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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended April 28, 2018

 

COMMISSION FILE NUMBER 1-9656

 

LA-Z-BOY INCORPORATED

(Exact name of registrant as specified in its charter)

 

MICHIGAN

 

38-0751137

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

One La-Z-Boy Drive, Monroe, Michigan

 

48162-5138

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code (734) 242-1444

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Shares, $1.00 Par Value

 

New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in rule 405 of the Securities Act.

 

Yes x

 

No o

 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.

 

Yes o

 

No x

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes x

 

No o

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).

 

Yes x

 

No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   x

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x  Accelerated filer o  Non-accelerated filer o  Smaller reporting company o  Emerging growth company o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes o

 

No x

 

Based on the closing price on the New York Stock Exchange on October 28, 2017, the aggregate market value of Registrant’s common shares held by non-affiliates of the Registrant on that date was $1,316.9 million.

 

The number of common shares outstanding of the Registrant was 46,638,907 as of June 12, 2018.

 

DOCUMENTS INCORPORATED BY REFERENCE:

 

(1)                                 Portions of the Registrant’s Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A for its 2018 Annual Meeting of Shareholders are incorporated by reference into Part III.

 

 

 



Table of Contents

 

LA-Z-BOY INCORPORATED

FORM 10-K ANNUAL REPORT FISCAL 2018

 

TABLE OF CONTENTS

 

 

 

Page
Number(s)

Cautionary Statement Concerning Forward-Looking Statements

 

3

 

 

 

 

PART I

 

3

Item 1.

Business

 

3

Item 1A.

Risk Factors

 

10

Item 1B.

Unresolved Staff Comments

 

14

Item 2.

Properties

 

14

Item 3.

Legal Proceedings

 

14

Item 4.

Mine Safety Disclosures

 

15

Executive Officers of the Registrant

 

15

 

 

 

 

PART II

 

16

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

16

Item 6.

Selected Financial Data

 

20

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

25

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

 

42

Item 8.

Financial Statements and Supplementary Data

 

43

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

84

Item 9A.

Controls and Procedures

 

84

Item 9B.

Other Information

 

84

 

 

 

 

 

PART III

 

84

Item 10.

Directors, Executive Officers, and Corporate Governance

 

84

Item 11.

Executive Compensation

 

85

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

85

Item 13.

Certain Relationships and Related Transactions, and Director Independence

 

85

Item 14.

Principal Accounting Fees and Services

 

85

 

 

 

 

 

PART IV

 

86

Item 15.

Exhibits, Financial Statement Schedules

 

86

Item 16.

Form 10-K Summary

 

88

 

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 2018 Annual Meeting of Shareholders. The required information is incorporated into this Form 10-K by reference to that document and is not repeated herein.

 

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Cautionary Statement Concerning Forward-Looking Statements

 

La-Z-Boy Incorporated and its subsidiaries (individually and collectively, “we,” “our” or the “Company”) make 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:

 

· future income, margins and cash flows

 

· future economic performance

· future sales

 

· industry and importing trends

· adequacy and cost of financial resources

 

· management plans and strategic initiatives

 

Forward-looking statements also include those preceded or followed by the words “anticipates,” “believes,” “estimates,” “hopes,” “plans,” “could,” “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) the possibility of a recession; (c) changes in the real estate and credit markets and their effects on our customers, consumers and suppliers; (d) international political unrest, terrorism or war; (e) volatility in energy and other commodities prices; (f) the impact of logistics on imports and exports; (g) tax rate, interest rate, and currency exchange rate changes; (h) changes in the stock market impacting our profitability and our effective tax rate; (i) operating factors, such as supply, labor or distribution disruptions (e.g. port strikes); (j) changes in legislation, including the tax code, or changes in the domestic or international regulatory environment or trade policies, including new or increased duties, tariffs, retaliatory tariffs, trade limitations and termination or renegotiation of the North American Free Trade Agreement; (k) adoption of new accounting principles; (l) fires, severe weather or other natural events such as hurricanes, earthquakes, flooding, tornadoes and tsunamis; (m) our ability to procure, transport or import, or material increases to the cost of transporting or importing, fabric rolls, leather hides or cut-and-sewn fabric and leather sets domestically or abroad; (n) information technology conversions or system failures and our ability to recover from a system failure; (o) effects of our brand awareness and marketing programs; (p) the discovery of defects in our products resulting in delays in manufacturing, recall campaigns, reputational damage, or increased warranty costs; (q) litigation arising out of alleged defects in our products; (r) unusual or significant litigation; (s) our ability to locate new La-Z-Boy Furniture Galleries® stores (or store owners) and negotiate favorable lease terms for new or existing locations; (t) the ability to increase volume through our e-commerce initiatives; (u) the impact of potential goodwill or intangible asset impairments; and (v) 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 in the state of Michigan as La-Z-Boy Chair Company, and in 1996 we changed our name to La-Z-Boy Incorporated. Today, our La-Z-Boy brand is the most recognized brand in the furniture industry.

 

We manufacture, market, import, export, distribute and retail upholstery furniture products. In addition, we import, distribute and retail accessories and casegoods (wood) furniture products. We are the leading global

 

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producer of reclining chairs and the second largest manufacturer/distributor of residential furniture in the United States. The La-Z-Boy Furniture Galleries® stores retail network is the third largest retailer of single-branded furniture in the United States. We have seven major manufacturing locations and six regional distribution centers in the United States and one facility in Mexico to support our speed-to-market and customization strategy. We operate a wholesale sales office that is responsible for distribution of our product in the United Kingdom and Ireland and we also participate in two joint ventures in Thailand that support our international businesses; one of which operates a manufacturing facility and the other operates a wholesale sales office. We operate a global trading company in Hong Kong which helps us manage our Asian supply chain by establishing and maintaining relationships with our Asian suppliers, as well as identifying efficiencies and savings opportunities. Additionally, we have contracts with several suppliers in Asia to produce products that support our pure import model for casegoods.

 

We sell our products to furniture retailers or distributors in the United States, Canada, and approximately 60 other countries, including the United Kingdom, China, Australia and New Zealand, directly to consumers through stores that we own and operate, and through our website, la-z-boy.com. The centerpiece of our retail distribution strategy is our network of 350 La-Z-Boy Furniture Galleries® stores and 535 La-Z-Boy Comfort Studio® locations, each dedicated to marketing our La-Z-Boy branded products. We consider this dedicated space to be “proprietary.” We own 146 of the La-Z-Boy Furniture Galleries® stores. The remainder of the La-Z-Boy Furniture Galleries® stores, as well as all 535 La-Z-Boy Comfort Studio® locations, 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 available design services. La-Z-Boy Comfort Studio® locations are defined spaces within larger independent retailers that are dedicated to displaying and selling La-Z-Boy branded products. In total, we have approximately 7.8 million square feet of proprietary floor space dedicated to selling La-Z-Boy branded products in North America. Additionally, floor space outside of the United States and Canada dedicated to selling La-Z-Boy branded products totals approximately 2.5 million square feet. Our other brands, England, American Drew, Hammary, and Kincaid enjoy distribution through many of the same outlets, with approximately half of Hammary’s sales originating through the La-Z-Boy Furniture Galleries® store network. Kincaid and England have their own dedicated proprietary in-store programs with 542 outlets and approximately 1.7 million square feet of proprietary floor space. In total, our proprietary floor space includes approximately 12.0 million square feet worldwide.

 

Principal Products and Industry Segments

 

Our reportable operating segments are the Upholstery segment, the Casegoods segment and the Retail segment.

 

Upholstery Segment. Our Upholstery reportable segment is our largest business segment and consists primarily of two operating segments: La-Z-Boy, our largest operating segment, and the operating segment for our England subsidiary. The Upholstery segment also includes our international wholesale businesses. These operating segments are aggregated into one reportable segment because they are economically similar and because they meet the other aggregation criteria for determining reportable segments. Our Upholstery segment manufactures and imports upholstered furniture such as recliners and motion furniture, sofas, loveseats, chairs, sectionals, modulars, ottomans and sleeper sofas. The Upholstery segment sells directly to La-Z-Boy Furniture Galleries® stores, operators of La-Z-Boy Comfort Studio® locations and England Custom Comfort Center locations, major dealers, and a wide cross-section of other independent retailers.

 

Casegoods Segment. Our Casegoods segment consists of one operating segment, and sells furniture under three brands: American Drew, Hammary, and Kincaid. Our Casegoods segment is an importer, marketer, and distributor of casegoods (wood) furniture such as bedroom sets, dining room sets, entertainment centers and occasional pieces, and also manufactures some coordinated upholstered furniture. The Casegoods segment sells directly to major dealers, as well as La-Z-Boy Furniture Galleries® stores, and a wide cross-section of other independent retailers.

 

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Retail Segment. Our Retail segment consists of one operating segment, and includes our 146 company-owned La-Z-Boy Furniture Galleries® stores. The Retail segment primarily sells upholstered furniture, in addition to some casegoods and other accessories, to the end consumer through these stores.

 

We have provided additional detailed information regarding our segments and their products in Note 16 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 and parts used in our Upholstery segment are purchased cover (primarily fabrics and leather), polyester batting and polyurethane foam for cushioning and padding, lumber and plywood for frames, steel for motion mechanisms, electrical components for power units and various other metal components for fabrication of product. We purchase about 50% of our polyurethane foam from one supplier, which has several facilities across the United States that deliver to our plants. We purchase cover from a variety of sources, but we rely on a limited number of major suppliers. We purchase approximately half of our cover in a raw state (fabric rolls or leather hides) and cut and sew it into cover, and purchase the remainder in covers that have already been cut and sewn to our specifications by third-party offshore suppliers. We buy cut-and-sewn leather and fabric products from six primary suppliers. Of the products that we import, four suppliers that operate in China manufacture over 95% of the leather cut-and-sewn sets, and three suppliers that also operate in China manufacture over 90% of the fabric products. One of the six primary suppliers manufactures both leather cut-and-sewn sets and fabric products. We use these suppliers primarily for their product design capabilities, to leverage our buying power, and to control quality and product flow, in addition to their ability to handle the volume of product we require to operate our business. If any of these suppliers experienced financial or other difficulties, we could experience temporary disruptions in our manufacturing process until we obtained alternate suppliers.

 

We manage our Asian supply chain through our global trading company in Hong Kong, which works to identify efficiencies, savings opportunities, and manage the relationship with our Asian suppliers. During fiscal 2018, the prices of materials we use in our upholstery manufacturing process increased moderately compared with fiscal 2017. We expect to experience an increase in raw material costs in fiscal 2019 as well as increases in transportation costs. In an effort to offset these projected increases, we have increased our selling prices to our customers.

 

Finished Goods Imports

 

We import all of the casegoods (wood) furniture that we sell. In fiscal 2018, we purchased approximately 55% of this imported product from three suppliers. We use these suppliers primarily to leverage our buying power, to control quality and product flow, and because their capabilities align with our product design needs. In addition, these suppliers have the ability to handle the volume of product we require. If any of these suppliers experienced financial or other difficulties, we could experience disruptions in our product flow until we obtained alternate suppliers, which could be lengthy due to the longer lead time required for sourced wood furniture from Asian manufacturers.

