La-Z-Boy Annual Report 2006

Plain-text annual report

1 9 2 8 LEADING THE PATH OF EVOLUTION 1 9 6 4 1 9 7 0 1 9 9 0 2 0 0 6 a n n u a l r e p o r t letter to our the La-Z-Boy shareholders’ meeting W E D N E S D A Y , A U G U S T 1 6 , 2 0 0 6 1 1 : 0 0 A . M . E D T L A - Z - B O Y A U D I T O R I U M , 1 2 8 4 N . T E L E G R A P H R O A D M O N R O E , M I C H I G A N U S A Dear Fellow Shareholders: Since the beginning of this decade, extensive change has permeated the U.S. furniture industry with incredible speed. Retail distribution has grown beyond traditional furniture retailers, and competition from Asia has completely transformed the marketplace. In the 79-year history of La-Z-Boy, change and evolution have always played signiﬁcant roles and helped to build our company into what it is today – La-Z-Boy® – the best known brand in furniture, North America’s largest upholstery manufacturer, the world’s leading producer of reclining chairs and the largest proprietary upholstery retailer in North America. We know that ongoing evolution is essential as we position our company for the future. 01 2 0 1 2 $ , 4 6 0 2 $ , 8 4 0 2 $ , 2 5 9 1 $ , 7 1 9 1 $ , . 4 6 9 $ . 1 4 6 $ Fiscal 2006 Accomplishments and Challenges As we continued to adapt our business model, we had many accomplishments, including those highlighted below: . 1 3 3 $ . 9 1 $ . ) 0 3 $ ( • Transitioned the Casegoods Segment – We completed the shift from a domestic casegoods manufacturer to primarily an importer, and realized a $13 million improvement in operating margin compared with last year – a signiﬁcant turnaround; 02 03 04 05 06 02 03 04 05 06 2006 sales mix sales 68% upholstery 22% casegoods 10% retail amounts in millions income (loss) from continuing operations amounts in millions • Expanded the La-Z-Boy Furniture Galleries® System – The quality of our store system was improved as we increased the number of New Generation stores by 49. At year end, with 154 new format stores out of 337, approximately 50% of our total stores are less than ﬁve years old. These stores increase our retail appeal to consumers, drive more trafﬁc, generate greater sales, strengthen our brand name with “permanent billboards” and differentiate us from our competition; shareholders • Strengthened our Balance Sheet – We reduced our debt by $42 million and achieved a debt-to-total-capitalization ratio of 26.5%, down from 30.0% last year; • Increased Dividend for Shareholders – In May, we announced a 9% increase in our quarterly dividend to 12¢, marking our 140th consecutive dividend; • Focused on Continued Innovations – Recent product introductions demonstrated our commitment to innovation, including: – Kaleidoscope,™ a new color-matching technology system for customers available at La-Z-Boy Furniture Galleries® stores; – A new lift chair design and technology that improves aesthetics and safety; – A state-of-the-art motion sofa mechanism with greater functionality that is more cost efﬁcient. In addition to the successes we achieved, we also had a few disappointments, including lower-than-expected sales growth, less-than-desired progress in improving our company-owned retail store performance and annual ﬁnancial results well below historical and expected levels. Throughout the remainder of this report, we will review how we are responding to the various challenges in our business and will address what we are doing to increase the growth and proﬁtability of our company. Above: (left) Kurt Darrow, President and Chief Executive Officer; (right) Patrick Norton, Chairman of the Board, seated on Sam Moore Annie chairs Fiscal 2006 Financial Performance To put our ﬁscal year into perspective, it is important to review what improved cost structure in place, particularly in casegoods, as we completed our transition to primarily an import model. In fact, transpired during our ﬁrst six months, which were marked by a series we generated upholstery and casegoods operating margins of of unusual – and several uncontrollable – events, including: 8.1% and 5.3%, respectively, in our second half, even on lower volume than last year, demonstrating the improving progression • Supply Shortage – A major supply chain problem arose when and repositioning of our strategy. the upholstery industry faced an unprecedented shortage and subsequent allocation of polyurethane foam resulting from The Retail Segment, however, had signiﬁcant losses, essentially Hurricanes Katrina and Rita. Our performance suffered as stemming from last year’s acquisition of three major markets, which production capacity was constrained by some 50%; all have tremendous demographic potential. We began the lengthy • Hurricane Damage – Hurricane activity damaged and disrupted our Newton, Mississippi parts supply manufacturing facility and 03 impacted our upholstery production; • Restructuring Charge – Because of increased efﬁciencies in our overall upholstery operations, we aligned our capacity with the closure of our Waterloo, Ontario facility, resulting in an $9 million restructuring charge; • Import Transition – Our last residential casegoods company converted to an import model which held back margin advancement during the ﬁrst half of the year. We made signiﬁcant strides in ﬁscal 2006 and have some ongoing challenges, but our momentum is clearly evident as our performance in the second half of ﬁscal 2006 dramatically eclipsed that of the ﬁrst half. Foam supply returned and production increased to normal levels. While the retail environment remained below expectations, we had respectable operating margins with an and necessary process of achieving proﬁtable operations in these markets by adding and remodeling stores while leveraging advertising, warehousing and administrative expenses. Past company-owned retail successes have proven that our target margin range of 3% to 5% is both realistic and achievable, although it will take time to reach these levels in our newer markets. With that as a backdrop, in ﬁscal 2006 our sales were $1.9 billion, down 6.4% from last year, principally as a result of the challenges faced in the ﬁrst half. Also, this ﬁscal year had 52 weeks, one less than the 53 in ﬁscal 2005. We had a net loss of $3 million, or $0.06 per share, for the ﬁscal year, including a before-tax restructuring charge of $6.6 million, which allowed us to better align our upholstery capacity, and a $23 million non-cash write-down of intangibles, stemming from one of our non-branded upholstery companies, Bauhaus, which, primarily as a result of department-store consolidation, had a signiﬁcant decrease in sales and earnings, and impaired the value of its intangibles. Management Succession Change and evolution take on many faces in the life of a company. This year, it meant a change in our senior management team with the retirements of our Chairman, Patrick H. Norton, and our Chief Financial Ofﬁcer, David M. Risley. An industry icon, Pat served our company for 25 years and, under his stewardship and direction, our company grew from $150 million in 1981 to over $2 billion. His will to succeed has inspired the culture of La-Z-Boy and his inﬂuence will be felt for many years to come. The Board appointed Pat as Chairman Emeritus, a non-voting member of the Board of Directors, upon his retirement. Even though Dave served us for a shorter period of time, he played a pivotal role in reshaping our ﬁnancial and operating strategies and built a strong ﬁnancial team. We wish them both well in their retirements. And sadly, we mourn the loss of Board member Helen Petrauskas, who passed away in March after contributing her wisdom, sound judgment and dedication to our company for six years. We are focused on developing our management team to meet the challenges and opportunities ahead and our succession planning has us prepared for change. As such, this process provided us with an internal candidate ready to step into the CFO position. Our Corporate Controller, Louis M. (“Mike”) Riccio, Jr., is slated to succeed Dave as CFO. And, in May, we promoted Otis Sawyer to the newly created position of Senior Vice President, Corporate Operations. Otis will oversee the key areas of Information Technology, Transportation/Logistics and Corporate Fabric Procurement as the coordination of these three areas is becoming more important in today’s increasingly global sourcing environment. Plans for 2007 As we enter ﬁscal 2007, we will continue to focus on proﬁtable sourcing that are well underway. There is no question that these initiatives are critical to our growth and to differentiating ourselves growth. There is substantial opportunity as we aggressively expand from our competitors. We are working to offer our customers our retail distribution, provide customers with innovative and stylish mass choice and customization with quick delivery and our entire furniture that offers the comfort, quality and value they expect from organization is focused on fulﬁlling that promise to the consumer. La-Z-Boy, and use consumer research to market and make our brands more relevant in a dynamic marketplace – one where our customer base is expanding and consumer preferences and shopping habits are changing – all to improve the top line. With ongoing change in the furniture industry, our retail presence will provide us with the strategic platform necessary to ensure a solid future for our company. In ﬁscal 2007, we plan to open 20-25 new La-Z-Boy Furniture Galleries® stores, and will relocate or convert 20-25 existing stores to the New Generation format, which has proven to return higher sales-per-square-foot performance. This includes our company-owned stores where we have an aggressive build-out plan for ﬁscal 2007 that will not only increase our total store count, but will increase substantially the number of company-owned stores in the New Generation format from 28 to 46. We are conﬁdent that as the operating performance of our company-owned stores improves, it will substantially change our overall earnings power. While we expect some margin improvement to result from top-line growth, we will continue to improve the efﬁciencies of our operations and will complete the shift to cellular manufacturing in Looking Ahead We are encouraged by our accomplishments as we completed the second half of our year and are optimistic that our company is positioned to capitalize on the extensive changes which have occurred and continue in our industry. While we cannot predict the future, as ﬁscal 2007 unfolds, with an environment with fewer signiﬁcant catastrophic events and a more stable economy, we are poised to perform well and increase shareholder value. We have the most powerful and respected brand in the home furnishings industry, and we are committed to improving our performance. We thank all of our stakeholders for your continued support. Without the guidance of our Board of Directors, the patience of our shareholders and the dedication of our customers, suppliers and employees, we could not have made the transition in our business model which has been necessary since the beginning of the decade. As you read on through this report, you will see just a few examples of the change we have experienced thus far in our company’s lifetime. To be sure, there will be more changes to come … and we embrace the opportunities they will present. our Upholstery Segment, while lowering costs in both casegoods Kurt L. Darrow and upholstery through numerous continuous process improvement President and Chief Executive Ofﬁcer projects, including initiatives in purchasing, logistics and global camden console AMERICAN DREW evolution P R O D U C T A leading U.S. furniture company, La-Z-Boy offers a complete line of upholstered furniture, complemented by a broad selection of casegoods furniture for bedrooms, dining rooms and more, in styles ranging from traditional to contemporary. From a wood-slat chair created in a garage, to furniture for every room in the home … La-Z-Boy, 05 through its 79-year history, continues to expand its product offering while remaining true to the elements of quality and innovation that began with its recliner roots. Pictured above: 1955 La-Z-Rocker® demonstration model Kincaid Colonnade dining room La-Z-Boy Kidz iRoom collection La-Z-Boy Home Theater Matinee Pennsylvania House Manhattan sofa and chair C A T E G O R I E S O F P R O D U C T S styles for every room lamps, rugs and accessories home theater youth furniture massage chairs stationary chairs dining room and bedroom furniture lift chairs occasional tables reclining sofas sleeper sofas reclining chairs Reclina-Rocker® reclining chairs 1928 1935 1945 1955 1965 1975 1985 1995 2005 Years product lines were introduced or acquired, company founded in 1927 brutus sofa ENGLAND, INC. continuous improvement M A N U F A C T U R I N G While La-Z-Boy has grown into a company with more than in the marketplace. And, as a result of a signiﬁcant change seven million square feet dedicated to manufacturing, the in the U.S. landscape for casegoods, La-Z-Boy has become company continues to operate with the philosophy its founders primarily a marketer, distributor and importer of wood established 79 years ago – to manufacture quality products furniture. Today, the company has strategically partnered using the best techniques and facilities. By focusing on with reliable, high-quality Asian manufacturers, and those 07 lean manufacturing, as it converts facilities to the cellular relationships, coupled with the company’s three remaining manufacturing process, and augmenting production with global stateside casegoods manufacturing facilities, have returned sourcing, La-Z-Boy has maintained its competitive positioning this segment of the company to sustainable proﬁtability. First assembly line 1950s Pressing metal parts 1950s Upholstery assembly 1950s Wood frame assembly 1960s Pictured above: A drill press from the original La-Z-Boy factory cellular manufacturing RECLINING MECHANISM ATTACHMENT 09 Press stamping machine Robotic welding Ripsaw hardwood processing Gerber fabric cutter progression R E T A I L 09 1960s 1970s 1990s The New Generation La-Z-Boy Furniture Galleries® store and all that it offers is a Technological innovation continues to play a signiﬁcant role in attracting and testament to innovation and evolution. After ﬁve decades of selling primarily to servicing customers. With a wide selection of fabrics, customers can utilize the independent dealers and department stores, in 1975 the company added its ﬁrst La-Z-Boy Screen Test System to view any fabric on any frame, enabling them set of dedicated La-Z-Boy Showcase Shoppes, followed in 1989 by the ﬁrst to completely visualize how a particular piece of furniture will look. Additionally, La-Z-Boy Furniture Galleries® store. Today’s New Generation store offers the new state-of-the-art Kaleidoscope™ system provides customers with the customers a vast furniture selection, decorative accessories and an in-store opportunity to scan anything from a paint chip to a pillow to ﬁnd colors design center coupled with a complimentary in-home design service. that correlate and harmonize with La-Z-Boy fabrics. La-Z-Boy Furniture Galleries® VAUGHAN, ONTARIO 011 Leather Gallery Design Center In-Home Design Program Kaleidoscope™ color-matching system change A D V E R T I S I N G The power of the La-Z-Boy® brand is unparalleled in the furniture industry and the brand has not only withstood the test of time, but, indeed, has evolved with it. As the most favored and recognized furniture name across every 11 La-Z-Boy has continued to promote its name and reputation through attention-grabbing advertising that communicates quality, style and value. Importantly, through the years, La-Z-Boy advertising has consistently adapted to demographic* in the United States, 1920s reﬂect the progression of American culture. 1951 1966 1973 1997 *InFurniture Magazine, October 2005 La-Z-Boy Hammary Kincaid La-Z-Boy blonde brunette redhead current advertising LA-Z-BOY 13 a tribute to Patrick H. Norton AN INDUSTRY ICON Few individuals have contributed as much to the furniture industry as Pat Norton. With a career spanning 67 years, Pat has left his mark both on the industry as a whole and on our company. Charged with being the “caretaker of the legacy”* left by the La-Z-Boy founders, Pat is credited with transforming the company and propelling it to its level today. Under his stewardship, La-Z-Boy widened its product offering and distribution system and today’s La-Z-Boy Furniture Galleries® store system was established. There is, however, much more to Pat Norton than furniture industry accomplishments and contributions. In addition to the successes Pat and LaVerne Norton he enjoyed as an industry executive, he is an extraordinarily philanthropic and charitable individual, serving as a role model to so many. Throughout his career, while working tirelessly and effortlessly, his passion for the business made it important to take time to mentor younger executives. He has also been extremely generous to many industry, academic and civic organizations. Career Timeline 1939 Pat begins his career in the furniture department of a local department store in St. Louis, Missouri, near his home town. 1943 Marries LaVerne Blocker and they have three children together: Krell, Kevin and Susan. 1945 After serving in the U.S. Army Air Force during World War II, Pat returns to St. Louis and manages a number of furniture stores, eventually becoming a partner in three. 1962 Pat joins Ethan Allen as a salesman, is named Vice President of Sales and Marketing four years later and is credited with building Ethan Allen’s proprietary retail network. 1972 Elected to Ethan Allen’s Board of Directors. 1981 At 59 years old, Pat joins La-Z-Boy as Senior Vice President of Sales and Marketing and is elected to the Board of Directors, with a plan to work for a short stint before retirement … that “stint” lasts 25 years. 1986 Pat receives the National Brotherhood Award from the National Conference of Christians and Jews. 1989 Elected to the Board of Directors of the American Furniture Manufacturers Association; receives the Human Relations Award from the American Jewish Committee. 1992 Members of the La-Z-Boy “extended family,” including sales representatives and dealers, established, in his honor, the Patrick H. Norton Scholarship Fund at High Point University. 1995 Inducted into the American Furniture Hall of Fame and receives the American Furniture Manufacturers Association Distinguished Service Award. 1997 Elected as Chairman of the La-Z-Boy Board of Directors. 1998 Receives the City of Hope Spirit of Life Award. 2000 High Point University names its Furniture Studies Hall “Norton Hall,” and awards Pat an honorary Doctorate. 2003 Pat establishes the LaVerne B. Norton Scholarship at Monroe County Community College in memory of his wife. 2006 Pat announces that he will retire from La-Z-Boy in August and the Board names him Chairman Emeritus upon his retirement. In The Legend of La-Z-Boy, our book celebrating our 75th year in business, Pat is quoted when talking about the company’s founders. He says, “I’ve always said that the shadow of those two gentlemen still stands over our board table, and I hope it always does. They made decisions for business reasons. They also made them for humane reasons, and there’s just not that many companies that operate that way anymore.”* Although we will miss Pat’s wisdom and judgment, we wish him all the best in a well- deserved retirement, and fully expect that his guidance and commitment to our business will continue to serve as a shining example for all our employees, just as the principles of our founders remain with us today. Patrick H. Norton, 2006 *The Legend of La-Z-Boy; Write Stuff Enterprises, Inc.; Jeffrey L. Rodengen and Richard F. Hubbard BOARD OF DIRECTORS Kurt L. Darrow President and Chief Executive Ofﬁcer, La-Z-Boy Incorporated John H. Foss CORPORATE EXECUTIVES Patrick H. Norton Chairman of the Board Kurt L. Darrow President and Chief Executive Ofﬁcer Retired Manufacturing Financial Executive Rodney D. England Richard M. Gabrys Retired Vice Chairman of Deloitte & Touche LLP, Interim Dean of the School of Business Administration at Wayne State University David K. Hehl Partner, Cooley Hehl Wohlgamuth & Carlton, PLLC James W. Johnston Private Investor Dr. H. George Levy Otorhinolaryngologist Rocque E. Lipford Senior Principal, Miller, Canﬁeld, Paddock and Stone, PLC Donald L. Mitchell Retired Furniture Executive Patrick H. Norton Senior VP and President Non-Branded Upholstery Product and President, England, Inc. Steven M. Kincaid Senior VP and President Casegoods Product and President, Kincaid David M. Risley Senior VP Louis M. Riccio, Jr. Senior VP and Chief Financial Ofﬁcer Otis S. Sawyer Senior VP Corporate Operations Mark A. Stegeman VP and Treasurer James P. Klarr Secretary and Corporate Counsel Roger L. Miller VP Process Improvement Chairman of the Board, La-Z-Boy Incorporated Mark A. Copping Jack L. Thompson VP and Corporate Controller Chairman of the Board, The Plastics Group, Inc. Steven P. Rindskopf VP Corporate Human Resources DIVISIONAL EXECUTIVES Upholstery Segment Thomas Brown Director, La-Z-Boy International Mac McCall President, Clayton Marcus Michael C. Moldenhauer President, Sam Moore Furniture Steven W. Pilgrim President, Bauhaus Casegoods Segment Noel L. Chitwood President, American of Martinsville John V. Labarowski President, Hammary Furniture R. Jack Richardson, Jr. President, American Drew and Lea Industries David M. Sowinski President, Pennsylvania House Retail Segment Mark Wiltshire President, La-Z-Boy Retail INVESTOR INFORMATION Shareholder Services Inquiries regarding the Dividend Reinvestment Plan, dividend payments, stock transfer requirements, address changes and account consolidations should be addressed to the company’s stock transfer agent and registrar: American Stock Transfer & Trust Company 59 Maiden Lane New York, NY 10038 212-936-5100 800-937-5449 www.amstock.com Investor Relations and Financial Reports We will provide the Form 10-K to any shareholder who requests it. Security analysts, shareholders and investors may request information from: Investor Relations La-Z-Boy Incorporated 1284 North Telegraph Road Monroe, MI 48162-3390 investorrelations@lazboy.com Stock Exchange La-Z-Boy Incorporated common shares are traded on the New York Stock Exchange and the Paciﬁc Stock Exchange under the symbol LZB. Corporate Headquarters La-Z-Boy Incorporated 1284 North Telegraph Road Monroe, MI 48162-3390 734-242-1444 www.lazboy.com Helen Petrauskas 1944 – 2006 A trusted advisor, valued colleague and an incredible individual, Helen will be missed for years to come. ©2006 La-Z-Boy Incorporated Except as noted, all designated trademarks and service marks utilized in this report are owned by La-Z-Boy Incorporated or its subsidiary companies. Management’s Discussion and Analysis o f F i n a n c i a l C o n d i t i o n a n d R e s u l t s o f O p e r a t i o n s Our Management’s Discussion and Analysis is an integral part of understanding our ﬁnancial results. from Chinese imports; (i) inventory supply price ﬂuctuations; (j) the impact of imports as it relates to This Management’s Discussion and Analysis should be read in conjunction with the accompanying