MONROE, Mich., Feb. 8 -- La-Z-Boy Incorporated
(NYSE: LZB; PCX) today reported operating results for the third fiscal quarter
ended January 22, 2005. Net sales for the quarter were $518 million, up $26
million or 5.3% compared to a year earlier, with earnings of $0.21 per fully
diluted share -- which was above management's previously announced guidance
range. The quarter includes after tax restructuring charges of $0.03 per
share and $15 million of additional sales and earnings of $0.01 per share
related to the consolidation of certain Variable Interest Entities (VIEs).
These VIEs were not reflected in our results in the year earlier reporting
period. This quarter's per share earnings compare against $0.29 per fully
diluted share earned in the fiscal 2004 third quarter, including $0.01 per
share of restructuring charges.
For the nine months ended January 22, 2005 net sales were $1.518 billion,
an increase of $64 million or 4.4% from the year earlier sales of $1.455
billion. Fully diluted earnings per share for the nine months totaled $0.31,
including restructuring charges of $0.16 per share on an after-tax basis, an
extraordinary gain of $0.01 per share, and $38 million of additional sales and
an after-tax loss of $0.08 per share related to the consolidation of certain
VIEs. This compares to $0.67 per share in the first nine months of fiscal
2004, including restructuring charges of $0.11 per share on an after-tax
basis.
Operating margin for the most recent quarter was 3.9%, down from 5.3% a
year earlier and a sequential improvement from last quarter's 3.0%. This
year's fiscal third quarter included restructuring charges amounting to 0.4%
of net sales versus 0.3% last year. The nine months fiscal 2005 operating
margin was 2.1% including 0.9% of net sales for restructuring charges, down
from 4.4% in the same period of fiscal 2004. Last year's fiscal nine months
included restructuring charges amounting to 0.7% of net sales.
La-Z-Boy Incorporated President and CEO Kurt L. Darrow said, "We were
pleased with our sales results for the quarter which exceeded our guidance and
were favorable given continuing softness at retail. Operating margins
continue to be weaker than last year primarily as a result of continued
pressure on margins from increased raw material pricing. During the quarter
we began to see improvements in our margin trend as the impact of our price
increases to our customers began to take effect. These increases will be
fully implemented by the end of our fourth quarter."
Upholstery Segment
The third quarter fiscal 2005 upholstery segment sales increased 2.0% from
a year earlier and were up 3.5% through the first nine months of the fiscal
year. Darrow noted, "Sales from our La-Z-Boy branded business continue to be
stronger than our upholstery segment in total. During the quarter, we further
expanded the La-Z-Boy Furniture Galleries(R) store system and gained
additional general dealer retail floor space which has allowed us to increase
our market share. In our branded upholstery business we continue to see
better order trends than in our non-branded upholstery, which is experiencing
declining order trends in the low single digits as a result of somewhat
inconsistent consumer demand similar to industry reports." The upholstery
segment operating margin for the quarter was 6.1% compared to a reported 8.4%
for last year's third quarter, while the nine months operating margin declined
to 5.7% from 7.9% a year earlier. The decline in margins for the year is
primarily attributable to unprecedented raw material price increases,
particularly in steel, poly and plywood.
Darrow continued, "During this quarter we continued to strengthen our
proprietary distribution network of mostly independently operated La-Z-Boy
Furniture Galleries(R) stores by opening four new stores and converting four
existing stores to the 'New Generation' format, bringing the total to 98 in
this new format. These new format stores are generating increased traffic
levels, higher average sales per square foot and greater total sales volumes
than the previous format stores. In the last nine months we have opened 30 of
these new format stores and plan on opening eight and remodeling six stores to
the new format by the end of our fiscal year. Currently, there are 328 stand-
alone stores, of which 38 are company-owned. Plans are to open approximately
50 of these updated format stores during our 2006 fiscal year, with over 20 of
those being new stores and the remainder being store remodels or relocations."
System-wide, the La-Z-Boy Furniture Galleries(R) stores' same store sales
dollars were up 3.6% for the 2004 calendar fourth quarter and up 2.9% for
calendar 2004. Total sales for the stores were up 6.5% for both the calendar
fourth quarter and for the entire calendar 2004.
