====== ====== ==== ====
Third quarter sales were up 41% over the prior year's third quarter due to
acquisitions. Pro forma sales were down 2% as per the table above. The 2% pro
forma sales decrease is primarily due to weakening furniture industry demand and
impacts of retailer financial difficulties; in particular, the recent
Heilig-Meyers, Montgomery Wards and Fleming Furniture bankruptcies. Our
residential casegoods segment sales were impacted much more than our residential
upholstery or contract segments from the bankruptcy filings because a greater
percentage of their sales were to these customers. On a positive note, our
proprietary distribution - most notably the La-Z-Boy Furniture Galleries -
continued to experience above-industry growth rates.
The 19% decrease in pro forma contract sales has followed pro forma robust
growth over the last few years. The assisted-living market is the primary area
of decline with some weakness in the office seating market as well as the
hospitality market. In calendar 1999, seven of the top ten skilled nursing
providers filed for some level of bankruptcy protection. The assisted-living
sector of the economy continued to suffer from high labor costs, patient
liability claims and reduced federal funding for facility care. The hospitality
sector was impacted by declining business and vacation travel related to higher
fuel costs. In the hospitality market growth slowed in the room supply business
due to reduced commitment to refurbishings and increased competition from
smaller regional competitors.
Gross profit as a percent of sales decreased to 23.1% from 25.3% in last year's
third quarter. The primary reason for the drop was the 2% pro forma decline in
sales volume and production declines to control inventory levels. We took
various actions to reduce costs as volume decreased, but those could not
entirely offset the effects on our fixed costs caused by the decline in sales.
Through attrition, a hiring freeze and layoffs our number of employees dropped
about 4% from last year on a pro forma basis. We took measurable down time and
reduced production at many plants. We also improved capacity utilization by
closing or combining parts of our plant production facilities. Production
declines were more than sales declines in the third quarter because of the
normal lag between a sales order slowdown and reducing on hand finished goods
inventory. With less production there was less overhead absorption and lower
gross margins.
Selling, General & Administrative (S, G & A) as a percent of sales has increased
from 16.5% to 18.0%. The primary areas that caused the increase as a percent of
sales compared to last year were bad debt expense, some sales/marketing expenses
like advertising and the unfavorable effects of recent acquisitions that had
higher than average S, G & A ratios. Bad debt expense was significantly higher
than in the prior year quarter due to the bankruptcies previously mentioned. We
increased our dollar expenditures slightly for advertising and other sales
expenses during this slowdown in order to continue to leverage our brand names.
In typical sales declines or slowdowns in the past we continued to agressively
advertise to put us in a better position for the future. A decline in our stock
and cash management incentive programs expense offset some of these expense
increases.
Operating profit as a percent of sales decreased from 8.8% last year to 5.1% in
this year`s third quarter. In general, sales volumes being below plan and below
last year, caused the drop in margins. Residential upholstery's operating margin
decreased compared to the prior year from 9.8% to 8.1%, primarily due to an
operating loss at one of our divisions which produces more promotional product
for department stores. Also, the mix of recently acquired residential upholstery
companies had much lower than average operating profit margins and contributed
to the drop in profitability compared to the prior year. Residential casegoods'
operating margin decreased from 7.1% to (0.1)%. The third quarter operating loss
of 0.1% of sales compares with operating profit of 7.0% of sales in the first
six months of this year. Bankruptcies affected our residential casegoods segment
much more than the residential upholstery segment; especially in our promotional
product lines. In addition, because residential casegoods builds finished goods
inventory to stock (instead of to a retail dealer order), there was a longer lag
time necessary to adjust to sales order declines. The items mentioned in the
Gross Margin paragraph above also unfavorably affected our casegoods segment
more than upholstery. Also, bad debts expense was much higher in our residential
casegoods segment than in our residential upholstery segment. Our contract
segment operating margin improved slightly from (0.7)% of sales last year to
1.5% this year; however, it dropped from 5.1% for the six months ended October,
2000. The contract segment improved from last year because of adding the more
profitable American of Martinsville division of LADD to the mix of companies in
that segment. The primary reason for the decline in margins from the six months
results was due to the 19% pro forma decline in sales which we were not able to
offset by cost declines in the short run.
Interest expense as a percent of sales increased from 0.6% last year to 0.9% due
to increased debt as a result of the financing obtained in connection with the
acquisition of LADD. In addition, interest rates were higher than last year.