 

We use an all-import model for our wood furniture primarily to remain competitive for these products. The prices we paid for these imported products, including associated transportation costs, increased slightly in fiscal 2018 compared with fiscal 2017. We currently expect the product costs to increase more in fiscal 2019 than fiscal 2018. We have increased our selling prices to help offset the expected rise in product costs. Looking across our wholesale segments, imported finished goods represented 8% of our consolidated sales in both fiscal 2018 and fiscal 2017.

 

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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. The table below shows our highest and lowest sales quarters based on historical experience, including fiscal 2018, by segment:

 

Segment

 

Highest sales
quarter

 

Lowest sales
quarter

Upholstery

 

4th

 

1st

Casegoods

 

4th

 

1st or 3rd

Retail

 

3rd

 

1st

 

We schedule production to maintain consistent manufacturing activity throughout the year whenever possible. We typically shut down our domestic plants for one week each fiscal year to perform routine maintenance on our equipment.

 

Economic Cycle and Purchasing Cycle

 

Our sales are impacted by the overall growth of the furniture industry, which is primarily influenced by consumer discretionary spending and existing and new housing activity. In addition, consumer confidence, employment rates, and other factors could affect demand. Upholstered furniture has a shorter life cycle than casegoods furniture because upholstered furniture is typically more fashion and design-oriented, and is often purchased one or two pieces at a time. Casegoods products, in contrast, are longer-lived and frequently purchased in groupings or “suites,” resulting in a much larger cost to the consumer. As a result, casegoods sales are more sensitive to economic conditions, and upholstered furniture normally exhibits a less volatile sales pattern over an economic cycle.

 

Practices Regarding Working Capital Items

 

The following describes our significant practices regarding working capital items.

 

Inventory: For our Upholstery segment, we maintain raw materials and work-in-process inventory at our manufacturing locations. Finished goods inventory is maintained at our six regional distribution centers as well as our manufacturing locations. Our regional distribution centers allow us 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 regional distribution centers also allow us to reduce the number of individual warehouses needed to supply our retail outlets and help us reduce inventory levels at our manufacturing and retail locations.

 

For our Casegoods segment, we import wood furniture from Asian vendors, resulting in long lead times on these products. To address these long lead times and meet our customers’ delivery requirements, we maintain higher levels of finished goods inventory in our domestic warehouses, as a percentage of sales, of our casegoods products than our upholstery products.

 

Our company-owned La-Z-Boy Furniture Galleries® stores maintain finished goods inventory at the stores for display purposes.

 

Our inventory increased $9.7 million during fiscal 2018 compared with fiscal 2017. The majority of the inventory growth is being driven by higher finished goods in our Upholstery segment due to increasing our on-hand inventory to better service our customers as we move into fiscal 2019. We will continue to manage our inventory levels to ensure they are appropriate relative to our sales volume, while maintaining our focus on service to our customers.

 

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Accounts Receivable: During fiscal 2018, our accounts receivable increased $3.2 million compared with fiscal 2017. The increase in accounts receivable was due to fourth quarter sales in fiscal 2018 being higher than those in the fourth quarter of the prior year. We monitor our customers’ accounts and limit our credit exposure to certain independent dealers and strive to decrease our days’ sales outstanding where possible. Our days’ sales outstanding is a measure of the time needed to collect outstanding accounts receivable once we have completed a sale. Our days’ sales outstanding decreased slightly during fiscal 2018.

 

Accounts Payable: During fiscal 2018, our accounts payable increased $11.1 million compared with fiscal 2017. This increase was primarily due to standardizing payment terms with our vendors, which resulted in many payment terms being extended. Additionally, a portion of the increase was for amounts due to vendors for the construction of our new Innovation Center located on our Dayton, Tennessee campus.

 

Customer Deposits: We collect a deposit on a portion of the total merchandise price at the time a customer order is placed in one of our company-owned Retail stores, and on la-z-boy.com. These customer deposits increased $4.7 million during fiscal 2018 compared with fiscal 2017. This increase was attributable to a higher volume of orders placed in the last quarter of fiscal 2018 compared with the prior fiscal year, which had not been delivered as of fiscal year end.

 

Customers

 

Our wholesale customers are furniture retailers. While primarily located throughout the United States and Canada, we also have customers located in various other countries, including the United Kingdom, China, Australia and New Zealand.  Sales in our Upholstery and Casegoods segments are almost entirely to furniture retailers, but we also sell directly to end consumers through our company-owned La-Z-Boy Furniture Galleries® stores that make up our Retail segment and through our website, la-z-boy.com.

 

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 proprietary galleries or studios within their stores. We consider this dedicated space to be “proprietary.” For our Upholstery and Casegoods segments, our fiscal 2018 customer mix based on sales was 57% proprietary, 16% major dealers such as Art Van Furniture, Nebraska Furniture Mart and Slumberland Furniture, and 27% other independent retailers.

 

The success of our product distribution model relies heavily on having retail floor space that is dedicated to displaying and marketing our products. The 350-store La-Z-Boy Furniture Galleries® network is central to this approach. In addition, we sell product through proprietary space within other retail furniture stores, primarily La-Z-Boy Comfort Studio® locations, England Custom Comfort Center locations, Kincaid Shoppes, and other international locations.

 

Maintaining, updating, and, when appropriate, expanding our proprietary distribution network is a key part of our overall sales and marketing strategy. We intend to not only increase the number of stores in the network but also to improve their quality, including upgrading old-format stores to our new concept design through remodels and relocations. At the end of fiscal 2018, less than five percent of the La-Z-Boy Furniture Galleries® stores in the network were in the old format. As we continue to maintain and update our current stores to improve the quality of the network, the La-Z-Boy Furniture Galleries® store network plans to open, relocate or remodel 20 to 25 stores during fiscal 2019, all of which will feature the new concept store design.

 

We select independent dealers for our proprietary La-Z-Boy Furniture Galleries® store network based on factors such as their management and financial qualifications and the potential for distribution in specific geographical areas. This proprietary distribution benefits La-Z-Boy, our dealers and our consumers. It enables La-Z-Boy to concentrate our marketing with sales personnel dedicated to our entire product line, and only that line and approved accessories. It allows dealers that join this proprietary group to take advantage of best practices with which other proprietary dealers have succeeded, and we facilitate forums for these

 

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dealers to share best practices. These La-Z-Boy Furniture Galleries® stores provide our consumers a full-service shopping experience with a large variety of products, knowledgeable sales associates, and design service consultants.

 

Orders and Backlog

 

We typically build upholstery units based on specific dealer orders, either for dealer stock or to fill consumers’ custom orders. We import casegoods product primarily to fill our internal orders, rather than customer or consumer orders, resulting in higher finished goods inventory on hand as a percentage of sales. Because the size of our backlog at a given time may not be indicative of our future sales, we do not rely entirely on backlogs to predict future sales.

 

Our Upholstery segment backlogs as of April 28, 2018, and April 29, 2017, were approximately $69.7 million and $54.3 million, respectively, and our Casegoods segment backlogs were approximately $7.3 million and $6.9 million, respectively. Our Upholstery segment backlog for fiscal 2018 increased compared with the prior year due to the timing of shipments near the end of the fiscal year relative to orders placed. Our Casegoods segment backlog for fiscal 2018 was higher than the prior year due to strong orders on a collection that was introduced at the end of fiscal 2017 and became available to consumers in the middle of fiscal 2018. Due to the high demand for this new collection, orders for the product outpaced our shipments.

 

Competitive Conditions

 

We are the second largest manufacturer/distributor of residential (living and family room, bedroom, and dining room) furniture in the United States, as measured by annual sales volume.

 

Alternative distribution channels have increasingly affected our retail markets. Furniture companies that operate primarily online, such as JoyBird and Article, or that have developed a product that can be shipped more easily than traditional upholstered furniture, have increased competition for our products. The increased ability of consumers to purchase furniture through various furniture manufacturers’ and retailers’ internet websites, including companies such as Amazon, QVC, and Wayfair, which operate with lower overhead costs than a brick-and-mortar retailer, has also increased competition in the industry. Companies such as Costco, Home Depot, IKEA, Sam’s Club, Target, Wal-Mart, and others, also offer products that compete with some of our product lines.

 

The home furnishings industry competes primarily on the basis of product styling and quality, customer service (product availability and delivery), price, and location. We compete primarily by emphasizing our brand and the value, comfort, quality, and styling of our products. In addition, we remain committed to innovation while striving to provide outstanding customer service, exceptional dealer support, and efficient on-time delivery. Maintaining, updating, and expanding our proprietary distribution system, including identifying desirable retail locations, is a key strategic initiative for us in striving to remain competitive. We compete in the mid-to-upper-mid price point, and a shift in consumer taste and trends to lower priced products could negatively affect our competitive position.

 

In the Upholstery segment, our largest competitors are Ashley, Bassett, Best Chair, Ethan Allen, Flexsteel, Klaussner, Kuka, Man Wah, Natuzzi, and Southern Motion.

 

In the Casegoods segment, our main competitors are Bassett, Bernhardt, Ethan Allen, Heritage Home Group, Hooker Furniture, and Lacquer Craft. The Casegoods segment faces additional market pressures from foreign manufacturers entering the United States market and increased direct purchases from foreign suppliers by large United States retailers.

 

The La-Z-Boy Furniture Galleries® stores operate in the retail furniture industry in the United States and Canada, and different stores have different competitors based on their geographic locations. Competitors

 

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include: Arhaus, Ashley, Bassett Furniture Direct, Bob’s Discount Furniture, Crate and Barrel, Ethan Allen, Restoration Hardware, Havertys, Williams-Sonoma, several other regional competitors (for example Art Van Furniture, Raymour & Flanigan Furniture, and Slumberland Furniture), and family-owned independent furniture stores.

 

In addition to the larger competitors listed above, a substantial number of small and medium-sized companies operate within our business segments, all of which are highly competitive.

 

Research and Development Activities

 

We remain committed to innovation and the construction of our new state-of-the-art Innovation Center located in Dayton, Tennessee, will replace our existing structure and house a model shop, technology center, test lab, and three-dimensional printing lab. This new Innovation Center will help us continue to develop new products to meet our customers’ needs. We expect construction of the Innovation Center to be completed during the first quarter of fiscal 2019.

 

We provide additional information regarding our research and development activities in Note 1 to our consolidated financial statements, which is included in Item 8 of this report.

 

Trademarks, Licenses and Patents

 

We own several trademarks, including the La-Z-Boy trademark, which is essential to the Upholstery and Retail segments of our business. To protect our trademarks, we have registered them in the United States and various other countries where our products are sold. These trademarks have a perpetual life, subject to renewal. We license the use of the La-Z-Boy trademark to our major international partners and dealers outside of North America. We also license the use of the La-Z-Boy trademark on contract office furniture, outdoor furniture, and non-furniture products, as these arrangements enhance our brand awareness, broaden the perceptions of La-Z-Boy, and create visibility of the La-Z-Boy brand in channels outside of the residential furniture industry. In addition, we license to our branded dealers the right to use our La-Z-Boy trademark in connection with the sale of our products and related services, on their signs, and in other ways, which we consider to be a key part of our marketing strategies. We provide more information about those dealers, under “Customers.”

 

We hold a number of patents that we actively enforce, but we believe that the loss of any single patent or group of patents would not significantly affect our business.