continued domestic production; (k) changes in currency exchange rates; (l) competitive factors; Management’s Report to our Shareholders, Report of Independent Registered Public Accounting Firm, (m) operating factors, such as supply, labor or distribution disruptions including changes in operating Consolidated Financial Statements and related Notes to Consolidated Financial Statements. We begin the conditions or costs; (n) effects of restructuring actions; (o) changes in the domestic or international Management’s Discussion and Analysis with an introduction of La-Z-Boy Incorporated’s key businesses, regulatory environment; (p) not fully realizing cost reductions through restructurings; (q) ability to implement strategies and signiﬁcant operational events in ﬁscal 2006. We then provide a discussion of our results of global sourcing organization strategies; (r) the impact of new manufacturing technologies; (s) the future operations, liquidity and capital resources, quantitative and qualitative disclosures about market risk, and ﬁnancial performance and condition of independently operated dealers that we are required to consolidate critical accounting policies. into our ﬁnancial statements or changes requiring us to consolidate additional independently operated dealers; (t) fair value changes to our intangible assets due to actual results differing from projected; CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS We are making forward-looking statements in this item. Generally, forward-looking statements include (u) the impact of adopting new accounting principles; (v) the impact from natural events such as hurricanes, earthquakes and tornadoes; (w) the ability to turn around under-performing retail stores; (x) the impact information concerning possible or assumed future actions, events or results of operations. More of retail store relocation costs, the success of new stores or the timing of converting stores to the New speciﬁcally, forward-looking statements include the information in this document regarding: Generation format; (y) the ability to procure fabric rolls or cut and sewn fabric sets domestically or abroad; 14 and (z) factors relating to acquisitions and other factors identiﬁed from time to time in our reports ﬁled • future income, margins and cash ﬂows • future economic performance with the Securities and Exchange Commission. We undertake no obligation to update or revise any • future growth • industry and importing trends forward-looking statements, either to reﬂect new developments or for any other reason. • adequacy and cost of ﬁnancial resources • management plans Forward-looking statements also include those preceded or followed by the words “anticipates,” “believes,” INTRODUCTION La-Z-Boy Incorporated is a manufacturer, marketer and retailer of upholstery products and a marketer of “estimates,” “hopes,” “plans,” “intends” and “expects” or similar expressions. With respect to all forward- imported or manufactured casegoods (wood) furniture products. Our La-Z-Boy brand is the top brand in looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the furniture industry, one of the most preferred brands in the home and we are the leading global producer the Private Securities Litigation Reform Act of 1995. of reclining chairs. In addition, we own 63 La-Z-Boy Furniture Galleries® stores, which are retail locations dedicated to marketing our La-Z-Boy branded product. These 63 stores are part of the larger store network Actual results could differ materially from those anticipated or projected due to a number of factors. These of La-Z-Boy Furniture Galleries® stores which includes a total of 337 stores, the balance of which are factors include, but are not limited to: (a) changes in consumer conﬁdence; (b) changes in demographics; independently owned and operated. The network is the industry’s largest single upholstered furniture (c) changes in housing sales; (d) the impact of terrorism or war; (e) continued energy price changes; retailer in North America. These stores combine the style, comfort and quality of La-Z-Boy furniture (f) the impact of logistics on imports; (g) the impact of interest rate changes; (h) the potential disruptions with our in-home design service to help customers furnish certain rooms in their homes. La-Z-Boy Incorporated Annual Report 2006 At the end of ﬁscal 2004, a new accounting pronouncement, Financial Accounting Standards Board Interpretation market advantages of a United States manufacturing base. The Upholstery Group sells furniture mainly to No. 46R (“FIN 46”), required us to start consolidating certain of our independent dealers who did not have La-Z-Boy Furniture Galleries® stores, general dealers and department stores. sufﬁcient equity to carry out their principal business activities without our ﬁnancial support. These dealers are referred to as Variable Interest Entities (“VIE”) by this pronouncement. During the ﬁscal 2006 ﬁrst quarter, an Our Casegoods Group today is primarily an importer, marketer and distributor of casegoods (wood) furniture and additional independent dealer had a change in ﬁnancial structure which made us the primary beneﬁciary and continues to make progress in year-over-year improvements in operating margin. Based on our current strategy required consolidation. The new VIE currently has four stores. for import versus domestic casegoods product, we have completed the planned transition of this business so that about 72% of our residential casegoods are imported. Over the past several years, we have rationalized our Our reportable operating segments are the Upholstery Group, the Casegoods Group and the Retail Group. domestic casegoods manufacturing capacity in order to compete globally and have signiﬁcantly changed the Below is a chart that shows the organizational structure of La-Z-Boy segments. cost structure from ﬁxed to highly variable. 15 In terms of revenue, our largest segment is the Upholstery Group, which includes La-Z-Boy, our largest The Retail Group consists of 63 company-owned La-Z-Boy Furniture Galleries® stores in nine markets operating unit. During the second quarter of ﬁscal 2006, we initiated a restructuring plan to close our upholstery ranging from the Midwest to the East Coast of the United States. This group includes the 21 stores acquired in manufacturing facility in Waterloo, Ontario and shift the plant’s production to other existing facilities in order to the fourth quarter of ﬁscal 2005. Two of those markets were previously consolidated as VIEs and were incurring rationalize our overall capacity utilization. We also import cut and sewn fabric kits to complement our leather signiﬁcant operating losses. kits that allow us to take full advantage of both the cost-saving opportunities presented in Asia and the speed to Upholstery Group (Manufactures upholstered furniture) Casegoods Group (Imports and manufactures wood furniture) Retail Group (Company-owned La-Z-Boy Furniture Galleries®) Bauhaus England La-Z-Boy American Drew American of Martinsville Hammary Own and operate 63 La-Z-Boy Furniture Galleries® stores Clayton Marcus La-Z-Boy U.K. Sam Moore Kincaid Lea Pennsylvania House La-Z-Boy Incorporated Annual Report 2006 In ﬁscal 2007, we plan to take the following actions to grow sales and improve the operating results for the During the 2006 ﬁscal year, the network opened 21 new stores, remodeled 20 stores, relocated eight stores and Retail Group as well as take advantage of certain synergies between the company-owned markets: closed 18 stores for a net store increase of three. There are now 154 stores in the more productive New Generation store format, which represents about 50% of our total stores being less than ﬁve years old. We believe the transition • We will continue to relocate, convert or add stores to our New Generation format which are more productive. to the New Generation format stores, with the addition of new stores, is enhancing our position in the competitive • We will continue to centralize certain of our advertising, marketing and warehousing functions to gain retail marketplace. The majority of the retail operations are owned and operated by independent retailers who better efﬁciencies. resell to end-users, but as noted earlier, we currently own and operate 63 stores in nine markets, representing • We will continue to consolidate information systems and eliminate duplicative processes and warehouses. approximately one-ﬁfth of the total stores. • We will continue to expand our in-home design service, which has increased the average sale per customer where employed. Our success with La-Z-Boy Furniture Galleries® stores has been expanded to our Kincaid and England operating units. There are 22 Kincaid and nine England stand-alone stores owned and operated by independent dealers. We believe that expanding our store network will drive top-line growth as we capitalize on the larger urban markets. Additionally, we have an extensive La-Z-Boy in-store gallery program with 340 in-store galleries. Our other With the further penetration in these markets we expect to gain necessary efﬁciencies in advertising, distribution and operating units, such as Kincaid, Pennsylvania House, Clayton Marcus, England and Lea, also have in-store gallery administration to achieve desired proﬁtability. Currently, 28 of our company-owned stores are in the New Generation programs. One of our strategic initiatives is to grow our proprietary distribution network at an increasing pace over format and we expect to signiﬁcantly increase this number in the next ﬁscal year. Through these actions we continue the next few years. The chart below shows the current structure of the La-Z-Boy Furniture Galleries® store network. 16 to remain optimistic about the future performance of this segment and believe this segment will be proﬁtable within 18 months to two years. According to the May 2006 Top 25 ranking by Furniture Today, an industry trade publication, the La-Z-Boy Furniture Galleries® stores network (“the network”) is the largest retailer of upholstered single-brand furniture in the U.S. One of our major strategic initiatives is to expand the retail opportunities of the La-Z-Boy brand name in the United States and Canada by opening new stores, relocating stores to better locations and converting existing stores to our New Generation store format. Slightly more than half of the 337 stores in the network – the majority of which are independently owned – are concentrated in the top 25 markets in the U.S. We anticipate increasing our market penetration over the next few years in the top 25 markets, allowing our dealers to create operating efﬁciencies, particularly in the areas of advertising, logistics and administration. We anticipate obtaining the future market penetration necessary through both our company-owned stores and independently owned dealers. In some cases, our independent dealers lack the resources to accomplish these initiatives. In those cases, we may either acquire those markets or transition ownership of those markets to individuals who have the resources to accomplish our goals. L A - Z - B O Y F U R N I T U R E G A L L E R I E S ® S T O R E S Y S T E M 337 Total Stores Company-Owned Stores (63 Stores) VIE Stores — Independently Owned (28 Stores) (4 Dealers) VIE Stores — Independently Owned (246 Stores) (112 Dealers) Consolidated in La-Z-Boy Statements La-Z-Boy Incorporated Annual Report 2006 We operate on a ﬁscal year ending on the last Saturday of April. Our most recent ﬁscal year was 52 weeks, Sales ended on April 29, 2006 (“ﬁscal 2006”), and the previous ﬁscal years were 53 and 52 weeks, respectively, Consolidated sales declined 6.4% during ﬁscal 2006. Our Upholstery and Casegoods Groups’ sales were ended on April 30, 2005 (“ﬁscal 2005”), and April 24, 2004 (“ﬁscal 2004”). also down when compared to the prior year due in large part to a volatile retail environment attributable to weak RESULTS OF OPERATIONS Analysis of Operations: Year Ended April 29, 2006 (Fiscal Year 2006 compared with 2005) 17 (Amounts in thousands, except per share amounts) Upholstery sales Casegoods sales Retail sales Other/eliminations Consolidated sales Consolidated gross proﬁt Consolidated gross margin Consolidated S,G&A S,G&A as a percent of sales Consolidated write-down of intangibles Upholstery operating income Casegoods operating income Retail operating income Corporate and other Write-down of intangibles Restructuring Consolidated operating income Upholstery operating margin Casegoods operating margin Retail operating margin Consolidated operating margin Income from continuing operations Diluted earnings per share from continuing operations N/M – not meaningful La-Z-Boy Incorporated Annual Report 2006 Year ended 4/29/06 (52 weeks) $ 1,347,964 432,307 213,438 (76,932) $ 1,916,777 $ 452,169 23.6% $ 410,348 21.4% $ 22,695 $ 85,253 18,265 (26,006) (29,048) (22,695) (6,643) $ 19,126 6.3% 4.2% -12.2% 1.0% $ (3,041) 4/30/05 (53 weeks) $ 1,467,311 455,343 173,099 (47,372) $ 2,048,381 $ 465,243 22.7% $ 401,592 19.6% $ — $ 101,856 5,370 (2,859) (30,422) — (10,294) $ 63,651 6.9% 1.2% -1.7% 3.1% $ 33,095 consumer demand. A decline in business with rental stores and the liquidation of several large regional chains accounted for approximately 1% of the sales decline during the year. Approximately 2% of the sales decline was attributed to the extra week in ﬁscal 2005. Additionally, sales declined approximately 1.4% during the year due to the polyurethane shortage that affected upholstered product shipments from October through the middle of December. The sales declines noted above were mitigated by a 1.5% increase in sales due to sales price increases and a 0.8% increase in sales which resulted from the retail stores acquired at the end of ﬁscal 2005. Upholstery Group sales were down 8.1% year-over-year, 2% of which was attributable to the extra week in ﬁscal 2005. Approximately 2% of the decrease in Upholstery Group sales for the year related to the polyurethane supply shortage, which limited our ability to ﬁll customer orders. Sales were also down due to the weak retail environment. Around 1% of our upholstery sales decline was related to a decline in business with our rental customers and the liquidation of several large regional chains in the past 12 months. The sales decline was mitigated by a 2.0% increase in sales which resulted from sales price increases. Our Casegoods Group sales decreased 5.1% during ﬁscal 2006, of which about 2% related to the extra week in ﬁscal 2005. The decrease in sales primarily occurred at Pennsylvania House due to market share erosion stemming from continued disruptions as they replace domestically produced product lines with Asian-produced furniture. Although sales decreased for the Casegoods Group as a whole during the period, the casegoods hospitality and health care business continued to show sales growth during the year, partly due to the economic recovery of the hospitality sector. % Change -8.1% -5.1% 23.3% -62.4% -6.4% -2.8% 2.2% N/M -16.3% 240.1% -809.6% 4.5% N/M 35.5% -70.0% Retail Group sales increased 23.3% due to the acquisition of 21 stores in the fourth quarter of ﬁscal 2005. -109.2% Eight of these stores were consolidated as VIEs prior to our acquiring them in the fourth quarter of ﬁscal $ (0.06) $ 0.63 -109.5% 2005. Excluding the 21 recently acquired stores, Retail Group sales for our previously owned markets actually decreased during ﬁscal 2006 due to slow retail activity. The net total of intercompany sales eliminations and sales to VIEs increased 62.4% as a result of greater sales to Factors negatively impacting gross margin in ﬁscal 2006 include the following: company-owned retail stores and fewer VIEs in ﬁscal 2006 versus ﬁscal 2005. Gross Profit • Upholstery Group production was disrupted during the period by the polyurethane shortage, which prevented us from producing and ﬁlling customer orders that we otherwise could have completed and shipped. The Our gross proﬁt as a percent of sales (“gross margin”) increased in ﬁscal 2006 in comparison to ﬁscal 2005 due polyurethane shortage decreased gross margin by 0.1 percentage points in ﬁscal 2006. to the following: • Our company-owned La-Z-Boy Furniture Galleries® stores in the Retail Group were a larger part of our refreshed merchandise and cleared out older inventory in ﬁscal 2006 at the newly acquired stores, which • Following the acquisition of 21 stores in three markets by our Retail Group near the end of ﬁscal 2005, we consolidated results in ﬁscal 2006, and since retail sales generally carry a higher gross margin than our resulted in a lower gross margin for our Retail Group. manufacturing units, it had a more signiﬁcant impact on our consolidated gross margins than in ﬁscal 2005 by 0.5 percentage points. Selling, General and Administrative Expenses • We initiated a signiﬁcant cost reduction program during the current ﬁscal year focusing on manufacturing ﬁscal 2006 compared to the prior year. This was attributable to: Selling, general and administrative expenses (“S,G&A”) increased in dollar amount and as a percent of sales in 18 cost reductions, indirect labor, distribution costs and waste reductions that have positively impacted our gross margins. • The increased relative size of the Retail Group increased consolidated S,G&A because the Retail Group has a higher S,G&A structure than our Upholstery and Casegoods segments. As the Retail Group grows as an • We experienced signiﬁcant price increases in raw materials, especially in raw steel, during ﬁscal 2005. Raw overall percentage of our net sales, this overall S,G&A percentage will also increase as a percent of sales. steel prices remained high but stabilized in ﬁscal 2006. During ﬁscal 2006, we experienced rising prices for The impact on the current ﬁscal year was approximately 2.0 percentage points. polyurethane foam, as a result of the damage inﬂicted by the hurricane season, which reduced our gross margin approximately 1.1 percentage points. We increased our selling prices due to the high raw material costs. This • We incurred additional expenses in the Retail Group related to the 21 acquired stores, including increased combined with our normal price increases helped increase our margins approximately 1.2 percentage points. advertising, higher occupancy costs and other selling expenses as well as costs involved in establishing new warehousing for two of our locations. • We had restructuring expense of $6.6 million in ﬁscal 2006 and $10.3 million in ﬁscal 2005. The restructuring costs decreased gross margin by 0.4 percentage points in 2006 and 0.5 percentage points in 2005. • Our company-owned same store sales were down, therefore we were not able to absorb our ﬁxed expenses • At the end of ﬁscal 2005, we changed our estimate for unpaid claims for workers’ compensation to an actuarial estimate. As a result, we recorded a charge to increase our claims liability by $5.9 million, which decreased Somewhat offsetting these increases in S,G&A expense were gains recognized during the current year on gross margin by 0.3 percentage points in ﬁscal 2005 that was not repeated in ﬁscal 2006. long-lived assets that we sold, which reduced S,G&A as a percent of sales by 0.2 percentage points. resulting in an increase in S,G&A as a percent of sales. La-Z-Boy Incorporated Annual Report 2006 Operating Margin we increased advertising spending, which had a negative effect on margins but was necessary to drive Our consolidated operating margin was 1.0% for ﬁscal 2006 and included 0.4 percentage points of retail trafﬁc. We also had an increase in occupancy costs and selling expenses. Consequently, due to restructuring costs and 1.2 percentage points of a write-down of intangibles at Bauhaus. Bauhaus was these acquisitions and an overall soft retail environment, our retail operating results for ﬁscal 2006 were impacted by several large customer bankruptcies and the merger of two major department stores, which well below our expectations. We anticipate that it will take 18 months to two years to return this group reduced production causing the closure of several production facilities. These events impacted our annual to proﬁtability. valuation of intangibles resulting in an impairment loss. Operating margin for ﬁscal 2005 was 3.1% and included 0.5 percentage points of restructuring charges. OPERATING MARGIN BY QUARTER FOR FISCAL 2006 AND FISCAL 2005 The Upholstery Group operating margin decreased due to lower sales volume caused by the weather- related supply chain disruptions and soft retail conditions. The Upholstery Group beneﬁted from selling price increases since the same period last year which somewhat offset these factors. 