Financial Report
Report of Management Responsibilities
The management of La-Z-Boy Chair Company is responsible for the preparation of
the accompanying consolidated financial statements, related financial data,
and all other information included in the pages following. The financial
statements have been prepared in accordance with generally accepted accounting
principles and include amounts based on management's estimates and judgements
where appropriate.
Management is further responsible for maintaining the adequacy and effectiveness
of established internal controls. These controls provide reasonable assurance
that the assets of La-Z-Boy Chair Company are safeguarded and that transactions
are executed in accordance with management's authorization and are recorded
properly for the preparation of financial statements. The internal control
system is supported by written policies and procedures, the careful selection
and training of qualified personnel, and a program of internal auditing.
The accompanying report of the Company's independent accountants states their
opinion on the Company's financial statements, based on examinations conducted
in accordance with generally accepted auditing standards. The Board of
Directors, through its Audit Committee composed exclusively of outside
directors, is responsible for reviewing and monitoring the financial statements
and accounting practices. The Audit Committee meets periodically with the
internal auditors, management, and the independent accountants to ensure that
each is meeting its responsibilities. The Audit Committee and the independent
accountants have free access to each other with or without management being
present.
Charles T. Knabusch
Chief Executive Officer
Frederick H. Jackson
Chief Financial Officer
Report of Independent Accountants
Price Waterhouse
To the Board of Directors and Shareholders of La-Z-Boy Chair Company:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of cash flows and of changes in shareholders'
equity, present fairly, in all material respects, the financial position of
La-Z-Boy Chair Company and its subsidiaries at April 30, 1994 and April 24,
1993, and the results of their operations and their cash flows for each of the
three years in the period ended April 30, 1994, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted
our audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 8 to the Consolidated Financial Statements, on April 25,
1993, the Company changed its method of accounting for income taxes.
Price Waterhouse
Toledo, Ohio
June 2, 1994
Consolidated Statement of Income
(Amounts in thousands, except per share data)
- - -----------------------------------------------------------------------------
Year Ended April 30, April 24, April 25,
1994 1993 1992
(53 weeks) (52 weeks) (52 weeks)
- - -----------------------------------------------------------------------------
Sales................................ $804,898 $684,122 $619,471
Cost of sales........................ 593,890 506,435 453,055
--------- --------- ---------
Gross profit....................... 211,008 177,687 166,416
Selling, general and administrative.. 150,700 130,855 122,888
--------- --------- ---------
Operating profit................... 60,308 46,832 43,528
Interest expense..................... 2,822 3,260 5,305
Interest income...................... 1,076 1,474 1,093
Acquisition amortization............. (1,056) (1,039) (1,039)
Other income......................... 649 1,292 1,628
--------- --------- ---------
Total other income................. 669 1,727 1,682
Income before income tax expense..... 58,155 45,299 39,905
Income tax expense
Federal - current.................. 19,719 16,726 17,595
- deferred................. (445) (1,965) (5,417)
State - current.................. 4,283 3,254 2,627
- deferred................. (119) - -
--------- --------- ---------
Total tax expense................ 23,438 18,015 14,805
--------- --------- ---------
Net income before accounting change.. 34,717 27,284 25,100
Accounting change.................... 3,352 - -
--------- --------- ---------
Net income....................... $38,069 $27,284 $25,100
========= ========= =========
Weighted average shares.............. 18,268 18,172 18,064
========= ========= =========
Net income per share before
accounting change.................. $1.90 $1.50 $1.39
Accounting change.................... .18 - -
--------- --------- ---------
Net income per share............. $2.08 $1.50 $1.39
========= ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
Consolidated Balance Sheet
(Amounts in thousands, except par value)
- - ----------------------------------------------------------------------------
As of April 30, April 24,
1994 1993
- - ----------------------------------------------------------------------------
Assets
- - ------
Current Assets
Cash and equivalents.............................. $ 25,926 $ 28,808
Receivables, less allowances of $13,537 in 1994
and $10,500 in 1993............................. 183,115 169,950
Inventories
Raw materials................................... 31,867 27,555
Work-in-progress................................ 29,325 30,598
Finished goods.................................. 26,676 20,135
--------- ---------
FIFO inventories.............................. 87,868 78,288
Excess of FIFO over LIFO...................... (20,632) (17,801)
--------- ---------
Total inventories........................... 67,236 60,487
Deferred income taxes............................. 15,160 9,152
Other current assets.............................. 4,148 5,065
--------- ---------
Total Current Assets............................ 295,585 273,462
Property, plant and equipment, net.................. 94,277 90,407
Goodwill, less accumulated amortization of
$5,574 in 1994 and $4,668 in 1993................. 20,752 21,658
Other long-term assets, less allowances of
$1,257 in 1994 and $1,170 in 1993................. 19,639 15,537
--------- ---------
Total Assets.................................. $430,253 $401,064
========= =========
Consolidated Balance Sheet
(Amounts in thousands, except par value)
- - ----------------------------------------------------------------------------
As of April 30, April 24,
1994 1993
- - ----------------------------------------------------------------------------
Liabilities and Shareholders' Equity
- - ------------------------------------
Current Liabilities
Current portion of long-term debt................. $ 2,875 $ 542
Accounts payable.................................. 21,552 20,010
Payroll/benefits.................................. 29,453 28,411
Estimated income taxes............................ 3,882 9,011
Other current liabilities......................... 13,701 13,090
--------- ---------
Total Current Liabilities....................... 71,463 71,064
Long-term debt...................................... 52,495 55,370
Deferred income taxes............................... 6,949 4,857
Other long-term liabilities......................... 8,435 6,387
Shareholders' Equity
Preferred Shares - 5,000 authorized; 0 issued..... - -
Common shares, $1 par value - 40,000 authorized;
18,287 issued in 1994 and 18,195 in 1993........ 18,287 18,195
Capital in excess of par value.................... 10,147 8,494
Retained earnings................................. 263,348 236,842
Currency translation adjustments.................. (871) (145)
--------- ---------
Total Shareholders' Equity...................... 290,911 263,386
--------- ---------
Total Liabilities and Shareholders' Equity.... $430,253 $401,064
========= =========
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements. Certain April 24, 1993 balance sheet items have
been reclassed for comparability to April 30, 1994.
