La-Z-Boy Reports Fourth Quarter and Full Year Operating Results

Furniture World Magazine

La-Z-Boy Incorporated reported operating results for the fourth fiscal quarter and full year ending April 30, 2005. Net sales for the quarter were $566 million, up $33 million or 6.3% compared to a year earlier. This year's fourth quarter included 14 weeks of sales versus 13 weeks last year. Quarterly earnings were $21 million or $0.40 per share, which included an after-tax loss of $0.04 per share related to the consolidation of certain VIEs. Income from continuing operations for the fourth quarter was $18 million or $0.35 per share. The quarter includes a number of special items: -a change in estimate for worker's compensation resulting in a pre-tax charge included in cost of goods sold of $5.9 million ($3.6 million net of tax) or $0.07 per share; -a reduction in the allowance for doubtful accounts included in SG&A of $5.5 million ($3.4 million net of tax) or $0.07 per share; -a net pre-tax gain on restructuring of $3.1 million ($1.9 million net of tax) or $0.04 per share, resulting primarily from gains on the sale of previously idled property and equipment; -an extraordinary pre-tax gain of $2.2 million ($1.4 million net of tax) or $0.03 per share from the recoveries of accounts receivables through the acquisition of certain Variable Interest Entities (VIEs); -pre-tax income of $1.7 million ($1.0 million net of tax) or $0.02 per share, comprised of pre-tax income of $0.6 million relating to discontinued operations for the fiscal fourth quarter and a pre-tax gain on the sale of the La-Z-Boy Contract(R) unit of $1.1 million. This quarter's per share earnings compare against a loss per share before the cumulative effect of change in accounting principle of $0.64 reported in fiscal 2004's fourth quarter. The 2004 fourth quarter results included a non- cash charge of $1.07 per share or $71.9 million before tax, $55.9 million after-tax, to reflect the impairment of certain intangible assets. Also included in the 2004 fourth quarter was a $0.01 per share after-tax restructuring charge related to casegoods restructuring. Additionally, the company adopted a new accounting standard in 2004's fiscal fourth quarter, FASB Interpretation No. 46 "Consolidation of Variable Interest Entities" (FIN 46), resulting in a cumulative effect non-cash charge of $8.3 million net of tax, or $0.16 per share. For the year ended April 30, 2005 net sales were $2.048 billion, an increase of $96 million or 4.9% from the year earlier sales of $1.952 billion. This year's sales included 53 weeks of sales versus 52 weeks last year. Earnings for the year totaled $37 million or $0.71 per share, which included an after-tax loss of $0.11 per share related to the consolidation of certain VIEs. Income from continuing operations for the year was $33 million or $0.63 per share. The full year's results include several special items in addition to the amounts recorded for the change in estimate for worker's compensation and the reduction in the allowance for doubtful accounts: -a full year pre-tax restructuring charge of $10.3 million ($6.4 million net of tax) or $0.12 per share, which is net of gains from the sale of property and equipment in the fourth quarter; -a full year pre-tax extraordinary gain of $3.4 million ($2.1 million net of tax) or $0.04 per share from the recoveries of accounts receivables of certain VIEs; -pre-tax income of $3.2 million ($2.0 million net of tax) or $0.04 per share, comprised of pre-tax income of $2.1 million relating to discontinued operations for the full fiscal year and a pre-tax gain on the sale of the La-Z-Boy Contract(R) Group of $1.1 million which was recorded in the fourth quarter. This compares to earnings before the cumulative effect of the accounting change for fiscal 2004 of $0.05 per share, and a loss after the cumulative effect of $0.11 from the adoption of VIE consolidation accounting standard. Fiscal 2004 results also included a $0.12 per share charge for casegoods restructuring and $1.04 per share for the write-down of intangibles. Operating margin for the fourth quarter was 5.8%, up from a negative 6.6% a year earlier, which included a write-down of intangible assets and restructuring charges amounting to 13.7% of net sales. This quarter's operating margin of 5.8% continued an improving trend in sequential operating profit margins from 2005's third quarter's 3.9%, the second quarter's 2.9% and first quarter's negative 0.9%. This year's fiscal fourth quarter included a gain on restructuring amounting to 0.5% of net sales versus a restructuring charge amounting to 0.2% last year. The effect on operating margin in the fourth quarter of fiscal 2005 for a change in estimate for worker's compensation was a charge of 1.0% of net sales. The effect of the reduction in the allowance for doubtful accounts was a positive impact of 1.0% of net sales. The change in estimate for determining our unpaid worker's compensation claims involved adopting an actuarial methodology which will more accurately reflect our future expected costs. The reduction in our allowance for doubtful accounts occurred as a result of the acquisition of a major dealer and the reassessment of our credit position of a significant dealer upon obtaining additional credit related information. The full year operating margin was 3.1% compared to 1.4% in the same period of fiscal 2004. The fiscal 2005 full year operating margin included 0.5% of net sales for restructuring charges, a change in estimate for worker's compensation amounting to a charge of 0.3% of net sales and a positive impact from the reduction of the allowance for doubtful accounts of 0.3% of net sales. Last year included restructuring and the write-down of intangible assets amounting to 4.2% of net sales. La-Z-Boy Incorporated President and CEO Kurt L. Darrow said, "We continue to make progress in the growth of our top line and with our operating margins. The significant changes we are driving are beginning to deliver the improvements we anticipated, specifically the change to an import model in our casegoods business. During our fourth quarter we moved decisively by taking actions to obtain higher market penetration levels in major markets by repositioning