LA-Z-BOY INCORPORATED
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Based on the closing price on the New York Stock Exchange on October 28, 2011, the aggregate market value of Registrant’s common shares held by non-affiliates of the Registrant on that date was $551.7 million.
The number of common shares outstanding of the Registrant was 52,132,606 as of June 12, 2012.
DOCUMENTS INCORPORATED BY REFERENCE:
FORM 10-K ANNUAL REPORT FISCAL 2012
TABLE OF CONTENTS
Note: The responses to Items 10 through 14 will be included in the Company’s definitive proxy statement to be filed pursuant to Regulation 14A for the 2012 Annual Meeting of Shareholders. The required information is incorporated into this Form 10-K by reference to that document and is not repeated herein.
La-Z-Boy Incorporated and its subsidiaries (individually and collectively, “we,” “our” or the “Company”) makes forward-looking statements in this report, and its representatives may make oral forward-looking statements from time to time. Generally, forward-looking statements include information concerning possible or assumed future actions, events or results of operations. More specifically, forward-looking statements may include information regarding:
Forward-looking statements also include those preceded or followed by the words "anticipates," "believes," "estimates," "hopes," "plans," "intends" and "expects" or similar expressions. With respect to all forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
Actual results could differ materially from those we anticipate or project due to a number of factors, including: (a) changes in consumer confidence and demographics; (b) speed of recovery from the recent economic recession or the emergence of a second wave of the recession; (c) changes in the real estate and credit markets and their effects on our customers and suppliers; (d) international political unrest, terrorism or war; (e) volatility in energy and other commodities prices; (f) the impact of logistics on imports; (g) interest rate and currency exchange rate changes; (h) operating factors, such as supply, labor or distribution disruptions; (i) any court actions requiring us to return our share of certain Continued Dumping and Subsidy Offset Act distributions; (j) changes in the domestic or international regulatory environment; (k) adoption of new accounting principles; (l) severe weather or other natural events such as hurricanes, earthquakes, flooding, tornadoes and tsunamis; (m) our ability to procure fabric rolls and leather hides or cut-and-sewn fabric and leather sets domestically or abroad; (n) fluctuations in our stock price; (o) information technology conversions or system failures; (p) effects of our brand awareness and marketing programs; (q) the discovery of defects in our products resulting in delays in manufacturing, recall campaigns, reputational damage, or increased warranty costs; (r) litigation arising out of alleged defects in our products; (s) our ability to locate new La-Z-Boy Furniture Galleries® stores owners and negotiate favorable lease terms for new or existing locations; and (t) those matters discussed in Item 1A of this Annual Report and other factors identified from time-to-time in our reports filed with the Securities and Exchange Commission. We undertake no obligation to update or revise any forward-looking statements, whether to reflect new information or new developments or for any other reason.
PART I
ITEM 1. BUSINESS.
Edward M. Knabusch and Edwin J. Shoemaker started Floral City Furniture in 1927, and in 1928 the newly formed company introduced its first recliner. In 1941, we were incorporated as La-Z-Boy Chair Company in the state of Michigan, and in 1996 our name was changed to La-Z-Boy Incorporated. Today, our La-Z-Boy brand is the most recognized brand in the furniture industry as we celebrate our 85th anniversary as a company.