 

Compliance with Environmental Regulations

 

Our manufacturing operations involve the use and disposal of certain substances regulated under environmental protection laws, and we are involved in a small number of remediation actions and site investigations concerning these substances. Based on a review of all currently known facts and our experience with previous environmental matters, we currently do not believe it is probable that we will have any additional loss for environmental matters that would be material to our consolidated financial statements.

 

Employees

 

We employed approximately 9,000 full-time equivalent employees as of April 28, 2018, compared with 8,950 employees at the end of fiscal 2017. We employed approximately 7,400 in our Upholstery segment, 200 in our Casegoods segment, 1,100 in our Retail segment, and the remaining employees as corporate personnel. We employ the majority of our employees on a full-time basis except in our Retail segment, where many of our employees are part-time.

 

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Financial Information about Foreign and Domestic Operations and Export Sales

 

In fiscal 2018, our direct export sales, including sales in Canada, were approximately 12% of our total sales. We operate a wholesale sales office in the United Kingdom which sells and distributes furniture in the United Kingdom and Ireland. We are part of a manufacturing joint venture in Thailand which distributes furniture in Australia, New Zealand, Thailand and other countries in Asia, including China. We sell and distribute furniture in Korea, Taiwan, Japan, India, Malaysia, and other Asian countries through a sales and marketing joint venture in Asia. In addition, our global trading company in Hong Kong continues to enhance our ability to source products and materials from our Asian suppliers, and provides quality assurance, procurement and logistics expertise. We operate a facility in Mexico which produces cut-and-sewn fabric sets for our domestic upholstery manufacturing facilities.

 

We provide information on sales in the United States, Canada, and other countries in Note 16 to our consolidated financial statements, which is included in Item 8 of this report. Our net property, plant, and equipment value in the United States was $173.6 million and $161.6 million at the end of fiscal 2018 and fiscal 2017, respectively. Our net property, plant, and equipment value in foreign countries was $7.3 million and $7.5 million in fiscal 2018 and fiscal 2017, respectively.

 

See Item 1A of this report for information about the risks related to our foreign operations.

 

Internet Availability

 

Our Forms 10-K, 10-Q, 8-K, proxy statements on Schedule 14A, and amendments to those reports are available free of charge through links on our internet website, www.la-z-boy.com, as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission (SEC). Copies of any materials we file with the SEC can also be obtained free of charge through the SEC’s website at www.sec.gov. The information on our website is not part of this report.

 

ITEM 1A. RISK FACTORS.

 

Our business is subject to a variety of risks. Interest rates, consumer confidence, housing starts and the overall housing market, increased unemployment, tightening of the financial and consumer credit markets, downturns in the economy, and other general economic factors that affect many other businesses are particularly significant to us because our principal products are consumer goods.

 

The risks and uncertainties described below are those that we currently believe may significantly affect our business. Additional risks and uncertainties of which we are unaware or that we do not currently deem significant may also become important factors that affect us at a later date. You should carefully consider the risks and uncertainties described below, together with the other information provided in this document and our subsequent filings with the Securities and Exchange Commission. Any of the following risks could significantly and adversely affect our business, results of operations, and financial condition.

 

Fluctuations in the price, availability and quality of raw materials could cause delays that could result in our inability to provide goods to our customers or could increase our costs, either of which could decrease our earnings.

 

In manufacturing furniture, we use various types of wood, fabrics, leathers, upholstered filling material including polyurethane foam, steel, and other raw materials. Because we are dependent on outside suppliers for our raw materials, fluctuations in their price, availability, and quality could have a negative effect on our cost of sales and our ability to meet our customers’ demands. Competitive and marketing pressures may prevent us from passing along price increases to our customers, and the inability to meet our customers’ demands could cause us to lose sales. We have a higher concentration in upholstery sales, including motion furniture, than many of our competitors, and the effects of steel, polyurethane foam, wood, electrical

 

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components for power units, leather and fabric price increases or quantity shortages could be significant to our business.

 

About 50% of our polyurethane foam comes from one supplier. This supplier has several facilities across the United States, but severe weather or natural disasters could result in delays in shipments of polyurethane foam to our plants.

 

A change in the financial condition of some of our domestic and foreign fabric suppliers could impede their ability to provide products to us in a timely manner. Upholstered furniture is fashion oriented, and if we were unable to acquire sufficient fabric variety, or to predict or respond to changes in fashion trends, we might lose sales and have to sell excess inventory at reduced prices. Doing so would have a negative effect on our sales and earnings.

 

Changes in United States trade policy, availability and cost of foreign sourcing, and economic uncertainty in countries outside of the United States in which we operate or from which we purchase product, could adversely affect our business and results of operations.

 

We have operations in countries outside the United States, some of which are located in emerging markets. Long-term economic and political uncertainty in some of the countries in which we operate, such as the United Kingdom, Mexico and Thailand, could result in the disruption of markets and negatively affect our business. Our Casegoods segment imports products manufactured by foreign sources, mainly in China and Vietnam, and our Upholstery segment purchases cut-and-sewn fabric and leather sets, electronic component parts, and some finished goods from Chinese and other foreign vendors. Our cut-and-sewn leather sets are primarily purchased from four suppliers that operate in China, and the majority of our fabric products are purchased from three suppliers that also operate in China. One of these primary suppliers provides both cut-and-sewn leather sets and fabric products. Our sourcing partners may not be able to produce goods in a timely fashion or the quality of their product may lead us to reject it, causing disruptions in our domestic operations and delays in our shipments to our customers.

 

There are other risks that are inherent in our operations, including the potential for changes in socio-economic conditions, changes in laws and regulations, including import, export, labor and environmental laws, port strikes, tariffs, duties and trade barriers, monetary and fiscal policies, investments, taxation, and exchange controls. Additionally, unsettled political conditions, possible terrorist attacks, organized crime, and public health concerns present a risk to our operations. All of these items could make servicing our customers more difficult or cause disruptions in our plants that could reduce our sales, earnings, or both in the future.

 

Changes in the political environment in the United States may also have a material adverse effect on our business in the future or require us to modify our current business practices. Because we manufacture components in Mexico and purchase components and finished goods manufactured in foreign countries including China, we are subject to risks relating to increased tariffs on U.S. imports, changes in the North American Free Trade Agreement, and other changes affecting imports. Our business in the United Kingdom could be affected by the United Kingdom’s exit from the European Union, and our sales and margins there and in other foreign countries could be adversely affected by the imposition in foreign countries of import bans, quotas, and increases in tariffs.

 

Inability to maintain and enhance our brand and respond to changes in our current and potential consumers’ tastes and trends in a timely manner could adversely affect our business and operating results.

 

The success of our business depends on our ability to maintain and enhance our brands to increase our business by retaining consumers and attracting new ones. Furniture product is fashion oriented so changes in consumers’ tastes and trends and the resultant change in our product mix, as well as failure to offer our

 

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consumers multiple avenues for purchasing our products, could adversely affect our business and operating results. We attempt to minimize these risks by maintaining strong advertising and marketing campaigns promoting our brands. We also attempt to minimize our risk by updating our current product designs, styles, quality, prices, and options to purchase our products in-store or online. If these efforts were unsuccessful or required us to incur substantial costs, our business, operating results and financial or competitive condition could be adversely affected.

 

Loss of market share and other financial or operational difficulties due to competition would likely result in a decrease in our sales, earnings, and liquidity.

 

The residential furniture industry is highly competitive and fragmented. We compete with many other manufacturers and retailers, including online retailers, some of which offer widely advertised products, and others, several of which are large retail furniture dealers offering their own store-branded products. Competition in the residential furniture industry is based on quality, style of products, perceived value, price, service to the customer, promotional activities, and advertising. The highly competitive nature of the industry means we are constantly subject to the risk of losing market share, which would likely decrease our future sales, earnings, and liquidity. In addition, due to the large number of competitors and their wide range of product offerings, we may not be able to differentiate our products (through styling, finish, and other construction techniques) from those of our competitors. Additionally, a majority of our sales are to distribution channels that rely on physical stores to merchandise and sell our products and a significant shift in consumer preference toward purchasing products online could have a materially adverse impact on our sales and operating margin. In the past several fiscal years we have experienced lower traffic to our company-owned stores, similar to other furniture retailers, as consumers have shifted to purchasing more furniture products online. We are attempting to meet these consumers where they prefer to shop by expanding our online capabilities and improving the user experience at la-z-boy.com to drive more traffic to both our online site and our physical stores. These and other competitive pressures could result in a decrease in our sales, earnings, and liquidity.

 

Our current retail markets and other markets that we enter in the future may not achieve the growth and profitability we anticipate. We could incur charges for the impairment of long-lived assets, goodwill, or other intangible assets if we fail to meet our earnings expectations for these markets.

 

From time to time we acquire retail locations and related assets, remodel and relocate existing stores, experiment with new store formats, and close underperforming stores. Our assets include goodwill and other indefinite-lived intangible assets acquired in connection with these acquisitions. Profitability of acquired, remodeled, relocated, and new format stores will depend on lease rates (for stores we lease) and retail sales and profitability justifying the costs of acquisition, remodeling, and relocation. If we do not meet our sales or earnings expectations for these stores, we may incur charges for the impairment of long-lived assets, the impairment of goodwill, or the impairment of other indefinite-lived intangible assets.

 

We operate a wholesale sales office that is responsible for distributing La-Z-Boy products in the United Kingdom and Ireland. Our assets include goodwill and other intangible assets, including acquired customer relationships, in connection with our acquisition of this business. If we do not meet our sales or earnings expectations for this operation, we may incur charges for the impairment of goodwill or the impairment of our intangible assets.

 

Changes in regulation of our international operations could adversely affect our business and results of operations.

 

Because we have operations outside of the United States and sell product in various countries, we are subject to many laws governing international relations, including the UK Bribery Act 2010, the U.S. Foreign Corrupt Practices Act and the U.S. Export Administration Act. These laws include prohibitions on improper payments to government officials, restrictions on where we can do business, what products we can supply to

 

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certain countries, and what information we can provide to certain governments. We are also subject to laws and regulations on the collection and use of electronic data, including the General Data Protection Regulation that became effective in May 2018 in the European Union and subjects violators that operate in the European Union to penalties of up to 4% of their global revenue. Violations of these laws, which are complex, may result in criminal penalties or sanctions that could have a significant adverse effect on our business and results of operations. Although we have implemented policies and procedures designed to ensure compliance with these laws, there can be no assurance that our employees, contractors, or agents will not violate our policies.

 

We rely extensively on information technology systems to process transactions, summarize results, and manage our business and that of certain independent dealers. Disruptions in both our primary and back-up systems could adversely affect our business and operating results.

 

Our primary and back-up information technology systems are subject to damage or interruption from power outages, computer and telecommunications failures, viruses, phishing attempts, cyber attacks, security breaches, natural disasters, and errors by employees. Though losses arising from some of these issues would be covered by insurance, interruptions of our critical business information technology systems or failure of our back-up systems could reduce our sales or result in longer production times. If our critical information technology systems or back-up systems were damaged or ceased to function properly, we might have to make a significant investment to repair or replace them.

 

We may be subject to product liability claims or undertake to recall one or more products, with a negative impact on our financial results and reputation.