Consolidated Statement of Cash Flows
(Amounts in thousands) Increase (Decrease) in Cash and Equivalents
- - -----------------------------------------------------------------------------
Year Ended April 30, April 24, April 25,
1994* 1993 1992
(53 weeks) (52 weeks) (52 weeks)
- - -----------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income.............................. $ 38,069 $ 27,284 $ 25,100
Adjustments to reconcile net income to net
cash provided by operating activities:
Accounting change................... (3,352) - -
Depreciation and amortization....... 14,014 14,061 14,840
Change in receivables............... (13,165) (14,475) (7,039)
Change in inventories............... (6,749) (2,679) 2,599
Change in other assets and liab..... (168) 12,368 6,301
Change in deferred taxes............ (564) (1,965) (5,417)
--------- --------- ---------
Total adjustments................. (9,984) 7,310 11,284
--------- --------- ---------
Cash Provided by Operating
Activities...................... 28,085 34,594 36,384
Cash Flows from Investing Activities:
Proceeds from disposals of assets....... 177 2,100 508
Capital expenditures.................... (17,485) (12,248) (12,187)
Change in pref. stocks held as invest... - - 1,583
Change in other investments............. (2,981) (2,624) -
--------- --------- ---------
Cash Used for Investing Activities (20,289) (12,772) (10,096)
Cash Flows from Financing Activities:
Short-term debt......................... 727 1,767 4,444
Long-term debt.......................... - - 24,700
Change in unexpended IRB funds.......... - - 414
Retirements of debt..................... (1,269) (6,581) (39,285)
Sale of stock under stock option plans.. 1,850 1,372 1,973
Stock for 40l(k) employee plans......... 2,952 2,503 1,533
Purchase of La-Z-Boy stock.............. (2,928) (2,676) (388)
Payment of cash dividends............... (11,692) (10,902) (10,474)
--------- --------- ---------
Cash Used for Financing Activities (10,360) (14,517) (17,083)
Effect of exchange rate changes on cash... (318) (234) (428)
--------- -------- ---------
Net change in cash and equivalents........ (2,882) 7,071 8,777
Cash and equiv. at beginning of the year.. 28,808 21,737 12,960
--------- --------- ---------
Cash and equiv. at end of the year........ $25,926 $28,808 $21,737
========= ========= =========
Cash paid during the year - Income taxes.. $29,116 $16,789 $20,128
- Interest...... $2,675 $3,108 $5,105
For purposes of the Statement of Cash Flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to
be cash equivalents.
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
*Certain April 24, 1993 balance sheet items have been reclassed for
comparability to April 30, 1994.
Statement of Changes in Shareholders' Equity
(Amounts in thousands)
- - ------------------------------------------------------------------------------
Capital Currency
in Trans-
Excess lation
Common of Par Retained Adjust-
Shares Value Earnings ments Total
- - ------------------------------------------------------------------------------
Balance at April 27, 1991.. $17,979 $ 6,293 $203,934 $1,011 $229,217
Purchase of La-Z-Boy stock... (16) (372) (388)
Currency translation......... (602) (602)
Exercise of stock options.... 107 427 1,439 1,973
Exercise of 40l(k) stock..... 65 585 883 1,533
Dividends paid............... (10,474) (10,474)
Net income................... 25,100 25,100
-------- ------- --------- ------- ---------
Balance at April 25, 1992.. 18,135 7,305 220,510 409 246,359
Purchase of La-Z-Boy stock... (117) (2,559) (2,676)
Currency translation......... (554) (554)
Exercise of stock options.... 74 245 1,053 1,372
Exercise of 40l(k) stock..... 103 944 1,456 2,503
Dividends paid............... (10,902) (10,902)
Net income................... 27,284 27,284
-------- ------- --------- ------- ---------
Balance at April 24, 1993.. 18,195 8,494 236,842 (145) 263,386
Purchase of La-Z-Boy stock... (91) (2,837) (2,928)
Currency translation......... (726) (726)
Exercise of stock options.... 90 307 1,453 1,850
Exercise of 40l(k) stock..... 93 1,346 1,513 2,952
Dividends paid............... (11,692) (11,692)
Net income................... 38,069 38,069
-------- ------- --------- ------- ---------
Balance at April 30, 1994.. $18,287 $10,147 $263,348 ($871) $290,911
======== ======= ========= ======= =========
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
Notes to Consolidated Financial Statements
Note 1: Accounting Policies
The Company operates in the furniture industry. The following is a summary of
significant accounting policies followed in the preparation of these financial
statements.
Principles of Consolidation
The consolidated financial statements include the accounts of La-Z-Boy Chair
Company and its wholly owned subsidiaries. All significant intercompany
transactions have been eliminated.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined on
the last-in, first-out (LIFO) basis.
Property, Plant and Equipment
Items capitalized, including significant betterments to existing facilities,
are recorded at cost. Depreciation is computed using primarily accelerated
methods over the estimated useful lives of the assets.