underperforming dealers. We also sold our contract office seating operation and accelerated the sale of previously idled manufacturing facilities and equipment. We are now prepared to enter our new fiscal year with a clearer focus on our core business. These changes are continuing to better align us with the three core elements of our business model, which are remaining the leading marketer, manufacturer and distributor of upholstered furniture; being a marketer, distributor and importer of casegoods furniture, and being the leading proprietary retailer of furniture. We believe this business model combined with the continued growth in the power of the La-Z-Boy brand will enable us to achieve our financial objectives." Upholstery Segment Upholstery segment sales for the fourth quarter of fiscal 2005 increased 3.5% from a year earlier and were up 3.6% for the full fiscal year. This year's quarter and year included an extra week of sales. Darrow said, "Our La-Z-Boy branded business continues to outperform our non-branded upholstery companies, though we had good feedback to our product introductions at the recent April Market across all business units. This year we were pleased that we continued the consistent growth of our La-Z-Boy Furniture Galleries(R) store retail network, both in total sales and store count. We have also made good progress in expanding our presence with major retailers across North America and added many new customers to our distribution portfolio." The upholstery segment operating margin for the quarter was 7.9% compared to 10.0% for last year's fourth quarter. The quarter's margin was impacted by higher raw material prices for steel, poly and plywood, but at a declining pace. This year the quarter's operating margin was also effected by the change in estimate for worker's compensation amounting to a charge of 1.1% of the upholstery segment's net sales and a positive impact from the reduction of bad debt reserves of 1.3% of its net sales. Operating margins for the year were 6.3% versus 8.6% in fiscal 2004's full year. This year's margin decline resulted largely from raw material prices for steel, poly and plywood rising at unprecedented levels. The change in estimate for worker's compensation for the year amounted to a charge of 0.3% of the upholstery segment's net sales and a positive impact from the reduction of bad debt reserves of 0.4% of its net sales. Darrow mentioned, "This fiscal year we further drove the growth of our proprietary distribution network of mostly independently operated La-Z-Boy Furniture Galleries(R) stores by opening 17 new stores and converting or relocating 24 existing stores to the 'New Generation' format, bringing the total to 109 in this new format. These new format stores are continuing to generate increased traffic levels, higher average sales per square foot and greater total sales volumes than our older format stores. In the fourth quarter our network opened seven of these new format stores and four stores were remodeled to the new design. Seven non-productive stores were closed during the fiscal year. We enter into fiscal 2006 as North America's largest single-source store network with 334 stand-alone stores, of which 61 are company-owned. Plans are to open 45-50 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. This year we made great strides in improving the quality and focus of the company's proprietary store program with our independent dealers." Darrow continued, "In seven of the top 25 markets the company now has an ownership role, acquiring three markets this quarter; Chicago, Pittsburgh and Connecticut, consisting of 21 stores. Two of these markets were previously consolidated as VIEs and will require considerable effort to enhance their performance. During the fiscal year we opened three new stores in our existing corporate markets and converted three stores to the new format. In fiscal 2006 we expect to open five to six company-owned stores and convert or relocate another ten plus stores." System-wide, the mostly independently owned La-Z-Boy Furniture Galleries(R) stores' April calendar year to date same store written sales were up 0.1% and total sales, which includes new stores, increased 3.2%. Darrow noted, "Our same store sales comparisons for the first four months of the calendar year were essentially flat, but were uneven throughout that period. The month of May appears to continue this trend in inconsistent sales patterns at retail and we expect continued flat to slightly up trends as we enter into the seasonally slower summer months for furniture retailing." Sale of Contract Furniture Darrow commented, "As previously announced, during the quarter we completed the sale of our contract seating furniture unit, La-Z-Boy Contract, as we continue to refocus the company to capitalize on our core strengths in residential furniture. This unit was included in our upholstery segment and sales from this discontinued operation were $48.7 million and $46.9 million for the fiscal years 2005 and 2004, respectively, and have been eliminated from consolidated sales for the year. Pre-tax operating profits from the unit were $0.6 million ($0.3 million net of tax) for the fiscal fourth quarter and $2.1 million ($1.3 million net of tax) for the full year. The net sale price of $11.7 million resulted in a pre-tax gain of $1.1 million ($0.7 million net of tax) in the fourth quarter and the cash generated was primarily utilized to pay down floating rate debt." Casegoods Segment Casegoods sales increased 10.2% from a year earlier for the fourth quarter, and were down just 0.2% for the fiscal year including an extra week of sales during the fourth quarter. Darrow commented, "The quarter sales increase in addition to the extra week was aided by the continuing positive trends in our hospitality business and the rebound in sales on the residential side of our business resulting from the execution of our strategy shift to a marketer, distributor and importer of casegoods product. This is the second consecutive quarter of year-over-year sales improvement." The operating margin for the casegoods segment in the April 2005 fiscal quarter was 2.1% compared to 0.2% last year. This year the quarter's operating margin was impacted