19 Our Casegoods Group operating margin increased over the prior year due to the increased operating margin in our casegoods hospitality and health care business and improvements resulting from our continuing Upholstery Casegoods Retail 2006 2005 2006 2005 2006 2005 transition to our import model for residential casegoods. Although Pennsylvania House continued to operate Consolidated 2006 below our stated operating margin objectives, the signiﬁcant changes that were made in the overhead 2005 structure as a result of transitioning to a fully imported business model limited the negative impact on the Casegoods Group as a whole. The Casegoods Group has been on a positive trend, making steady progress Interest Expense First Quarter Second Quarter Third Quarter Fourth Quarter 4.9% 4.2% 4.1% 0.5% -10.3% 1.3% 1.7% -0.9% 3.9% 7.2% 2.0% 0.1% -12.3% 1.2% -1.6% 2.9% 7.2% 6.2% 6.0% 1.9% -10.4% -0.4% 3.7% 3.9% 8.9% 9.4% 4.5% 2.1% -15.8% -7.5% 0.0% 5.8% in improving year-over-year operating margins. Interest expense for ﬁscal 2006 was higher than ﬁscal 2005 due to rising interest rates on ﬂoating rate debt equating to an increase of about 1% in our effective interest rate. Our weighted average debt was down slightly Our Retail Group operating margin decreased by 10.5 percentage points during ﬁscal 2006 in comparison compared to the prior year, due to the repayment of $26 million in debt occurring near the end of the ﬁscal year. to ﬁscal 2005. Two of the three markets acquired in ﬁscal 2005 were operating at signiﬁcant losses and were previously reported as VIEs and contributed to operating losses during the current year. After acquiring the new Income Taxes locations, we refreshed merchandise at our newly acquired locations by liquidating our older inventory which Our effective tax rate was 132% in ﬁscal 2006 compared to 38% in ﬁscal 2005. The increase in the effective resulted in a lower operating margin. The acquired stores also incurred transitional costs during the year. tax rate was attributable to the write-off of goodwill at Bauhaus in the fourth quarter of ﬁscal 2006, which had no The decrease in operating margin was also due in part to the decrease in both same store sales volume taxed at a lower rate, therefore reducing the tax beneﬁt and increasing the effective rate relating to those expenses. tax beneﬁt, as well as the restructuring charges incurred at our Canadian upholstery operation, which is generally and acquired store sales. Additionally, due to the acquisition of new markets and a slow retail environment, La-Z-Boy Incorporated Annual Report 2006 RESULTS OF OPERATIONS Analysis of Operations: Year Ended April 30, 2005 (Fiscal Year 2005 compared with 2004) (Amounts in thousands, except per share amounts) Upholstery sales Casegoods sales Retail sales Other/eliminations Consolidated sales Consolidated gross proﬁt Consolidated gross margin Consolidated S,G&A S,G&A as a percent of sales Write-down of Upholstery intangibles Write-down of Casegoods intangibles Year ended 4/30/05 (53 weeks) $ 1,467,311 455,343 173,099 (47,372) 4/24/04 (52 weeks) $ 1,439,253 456,090 128,996 (72,342) $ 2,048,381 $ 1,951,997 $ 465,243 22.7% $ 401,592 19.6% $ — — $ 431,692 22.1% $ 331,620 17.0% $ 11,313 60,630 $ 71,943 $ 129,719 2,991 1,295 (23,492) (71,943) (10,441) Consolidated write-down of intangibles $ — Upholstery operating income Casegoods operating income Retail operating income Corporate and other Write-down of intangibles Restructuring $ 101,856 5,370 (2,859) (30,422) — (10,294) Consolidated operating income $ 63,651 $ 28,129 Upholstery operating margin Casegoods operating margin Retail operating margin Consolidated operating margin 6.9% 1.2% -1.7% 3.1% 9.0% 0.7% 1.0% 1.4% Income from continuing operations $ 33,095 $ 1,878 Diluted earnings per share from continuing operations N/M - not meaningful $ 0.63 $ 0.04 % Change 1.9% -0.2% 34.2% 34.5% 4.9% 7.8% 21.1% N/M N/M N/M -21.5% 79.5% -320.8% -29.5% N/M 1.4% 126.3% N/M N/M Sales Consolidated sales increased in ﬁscal 2005 compared to ﬁscal 2004 due to increased sales in our Retail Group and our Upholstery Group, price increases, the consolidation of VIEs and an additional week in ﬁscal 2005. Included in our Corporate and other group are the VIEs, which we began consolidating at the end of ﬁscal 2004. The VIEs accounted for $46.0 million of the $96.4 million overall increase in sales. Additionally, we instituted price increases that accounted for approximately 1.0% of the sales increase during the ﬁscal year, which mitigated the rising costs of raw materials. Upholstery Group sales increased based on the strength of the La-Z-Boy branded product sold through general furniture dealers as well as the La-Z-Boy Furniture Galleries® store system. Although most of our La-Z-Boy Furniture Galleries® stores are independently owned, we do track the written sales activity of the total store system to monitor retail activity. A contributing factor to the increased Upholstery sales was an additional week in ﬁscal 2005 (53 weeks) in comparison to ﬁscal 2004 (52 weeks). Our non La-Z-Boy branded upholstery 20 operating units were down slightly due in part to bankruptcies of two large customers. Sales increases in our Retail Group were partially due to the opening of company-operated stores and a full year of sales realized from our Baltimore retail stores acquisition, which occurred at the end of ﬁscal 2004. We also acquired 21 stores near the end of ﬁscal 2005, of which eight were previously consolidated as VIEs. In ﬁscal 2005, the Casegoods Group ﬁnished the ﬁscal year strong by posting two consecutive quarters of sales growth. The second half of ﬁscal 2005 was a signiﬁcant turnaround from the last several years of double-digit declines in sales. A trend analysis of Casegoods Group sales follows. La-Z-Boy Incorporated Annual Report 2006 ANALYSIS OF CASEGOODS GROUP SALES BY QUARTER FOR FISCAL 2005 AND 2004 i) Steel for our recliner mechanisms, springs, fasteners and other metal parts increased our cost of (Amounts in thousands) Fiscal 2005 Fiscal 2004 % Change First Quarter Second Quarter Third Quarter Fourth Quarter $ 105,714 $ 114,169 $ 111,918 $ 123,542 $ 116,508 $ 119,621 $ 107,899 $ 112,062 -9.3% -4.6% 3.7% 10.2% sales for ﬁscal 2005 by approximately 1.0% of net sales compared to the previous year’s costs. Higher raw steel prices increased our raw material costs proportionately more than other companies in the furniture industry, due to our heavier concentration of upholstery and motion upholstery as a percentage of our overall business. ii) The cost of plywood, which mainly impacts our upholstered products, negatively affected our gross The casegoods hospitality and health care business led the sales turnaround by posting double-digit proﬁt by approximately 0.3% of net sales. growth over the prior year, which was partly due to the economic recovery of the hospitality sector. The 21 Casegoods Group beneﬁted from an additional week in ﬁscal 2005 (53 weeks) in comparison to ﬁscal 2004 iii) At the end of ﬁscal 2005, we changed our estimate for unpaid claims for workers’ compensation to an (52 weeks). We also showed some improvement resulting from our transition efforts as some of our other actuarial estimate. As a result, we recorded a charge to increase our claims liability by $5.9 million, casegoods businesses started to experience favorable growth. However, the momentum that the Casegoods which decreased gross margin by 0.3%. Group gained during ﬁscal 2005 was offset by the planned transition of Pennsylvania House to a distributor of imported ﬁnished goods. Pennsylvania House sales decreased in the transition period as we began to iv) We had restructuring expenses of $10.3 million and $10.4 million in ﬁscal 2005 and 2004, wind down the production at our domestic plants during the year and, as a result, there were fewer respectively. The restructuring expense impact on the gross margin was approximately the same for products to ship. Gross Profit both ﬁscal 2005 and 2004. v) Pennsylvania House experienced signiﬁcant manufacturing inefﬁciencies relating to the scheduled Our consolidated gross margin increased 0.6 percentage points, which was mainly due to our increased closures of its plants, which occurred during the third quarter. There were additional costs due to the retail operations and consolidating our VIEs beginning in ﬁscal 2005. Because the VIEs and the La-Z-Boy transition of sourcing product from overseas manufacturers. Furniture Galleries® stores are retailers and not manufacturers, they have a higher gross margin than our manufacturing operations. The VIEs and our retail operations contributed a 4.7 percentage point increase Our selling price increases during the year began to have a positive impact on the third and fourth quarter to our gross margin. Notwithstanding the increase in our gross margins due to the VIEs and our retail gross margins, which somewhat mitigated the negative impact of the raw material cost increases. operations, our remaining businesses’ gross margin was lower in ﬁscal 2005 in comparison to the prior year due to the following: La-Z-Boy Incorporated Annual Report 2006 Selling, General and Administrative Expenses OPERATING MARGIN BY QUARTER FOR FISCAL 2005 AND FISCAL 2004 S,G&A increased in ﬁscal 2005 compared to the prior year, both in dollars and as a percent of sales. We increased our company-owned retail operations after the end of ﬁscal 2004 by opening new stores and acquiring some stores. At the end of ﬁscal 2005, we had 61 company-owned stores – of which 21 were acquired in the fourth quarter – compared to 36 in ﬁscal 2004. Additionally, we began consolidating several independently owned stores as VIEs at the end of ﬁscal 2004 due to the adoption of FIN 46. Since retail and our VIE operations inherently have a higher S,G&A concentration, our consolidated S,G&A as a percent of sales increased due to the expansion of our retail operations and the VIEs that were not in our consolidated statement of operations prior to the 2005 ﬁscal year. Our non-retail based operations’ S,G&A expense in ﬁscal 2005 was relatively ﬂat as a percentage of sales when compared to ﬁscal 2004. Additionally, during the fourth quarter of ﬁscal 2005, we reevaluated our allowance for doubtful accounts after our acquisition First Quarter Second Quarter Third Quarter Fourth Quarter Upholstery Casegoods Retail 2005 2004 2005 2004 2005 2004 Consolidated 2005 2004 4.2% 7.3% 0.5% 0.9% 1.3% 0.9% -0.9% 2.6% 7.2% 8.8% 0.1% 1.7% 1.2% 0.3% 2.9% 5.3% 6.2% 8.7% 1.9% -0.3% -0.4% 2.2% 3.9% 5.3% 9.4% 10.8% 2.1% 0.2% -7.5% 0.6% 5.8% -6.6% 22 of a major La-Z-Boy Furniture Galleries® store market and reassessment of our credit position with respect The year-over-year decrease in the Upholstery Group operating margin was primarily due to the cost to another signiﬁcant dealer upon obtaining additional credit-related information, and therefore we reduced increases in certain raw materials, especially steel and plywood. We did, however, increase our Upholstery our allowance for doubtful accounts by $5.5 million. The additional cost we incurred for complying with Group margins throughout the year due to price increases taken during the April 2004 furniture market as Sarbanes-Oxley was about 0.1% of net sales and was recorded in S,G&A. well as during the summer. Some price increases took effect in the third and fourth quarters and helped Operating Margin mitigate raw material cost increases. In addition to the price increases, we also continued to streamline our manufacturing processes and continued to reduce costs through product re-engineering and material For the reasons noted above, our operating margin for both ﬁscal years was negatively impacted. Our substitution. Some of our non La-Z-Boy branded operating margins were down due to a drop in sales operating margin for ﬁscal 2005 was 3.1% and included 0.5 percentage points of restructuring costs. volume, partially caused by the bankruptcies of two large customers. Our ﬁscal 2004 operating margin was 1.4% and included 0.5 percentage points of restructuring costs. Our operating margins did improve from the beginning of the year to the end of the year, as shown in Although our Casegoods Group operating margins improved during ﬁscal 2005, Pennsylvania House plant the table following. closures and disruptions in our other businesses kept us from fully realizing our margin targets. Additionally, our margins improved as we continued our transition of replacing domestically produced residential casegoods with imported product. Lower priced imported product made us more competitive in the marketplace, which fueled our sales increases in this segment. However, offsetting this momentum was the closure of our Pennsylvania House facilities during the ﬁscal year. The manufacturing inefﬁciencies caused by the reduced production at these facilities somewhat reduced the gains we experienced at our other casegoods businesses. La-Z-Boy Incorporated Annual Report 2006 The decline in the Retail Group operating margins in ﬁscal 2005 was due to the costs associated with opening The cash generated as a result of the signiﬁcant reductions in accounts receivable and inventory was used to new stores during the year, losses after acquiring the Chicago market at the beginning of the fourth quarter of reduce total debt by $43.1 million. ﬁscal 2005 and a weaker retail environment in the second half of ﬁscal 2005. Corporate and other operating proﬁt includes the consolidation of VIEs. Since some of our VIEs have either under credit facilities. These sources have been adequate for day-to-day operations, dividends to negative or no equity in their businesses, we are required to absorb their losses in our consolidated statement shareholders and capital expenditures. We expect these sources of liquidity to continue to be adequate for of operations. During ﬁscal 2005, we focused on reducing our VIEs by either acquiring them or arranging for the foreseeable future. Capital expenditures for ﬁscal 2006 were $28.0 million compared to $34.8 million in them to be acquired by new independent owners. Due to the application of purchase accounting relating to ﬁscal 2005 – which included VIE capital expenditures of $4.3 million for 2006 and $5.0 million for 2005. our acquisition of previously consolidated VIEs, we recognized extraordinary gains of $2.1 million (net of tax). There are no material purchase commitments for capital expenditures. As of the end of the ﬁscal year 2006, Additionally, during the year, one of the equity owners of our VIEs contributed $2.0 million of capital to the we had unused lines of credit and commitments of $221.1 million under several credit arrangements. Our sources of cash liquidity include cash and equivalents, cash from operations and amounts available 23 business. Because we consolidated this entity based on voting interests, we recorded the capital contribution as income in that period to offset previously recorded losses. This was more than offset by $9.6 million of The following table illustrates the main components of our cash ﬂows: pre-tax losses experienced by our VIEs in ﬁscal 2005. Interest Expense Interest expense for ﬁscal 2005 was lower than 2004 due mainly to a decrease in our effective interest rate, offset in part by an increase in our weighted average debt outstanding. Income Taxes Our effective tax rate was 38% in ﬁscal 2005 and 89% in ﬁscal 2004. While our statutory rate was the same for both years, the write-down of intangibles increased our effective tax rate by 51 percentage points in ﬁscal 2004. CASH FLOWS FROM (USED FOR) (Amounts in thousands) Operating activities Net income (loss), depreciation and deferred taxes Write-down of intangibles Restructuring Working capital and other Cash provided from operating activities Investing activities Financing activities Repurchases of common stock Net increase (decrease) in debt Other ﬁnancing activities and exchange rate changes Net increase (decrease) in cash and cash equivalents 4/29/06 4/30/05 $ 22,790 22,695 6,643 37,649 89,777 (30,673) (10,890) (43,102) (18,728) $ (13,616) $ 77,146 — 10,294 (41,475) 45,965 (23,987) (2,476) 1,939 (17,618) $ 3,823 LIQUIDITY AND CAPITAL RESOURCES Our total assets at the end of ﬁscal 2006 were $55.2 million less than ﬁscal 2005. A large portion of that Operating Activities change related to the $41.4 million decline in inventory and trade accounts receivable and the $22.7 million During ﬁscal 2006 and ﬁscal 2005, net cash provided by operating activities was $89.8 million and $46.0 write-down of goodwill during ﬁscal 2006, offset somewhat by a $12.3 million increase in our investments. million, respectively. The increase in 2006 operating cash ﬂows was due mainly to a reduction of $16.3 million in trade receivables and $25.1 million in inventory. Although there are seasonal ﬂuctuations in La-Z-Boy Incorporated Annual Report 2006 inventory and trade receivable balances, we have implemented strategies to reduce these working capital In addition to the obligations listed below, we have guaranteed various leases of dealers with proprietary balances over the past year and expect these balances to continue to be below historical balances. stores. The total amount of these guarantees is $6.7 million. Of this, $2.7 million will expire within one year, Investing Activities $3.1 million in one to three years and $0.9 million in four to ﬁve years. In recent years, we have increased our imports of casegoods product and leather and fabric for upholstery product. At the end of the 2006 ﬁscal During ﬁscal 2006 and ﬁscal 2005, net cash used in investing activities was $30.7 million and $24.0 year, we had $89.3 million in open purchase orders with foreign casegoods, leather and fabric sources. Some million, respectively. The increase in cash used for investing activities in ﬁscal 2006 was primarily reﬂected of these open purchase orders are cancelable. We are not required to make any contributions to our deﬁned in an increase in investments. At April 30, 2005, we had signiﬁcant cash and cash equivalents which were beneﬁt plans; however, we may make discretionary contributions. We have entered into several interest rate invested in longer term assets during ﬁscal 2006. swap agreements with counter-parties that are participants in our revolving credit facility; however, we are currently in a favorable position on this swap, which expires in August 2006, so there are no obligations. Financing Activities Our ﬁnancing activities included borrowings and payments on our debt facilities, dividend payments, Continuing compliance with existing federal, state and local statutes dealing with protection of the issuances of stock and stock repurchases. We used $73.2 million of cash in ﬁnancing activities in ﬁscal environment is not expected to have a material effect upon our capital expenditures, earnings, competitive 24 2006 compared to $18.8 million of cash provided by ﬁnancing activities in ﬁscal 2005. During ﬁscal 2006 position or liquidity. we increased cash from operating activities and were able to pay dividends of $22.9 million and repurchase common stock in the amount of $10.9 million. Our change in net borrowing was $45.0 million less in ﬁscal On October 28, 1987, our Board of Directors announced the authorization of the plan to repurchase company 2006 in comparison to the prior year. stock. The plan originally authorized 1.0 million shares and, subsequent to October 1987, 22.0 million additional shares were added to this plan for repurchase. As of April 29, 2006, 5.9 million additional shares Our debt-to-capitalization ratio was 26.5% at April 29, 2006, 30.0% at April 30, 2005, and 30.0% at could be purchased pursuant to this authorization. The company purchased 0.8 million shares during April 24, 2004. ﬁscal year 2006. The following table summarizes our contractual obligations of the types speciﬁed: (Amounts in thousands) Long-term debt obligations Capital lease obligations Operating lease obligations Interest obligations Other long-term commitments not reﬂected on our balance sheet Total contractual obligations Payments by Period Total Less than 1 Year $ 173,876 2,336 285,972 32,631 996 $ 495,811 $ 1,509 1,335 35,006 8,199 707 $ 46,756 1-3 Years $ 37,640 991 68,283 12,265 210 $ 119,389 4-5 Years More than 5 Years $ 72,497 10 54,952 7,156 79 $ 134,694 $ 62,230 — 127,731 5,011 — $ 194,972 La-Z-Boy Incorporated Annual Report 2006 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk from changes in interest rates. Our exposure to interest rate risk results from assumptions in order to mitigate the likelihood of material adjustments. Our critical accounting policies and changes to critical estimates are reviewed by management with the Audit Committee of our Board of our lines of credit and our ﬂoating rate $150 million revolving credit facility under which we had $25 million Directors and our independent accountants. borrowed at April 29, 2006. Management estimates that a one percentage point change in interest rates would not have a material impact on our results of operations for ﬁscal 2007 based upon the year-end levels of exposed liabilities. Inventories Inventories are stated at the lower of cost or market. Cost was determined using the last-in, ﬁrst-out (“LIFO”) basis for approximately 67% and 70% of our inventories at April 29, 2006, and April 30, 2005, respectively. We are exposed to market risk from changes in the value of foreign currencies. Our exposure to changes in Cost is determined for all other inventories on a ﬁrst-in, ﬁrst-out (“FIFO”) basis. 25 the value of foreign currencies is reduced through our use of foreign currency forward contracts from time to time. At April 29, 2006, we had no foreign exchange forward contracts outstanding. Substantially all of our imports purchased outside of North America are denominated in U.S. dollars. However, a change in the Revenue Recognition and Related Allowances Shipping terms for third-party carriers are FOB shipping point, and revenue is recognized upon shipment value of Chinese currency could be one of several factors that could inﬂate costs in the future. We believe of product. For product shipped on our company-owned trucks, revenue is recognized upon delivery. that gains or losses resulting from changes in the value of foreign currencies will not be material to our This revenue includes amounts billed to customers for shipping. Provision is made at the time revenue results from operations in ﬁscal year 2007. is recognized for estimated product returns and warranties as well as other incentives that may be offered CRITICAL ACCOUNTING POLICIES An appreciation of our critical accounting policies is necessary to understand our ﬁnancial results. These policies may require management to make difﬁcult and subjective judgments regarding uncertainties and, to customers. We import certain products from foreign ports, which are shipped directly to our domestic customers. In this case, revenue is not recognized until title is assumed by our customer, which is normally after the goods pass through U.S. Customs. as a result, such estimates may signiﬁcantly impact our ﬁnancial results. These policies were identiﬁed as Other incentives offered to customers include cash discounts, advertising agreements and other sales critical because they are broadly applicable within our operating units. The expenses and accrued liabilities incentives. Cash discounts are recorded as a reduction of revenues when the revenue is recognized. Other or allowances related to certain of these policies are initially based on our best estimates at the time of sales incentives are recorded at the time of sale as a reduction to revenue. Our advertising agreements give original entry in our accounting records. Adjustments are recorded when our actual experience differs from our non-branded customers advertising allowances based on revenues and are recorded when the revenue the assumptions underlying the estimates. These adjustments could be material if our experience were to is recognized as a reduction to revenue. change signiﬁcantly in a short period of time. We make frequent comparisons of actual experience to our La-Z-Boy Incorporated Annual Report 2006 Goodwill and Trade Names In accordance with SFAS No. 142, trade names are tested at least annually for impairment by comparing In the fourth quarter of ﬁscal 2004, the annual evaluation of goodwill and trade names was performed. Following the evaluation procedures it was determined that the carrying value of trade names exceeded their their fair value to their carrying values. The fair value for each trade name was established based upon a fair value, creating an impairment loss of $43.2 million, and the carrying value of goodwill exceeded its fair royalty savings approach. Additionally, goodwill was tested for impairment by comparing the fair value of our value, creating an impairment loss of $28.7 million. The after-tax effect of the impairment was $55.9 million. operating units to their carrying values. The fair value for each operating unit was established based on the The before-tax effect of $71.9 million for these impairment losses was recorded as a component of operating discounted cash ﬂows. In situations where the fair value is less than the carrying value, indicating a potential income. Of the total impairment losses, $11.3 million and $60.6 million were attributed to the Upholstery impairment, a second comparison was performed using a calculation of implied fair value of goodwill to and the Casegoods segments, respectively. One operating unit accounted for the write-down in the determine the monetary value of impairment. Upholstery Group. During ﬁscal 2004, this operating unit had experienced a decline in sales and operating income, which caused a decline in the fair value of its intangibles. Prior to ﬁscal 2005, Casegoods Group In the fourth quarter of ﬁscal 2006, the annual evaluation of goodwill and trade names was performed. sales and operating results had been declining in the last few years. Due to continued lagging operating Following the evaluation procedures, it was determined that our trade names were not impaired. The carrying results and changes in facts relating to underlying assumptions, the fair value evaluation was lower in the value of goodwill exceeded its fair value at Bauhaus, creating an impairment loss of $22.7 million which ﬁscal 2004 fourth quarter than in the prior year fourth quarter. 