Goodwill
The excess of the cost of operating companies acquired over the value of their
net assets is amortized on a straight-line basis over 30 years from the date
of acquisition.
Income Taxes
Income tax expense is provided on all revenue and expense items included in
the consolidated statement of income, regardless of the period such items are
recognized for income tax purposes. In fiscal 1994 the Company changed its
method of accounting for income taxes (see Note 8).
Note 2: Cash and Equivalents
(Amounts in thousands)
- - -----------------------------------------------------------------
April 30, April 24,
1994 1993
- - -----------------------------------------------------------------
Cash in bank........................... $ 5,926 $ 5,808
Certificates of deposit................ 20,000 15,000
Commercial paper....................... - 8,000
------- -------
Total cash and equivalents........... $25,926 $28,808
======= =======
The Company invests in certificates of deposit with a bank whose board of
directors includes three members of the Company's board of directors. At the
end of 1994 and 1993, $10 million and $15 million, respectively, was invested
in this bank's certificates.
Note 3: Property, Plant and Equipment
(Amounts in thousands)
- - ------------------------------------------------------------------
April 30, April 24,
1994 1993
- - ------------------------------------------------------------------
Land and land improvements............ $ 7,117 $ 6,604
Buildings and building fixtures....... 92,720 88,669
Machinery and equipment............... 82,971 73,281
Information systems................... 9,859 10,523
Other................................. 11,789 12,092
-------- --------
204,456 191,169
Less: accumulated depreciation....... 110,179 100,762
-------- --------
Property, plant and equipment, net.. $ 94,277 $ 90,407
======== ========
Note 4: Debt
(Dollar amounts in thousands)
- - -------------------------------------------------------------------------
Interest April 30, April 24,
rates Maturities 1994 1993
- - -------------------------------------------------------------------------
Credit lines.............. 4.1% 1995-98 $15,000 $15,000
Private placement......... 8.8% 1995-02 15,000 15,000
Industrial 2.7%-
revenue bonds........... 3.3% 1995-12 25,370 25,912
------- -------
Total debt................................... $55,370 $55,912
Less: current portion........................ 2,875 542
------- -------
Long-term debt............................... $52,495 $55,370
======= =======
Weighted average interest 4.8% 4.8%
Fair value of long-term debt $56,003 $56,597
In April 1991 the Company entered into a $50 million unsecured revolving
credit line (Credit Agreement) to extend through August 31, 1998, requiring
interest payments only through August 31, 1994 and periodic payments of
principal and interest through 1998. The Company is in the process of
renewing the Credit Agreement to require interest only payments through
August 1999 and to require principal payment in August 1999. The Credit
Agreement also includes covenants that, among other things, require the
Company to maintain certain financial statement ratios. The Company has
complied with all of the requirements.
Proceeds from industrial revenue bonds were used to finance the construction
of manufacturing facilities. These arrangements require the Company to insure
and maintain the facilities and make annual payments that include interest.
The bonds are secured by the facilities constructed from the bond proceeds.
Maturities on debt obligations for the five years subsequent to April 30,
1994 are $3 million, $2 million, $3 million, $2 million and $3 million,
respectively. As of April 30, 1994, the Company had remaining unused lines
of credit and commitments of $60 million under several credit arrangements.
Note 5: Stock Option Plans
The Company's shareholders adopted an employee stock option plan that provides
grants to certain employees to purchase common shares of the Company at not
less than their fair market value at the date of grant. Options are for five
years and become exercisable at 25% per year beginning one year from date of
grant. The Company is authorized to grant options for up to 1,600,000 common
shares.
- - --------------------------------------------------------------------
Number of Per share
shares option price
- - --------------------------------------------------------------------
Outstanding at April 25, 1992.... 415,942 $14.13 - $22.13
Granted........................ 133,750 $21.75
Exercised...................... (59,099) $14.13 - $22.13
Expired or cancelled........... (27,019)
- - --------------------------------------------------------------------
Outstanding at April 24, 1993.... 463,574 $14.13 - $22.13
Granted........................ 120,110 $29.63
Exercised...................... (78,584) $14.13 - $22.13
Expired or cancelled........... (15,126)
- - --------------------------------------------------------------------
Outstanding at April 30, 1994.... 489,974 $14.13 - $29.63
- - --------------------------------------------------------------------
Exercisable at April 30, 1994.... 193,915
Shares available for grants at
April 30, 1994................. 877,725
- - --------------------------------------------------------------------
The Company's shareholders have adopted Restricted Share Plans under which the
Compensation and Stock Option Committee of the Board of Directors was
authorized to offer for sale up to an aggregate of 650,000 common shares to
certain employees and non-employee directors at 25% of the fair market value
of the shares. The plans require that all shares be held in an escrow account
for a period of three years in the case of an employee, or until the
participant's service as a director ceases in the case of a director. In the
event of an employee's termination during the escrow period, the shares must
be sold back to the Company at the employee's cost.
Shares aggregating 11,800 and 14,450 were granted and issued during the fiscal
years 1994 and 1993, respectively, under the Restricted Share Plans. Shares
remaining for future grants under the above plans amounted to 442,075 at
April 30, 1994.
The Company's shareholders have also adopted a Performance-Based Restricted
Stock Plan. This plan authorizes the Compensation and Stock Option Committee
of the Board of Directors to award up to an aggregate of 400,000 shares to key
employees. Grants of shares are based entirely on achievement of goals over
a three-year performance period. Any award made under the plan will be at
the sole discretion of the Committee after judging all relevant factors. At
April 30, 1994, performance awards were outstanding pursuant to which up to
47,000 shares and 43,520 shares may be issued in fiscal years 1996 and 1997,
respectively, depending on the extent to which certain specified performance
objectives are met. The costs of performance awards are expensed over the
performance period.