 

Millions of our products, sold over many years, are currently used by consumers. We may be named as a defendant in lawsuits instituted by persons allegedly injured while using one of our products. We have insurance that we believe is adequate to cover such claims, but we are self-insured for the first $1.5 million in liability and for all defense costs. Furthermore, such claims could damage our brands and reputation and negatively affect our operating results. We have voluntarily recalled products in the past, and while none of those recalls has resulted in a material expense or other significant adverse effect, it is possible that recalls could result in future additional expense, penalties, and injury to our brands and reputation, and negatively impact our operating results.

 

Our business and our reputation could be adversely affected by cybersecurity incidents and the failure to protect sensitive employee, customer, consumer, vendor or Company data, or to comply with evolving regulations relating to our obligation to protect such data.

 

Cyber attacks designed to gain access to sensitive information by breaching security systems of large organizations leading to unauthorized release of confidential information have occurred over the last several years at a number of major U.S. companies. Despite widespread recognition of the cyber attack threat and improved data protection methods, cyber attacks on organizations continue to be persistent and ever-changing making it difficult to prevent and detect these attacks. Similar to many other retailers, we receive and store certain personal information about our employees, customers, consumers, and vendors. Additionally, we rely on third-party service providers to execute certain business processes and maintain certain information technology systems and infrastructure, and we supply such third-party providers with the personal information required for those services.

 

During fiscal 2018, we were subject, and will likely continue to be subject, to attempts to breach the security of our networks and IT infrastructure through cyber attack, malware, computer viruses, and other means of unauthorized access. To the best of our knowledge, attempts to breach our systems have not been successful to date. A breach of our systems that resulted in the unauthorized release of sensitive data could adversely affect our reputation, drive existing and potential customers away, lead to financial losses from remedial actions or potential liability, possibly including punitive damages, or we could incur regulatory fines or

 

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penalties. An electronic security breach resulting in the unauthorized release of sensitive data from our information systems or those of our third party service providers could also materially increase the costs we already incur to protect against these risks. We continue to balance the additional risk with the cost to protect us against a breach, and have taken steps to ensure that losses arising from a breach would be covered in part by insurance that we carry.

 

Changes in the inputs we used to calculate our acquisition-related contingent consideration liabilities could have a material adverse impact on our financial results.

 

Certain acquisitions include contingent consideration liabilities relating to payments based on the future performance of the operations acquired. Under generally accepted accounting principles, we are required to estimate the fair value of any contingent consideration. Our estimates of fair value are based on assumptions we believe to be reasonable but the assumptions are uncertain and involve significant judgment by management. Changes in business conditions or other events could materially change the projection of future cash flows or the discount rate we used in the fair value calculation of the contingent consideration. We reassess the fair value quarterly, and we record in our results of operations increases or decreases based on the actual or expected future performance of the acquired operations. These quarterly adjustments could have a material effect on our results of operations.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS.

 

None.

 

ITEM 2. PROPERTIES.

 

We owned or leased approximately 11.1 million square feet of active manufacturing, warehousing and distribution centers, office, showroom, and retail facilities, and had approximately 0.3 million square feet of idle facilities, at the end of fiscal 2018. Of the 11.1 million square feet occupied at the end of fiscal 2018, our Upholstery segment occupied approximately 6.7 million square feet, our Casegoods segment occupied approximately 1.4 million square feet, our Retail segment occupied approximately 2.8 million square feet, and our Corporate and other operations occupied the balance.

 

Our active facilities and retail locations are located in Arkansas, California, Colorado, Connecticut, Delaware, Florida, Illinois, Indiana, Iowa, Kansas, Kentucky, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nevada, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Virginia,  Washington D.C., Wisconsin, Coahuila (Mexico), Bangkok (Thailand), Alberta and Manitoba (Canada), Dongguan (China), Hong Kong, and Berks (United Kingdom). All of our plants and stores are well maintained and insured. We do not expect any major land or building additions will be needed to increase capacity in the foreseeable future for our manufacturing operations. We own all of our domestic plants, and our joint venture owns our Thailand plant. We lease the majority of our retail stores and regional distribution centers, as well as our manufacturing facility in Mexico and our office spaces in China, Hong Kong and the United Kingdom. For information on terms of operating leases for our properties, see Note 10 to our consolidated financial statements, which is included in Item 8 of this report.

 

ITEM 3. LEGAL PROCEEDINGS.

 

We are involved in various legal proceedings arising in the ordinary course of our business. Based on a review of all currently known facts and our experience with previous legal matters, we have recorded expense in respect of probable and reasonably estimable losses arising from legal matters and we currently do not believe it is probable that we will have any additional loss that would be material to our consolidated financial statements.

 

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ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

EXECUTIVE OFFICERS OF THE REGISTRANT

 

Listed below are the names, ages and current positions of our executive officers and, if they have not held those positions for at least five years, their former positions during that period. All executive officers serve at the pleasure of the board of directors.

 

Kurt L. Darrow, age 63

· Chairman, President and Chief Executive Officer since August 2011

 

Louis M. Riccio Jr., age 55

· Senior Vice President and Chief Financial Officer since July 2006

 

J. Douglas Collier, age 51

· Senior Vice President, Chief Commercial Officer and President, International since May 2017

· Senior Vice President, Chief Marketing Officer, and President, International from August 2014 through May 2017

· Chief Marketing Officer and President, International from August 2011 through August 2014

 

Darrell D. Edwards, age 54

· Senior Vice President and Chief Supply Chain Officer since August 2014

· Senior Vice President of Operations, Residential Division from May 2012 through August 2014

 

Otis S. Sawyer, age 60

· Senior Vice President and President, La-Z-Boy Portfolio Brands since February 2017

· Senior Vice President and President, England, Inc. from February 2008 through February 2017

· President of La-Z-Boy Casegoods from November 2015 through February 2017

· President of Non-Branded Upholstery from February 2008 through August 2014

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

Dividend and Market Information

 

The New York Stock Exchange is the principal market on which our common stock is traded. The tables below show the high and low sale prices of our common stock on the New York Stock Exchange during each quarter of our last two fiscal years.

 

 

 

 

 

 

 

 

 

 

 

Fiscal 2018

 

Dividends

 

 

 

 

 

 

 

Quarter

 

Paid Per

 

Market Price

 

Ended

 

Share

 

High

 

Low

 

Close

 

July 29

 

$

0.11

 

$

33.45

 

$

26.10

 

$

33.00

 

October 28

 

$

0.11

 

$

34.10

 

$

23.15

 

$

27.70

 

January 27

 

$

0.12

 

$

34.25

 

$

25.90

 

$

32.15

 

April 28

 

$

0.12

 

$

32.65

 

$

27.85

 

$

29.30

 

 

 

$

0.46

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal 2017

 

Dividends

 

 

 

 

 

 

 

Quarter 

 

Paid Per

 

Market Price

 

Ended

 

Share

 

High

 

Low

 

Close

 

July 30

 

$

0.10

 

$

30.27

 

$

24.31

 

$

30.22

 

October 29

 

$

0.10

 

$

31.22

 

$

22.09

 

$

23.25

 

January 28

 

$

0.11

 

$

32.90

 

$

22.50

 

$

28.80

 

April 29

 

$

0.11

 

$

29.95

 

$

25.85

 

$

27.90

 

 

 

$

0.42

 

 

 

 

 

 

 

 

Our credit agreement allows us to pay dividends or purchase shares as long as we are not in default and our excess availability, as defined in the credit agreement, is above 17.5% of the revolving credit commitment. If excess availability falls between 12.5% and 17.5%, then to continue paying dividends or purchasing shares, we must maintain a fixed charge coverage ratio of at least 1.00 to 1.00 on a pro-forma basis and not be in default. Currently we are not prohibited from paying dividends or purchasing shares. Refer to Note 9 of the consolidated financial statements in Item 8 for further discussion of our credit agreement. The payment of future cash dividends is within the discretion of our board of directors and will depend on our earnings, capital requirements and operating and financial condition, as well as excess availability under the credit agreement, among other factors.

 

Shareholders

 

We had approximately 14,800 shareholders of record at May 2, 2018.

 

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Equity Plans

 

The table below provides information concerning our compensation plans under which common shares may be issued.

 

Equity Compensation Plan Information as of April 28, 2018

 

Plan category

 

Number of
securities to be
issued upon
exercise of
outstanding
options
(i)

 

Weighted-
average
exercise
price of
outstanding
options
(ii)

 

Number of
securities
remaining
available for
future issuance
under
equity
compensation
plans
(excluding
securities
reflected in
column (i))
(iii)

 

Equity compensation plans approved by shareholders

 

1,837,179

(1)

$

24.18

 

145,000

(2)(3)

 

Note 1: These shares were issued under our 2010 Omnibus Incentive Plan. Effective April 29, 2018, no additional shares can be awarded under this plan.

 

Note 2: This amount is the aggregate number of shares that were available for future issuance under our 2010 Omnibus Incentive Plan at April 28, 2018. Effective April 29, 2018, no additional shares can be awarded under this plan.

 

Note 3: Effective April 29, 2018, awards may be issued under our 2017 Omnibus Incentive Plan, which provides for awards of stock options, restricted stock, and performance awards (awards of our common stock based on achievement of pre-set goals over a performance period) to selected key employees and non-employee directors. We have 5,850,000 shares available for future issuance under this plan.

 

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Performance Graph

 

The graph below shows the cumulative total return for our last five fiscal years that would have been realized (assuming reinvestment of dividends) by an investor who invested $100 on April 27, 2013, in our common shares, in the S&P 500 Composite Index, and in the Dow Jones U.S. Furnishings Index.

 

 

Company/Index/Market

 

2013

 

2014

 

2015

 

2016

 

2017

 

2018

 

La-Z-Boy Incorporated

 

$

100

 

$

139.94

 

$

158.49

 

$

151.21

 

$

165.58

 

$

176.72

 

S&P 500 Composite Index

 

$

100

 

$

120.27

 

$

139.48

 

$

139.05

 

$

163.96

 

$

187.24

 

Dow Jones U.S. Furnishings Index

 

$

100

 

$

110.40

 

$

146.25

 

$

154.75

 

$

173.39

 

$

153.75

 

 

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Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

Our board of directors has authorized the purchase of company stock. As of April 28, 2018, 6.7 million shares remained available for purchase pursuant to this authorization. We spent $56.7 million in fiscal 2018 to purchase 2.0 million shares. During the fourth quarter of fiscal 2018, pursuant to the existing board authorization, we adopted a plan to purchase company stock pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934. The plan was effective April 6, 2018. Under this plan, our broker has the authority to purchase company shares on our behalf, subject to SEC regulations and the price, market volume and timing constraints specified in the plan. The plan expires at the close of business on June 22, 2018. With the cash flows we anticipate generating in fiscal 2019, we expect to continue being opportunistic in purchasing company stock.

 

The following table summarizes our purchases of company stock during the fourth quarter of fiscal 2018:

 

(Shares in thousands)

 

Total
number of
shares
purchased
(1)

 

Average
price
paid per
share

 

Total number
of shares
purchased as
part of
publicly
announced
plan (2)

 

Maximum
number of
shares that
may yet be
purchased
under the
plan

 

Fiscal February (January 28 – March 3, 2018)

 

156

 

$

30.21

 

155

 

6,882

 

Fiscal March (March 4 – March 31, 2018)

 

116

 

$

30.64

 

116

 

6,766

 

Fiscal April (April 1 – April 28, 2018)

 

82

 

$

29.79

 

81

 

6,685

 

Fiscal Fourth Quarter of 2018

 

354

 

$

30.26

 

352

 

6,685

 

 

(1)         In addition to the 351,946 shares purchased during the quarter as part of our publicly announced director authorization described above, this column includes 1,816 shares purchased from employees to satisfy their withholding tax obligations upon vesting of restricted shares and performance based shares.

