La-Z-Boy Incorporated — Fiscal 2013 Second-Quarter Form 10-Q
Reporting period: Quarter and six months ended October 27, 2012, compared with October 29, 2011. The filing is unaudited. La-Z-Boy manufactures, imports, distributes and retails upholstered furniture, casegoods and related products through Upholstery, Casegoods and Retail segments.
Financial performance
| Metric | Second quarter 2013 | Second quarter 2012 | Change |
|---|---|---|---|
| Sales | $322.3 million | $307.7 million | 4.8% |
| Gross profit | $100.3 million | $95.8 million | 4.7% |
| Operating income | $10.6 million | $12.2 million | (13.8%) |
| Operating margin | 3.3% | 4.0% | (0.7) percentage points |
| Net income attributable to La-Z-Boy | $6.6 million | $7.9 million | Decrease |
| Diluted earnings per share | $0.12 | $0.15 | Decrease |
| Metric | Six months 2013 | Six months 2012 | Change |
|---|---|---|---|
| Sales | $623.8 million | $587.8 million | 6.1% |
| Operating income | $18.2 million | $15.7 million | 15.7% |
| Operating margin | 2.9% | 2.7% | 0.2 percentage points |
| Net income attributable to La-Z-Boy | $11.0 million | $53.4 million | Decrease |
| Diluted earnings per share | $0.20 | $1.00 | Decrease |
Second-quarter gross margin was approximately 31.1%, essentially flat year over year. SG&A increased to $89.7 million from $83.5 million, reflecting higher incentive compensation, marketing spending and ERP implementation costs, partly offset by lower bad-debt provisions and favorable fixed-cost absorption.
The six-month 2012 net income comparison benefited from a substantial deferred-tax valuation allowance release. Excluding that discrete tax adjustment, the prior-year effective tax rate would have been approximately 36.0%, versus 36.5% in the first six months of fiscal 2013.
Segment results
- Upholstery: Second-quarter sales increased 7.5% to $259.5 million; operating income increased 3.8% to $21.8 million; margin declined to 8.4% from 8.7%. Six-month sales increased 8.4% to $497.6 million and operating margin improved to 7.5% from 7.0%.
- Casegoods: Second-quarter sales declined 3.9% to $34.5 million; operating income fell 54.0% to $0.9 million; margin declined to 2.6% from 5.5%. Lower order levels and fixed-cost underabsorption pressured results.
- Retail: Second-quarter sales increased 16.1% to $61.2 million; operating loss narrowed to $0.6 million from $2.7 million. Six-month sales increased 16.5% to $118.3 million, while the operating loss narrowed to $2.6 million from $6.1 million. Results included the acquisition of nine southern Ohio stores.
Cash flow, liquidity and capital structure
- Cash used in operating activities was $2.5 million in the first six months of fiscal 2013, compared with $17.5 million provided in the prior-year period. Working capital used $35.1 million, principally because of higher inventories and accrued-benefit payments.
- Cash used in investing activities was $59.3 million, including $11.6 million of capital expenditures, $25.8 million of net investment purchases, $6.9 million added to restricted cash and $15.9 million for acquisitions.
- Cash used in financing activities was $4.0 million, including $2.3 million of debt repayments and $4.0 million of common-stock purchases.
- Cash and equivalents declined to $86.6 million at October 27, 2012, from $152.4 million at April 28, 2012. Restricted cash increased to $9.8 million.
- Total debt was $7.7 million, consisting of $0.4 million current and $7.4 million long-term debt. Debt-to-capitalization was 1.6%, compared with 2.1% at fiscal year-end.
- The company had no borrowings under its $150 million revolving credit facility and reported $141.7 million of excess availability. The fixed-charge coverage covenant was not applicable at quarter-end.
- Fiscal 2013 capital expenditures are expected to be $25 million to $30 million. The board declared a quarterly dividend of $0.04 per share, approximately $2.0 million in total.
Material changes, outlook and unusual items
- La-Z-Boy acquired nine independently operated Furniture Galleries stores and one distribution center in southern Ohio for approximately $17.4 million. The acquisition added $12.8 million of goodwill and a $2.2 million indefinite-lived intangible asset; its impact on consolidated results was not material.
- The company recorded a $2.7 million restructuring charge, primarily for fixed-asset and inventory write-downs related to closing its Casegoods lumber-processing operation. Component lumber parts will be outsourced.
- Incentive compensation expense increased by $2.9 million in the quarter and $5.9 million year to date. Management expects compensation expense to have less impact in the second half of the fiscal year.
- Management described the furniture-industry environment as challenging but expects the business model to support profitable growth. Planned investments include brand advertising, the store system and other initiatives intended to drive sales, retail profitability and volume conversion.
- Hurricane Sandy caused no significant damage to company Furniture Galleries stores, although its effect on future sales was unknown at the filing date.
- Key risks include consumer confidence and housing conditions, commodity and import costs, supply-chain and labor disruptions, currency movements, product defects and warranty costs, ERP implementation, integration of acquired stores, and potential impairment of retail assets, goodwill or indefinite-lived intangibles.
- The company reported $42.0 million of open purchase orders with foreign casegoods, leather and fabric suppliers; most orders not yet in production were cancelable.
Investor verification points
- Verify whether higher Upholstery and Retail volume offsets Casegoods weakness and the company’s continuing marketing, incentive-compensation and ERP costs.
- Monitor operating cash conversion, inventory levels and the effect of planned seasonal raw-material purchases on liquidity.
- Assess performance and integration of the nine acquired southern Ohio stores, including goodwill and indefinite-lived intangible asset impairment risk.
- Evaluate whether the Casegoods restructuring produces expected cost benefits after outsourcing lumber components.
- Reconcile year-over-year earnings against the prior-year deferred-tax valuation allowance release rather than relying solely on reported net income.
- Track compliance with the revolving-credit facility covenants and the availability of borrowing capacity.
- Review exposure to warranty claims, customer credit losses, pension obligations and the $1.7 million uncertain-tax-position liability.