Note 6: Retirement
The Company has contributory and non-contributory retirement plans covering
substantially all factory employees.
Eligible salaried employees are covered under a trusteed profit sharing
retirement plan. Cash contributions to a trust are made annually based on
profits.
The Company has established a non-qualified deferred compensation plan for
highly compensated employees called a SERP (Supplemental Executive Retirement
Plan).
The Company offers a voluntary 401(k) retirement plan to eligible employees
within all U.S. operating divisions. Currently over 70% of eligible employees
are participating in the plan. Employee contributions are matched with
La-Z-Boy stock at $0.50 on the dollar up to a maximum company contribution of
1% of pay.
The actuarially determined net periodic pension cost and retirement costs are
computed as follows (for the years ended):
(Amounts in thousands)
- - ------------------------------------------------------------------------------
April 30, April 24, April 25,
1994 1993 1992
(53 weeks) (52 weeks) (52 weeks)
- - ------------------------------------------------------------------------------
Service cost........................... $1,526 $1,426 $ 839
Interest cost.......................... 1,683 1,455 1,303
Actual return on plan assets........... (719) (2,197) (2,428)
Net amortization and deferral.......... (1,575) (234) 233
------- ------- -------
Net periodic pension cost............ 915 450 (53)
Profit sharing......................... 4,659 4,341 3,557
SERP................................... 795 691 559
40l(k)................................. 1,145 1,002 835
Other.................................. 442 478 726
------- ------- -------
Total retirement costs............... $7,956 $6,962 $5,624
======= ======= =======
The funded status of the pension plans was as follows:
(Amounts in thousands)
- - ------------------------------------------------------------------------------
April 30, April 24,
1994 1993
- - ------------------------------------------------------------------------------
Actuarial present value of accumulated benefit
obligation........................................ ($23,887) ($19,608)
Plan assets at fair value........................... 28,531 27,134
--------- ---------
Excess of plan assets over projected benefit
obligation...................................... 4,644 7,526
Prior year service cost not yet recognized in net
periodic pension cost............................. 1,117 1,215
Unrecognized net loss............................... 5,274 1,895
Unrecognized initial asset.......................... (3,995) (4,326)
--------- ---------
Prepaid pension asset............................. $7,040 $6,310
========= =========
The expected long-term rate of return on plan assets was 8.5% for 1994 and 9.0%
for 1993 and 1992. The discount rate used in determining the actuarial present
value of accumulated benefit obligations was 7.5% for 1994, 8.0% for 1993 and
8.5% for 1992. Vested benefits included in the accumulated benefit obligation
were $21 million and $17 million at April 30, 1994 and April 24, 1993,
respectively. Plan assets are invested in a diversified portfolio that
consists primarily of debt and equity securities.
The Company's pension plan funding policy has been to contribute annually the
maximum amount that can be deducted for federal income tax purposes.
Note 7: Health Care
The Company offers eligible employees an opportunity to participate in group
health plans. Participating employees make required premium payments through
pretax payroll deductions.
Health-care expenses were as follows (for the years ended):
(Amounts in thousands)
- - ----------------------------------------------------------------------------
April 30, April 24, April 25,
1994 1993 1992
(53 weeks) (52 weeks) (52 weeks)
- - ----------------------------------------------------------------------------
Gross health care................. $29,061 $23,962 $22,298
Participant payments.............. (4,442) (2,356) (1,323)
-------- -------- --------
Net health care................. $24,619 $21,606 $20,975
======== ======== ========
The 1994 gross health-care expenses increased 21% over 1993 which was a much
higher rate of increase than 1993's 7% increase over 1992, even after
adjusting for employment increases.
Participant payments increased markedly due to premium payments for most
employees becoming effective January 1993 making 1994 the first full payment
year. Participant payments covered 15% of health-care expenses in 1994.
Net health-care costs in 1994 increased 14% over 1993 compared to a 3% increase
in 1993 over 1992 even though much higher participant payments occurred.
The Company makes annual provisions for any current and future retirement
health-care costs which may not be covered by retirees' collected premiums.
Note 8: Income Taxes
Effective April 25, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109 (SFAS 109), "Accounting for Income Taxes," which applies a
balance sheet approach to income tax accounting. In accordance with the new
standard, the balance sheet reflects the anticipated tax impact of future
taxable income or deductions implicit in the balance sheet in the form of
temporary differences. These temporary differences reflect the difference
between the basis in assets and liabilities as measured in the financial
statements and as measured by tax laws using enacted tax rates. On April 25,
1993, the Company recorded a tax credit of $3 million or $0.18 per share,
which represents the net increase in the net deferred tax asset as of that
date. Such amount has been reflected in the consolidated statement of
income as an accounting change. Prior years' financial statements have not
been restated.