Casegoods Segment
Casegoods sales increased 3.7% from a year earlier for the January quarter
and were down 3.6% through the nine months. The casegoods segment's operating
margin for the January 2005 quarter was 1.9% compared to a negative 0.3% for
last year and the nine months operating margin was flat with last year at
0.8%. Darrow commented, "This is the first positive sales comparison quarter
for our casegoods segment in over three years and was lead by the portion of
this segment serving primarily the hospitality industry. The residential
portion of the segment continues to improve as we transition our business
model to be primarily a marketer, distributor and importer of casegoods. In
our casegoods segment, recent order trends have been down mid single digits
with the exception of hospitality products."
He added, "Margins improved this quarter, but were adversely affected by
greater than anticipated transition costs over and above the restructuring
costs associated with our change to the Pennsylvania House business model.
Also, due to the long lead times inherent in bidding our custom order
hospitality business, we have not yet realized the margin benefits of recent
pricing."
Restructuring charge
As previously announced, we began the closure of several production
facilities during our second fiscal quarter and production was phased out at
the last facility during the third fiscal quarter. During the third quarter
charges of $0.03 per diluted share on an after-tax basis were incurred and
were higher than anticipated resulting from additional union severance
combined with higher inventory write-downs.
Variable Interest Entities
FIN 46 requires us to consolidate certain Variable Interest Entities
(VIEs) beginning April 2004 which are included in our corporate and other
segment. Certain of our independent dealers meet this criteria and the
attached schedule outlines the impact and offers further explanation. This
quarter one of our VIEs contributed $2 million of capital to their business
which was recorded as income to reflect a recovery of previously recorded
losses. Additionally, for the nine months the extraordinary gain is a result
of the application of purchase accounting relating to the acquisition of a
previously consolidated VIE. Darrow commented, "This quarter we successfully
transitioned the ownership of two of our four under performing VIEs to new
independent dealers and are in the process of taking specific actions to
address the remaining two operations in our fourth quarter."
Balance sheet
During the quarter we generated positive cash flow from working capital
management which was primarily utilized to reduce debt. Total debt at quarter
end was $243 million, down $25 million from last quarter and the company's
third quarter debt-to-capitalization ratio was 31.6%. Darrow stated, "This
quarter we made progress moving the debt-to-capitalization ratio toward our
targeted range of the mid-twenties and did not repurchase any stock during the
quarter. Management remains opportunistic in execution of its stock
repurchase program, but our prime focus is to bring our debt-to-capitalization
ratio within our targeted range." At quarter-end, 6.7 million shares remained
available under the company's existing stock repurchase authorization.
Business Outlook
Commenting on the business outlook, Darrow said, "Despite high energy
prices, rising interest rates, constant geopolitical jitters, and a weakened
dollar, consumer confidence has been slightly improving in the last several
months. Our guidance takes into consideration the current direction of the
economy, an extra week in our fiscal year calendar this year versus last year
and anticipates little to no further increases in our major raw material
costs. With this as a backdrop, we expect our fourth fiscal quarter sales to
be flat to slightly up compared to the prior year's quarter. We anticipate
reported earnings for the fourth quarter to be in the range of $0.26 - $0.30
per diluted share, which includes restructuring charges of $0.01 and up to a
$0.02 per share potential loss from the consolidation of VIEs. This compares
to the loss of $0.64 we incurred per diluted share before the cumulative
effect of change in accounting principle in fiscal 2004's fourth quarter,
which included a non-cash charge of $1.07 per diluted share to reflect the
impairment of certain intangible assets and $0.01 of restructuring charges.
Last year's quarter also included a non-cash cumulative effect charge of $0.16
per diluted share from the adoption of a new accounting standard.