26 was recorded as a component of operating income. In the latter half of ﬁscal 2006, Bauhaus was impacted by several large customer bankruptcies and the merger of two major department stores, which reduced production causing the closure of several production facilities. There was no tax beneﬁt recognized on this impairment charge. Other Loss Reserves The allowance for doubtful accounts reﬂects our best estimate of probable losses inherent in the accounts receivable balance. In ﬁscal 2006, our allowance for doubtful accounts for trade accounts receivable and long-term notes decreased from $20.5 million to $17.4 million. The decrease in the allowance was due to In the fourth quarter of ﬁscal 2005 and in ﬁscal 2004, we acquired several La-Z-Boy Furniture Galleries® several write-offs during the fourth quarter of ﬁscal 2006 for previously reserved accounts for a total of stores that were independently owned. Relating to these acquisitions, we recorded goodwill of $11.3 million $4.0 million and due to a lower accounts receivable balance. and $10.3 million in ﬁscal 2005 and ﬁscal 2004, respectively. Additionally, in the fourth quarter of ﬁscal 2005, we completed a valuation of the tax reserves relating to an acquisition in ﬁscal 2000. Due to the We have other loss exposures arising from the ordinary course of business, including inventory resolution of certain open tax items relating to the acquisition, a reduction of the tax reserves was required obsolescence, litigation, environmental claims, health insurance, product liability, warranty, restructuring during ﬁscal 2005, resulting in a reduction of the remaining acquired intangible assets, which consisted of charges and the recoverability of deferred income tax beneﬁts. Establishing loss reserves requires the trade names and totaled $6.4 million. Furthermore, in the fourth quarter of ﬁscal 2005, the annual evaluation estimate and judgment of management with respect to risk exposure and ultimate liability. We use legal of goodwill and trade names was performed. We determined that goodwill and trade names were not counsel or other experts, including actuaries as appropriate, to assist in developing estimates. Due to the impaired as of the end of ﬁscal 2005. uncertainties and potential changes in facts and circumstances, additional charges related to these reserves could be required in the future. La-Z-Boy Incorporated Annual Report 2006 PENSIONS We maintain deﬁned beneﬁt pension plans for eligible factory hourly employees at some operating units. used for determining pension expense of our Canadian plan was 7.5% as of April 29, 2006, and 8.0% as of April 30, 2005. The expected rate of return assumption as of April 29, 2006, will be used to determine Our largest plan has been frozen for new participants since January 1, 2001, but active participants still earn pension expense for plans in 2007. service cost. Additionally, we closed our Canadian manufacturing facility during ﬁscal 2006 and terminated the pension plan associated with that business. Annual net periodic expense and beneﬁt liabilities under our Our long-term stated investment objective is to maximize the investment return with the least amount of risk deﬁned beneﬁt plans are determined on an actuarial basis. Each year, we compare the actual experience to through a combination of capital appreciation and income. The strategic asset allocation targets are 65% the more signiﬁcant assumptions used; if warranted, we make adjustments to the assumptions. equities and 35% ﬁxed income within a range of 5% of the target. As of April 29, 2006, our weighted average asset allocation was 69% equity securities and 31% debt securities. As of April 30, 2005, our weighted Our pension plan discount rate assumption is evaluated annually. The discount rate selected for our U.S. average asset allocation was 68% equity securities and 32% debt securities. plans is based upon a single rate developed after matching expected beneﬁt payments to a yield curve for 27 high-quality ﬁxed-income investments. Long-term interest rates on high-quality debt instruments, which are As of the end of ﬁscal 2005, the qualiﬁed plans were underfunded; however, only our Canadian plan used to determine the discount rate, were up slightly at the end of ﬁscal 2006 after declining in ﬁscal 2005. remained underfunded at the end of ﬁscal 2006. We expect to fund our Canadian pension plan fully in ﬁscal Accordingly, we increased the discount rate used to determine our pension beneﬁt obligation on our U.S. 2007 but expect that the funding will be less than $0.1 million U.S. dollars. In addition, our non-qualiﬁed plans 95 basis points for ﬁscal 2006, after decreasing the rate 50 basis points for ﬁscal 2005. For our U.S. retirement plan was not funded at April 29, 2006. We do not expect to fund our non-qualiﬁed deﬁned beneﬁt plans, we utilized a discount rate of 6.45% at April 29, 2006, compared to a rate of 5.50% at April 30, 2005, retirement plan as we hold funds equal to the liability of the plan in a Rabbi trust. We are not required to and 6.00% at April 24, 2004. In addition, the discount rate utilized by our Canadian plan was 4.3% at make any contributions to the deﬁned beneﬁt plans in ﬁscal year 2007; however, we reserve the right to April 29, 2006, compared to a rate of 5.5% at April 30, 2005, and 6.5% at April 24, 2004. make discretionary contributions. Pension beneﬁts are funded through deposits with trustees and satisfy, at a minimum, the applicable funding We had unrecognized losses related to our pension plans of $9.9 million and $24.2 million in ﬁscal 2006 regulations. The expected long-term rates of return on fund assets are based upon actual historical returns and ﬁscal 2005, respectively. The change in the unrecognized actuarial loss for the past two years is primarily modiﬁed for known changes in the markets and any expected changes in investment policy. attributed to changes in the discount rate and return on plan assets. A portion of the ﬁscal 2006 unrecognized Besides evaluating the discount rate used to determine our pension obligation, we also evaluate our on the actual experience of the plans in ﬁscal 2007 and beyond. We expect that the ﬁscal 2007 pension assumption relating to the expected return on plan assets annually. In selecting the expected long-term expense after considering all relevant assumptions will be approximately $2.0 million compared to $3.4 rate of return on assets, we considered the average rate of earnings expected on the funds invested or to million in ﬁscal 2006, which included $0.9 million of curtailment charges. We do not believe that a 25 basis be invested to provide the beneﬁts of these plans. This included considering the trust’s asset allocation, point change in our discount rate or our expected return on plan assets would have a material impact on our loss will be amortized into earnings in ﬁscal 2007. The effect on years after ﬁscal 2007 will mostly depend investment strategy and the expected returns likely to be earned over the life of the plans. The rate of return ﬁnancial statements. assumption for U.S. plans as of April 29, 2006, and April 30, 2005, was 8.0%. The rate of return assumption La-Z-Boy Incorporated Annual Report 2006 Financial Guarantees We have provided ﬁnancial guarantees relating to leases in connection with certain La-Z-Boy Furniture La-Z-Boy Furniture Galleries® 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 Galleries® stores, which are neither owned nor operated by the company. Lease guarantees are generally vendors. In some cases we have extended credit beyond normal trade terms to the independent dealers, made for real estate leases and have terms lasting up to ﬁve years. These lease guarantees enhance the credit of direct loans and/or guaranteed certain leases. Most of these independent dealers have sufﬁcient equity to these dealers. The dealer is required to make periodic fee payments to compensate us for our guarantees. carry out their principal operating activities without subordinated ﬁnancial support. However, there are certain We have recognized liabilities for the fair values of the lease agreements that we have entered into since independent dealers that we have determined may not have sufﬁcient equity. December 31, 2002, but they are not material to our ﬁnancial position. Based on the criteria for consolidation of VIEs, as of April 24, 2004, we consolidated several dealers where We would be required to perform under these agreements only if the dealer were to default on the lease. The we were the primary beneﬁciary based on the fair value of our variable interests. All of our consolidated VIEs maximum amount of potential future payments under lease guarantees was $6.7 million as of April 29, 2006. were recorded at fair value on the date we became the primary beneﬁciary resulting in a cumulative effect We have, from time to time, entered into agreements which resulted in indemnifying third parties against as if the entities were consolidated based on voting interests, we absorb all net losses of the VIEs in excess certain liabilities, mainly environmental. We believe that judgments, if any, against us related to such of the equity at the dealerships. We recognize all net earnings of these VIEs to the extent of recouping the agreements would not have a material effect on our business or ﬁnancial condition. losses we recorded. Earnings in excess of our losses are attributed to equity owners of the dealers and are of accounting change of $8.3 million (net of tax of $5.1 million). Because these entities are accounted for 28 Our accounting policy for product warranties is to accrue an estimated liability at the time the revenue is by acquisition. At the end of the ﬁrst quarter of ﬁscal 2006, we became the primary beneﬁciary of one recognized. This estimate is based on historical claims and adjusted for currently known warranty issues. additional dealer due to a change in ﬁnancial structure of this dealer. shown as minority interest on our ﬁnancial statements. During ﬁscal 2005, we eliminated two of our VIEs Variable Interest Entities Financial Accounting Standards Board Interpretation No. 46R, Consolidation of Variable Interest Entities Our consolidated VIEs recognized $36.8 million and $46.0 million in sales, net of intercompany eliminations, in ﬁscal 2006 and ﬁscal 2005, respectively. Additionally, we recognized a net loss per share of $0.09 and (“FIN 46”), which was issued in December 2003, requires the “primary beneﬁciary” of a VIE to include the $0.11 in ﬁscal 2006 and ﬁscal 2005, respectively, resulting from the operating results of these VIEs. The VIEs had VIE’s assets, liabilities and operating results in its consolidated ﬁnancial statements. In general, a VIE is $8.6 million and $10.2 million of assets net of elimination of intercompany activity at the end of ﬁscal 2006 and a corporation, partnership, limited-liability corporation, trust or any other legal structure used to conduct ﬁscal 2005, respectively. During the third quarter of ﬁscal 2005, one of the equity owners of our VIEs contributed activities or hold assets that either (a) has an insufﬁcient amount of equity to carry out its principal activities $2.0 million of capital to their business. Because we accounted for this entity as if it were consolidated based without additional subordinated ﬁnancial support, (b) has a group of equity owners that are unable to make on voting interests, we recorded the capital contribution as income in that period to offset previously recorded signiﬁcant decisions about its activities, or (c) has a group of equity owners that do not have the obligation losses. In ﬁscal 2005, the extraordinary gain of $3.4 million ($2.1 million net of income taxes) resulted from the to absorb losses or the right to receive returns generated by its operations. application of purchase accounting relating to the acquisition of previously consolidated VIEs. La-Z-Boy Incorporated Annual Report 2006 Additionally, there is an independent dealer that qualiﬁes as a VIE; however, we are not the primary beneﬁciary. Our interest in this dealer began in 1992 and is comprised of accounts and notes receivable of $21.8 million, (Amounts in thousands) which we evaluated periodically for collectibility. We acquired this business at fair value subsequent to year end. This acquisition is expected to impact our consolidated sales by less than 1.0% for the full year of ﬁscal 2007. The tables following show the impact of this standard on our consolidated balance sheet at April 29, 2006, and April 30, 2005, and statement of operations for the years ended April 29, 2006, and April 30, 2005. The amounts reﬂected in the tables include the elimination of related payables, receivables, sales, cost of sales and interest, as well as proﬁt in inventory. Sales(2) Cost of sales(2) Gross proﬁt Selling, general and administrative Operating loss Interest expense Other expense, net(3) Pre-tax loss Income tax beneﬁt VIEs 4/29/06 $ 36,806 4,488 32,318 38,438 (6,120) 504 (1,260) (7,884) (2,996) 4/30/05 $ 46,019 1,224 44,795 49,825 (5,030) 427 (4,154) (9,611) (3,652) 29 (Amounts in thousands) Assets Cash and equivalents Receivables, net(1) Inventories, net Deferred income taxes Other current assets Total current assets Property, plant and equipment, net Intangibles Other long-term assets(1) Total assets Liabilities and shareholders’ equity Current portion of long-term debt and capital leases Accounts payable Other current liabilities Total current liabilities Long-term debt and capital leases Other long-term liabilities Shareholders’ equity (deﬁcit) VIEs 4/29/06 4/30/05 (2) Includes the elimination of intercompany sales and cost of sales. (3) Includes the elimination of intercompany interest income and interest expense. Net loss from continuing operations $ (4,888) $ (5,959) $ 2,554 (20,507) 12,795 10,194 1,487 6,523 12,965 8,122 (19,000) $ 1,699 (9,131) 7,211 7,199 1,226 8,204 8,431 7,714 (14,169) Restructuring In the second quarter of ﬁscal 2006, the decision was made to close our Canadian upholstery manufacturing facility due to our overall underutilization of capacity. The plant closure occurred in the third quarter of ﬁscal 2006 and production was absorbed in our other upholstery facilities. A total of 413 jobs were eliminated as a result of this closure. During ﬁscal 2006, pre-tax restructuring charges for our Canadian facility were $8.9 million, or $0.11 per diluted share, covering severance and beneﬁts, appropriate $ 8,610 $ 10,180 adjustments to our pension liability and the write-down of certain ﬁxed assets. During ﬁscal 2006, the $ 1,587 1,390 6,146 9,123 6,764 (1,632) (5,645) $ 1,934 329 3,523 5,786 6,256 (1,300) (562) decision was made to close a small, 90,000-square-foot upholstery manufacturing facility in Mississippi with production absorbed by other upholstery facilities. Pre-tax restructuring charges relating to this closure were $0.3 million, covering severance and beneﬁts and the write-down of certain ﬁxed assets. Severance costs and other costs for our restructurings were expensed in accordance with SFAS No. 112, Employers’ Accounting for Postemployment Beneﬁts, and SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. The write-downs were accounted for in accordance with SFAS No. 144, Accounting for Total liabilities and shareholders’ equity $ 8,610 $ 10,180 the Impairment or Disposal of Long-Lived Assets. We expect to dispose of the remaining plants by sale. (1) Reﬂects the elimination of intercompany accounts and notes receivable. La-Z-Boy Incorporated Annual Report 2006 Somewhat offsetting these expenses for the upholstery restructurings was a pre-tax gain of $2.5 million Restructuring liabilities along with charges to expense, cash payments or asset write-downs were as follows: relating to the sale of two facilities in Mississippi and one facility in Pennsylvania idled as part of previous restructurings. In the ﬁrst quarter of ﬁscal 2005, we announced the closing of three casegoods facilities, an upholstery plant and an upholstery warehouse. The casegoods facilities were closed as a result of continued underutilization of our domestic casegoods facilities due to an increase in our importing of product from overseas. The upholstery plant was closed and production was absorbed in another upholstery facility, resulting in better production efﬁciencies. Approximately 525 jobs were eliminated as a result of these closures. During ﬁscal 2005, pre-tax restructuring charges were $10.3 million or $0.12 per diluted share, covering the following: write-down of certain ﬁxed assets, the write-down of certain inventories, payment of severance and beneﬁts and other costs related to the shutdown. We expect to dispose of these plants by sale, or abandonment if a sale is not practical. Restructuring expenses during 2005 were lower than we had originally anticipated Fiscal 2006 (Amounts in thousands) 4/30/05 Balance Charges to Expense Cash Payment or Asset Write-Down 4/29/06 Balance Fixed asset write-downs, net of gains Severance and beneﬁt- related costs Total $ — 38 $ 38 $ (2,327) $ 2,327 8,970 $ 6,643 (8,117) $ (5,790) $ — 891 $ 891 Fiscal 2005 (Amounts in thousands) 4/24/04 Balance Charges to Expense Cash Payment or Asset Write-Down 4/30/05 Balance Fixed asset write-downs, net of gains Severance and beneﬁt- related costs Inventory write-downs Other $ — 329 — 174 $ 503 $ 4,619 $ (4,619) $ — 1,700 2,450 1,525 (1,991) (2,450) (1,699) 38 — — $ 10,294 $ (10,759) $ 38 30 because our charges to expense were offset by the gains on sale of assets previously written down through Total restructuring in the fourth quarter of ﬁscal 2005. The write-down was accounted for in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Severance costs and other costs are being expensed as incurred throughout the current ﬁscal year in accordance with SFAS No. 146, BUSINESS OUTLOOK While we are pleased with our progress in our Upholstery and Casegoods divisions, we are concerned Accounting for Costs Associated with Exit or Disposal Activities. about the macroeconomic environment as the energy markets remain volatile and interest rates continue to increase. In particular, there has been a change in the retail environment since the ﬁrst calendar quarter We had $4.2 million of assets held for sale included in other long-term assets on our consolidated balance of 2006 with April and May being difﬁcult months. Due to seasonal factors, the ﬁrst ﬁscal quarter is sheet as of April 29, 2006, primarily as a result of the above restructurings. This amount consists of typically our weakest. With that as a backdrop, we expect our ﬁrst-quarter sales to be ﬂat against last year’s buildings and related assets. All of these assets have been written down to their fair value less costs to sell $451 million and reported earnings to be in the range of $0.01 to $0.05 per share, which will include up and are currently being marketed. to a $0.02 per share charge for stock option expense. La-Z-Boy Incorporated Annual Report 2006 RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial The FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets – an amendment of APB Opinion No. 29, in December 2004. The guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, Accounting Standards (“SFAS”) No. 123(R), Share-Based Payment. This statement replaces SFAS is based on the principle that exchanges of nonmonetary assets should be measured based on the fair No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that Stock Issued to Employees. SFAS No. 123(R) requires companies to apply a fair-value-based measurement principle. This statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of method in accounting for share-based payment transactions with employees and to record compensation similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that cost for all stock awards granted after the required effective date and to awards modiﬁed, repurchased or do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash canceled after that date. In addition, we are required to record compensation expense (as previous awards ﬂows of the entity are expected to change signiﬁcantly as a result of the exchange. We do not expect this continue to vest) for the unvested portion of previously granted awards that remain outstanding at the date pronouncement to have a material impact on our ﬁnancial statements. of adoption. The revised statement generally requires that an entity account for stock-based compensation 31 transactions using the fair-value-based method and eliminates an entity’s ability to account for those In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections. SFAS No. 154 transactions using the intrinsic value method of accounting. SFAS No. 123(R) is effective for us beginning is a replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS No. 154 provides guidance on on April 30, 2006. We will adopt this statement using a modiﬁed version of prospective application on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective April 30, 2006. Management has evaluated the impact that SFAS No. 123(R) will have on our ﬁnancial application as the required method for reporting a change in accounting principle. SFAS No. 154 provides position and results of operations and does not expect the impact to be materially different than the effect guidance for determining whether retrospective application of a change in accounting principle is shown in Note 1 under “Accounting for Stock-Based Compensation.” impracticable and for reporting a change when retrospective application is impracticable. The reporting of a In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, SFAS No. 154 is effective for accounting changes and corrections of errors made in ﬁscal years beginning Chapter 4. The amendments made by SFAS No. 151 will improve ﬁnancial reporting by clarifying that after December 15, 2005. We will be adopting this pronouncement beginning in our ﬁscal year 2007. abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current-period charges, and by requiring the allocation of ﬁxed production overheads to In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments, inventory, based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory an amendment of FASB Statements No. 133 and 140, which permits fair value measurement for any costs incurred during ﬁscal years beginning after June 15, 2005. We have evaluated SFAS No. 151 and do hybrid ﬁnancial instrument that contains an embedded derivative that otherwise would require bifurcation. not expect this pronouncement to have a material impact on our ﬁnancial statements. Statement 155 is effective for all ﬁnancial