The primary components of the Company's deferred tax assets and liabilities as
of April 30, 1994 and April 25, 1993 (date of adoption) are as follows:
(Amounts in thousands)
- - ---------------------------------------------------------------------------
April 30, April 25,
1994 1993
- - ---------------------------------------------------------------------------
Current
Deferred income tax assets (liabilities):
Bad debt................................... $ 5,993 $ 4,628
Warranty................................... 2,703 2,496
Workers' compensation...................... 1,211 1,118
Inventory.................................. 916 1,186
State income tax........................... (40) 1,569
Other...................................... 4,881 2,794
-------- --------
Net current deferred tax assets.......... 15,664 13,791
Noncurrent
Deferred income tax assets (liabilities):
Property, plant and equipment.............. (4,372) (4,108)
Pension.................................... (2,899) (2,638)
Other...................................... 322 408
------- -------
Net noncurrent deferred tax liabilities.. (6,949) (6,338)
Valuation allowance.......................... (504) (342)
------- -------
Net deferred tax asset..................... $8,211 $7,111
======= =======
The differences between the provision for income taxes and income taxes
computed using the U.S. federal statutory rate are as follows (for the years
ended):
(% of pretax income)
- - ------------------------------------------------------------------------------
April 30, April 24, April 25,
1994 1993 1992
- - ------------------------------------------------------------------------------
Statutory tax rate......................... 35.0 34.0 34.0
Increase (reduction) in taxes resulting in:
State income taxes net of federal benefit.. 4.8 4.7 4.3
Tax credits................................ (0.2) (0.3) (1.0)
Acquisition amortization................... 0.7 0.9 0.9
Merger of previously acquired operation.... - - (0.7)
Miscellaneous items........................ 0.0 0.5 (0.4)
----- ----- -----
Effective tax rate......................... 40.3 39.8 37.1
===== ===== =====
Note 9: Contingencies
The Company has been named as defendant in various lawsuits arising in the
normal course of business. It is not possible at the present time to estimate
the ultimate outcome of these actions; however, management and the Company's
legal counsel believe that the resultant liability, if any, will not be
material.
The Company is also subject to contingencies pursuant to environmental laws
and regulations. The Company accrues for certain environmental remediation
activities related to past operations, including Superfund clean-up and Resource
Conservation and Recovery Act compliance activities, for which commitments
have been made and reasonable cost estimates are possible. Currently, the
Company has been determined to be a "de-minimus" level potentially responsible
party (PRP) at three clean-up sites and has provided for any known costs
relating to these sites. The Company is also conducting voluntary compliance
audits at Company owned facilities. Although there probably will be future
expenditures in this area, the effect on future financial results is not
subject to reasonable estimation. However, management does not anticipate
that they will have a material adverse effect.
Management Discussion
The Management Discussion and Analysis, as required by the Securities and
Exchange Commission, should be read in conjunction with the Report of
Management Responsibilities, the Report of Independent Accountants, the
Financial Statements and related Notes, and all other pages that follow them
in the annual report.
Background
- - -------------------------------------------------------------------------
Sales by Type 1994 1993 1992
- - -------------------------------------------------------------------------
Residential (Home)
Upholstery............................... 76% 74% 75%
Wood & Other............................. 18% 19% 17%
---- ---- ----
94% 93% 92%
Contract (Office).......................... 6% 7% 8%
---- ---- ----
100% 100% 100%
==== ==== ====
- - -------------------------------------------------------------------------
Sales by Country 1994 1993 1992
- - -------------------------------------------------------------------------
United States.............................. 94% 95% 95%
Canada and Foreign......................... 6% 5% 5%
---- ---- ----
100% 100% 100%
==== ==== ====
La-Z-Boy is organized into five operating divisions. Residential (67 years in
business) accounts for the majority of the upholstery category. Kincaid (48
years) is part of the wood category. La-Z-Boy Contract Furniture Group (22
years) is all of the Contract line. Hammary (50 years) is primarily in the
wood category. La-Z-Boy Canada (65 years) is part of the upholstery category.
La-Z-Boy's market share of all U.S. upholstery furniture products is above 8%.
On the basis of available market share data (in dollars), La-Z-Boy has 30-35%
of the U.S. single-seat recliner market and is the world's largest recliner
manufacturer. (The next largest U.S. competitor holds roughly 20% of the
U.S. market.) La-Z-Boy's sleep sofa current market share, approximately
12%, has been growing over the last three years.
Market share data by individual product lines other than recliners and sleepers
(e.g., sofas, reclining sofas, wood bedroom and dining room, wood occasional,
etc.) indicate that, although La-Z-Boy does not have a market share above 10%
in any one line, the Company's market share has been growing over the last
three years in most lines.
Analysis of Operations
Year Ended April 30, 1994
(1994 compared with 1993)
U.S. furniture industry sales increased roughly 6-8% in La-Z-Boy's fiscal 1994
over 1993. La-Z-Boy's sales increase of 18% over 1993 continued to exceed the
increase experienced by the industry as a whole. Approximately 2% of this
increase was due to 1994 including 53 weeks while 1993 contained 52 weeks.
The sales volume increase was largely due to improvements in the economy.
Selling price increases were generally in the 2-4% range. Major product lines
that experienced rates of unit growth above the Company average were the
modulars, lower end recliners, sofas, reclining sofas, high end recliners and
bedroom (wood).
No divisions or companies were acquired or disposed of during the last six
years. Therefore, all sales growth has been internally generated.
During 1994, the La-Z-Boy Contract Furniture Group was formed through the
merger of the former La-Z-Boy Contract and RoseJohnson divisions.
The number of independently owned La-Z-Boy Furniture Galleries stores continued
to grow in 1994. Most of these stores were major upgrades or new locations
for earlier generation La-Z-Boy Showcase Shoppes. These stores are part of
the reason La-Z-Boy sales growth has exceeded the industry average. In
addition, the number of smaller in-store galleries continued to grow for all
divisions.
The gross margin (gross profit dollars as a percent of sales) of 26.2% in 1994
was up from the 26.0% gross margin in 1993. Reasons for the improvement
include: the 18% sales increase covering fixed costs; the lack of some one-
time costs that affected last year relating to start-up and training for new
styles and changes to manufacturing techniques; real selling price increases
and better plant efficiencies. These reasons for improvement more than offset
the effects of increased sales of product lines with lower-than-average gross
margins and increased lumber and health-care costs.