by the change in estimate for worker's compensation amounting to a charge of 1.1% of the casegoods segment's net sales. For the year the segment's operating margin was 1.2%, up compared with last year's 0.7%. The change in estimate for worker's compensation for the year amounted to a charge of 0.3% of the segment's net sales. He added, "Margins continued to improve this fiscal quarter, but were still adversely affected by greater than anticipated transition costs associated with our change to the Pennsylvania House import model. This was somewhat offset by margin benefits of recent pricing initiatives in our hospitality business that we now are beginning to realize. During the fourth quarter, the casegoods distribution center which will support the logistics needs of American Drew, Lea and Pennsylvania House became operational. Although the start-up cost had a negative effect on fourth quarter earnings, this modern facility will enable us to better serve the customers of these three companies." Restructuring charge As previously announced, we began the closure of several facilities during our second fiscal quarter of 2005 and production was phased out at the last facility during the third fiscal quarter. During the fourth quarter a net after-tax gain on restructuring of $0.04 per share or $1.9 million was realized, which included an after-tax gain of $2.9 million from the sale of property and equipment net of after-tax charges of $1 million incurred resulting from costs associated with the restructuring plan. For the year restructuring charges amounted to a net after-tax loss on restructuring of $0.12 per share or $6.4 million which is net of the after-tax gain from the sale of property and equipment. Darrow stated, "We continue to make steady progress in the liquidation and the disposal of the plants and equipment, many of which are in areas which are now economically depressed by the closure of a number of other manufacturing plants. As we have noted previously, in our casegoods segment, where the bulk of our restructuring has occurred, we now have three manufacturing facilities operating today, each of which is focused on a specific product category." Variable Interest Entities In April of 2004, we began consolidating certain of our independent dealers as Variable Interest Entities (VIEs) which are included in our corporate and other segment. During the year, the equity owner of one of our VIEs contributed $2 million of capital to its business which was recorded as income to reflect a recovery of previously recorded losses. Additionally, for the quarter and the year, an after-tax extraordinary gain of $1.4 million and $2.1 million, respectively, resulted from the recoveries of accounts receivable previously written off relating to the acquisition of previously consolidated VIEs. Darrow commented, "This year the VIEs lost $0.04 per share in the fourth quarter and $0.11 per share for the year. During our fiscal year we took actions to transition the ownership of two of our four under performing VIEs to new independent ownership and acquired the other two operations in the fourth quarter. These actions addressed our negatively performing VIEs. Although we will continue to have some VIEs, we do not expect to have any of these operations significantly detract from our long- term financial performance on an annualized basis." Cash Flow and Balance sheet During the quarter we generated positive cash flow from operations of $32.1 million and $46.0 million for the year. Cash of $11 million was generated from the sale of La-Z-Boy Contract and $5.6 million was also generated from the continued liquidation of property, plant and equipment primarily from closed facilities during the quarter. Total debt at quarter end was $226 million, down $17 million from last quarter. The debt-to- capitalization ratio was 30.0% at year end, down from third quarter's 31.6%. Darrow stated, "We continue to make consistent progress in moving our debt-to- capitalization ratio toward our targeted range of the mid-twenties. Although we are not yet within our targeted range of leverage, with the concurrence of our board of directors the company plans to reenter the open market on a moderate basis to begin repurchasing its shares. This action is being taken in light of the low market price of our stock and the belief in the company's future prospects." At year end, 6.7 million shares remained available under the company's existing stock repurchase authorization. Business Outlook Commenting on the business outlook, Darrow said, "We are pleased with the continuing improvement in our operations and with the progress we have made in the transition of our business model. From a macro economic perspective, we remain cautiously optimistic about the industry's growth prospects for the coming year, though we are concerned that May's recent consumer confidence improvements could be challenged by a number of factors. These factors include continued high energy prices, rising short-term interest rates and general geopolitical uncertainty, which continue to overshadow the economic expansion which appeared to be underway." Darrow continued, "Our first quarter is historically our seasonally weakest and with the continued inconsistent trends at retail we expect our first quarter sales to be up in the low single digit range compared to last year's first quarter sales of $455 million, as reclassified to reflect our discontinued operations. Reported earnings for the first quarter are forecasted to be in the range of $0.10 - $0.14 per share. This compares to a loss of $0.07 per share in fiscal 2005's first quarter, which included an after-tax restructuring charge of $0.12 per share." 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 conferencecalls may sign up at: http://www.la-z-boy.com/about/investorRelations/IR_email_alerts.aspx . Background Information With annual sales of over $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, 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 334 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 sixth largest U.S. furniture retailer and the largest single source furniture retailer in North America. Additional information is available at http://www.la-z-boy.com/ /.