instruments acquired or issued subsequent to the beginning of correction of an error by restating previously issued ﬁnancial statements is also addressed by SFAS No. 154. the ﬁrst ﬁscal year that begins after September 15, 2006. We do not expect this pronouncement to have a material impact on our ﬁnancial statements. La-Z-Boy Incorporated Annual Report 2006 In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets, an amendment According to U.S. Customs and Border Protection, as of October 1, 2005, approximately $117 million of FASB Statement No. 140, which provides relief for servicers that use derivatives to economically hedge had been collected in tariffs and is potentially available for distribution under CDSOA to eligible domestic ﬂuctuations in the fair value of their servicing rights and changes how gains and losses are computed in manufacturers in connection with the case involving wooden bedroom furniture imported from China. certain transfers or securitizations. Statement 156 is effective as of the beginning of the ﬁrst ﬁscal year that These funds are subject to adjustment as the amount of the actual duties is determined retrospectively begins after September 15, 2006. We do not expect this pronouncement to have a material impact on our for those imports that are subject to annual administrative reviews conducted by the U.S. Department of ﬁnancial statements. Commerce. Further, certain importers and Chinese producers have appealed the initial ﬁndings of the anti-dumping order to the U.S. Court of International Trade, and favorable rulings for these importers The FASB issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (“FIN 47”), and Chinese producers could reduce the amount of duties ultimately available for distribution. The tariffs on March 30, 2005. The interpretation will result in (a) more consistent recognition of liabilities relating attributable to importers and Chinese producers whose imports are subject to appeals and administrative to asset retirement obligations, (b) more information about expected future cash outﬂows associated with reviews are not available for distribution until those proceedings have been completed. Consequently, those obligations, and (c) more information about investments in long-lived assets because additional asset the amount ultimately available for distribution in this case during 2006 will depend on tariffs collected retirement costs will be recognized as part of the carrying amounts of the assets. Interpretation No. 47 is through September 30, 2006, that are not subject to administrative reviews and pending legal appeals. Also, effective no later than the end of ﬁscal years ending after December 15, 2005. FIN 47 did not have a material any amount we may receive will depend on our percentage allocation, which is based on our qualifying 32 impact on our ﬁnancial statements. expenditures in relation to the qualifying expenditures of other domestic producers requesting distribution for the relevant time periods under CDSOA. Our percentage allocation for payments received in calendar REGULATORY DEVELOPMENTS The Continued Dumping and Subsidy Offset Act (CDSOA) provides for distribution of monies collected by 2005 was approximately 20%. The payments received in calendar 2005 were immaterial in total dollars. In view of the uncertainties associated with this program, we are unable to predict the amounts, if any, we may U.S. Customs from anti-dumping cases to domestic producers that supported the anti-dumping petition. receive in ﬁscal 2007 or thereafter under CDSOA. However, assuming CDSOA distributions continue, these The Dispute Settlement Body of the World Trade Organization (WTO) ruled that such payments violate distributions could be material depending on the results of legal appeals and administrative reviews and the United States’ WTO obligations. In response to that ruling, on February 8, 2006, the President signed our actual percentage allocation. legislation passed by Congress that repeals CDSOA distributions to eligible domestic producers for tariffs collected on imports entered into the United States after September 30, 2007. La-Z-Boy Incorporated Annual Report 2006 CONSOLIDATED STATEMENT OF OPERATIONS (Amounts in thousands, except per share data) Fiscal Year Ended Sales Cost of sales Cost of goods sold Restructuring Total cost of sales Gross proﬁt Selling, general and administrative Write-down of intangibles Operating income Interest expense Other income, net Income from continuing operations before income taxes Income tax expense Income (loss) from continuing operations Income from discontinued operations (net of tax of $1,223 in 2005 and $398 in 2004) Extraordinary gains (net of tax of $1,283 in 2005) Cumulative effect of accounting changes (net of tax of $5,101 in 2004) Net income (loss) 33 Basic average shares outstanding Basic net income (loss) per share: Income (loss) from continuing operations Income from discontinued operations (net of tax) Extraordinary gains (net of tax) Cumulative effect of accounting changes (net of tax) Net income (loss) per basic share Diluted weighted average shares outstanding Diluted net income (loss) per share: Income (loss) from continuing operations Income from discontinued operations (net of tax) Extraordinary gains (net of tax) Cumulative effect of accounting changes (net of tax) Net income (loss) per diluted share The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. La-Z-Boy Incorporated Annual Report 2006 4/29/06 (52 Weeks) $ 1,916,777 1,457,965 6,643 1,464,608 452,169 410,348 22,695 19,126 11,540 1,847 9,433 12,474 (3,041) — — — 4/30/05 (53 Weeks) $ 2,048,381 1,572,844 10,294 1,583,138 465,243 401,592 — 63,651 10,442 170 53,379 20,284 33,095 1,996 2,094 — 4/24/04 (52 Weeks) $ 1,951,997 1,509,864 10,441 1,520,305 431,692 331,620 71,943 28,129 11,253 4,364 21,240 19,362 1,878 650 — (8,324) $ (3,041) $ 37,185 $ (5,796) 51,801 $ (0.06) — — — $ (0.06) 51,801 $ (0.06) — — — $ (0.06) 52,082 $ 0.63 0.04 0.04 — $ 0.71 52,138 $ 0.63 0.04 0.04 — $ 0.71 53,508 $ 0.04 0.01 — (0.16) $ (0.11) 53,679 $ 0.04 0.01 — (0.16) $ (0.11) CONSOLIDATED BALANCE SHEET As of Assets Current assets Cash and equivalents Receivables, less allowance of $14,164 in 2006 and $17,540 in 2005 Inventories, net Deferred income taxes Other current assets Total current assets Property, plant and equipment, net Goodwill Trade names Other long-term assets, less allowance of $3,267 in 2006 and $2,949 in 2005 Total assets Liabilities and shareholders’ equity Current liabilities Short-term borrowings Current portion of long-term debt Accounts payable Accrued expenses and other current liabilities Total current liabilities Long-term debt Deferred income taxes Other long-term liabilities Contingencies and commitments Shareholders’ equity Preferred shares – 5,000 authorized; none issued Common shares, $1 par value – 150,000 authorized; 51,782 outstanding in 2006 and 52,225 outstanding in 2005 Capital in excess of par value Retained earnings Unearned compensation Accumulated other comprehensive income (loss) Total shareholders’ equity Total liabilities and shareholders’ equity The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. (Amounts in thousands, except par value) 4/29/06 4/30/05 $ 24,089 270,578 238,826 27,276 23,790 584,559 209,986 56,926 18,794 100,909 $ 37,705 283,915 260,556 22,779 33,410 638,365 210,565 79,362 21,484 76,581 $ 971,174 $ 1,026,357 $ 8,000 2,844 85,561 132,005 228,410 173,368 14,548 44,503 — 51,782 210,826 246,387 (3,083) 4,433 510,345 $ 971,174 34 $ 9,700 3,060 82,792 133,172 228,724 213,549 5,389 51,409 — 52,225 214,087 273,143 (1,536) (10,633) 527,286 $ 1,026,357 La-Z-Boy Incorporated Annual Report 2006 CONSOLIDATED STATEMENT OF CASH FLOWS Fiscal Year Ended Cash ﬂows from operating activities Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by operating activities Write-down of intangibles Cumulative effect of accounting change (net of tax) Extraordinary gains (net of tax) Gain on sale of discontinued operations (net of tax) Restructuring Change in allowance for doubtful accounts Depreciation and amortization Change in receivables Change in inventories Change in payables Change in other assets and liabilities Change in deferred taxes 35 Total adjustments Net cash provided by operating activities Cash ﬂows from investing activities Proceeds from disposals of assets Proceeds from sale of discontinued operations Capital expenditures Purchases of investments Proceeds from sales of investments Acquisitions, net of cash acquired Change in other long-term assets Net cash used for investing activities Cash ﬂows from ﬁnancing activities Proceeds from debt Payments on debt Stock issued for stock and employee beneﬁt plans Repurchases of common stock Dividends paid Net cash used for ﬁnancing activities Effect of exchange rate changes on cash and equivalents Change in cash and equivalents Cash acquired from consolidation of VIEs Cash and equivalents at beginning of the year Cash and equivalents at end of the year The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. La-Z-Boy Incorporated Annual Report 2006 4/29/06 4/30/05 4/24/04 (Amounts in thousands) $ (3,041) $ 37,185 $ (5,796) 22,695 — — — 6,643 1,805 29,234 16,251 25,132 2,260 (7,799) (3,403) 92,818 89,777 11,499 — (27,991) (25,289) 12,983 — (1,875) (30,673) 103,380 (146,482) 3,679 (10,890) (22,923) (73,236) 516 (13,616) — 37,705 — — (2,094) (668) 10,294 (3,189) 28,329 (5,935) (10,633) (10,032) (8,924) 11,632 8,780 45,965 11,226 10,985 (34,771) (14,890) 8,120 (6,806) 2,149 (23,987) 126,752 (124,813) 4,573 (2,476) (22,868) (18,832) 677 3,823 — 33,882 71,943 8,324 — — 10,441 (1,201) 29,112 8,631 16,309 13,220 (6,238) (11,843) 138,698 132,902 2,167 — (31,593) (5,394) 9,250 (9,189) (403) (35,162) 101,572 (111,657) 6,714 (72,509) (21,514) (97,394) 775 1,121 3,944 28,817 $ 24,089 $ 37,705 $ 33,882 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (Amounts in thousands) At April 26, 2003 Repurchases of common stock Stock issued for stock and employee beneﬁt plans Tax beneﬁt from exercise of options Dividends paid Comprehensive income (loss) Net loss Unrealized gain on marketable securities (net of tax) Realization of gains on marketable securities (net of tax) Change in additional minimum pension liability (net of tax) Translation adjustment Change in fair value of cash ﬂow hedges (net of tax) Total comprehensive loss At April 24, 2004 Repurchases of common stock Stock issued for stock and employee beneﬁt plans Amortization of unearned compensation Tax beneﬁt from exercise of options Dividends paid Comprehensive income (loss) Net income Unrealized gain on marketable securities (net of tax) Realization of gains on marketable securities (net of tax) Change in additional minimum pension liability (net of tax) Translation adjustment Change in fair value of cash ﬂow hedges (net of tax) Total comprehensive income At April 30, 2005 Repurchases of common stock Stock issued for stock and employee beneﬁt plans Amortization of unearned compensation Dividends paid Comprehensive income (loss) Net loss Unrealized gain on marketable securities (net of tax) Realization of gains on marketable securities (net of tax) Change in additional minimum pension liability (net of tax) Translation adjustment Change in fair value of cash ﬂow hedges (net of tax) Total comprehensive income Common Shares $ 55,027 (3,379) 383 Capital in Excess of Par Value $ 216,081 (493) 568 52,031 (120) 314 216,156 (2,063) (6) 52,225 (760) 317 214,087 (3,261) Retained Earnings $ 342,628 (69,130) 6,824 (21,514) (5,796) 253,012 (2,356) 8,170 (22,868) 37,185 273,143 (10,130) 9,338 (22,923) (3,041) Unearned Compensation Accumulated Other Comprehensive Income (Loss) $ — $ (3,797) — (1,848) 312 (1,536) (2,715) 1,168 1,884 (525) (457) 1,870 2,154 1,129 127 (93) (14,144) 2,359 (11) (10,633) 1,020 (451) 13,572 988 (63) At April 29, 2006 $ 51,782 $ 210,826 $ 246,387 $ (3,083) $ 4,433 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. Total $ 609,939 (72,509) 6,714 568 (21,514) (870) 522,328 (2,476) 4,573 312 (6) (22,868) 25,423 527,286 (10,890) 3,679 1,168 (22,923) 12,025 $ 510,345 36 La-Z-Boy Incorporated Annual Report 2006 Notes to Consolidated Financial Statements 37 NOTE 1: ACCOUNTING POLICIES The following is a summary of signiﬁcant accounting policies followed in the preparation of these canceled after that date. In addition, we are required to record compensation expense (as previous awards continue to vest) for the unvested portion of previously granted awards that remain outstanding at the date consolidated ﬁnancial statements. Our ﬁscal year ends on the last Saturday of April. Fiscal years 2006 and of adoption. The revised statement generally requires that an entity account for stock-based compensation 2004 included 52 weeks, whereas ﬁscal year 2005 included 53 weeks. transactions using the fair-value-based method and eliminates an entity’s ability to account for those Principles of Consolidation transactions using the intrinsic value method of accounting. SFAS No. 123(R) is effective for us beginning on April 30, 2006. We will adopt this statement using a modiﬁed version of prospective application on The consolidated ﬁnancial statements include the accounts of La-Z-Boy Incorporated and its majority-owned April 30, 2006. Management has evaluated the impact that SFAS No. 123(R) will have on our ﬁnancial subsidiaries (“the Company”). All signiﬁcant intercompany transactions have been eliminated. Additionally, position and results of operations and does not expect the impact to be materially different than the effect we adopted Financial Accounting Standards Board Interpretation No. 46R, Consolidation of Variable Interest shown below under “Accounting for Stock-Based Compensation.” Entities (“VIE”) (“FIN 46”), as of April 24, 2004, which resulted in the consolidation of several of our independently owned La-Z-Boy Furniture Galleries® stores. In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Use of Estimates Chapter 4. The amendments made by SFAS No. 151 will improve ﬁnancial reporting by clarifying that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should The consolidated ﬁnancial statements are prepared in conformity with accounting principles generally be recognized as current-period charges, and by requiring the allocation of ﬁxed production overheads to accepted in the United States of America, which require management to make estimates and assumptions inventory, based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory that affect the reported amounts of assets, liabilities, sales and expenses for the reporting periods. Some costs incurred during ﬁscal years beginning after June 15, 2005. We have evaluated SFAS No. 151 and of the more signiﬁcant estimates include depreciation, valuation of inventories, valuation of intangibles, do not expect this pronouncement to have a material impact on our ﬁnancial statements. allowances for doubtful accounts, sales returns, legal, environmental, restructuring, product liability, insurance reserves and warranty accruals. Actual results could differ from those estimates. The FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets – an amendment of APB Opinion New Pronouncements No. 29, in December 2004. The guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, is based on the principle that exchanges of nonmonetary assets should be measured based on the fair In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that Accounting Standards (“SFAS”) No. 123(R), Share-Based Payment. This statement replaces SFAS No. 123, principle. This statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that Issued to Employees. SFAS No. 123(R) requires companies to apply a fair-value-based measurement do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash method in accounting for share-based payment transactions with employees and to record compensation ﬂows of the entity are expected to change signiﬁcantly as a result of the exchange. We do not expect this cost for all stock awards granted after the required effective date and to awards modiﬁed, repurchased or pronouncement to have a material impact on our ﬁnancial statements. La-Z-Boy Incorporated Annual Report 2006 In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections. SFAS No. 154 those obligations, and (c) more information about investments in long-lived assets because additional asset is a replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS No. 154 provides guidance on retirement costs will be recognized as part of the carrying amounts of the assets. Interpretation No. 47 is the accounting for and reporting of accounting changes and error corrections. It establishes retrospective effective no later than the end of ﬁscal years ending after December 15, 2005. FIN 47 did not have a material application as the required method for reporting a change in accounting principle. SFAS No. 154 provides impact on our ﬁnancial statements. guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. The reporting of a Cash and Equivalents correction of an error by restating previously issued ﬁnancial statements is also addressed by SFAS No. 154. For purposes of the consolidated balance sheet and statement of cash ﬂows, we consider all highly liquid SFAS No. 154 is effective for accounting changes and corrections of errors made in ﬁscal years beginning debt instruments purchased with maturities of three months or less to be cash equivalents. after December 15, 2005. We will be adopting this pronouncement beginning in our ﬁscal year 2007. Inventories In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments, an Inventories are stated at the lower of cost or market. Cost is determined using the last-in, ﬁrst-out (“LIFO”) amendment of FASB Statements No. 133 and 140, which permits fair value measurement for any hybrid basis for approximately 67% and 70% of our inventories at April 29, 2006, and April 30, 2005, respectively. 38 ﬁnancial instrument that contains an embedded derivative that otherwise would require bifurcation. SFAS Cost is determined for all other inventories on a ﬁrst-in, ﬁrst-out (“FIFO”) basis. No. 155 is effective for all ﬁnancial instruments acquired or issued subsequent to the beginning of the ﬁrst ﬁscal year that begins after September 15, 2006. We do not expect this pronouncement to have a material Property, Plant and Equipment impact on our ﬁnancial statements. Items capitalized, including signiﬁcant betterments to existing facilities, are recorded at cost. All maintenance and repair costs are expensed when incurred. Depreciation is computed using accelerated and In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets, an amendment straight-line methods over the estimated useful lives of the assets. of FASB Statement No. 140, which provides relief for servicers that use derivatives to economically hedge ﬂuctuations in the fair value of their servicing rights and changes how gains and losses are computed in Goodwill and Trade Names certain transfers or securitizations. SFAS No. 156 is effective as of the beginning of the ﬁrst ﬁscal year that We adopted SFAS No. 142, Goodwill and Other Intangible Assets, which eliminated the amortization of our begins after September 15, 2006. We do not expect this pronouncement to have a material impact on our goodwill and trade names. Under this accounting standard, our goodwill and trade names are required to be ﬁnancial statements. reviewed at least annually for impairment. See Note 2 for additional information on our goodwill and trade names and the effect of adopting and applying SFAS No. 142. The FASB issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (“FIN 47”) on March 30, 2005. The interpretation will result in (a) more consistent recognition of liabilities relating to asset retirement obligations, (b) more information about expected future cash outﬂows associated with La-Z-Boy Incorporated Annual Report 2006 Investments Advertising Expenses Trading securities are recorded at fair value with unrealized gains and losses included in income. Available- Production costs of commercials and programming and costs of other advertising, promotion and for-sale securities are recorded at fair value with the net unrealized gains and losses reported, net of tax, as marketing programs are charged to income in the period incurred. Cooperative advertising agreements exist a component of other comprehensive income. Realized gains and losses for available-for-sale securities are with some customers to reimburse them for actual advertising expenses. The reimbursements are recorded based on the ﬁrst-in, ﬁrst-out method. as advertising expense when the customer substantiates the advertising. Advertising expenses were Revenue Recognition $58.3 million, $59.7 million and $46.4 million for the ﬁscal years ended April 29, 2006, April 30, 2005, and April 24, 2004, respectively. Advertising costs were higher in the last two years due to our increase Shipping terms for third-party carriers are FOB shipping point and revenue is recognized upon shipment in company-owned retail stores and the inclusion of advertising costs of consolidated VIEs. of product. For product shipped on our company-owned trucks, revenue is recognized upon delivery. This revenue includes amounts billed to customers for shipping. Provision is made at the time revenue is Income Taxes 39 recognized for estimated product returns and warranties, as well as other incentives that may be offered Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities to customers. We import certain products from foreign ports, which are shipped directly to our domestic are recognized for the estimated future tax consequences attributable to differences between the ﬁnancial customers. In this case, revenue is not recognized until title is assumed by our customer, which is normally statement carrying amounts of existing assets and liabilities and their respective tax bases and operating after the goods pass through U.S. Customs. loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Other incentives offered to customers include cash discounts, advertising agreements and other sales incentive programs. Cash discounts are recorded as a reduction of revenues when the revenue is recognized. Foreign Currency Translation Other sales incentives are recorded at the time of sale as a reduction to revenue. Our advertising agreements The functional currency of each foreign subsidiary is the respective local currency. Assets and liabilities are give customers advertising allowances based on revenues and are recorded when the revenue is recognized translated at the year-end exchange rates and revenues and expenses are translated at average exchange as a reduction to revenue. rates for the period. Resulting translation adjustments are recorded as a component of shareholders’ equity Research and Development Costs in other comprehensive income. Research and development costs are charged to expense in the periods incurred. Expenditures for research Financial Instruments and Hedging and development costs were $14.7 million, $16.2 million and $15.2 million for the ﬁscal years ended We have derivative instruments consisting of interest rate swap agreements that are used to ﬁx the interest April 29, 2006, April 30, 