La-Z-Boy Incorporated: Fiscal 2012 Second-Quarter Form 10-Q
Reporting period: Quarter and six months ended October 29, 2011, compared with October 23, 2010. Fiscal 2012 has 52 weeks versus 53 weeks in fiscal 2011. The filing’s interim financial statements are unaudited.
Business context
La-Z-Boy manufactures, imports, distributes and retails upholstered furniture, casegoods and accessories, primarily in the United States and Canada. Reportable segments are Upholstery, Casegoods and Retail. The company owned 85 La-Z-Boy Furniture Galleries stores within a broader network of 309 Galleries and 545 Comfort Studios.
Key financial metrics
| Metric | Q2 FY2012 | Q2 FY2011 | Six months FY2012 | Six months FY2011 |
|---|---|---|---|---|
| Sales | $307.7 million | $293.0 million | $587.8 million | $556.3 million |
| Operating income | $12.2 million | $5.3 million | $15.7 million | $3.7 million |
| Operating margin | 4.0% | 1.8% | 2.7% | 0.7% |
| Net income attributable to La-Z-Boy | $7.9 million | $3.9 million | $53.4 million | $3.7 million |
| Diluted earnings per share | $0.15 | $0.07 | $1.00 | $0.07 |
| Net cash from operating activities | Not separately provided | Not separately provided | $17.5 million | $(18.8) million |
Second-quarter gross margin improved 2.1 percentage points, while selling, general and administrative expense increased to $83.5 million from $79.8 million. The second-quarter effective tax rate was 35.6%, compared with 30.3% in the prior-year quarter.
At October 29, 2011, cash and equivalents were $117.5 million, compared with $115.3 million at April 30, 2011. Total debt was approximately $30.7 million, consisting of $2.5 million current debt and $28.2 million long-term debt. The debt-to-capitalization ratio was 6.8%, versus 8.8% at fiscal year-end.
Six-month investing cash use was $8.7 million, including $8.2 million of capital expenditures. Financing activities used $6.5 million, including $4.9 million of debt repayment and $1.5 million of share repurchases. Cash increased $2.3 million during the six months.
Material changes versus the prior comparable period
- Second-quarter sales increased 5.0%, and six-month sales increased 5.7%, primarily due to stronger volume.
- Second-quarter operating income rose 129.4%, and the operating margin expanded 2.2 percentage points to 4.0%. Six-month operating income increased 326.2% and the operating margin improved to 2.7%.
- Upholstery sales increased 7.3% in the quarter and 7.5% year to date; operating margin improved to 8.7% and 7.0%, respectively, driven by volume, mix, cost reductions and efficiencies. Raw-material inflation partially offset these benefits.
- Casegoods sales declined 9.0% in the quarter and 8.2% year to date. Quarterly margin improved to 5.5% due primarily to price increases, but six-month margin declined slightly to 3.6% as material costs were not fully offset.
- Retail sales increased 34.3% in the quarter and 36.2% year to date, partly due to the acquisition of the Southern California VIE stores. Retail operating losses narrowed, but the segment remained unprofitable because of its high lease expense relative to sales.
- Six-month net income included a $43.4 million valuation allowance reversal related primarily to U.S. deferred tax assets. The filing states that the six-month effective tax rate would have been 36.0% absent this discrete adjustment.
- The company received $0.3 million in first-quarter payments under the Continued Dumping and Subsidy Offset Act.
Guidance, outlook, risks and unusual items
- Management expects the industry environment to remain challenging because of low consumer confidence, a depressed housing market and financial-market volatility. Management believes the brand, marketing initiatives and operating efficiencies position the company for an eventual market improvement.
- Fiscal 2012 capital expenditures are expected to be $15 million to $20 million; $8.2 million had been spent through six months. No material future capital expenditure commitments were outstanding.
- On October 19, 2011, the company amended its revolving credit agreement, reducing capacity from $175 million to $150 million and extending maturity to October 19, 2016. Borrowings were $20 million and excess availability was $112.5 million at October 29, 2011.
- The amended facility is secured primarily by receivables, inventory, cash and securities accounts. A 1.05-to-1.00 fixed-charge coverage covenant applies if excess availability falls below 12.5% of the commitment; the company was not subject to the test at quarter-end and stated it would have complied if tested.
- Management identified risks involving consumer demand, housing and credit conditions, commodity prices, imports and logistics, supply disruptions, labor, recalls, foreign exchange, information technology, regulatory changes and the ability to maintain and expand the store network.
- Notes receivable from customers totaled $9.9 million gross, with a $2.3 million allowance. The company’s exposure to three independent dealers for which it was not the primary beneficiary was $4.6 million, primarily receivables and notes receivable; management reported no obligation to provide further support.
- Product warranty liabilities totaled $13.8 million at October 29, 2011. The filing notes that actual warranty costs could differ materially from estimates.
- The company had a $2.2 million liability for uncertain tax positions, of which $0.4 million could be settled within the next 12 months.
- The company repurchased 185,000 shares during the second quarter for $1.5 million and had approximately 5.2 million shares remaining under its authorization at quarter-end.
Important facts for investors to verify
- Separate recurring operating performance from the $43.4 million deferred-tax valuation allowance reversal that drove much of the six-month net income increase.
- Monitor whether Retail can eliminate its continuing operating losses despite improved sales and margins.
- Assess Casegoods demand, order levels and the ability to recover material-cost inflation through pricing.
- Verify borrowing-base availability and compliance with the amended credit agreement’s conditional covenant requirements.
- Evaluate cash conversion, inventory growth and planned fiscal 2012 capital expenditures.
- Review exposure to customer and dealer credit losses, warranty claims, supply-chain disruptions and import-related costs.
- Track the uncertain future of CDSOA distributions, which management stated cannot be predicted and could vary significantly.