LZB

LA-Z-BOY INCORPORATED - 10-K Summary (Fiscal Year Ended April 27, 2002)

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended April 27, 2002 (52 weeks). La-Z-Boy Incorporated is the second-largest residential furniture manufacturer in the United States. The company operates through two primary segments: the Upholstery Group (recliners, sofas, motion furniture) and the Casegoods Group (hardwood tables, dressers, entertainment centers). The reporting period was characterized by significant restructuring efforts to align capacity with weak industry demand and the divestiture of the Pilliod Furniture unit.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Consolidated sales decreased 4% primarily due to the divestiture of Pilliod Furniture (accounting for ~1/3 of Casegoods sales decline), continued weak industry demand, and retailer bankruptcies (e.g., HomeLife, Montgomery Ward). The Upholstery Group sales increased 4%, driven by the proprietary La-Z-Boy Furniture Galleries network.
• Restructuring Charges: The company recorded $22.2 million in restructuring expenses in 2002 (vs. $11.2 million in 2001). These charges included closing four manufacturing facilities and converting two others to warehousing/import operations, resulting in a reduction of approximately 822 employees.
• Divestiture Loss: A pre-tax loss of $11.7 million was recorded on the sale of Pilliod Furniture. This was partially offset by an $11.8 million tax benefit from a "worthless stock" deduction, resulting in a negligible net impact on earnings per share.
• Debt Reduction: Total debt decreased by $63 million ($74 million net decline in borrowings) due to strong operating cash flows used to pay down obligations. Interest expense dropped 44% year-over-year.
• Segment Performance: The Upholstery Group remained profitable with an 8.5% operating margin. The Casegoods Group reported a net operating loss of $10.6 million (margin of -1.7%) due to restructuring charges and the divestiture loss, down from a 1.9% margin in 2001.

Guidance, Outlook, and Risks

• Short-Term Outlook: Management anticipates low single-digit sales growth for the first quarter of fiscal 2003 (ending July 27, 2002) compared to the prior year. Diluted EPS is projected in the range of $0.22 to $0.27, a significant improvement over the $0.05 reported in the first quarter of fiscal 2002.
• Long-Term Strategy: The company aims to grow sales faster than the industry by expanding its proprietary distribution network (currently 38% of sales) and increasing imports of finished goods and components (21% of Casegoods sales). The long-term goal is to achieve a normalized operating margin of 10.0%.
• Accounting Changes: Adoption of SFAS No. 142 in fiscal 2003 will eliminate goodwill amortization, expected to increase annual earnings by approximately $7.5 million (net of taxes), though impairment testing will be required.
• Risks: Key risks include continued volatility in housing sales, consumer confidence, and interest rates. The company faces competitive pressure from foreign imports and the potential for further retailer bankruptcies. Environmental liabilities exist at six sites, though management believes recorded provisions are adequate.

Investor Verification Checklist

• Restructuring Completion: Verify the timeline and cost savings realization from the closure of four plants and the conversion of two others to import/warehousing hubs.
• Casegoods Turnaround: Monitor the Casegoods segment's ability to return to profitability given the heavy reliance on imports and the loss of major retail customers.
• Proprietary Channel Growth: Assess the continued expansion of the La-Z-Boy Furniture Galleries network as a driver for the Upholstery segment's outperformance.
• Debt Covenants: Confirm continued compliance with the $300 million revolving credit facility covenants, particularly the debt-to-capital ratio.
• Goodwill Impairment: Review the results of the first annual goodwill impairment test required under SFAS No. 142 in fiscal 2003.