2005, and April 24, 2004, respectively. rate on a portion of the variable interest rate borrowings on our revolving credit facility. These agreements were designated and accounted for as cash ﬂow hedges. These interest rate swap agreements expire in August 2006. The effect of marking these contracts to fair value was recorded as a component of shareholders’ equity in other comprehensive income. La-Z-Boy Incorporated Annual Report 2006 We also enter into forward foreign currency exchange contracts to limit our exposure from changes in Reclassifications foreign currency exchange rates. These foreign exchange contracts are entered into to support product Certain prior year information has been reclassiﬁed to be comparable to the current year presentation. sales, purchases and ﬁnancing transactions made in the normal course of business and, accordingly, are not speculative in nature. These contracts are designed to match our currency needs and are therefore Insurance/Self-Insurance designated and accounted for as cash ﬂow hedges. The fair value of our foreign currency contracts is based We use a combination of insurance and self-insurance for a number of risks, including workers’ on quoted market prices. We had no foreign exchange rate contracts outstanding at April 29, 2006. compensation, general liability, vehicle liability and the company-funded portion of employee-related health Accounting for Stock-Based Compensation experience, demographic factors, severity factors and other actuarial assumptions. We account for our stock-based compensation plans using the intrinsic value method of recognition and measurement principles under APB Opinion No. 25, Accounting for Stock Issued to Employees, and related In the fourth quarter of ﬁscal 2005, we changed our estimate of workers’ compensation unpaid claims. interpretations. We adopted the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based Previously, we established our workers’ compensation liability using historical trends as the basis for the Compensation, and SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure. liability. The new estimate uses a third-party actuary to estimate settlement costs for incurred claims. We 40 Assuming that we had accounted for our stock-based compensation programs using the fair value method recognized an additional expense of $5.9 million, or $0.07 per diluted share, in the fourth quarter of ﬁscal promulgated by SFAS No. 123, pro forma net income and net income per share would have been as follows 2005 based on our new estimate. care beneﬁts. Liabilities associated with these risks are estimated in part by considering historical claims (for the ﬁscal years ended): (Amounts in thousands, except per share data) Net income (loss) Fair value of stock plan Pro forma net income (loss) Basic net income (loss) per share as reported Pro forma basic net income (loss) per share Diluted net income (loss) per share as reported Pro forma diluted net income (loss) per share 4/29/06 $ (3,041) (1,893) $ (4,934) $ (0.06) $ (0.10) $ (0.06) $ (0.10) 4/30/05 $ 37,185 (2,258) $ 34,927 $ 0.71 $ 0.67 $ 0.71 $ 0.67 4/24/04 $ (5,796) (2,375) $ (8,171) $ (0.11) $ (0.15) $ (0.11) $ (0.15) Discontinued Operations Under the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we classify a business component that has been disposed of as a discontinued operation if the cash ﬂow of the component has been eliminated from our ongoing operations and we will no longer have any signiﬁcant continuing involvement in the component. The results of operations of our discontinued operations through the date of sale, including any gains or losses on disposition, are aggregated and presented on one line in the income statement. SFAS No. 144 requires the reclassiﬁcation of amounts presented for prior years as discontinued operations. The amounts presented in the consolidated statement of operations for years prior to ﬁscal 2005 were reclassiﬁed to comply with SFAS No. 144. La-Z-Boy Incorporated Annual Report 2006 As a result of the disposition of our La-Z-Boy Contract operating unit in April 2005, the balance sheet as of was recorded as a component of operating income. In the latter half of ﬁscal 2006, Bauhaus was impacted April 30, 2005, does not include any assets or liabilities of discontinued operations. In the consolidated by several large customer bankruptcies and the merger of two major department stores, which reduced statement of cash ﬂows, the cash ﬂows of discontinued operations are not reclassiﬁed. See Note 14 for production causing the closure of several production facilities. There was no tax beneﬁt recognized on this additional information regarding our discontinued operations. impairment charge. Allowance for Doubtful Accounts In the fourth quarter of ﬁscal 2005 and in ﬁscal 2004, we acquired several La-Z-Boy Furniture Galleries® The allowance for doubtful accounts reﬂects our best estimate of probable losses inherent in the accounts stores that were independently owned. Relating to these acquisitions, we recorded goodwill of $11.3 million receivable balance. We determine the allowance based on known troubled accounts, historical experience and $10.3 million in ﬁscal 2005 and ﬁscal 2004, respectively. Additionally, in the fourth quarter of ﬁscal and other currently available evidence. 2005, we completed a valuation of the tax reserves relating to an acquisition in ﬁscal 2000. Due to the resolution of certain open tax items relating to the acquisition, a reduction of the tax reserves was required 41 In ﬁscal 2005, we reevaluated our allowance for doubtful accounts after the acquisition of a major La-Z-Boy during ﬁscal 2005. These reductions in the tax reserves were recorded as a reduction in the remaining Furniture Galleries® store market and reassessment of our credit position of another signiﬁcant dealer acquired intangible assets, which consisted of trade names and totaled $6.4 million. Furthermore, in the upon obtaining additional credit-related information. Based on this valuation, we reduced the allowance for fourth quarter of ﬁscal 2005, the annual evaluation of goodwill and trade names was performed. doubtful accounts by $5.5 million. We determined that goodwill and trade names were not impaired as of the end of ﬁscal 2005. NOTE 2: GOODWILL AND OTHER INTANGIBLE ASSETS In accordance with SFAS No. 142, trade names are tested at least annually for impairment by comparing In the fourth quarter of ﬁscal 2004, the annual evaluation of goodwill and trade names was performed. Following the evaluation procedures, it was determined that the carrying value of trade names exceeded their fair value to their carrying values. The fair value for each trade name was established based upon a their fair value, creating an impairment loss of $43.2 million, and the carrying value of goodwill exceeded royalty savings approach. Additionally, goodwill was tested for impairment by comparing the fair value of its fair value, creating an impairment loss of $28.7 million. The after-tax effect of the impairment was $55.9 our operating units to their carrying values. The fair value for each operating unit was established based on million. The before-tax effect of $71.9 million for these impairment losses was recorded as a component the discounted cash ﬂows. In situations where the fair value was less than the carrying value, indicating a of operating income. Of the total impairment losses, $11.3 million and $60.6 million were attributed to the potential impairment, a second comparison is performed using a calculation of implied fair value of goodwill Upholstery and the Casegoods segments, respectively. One operating unit accounted for the write-down to determine the monetary value of impairment in the Upholstery Group. During ﬁscal 2004, this operating unit had experienced a decline in sales and In the fourth quarter of ﬁscal 2006, the annual evaluation of goodwill and trade names was performed. Group sales and operating results had been declining in the few preceding years. Due to continued lagging Following the evaluation procedures, it was determined that our trade names were not impaired. The carrying operating results and changes in facts relating to underlying assumptions, the fair value evaluation was lower value of goodwill exceeded its fair value for Bauhaus creating an impairment loss of $22.7 million which in the ﬁscal 2004 fourth quarter than in the prior year fourth quarter. operating income, which caused a decline in the fair value of its intangibles. Prior to ﬁscal 2004, Casegoods La-Z-Boy Incorporated Annual Report 2006 The following table summarizes changes to goodwill and trade names in ﬁscal 2006 and ﬁscal 2005: (Amounts in thousands) Goodwill (Fiscal 2006) Upholstery Group Retail Group Corporate and other Consolidated Goodwill (Fiscal 2005) Upholstery Group Retail Group Corporate and other Consolidated Trade names (Fiscal 2006) Upholstery Group Casegoods Group Consolidated Trade names (Fiscal 2005) Upholstery Group Casegoods Group Consolidated Beginning Balance Impairment of Goodwill Acquisitions, Dispositions and Other Ending Balance $ 49,654 21,994 7,714 $ 79,362 $ 49,736 10,666 7,714 $ 68,116 $ 7,165 14,319 $ 21,484 $ 8,690 19,199 $ 27,889 $ (22,695) — — $ (22,695) $ — — — $ — $ — — $ — $ — — $ — $ — (149) 408 $ 259 $ (82) 11,328 — $ 11,246 $ (2,690) — $ (2,690) $ (1,525) (4,880) $ (6,405) $ 26,959 21,845 8,122 $ 56,926 $ 49,654 21,994 7,714 $ 79,362 $ 4,475 14,319 $ 18,794 $ 7,165 14,319 $ 21,484 42 La-Z-Boy Incorporated Annual Report 2006 NOTE 3: INVENTORIES (Amounts in thousands) Raw materials Work in progress Finished goods FIFO inventories Excess of FIFO over LIFO Total inventories NOTE 4: PROPERTY, PLANT AND EQUIPMENT 43 (Amounts in thousands) Buildings and building ﬁxtures Machinery and equipment Information systems Land and land improvements Transportation equipment Other Construction in progress Less: accumulated depreciation Property, plant and equipment, net Estimated Useful Lives 3-40 yrs. 3-30 yrs. 3-10 yrs. 3-40 yrs. 3-10 yrs. 3-20 yrs. 4/29/06 $ 61,120 50,958 147,996 260,074 (21,248) 4/30/05 $ 69,350 56,655 155,114 281,119 (20,563) $ 238,826 $ 260,556 4/29/06 $ 211,093 171,407 48,892 29,119 17,228 11,464 9,091 498,294 288,308 4/30/05 $ 207,460 174,913 51,119 28,838 16,546 11,111 4,719 494,706 284,141 The following is a summary of available-for-sale and trading securities at April 29, 2006, and April 30, 2005: Fiscal 2006 (Amounts in thousands) Available-for-sale Equity securities Fixed income Other Total securities Fiscal 2005 (Amounts in thousands) Trading securities Available-for-sale Equity securities Fixed income Other Total available-for-sale securities Gross Unrealized Gains Gross Unrealized Losses $ 2,717 30 — $ 2,747 $ (6) (558) — $ (564) Gross Unrealized Gains Gross Unrealized Losses $ 25 $ (50) 1,274 49 — 1,323 (21) (40) — (61) Total securities $ 1,348 $ (111) Fair Value $ 12,573 19,400 413 $ 32,386 Fair Value $ 9,478 8,976 4,033 183 13,192 $ 22,670 The following table summarizes sales of available-for-sale securities (for the ﬁscal years ended): $ 209,986 $ 210,565 (Amounts in thousands) NOTE 5: INVESTMENTS Included in other long-term assets were $32.4 million and $13.2 million at April 29, 2006, and Proceeds from sales Gross realized gains Gross realized losses 4/29/06 $ 12,983 $ 773 $ (91) 4/30/05 $ 1,672 $ 173 $ (25) 4/24/04 $ 6,638 $ 891 $ (56) April 30, 2005, respectively, of available-for-sale marketable securities to fund future obligations of one The fair value of ﬁxed income available-for-sale securities by contractual maturity was $4.1 million within of our retirement plans and our captive insurance company. As of April 30, 2005, we had $9.5 million of one year, $5.9 million within two to ﬁve years, $8.5 million within six to ten years and $0.9 million thereafter. trading securities. These investments related to our captive insurance company. La-Z-Boy Incorporated Annual Report 2006 NOTE 6: ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES to be excluded for purposes of covenant calculations under the agreement. On November 22, 2005, we (Amounts in thousands) Payroll and other compensation Customer deposits Accrued product warranty Other current liabilities Accrued expenses and other current liabilities 4/29/06 $ 56,411 19,683 17,221 38,690 $ 132,005 4/30/05 $ 64,419 13,036 12,288 43,429 $ 133,172 executed an amendment to the credit agreement to modify its ﬁxed charge coverage ratio requirements and interest rate provisions. The revolving credit facility expires on May 1, 2009. At April 29, 2006, we were in compliance with all of the covenants under this facility. As of April 29, 2006, we had $125.0 million available for future borrowings under this facility. We have short-term borrowing arrangements with several banks that allow us to borrow funds on demand. Our availability of credit from short-term borrowing lines of credit total $104.1 million, of which we had NOTE 7: DEBT On March 30, 2004, we entered into an unsecured $150 million revolving credit facility agreement. The borrowed $8.0 million at April 29, 2006. facility has an accordion feature, enabling us to expand the facility by $50 million to $200 million with Industrial revenue bonds were used to ﬁnance the construction of some of our manufacturing facilities. the same terms and conditions, subject to approval by the banks that are a party to the agreement. The The facilities constructed from the bond proceeds are mortgaged as collateral for the bonds. 44 agreement has a performance-based interest rate pricing grid ranging from LIBOR plus 0.475% to LIBOR plus 0.800%, determined by our consolidated debt-to-capital ratio. The agreement also requires that We have entered into several interest rate swap agreements with counter-parties that are participants in the certain ﬁnancial covenants be met. On November 11, 2005, we executed a consent and waiver with the revolving credit facility to reduce the impact of changes in interest rates on the ﬂoating rate debt. We believe lenders under our credit agreement clarifying that the assets, liabilities and operating results of VIEs are that the risk of potential credit loss from counter-party non-performance is minimal. The purpose of (Amounts in thousands) Revolving credit facility Industrial revenue bonds Private placement notes Other debt Capital leases Total debt Less: current portion Long-term debt Weighted average interest rate Fair value of debt Interest Rate 3.6-5.4% 3.4-7.0% 6.5% 4.6% 5.3% 5.5-13.7% 7.0-8.3% Fiscal Year Maturity 2010 2010-23 2008 2010 2013 2007-11 2007-11 4/29/06 $ 25,000 16,856 35,000 36,000 50,000 11,020 2,336 176,212 2,844 $ 173,368 4.8% $ 173,415 4/30/05 $ 65,000 17,088 35,000 36,000 50,000 11,170 2,351 216,609 3,060 $ 213,549 3.9% $ 218,785 La-Z-Boy Incorporated Annual Report 2006 these swaps is to ﬁx interest rates on a notional amount of $10 million through August 4, 2006, at 3.05% Rental expense, rental income and contingent rentals for operating leases were as follows (for the ﬁscal plus the applicable borrowing spread under the revolving credit facility. The fair market value of the swaps years ended): was an asset of less than $0.1 million. Maturities of long-term debt, subsequent to April 29, 2006, are $2.8 million in 2007, $37.0 million in 2008, $1.8 million in 2009, $68.0 million in 2010, $4.4 million in 2011 and $62.2 million thereafter. (Amounts in thousands) Rental expense Rental income Contingent rentals 4/29/06 $ 45,125 $ 994 $ 470 4/30/05 $ 38,771 $ 612 $ 512 4/24/04 $ 26,114 $ 1,812 $ 446 Cash paid for interest during ﬁscal years 2006, 2005 and 2004 was $11.5 million, $10.1 million and $11.6 million, respectively. NOTE 9: FINANCIAL GUARANTEES AND PRODUCT WARRANTIES Prior to December 31, 2002, we provided secured and unsecured ﬁnancial guarantees relating to leases in connection with certain La-Z-Boy Furniture Galleries® dealers whose stores are not owned by the company. 45 NOTE 8: OPERATING LEASES We have operating leases for manufacturing facilities, executive and sales ofﬁces, warehouses, showrooms The lease guarantees are generally for real estate leases and have terms lasting up to ﬁve years. These lease guarantees enhance the credit of these dealers. The dealer is required to make periodic fee payments and retail facilities, as well as for transportation and data processing. The operating leases expire at various to compensate us for our guarantees. As required by FIN 45, Guarantor’s Accounting and Disclosure dates through ﬁscal 2027. Certain transportation leases contain a provision for the payment of contingent Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, we have recognized rentals based on mileage in excess of stipulated amounts. We lease additional transportation, data liabilities for the fair values of the lease agreements we have entered into since December 31, 2002, but processing and other equipment under capital leases expiring at various dates through ﬁscal 2010. they are not material to our ﬁnancial position. We have certain retail facilities which we sublease to outside parties. We would be required to perform under these agreements only if the dealer were to default on the lease. The maximum amounts of potential future payments under lease guarantees was $6.7 million as of The future minimum rentals for all non-cancelable leases and future rental income from subleases are as April 29, 2006. follows (for the ﬁscal years): (Amounts in thousands) 2007 2008 2009 2010 2011 2012 and beyond La-Z-Boy Incorporated Annual Report 2006 Future Minimum Rentals Future Minimum Income We have, from time to time, entered into agreements which resulted in indemnifying third parties against certain liabilities, mainly environmental. We believe that judgments, if any, against us related to such $ 35,006 34,989 33,294 30,493 24,459 127,731 $ 285,972 $ 1,369 1,273 1,297 1,314 1,350 10,084 $ 16,687 agreements would not have a material effect on our business or ﬁnancial condition. Our accounting policy for product warranties is to accrue an estimated liability at the time the revenue is recognized. This estimate is based on historical claims and adjusted for currently known warranty issues. A reconciliation of the changes in our product warranty liability is as follows: This new plan provides grants to certain employees to purchase common shares at a speciﬁed price, (Amounts in thousands) Balance as of the beginning of the year Accruals during the year Adjustment for discontinued operations Settlements during the year Balance as of the end of the year 4/29/06 $ 18,688 13,332 — (12,365) $ 19,655 4/30/05 $ 19,527 17,481 (1,265) (17,055) $ 18,688 NOTE 10: CONTINGENCIES AND COMMITMENTS We have been named as a defendant in various lawsuits arising in the ordinary course of business, including being named as a potentially responsible party at six environmental clean-up sites. Based on a review of all currently known facts and our experience with previous legal and environmental matters, we have recorded expense in respect of probable and reasonably estimable losses arising from legal and environmental matters and do not believe that a material additional loss is reasonably possible for legal or environmental matters. NOTE 11: STOCK PLANS In ﬁscal 2005, our shareholders approved a long-term equity award plan which replaces the former employee incentive stock option plan, the former employee restricted share plan and the former performance-based stock plan. The new plan allows for awards in the form of performance awards, restricted shares and stock options. Under this new plan, the aggregate number of common shares that may be issued through awards of any form is 5,000,000. No further grants or awards may be issued under the former plans. which may not be less than 100% of their fair market value at the date of grant. Granted options generally become exercisable at 25% per year, beginning one year from the date of grant for a term of ﬁve years. Granted options outstanding under the former plan remain in effect and become exercisable at 25% per year, beginning one year from the date of grant for a term of ﬁve or ten years. Plan activity for stock options under the new long-term equity award plan and the former employee incentive stock option plan is as follows: Outstanding at April 26, 2003 Granted Exercised Expired or canceled Outstanding at April 24, 2004 Granted Exercised Expired or canceled Outstanding at April 30, 2005 Granted Exercised Expired or canceled Outstanding at April 29, 2006 Exercisable at April 29, 2006 Exercisable at April 30, 2005 Exercisable at April 24, 2004 Shares available for grants at April 29, 2006 46 Number of Shares Weighted Avg. Exercise Price 2,206,522 734,900 (342,170) (149,005) 2,450,247 446,900 (49,821) (720,073) 2,127,253 696,100 (3,540) (494,729) 2,325,084 1,103,063 1,031,983 1,096,467 3,714,275 $ 20.01 20.52 17.30 20.94 20.48 16.66 15.54 21.12 19.58 13.57 10.10 17.23 18.29 20.65 19.73 $ 20.28 La-Z-Boy Incorporated Annual Report 2006 Information regarding currently outstanding and exercisable options is as follows: Range of exercise prices $13.57 - $13.73 $13.74 - $17.17 $17.18 - $20.60 $20.61 - $24.03 $24.04 - $27.46 Number Outstanding at April 29, 2006 Weighted Avg. Exercise Price Weighted Avg. Remaining Contractual Life In Years Number Exercisable at April 29, 2006 Weighted Avg. Exercise Price 644,800 372,820 818,939 475,545 12,980 2,325,084 $ 13.57 16.64 20.18 22.58 24.69 $ 18.29 4.3 3.3 3.7 5.4 2.0 4.2 — 105,595 614,562 369,926 12,980 1,103,063 $ — 16.57 20.10 22.58 24.69 $ 20.65 The table above includes options that were issued to replace outstanding options of a company acquired in Our shareholders have approved a non-employee directors’ restricted share plan, under which shares were 47 ﬁscal 2000. The options outstanding under this plan as of April 29, 2006, were 29,500, with a weighted average offered at 25% of the fair market value at the date of grant. The plan required that all shares be held in an escrow exercise price of $19.88 per share. There are no shares available for future grant under this plan. account until the participant’s service as a director ceases unless otherwise approved by the Board of Directors. Under a second component of the new long-term equity award plan, the Compensation Subcommittee of the to us at their cost. Common shares aggregating 16,000 and 18,000 were granted and issued to non-employee Board of Directors is authorized to award restricted common shares to certain employees. The shares are directors during ﬁscal years 2006 and 2005, respectively, under the restricted share plan. Common shares offered at no cost to the employees, and the plan requires that all shares be held in an escrow account for a remaining for future grants under this plan amounted to 199,800 at April 29, 2006. period of three to ﬁve years. In the event of an employee’s termination during the escrow period, the shares are returned to the company at no cost to the company. Common shares aggregating 201,875 and 122,400 Under a third component of the new long-term equity award plan, the Compensation Subcommittee of the were awarded during ﬁscal 2006 and ﬁscal 2005, respectively, as restricted shares under the new long-term Board of Directors is authorized to award common shares to certain