Forward-looking Information
Any forward-looking statements contained in this news release are based on
current information and assumptions and represent management's best judgment
at the present time. Actual results could differ materially from those
anticipated or projected due to a number of factors. These factors include,
but are not limited to: changes in consumer sentiment or demand, changes in
demographics, changes in housing sales, the impact of terrorism or war, energy
price changes, the impact of logistics on imports, the impact of interest rate
changes, the effects of the ruling on tariffs by the U.S. Department of
Commerce and potential disruptions of Chinese imports, the availability and
cost of capital, the impact of imports as it relates to continued domestic
production, raw material price changes, changes in currency rates, competitive
factors, operating factors, such as supply, labor, or distribution disruptions
including changes in operating conditions or costs, effects of restructuring
actions, changes in the domestic or international regulatory environment, not
fully realizing cost reductions through restructurings, ability to implement
global sourcing organization strategies, the future financial performance and
condition of independently owned dealers that we are required to consolidate
into our financial statements or changes requiring us to consolidate
additional independently owned dealers, the impact of new manufacturing
technologies, the impact of adopting new accounting principles, fair value
changes to our intangible assets due to actual results differing from
projected, factors relating to acquisitions and other factors identified from
time to time in the company's reports filed with the Securities and Exchange
Commission. The company undertakes no obligation to update or revise any
forward-looking statements, either to reflect new developments, or for any
other reason.
Additional Information
This news release is just one part of La-Z-Boy's financial disclosures and
should be read in conjunction with other information filed with the Securities
and Exchange Commission, which is available at
http://www.la-z-boy.com/about/investorRelations/sec_filings.aspx. Investors
and others wishing to be notified of future La-Z-Boy news releases, SEC
filings and quarterly investor conference calls may sign up at:
http://www.la-z-boy.com/about/investorRelations/IR_email_alerts.aspx.
Background Information
With annual sales of $2 billion, La-Z-Boy Incorporated is one of the
world's leading residential furniture producers, marketing furniture for every
room of the home and office, as well as for the hospitality, health care and
assisted-living industries. The La-Z-Boy Upholstery Group companies are
Bauhaus, Centurion, Clayton Marcus, England, La-Z-Boy, La-Z-Boy Contract and
Sam Moore. The La-Z-Boy Casegoods Group companies are American Drew, American
of Martinsville, Hammary, Kincaid, Lea and Pennsylvania House.
The corporation's vast proprietary distribution network is dedicated
exclusively to selling La-Z-Boy Incorporated products and brands, and includes
328 stand-alone La-Z-Boy Furniture Galleries(R) stores and 334 La-Z-Boy In-
Store Gallerys, in addition to in-store gallery programs at the company's
Kincaid, Pennsylvania House, Clayton Marcus, England and Lea operating units.
According to industry trade publication Furniture/Today, the La-Z-Boy
Furniture Galleries retail network by itself represents the industry's fourth
largest U.S. furniture retailer and the second largest single source furniture
retailer. Additional information is available at http://www.la-z-boy.com/.
LA-Z-BOY INCORPORATED CONSOLIDATED STATEMENT OF INCOME
(Unaudited, amounts in thousands, except per share data)
Third Quarter Ended
% Over Percent of Sales
1/22/05 1/24/04 (Under) 1/22/05 1/24/04
Sales $518,160 $492,167 5.3% 100.0% 100.0%
Cost of sales
Cost of goods sold 393,743 382,865 2.8% 76.0% 77.8%
Restructuring 2,252 1,244 81.0% 0.4% 0.3%
Total cost of sales 395,995 384,109 3.1% 76.4% 78.0%
Gross profit 122,165 108,058 13.1% 23.6% 22.0%
Selling, general and
administrative 101,911 82,018 24.3% 19.7% 16.7%
Operating income 20,254 26,040 -22.2% 3.9% 5.3%
Interest expense 2,684 2,697 -0.5% 0.5% 0.5%
Other income, net 321 1,301 -75.3% 0.1% 0.3%
Pre-tax income 17,891 24,644 -27.4% 3.5% 5.0%
Income tax expense 6,799 9,365 -27.4% 38.0%* 38.0%*
Net income $11,092 $15,279 -27.4% 2.1% 3.1%
Basic weighted average
shares 52,122 52,825
Basic net income per
share $0.21 $0.29
Diluted weighted average
shares 52,193 52,931
Diluted net income per
share $0.21 $0.29
Dividends paid per share $0.11 $0.10
*As a percent of pre-tax income, not sales.