(2)         On October 28, 1987, our board of directors announced the authorization of the plan to repurchase company stock. The plan originally authorized 1.0 million shares, and since October 1987, 27.0 million shares were added to the plan for repurchase. The authorization has no expiration date.

 

Recent Sales of Unregistered Securities

 

There were no sales of unregistered securities during fiscal year 2018.

 

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ITEM 6. SELECTED FINANCIAL DATA.

 

The following table presents our selected financial data. The table should be read in conjunction with Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. This information is derived from our audited financial statements and should be read in conjunction with those statements, including the related notes.

 

Consolidated Five-Year Summary of Financial Data

 

(Amounts in thousands)

 

(52 weeks)

 

(52 weeks)

 

(53 weeks)

 

(52 weeks)

 

(52 weeks)

 

Fiscal Year Ended

 

4/28/2018

 

4/29/2017

 

4/30/2016

 

4/25/2015

 

4/26/2014

 

Sales

 

$

1,583,947

 

$

1,520,060

 

$

1,525,398

 

$

1,425,395

 

$

1,357,318

 

Cost of sales

 

961,200

 

910,757

 

940,420

 

918,251

 

891,453

 

Gross profit

 

622,747

 

609,303

 

584,978

 

507,144

 

465,865

 

Selling, general and administrative expense

 

493,378

 

475,961

 

459,647

 

401,327

 

375,158

 

Operating income

 

129,369

 

133,342

 

125,331

 

105,817

 

90,707

 

Interest expense

 

538

 

1,073

 

486

 

523

 

548

 

Interest income

 

1,709

 

981

 

827

 

1,030

 

761

 

Other income (expense), net

 

(1,650

)

(2,510

)

(629

)

(696

)

639

 

Income from continuing operations before income taxes

 

128,890

 

130,740

 

125,043

 

105,628

 

91,559

 

Income tax expense

 

47,295

 

43,756

 

44,080

 

36,954

 

31,383

 

Income from continuing operations

 

81,595

 

86,984

 

80,963

 

68,674

 

60,176

 

Income (loss) from discontinued operations, net of tax

 

 

 

 

3,297

 

(3,796

)

Net income

 

81,595

 

86,984

 

80,963

 

71,971

 

56,380

 

Net income attributable to noncontrolling interests

 

(729

)

(1,062

)

(1,711

)

(1,198

)

(1,324

)

Net income attributable to La-Z-Boy Incorporated

 

$

80,866

 

$

85,922

 

$

79,252

 

$

70,773

 

$

55,056

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to La-Z-Boy Incorporated:

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations attributable to La-Z-Boy Incorporated

 

$

80,866

 

$

85,922

 

$

79,252

 

$

67,476

 

$

58,852

 

Income (loss) from discontinued operations

 

 

 

 

3,297

 

(3,796

)

Net income attributable to La-Z-Boy Incorporated

 

$

80,866

 

$

85,922

 

$

79,252

 

$

70,773

 

$

55,056

 

 

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Table of Contents

 

(Amounts in thousands, except per share data)

 

(52 weeks)

 

(52 weeks)

 

(53 weeks)

 

(52 weeks)

 

(52 weeks)

 

Fiscal Year Ended

 

4/28/2018

 

4/29/2017

 

4/30/2016

 

4/25/2015

 

4/26/2014

 

Basic weighted average shares

 

47,621

 

48,963

 

50,194

 

51,767

 

52,386

 

Basic net income attributable to La-Z-Boy Incorporated per share:

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations attributable to La-Z-Boy Incorporated

 

$

1.69

 

$

1.75

 

$

1.57

 

$

1.30

 

$

1.11

 

Income (loss) from discontinued operations

 

 

 

 

0.06

 

(0.07

)

Basic net income attributable to La-Z-Boy Incorporated per share

 

$

1.69

 

$

1.75

 

$

1.57

 

$

1.36

 

$

1.04

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted weighted average shares

 

48,135

 

49,470

 

50,765

 

52,346

 

53,829

 

Diluted net income attributable to La-Z-Boy Incorporated per share:

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations attributable to La-Z-Boy Incorporated

 

$

1.67

 

$

1.73

 

$

1.55

 

$

1.28

 

$

1.09

 

Income (loss) from discontinued operations

 

 

 

 

0.06

 

(0.07

)

Diluted net income attributable to La-Z-Boy Incorporated per share

 

$

1.67

 

$

1.73

 

$

1.55

 

$

1.34

 

$

1.02

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per share

 

$

0.46

 

$

0.42

 

$

0.36

 

$

0.28

 

$

0.20

 

Book value of year-end shares outstanding (1)

 

$

13.08

 

$

12.17

 

$

11.09

 

$

10.33

 

$

10.04

 

 

21



Table of Contents

 

(Dollar amounts in thousands)

 

(52 weeks)

 

(52 weeks)

 

(53 weeks)

 

(52 weeks)

 

(52 weeks)

 

Fiscal Year Ended

 

4/28/2018

 

4/29/2017

 

4/30/2016

 

4/25/2015

 

4/26/2014

 

Return on average total equity (2)

 

13.3

%

15.0

%

14.9

%

12.9

%

11.8

%

Gross profit as a percent of sales

 

39.3

%

40.1

%

38.3

%

35.6

%

34.3

%

Operating income as a percent of sales

 

8.2

%

8.8

%

8.2

%

7.4

%

6.7

%

Effective tax rate (3)

 

36.7

%

33.5

%

35.3

%

35.0

%

34.3

%

Return on sales (3)

 

5.2

%

5.7

%

5.3

%

4.8

%

4.4

%

Depreciation and amortization

 

$

31,767

 

$

29,132

 

$

26,517

 

$

22,283

 

$

23,182

 

Capital expenditures

 

$

36,337

 

$

20,304

 

$

24,684

 

$

70,319

 

$

33,730

 

Property, plant and equipment, net

 

$

180,882

 

$

169,132

 

$

171,590

 

$

174,036

 

$

127,535

 

Working capital

 

$

335,443

 

$

318,746

 

$

324,545

 

$

321,560

 

$

355,291

 

Current ratio (4)

 

2.9 to 1

 

2.6 to 1

 

3.1 to 1

 

3.1 to 1

 

3.1 to 1

 

Total assets

 

$

892,967

 

$

888,855

 

$

800,029

 

$

774,604

 

$

771,295

 

Long-term debt, excluding current portion

 

$

199

 

$

296

 

$

513

 

$

433

 

$

277

 

Total debt

 

$

422

 

$

515

 

$

803

 

$

830

 

$

7,774

 

Total equity

 

$

625,216

 

$

601,105

 

$

557,212

 

$

533,100

 

$

529,718

 

Debt to equity ratio (5)

 

0.1

%

0.1

%

0.1

%

0.2

%

1.5

%

Debt to capitalization ratio (6)

 

0.1

%

0.1

%

0.1

%

0.2

%

1.4

%

 

(1)    Equal to total La-Z-Boy Incorporated shareholders’ equity divided by the number of outstanding shares on the last day of the fiscal year

(2)    Equal to income from continuing operations divided by average two year equity

(3)    Based on income from continuing operations

(4)    Equal to total current assets divided by total current liabilities

(5)    Equal to total debt divided by total equity

(6)    Equal to total debt divided by total debt plus total equity

 

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Table of Contents

 

Unaudited Quarterly Financial Information Fiscal 2018

 

(Amounts in thousands, except per share data)

 

(13 weeks)

 

(13 weeks)

 

(13 weeks)

 

(13 weeks)

 

Fiscal Quarter Ended

 

7/29/2017

 

10/28/2017

 

1/27/2018

 

4/28/2018

 

Sales

 

$

357,079

 

$

393,205

 

$

413,638

 

$

420,025

 

Cost of sales

 

217,976

 

238,253

 

251,140

 

253,831

 

Gross profit

 

139,103

 

154,952

 

162,498

 

166,194

 

Selling, general and administrative expense

 

122,805

 

120,683

 

129,403

 

120,487

 

Operating income

 

16,298

 

34,269

 

33,095

 

45,707

 

Interest expense

 

157

 

160

 

113

 

108

 

Interest income

 

343

 

376

 

444

 

546

 

Other income (expense), net

 

1,749

 

(926

)

(1,094

)

(1,379

)

Income before income taxes

 

18,233

 

33,559

 

32,332

 

44,766

 

Income tax expense

 

6,489

 

10,353

 

20,047

 

10,406

 

Net income

 

11,744

 

23,206

 

12,285

 

34,360

 

Net income attributable to noncontrolling interests

 

(93

)

(310

)

(176

)

(150

)

Net income attributable to La-Z-Boy Incorporated

 

$

11,651

 

$

22,896

 

$

12,109

 

$

34,210

 

 

 

 

 

 

 

 

 

 

 

Diluted weighted average common shares

 

48,846

 

48,297

 

47,757

 

47,472

 

Diluted net income attributable to La-Z-Boy Incorporated per share

 

$

0.24

 

$

0.47

 

$

0.25

 

$

0.72

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per share

 

$

0.11

 

$

0.11

 

$

0.12

 

$

0.12

 

 

23



Table of Contents

 

Unaudited Quarterly Financial Information Fiscal 2017

 

(Amounts in thousands, except per share data)

 

(13 weeks)

 

(13 weeks)

 

(13 weeks)

 

(13 weeks)

 

Fiscal Quarter Ended

 

7/30/2016

 

10/29/2016

 

1/28/2017

 

4/29/2017

 

Sales

 

$

340,783

 

$

376,579

 

$

389,992

 

$

412,706

 

Cost of sales

 

206,562

 

227,195

 

233,185

 

243,815

 

Gross profit

 

134,221

 

149,384

 

156,807

 

168,891

 

Selling, general and administrative expense

 

111,763

 

115,526

 

123,235

 

125,437

 

Operating income

 

22,458

 

33,858

 

33,572

 

43,454

 

Interest expense

 

115

 

117

 

562

 

279

 

Interest income

 

204

 

234

 

241

 

302

 

Other income (expense), net

 

(762

)

(969

)

221

 

(1,000

)

Income before income taxes

 

21,785

 

33,006

 

33,472

 

42,477

 

Income tax expense

 

7,777

 

11,901

 

9,830

 

14,248

 

Net income

 

14,008

 

21,105

 

23,642

 

28,229

 

Net income attributable to noncontrolling interests

 

(202

)

(272

)

(356

)

(232

)

Net income attributable to La-Z-Boy Incorporated

 

$

13,806

 

$

20,833

 

$

23,286

 

$

27,997

 

 

 

 

 

 

 

 

 

 

 

Diluted weighted average common shares

 

49,594

 

49,511

 

49,384

 

49,181

 

Diluted net income attributable to La-Z-Boy Incorporated per share

 

$

0.28

 

$

0.42

 

$

0.47

 

$

0.57

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per share

 

$

0.10

 

$

0.10

 

$

0.11

 

$

0.11

 

 

24



Table of Contents

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

We have prepared this Management’s Discussion and Analysis as an aid to understanding our financial results. It should be read in conjunction with the accompanying Consolidated Financial Statements and related Notes to Consolidated Financial Statements. We begin with an introduction to our key businesses and then provide discussions of our results of operations, liquidity and capital resources, and critical accounting policies. It is important to note that our fiscal year 2018 and fiscal year 2017 included 52 weeks, whereas fiscal year 2016 included 53 weeks. The additional week in fiscal year 2016 was included in our fourth quarter.