employees based on the attainment of In the event of a non-employee director’s termination during the escrow period, the shares must be sold back equity award plan. certain ﬁnancial goals. The shares are offered at no cost to the employees. No shares will be issued in ﬁscal 2007 and no shares were issued in ﬁscal 2006 for this component of the new long-term equity award plan. Under our former employee restricted share plan, the Compensation Subcommittee of the Board of Directors is This new component of the long-term equity award plan replaced the former performance-based stock plan, authorized to offer for sale common shares to certain employees. Under the former restricted share plans, shares which also allowed grants of shares or short-term options to purchase shares based on achievement of goals were offered at 25% of the fair market value at the date of grant. The plans required that all shares be held in an over a three-year performance period. No shares were issued in ﬁscal 2005 under the former performance- escrow account for a period of three years. In the event of an employee’s termination during the escrow period, based stock plan. The cost of performance-based awards is expensed over the performance period. the shares must be sold back to us at their cost. No shares were issued in ﬁscal 2006 and ﬁscal 2005 under the former employee restricted share plan. La-Z-Boy Incorporated Annual Report 2006 Actual expense relating to the restricted shares and the performance-based stock awards was $0.6 million in ﬁscal 2006, $(0.6) million in ﬁscal 2005 and $0.3 million in ﬁscal 2004. The performance-based metrics that the performance-based stock plan payouts are based upon were not achieved in the three-year cycle ending in We maintain a non-qualiﬁed deﬁned beneﬁt retirement plan for certain former salaried employees. Included April 2004, the one-year cycle ending in April 2005 or the two-year cycle ending in April 2006. Therefore, in in other long-term liabilities were plan obligations of $13.8 million and $15.1 million at April 29, 2006, and ﬁscal 2006 and ﬁscal 2005, expenses of $0.5 million and $1.4 million, respectively, were reversed relating to April 30, 2005, respectively. During ﬁscal 2006, the interest cost recognized for this plan was $0.8 million, prior year accruals for the previously anticipated payout on this plan. the actuarial gain recognized was $1.3 million and the beneﬁt payments during the year were $0.8 million. This plan is excluded from the obligation charts that follow. As permitted by SFAS No. 123, Accounting for Stock-Based Compensation, we have chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Voluntary 401(k) retirement plans are offered to eligible employees within certain U.S. operating units. For Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Refer to most operating units, we make matching contributions based on speciﬁc formulas, and this match is made in Note 1 for additional information. our common shares. We also maintain deﬁned beneﬁt pension plans for eligible factory hourly employees at some operating units. Our largest plan has been frozen for new participants since January 1, 2001, but active The fair value of each option grant was estimated on the date of grant using the Black-Scholes model with the participants still earn service cost. As discussed in Note 13, we closed our Canadian manufacturing facility following assumptions (for the ﬁscal years ended): during ﬁscal 2006 and terminated the pension plan associated with that business, which caused a curtailment 48 Risk-free interest rate Dividend rate Expected life in years Stock price volatility 4/29/06 4.25% 3.1% 5.0 29.0% 4/30/05 3.4% 2.1% 5.5 36.0% 4/24/04 3.1% 1.9% 5.0 36.0% loss of $0.9 million as shown in the table below. The measurement dates for the pension plan assets and beneﬁt obligations were April 29, 2006, April 30, 2005, and April 24, 2004, in the years presented. Based on the above assumptions, the weighted average fair value per share of options granted under these plans The net periodic pension cost and retirement costs for retirement plans were as follows (for the ﬁscal years ended): was $3.21 in ﬁscal 2006, $5.02 in ﬁscal 2005 and $6.41 in ﬁscal 2004. NOTE 12: RETIREMENT/WELFARE Eligible salaried employees are covered under a trusteed proﬁt-sharing retirement plan. Discretionary cash contributions to a trust are made annually based on proﬁts. We also maintain an Executive Qualiﬁed Deferred Compensation plan for eligible highly compensated employees. An element of this plan is the Supplemental Executive Retirement Plan (“SERP”), which allows contributions for eligible highly compensated employees. We had life insurance contracts at April 29, 2006, and April 30, 2005, of $18.3 million and $15.1 million, respectively, included in other long-term assets related to this plan. (Amounts in thousands) Service cost Interest cost Expected return on plan assets Net amortization and deferral Curtailment loss – plan termination Net periodic pension cost Proﬁt sharing/SERP* 401(k)* Other* Total retirement costs * Not determined by an actuary. 4/29/06 $ 2,979 4,880 (6,514) 1,202 900 3,447 6,405 4,415 755 4/30/05 $ 3,065 4,695 (6,126) (53) — 1,581 10,970 4,973 1,130 4/24/04 $ 2,891 4,440 (6,727) 1,916 — 2,520 10,597 5,163 911 $ 15,022 $ 18,654 $ 19,191 La-Z-Boy Incorporated Annual Report 2006 The funded status of the deﬁned beneﬁt pension plans was as follows: The weighted average actuarial assumptions were as follows (for the ﬁscal years ended): (Amounts in thousands) Change in beneﬁt obligation Beneﬁt obligation at beginning of year Service cost Interest cost Actuarial (gain)/loss Beneﬁts paid Beneﬁt obligation at year end Change in plan assets Fair value of plan assets at beginning of year Actual return on plan assets Employer contribution Beneﬁts paid Fair value of plan assets at year end 49 Funded (underfunded) status Unrecognized actuarial loss Unamortized prior service cost Prepaid beneﬁt cost Accumulated beneﬁt obligation Amounts recognized in the balance sheet consist of the following: (Amounts in thousands) Prepaid beneﬁt cost Accrued beneﬁt liability Intangible assets Accumulated other comprehensive loss Net amount recognized La-Z-Boy Incorporated Annual Report 2006 4/29/06 4/30/05 4/29/06 4/30/05 4/24/04 $ 90,222 2,979 4,880 (6,635) (5,008) 86,438 82,842 12,404 1,230 (5,008) 91,468 5,030 9,903 27 $ 14,960 $ 84,745 4/29/06 $ 14,960 (1,291) — 1,291 $ 14,960 $ 79,319 3,065 4,695 7,030 (3,887) 90,222 82,105 3,471 1,153 (3,887) 82,842 (7,380) 24,205 439 $ 17,264 $ 87,948 4/30/05 $ — (5,106) 439 21,931 $ 17,264 Discount rate used to determine beneﬁt obligations Discount rate used to determine net beneﬁt cost Long-term rate of return 6.4% 5.5% 8.0% 5.5% 6.0% 8.0% 6.0% 6.5% 8.0% Our long-term stated investment objective is to maximize the investment return with the least amount of risk through a combination of capital appreciation and income. The strategic asset allocation targets are 65% equities and 35% ﬁxed income within a range of 5% of the target. In selecting the expected long-term rate of return on assets, we considered the average rate of earnings expected on the funds invested or to be invested to provide the beneﬁts of these plans. This included considering the trust’s asset allocation and the expected returns likely to be earned over the life of the plans. This basis is consistent with the prior year. As of the end of ﬁscal 2005, the qualiﬁed plans were underfunded; however, only our Canadian plan remained underfunded at the end of ﬁscal 2006. We expect to fund our Canadian pension plan fully in ﬁscal 2007 but expect that the funding will be less than $0.1 million U.S. dollars. In addition, our non-qualiﬁed retirement plan was not funded at April 29, 2006. We do not expect to fund our non-qualiﬁed deﬁned beneﬁt retirement plan as we hold funds equal to the liability of the plan in a Rabbi trust. We are not required to make any contributions to the deﬁned beneﬁt plans in ﬁscal year 2007; however, we reserve the right to make discretionary contributions. The weighted average asset allocations at year end were as follows: Equity securities Debt securities 4/29/06 4/30/05 69% 31% 100% 68% 32% 100% The amounts reported in total comprehensive income (loss), net of tax, were $13.6 million and $(14.1) the Impairment or Disposal of Long-Lived Assets. We expect to dispose of these plants by sale. million in ﬁscal 2006 and ﬁscal 2005, respectively. Also during ﬁscal 2005, we recorded $0.4 million of Somewhat offsetting these expenses for the upholstery restructurings was a pre-tax gain of $2.5 million intangible assets relating to prepaid beneﬁt cost. relating to the sale of two facilities in Mississippi and one facility in Pennsylvania, which were idled as part The expected beneﬁt payments by our pension plans for each of the next ﬁve years and for periods thereafter of previous restructurings. are presented in the following table: (Amounts in thousands) 2007 2008 2009 2010 2011 2012 and 2015 In the ﬁrst quarter of ﬁscal 2005, the decision was made to close three casegoods facilities, an upholstery Beneﬁt Payments plant and an upholstery warehouse. The casegoods facilities were closed as a result of continued $ 7,851 3,512 3,720 3,934 4,118 23,701 $ 46,836 underutilization of our domestic casegoods facilities due to an increase in our importing of product from overseas. The upholstery plant was closed and production was absorbed by another upholstery facility, resulting in better production efﬁciencies. The casegoods plants were closed in the third quarter. Approximately 525 jobs were eliminated as a result of these closures. During ﬁscal 2005, pre-tax restructuring charges were $10.3 million, or $0.12 per diluted share, covering the following: write-down of certain ﬁxed assets, write-down of certain inventories, payment of severance and beneﬁts and other 50 costs related to the shutdown. We expect to dispose of these plants by sale, or abandonment if a sale is not NOTE 13: RESTRUCTURING In the second quarter of ﬁscal 2006, the decision was made to close our Canadian upholstery manufacturing practical. The restructuring expenses during 2005 were lower than we had originally anticipated because our charges to expense were offset by the gains on sale of assets previously written down through restructuring. facility due to underutilization of capacity. The plant closure occurred in the third quarter of ﬁscal 2006 The write-down was accounted for in accordance with SFAS No. 144, Accounting for the Impairment or and production was absorbed by other upholstery facilities. Approximately 413 jobs were eliminated as Disposal of Long-Lived Assets. Severance costs and other costs were expensed as incurred throughout ﬁscal a result of this closure. During ﬁscal 2006, pre-tax restructuring charges for our Canadian facility were 2005 in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. $8.9 million, or $0.11 per diluted share, covering severance and beneﬁts, appropriate adjustments to our pension liability and the write-down of certain ﬁxed assets. During the third quarter of ﬁscal 2006, the During the ﬁrst quarter of ﬁscal 2004, we announced the closing of three of our Casegoods Group decision was made to close a small, 90,000-square-foot upholstery manufacturing facility in Mississippi, manufacturing facilities. This action was the result of underutilization of certain manufacturing facilities with production absorbed by other upholstery facilities. Pre-tax restructuring charges relating to this closure as we transition to more foreign-sourced products in order to be competitive with imported furniture. The were $0.3 million, covering severance and beneﬁts and the write-down of certain ﬁxed assets. Severance closure of these facilities resulted in the elimination of 480 jobs. During ﬁscal 2004, pre-tax restructuring costs and other costs for our restructurings were expensed in accordance with SFAS No. 112, Employers’ charges related to the restructuring were $10.4 million, covering the write-down of certain ﬁxed assets Accounting for Postemployment Beneﬁts, and SFAS No. 146, Accounting for Costs Associated with Exit or and inventories, lease costs and severance-related costs, which were recorded in cost of sales. We expect Disposal Activities. The write-downs were accounted for in accordance with SFAS No. 144, Accounting for to dispose of two manufacturing plants by sale, and the related write-down has been accounted for in La-Z-Boy Incorporated Annual Report 2006 accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Our third plant was leased, and the lease expired in our fourth quarter of ﬁscal 2004. The plants ceased operations NOTE 14: DISPOSITIONS/ACQUISITIONS Discontinued Operations during ﬁscal year 2004. The remaining liability was paid out in ﬁscal 2006. On April 29, 2005, we completed the sale of our La-Z-Boy Contract operating unit for $11.0 million in cash and a note for $0.7 million. The pre-tax gain recognized on the sale during the fourth quarter of ﬁscal We have $4.2 million of assets held for sale included in other long-term assets on our consolidated 2005 was $1.1 million. This disposition qualiﬁed for discontinued operations treatment. Accordingly, balance sheet as of April 29, 2006, primarily as a result of the above restructurings. This amount consists of the consolidated statement of operations for all prior years has been reclassiﬁed to reﬂect the results of buildings and related assets. All of these assets have been written down to their fair value less costs to sell operations of this divested business as a discontinued operation. There were no assets or liabilities of and are currently being marketed. discontinued operations reported in the consolidated balance sheet as of April 30, 2005. In the consolidated statement of cash ﬂows, the cash ﬂows of discontinued operations were not reclassiﬁed in all periods Restructuring liabilities along with charges to expense, cash payments or asset write-downs were as follows: presented. The operating results for ﬁscal 2005 and 2004 of our La-Z-Boy Contract operating unit, which 51 Fiscal 2006 was part of our Upholstery segment, are reported in the following table. (Amounts in thousands) Fixed asset write- downs, net of gains Severance and beneﬁt- related costs Total (Amounts in thousands) Fixed asset write- downs, net of gains Severance and beneﬁt- related costs Inventory write-downs Other Total 4/30/05 Balance Charges to Expense Cash Payment or Asset Write-Down 4/29/06 Balance $ — 38 $ 38 $ (2,327) $ 2,327 8,970 $ 6,643 (8,117) $ (5,790) Fiscal 2005 $ — 891 $ 891 (Amounts in thousands) Sales Income from operations before income taxes Income tax expense Income from operations 4/30/05 (53 Weeks) $ 48,718 2,142 814 1,328 4/24/04 (52 Weeks) $ 46,879 1,048 398 650 Gain on disposal of operating unit (net of tax) $ 668 $ — 4/24/04 Balance Charges to Expense Cash Payment or Asset Write-Down 4/30/05 Balance Acquisitions $ — 329 — 174 $ 503 $ 4,619 $ (4,619) $ — 1,700 2,450 1,525 (1,991) (2,450) (1,699) 38 — — $ 10,294 $ (10,759) $ 38 In ﬁscal years 2005 and 2004, we acquired retail operations consisting of 21 stores (eight of which were previously consolidated as VIEs in ﬁscal 2005), and four stores, respectively. In aggregate, these acquisitions increased our reported net sales by less than 1.0%. Pro forma sales and results of operations are not presented, as they are not materially different from that of our consolidated results of operations as reported. La-Z-Boy Incorporated Annual Report 2006 NOTE 15: INCOME TAXES The primary components of our deferred tax assets and (liabilities) were as follows: (Amounts in thousands) Assets Deferred and other compensation Warranty Allowance for doubtful accounts Consolidation of variable interest entities State income tax Restructuring Workers’ compensation Pension Employee beneﬁts Other Valuation reserve Total deferred tax assets Liabilities Trade names Pension Property, plant and equipment Inventory Other Total deferred tax liabilities Net deferred tax assets 4/29/06 4/30/05 $ 13,890 7,810 7,212 5,705 11,096 2,002 929 — 4,228 1,376 (10,422) 43,826 (7,049) (5,457) (13,902) (2,660) (2,030) (31,098) $ 12,719 8,004 6,782 3,170 12,811 1,821 1,197 1,513 2,295 633 (12,212) 38,733 (6,484) — (10,245) (1,722) (2,892) (21,343) $ 12,728 $ 17,390 Our effective tax rate differs from the U.S. federal income tax rate for the following reasons: (% of pre-tax income) Statutory tax rate Increase (reduction) in income taxes resulting from: State income taxes, net of federal beneﬁt Goodwill impairment Dividend from foreign subsidiary Non-deductible meals and entertainment ESOP beneﬁt Change in valuation allowance Foreign tax rate differential Increase in value of life insurance contracts Federal income tax credits Deduction for U.S. manufacturing Miscellaneous items 4/29/06 35.0% 4/30/05 35.0% 4/24/04 35.0% 11.9 84.2 — 4.4 (4.8) 15.2 (0.3) (6.6) (3.4) (3.6) 0.2 4.8 — 0.5 0.7 (0.7) (1.7) (0.6) — (0.2) — 0.2 8.0 45.1 1.4 2.3 (1.8) — (0.1) — (0.5) — (0.7) Effective tax rate 132.2% 38.0% 88.7% At April 29, 2006, and April 30, 2005, we had state net operating losses and credits that, if fully utilized, would result in a tax reduction of approximately $11.1 million and $14.7 million, respectively. Due to the uncertainty of their actual utilization, we established a valuation reserve at the end of each year in the amounts of $8.7 million and $11.4 million for ﬁscal 2006 and ﬁscal 2005, respectively. These state net operating losses and credits expire between ﬁscal 2007 and ﬁscal 2026. During ﬁscal 2006, it became apparent that some tax beneﬁts would not be used as the business operations in certain tax jurisdictions were terminated. Consequently, both the gross amount of these tax beneﬁts and the related reserve were reduced by $3.9 million. In addition, the valuation reserve related to tax credits was increased by $0.8 million. Furthermore, at April 29, 2006, and April 30, 2005, our foreign subsidiaries had realized net operating losses that, if fully utilized, would result in a tax reduction of approximately $3.6 million and $1.1 million, respectively. Due to the uncertainty of their actual utilization, we established a valuation reserve of $1.8 million and $0.8 million at April 29, 2006, and April 30, 2005, respectively. La-Z-Boy Incorporated Annual Report 2006 52 During ﬁscal 2005 and 2004, we repatriated earnings of a Canadian subsidiary. However, due to current during the period plus the additional common shares that would have been outstanding if the dilutive year losses resulting from the closure of its manufacturing operations, there are no undistributed earnings potential common shares had been issued. Our dilutive potential common shares are for employee stock- for which a deferred tax liability is required. For our other foreign subsidiaries, we continue to assert that related plans described in Note 11. Outstanding share information is as follows (for the ﬁscal years ended): their earnings are permanently reinvested; consequently, no deferred tax was recorded for their undistributed earnings. An estimate of these permanently reinvested earnings is $5.0 million at April 29, 2006. The potential deferred tax attributable to these earnings is not currently estimable. Income tax expense applicable to continuing operations consists of the following components (for the (Amounts in thousands) 4/29/06 4/30/05 4/24/04 Weighted average common shares outstanding (basic) Effect of options and unvested restricted stock Weighted average common shares outstanding (diluted) 51,801 — 51,801 52,082 56 52,138 53,508 171 53,679 53 ﬁscal years ended): (Amounts in thousands) Federal – current – deferred State – current – deferred Foreign – current – deferred Total income tax expense 4/29/06 $ 14,149 (2,849) 2,236 314 214 (1,590) $ 12,474 4/30/05 $ 7,211 10,323 2,417 (1,199) 2,073 (541) $ 20,284 4/24/04 $ 26,972 (12,131) 3,671 (984) 1,994 (160) $ 19,362 The weighted average common shares outstanding (diluted) at April 29, 2006, excludes outstanding stock options of 0.2 million because the net loss in the ﬁscal year would cause the effect of options to be antidilutive. The effect of options to purchase 1.7 million, 1.9 million and 0.9 million shares for the ﬁscal years ended April 29, 2006, April 30, 2005, and April 24, 2004, with a weighted average exercise price of $20.11, Income from continuing operations before income taxes consists of the following (for the ﬁscal years ended): $20.10 and $22.98, respectively, were excluded from the diluted share calculation because the exercise (Amounts in thousands) United States Foreign Total 4/29/06 $ 15,853 (6,420) $ 9,433 4/30/05 $ 47,977 5,402 $ 53,379 4/24/04 $ 15,951 5,289 $ 21,240 prices of these options were higher than the weighted average share price for the ﬁscal years and would have been antidilutive. NOTE 17: SEGMENTS Our reportable operating segments are the Upholstery Group, the Casegoods Group and the Retail Group. Cash paid for taxes during the ﬁscal years ended April 29, 2006, April 30, 2005, and April 24, 2004, was We acquired 21 La-Z-Boy Furniture Galleries® stores in the fourth quarter of ﬁscal 2005. Combining these $6.2 million, $23.7 million and $30.0 million, respectively. acquisitions with existing company-owned stores, the retail operations became a signiﬁcant part of our NOTE 16: EARNINGS PER SHARE Basic net income per share is computed using the weighted average number of shares outstanding during the period. Diluted net income per share uses the weighted average number of shares outstanding La-Z-Boy Incorporated Annual Report 2006 business. Management determined, based on the signiﬁcance of the retail operations and the criteria of segment reporting as outlined in SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, that retail would be reported in its own segment. We changed our internal reporting structure to the following three segments: Upholstery, Casegoods and Retail. All segment data was restated to Information used to evaluate segments is as follows (for the ﬁscal years ended): reﬂect this change. (Amounts in thousands) 4/29/06 4/30/05 4/24/04 Upholstery Group. The operating units in the Upholstery Group are Bauhaus, Clayton Marcus, England, La-Z-Boy, La-Z-Boy UK and Sam Moore. This group primarily manufactures and sells upholstered furniture to furniture retailers. Upholstered furniture includes recliners and motion furniture, sofas, loveseats, chairs, ottomans and sleeper sofas. Casegoods Group. The operating units in the Casegoods Group are American Drew, American of Martinsville, Hammary, Kincaid, Lea and Pennsylvania House. This group primarily sells manufactured or imported wood furniture to furniture retailers and the hospitality industry. Casegoods products include tables, chairs, entertainment centers, headboards, dressers, accent pieces and some coordinated upholstered furniture for the residential and hospitality markets. Retail Group. The Retail Group consists of 63 company-owned La-Z-Boy Furniture Galleries® stores (“the retail network”) located in nine markets ranging from the Midwest to the East Coast of the United States. The Retail Group sells mostly upholstered furniture to end consumers through the retail network. Our