LA-Z-BOY INCORPORATED CONSOLIDATED STATEMENT OF INCOME
(Unaudited, amounts in thousands, except per share data)
Nine Months Ended
% Over Percent of Sales
1/22/05 1/24/04 (Under) 1/22/05 1/24/04
Sales $1,518,201 $1,454,657 4.4% 100.0% 100.0%
Cost of sales
Cost of goods
sold 1,164,296 1,129,603 3.1% 76.7% 77.7%
Restructuring 13,401 9,493 41.2% 0.9% 0.7%
Total cost of sales 1,177,697 1,139,096 3.4% 77.6% 78.3%
Gross profit 340,504 315,561 7.9% 22.4% 21.7%
Selling, general and
administrative 307,975 251,164 22.6% 20.3% 17.3%
Operating income 32,529 64,397 -49.5% 2.1% 4.4%
Interest expense 7,500 8,936 -16.1% 0.5% 0.6%
Other income, net 338 3,021 -88.8% -- 0.2%
Pre-tax income 25,367 58,482 -56.6% 1.7% 4.0%
Income tax expense 9,640 22,223 -56.6% 38.0%* 38.0%*
Income before
extraordinary item 15,727 36,259 -56.6% 1.0% 2.5%
Extraordinary gain, net
of income tax expense
of $430 702 -- N/M -- --
Net income $16,429 $36,259 -54.7% 1.1% 2.5%
Basic weighted average
shares 52,043 53,904
Basic income per share
before extraordinary
gain $0.30 $0.67
Extraordinary gain per
share 0.01 --
Basic net income per
share $0.31 $0.67
Diluted weighted average
shares 52,100 54,066
Diluted income per share
before extraordinary
gain $0.30 $0.67
Extraordinary gain per
share 0.01 --
Diluted net income per
share $0.31 $0.67
Dividends paid per share $0.33 $0.30
N/M = not meaningful
*As a percent of pre-tax income, not sales.
LA-Z-BOY INCORPORATED CONSOLIDATED BALANCE SHEET
(Unaudited, amounts in thousands)
Increase/(Decrease)
1/22/05 1/24/04 Dollars Percent 4/24/04
Current assets
Cash and equivalents $25,994 $25,774 $220 0.9% $33,882
Receivables, net 278,269 295,148 (16,879) -5.7% 299,801
Inventories, net 272,922 228,954 43,968 19.2% 250,568
Deferred income taxes 38,961 35,897 3,064 8.5% 37,969
Other current assets 20,558 16,880 3,678 21.8% 31,454
Total current
assets 636,704 602,653 34,051 5.7% 653,674
Property, plant and
equipment, net 209,920 201,398 8,522 4.2% 212,739
Goodwill 68,615 78,807 (10,192) -12.9% 68,116
Trade names 27,889 71,144 (43,255) -60.8% 27,889
Other long-term assets 84,367 89,498 (5,131) -5.7% 85,078
Total
assets $1,027,495 $1,043,500 $(16,005) -1.5% $1,047,496
Current liabilities
Short-term
borrowings $11,500 $3,000 $8,500 283.3% $37,219
Current portion of
long-term debt and
capital leases 2,776 4,893 (2,117) -43.3% 5,344
Accounts payable 72,618 69,475 3,143 4.5% 93,298
Accrued expenses and
other current
liabilities 122,148 121,017 1,131 0.9% 147,460
Total current
liabilities 209,042 198,385 10,657 5.4% 283,321
Long-term debt and
capital leases 229,158 185,903 43,255 23.3% 181,807
Deferred income taxes 20,329 38,154 (17,825) -46.7% 20,219
Other long-term
liabilities 42,813 37,641 5,172 13.7% 39,821
Contingencies and commitments
Shareholders' equity
Common shares,
$1 par value 52,167 52,584 (417) -0.8% 52,031
Capital in excess of
par value 214,538 215,738 (1,200) -0.6% 216,156
Retained earnings 257,099 312,287 (55,188) -17.7% 253,012
Unearned compensation (1,683) -- (1,683) N/M --
Accumulated other
comprehensive income 4,032 2,808 1,224 43.6% 1,129
Total shareholders'
equity 526,153 583,417 (57,264) -9.8% 522,328