La-Z-Boy Incorporated manufactures, markets, imports, distributes and retails upholstery products, accessories and casegoods (wood) furniture products. We are the leading global producer of reclining chairs, the second largest manufacturer/distributor of residential furniture in the United States according to the May 2012 Top sources for the U.S. Furniture Market in Furniture Today, and the La-Z-Boy Furniture Galleries® stores retail network is the second largest retailer of single-branded upholstered furniture in North America according to the May 2012 Top 100 ranking by Furniture Today. We have nine major North American manufacturing locations to support our speed to market and customization strategy. We sell our products, primarily in the United States and Canada, to furniture retailers and directly to consumers through company-owned stores. The centerpiece of our retail distribution strategy is our network of 312 La-Z-Boy Furniture Galleries® stores and 553 Comfort Studios®, each dedicated to marketing our La-Z-Boy branded products. We consider this dedicated space to be “proprietary.” We own and operate 85 of the La-Z-Boy Furniture Galleries® stores. The remainder of the La-Z-Boy Furniture Galleries® stores, as well as all 553 Comfort Studios®, are independently owned and operated. La-Z-Boy Furniture Galleries® stores help consumers furnish their homes by combining the style, comfort and quality of La-Z-Boy furniture with our in-home design service. Comfort Studios® are defined spaces within larger independent retailers that are dedicated to displaying La-Z-Boy branded products. In addition to the La-Z-Boy Comfort Studios®, our Kincaid, England and Lea operating units have their own dedicated in-store gallery programs with over 700 outlets and 2.0 million square feet of proprietary floor space. In total, our proprietary floor space includes approximately 9.3 million square feet.
Principal Products and Industry Segments
Our reportable segments are the Upholstery segment, the Casegoods segment and the Retail segment.
Upholstery Segment. In terms of revenue, our largest segment is the Upholstery segment, which consists of three operating units, La-Z-Boy, our largest operating unit, as well as the Bauhaus and England operating units. The Upholstery segment manufactures or imports upholstered furniture such as recliners and motion furniture, sofas, loveseats, chairs, ottomans and sleeper sofas. The Upholstery segment sells directly to La-Z-Boy Furniture Galleries® stores, operators of Comfort Studios®, major dealers and other independent retailers.
Casegoods Segment. Our Casegoods segment is an importer, marketer, manufacturer and distributor of casegoods (wood) furniture such as bedroom sets, dining room sets, entertainment centers and accent pieces, as well as some coordinated upholstered furniture. The Casegoods segment consists of two operating units, one consisting of American Drew, Lea and Hammary, and the second being Kincaid. The Casegoods segment primarily sells to major dealers and other independent retailers.
Retail Segment. Our Retail segment consists of 85 company-owned La-Z-Boy Furniture Galleries® stores located in nine markets ranging from the Midwest to the east coast of the United States and also including southeastern Florida and southern California. The Retail segment primarily sells upholstered furniture, as well as some casegoods and other accessories, to end consumers through the retail network.
Additional detailed information regarding our segments and the products which compose the segments is contained in Note 14 to our consolidated financial statements and our “Management’s Discussion and Analysis” section, both of which are included in this report.
Raw Materials and Parts
The principal raw materials for the Upholstery segment are purchased cover (primarily fabrics and leather), polyester batting and non-chlorofluorocarbonated polyurethane foam for cushioning and padding, lumber and plywood for frames and steel for motion mechanisms, which together total about 85% of the segment’s total upholstery material costs. We purchase about 70% of our polyurethane foam from one supplier, although this supplier has several facilities across the United States which ship to our plants. The largest raw material cost of the Upholstery segment is purchased cover, which represents about 41% of the segment’s total material costs. Although we purchase cover from a variety of sources, we do rely on a limited number of major suppliers. If one of these major suppliers experienced financial or other difficulties we could experience temporary disruptions in our manufacturing process until an alternate supplier could be obtained.
Our cover is purchased either in a raw state (a roll or hide), then cut and sewn into parts or purchased as cut-and-sewn parts from third-party offshore suppliers. Our cover material costs are evenly divided between fabric rolls and hides and cut-and-sewn parts. There are four primary suppliers of cut-and-sewn leather and fabric products. Of the products we import from China, one supplier manufactures over half of the leather cut-and-sewn sets and one supplier manufactures over half of the fabric products.
For fiscal 2013, we expect raw material costs to rise due to increased global demand for steel, leather, wood, yarn and polyurethane, as well as other materials used in our upholstery manufacturing processes. Additionally, costs associated with our shipping and transportation activities are sensitive to changes in crude oil pricing.
As the Casegoods segment is an importer, marketer, manufacturer and distributor of casegoods furniture, raw materials represent only about 12% of the total inventory of this segment. The principal raw materials used by our manufacturing facility within our Casegoods segment are hardwoods, plywood and chip wood, veneers and liquid stains, paints and finishes and decorative hardware. Hardwood lumber and purchased hardwood components represent about 42% of this segment’s total material costs.
