LZB

LA-Z-BOY INC - 10-Q Summary (Quarter Ended Jan 25, 2003)

Business Context and Reporting Period

This Form 10-Q covers the third quarter and nine months ended January 25, 2003, for LA-Z-BOY INC, a leading residential furniture producer. The company operates through two primary segments: Upholstery and Casegoods. The reporting period is significantly impacted by the adoption of SFAS No. 142 (Goodwill and Other Intangible Assets) effective April 28, 2002, which eliminated goodwill amortization but triggered a one-time impairment charge.

Key Financial Metrics

Note: Nine-month Net Income and EPS are significantly reduced by a $59.8M after-tax cumulative effect of accounting change related to goodwill and trade name impairments.

Material Changes vs. Prior Period

• Sales Performance: Q3 sales declined 6.1% year-over-year. On a comparable basis (excluding divestitures and acquisitions), sales were down 4.1%. The Casegoods segment saw a 12.7% decline on a comparable basis, while Upholstery was relatively flat (-0.7%).
• Profitability: Despite lower sales, Operating Income increased 54.1% in Q3. This was driven by a 12.4% reduction in SG&A expenses and improved gross margin absorption due to restructuring. The prior year Q3 included an $11.7M loss on the divestiture of the Pilliod unit.
• Accounting Change: The adoption of SFAS 142 resulted in a $77.7M pre-tax impairment charge ($59.8M after-tax) recorded in the nine-month period, wiping out most of the year-to-date earnings. However, the elimination of $9.3M in annual goodwill/trade name amortization improved ongoing operating margins.
• Balance Sheet: Total debt increased to $223.9M (current + long-term) from $142.6M in the prior year, driven by a new $86M private placement of notes used to pay down bank borrowings and fund general purposes. Shareholders' equity decreased by $110M, primarily due to $113.7M in stock repurchases.

Guidance, Outlook, and Risks

• Outlook: Management expects Q4 2003 diluted EPS between $0.43 and $0.48. Full-year 2003 diluted EPS (excluding the accounting change) is projected at $1.65 - $1.70. Sales for the full year are expected to be flat to slightly up, excluding the impact of the HickoryMark cessation.
• Segment Outlook: The Upholstery segment is expected to outperform Casegoods. Casegoods demand remains weak, particularly in the upper-middle price points, due to consumer caution and economic uncertainty.
• Capital Allocation: The company plans to continue share repurchases opportunistically. Capital expenditures for fiscal 2003 are estimated between $32M and $37M.
• Risks: Key risks include consumer sentiment, housing sales trends, the threat of war/terrorism, rising energy costs, and competition from imported goods. The company also faces potential impacts from new accounting standards (SFAS 143, 145, 146) in the coming fiscal year.

Investor Verification Checklist

• Accounting Impact: Verify the sustainability of earnings by excluding the one-time $59.8M impairment charge and the benefit of eliminated goodwill amortization.
• Casegoods Trend: Monitor the Casegoods segment closely, as it continues to face significant volume declines (-13% comparable in Q3) despite margin improvements.
• Debt Structure: Confirm the impact of the new $86M fixed-rate debt on future interest expenses, which management expects to rise in future periods.
• Inventory Levels: Review inventory increases ($251.9M vs $227.1M prior year) to ensure they align with sales forecasts and do not indicate future write-downs.
• Share Count: Note the reduction in shares outstanding (55.97M) due to aggressive buybacks, which supports EPS growth despite flat sales.