 

Introduction

 

Our Business

 

We manufacture, market, import, export, distribute and retail upholstery furniture products. In addition, we import, distribute and retail accessories and casegoods (wood) furniture products. We are the leading global producer of reclining chairs and the second largest manufacturer/distributor of residential furniture in the United States. The La-Z-Boy Furniture Galleries® stores retail network is the third largest retailer of single-branded furniture in the United States. We have seven major manufacturing locations and six regional distribution centers in the United States and one facility in Mexico to support our speed-to-market and customization strategy. We operate a wholesale sales office that is responsible for distribution of our product in the United Kingdom and Ireland and we also participate in two joint ventures in Thailand that support our international businesses; one of which operates a manufacturing facility and the other operates a wholesale sales office. We operate a global trading company in Hong Kong which helps us manage our Asian supply chain by establishing and maintaining relationships with our Asian suppliers, as well as identifying efficiencies and savings opportunities.  Additionally, we have contracts with several suppliers in Asia to produce products that support our pure import model for casegoods.

 

We sell our products to furniture retailers or distributors in the United States, Canada, and approximately 60 other countries, including the United Kingdom, China, Australia and New Zealand, directly to consumers through stores that we own and operate, and through our website, la-z-boy.com. The centerpiece of our retail distribution strategy is our network of 350 La-Z-Boy Furniture Galleries® stores and 535 La-Z-Boy Comfort Studio® locations, each dedicated to marketing our La-Z-Boy branded products. We consider this dedicated space to be “proprietary.” We own 146 of the La-Z-Boy Furniture Galleries® stores. The remainder of the La-Z-Boy Furniture Galleries® stores, as well as all 535 La-Z-Boy Comfort Studio® locations, 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 available design services. La-Z-Boy Comfort Studio® locations are defined spaces within larger independent retailers that are dedicated to displaying and selling La-Z-Boy branded products. In total, we have approximately 7.8 million square feet of proprietary floor space dedicated to selling La-Z-Boy branded products in North America. Additionally, floor space outside of the United States and Canada dedicated to selling La-Z-Boy branded products totals approximately 2.5 million square feet. Our other brands, England, American Drew, Hammary, and Kincaid enjoy distribution through many of the same outlets, with approximately half of Hammary’s sales originating through the La-Z-Boy Furniture Galleries® store network. Kincaid and England have their own dedicated proprietary in-store programs with 542 outlets and approximately 1.7 million square feet of proprietary floor space. In total, our proprietary floor space includes approximately 12.0 million square feet worldwide.

 

Our goal is to deliver value to our shareholders with improved sales and earnings over the long term through executing our strategic initiatives. The foundation of our strategic initiatives is driving profitable sales

 

25



Table of Contents

 

growth in all areas of our business, but most importantly in our flagship La-Z-Boy brand. We are planning for this growth in multiple ways:

 

·                  We are expanding our branded distribution channels, which include the La-Z-Boy Furniture Galleries® store network and the La-Z-Boy Comfort Studio® locations, our store-within-a-store format. We expect this initiative to generate growth in our Retail segment through an increased company-owned store count and in our wholesale Upholstery segment as our proprietary distribution network expands. We are not only focused on growing the number of locations, but also on upgrading existing store locations to our new concept designs.

·                  We are growing the size of our company-owned retail business by opening new La-Z-Boy Furniture Galleries® stores or acquiring stores from existing dealers, primarily in markets that can be serviced through our regional distribution centers, where we see opportunity for growth, or where we believe we have opportunities for further market penetration.

·                  We are attempting to responsibly increase our market share by taking advantage of our unique multi-channel distribution network. In addition to our branded distribution channels, over 2,000 other dealers sell La-Z-Boy products, providing us the benefit of multi-channel distribution. These outlets include some of the best known names in the industry, including Art Van, Nebraska Furniture Mart, and Slumberland. Our other brands, England, American Drew, Hammary, and Kincaid, enjoy distribution through many of the same outlets. We believe there is significant growth potential for our brands through these retail channels.

·                  We also aim to increase our market share in stationary upholstered furniture through a combination of our Live Life Comfortably® marketing campaign and our innovative and on-trend product. While we are known for our iconic recliners, they account for less than half of our sales in dollars, and we believe we have the potential to expand sales of our other products. To stimulate growth, we are focusing on expanding our digital marketing and e-commerce capabilities to build traffic across our multiple digital and physical properties. We are driving change throughout our digital platforms to improve the user experience, with a specific focus on the ease by which customers browse through our broad assortment, customize products to their liking, find stores to make a purchase, or purchase at la-z-boy.com.

·                  We are bringing innovative products to market, including stain-resistant iCleanTM fabric and our power products, some of which include dual mechanisms and articulating headrests. Our newest innovation, duoTM, is a revolutionary product line that features the look of stationary furniture with the power to recline at the push of a button. We are committed to innovation throughout our business, and to support these efforts we are building a new state-of-the-art Innovation Center at our Dayton, Tennessee campus. We expect the Innovation Center to be completed and operational in the first quarter of fiscal 2019.

·                  We developed a multifaceted strategy to participate in the growing online furniture sales space. This strategy has three components: increasing online sales of La-Z-Boy furniture through la-z-boy.com and other digital companies, such as Wayfair and Amazon; leveraging the strength of our world-class supply chain to support other e-commerce brands; and investing in new online companies. We believe this three-pronged approach will position us for growth in the ever-changing online selling environment, and we will continue developing this strategy as we move forward.

 

Our reportable segments are the Upholstery segment, the Casegoods segment, and the Retail segment.

 

·                  Upholstery Segment. Our Upholstery reportable segment is our largest business segment and consists primarily of two operating segments: La-Z-Boy, our largest operating segment, and the operating segment for our England subsidiary. The Upholstery segment also includes our international wholesale businesses. These operating segments are aggregated into one reportable segment because they are economically similar and because they meet the other aggregation criteria for determining reportable segments. Our Upholstery segment manufactures and imports upholstered furniture such as recliners and motion furniture, sofas, loveseats, chairs, sectionals, modulars, ottomans and sleeper sofas. The Upholstery segment sells directly to La-Z-Boy Furniture Galleries® stores, operators of

 

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Table of Contents

 

La-Z-Boy Comfort Studio® locations and England Custom Comfort Center locations, major dealers, and a wide cross-section of other independent retailers.

·                  Casegoods Segment. Our Casegoods segment consists of one operating segment, and sells furniture under three brands: American Drew, Hammary, and Kincaid. The Casegoods segment is an importer, marketer, and distributor of casegoods (wood) furniture such as bedroom sets, dining room sets, entertainment centers and occasional pieces, and also manufactures some coordinated upholstered furniture. The Casegoods segment sells directly to major dealers, as well as La-Z-Boy Furniture Galleries® stores, and a wide cross-section of other independent retailers.

·                  Retail Segment. Our Retail segment consists of one operating segment, and includes our 146 company-owned La-Z-Boy Furniture Galleries® stores. The Retail segment primarily sells upholstered furniture, in addition to some casegoods and other accessories, to the end consumer through these stores.

 

Results of Operations
Fiscal Year 2018, Fiscal Year 2017, and Fiscal Year 2016

 

La-Z-Boy Incorporated

 

(Amounts in thousands,
except percentages)

 

(52 weeks)
4/28/2018

 

(52 weeks)
4/29/2017

 

(FY18 vs FY17)
% Change

 

(53 weeks)
4/30/2016

 

(FY17 vs FY16)
% Change

 

Sales

 

$

1,583,947

 

$

1,520,060

 

4.2

%

$

1,525,398

 

(0.3

)%

Operating income

 

129,369

 

133,342

 

(3.0

)%

125,331

 

6.4

%

Operating margin

 

8.2

%

8.8

%

 

 

8.2

%

 

 

 

Sales

 

Our consolidated sales increased $63.9 million in fiscal 2018 compared with fiscal 2017, following a decrease of $5.3 million in fiscal 2017 compared with fiscal 2016. As a reminder, fiscal 2016 contained 53 weeks, while fiscal 2018 and fiscal 2017 contained 52 weeks. The additional week in fiscal 2016 resulted in approximately $29 million of additional sales based on the average weekly sales for that fiscal year.

 

·                  The increase in sales in fiscal 2018 compared with fiscal 2017 was driven by sales growth in all three of our operating segments. Our Upholstery segment benefited from the acquisition of the La-Z-Boy wholesale business in the United Kingdom and Ireland and a favorable change in our product mix. Our Casegoods segment grew sales volume by expanding floor space with existing retailers. Our Retail segment sales increased due to the addition of new stores that were not open in the prior-year period and from acquisitions we completed in the last 12 months.

·                  Sales were essentially flat in fiscal 2017 compared with fiscal 2016, due to lower sales in our Upholstery and Casegoods segments which were offset by higher sales in our Retail segment. The sales decline in our Upholstery and Casegoods segments were mostly due to fiscal 2017 including only 52 weeks while fiscal 2016 included 53 weeks. The sales increase in our Retail segment was driven by the sales from new stores that were not open in the prior-year period and acquired stores, partially offset by lower sales from stores that had been open a minimum of 12 months, and the impact of fiscal 2017 including one less week than fiscal 2016.

 

Operating Margin

 

Our operating margin decreased 0.6 percentage points in fiscal 2018 compared with the prior year, following an increase of 0.6 percentage points in fiscal 2017 compared with the prior year.

 

·                  Our gross margin decreased 0.8 percentage points during fiscal 2018 compared with fiscal 2017, following an increase of 1.7 percentage points in fiscal 2017 compared with fiscal 2016.

 

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Table of Contents

 

·                  Our gross margin declined in fiscal 2018 compared with the prior year, mostly due to a decline in our Upholstery segment’s gross margin resulting from increased prices for our three core raw material components of steel, polyurethane foam and wood.

·                  Our gross margin improved in fiscal 2017 compared with fiscal 2016 due to an increase in our Upholstery segment’s gross margin due to favorable changes in our product mix, as well as improved efficiencies in our supply chain, including procurement, manufacturing operations, and logistics. In addition, our Casegoods segment’s gross margin improved in fiscal 2017 compared with the prior year due to lower promotional activity related to discontinued product and lower freight expense on imported product.

·                  Our Retail segment’s gross margin was essentially flat in both fiscal 2018 and fiscal 2017 compared with the prior years.

·                  Our gross margin improved 0.2 and 0.9 percentage points in fiscal 2018 and fiscal 2017, respectively, compared with each of the prior years, due to changes in our consolidated sales mix. Our consolidated sales mix changed due to the growth of our Retail segment, which has a higher gross margin than our wholesale segments.

·                  Additionally, each of fiscal 2017 and fiscal 2016 included the benefit of favorable legal settlements, which provided a benefit of 0.2 and 0.3 percentage points, respectively.

 

·                  Our selling, general, and administrative (“SG&A”) expense as a percentage of sales decreased 0.2 percentage points during fiscal 2018 compared with fiscal 2017, following an increase of 1.1 percentage points in fiscal 2017 compared with fiscal 2016.