Other income declined in 1994 due to a reduction in interest income, changes
in pension-related assumptions and Canadian currency exchange losses.
Income tax expense as a percent of pretax income increased to 40.3% in 1994
from 39.8% in 1993. The effect of the 1% increase in the federal tax rate to
35% was partially offset by changes in profitability among divisions.
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes", which changed the method of accounting for income taxes, was adopted
by the Company effective April 25, 1993. This change in accounting principle
increased net income and the net deferred tax asset by $3.4 million or $.18
per share.
Analysis of Operations
Year Ended April 24, 1993
(1993 compared with 1992)
La-Z-Boy's 1993 sales increase of 10% over 1992 once again exceeded the growth
in the U.S. residential furniture industry as a whole. The 1993 sales increase
together with forecasted growth in the industry indicates that the furniture
industry recession which adversely affected results for the previous four years
has ended. Selling price increases during 1993 were generally in the 1-3%
range. Major product lines that experienced rates of unit sales growth above
the Company average were the reclining sofa, high end recliner, lower end
recliners, bedroom (wood) and occasional (wood) product lines.
During 1993, 18 independently owned La-Z-Boy Furniture Galleries stores opened,
bringing the total number of stores to 63. The rate of new store openings and
their sales volumes are meeting management's expectations. Most of these
openings were major upgrades or new locations for earlier generation La-Z-Boy
Showcase Shoppes.
Gross margin of 26.0% in 1993 was down from the 26.9% gross margin in 1992
even though unit volume increased. This decline in gross margin was primarily
in the Residential division which generates roughly 70% of consolidated sales.
The Residential division gross margin declined for two main reasons. The
primary reason was that unexpectedly high labor and overhead costs were
incurred at most plants. These costs were primarily caused by the introduction
of new styles and efforts to improve plant methods while at the same time,
reduce inventories, improve the flexibility to handle a greater number of
different styles, and ship dealer orders more complete and quicker than in the
past. In addition, an anticipated unfavorable product line mix effect occurred
from selling more product lines with lower-than-average gross margins.
S,G & A expense for 1993 of 19.2% of sales was lower than last year's percentage
of 19.9% primarily due to the relatively large sales increase and a decline in
bad debt expense.
Interest expense declined $2.0 million in 1993 from 1992 due to a combination
of lower debt principal amounts and lower interest rates.
The increase in other income was primarily due to increased interest income
realized from higher cash balances throughout the year more than offsetting
lower interest rates.
Income tax expense as a percent of pretax income increased to 39.8% in 1993
from 37.1% in 1992. In 1992, there was a one-time tax benefit from the merger
of a previously acquired division.
Liquidity and Financial Condition
Cash flows from operations amounted to $28 million in 1994, $35 million in
1993 and $36 million in 1992 and have usually been adequate for day-to-day
expenditures, dividends to shareholders and capital expenditures.
The 1994 cash flow from operations declined $6.5 million from 1993. Other
assets and liabilities changed from a source of cash in 1993 to a use of cash
in 1994 primarily due to the payment of income taxes. Also, inventories
increased $6.7 million.
Capital expenditures were $17.5 million in 1994 compared to $12.2 million for
both 1993 and 1992. Some capacity expansions occurred in 1994 while the prior
two years did not require expansions. Capacity utilization of about 70% at
the end of 1994 was up from about 65% at the end of 1993.
Cash flows relating to debt caused both inflows and outflows of cash. No new
debt was raised in the last three years. During 1992, a $15.0 million bridge
loan was refinanced through a private placement and two industrial revenue
bonds totaling $9.7 million were refinanced at a lower interest rate.
Retirements of debt totaled between $1 million and $15 million for each of the
last three years and are primarily related to paying down the $53 million debt
incurred in 1987 to acquire an operating division. While the cash flow
statement shows that $39.3 million of debt was retired in 1992, $24.7 million
relates to refinancing as described above.
In October 1987, the La-Z-Boy Board of Directors authorized a one-million
share stock repurchase program. In February 1993, the Board authorized the
repurchase of another one million shares. As of April 30, 1994 and April 24,
1993, the Company had acquired about 1,010,000 and 930,000 shares, respectively,
of its own stock. The Company plans to be in the market for its shares as
changes in its stock price and other financial opportunities arise.
The financial strength of the Company is reflected in two commonly used ratios
- - -the current ratio (current assets divided by current liabilities) and the
debt-to-capital ratio (total debt divided by beginning of the year shareholders'
equity plus total debt). The current ratio at the end of 1994 and 1993 was
4.1:1 and 3.8:1, respectively. The debt to capital ratio was 17.4% at the end
of 1994 and 18.5% at the end of 1993.
La-Z-Boy provides for all current and future potential liabilities as required
including those relating to postretirement benefits.
The Company is subject to contingencies pursuant to environmental laws and
regulations. The Company accrues for certain environmental remediation
activities related to past operations, including Superfund clean-up and
Resource Conservation and Recovery Act compliance activities, for which
commitments have been made and reasonable cost estimates are possible.
Currently, the Company has been determined to be a "de-minimus" level
potentially responsible party (PRP) at three clean-up sites and has provided
for any known costs relating to these sites. The Company is also conducting
voluntary compliance audits at Company owned facilities.
Outlook
La-Z-Boy's 1995 fiscal year to end April 29, 1995 will include 52 weeks
compared to fiscal year 1994, which included 53 weeks. This is approximately
a 2% reduction in the length of the year which will affect sales and other
financial comparisons from year to year.