Finished Goods Imports
The majority of finished wood furniture marketed and distributed by our Casegoods segment is imported. This import model for our Casegoods segment is effective primarily due to the low labor and overhead costs associated with manufacturing casegoods product overseas. We have continued to make changes to our model in order to improve our service performance levels by improving our supply chain management and distribution networks.
During fiscal 2012, prices on imported casegoods increased due to inflationary pressures in Asia resulting from increases in labor and raw material costs. We expect these price increases to continue in fiscal 2013, along with increased transportation costs.
Sales of imported casegoods finished goods represented about 75% and 77% of our total casegoods sales for fiscal 2012 and fiscal 2011, respectively. Sales of imported finished goods, for all our segments, represented approximately 10% and 12% of our fiscal 2012 and fiscal 2011 consolidated sales, respectively.
Seasonal Business
We believe that the demand for furniture generally reflects sensitivity to overall economic conditions, including, consumer confidence, housing market conditions and unemployment rates. Historically, our Upholstery segment and Retail segment have experienced lower levels of sales during the first half of our fiscal year and higher levels during the second half. Our Casegoods segment historically has experienced a lower level of sales during the first quarter of our fiscal year and a higher level during our second fiscal quarter. We believe variations to these historical patterns are a result of economic conditions during those periods and not a change in our historical patterns.
During fiscal 2012, our Upholstery segment experienced its highest level of sales during our fourth fiscal quarter, our Casegoods segment experienced its highest level of sales during our second fiscal quarter and our Retail segment experienced their highest level of sales during our third fiscal quarter. All three segments experienced their lowest level of sales for fiscal 2012 during our first fiscal quarter.
When possible, we schedule production to maintain uniform manufacturing activity throughout the year. We shut down our domestic plants for a week in July to perform routine maintenance on our equipment.
Economic Cycle and Purchasing Cycle
In terms of our product segments, upholstered furniture has a shorter life cycle and exhibits a less volatile sales pattern over an economic cycle than does casegoods. This is because upholstered furniture is typically more fashion and design oriented, and is often purchased one or two pieces at a time. In contrast, casegoods products are longer-lived and frequently purchased in groupings or “suites,” resulting in a much larger cost to the consumer.
Practices Regarding Working Capital Items
The following describes our significant practices regarding working capital items.
Inventory: We do not carry significant amounts of upholstered finished goods in inventory at our manufacturing locations as these goods are primarily built to order. However, we generally build or import casegoods inventory to stock, in order to attain manufacturing efficiencies and/or to meet delivery requirements of customers. This results in higher levels of finished goods inventory for our casegoods products than our upholstery products as a percentage of sales. Our company-owned La-Z-Boy Furniture Galleries® stores maintain finished goods inventory at the stores for display purposes.
Over the past several years we have opened five regional distribution centers. We created these distribution centers to streamline the warehousing and distribution processes for our La-Z-Boy Furniture Galleries® store network, including both company-owned stores and independently owned stores. Our move to regional distribution centers allowed us to reduce the number of individual warehouses needed to supply our retail outlets and helped us reduce our inventory levels.
During fiscal 2012 our inventory levels increased $5.3 million compared to fiscal 2011, but only increased slightly as a percentage of sales. We will continue to manage our inventory levels to make sure they are in line with sales levels, while maintaining our focus on service to our customers.
Accounts Receivable: During fiscal 2012 our accounts receivables increased $5.9 million compared to fiscal 2011, but receivables as a percentage of sales were flat. We continue to monitor our customers’ accounts and limit our exposure and credit support to certain independent dealers.
Accounts Payable: During fiscal 2012 our accounts payable increased $7.1 million compared to fiscal 2011, primarily due to increased raw material inventory in our Upholstery segment.