 

·                  Our SG&A expense as a percentage of sales was lower in fiscal 2018 compared with fiscal 2017, primarily due to lower incentive compensation expense. As a percentage of sales, incentive compensation expense was 0.4 percentage points lower in fiscal 2018 compared with fiscal 2017 because our consolidated financial performance was lower when compared against our incentive-based targets in fiscal 2018. Additionally, we benefited from favorable absorption of fixed SG&A costs on the higher sales dollars and a reduction in discretionary SG&A spending in fiscal 2018. Partially offsetting these items was the impact of the previously announced legal settlement of a civil dispute, which increased SG&A expense as a percentage of sales by 0.3 percentage points in fiscal 2018 compared with fiscal 2017. With the announced settlement, which resolved all of our past and future obligations at issue in the litigation, we recognized an additional charge of $4.1 million in the third quarter of fiscal 2018.

·                  Our SG&A expense as a percentage of sales was higher in fiscal 2017 compared with fiscal 2016, primarily due to higher advertising expense. As a percentage of sales, advertising expense was 0.8 percentage points higher because we strategically increased spending in our Live Life Comfortably® marketing campaign and on promotional marketing to support our retail stores and enhance our share of voice in selected markets. This was partly offset by professional fees and legal costs that were 0.7 percentage points lower as a percentage of sales during fiscal 2017 compared with fiscal 2016, because we incurred higher legal costs in fiscal 2016 related to the previously announced civil dispute that was settled in the third quarter of fiscal 2018.

·                  Additionally, our SG&A expense as a percentage of sales increased 0.3 and 1.2 percentage points in fiscal 2018 and fiscal 2017, respectively, compared with each of the prior years, due to changes in our consolidated sales mix. Our consolidated sales mix changed due to the growth of our Retail segment, which has a higher level of SG&A expense as a percentage of sales than our wholesale segments.

 

We explain these items further when we discuss each segment’s results later in this Management’s Discussion and Analysis.

 

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Table of Contents

 

Upholstery Segment

 

(Amounts in thousands,
except percentages)

 

(52 weeks)
4/28/2018

 

(52 weeks)
4/29/2017

 

(FY18 vs FY17)
% Change

 

(53 weeks)
4/30/2016

 

(FY17 vs FY16)
% Change

 

Sales

 

$

1,227,363

 

$

1,191,443

 

3.0

%

$

1,215,805

 

(2.0

)%

Operating income

 

130,349

 

148,996

 

(12.5

)%

137,135

 

8.6

%

Operating margin

 

10.6

%

12.5

%

 

 

11.3

%

 

 

 

Sales

 

Our Upholstery segment’s sales increased $35.9 million in fiscal 2018 compared with fiscal 2017, following a decrease of $24.4 million in fiscal 2017 compared with fiscal 2016. The additional week in fiscal 2016 resulted in approximately $23 million of additional sales based on the average weekly sales for that fiscal year.

 

·                  The segment’s sales increase in fiscal 2018 was primarily due to the following:

 

·                  The acquisition of the La-Z-Boy wholesale business in the United Kingdom and Ireland added sales of $18.9 million.

·                  Changes in our product mix resulted in an additional 2.0% increase in sales. Our product mix shifted from non-powered fabric units to more leather units with power that have a higher average selling price.

·                  Higher selling prices resulted in a 0.7% increase in sales. We raised our selling price in response to inflationary pressures on our raw materials.

·                  These increases were somewhat offset by lower overall unit volume, which resulted in a 2.5% decrease in sales.

 

·                  The segment’s sales decline in fiscal 2017 was mostly due to fiscal 2017 including only 52 weeks while fiscal 2016 included 53 weeks, in addition to the following:

 

·                  Lower overall unit volume resulted in a 2.4% decrease in sales.

·                  Higher promotional activity in fiscal 2017 resulted in a 0.5% decrease in sales. The higher promotional activity was due to our strategic decision to discount product to drive sales against weaker demand, and in connection with our phasing out certain frames and fabrics.

·                  These decreases were partially offset by changes in our product mix which resulted in a 0.7% increase in sales. Our product mix shifted to more motion units and more units with power. Motion units have a higher average selling price than stationary units, and units with power have a higher average selling price than units without power.

·                  Lastly, fiscal 2017 included the benefit of four months of sales from our acquisition of the La-Z-Boy wholesale business in the United Kingdom and Ireland, which contributed $8.9 million of sales in fiscal 2017.

 

Operating Margin

 

Our Upholstery segment’s operating margin decreased 1.9 percentage points in fiscal 2018 compared with the prior year, following an increase of 1.2 percentage points in fiscal 2017 compared with the prior year.

 

·                  The segment’s gross margin decreased 1.6 percentage points during fiscal 2018 compared with fiscal 2017.

 

·                  Increased prices, primarily for our three core raw material components of steel, polyurethane foam and wood, decreased the segment’s gross margin by 0.8 percentage points. The inflationary pressure we experienced from these raw materials was higher than we expected, and during fiscal 2018 we implemented sales price increases that we expect will offset the negative impact on our margins as we move into fiscal 2019, providing costs do not continue to escalate.

 

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Table of Contents

 

·                  Lower absorption of fixed costs in our manufacturing facilities, driven primarily by a decline in production volume, decreased the segment’s gross margin by 0.7 percentage points.

·                  The benefit of a legal settlement during fiscal 2017 negatively impacted the comparison of the segment’s gross margin by 0.2 percentage points.

 

·                  The segment’s gross margin increased 0.7 percentage points during fiscal 2017 compared with fiscal 2016.

 

·                  Changes in our product mix resulted in an improvement of 0.7 percentage points. The improvement was primarily due to a shift to more motion units with power, as well as a shift to more recliners.

·                  Improved efficiencies in our supply chain, including procurement, manufacturing operations and logistics, resulted in an improvement of 0.5 percentage points.

·                  Higher promotional activity related to our strategic decision to discount product to drive sales against the weaker demand in the home furnishings sector, and in connection with our phasing out of certain frames and fabric, resulted in a reduction of 0.3 percentage points in the segment’s gross margin.

·                  Favorable legal settlements provided a benefit of 0.2 and 0.3 percentage points in the segment’s gross margin during fiscal 2017 and fiscal 2016, respectively.

 

·                  The segment’s SG&A expense as a percentage of sales increased 0.3 percentage points during fiscal 2018 compared with fiscal 2017.

 

·                  The previously announced legal settlement of a civil dispute increased SG&A expense as a percentage of sales by 0.3 percentage points. With the announced settlement, which resolved all of our past and future obligations at issue in the litigation, we recognized an additional charge of $4.1 million in the third quarter of fiscal 2018.

 

·                  The segment’s SG&A expense as a percentage of sales decreased 0.5 percentage points during fiscal 2017 compared with fiscal 2016.

 

·                  Professional fees and legal costs were 0.9 percentage points lower as a percent of sales. We incurred higher legal costs in fiscal 2016 related to the previously announced civil dispute that was settled in the third quarter of fiscal 2018.

·                  Advertising expense was 0.2 percentage points higher as a percentage of sales as we strategically increased spending on our Live Life Comfortably® marketing campaign.

 

Casegoods Segment

 

(Amounts in thousands,
except percentages)

 

(52 weeks)
4/28/2018

 

(52 weeks)
4/29/2017

 

(FY18 vs FY17)
% Change

 

(53 weeks)
4/30/2016

 

(FY17 vs FY16)
% Change

 

Sales

 

$

111,393

 

$

100,228

 

11.1

%

$

102,540

 

(2.3

)%

Operating income

 

11,641

 

8,623

 

35.0

%

7,734

 

11.5

%

Operating margin

 

10.5

%

8.6

%

 

 

7.5

%

 

 

 

Sales

 

Our Casegoods segment’s sales increased $11.2 million in fiscal 2018 compared with fiscal 2017, following a decrease of $2.3 million in fiscal 2017 compared with fiscal 2016. The additional week in fiscal 2016 resulted in approximately $2 million of additional sales based on the average weekly sales for that fiscal year.

 

·                  The segment’s sales increase in fiscal 2018 was primarily due to higher volume we achieved through improved product styling, expanding our floor space with existing retailers, and a reliable in-stock position.

·                  The segment’s sales decrease in fiscal 2017 was mostly due to fiscal 2017 including only 52 weeks while fiscal 2016 included 53 weeks, in addition to a decline in unit volume. We believe the lower volume resulted from weaker demand throughout the home furnishings sector, which

 

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had been more prominent for casegoods product than for other product categories. The volume decline was somewhat offset by lower promotional activity on discontinued product.

 

Operating Margin

 

Our Casegoods segment’s operating margin increased 1.9 percentage points in fiscal 2018 compared with the prior year, following an increase of 1.1 percentage points in fiscal 2017 compared with the prior year.

 

·                  The segment’s gross margin increased 0.2 percentage points during fiscal 2018 compared with fiscal 2017, following an increase of 1.4 percentage points during fiscal 2017 compared with fiscal 2016.

 

·                  During fiscal 2018, the segment’s gross margin increased due to increased volume and shift in our product mix to newer, higher margin collections, which was slightly offset by higher freight expense on imported product.

·                  During fiscal 2017, the segment’s gross margin increased due to lower promotional activity related to discontinued product and lower freight expense on imported product.

 

·                  The segment’s SG&A expense as a percentage of sales decreased 1.7 percentage points during fiscal 2018 compared with fiscal 2017, following an increase of 0.3 percentage points during fiscal 2017 compared with fiscal 2016.

 

·                  During fiscal 2018, the decreased SG&A expense was due primarily to our improved absorption of fixed SG&A costs on the higher sales volume, and a reduction in discretionary spending.

·                  During fiscal 2017, the increased SG&A expense was primarily due to our inability to absorb fixed SG&A costs on the lower sales volume.

 

Retail Segment

 

(Amounts in thousands,
except percentages)

 

(52 weeks)
4/28/2018

 

(52 weeks)
4/29/2017

 

(FY18 vs FY17)
% Change

 

(53 weeks)
4/30/2016

 

(FY17 vs FY16)
% Change

 

Sales

 

$

474,613

 

$

443,238

 

7.1

%

$

402,479

 

10.1

%

Operating income

 

20,709

 

19,205

 

7.8

%

25,567

 

(24.9

)%

Operating margin

 

4.4

%

4.3

%

 

 

6.4

%

 

 

 

Sales

 

Our Retail segment’s sales increased $31.4 million in fiscal 2018 compared with fiscal 2017, following an increase of $40.8 million in fiscal 2017 compared with fiscal 2016. The additional week in fiscal 2016 resulted in approximately $8 million of additional sales based on the average weekly sales for that fiscal year.

 

·                  The segment’s sales increase in fiscal 2018 was a result of $20.4 million from acquired stores and $14.7 million from new stores that were not open in the prior-year period. Partially offsetting these items was a $3.7 million decrease in sales from stores that had been open a minimum of 12 months, a decline of 1.0%. The decrease was primarily driven by lower store traffic, the impact of which was somewhat offset by an increase in average ticket that resulted from increased design services and custom orders.