largest customer represents less than 4.0% of each of our segments’ sales. The accounting policies of the operating segments are the same as those described in Note 1. Segment operating income is based on proﬁt or loss from operations before interest expense, other income and income taxes. Identiﬁable assets are cash and equivalents, notes and accounts receivable, net inventories, net property, plant and equipment, goodwill and trade names. Our unallocated assets include deferred income taxes, corporate assets (including a portion of cash and equivalents), VIEs and various other assets. Substantially all of our long-lived assets were located within the U.S. VIEs are included in Corporate and other in the following table. Sales Upholstery Group Casegoods Group Retail Group VIEs/eliminations Consolidated Operating income (loss) Upholstery Group Casegoods Group Retail Group Restructuring Write-down of intangibles Corporate and other Consolidated Depreciation and amortization Upholstery Group Casegoods Group Retail Group Corporate and other Consolidated Capital expenditures Upholstery Group Casegoods Group Retail Group Corporate and other Consolidated Assets Upholstery Group Casegoods Group Retail Group Unallocated assets Consolidated Sales by country United States Canada Other 54 $ 1,347,964 432,307 213,438 (76,932) 1,916,777 $ 1,467,311 455,343 173,099 (47,372) 2,048,381 $ 1,439,253 456,090 128,996 (72,342) 1,951,997 85,253 18,265 (26,006) (6,643) (22,695) (29,048) 19,126 14,410 6,020 3,801 5,003 29,234 15,038 2,771 4,038 6,144 27,991 101,856 5,370 (2,859) (10,294) — (30,422) 63,651 15,511 6,732 2,710 3,376 28,329 13,965 2,930 7,126 10,750 34,771 129,719 2,991 1,295 (10,441) (71,943) (23,492) 28,129 16,274 8,968 2,240 1,630 29,112 18,252 3,617 4,236 5,488 31,593 511,733 213,061 103,611 142,769 $ 971,174 583,949 230,873 97,805 113,730 $ 1,026,357 573,868 247,816 65,720 153,510 $ 1,040,914 92% 5% 3% 100% 93% 5% 2% 100% 93% 4% 3% 100% La-Z-Boy Incorporated Annual Report 2006 NOTE 18: SHARE REPURCHASES We are authorized to repurchase common stock under the repurchase program approved by our Board of Directors. At April 29, 2006, approximately 5.9 million additional shares could be repurchased pursuant to the repurchase operating activities without subordinated ﬁnancial support. However, there are certain independent dealers that we have determined may not have sufﬁcient equity. program. Our repurchases were as follows (for the ﬁscal years ended): Based on the criteria for consolidation of VIEs, as of April 24, 2004, we consolidated several dealers where we were (Amounts in thousands) Shares repurchased Cash used for repurchases 4/29/06 760 $ 10,890 4/30/05 120 $ 2,476 4/24/04 3,379 $ 72,509 the primary beneﬁciary based on the fair value of our variable interests. All of our consolidated VIEs were recorded at fair value on the date we became the primary beneﬁciary resulting in a cumulative effect of accounting change of $8.3 million (net of tax of $5.1 million). Because these entities are accounted for as if the entities were consolidated based on voting interests, we absorb all net losses of the VIEs in excess of the equity at the dealerships. We NOTE 19: RELATED PARTIES The current chairman of our Board of Directors, who has announced his intention to retire in August 2006, is a recognize all net earnings of these VIEs to the extent of recouping the losses we recorded. Earnings in excess of our losses are attributed to equity owners of the dealers and are shown as minority interest on our ﬁnancial statements. member and lead director of the Board of Directors of Culp, Inc. Culp provided $33.3 million or 24.9% of the total During ﬁscal 2005, we eliminated two of our VIEs by acquisition. At the end of the ﬁrst quarter of ﬁscal 2006, we fabric purchased by us during the ﬁscal year. The purchases from Culp were at prices comparable to other vendors became the primary beneﬁciary of one additional dealer due to a change in ﬁnancial structure of this dealer. 55 and under similar terms. Our Chairman has no involvement in our selection or purchase processes related to fabrics. NOTE 20: VARIABLE INTEREST ENTITIES Financial Accounting Standards Board Interpretation No. 46R, Consolidation of Variable Interest Entities Our consolidated VIEs recognized $36.8 million and $46.0 million in sales, net of intercompany eliminations, in ﬁscal 2006 and ﬁscal 2005, respectively. Additionally, we recognized a net loss per share of $0.09 and $0.11 in ﬁscal 2006 and ﬁscal 2005, respectively, resulting from the operating results of these VIEs. The VIEs had (“FIN 46”), which was issued in December 2003, requires the “primary beneﬁciary” of a VIE to include the VIE’s $8.6 million and $10.2 million of assets net of elimination of intercompany activity at the end of ﬁscal 2006 and assets, liabilities and operating results in its consolidated ﬁnancial statements. In general, a VIE is a corporation, ﬁscal 2005, respectively. During the third quarter of ﬁscal 2005, one of the equity owners of our VIEs contributed partnership, limited-liability corporation, trust or any other legal structure used to conduct activities or hold assets $2.0 million of capital to their business. Because we consolidated this entity based on voting interests, we recorded that either (a) has an insufﬁcient amount of equity to carry out its principal activities without additional subordinated the capital contribution as income in that period to offset previously recorded losses. In ﬁscal 2005, the extraordinary ﬁnancial support, (b) has a group of equity owners that are unable to make signiﬁcant decisions about its activities, gain of $3.4 million ($2.1 million net of income taxes) is a result of the application of purchase accounting relating or (c) has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns to the acquisition of previously consolidated VIEs. generated by its operations. La-Z-Boy Furniture Galleries® stores that are not operated by us are operated by independent dealers. These stores Our interest in this dealer began in 1992 and is comprised of accounts and notes receivable of $21.8 million, sell La-Z-Boy manufactured products as well as various accessories purchased from approved La-Z-Boy vendors. which was evaluated periodically for collectibility. We acquired this business at fair value subsequent to year end. In some cases we have extended credit beyond normal trade terms to the independent dealers, made direct loans This acquisition is expected to impact our consolidated sales by less than 1.0% for the full year of ﬁscal 2007. Additionally, there is an independent dealer that qualiﬁes as a VIE; however, we are not the primary beneﬁciary. and/or guaranteed certain leases. Most of these independent dealers have sufﬁcient equity to carry out their principal La-Z-Boy Incorporated Annual Report 2006 MANAGEMENT’S REPORT TO OUR SHAREHOLDERS upon the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our management concluded that Management’s Responsibility for Financial Information our internal control over ﬁnancial reporting was effective as of April 29, 2006. Management of La-Z-Boy Incorporated is responsible for the preparation, integrity and objectivity of La-Z-Boy Incorporated’s consolidated ﬁnancial statements and other ﬁnancial information contained in this Management has excluded two La-Z-Boy Furniture Galleries® operations from our assessment of internal Annual Report to Shareholders. Those consolidated ﬁnancial statements were prepared in conformity with control over ﬁnancial reporting because we do not have the right or authority to assess the internal controls accounting principles generally accepted in the United States of America. In preparing those consolidated of the consolidated entity and we also lack the ability, in practice, to make that assessment. These two ﬁnancial statements, Management was required to make certain estimates and judgments, which are based retail furniture businesses were created prior to December 15, 2003, and were consolidated by La-Z-Boy upon currently available information and Management’s view of current conditions and circumstances. Incorporated on April 24, 2004, upon the adoption of Financial Accounting Standards Board Interpretation The Audit Committee of the Board of Directors, which consists solely of independent directors, oversees excluded businesses represent 0.7% and 1.3%, respectively, of the related consolidated ﬁnancial statement No. 46R, Consolidation of Variable Interest Entities. The combined total assets and total revenues of the our process of reporting ﬁnancial information and the audit of our consolidated ﬁnancial statements. The amounts as of and for the year ended April 29, 2006. Audit Committee stays informed of the ﬁnancial condition of La-Z-Boy Incorporated and regularly reviews Management’s ﬁnancial policies and procedures, the independence of our independent auditors, our PricewaterhouseCoopers LLP, the independent registered public accounting ﬁrm who audited the internal control and the objectivity of our ﬁnancial reporting. Both the independent auditors and the internal consolidated ﬁnancial statements included in this annual report, has also audited our management’s auditors have free access to the Audit Committee and meet with the Audit Committee periodically, both assessment of the effectiveness of our internal controls over ﬁnancial reporting as of April 29, 2006, and with and without Management present. the effectiveness of our internal control over ﬁnancial reporting as of April 29, 2006, as stated in their 56 opinion which is included herein. Management’s Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over ﬁnancial reporting, as such term is deﬁned in Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Ofﬁcer and Chief Financial Ofﬁcer, Kurt L. Darrow David M. Risley we conducted an evaluation of the effectiveness of our internal control over ﬁnancial reporting based President and Chief Executive Ofﬁcer Senior VP and Chief Financial Ofﬁcer La-Z-Boy Incorporated Annual Report 2006 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM statements are free of material misstatement. An audit of ﬁnancial statements 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 To the Board of Directors and Shareholders of La-Z-Boy Incorporated: basis for our opinion. We have completed integrated audits of La-Z-Boy Incorporated’s ﬁscal 2006 As discussed in Note 20 to the consolidated ﬁnancial statements, on April 24, and ﬁscal 2005 consolidated ﬁnancial statements and of its internal control 2004, the company adopted Financial Accounting Standards Board Interpretation over ﬁnancial reporting as of April 29, 2006 and an audit of its ﬁscal 2004 No. 46R, “Consolidation of Variable Interest Entities.” consolidated ﬁnancial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below. Consolidated Financial Statements In our opinion, the accompanying consolidated ﬁnancial statements present Internal Control Over Financial Reporting Also, in our opinion, management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that the Company maintained effective internal control over ﬁnancial reporting as of April 29, 2006 based on criteria established in Internal Control – Integrated fairly, in all material respects, the ﬁnancial position of La-Z-Boy Incorporated Framework issued by the Committee of Sponsoring Organizations of the Treadway and its subsidiaries at April 29, 2006 and April 30, 2005, and the results of their Commission (COSO), is fairly stated, in all material respects, based on those operations and their cash ﬂows for each of the three ﬁscal years in the period criteria. Furthermore, in our opinion, the Company maintained, in all material ended April 29, 2006 in conformity with accounting principles generally accepted respects, effective internal control over ﬁnancial reporting as of April 29, 2006, in the United States of America. These ﬁnancial statements are the responsibility based on criteria established in Internal Control – Integrated Framework issued of the Company’s management. Our responsibility is to express an opinion on by the COSO. The Company’s management is responsible for maintaining these ﬁnancial statements based on our audits. We conducted our audits of these effective internal control over ﬁnancial reporting and for its assessment of the statements in accordance with the standards of the Public Company Accounting effectiveness of internal control over ﬁnancial reporting. Our responsibility is to Oversight Board (United States). Those standards require that we plan and express opinions on management’s assessment and on the effectiveness of the perform the audit to obtain reasonable assurance about whether the ﬁnancial Company’s internal control over ﬁnancial reporting based on our audit. 57 La-Z-Boy Incorporated Annual Report 2006 We conducted our audit of internal control over ﬁnancial reporting in accordance Because of its inherent limitations, internal control over ﬁnancial reporting may with the standards of the Public Company Accounting Oversight Board (United not prevent or detect misstatements. Also, projections of any evaluation of States). Those standards require that we plan and perform the audit to obtain effectiveness to future periods are subject to the risk that controls may become reasonable assurance about whether effective internal control over ﬁnancial inadequate because of changes in conditions, or that the degree of compliance reporting was maintained in all material respects. An audit of internal control over with the policies or procedures may deteriorate. ﬁnancial reporting includes obtaining an understanding of internal control over ﬁnancial reporting, evaluating management’s assessment, testing and evaluating As described in the accompanying Management’s Report on Internal Control over the design and operating effectiveness of internal control, and performing such Financial Reporting, management has excluded two La-Z-Boy Furniture Galleries® other procedures as we consider necessary in the circumstances. We believe that operations from its assessment of internal control over ﬁnancial reporting our audit provides a reasonable basis for our opinions. because the Company does not have the right or authority to assess the internal controls of the consolidated entity and also lacks the ability, in practice, to make A company’s internal control over ﬁnancial reporting is a process designed to that assessment. These two retail furniture operations were created prior to provide reasonable assurance regarding the reliability of ﬁnancial reporting and December 15, 2003, and were consolidated by the Company on April 24, 2004 the preparation of ﬁnancial statements for external purposes in accordance with upon the adoption of Financial Accounting Standards Board Interpretation (FIN) generally accepted accounting principles. A company’s internal control over No. 46R, Consolidation of Variable Interest Entities. The combined total assets and ﬁnancial reporting includes those policies and procedures that (i) pertain to the total revenues of the excluded businesses represent 0.7% and 1.3%, respectively, maintenance of records that, in reasonable detail, accurately and fairly reﬂect the of the related consolidated ﬁnancial statement amounts as of and for the year transactions and dispositions of the assets of the company; (ii) provide reasonable ended April 29, 2006. assurance that transactions are recorded as necessary to permit preparation of ﬁnancial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; Toledo, Ohio and (iii) provide reasonable assurance regarding prevention or timely detection of June 22, 2006 unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the ﬁnancial statements. 58 La-Z-Boy Incorporated Annual Report 2006 CONSOLIDATED FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA (Amounts in thousands, except per share data) Fiscal Year Ended Sales Cost of sales Cost of goods sold Restructuring Total cost of sales Gross proﬁt Selling, general and administrative Write-down of intangibles Loss on divestiture Operating income Interest expense Other income, net Income from continuing operations before income taxes Income tax expense Income (loss) from continuing operations Income (loss) from discontinued operations (net of tax) Extraordinary gains (net of tax) Cumulative effect of accounting change (net of tax) 59 Net income (loss) Diluted weighted average shares outstanding Diluted income (loss) from continuing operations per share Diluted net income (loss) per share Dividends declared per share Book value on year-end shares outstanding Return on average shareholders’ equity* Gross proﬁt as a percent of sales Operating proﬁt as a percent of sales Effective tax rate Return on sales* Depreciation and amortization Capital expenditures Property, plant and equipment, net Working capital Current ratio Total assets Long-term debt Total debt Shareholders’ equity Ratio of total debt-to-equity Ratio of total debt-to-capital Shareholders Employees * Based on income from continuing operations. La-Z-Boy Incorporated Annual Report 2006 4/29/06 (52 weeks) $ 1,916,777 1,457,965 6,643 1,464,608 452,169 410,348 22,695 — 19,126 11,540 1,847 9,433 12,474 (3,041) — — — $ (3,041) 51,801 $ (0.06) $ (0.06) $ 0.44 $ 9.86 (0.6%) 23.6% 1.0% 132.2% (0.2%) $ 29,234 $ 27,991 $ 209,986 $ 356,149 2.6 to 1 $ 971,174 $ 173,368 $ 184,212 $ 510,345 36.1% 26.5% 31,900 13,400 4/30/05 (53 weeks) $ 2,048,381 1,572,844 10,294 1,583,138 465,243 401,592 — — 63,651 10,442 170 53,379 20,284 33,095 1,996 2,094 — $ 37,185 52,138 $ 0.63 $ 0.71 $ 0.44 $ 10.10 6.3% 22.7% 3.1% 38.0% 1.6% $ 28,329 $ 34,771 $ 210,565 $ 409,641 2.8 to 1 $ 1,026,357 $ 213,549 $ 226,309 $ 527,286 42.9% 30.0% 26,500 14,820 4/24/04 (52 weeks) $ 1,951,997 1,509,864 10,441 1,520,305 431,692 331,620 71,943 — 28,129 11,253 4,364 21,240 19,362 1,878 650 — (8,324) $ (5,796) 53,679 $ 0.04 $ (0.11) $ 0.40 $ 10.04 0.3% 22.1% 1.4% 88.7% 0.1% $ 29,112 $ 31,593 $ 212,739 $ 363,771 2.3 to 1 $ 1,040,914 $ 181,807 $ 224,370 $ 522,328 43.0% 30.0% 28,500 16,125 4/26/03 (52 weeks) $ 2,064,198 1,578,789 1,070 1,579,859 484,339 320,943 — — 163,396 10,510 2,621 155,507 59,093 96,414 (316) — (59,782) $ 36,316 57,435 $ 1.68 $ 0.63 $ 0.40 $ 11.08 14.6% 23.5% 7.9% 38.0% 4.7% $ 30,695 $ 32,821 $ 209,411 $ 464,907 3.2 to 1 $ 1,123,066 $ 222,371 $ 223,990 $ 609,939 36.7% 26.9% 29,100 16,970 4/27/02 (52 weeks) $ 2,101,741 1,624,477 22,187 1,646,664 455,077 342,819 — 11,689 100,569 10,063 2,299 92,805 28,690 64,115 (2,364) — — $ 61,751 61,125 $ 1.05 $ 1.01 $ 0.36 $ 11.90 9.1% 21.7% 4.8% 30.6% 3.1% $ 43,988 $ 32,966 $ 205,463 $ 445,850 3.0 to 1 $ 1,161,827 $ 139,386 $ 141,662 $ 713,522 19.9% 16.6% 33,000 17,850 UNAUDITED QUARTERLY FINANCIAL INFORMATION (Amounts in thousands, except per share data) Quarter Ended Sales Cost of sales Cost of goods sold Restructuring Total cost of sales Gross proﬁt Selling, general and administrative Write-down of intangibles Operating income (loss) Interest expense Other income, net Income (loss) from continuing operations before income taxes Income tax expense (beneﬁt) Income (loss) from continuing operations Income from discontinued operations (net of tax) Extraordinary gains (net of tax) Net income (loss) Diluted weighted average shares outstanding Diluted income (loss) from continuing operations per share Diluted net income (loss) per share Quarter Ended Sales Cost of sales Cost of goods sold Restructuring Total cost of sales Gross proﬁt Selling, general and administrative Operating income (loss) Interest expense Other income (expense), net Income (loss) from continuing operations before income taxes Income tax expense (beneﬁt) Income (loss) from continuing operations Income from discontinued operations (net of tax) Cumulative effect of accounting change (net of tax) Net income (loss) Diluted weighted average shares outstanding Diluted income (loss) from continuing operations per share Diluted net income (loss) per share 7/30/05 (13 weeks) $ 451,487 345,018 — 345,018 106,469 98,568 — 7,901 2,741 15 5,175 1,967 3,208 — — $ 3,208 52,195 $ 0.06 $ 0.06 7/24/04 (13 Weeks) $ 455,107 351,716 10,400 362,116 92,991 97,045 (4,054) 2,209 373 (5,890) (2,238) (3,652) 129 — $ (3,523) 51,967 $ (0.07) $ (0.07) 10/29/05 (13 Weeks) $ 454,605 354,409 7,817 362,226 92,379 99,597 — (7,218) 3,090 295 (10,013) (3,566) (6,447) — — $ (6,447) 51,655 $ (0.12) $ (0.12) 10/23/04 (13 Weeks) $ 520,760 400,834 749 401,583 119,177 103,874 15,303 2,607 (354) 12,342 4,690 7,652 506 702 $ 8,860 52,101 $ 0.15 $ 0.17 1/28/06 (13 Weeks) $ 502,323 377,937 594 378,531 123,792 105,301 — 18,491 2,965 1,395 16,921 6,453 10,468 — — $ 10,468 51,857 $ 0.20 $ 0.20 1/22/05 (13 Weeks) $ 506,959 385,353 2,252 387,605 119,354 99,620 19,734 2,684 273 17,323 6,583 10,740 352 — $ 11,092 52,193 $ 0.21 $ 0.21 4/29/06 (13 Weeks) $ 508,362 380,601 (1,768) 378,833 129,529 106,882 22,695 (48) 2,744 142 (2,650) 7,620 (10,270) — — $ (10,270) 51,747 $ (0.20) $ (0.20) 4/30/05 (14 Weeks) $ 565,555 434,941 (3,107) 431,834 133,721 101,053 32,668 2,942 (122) 29,604 11,249 18,355 1,009 1,392 $ 20,756 52,262 $ 0.35 $ 0.40 60 La-Z-Boy Incorporated Annual Report 2006 DIVIDEND AND MARKET INFORMATION Fiscal 2006 Quarter Ended July 30 Oct. 29 Jan. 28 April 29 Fiscal Year 2006 2005 2004 2003 2002 Dividends Paid $ 0.11 0.11 0.11 0.11 $ 0.44 Dividends Paid $ 0.44 0.44 0.40 0.40 $ 0.36 High $ 15.32 14.59 16.15 $ 17.25 Dividend Yield 3.1% 2.8% 1.9% 1.7% 1.7% Market Price Low $ 11.59 10.13 11.51 $ 14.91 Dividend Payout Ratio (733.3%)* 62.0% 800.0%** 24.0% 35.6% Close $ 13.37 11.66 16.10 $ 15.32 High $ 17.04 21.97 24.75 30.25 $ 30.94 Fiscal 2005 Quarter Ended July 24 Oct. 23 Jan. 22 April 30 Market Price Low $ 10.13 11.77 18.25 16.20 $ 14.70 Dividends Paid $ 0.11 0.11 0.11 0.11 $ 0.44 Close $ 15.32 11.84 21.85 18.07 $ 30.20 High $ 21.97 17.44 15.80 $ 16.40 Fiscal Year End Market Value (in Millions) $ 793 618 1,137 994 $ 1,811 Market Price Low $ 16.61 12.80 12.75 $ 11.77 High (284)* 31 495** 18 31 P/E Ratio Close $ 16.63 13.42 13.27 $ 11.84 Low (169)* 17 365** 10 15 61 *Fiscal 2006 includes a $22.7 million after-tax write-down of intangibles which decreases the dividend payout ratio by 849.1 percentage points, the high P/E ratio by 329 and the low P/E ratio by 196. **Fiscal 2004 includes a $55.9 million after-tax write-down of intangibles, which increases the dividend payout ratio by 736.3 percentage points, the high P/E ratio by 472 and the low P/E ratio by 348. La-Z-Boy Incorporated common shares are traded on the NYSE and PCX (symbol LZB). 2006, 2005 and 2004 ratios are based on income before the cumulative effect of accounting change and the extraordinary item. La-Z-Boy Incorporated Annual Report 2006 LA-Z-BOY COMPANIES ONLINE www.lazboy.com www.americandrew.com www.americanofmartinsville.com www.bauhaususa.com www.claytonmarcus.com www.englandfurniture.com www.hammary.com www.kincaidfurniture.com www.leafurniture.com www.lazboykidz.com www.pennsylvaniahouse.com www.sammoore.com www.la-z-boy.co.uk La-Z-Boy Incorporated, 1284 North Telegraph Road, Monroe, Michigan 48162-3390 Items shown on cover (from left): The Folding Porch Chair, Americana, Lectra-Lounger, Wendell and Carlyle chairs by La-Z-Boy.

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