La-Z-Boy Incorporated: Fiscal 2012 Form 10-K Summary
Business context and reporting period
La-Z-Boy manufactures, imports, distributes and retails upholstered furniture, casegoods and related products. Reportable segments are Upholstery, Casegoods and Retail. The filing covers the 52-week fiscal year ended April 28, 2012; fiscal 2011 had 53 weeks. The requested “2011 Q4” corresponds to the fiscal fourth quarter ended April 28, 2012, unless otherwise specified.
- The company operated 85 company-owned La-Z-Boy Furniture Galleries stores within a broader network of 312 Galleries stores and 553 Comfort Studios.
- Fiscal 2012 sales were primarily in the United States and Canada; direct exports, including Canada, represented approximately 13.1% of total sales.
Financial performance and key metrics
| Metric | Fiscal 2012 | Fiscal 2011 | Change |
|---|---|---|---|
| Sales | $1,231.7 million | $1,187.1 million | +3.8% |
| Gross profit | $379.9 million | $354.3 million | +7.2% |
| Gross margin | 30.8% | 29.8% | +1.0 percentage point |
| Operating income | $49.6 million | $25.9 million | +91.6% |
| Operating margin | 4.0% | 2.2% | +1.8 percentage points |
| Net income attributable to La-Z-Boy | $88.0 million | $24.0 million | +265.9% |
| Diluted EPS | $1.64 | $0.45 | +264.4% |
| Cash provided by operating activities | $82.8 million | $27.8 million | +$55.0 million |
| Capital expenditures | $15.7 million | $10.5 million | +$5.1 million |
Fiscal fourth-quarter sales were $327.4 million, operating income was $16.9 million, and net income attributable to La-Z-Boy was $19.6 million, or $0.37 diluted EPS. Fourth-quarter results included $16.3 million of previously withheld CDSOA distributions.
- Upholstery: Sales of $975.1 million, up 6.4%; operating income of $81.8 million, up 12.4%; operating margin improved to 8.4% from 7.9%.
- Casegoods: Sales of $139.6 million, down 8.5%; operating income of $5.5 million, down 17.3%; operating margin declined to 4.0% from 4.4%.
- Retail: Sales of $215.5 million, up 21.8%; operating loss narrowed to $7.8 million from $15.1 million; operating margin improved to negative 3.6% from negative 8.5%.
Liquidity, debt and balance sheet
- Cash and equivalents increased to $152.4 million from $115.3 million. Working capital was $350.2 million and the current ratio was 3.3 to 1.
- Total debt declined to $9.8 million from $35.1 million; debt-to-capitalization declined to 2.1% from 8.8%.
- The amended revolving credit facility has $150 million of capacity, matures October 19, 2016, and had no borrowings outstanding at year-end. Excess availability was $124.2 million.
- The company used $26.5 million in financing cash flow, including $25.9 million of net debt repayment and $5.2 million for share repurchases.
- Fiscal 2013 capital expenditures were expected to be $25 million to $30 million. Contractual obligations totaled $333.2 million, including $318.5 million of operating lease commitments.
Material changes versus the prior comparable period
- Sales and profitability improved despite one fewer fiscal week, driven by higher Upholstery and Retail volume, promotional activity, new products and improved store performance.
- Gross margin benefited from production efficiencies, particularly at the Mexico cut-and-sew facility, and Retail margin improvement, partially offset by higher raw material costs.
- SG&A increased in dollars but declined 0.5 percentage point as a percentage of sales due to operating leverage. Incentive compensation and advertising expenses increased.
- The company recorded no long-lived asset impairment in fiscal 2012, compared with $4.5 million in fiscal 2011.
- The last variable-interest entity was deconsolidated during the third quarter, producing a $1.1 million non-cash operating gain and ending consolidation of VIE operations.
- Fiscal 2012 included $18.0 million of CDSOA income versus $1.1 million in fiscal 2011.
- A $46.2 million reversal of valuation allowances on deferred tax assets produced a $22.1 million income tax benefit and increased diluted EPS by approximately $0.88. Excluding these adjustments, management reported an effective tax rate of 37.5%.
- Backlog declined in Upholstery to $69.7 million from $73.2 million and increased in Casegoods to $14.0 million from $12.3 million.
Guidance, outlook, risks and unusual items
Management stated that the company was positioned to continue improving market share, supported by its brand, proprietary distribution network, store growth plans and recent same-store-sales improvement. The company planned to open, relocate or remodel 10 to 15 Galleries stores in fiscal 2013.
- Management expected higher fiscal 2013 costs for steel, leather, wood, yarn, polyurethane and transportation, as well as continued inflation in imported Casegoods costs.
- The company expected to contribute approximately $4.8 million to its defined benefit pension plan in fiscal 2013 and estimated pension expense of $2.7 million, versus $1.5 million in fiscal 2012.
- CDSOA distributions remain subject to litigation risk; Customs could seek repayment of some or all distributions if opposing parties ultimately prevail.
- Key operating risks include weak consumer confidence and housing markets, competition, raw material price and supply volatility, foreign sourcing and logistics disruptions, reliance on certain suppliers, product defects and warranty claims, information technology failures, cyber risks and retail-store impairment.
- The defined benefit pension plan was underfunded by $29.3 million at year-end, compared with $15.5 million in the prior year.
- Legal and environmental matters arise in the ordinary course. Management recorded reserves for probable and estimable losses and did not anticipate significant additional losses.
- The filing states that management and PricewaterhouseCoopers concluded internal control over financial reporting was effective as of April 28, 2012.
Investor verification checklist
- Assess the sustainability of earnings excluding the $18.0 million CDSOA benefit and the $46.2 million deferred-tax valuation allowance reversal.
- Verify fiscal 2013 pricing actions and margin resilience against expected raw material, fuel, freight and imported-product inflation.
- Monitor Casegoods demand, product acceptance, backlog and inventory levels following the fiscal 2012 sales decline.
- Evaluate whether the Retail segment can achieve profitability despite its substantial lease commitments and continuing operating loss.
- Review the CDSOA litigation and potential repayment exposure.
- Track pension funding requirements, actuarial assumptions and the increase in the funded-status deficit.
- Confirm cash generation, share repurchase activity and compliance with the revolving-credit agreement’s availability and fixed-charge coverage requirements.