Diluted net income per share decreased from $0.41 to $0.27 due primarily to the
items discussed above and the 16% increase in average diluted shares outstanding
due to the LADD acquisition.
Nine Months Ended Jan. 27, 2001 Compared to Nine Months Ended Jan. 22, 2000.
See page 4 for the consolidated statement of income with analysis of percentages
and calculations. In addition, see page 7 for pro forma analysis and comments.
(Unaudited)
Segment Analysis
Nine Months Ended
------------------------------------------------------
Sales Operating Profit
------------------- --------------------------
FY01 Over/
(Under) FY00 FY01 Percent of Sales
------------------- Over ----------------
Pro (Under)
Actual forma FY00 FY01 FY00
--------- ------- ----- ---- ----
Residential upholstery 18% 2% 5% 8.3% 9.5%
Residential casegoods 163% 0% 26% 4.1% 8.6%
Contract 194% (11%) 660% 3.9% 1.5%
Unallocated corp.
costs & eliminations. N/A N/A 216% N/A N/A
--------- ------- ----- ---- ----
Consolidated 47% 0% 4% 6.0% 8.6%
========= ======= ===== ==== ====
Nine months ended January sales were up 47% over the prior year's third quarter.
However, sales were basically flat compared to last year's pro forma sales. The
47% sales growth on a consolidated basis shown in the table above was primarily
due to acquisitions. The 11% decrease in pro forma contract sales follows a
robust growth period over the last few years and is partially associated with
the business interruption discussed in the Other Income section below. Contract
sales were weak across all of our lines of business in this segment.
Gross profit as a percent of sales for the nine months ended January decreased
from 25.5% last year to 23.8% in fiscal 2001. Major impacts on this lower profit
margin were the sales slowdown, production declines and acquisitions with lower
margins than those divisions that made up the company last year.
S, G & A for the nine months ended January were up from 16.9% of sales last year
to 17.8% with the most marked increases in bad debt expense, some sales expenses
and research and development expenses. The sales expense increases are
consistent with trends since the acquisition of LADD which has some divisions
with higher expenses as a percent of sales than other divisions. Higher research
and development expenditures were planned and represent targeted efforts to
improve both existing products and new products. Offsetting some of these
expense increases was a decline in our stock and cash management incentive
programs expense.
Operating profit was down from 8.6% last year to 6.0% for the nine months ended
January 27, 2001 due to many of the items discussed above. The decrease was
apparent in both the residential upholstery and residential casegoods segments
shown above. The contract segment, however, showed an improvement in operating
profit going from 1.5% to 3.9%, primarily because of the acquisition of LADD's
American of Martinsville division, which has a higher profit margin than our
other division in this segment.
Other income increased $4.9 million primarily due to a second quarter business
interruption insurance recovery. This one time cash recovery was primarily
related to the effects on future earnings of Hurricane Floyd that occurred in
September 1999. Some of the earnings effects were attributed to the current
fiscal year. This recovery was net of a $0.2 million receivable. A total of $5.1
million was recognized as an increase in cash flows from operating activities on
the enclosed Consolidated Statement of Cash Flows.
Interest expense was up 152% in total or as a percent of sales from 0.5% to
0.9%. This increase was due to increased debt associated with the 2000
acquisitions. In addition, interest rates were higher than last year.
Diluted net income per share decreased from $1.10 to $0.96 due primarily to the
items discussed above and the 16% increase in average diluted shares
outstanding. In addition, $0.05 of the decrease was due to the one time effect
of the second quarter insurance recovery.
Liquidity and Capital Resources
See pages 3 through 5 for our Consolidated Balance Sheet, Consolidated Statement
of Income, and Consolidated Statement of Cash Flows with analysis and
calculations.
Cash flows from operations amounted to $66 million in the first nine months of
fiscal year 2001 compared to $50 million in the prior year. In the aggregate,
capital expenditures, dividends and stock repurchases totaled approximately $63
million during the nine month period, which was about the same as in the first
nine months of fiscal 2000. Cash and cash equivalents increased by $6 million
during the nine month period compared to a decline of $17 million in the prior
year.
Our financial strength is reflected in three commonly used calculations. Our
current ratio (current assets divided by current liabilities) was 3.6 at January
27, 2001, 2.9 at April 29, 2000 and 3.3 at January 22, 2000. Our total
debt-to-capitalization percentage (total debt divided by shareholders' equity
plus total debt plus net deferred taxes) was 25.4% at January 27, 2001, 26.5% at
April 29, 2000, and 22.1% at January 22, 2000. Our interest coverage ratio (the
rolling twelve months net income plus income tax expense plus interest expense
divided by interest expense) was 8.9 at January 27, 2001, 10.4 at April 29, 2000
and 21.1 at January 22, 2000.