Total liabilities
and shareholders'
equity $1,027,495 $1,043,500 $(16,005) -1.5% $1,047,496
N/M = not meaningful
LA-Z-BOY INCORPORATED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited, amounts in thousands)
Third Quarter Ended Nine Months Ended
1/22/05 1/24/04 1/22/05 1/24/04
Cash flows from
operating activities
Net income $11,092 $15,279 $16,429 $36,259
Adjustments to
reconcile net income
to cash provided by
operating activities
Extraordinary gain -- -- (702) --
Restructuring 2,252 1,244 13,401 9,493
Depreciation and
amortization 7,154 7,193 21,154 21,830
Change in receivables 27,596 23,833 23,225 44,862
Change in inventories 9,098 8,701 (24,804) 23,583
Change in payables (14,098) (11,784) (20,680) (9,456)
Change in other
assets and
liabilities (4,447) (3,256) (13,250) (14,832)
Change in deferred
taxes (667) 1,820 (882) 3,063
Total adjustments 26,888 27,751 (2,538) 78,543
Net cash provided
by operating
activities 37,980 43,030 13,891 114,802
Cash flows from investing
activities
Proceeds from disposals
of assets 8 196 5,605 1,968
Capital expenditures (9,833) (6,409) (27,012) (21,035)
Change in other long-term
assets (1,300) 15 (5,150) (732)
Net cash used for
investing
activities (11,125) (6,198) (26,557) (19,799)
Cash flows from financing
activities
Proceeds from debt 3,746 5,544 105,988 12,466
Payments on debt (28,668) (18,825) (86,925) (42,661)
Stock issued for stock
option and employee
benefits plans 1,124 246 3,881 6,258
Repurchase of common stock -- (17,158) (2,476) (59,378)
Dividends paid (5,743) (5,279) (17,115) (16,266)
Net cash provided by
(used for) financing
activities (29,541) (35,472) 3,353 (99,581)
Effect of exchange rate
changes on cash and
equivalents 3 (173) 1,425 1,535
Net increase (decrease) in
cash and equivalents (2,683) 1,187 (7,888) (3,043)
Cash and equivalents at
beginning of period 28,677 24,587 33,882 28,817
Cash and equivalents at
end of period $25,994 $25,774 $25,994 $25,774
Cash paid (net of refunds)
during period - income
taxes $10,655 $11,150 $17,053 $21,643
Cash paid during period -
interest $2,772 $3,567 $6,832 $10,007
LA-Z-BOY INCORPORATED
Impact of FIN46 on Consolidation
1/22/05
(Unaudited, amounts in thousands) VIEs Consolidated
Assets
Cash and cash equivalents $3,209 $25,994
Accounts receivable, net (18,863)(1) 278,269
Inventories, net 9,392 272,922
Deferred income taxes 6,112 38,961
Other current assets 1,395 20,558
Total current assets 1,245 636,704
Property, plant and equipment, net 10,608 209,920
Intangibles 7,714 96,504
Other long-term assets (14,416)(1) 84,367
Total assets $5,151 $1,027,495
Liabilities and shareholders' equity
Short-term borrowings $-- $11,500
Current portion of long-term debt
and capital leases 1,569 2,776
Accounts payable 694 72,618
Other current liabilities 1,930 122,148
Total current liabilities 4,193 209,042
Long-term debt and capital leases 6,586 229,158
Deferred income taxes -- 20,329
Other long-term liabilities (846) 42,813
Shareholders' equity (deficit) (4,782) 526,153
Total liabilities and
shareholders' equity $5,151 $1,027,495
(1) Includes the elimination of intercompany accounts and notes
receivable.