The Company expects the economic recovery to continue through calendar year
1994. Sales in fiscal year 1995 are expected to exceed the 1994 results but
due to the stronger than expected year in 1994, the double digit sales
increase experienced in 1994 is not expected to repeat.
One of La-Z-Boy's financial objectives is to achieve sales increases of 10%
per year or increases at least greater than that of the furniture industry.
Some furniture industry forecasts for calendar year 1994 over 1993 are in the
5-7% range. For 1994, La-Z-Boy sales increased 18% over 1993.
The Company's major residential efforts and opportunities for sales growth
greater than industry averages are focused outside the recliner market segment,
e.g., stationary upholstery (single and multi-seat), reclining sofas and
modulars, wood occasional and wall units and wood bedroom and dining room.
The newly formed La-Z-Boy Contract Furniture Group sales growth rate in the
next few years is expected to exceed the average of the other divisions.
Today, this division is not generating a profit and profits are not expected
to improve in 1995 due to large research and development expenditures,
reorganization costs and start-up costs associated with the recent merger of
the two formerly separate contract divisions. Eventually, profit margins
comparable to the Company's average rates are believed to be able to be
achieved. Profitability at this level would help the Company reach the
financial goals described below even though this division is not large enough
to dramatically affect the results.
A second financial goal is to improve operating profit as a percent of sales
in 1995 compared to 1994. For 1994, the operating profit margin was 7.5% of
sales.
A third goal is to achieve operating profit, interest income and other income
(return) as a percent of beginning of the year capital of 20%. For 1994,
return on capital was 19.4%.
La-Z-Boy has an opportunity to improve its margins through increases in
efficiency, improvements in the utilization of equipment and facilities and
increases in sales volumes, even though product line growth may be in lines
with lower gross margins.
Capital expenditures are forecast to be approximately $19 to $24 million in
1995 compared to $17.5 million in 1994. The 1995 forecast includes the
construction of a new upholstery factory in Arkansas. The 396,000 square foot
plant is being constructed to replace an existing older 200,000 square foot
plant. Long-term financing of the expected $7 million cost is planned to be
through the use of industrial revenue bonds.
The effect of environmental costs on future financial results is not subject
to reasonable estimation. However, management does not anticipate that they
will have a material adverse effect.
Consolidated Six-Year Summary of Selected Financial Data
(Dollar amounts in thousands, except per share data)
- - -------------------------------------------------------------------------------
Year Ended in April 1994 1993 1992 1991 1990 1989
(53 wks) (52 wks) (52 wks) (52 wks) (52 wks) (52 wks)
- - -------------------------------------------------------------------------------
Sales.............. $804,898 $684,122 $619,471 $608,032 $592,273 $553,187
Cost of sales...... 593,890 506,435 453,055 449,502 430,383 397,776
--------- --------- --------- --------- --------- ---------
Gross profit..... 211,008 177,687 166,416 158,530 161,890 155,411
Sell, gen & admin.. 150,700 130,855 122,888 115,239 111,613 106,937
--------- --------- --------- --------- --------- ---------
Oper profit...... 60,308 46,832 43,528 43,291 50,277 48,474
Interest expense... 2,822 3,260 5,305 6,374 7,239 7,567
Interest income.... 1,076 1,474 1,093 1,215 1,597 1,864
Acquisition amort.. (1,056) (1,039) (1,039) (1,039) (1,039) (1,041)
Other income....... 649 1,292 1,628 1,277 1,939 2,244
--------- --------- --------- --------- --------- ---------
Total other inc.. 669 1,727 1,682 1,453 2,497 3,067
--------- --------- --------- --------- --------- ---------
Income before tax.. 58,155 45,299 39,905 38,370 45,535 43,974
Income tax expense. 23,438 18,015 14,805 15,009 17,282 16,508
--------- --------- --------- --------- --------- ---------
Net income....... $34,717* $27,284 $25,100 $23,361 $28,253 $27,466
========= ========= ========= ========= ========= =========
Weighted avg shares
outstg ('000s)... 18,268 18,172 18,064 17,941 17,868 17,886
Per com shr outstg
Net income....... $1.90* $1.50 $1.39 $1.30 $1.58 $1.54
Cash div paid.... $0.64 $0.60 $0.58 $0.56 $0.54 $0.46
BV on YE shr outst. $15.91 $14.48 $13.58 $12.75 $11.98 $10.91
Rtn avg shrhdr eqt. 12.5%* 10.7% 10.6% 10.5% 13.8% 14.7%
Gr prft % of sales. 26.2% 26.0% 26.9% 26.1% 27.3% 28.1%
Op prft % of sales. 7.5% 6.8% 7.0% 7.1% 8.5% 8.8%
Op prft, int inc &
oth inc as % of
BOY capital...... 19.4% 16.2% 15.4% 15.6% 19.6% 19.3%
Net inc % of sales. 4.3%* 4.0% 4.1% 3.8% 4.8% 5.0%
Income tax expense
% pretax income.. 40.3% 39.8% 37.1% 39.1% 38.0% 37.5%
- - -------------------------------------------------------------------------------
Deprec & amortiz... $14,014 $14,061 $14,840 $14,039 $13,735 $13,607
Capital expendtrs.. $17,485 $12,248 $12,187 $21,428 $22,418 $9,334
Prty,plt,eqpt,net.. $94,277 $90,407 $93,440 $95,508 $89,141 $79,845
- - -------------------------------------------------------------------------------
Working capital.... $224,122 $202,398 $184,431 $172,989 $170,292 $158,947
Current ratio...... 4.1 to 1 3.8 to 1 3.7 to 1 3.7 to 1 3.4 to 1 3.1 to 1
Total assets....... $430,253 $401,064 $376,722 $363,085 $361,856 $349,007
- - -------------------------------------------------------------------------------
Long-term debt..... $52,495 $55,370 $55,912 $62,187 $69,066 $70,641
Debt............... $55,370 $55,912 $60,726 $70,867 $78,036 $80,244
Shareholders' eqty. $290,911 $263,386 $246,359 $229,217 $214,585 $194,293
Ending capital..... $346,281 $319,298 $307,085 $300,084 $292,621 $274,537
Ratio debt to eqty. 19.0% 21.2% 24.6% 30.9% 36.4% 4l.3%
Ratio debt to capl. 17.4% 18.5% 20.9% 24.8% 28.7% 31.0%
- - -------------------------------------------------------------------------------
Shareholders....... 12,615 9,032 8,081 7,208 6,827 4,843
Employees.......... 9,370 8,724 8,153 7,828 8,046 7,743
- - -------------------------------------------------------------------------------
*Excludes the income effect of adopting SFAS 109 in May 1993 of $3,352 or
$.18 per share.