As of January 27, 2001, we had line of credit availability of approximately $196
million under several credit agreements. On May 12, 2000, we entered into a $300
million unsecured revolving credit facility with a group of banks and used the
proceeds to retire an unsecured $150 million bridge loan facility, which had
been put in place to finance the acquisition of LADD, and to also retire a $75
million unsecured revolving line of credit. The new revolving credit facility
uses a performance based interest rate grid with pricing ranging from LIBOR plus
.475% to LIBOR plus .800%. The current pricing under the facility is LIBOR plus
.550%.
During the third quarter we entered into several interest rate swaps with
counter-parties that are lenders under our revolving credit facility. We fixed
our interest rates on $70 million for a period of three years at an effective
rate of 6.095% plus our applicable borrowing spread under our revolving credit
agreement.
Capital expenditures were $6 million during the three months ended January 27,
2001 and $23 million for the nine months ended January 27, 2001, compared to
last year's $7 million for the quarter and $29 million for the nine months.
As of January 27, 2001, approximately 1.3 million of the 12 million La-Z-Boy
shares authorized for purchase on the open market were still available for
purchase by us.
Outlook
Our upcoming fourth quarter contains 13 weeks compared to 14 weeks in the prior
year. This will make the full fiscal year of 2001 contain 52 weeks compared to
last year's 53.
Our pro forma sales growth has declined from about 3% in the fourth quarter
ended April to 2% in the first quarter ended July, 1% in the second quarter
ended October, and 2% decrease in the third quarter ended January. (Comparisons
are to the prior year's comparable quarter.) Our proprietary sales have been the
bright spot in this unfavorable quarterly sales trend above. We are determined
to further strengthen our in-store gallery programs during the coming year.
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, along with housing turnover and home
remodeling - both strong drivers of retail furniture demand. Nevertheless,
current consumer sentiment remains highly unsettled, and we anticipate a very
challenging fourth fiscal quarter.
Interest expense is expected to flatten out compared to the fourth quarter of
fiscal 2000.
Other income is not expected to have a reoccurrence of a large insurance
recovery.
We estimate that our diluted net income per share for the fourth quarter ending
April 2001 will be between $0.30 and $0.40 compared to $0.49 last year.
We expect capital expenditures of approximately $30 million during fiscal 2001,
down from the $40 million we estimated at October 28, 2000. This compares to $38
million in 2000. 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 2001 from cash generated by operations and
borrowings under available lines of credit.
In June 1998, the Financial Accounting Board issued SFAS No. 133. "Accounting
for Derivative Instruments and Hedging Activities." As amended, this new
standard is effective for fiscal years beginning after June 15, 2000, which
means it will be effective for our first quarter of fiscal year 2002. SFAS No.
133 requires a company to recognize all derivative instruments as assets or
liabilities in its balance sheet and measure them at fair market value. We have
not yet determined the impact on our financial position or results of operations
of implementing SFAS No. 133.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" which
provided guidance on applying generally accepted accounting principles to
revenue recognition issues in financial statements. In June 2000, the SEC issued
SAB 101B delaying the implementation of SAB 101 until no later than the fourth
quarter of fiscal years beginning after December 15, 1999, which for us is the
current quarter ended April 2001. We have not yet determined the impact on our
financial position or results of operations of implementing SAB 101.
In September 2000, the Emerging Issues Task Force of the Financial Accounting
Standards Board reached a final consensus on the classification of shipping and
handling fees and costs that is applicable to the fourth quarter of our current
fiscal year ending April 2001. While this opinion has no impact on our financial
position, cash flow or net income; it may require reclassifications between
revenues and cost of sales for shipping and handling cost.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No information is presented in response to this item because we have no material
market risk relating to derivative financial instruments, derivative commodity
instruments, or other financial instruments.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)......Exhibits
(11).....Statement of Computation of Earnings
See note 5 to the financial statements included in this
report.
(b) Reports on Form 8-K
A Form 8-K containing a press release about our expected third quarter
financial results was filed with the SEC on December 22, 2000.
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 7, 2001 /s/ James J. Korsnack
---------------------
James J. Korsnack
Chief Accounting Officer