Third Quarter Ended Nine Months Ended
1/22/05 1/22/05
(Unaudited, amounts in
thousands) VIEs Consolidated VIEs Consolidated
Sales $14,847(2) $518,160 $38,142(2) $1,518,201
Cost of sales
Cost of goods sold 1,765(2) 393,743 2,441(2) 1,164,296
Restructuring -- 2,252 -- 13,401
Total cost of sales 1,765 395,995 2,441 1,177,697
Gross profit 13,082 122,165 35,701 340,504
Selling, general and
administrative 11,321 101,911 38,710 307,975
Operating income
(loss) 1,761 20,254 (3,009) 32,529
Interest expense 94 2,684 330 7,500
Other income (expense),
net (676)(3) 321 (3,062)(3) 338
Pre-tax income (loss) 991 17,891 (6,401) 25,367
Income tax expense
(benefit) 378 6,799 (2,431) 9,640
Income (loss) before
extraordinary item 613 11,092 (3,970) 15,727
Extraordinary gain,
net of income taxes
of $430 -- -- -- 702
Net income (loss) $613 $11,092 $(3,970) $16,429
- (2) Includes the elimination of intercompany sales and cost of sales.
- (3) Includes the elimination of intercompany interest income and interest
expense.
La-Z-Boy Furniture Galleries(R) stores that are not operated by us are
operated by independent dealers. These stores sell La-Z-Boy manufactured
product as well as various accessories purchased from approved La-Z-Boy
vendors. In some cases we have extended credit beyond normal trade terms to
the independent dealers, made direct loans and/or guaranteed certain loans or
leases. Most of these independent dealers have sufficient equity to carry out
their principal operating activities without subordinated financial support,
however, there are certain independent dealers that we have determined may not
have sufficient equity. Based on the criteria for consolidation of VIEs, we
have determined that several dealers are VIEs of which, under FIN 46, we are
deemed the primary beneficiary.
Since some of our VIEs have either negative or no equity in their
business, we are required to absorb their losses in our consolidated statement
of income. During the third fiscal quarter, one of the equity owners of our
VIEs contributed $2.0 million of capital to their business. Current
accounting standards required us to record the capital contribution as income
in the current period to offset previously recorded losses. The operating
results of the consolidated VIEs impacted our diluted earnings per share by
$0.01 and ($0.08) for the third quarter and first nine months of fiscal 2005,
respectively. The extraordinary gain of $1.1 million ($0.7 million net of
income taxes), is a result of the application of purchase accounting relating
to the acquisition of a previously consolidated VIE. Additionally, there are
certain independent dealers that qualify as VIEs; however, we are not the
primary beneficiary. Our interest in these dealers is comprised of accounts
and notes receivable of $18.3 million.
In prior years, we have evaluated the collectibility of our trade accounts
receivable from our independent dealers and we have provided an appropriate
reserve relating to the collectibility of our receivables with these dealers
or the contingent payout under any guarantees. There are no VIEs consolidated
in the third quarter and first nine months of our fiscal 2004 financial
statements. The table above shows the impact of this standard on our
consolidated balance sheet and statement of income as of January 22, 2005.
The amounts reflected in the table include the elimination of related
payables, receivables, sales, cost of sales, and interest as well as profit in
inventory.
LA-Z-BOY INCORPORATED
Segment Information
Our reportable operating segments are the Upholstery Group and the
Casegoods Group. The third quarter and nine months ended operating results
are shown in the table below.
Third Quarter Ended Nine Months Ended
(Unaudited, amounts
in thousands) 1/22/05 1/24/04 1/22/05 1/24/04
Sales
Upholstery segment $393,272 $385,511 $1,153,272 $1,114,000
Casegoods segment 111,918 107,899 331,801 344,029
Eliminations/Other 12,970* (1,243) 33,128* (3,372)
Consolidated $518,160 $492,167 $1,518,201 $1,454,657
Operating income
Upholstery segment $24,046 $32,555 $65,161 $87,932
Casegoods segment 2,152 (360) 2,732 2,717
Corporate and other (3,692)* (4,911) (21,963)* (16,759)
Restructuring (2,252) (1,244) (13,401) (9,493)
Consolidated $20,254 $26,040 $32,529 $64,397
The consolidated variable interest entities are included in Corporate and
other.