Customers
Our customers are furniture retailers primarily located throughout the United States and Canada. Additionally, we sell to a number of furniture retailers outside of North America. We also sell to consumers through our company-owned La-Z-Boy Furniture Galleries® stores. We did not have any single customer whose purchases amounted to more than 3% of our consolidated or Upholstery segment sales in fiscal 2012, or more than 6% of our Casegoods segment’s sales in fiscal 2012. Sales in our Upholstery and Casegoods segments are almost entirely to furniture retailers. Sales in our Retail segment are to end-consumers.
We have formal agreements with many furniture retailers for them to display and merchandise products from one or more of our operating units and sell them to consumers in dedicated retail space, either in stand-alone stores or dedicated galleries or studios within their stores. We consider this dedicated space to be “proprietary”. For our Upholstery and Casegoods segments, our 2012 customer mix based on sales was about 57% proprietary, 11% major dealers (for example, Art Van Furniture, Berkshire Hathaway, Havertys Furniture, and Raymour & Flanigan Furniture) and 32% other independent retailers.
As of April 28, 2012, our network included 312 La-Z-Boy Furniture Galleries® stores and 553 Comfort Studios®, each dedicated to marketing our La-Z-Boy branded products. We own 85 stand-alone La-Z-Boy Furniture Galleries® stores. The remainder of the La-Z-Boy Furniture Galleries® stores, as well as all 553 Comfort Studios®, are independently owned and operated. Comfort Studios® are defined spaces within larger independent retailers that are dedicated to displaying La-Z-Boy branded products. In addition to the La-Z-Boy Comfort Studios®, our Kincaid, England and Lea operating units have their own dedicated in-store gallery programs with over 700 outlets and 2.0 million square feet of proprietary floor space. In total, our proprietary floor space includes approximately 9.3 million square feet.
The success of our product distribution relies heavily on having retail floor space that is dedicated to displaying and marketing our products. This distribution system originated with our La-Z-Boy Furniture Galleries® stores network, which continues to have the largest number of proprietary stores and galleries among our other operating units. According to the May 2012 Top 100 ranking by Furniture Today, an industry trade publication, the La-Z-Boy Furniture Galleries® stores retail network is the second largest retailer of single-brand upholstered furniture in North America.
Maintaining, updating, and expanding, when appropriate, our proprietary distribution network is a key part of our overall sales and marketing strategy. As we continue to maintain and update our current stores, the La-Z-Boy Furniture Galleries® store network plans to open, relocate or remodel 10 to 15 stores during fiscal 2013. A majority of these new stores will feature the new concept store design recently developed and debuted in Warwick, RI. We select independent dealers for our proprietary distribution network based on factors such as the management and financial qualifications of those potential dealers as well as the potential for distribution in a specific geographical area. This proprietary method of distribution is beneficial to La-Z-Boy, our dealers and the consumer. For La-Z-Boy, it allows us to have a concentration of marketing of our product by sales personnel dedicated to our entire product line, and only that line. For dealers who join this proprietary group, it allows them to take advantage of practices that have proven successful based on past experiences of other proprietary dealers. As a part of this, we facilitate forums and communications for these dealers to share best practices among their peers. For our consumers, these stores provide a full-service shopping experience with knowledgeable sales associates and in-home design consultants to support their purchasing process. The La-Z-Boy Furniture Galleries® stores’ independent dealers and the Comfort Studios® retailers are responsible for displaying and merchandising our product within the dedicated retail space.
Orders and Backlog
The measure of backlog at a point in time may not be indicative of our future sales performance, therefore we do not rely entirely on backlogs to predict future sales. For most operating units, an order cannot be canceled after it has been selected for production. Upholstery orders are primarily built to a specific dealer order (stock order) or a special order with a down payment from a consumer (sold orders). Casegoods are primarily produced to our internal order (not a customer or consumer order), which results in higher finished goods inventory on hand as a percentage of sales.
As of April 28, 2012 and April 30, 2011, our Upholstery segment backlogs were approximately $69.7 million and $73.2 million, respectively. Our Casegoods segment backlogs as of April 28, 2012, and April 30, 2011, were approximately $14.0 million and $12.3 million, respectively.