Dividend and Market Information
----------------------------------------------------
1994 Divi- Market Price
Quarter dends -------------------------------
Ended Paid High Low Close
----------------------------------------------------
July 24 $0.15 $31 7/8 $25 1/2 $29 3/4
Oct. 23 0.15 31 7/8 29 1/4 31 3/8
Jan. 22 0.17 39 3/4 31 1/2 39 3/4
Apr. 30 $0.17 $40 $30 1/2 $33 1/2
-----
$0.64
=====
----------------------------------------------------
1993 Divi- Market Price
Quarter dends -------------------------------
Ended Paid High Low Close
-----------------------------------------------------
July 25 $0.15 $24 5/8 $21 $23 3/8
Oct. 24 0.15 24 3/8 18 20 3/8
Jan. 23 0.15 27 1/8 20 5/8 26 3/8
Apr. 24 $0.15 $29 3/4 $26 3/8 $28
-----
$0.60
=====
- - -------------------------------------------------------------------------------
Dividend Market Price P/E Ratio
Dividends Dividend Payout ----------------------- ---------
Year Paid Yield Ratio High Low Close Earnings High Low
- - -------------------------------------------------------------------------------
1994 $0.64 1.9% 33.7%* $40 25 1/2 33 1/2 $1.90* 21* 13*
1993 0.60 2.1% 40.0% 29 3/4 18 28 l.50 20 12
1992 0.58 2.5% 41.7% 28 3/4 19 1/2 23 1/2 1.39 21 14
1991 0.56 2.6% 43.1% 21 1/2 12 1/4 21 1/4 1.30 17 9
1990 0.54 2.8% 34.2% 23 16 3/4 19 5/8 1.58 15 11
1989 0.46 2.4% 29.9% 19 7/8 14 19 1/8 1.54 13 9
La-Z-Boy Chair Company common shares are traded on the NYSE and the PSE
(symbol LZB).
Unaudited Quarterly Financial Information
(Amounts in thousands, except per share data)
- - -------------------------------------------------------------------------------
Quarter Ended July 24 October 23 January 22 April 30 Year 1994
(13 weeks) (13 weeks) (13 weeks) (14 weeks) (53 weeks)
- - -------------------------------------------------------------------------------
Sales............ $162,096 $209,044 $192,648 $241,110 $804,898
Cost of sales.... 123,047 152,160 141,771 176,912 593,890
-------- -------- -------- --------- ---------
Gross profit... 39,049 56,884 50,877 64,198 211,008
Selling, general
& admin........ 32,249 39,204 36,877 42,370 150,700
-------- -------- -------- --------- ---------
Opertg profit.. 6,800 17,680 14,000 21,828 60,308
Interest expense. 720 776 682 644 2,822
Total other inc.. 457 411 153 (352) 669
-------- -------- -------- --------- ---------
Inc before tax. 6,537 17,315 13,471 20,832 58,155
Income tax exp... 2,563 6,900 5,483 8,492 23,438
-------- -------- -------- --------- ---------
Net income... $3,974* $10,415 $7,988 $12,340 $34,717*
======== ======== ======== ========= =========
Net income
per share.. $0.22* $0.57 $0.44 $0.67 $1.90*
======== ======== ======== ========= =========
- - -------------------------------------------------------------------------------
Quarter Ended July 25 October 24 January 23 April 24 Year 1993
(13 weeks) (13 weeks) (13 weeks) (13 weeks) (52 weeks)
- - -------------------------------------------------------------------------------
Sales............ $140,003 $175,877 $169,810 $198,432 $684,122
Cost of sales.... 106,543 130,924 125,677 143,291 506,435
-------- -------- -------- -------- --------
Gross profit... 33,460 44,953 44,133 55,141 177,687
Selling, general
& admin........ 28,478 33,869 33,210 35,298 130,855
-------- -------- -------- -------- --------
Opertg profit.. 4,982 11,084 10,923 19,843 46,832
Interest expense. 867 841 765 787 3,260
Total other inc.. 518 431 346 432 1,727
-------- -------- -------- -------- --------
Inc before tax. 4,633 10,674 10,504 19,488 45,299
Income tax exp... 1,850 4,167 4,113 7,885 18,015
-------- -------- -------- -------- --------
Net income... $2,783 $6,507 $6,391 $11,603 $27,284
======== ======== ======== ======== ========
Net income
per share.. $0.15 $0.36 $0.35 $0.64 $1.50
======== ======== ======== ======== ========
*Excludes the income effect of adopting SFAS 109 in May 1993 of $3,352 or
$.18 per share.