La-Z-Boy Incorporated Fiscal 2013 Form 10-K Summary
Business context and reporting period
La-Z-Boy manufactures, imports, distributes, markets, and retails upholstered furniture, casegoods, accessories, and related products. Reportable segments are Upholstery, Casegoods, and Retail. The filing covers the 52-week fiscal year ended April 27, 2013; the comparable fiscal year ended April 28, 2012 also contained 52 weeks. Although the request references 2012 Q4, this filing is an annual fiscal 2013 Form 10-K and includes fourth-quarter information.
The company operated 94 company-owned La-Z-Boy Furniture Galleries stores and, in total, its network included 313 Furniture Galleries stores and 565 Comfort Studios locations. In the second quarter, La-Z-Boy acquired nine independently operated Furniture Galleries stores and one distribution center in southern Ohio.
Financial performance and key metrics
| Metric | Fiscal 2013 | Fiscal 2012 | Change |
|---|---|---|---|
| Sales | $1.333 billion | $1.232 billion | Up 8.2% |
| Gross profit | $424.9 million | $379.9 million | Up $45.1 million |
| Gross margin | 31.9% | 30.8% | Up 1.1 points |
| Operating income | $67.6 million | $49.6 million | Up 36.3% |
| Operating margin | 5.1% | 4.0% | Up 1.1 points |
| Net income attributable to La-Z-Boy | $46.4 million | $88.0 million | Down 47.3% |
| Diluted earnings per share | $0.85 | $1.64 | Down $0.79 |
| Cash flow from operations | $68.4 million | $82.8 million | Down $14.4 million |
Fiscal 2012 net income benefited from a $46.2 million release of deferred-tax valuation allowances and $18.0 million of Continued Dumping and Subsidy Offset Act distributions. Fiscal 2013 had neither benefit, making year-over-year net income and EPS comparisons less representative of underlying operating progress.
- Upholstery: Sales increased 9.4% to $1.067 billion; operating income increased 18.4% to $96.8 million; operating margin improved to 9.1% from 8.4%.
- Casegoods: Sales declined 4.0% to $134.0 million; operating income declined 52.3% to $2.6 million; operating margin fell to 2.0% from 4.0%.
- Retail: Sales increased 22.8% to $264.7 million; operating income improved to $4.1 million from a $7.8 million loss; operating margin improved to 1.5% from negative 3.6%.
Quarterly sales and operating income increased sequentially during fiscal 2013, with fourth-quarter sales of $359.5 million and operating income of $26.2 million. Fourth-quarter net income attributable to La-Z-Boy was $18.3 million, or $0.33 diluted EPS.
Cash flow, liquidity, debt, and capital allocation
- Cash and equivalents were $131.1 million at April 27, 2013, compared with $152.4 million a year earlier. Restricted cash increased to $12.7 million from $2.9 million.
- Net cash used in investing activities was $78.0 million, including $25.9 million of capital expenditures, $15.8 million for the southern Ohio acquisition, $9.8 million of increased restricted cash, and approximately $30.9 million of net investment purchases.
- Net cash used in financing activities was $11.6 million, including $10.3 million of share repurchases and $4.2 million of dividend payments.
- Total debt declined to $8.1 million from $9.8 million; debt-to-capitalization was 1.6%. The company had no borrowings under its $150 million revolving credit facility and reported $143.3 million of excess availability.
- Working capital was $350.7 million and the current ratio was 3.3 to 1 at year-end.
- The company repurchased approximately 0.7 million shares during fiscal 2013 and declared $0.08 per share of dividends after reinstating quarterly dividends.
- Capital expenditures are expected to be $60 million to $70 million in fiscal 2014, including approximately $57 million for a new world headquarters expected to be spent over 18 months.
Material changes versus the prior comparable period
- Consolidated sales and operating income improved substantially, led by higher Upholstery volume, pricing, product mix, and stronger Retail performance.
- Gross margin improved by 1.1 percentage points, while SG&A increased in dollars but remained flat as a percentage of sales. Additional incentive compensation expense was $8.8 million.
- Raw-material prices in Upholstery increased approximately 3.2%; material inflation reduced Upholstery gross margin by approximately 1.1 percentage points.
- Casegoods performance weakened because of lower volume, fixed-cost deleverage, an import-duty charge, and higher incentive compensation. The company closed its lumber-processing operation and shifted to a parts-assembly and outsourced-component model, recording a $2.7 million restructuring charge.
- Retail moved from an operating loss to operating income, aided by the southern Ohio acquisition, improved traffic and average ticket, product mix, pricing, and lower promotional activity.
- Operating cash flow declined primarily because fiscal 2013 included a $20.0 million discretionary pension contribution, while fiscal 2012 benefited from CDSOA distributions.
- The defined benefit pension plan remained underfunded, but the funded deficit improved to $12.1 million from $29.3 million following $23.5 million of contributions, including the $20.0 million discretionary payment.
Guidance, outlook, risks, contingencies, and unusual items
Management expressed confidence in its integrated retail strategy, brand strength, proprietary outlet expansion, and the potential benefits of a strengthening economy and housing recovery. The company planned to open, relocate, or remodel 15 to 20 stores in fiscal 2014. Management also expected continued quarterly dividends and indicated it would remain opportunistic regarding share repurchases.
- Demand is seasonal: Upholstery and Retail generally have their weakest first quarter and strongest fourth quarter. The first fiscal quarter includes a one-week plant shutdown for vacation and maintenance.
- Management expects Upholstery raw-material costs to rise in fiscal 2014, while imported casegoods prices and transportation costs were expected to remain relatively stable.
- Major risks include consumer confidence, housing and credit conditions, competition, product liability and recalls, brand and fashion trends, imported sourcing and logistics, supplier concentration, commodity costs, foreign operations, cybersecurity, and implementation of the ERP system.
- Approximately 74% of polyurethane foam was sourced from one supplier. The company also relies on a limited number of suppliers for imported leather and fabric sets.
- Operating lease commitments totaled $319.2 million, and total contractual obligations were $414.3 million, including $134.0 million due within one year.
- The company reported various legal and environmental proceedings but did not expect material additional losses beyond recorded reserves. It also disclosed potential uncertainty regarding future CDSOA distributions and the remote possibility that prior distributions could be required to be returned.
- Product warranty liabilities increased to $15.5 million from $14.3 million. The company is self-insured for the first $1.5 million of product-liability and defense costs.
- The ERP implementation is expected to occur over several years and could cause operational disruption, cost overruns, or delays in internal-control testing if not executed effectively.
Important facts for investors to verify
- Whether operating momentum in Upholstery and Retail continued after fiscal 2013, and whether Casegoods margins recovered.
- The sustainability of margin gains after material inflation, freight costs, incentive compensation, and restructuring effects.
- Fiscal 2014 spending on the headquarters project, store expansion, and other capital expenditures relative to operating cash flow.
- Actual cash generation after the unusually large pension contribution and the absence of CDSOA distributions.
- Compliance with credit-facility covenants, debt maturities, and the availability of the revolving facility.
- Progress and costs of the ERP implementation, including any effect on internal controls or operations.
- Changes in pension funded status, future required contributions, and the impact of lower discount rates and expected asset returns.
- Exposure to concentrated suppliers, imported products, tariffs, commodity prices, product claims, warranty costs, and potential environmental or legal liabilities.