·                  The segment’s sales increase in fiscal 2017 was the result of $55.8 million from our acquired stores and $10.8 million from new stores that were not open in the prior-year period. Partially offsetting these items was a $25.8 million decrease in sales from stores that had been open a minimum of 12 months, a decline of 7.2%, of which about 2% related to the extra week in fiscal 2016. The decrease was primarily driven by lower store traffic, the impact of which was

 

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somewhat offset by an increase in average ticket that resulted from increased design services and custom orders.

 

Operating Margin

 

Our Retail segment’s operating margin increased 0.1 percentage point in fiscal 2018 compared with the prior year, following a decrease of 2.1 percentage points in fiscal 2017 compared with the prior year.

 

·                  The segment’s gross margin decreased 0.2 percentage points during fiscal 2018 compared with fiscal 2017, following an increase of 0.1 percentage point in fiscal 2017 compared with fiscal 2016.

 

·                  During fiscal 2018, our gross margin decreased slightly as we executed a variety of strategies to drive traffic to our stores and convert that traffic into sales.

·                  During fiscal 2017, a higher percentage of custom orders and increased design services drove the increase in gross margin.

 

·                  The segment’s SG&A expense as a percentage of sales decreased 0.3 percentage points during fiscal 2018 compared with fiscal 2017, following an increase of 2.2 percentage points in fiscal 2017 compared with fiscal 2016.

 

·                  During fiscal 2018, SG&A expenses as a percentage of sales was lower due to reducing our discretionary SG&A spending to better align with our current sales volume.

·                  During fiscal 2017, SG&A expenses as a percentage of sales was higher due to an increase in advertising expense of 1.2 percentage points, as we strategically increased spending on our Live Life Comfortably® marketing campaign and on promotional marketing to enhance our share of voice in selected markets. The remainder of the increase in SG&A expense as a percentage of sales was the result of the fixed nature of many of our costs (primarily occupancy and administrative costs) in relation to the decline in sales from stores that had been open a minimum of 12 months.

 

Corporate and Other

 

(Amounts in thousands,
except percentages)

 

(52 weeks)
4/28/2018

 

(52 weeks)
4/29/2017

 

(FY18 vs FY17)
% Change

 

(53 weeks)
4/30/2016

 

(FY17 vs FY16)
% Change

 

Sales:

 

 

 

 

 

 

 

 

 

 

 

Corporate and Other

 

$

12,739

 

$

9,161

 

39.1

%

$

6,423

 

42.6

%

Eliminations

 

(242,161

)

(224,010

)

(8.1

)%

(201,849

)

(11.0

)%

 

 

 

 

 

 

 

 

 

 

 

 

Operating loss:

 

 

 

 

 

 

 

 

 

 

 

Corporate and Other

 

(33,330

)

(43,482

)

23.3

%

(45,105

)

3.6

%

 

Sales

 

Corporate and Other sales increased in fiscal 2018 and fiscal 2017 compared with the prior years due to an increase in intercompany commission revenue charged to our reportable segments by our global trading company in Hong Kong.

 

Eliminations increased in both fiscal 2018 and fiscal 2017 compared with the prior years due to higher sales from our Upholstery and Casegoods segments to our Retail segment, mainly because of new store openings and store acquisitions.

 

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Operating Loss

 

Our Corporate and Other operating loss was $10.2 million lower in fiscal 2018 compared with fiscal 2017.

 

·                  The Corporate and Other operating loss was lower due to a decrease in incentive compensation expense because our consolidated financial performance was lower when compared against our incentive-based targets in fiscal 2018.

·                  In addition, our global trading company in Hong Kong was more profitable, due to the increased intercompany commission revenue we charge to our reportable segments.

·                  Lastly, we recorded a $1.8 million insurance gain during fiscal 2018 following a fire in our England subsidiary’s corporate office building. We recognized a gain because the insurance proceeds we expect to receive exceed the building’s net book value on the date of the fire.

 

Our Corporate and Other operating loss was $1.6 million lower in fiscal 2017 compared with fiscal 2016.

 

·                  The Corporate and Other operating loss was lower due to the improved profitability of our global trading company in Hong Kong, due to the increased intercompany commission revenue we charge to our reportable segments.

 

Interest Expense

 

Interest expense was $0.5 million lower in fiscal 2018 compared with fiscal 2017, following an increase of $0.6 million in fiscal 2017 compared with fiscal 2016. As a result of the judgment entered against us in a legal dispute over whether we owed royalties on certain power units, we recognized $0.5 million of interest expense during fiscal 2017.

 

Other Income (Expense)

 

Other income (expense) was $0.9 million lower in fiscal 2018 compared with fiscal 2017, due to a $2.2 million gain on investments recorded in fiscal 2018 when our available-for-sale convertible debt security converted to preferred shares of a privately-held company. This was partially offset by higher foreign currency exchange rate losses realized during fiscal 2018 than in fiscal 2017.

 

Other income (expense) was $1.9 million lower in fiscal 2017 compared with fiscal 2016, due to lower foreign currency exchange rate gains realized during fiscal 2017 than in fiscal 2016.

 

Income Taxes

 

Our effective tax rate was 36.7% for fiscal 2018, 33.5% for fiscal 2017, and 35.3% for fiscal 2016.

 

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law. Most of its provisions are effective for tax years beginning on or after January 1, 2018. Because we are a fiscal year U.S. taxpayer, the majority of the provisions, such as elimination of the domestic manufacturing deduction, new taxes on certain foreign-sourced income, and new limitations on certain business deductions, will begin applying to us in fiscal 2019. For fiscal 2018, the most significant impacts include a lower U.S. federal corporate income tax rate applied to our fiscal 2018, a revaluing of U.S. net deferred taxes, and a new transition tax on the deemed repatriation of certain foreign earnings. The phasing in of the lower corporate income tax rate resulted in a blended federal rate of 30.4% for fiscal 2018, compared with the previous 35% rate. The federal tax rate will be reduced to 21% in subsequent fiscal years.

 

We recorded a charge of $5.5 million in fiscal 2018, reflecting the net effect of the Tax Act. This included a $10.0 million charge for the provisional re-measurement of certain deferred taxes and related amounts, a provisional $0.2 million of income tax expense for the estimated effects of the transition tax, and a benefit of $4.7 million primarily related to the lower blended federal tax rate.

 

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In December of 2017, the Securities and Exchange Commission staff issued guidance which provides that companies that have not completed their accounting for the effects of the Tax Act but can determine a reasonable estimate of those effects should include a provisional amount based on their reasonable estimate in their financial statements. The guidance also allows companies to adjust the provisional amounts during a one year measurement period which is similar to the measurement period used when accounting for business combinations. As of April 28, 2018, we have not completed our accounting for all of the tax effects associated with the enactment of the Tax Act. However, we made reasonable estimates, based on our current interpretation of the Tax Act, to record provisional adjustments during fiscal 2018. We may alter our estimates as we continue to accumulate and process data to finalize the underlying calculations and review further guidance that we expect regulators to issue. We are also analyzing other provisions of the Tax Act to determine if they will impact our effective tax rate in the future. We will continue to refine our adjustments through the permissible measurement period, which is not to extend beyond one year of the enactment date.

 

Impacting our effective tax rate for fiscal 2018, in addition to the above items related to the Tax Act, was a net tax benefit primarily of $2.4 million from research and development credits related to amended prior-year tax returns and the release of valuation allowances relating to certain U.S. state deferred tax assets and state income tax credits. Absent discrete adjustments, the effective tax rate in fiscal 2018 would have been 30.6%.

 

Impacting our effective tax rate for fiscal 2017 was a net tax benefit of $1.4 million primarily from the release of valuation allowances relating to certain U.S. state deferred tax assets and state income tax credits. Absent discrete adjustments, the effective tax rate in fiscal 2017 would have been 34.6%.

 

Impacting our effective tax rate for fiscal 2016 was a net tax benefit of $0.3 million for the release of valuation allowances relating to certain U.S. state deferred tax assets. Absent discrete adjustments, the effective tax rate in fiscal 2016 would have been 35.6%.

 

Liquidity and Capital Resources

 

Our sources of liquidity include cash and equivalents, short-term and long-term investments, cash from operations, and amounts available under our credit facility. We believe these sources remain adequate to meet our short-term and long-term liquidity requirements, finance our long-term growth plans, and fulfill other cash requirements for day-to-day operations, dividends to shareholders, and capital expenditures. We had cash, cash equivalents and restricted cash of $136.9 million at April 28, 2018, compared with $150.9 million at April 29, 2017. In addition, we had investments to enhance our returns on cash of $34.4 million at April 28, 2018, compared with $33.1 million at April 29, 2017.

 

We maintain a revolving credit facility secured primarily by all of our accounts receivable, inventory, and cash deposit and securities accounts. Availability under the agreement fluctuates according to a borrowing base calculated on eligible accounts receivable and inventory. We amended this agreement on December 19, 2017, extending its maturity date to December 19, 2022. The credit agreement includes affirmative and negative covenants that apply under certain circumstances, including a fixed-charge coverage ratio requirement that applies when excess availability under the line is less than certain thresholds. At April 28, 2018, we were not subject to the fixed-charge coverage ratio requirement, had no borrowings outstanding under the agreement, and had excess availability of $148.1 million of the $150.0 million credit commitment.

 

Capital expenditures for fiscal 2018 were $36.3 million compared with $20.3 million for fiscal 2017. Capital expenditures were higher in fiscal 2018 primarily due to the construction of our new Innovation Center in Dayton, Tennessee, which we expect to be completed during the first quarter of fiscal 2019. We have no material contractual commitments outstanding for future capital expenditures. We expect capital expenditures to be in the range of $55 to $65 million for fiscal 2019. Additionally, we expect capital

 

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expenditures to be higher during fiscal 2019 than fiscal 2018 due to the construction of a new corporate office building and a plant expansion for our England subsidiary, plant upgrades to our manufacturing facility in Dayton, Tennessee, and the relocation of one of our regional distribution centers, all of which we anticipate being completed by the end of fiscal 2019.

 

Our board of directors has sole authority to determine if and when we will declare future dividends and on what terms. We expect the board to continue declaring regular quarterly cash dividends for the foreseeable future, but it may discontinue doing so at any time.

 

We believe our cash flows from operations, present cash, cash equivalents and restricted cash balance of $136.9 million, short and long-term investments to enhance returns on cash of $34.4 million, and current excess availability under our credit facility of $148.1 million, will be sufficient to fund our business needs, including fiscal 2019 contractual obligations of $166.2 million as presented in our contractual obligations table. Included in our cash, cash equivalents and restricted cash at April 28, 2018, is $30.8 million held by foreign subsidiaries for which we have determined the amounts to be permanently reinvested.

 

The following table illustrates the main components of our cash flows:

 

 

 

Year Ended

 

 

 

(52 weeks)

 

(52 weeks)

 

(53 weeks)

 

(Amounts in thousands)

 

4/28/2018

 

4/29/2017

 

4/30/2016

 

Cash Flows Provided By (Used For)

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

115,750

 

$

147,990

 

$

114,509

 

Net cash used for investing activities

 

(55,224

)

(65,230

)

(37,229

)

Net cash used for financing activities

 

(76,255

)

(53,414

)

(63,195

)

Exchange rate changes

 

1,741

 

178

 

(688

)

 

 

 

 

 

 

 

 

Change in cash, cash equivalents and restricted cash

 

$

(13,988

)

$

29,524

 

$

13,397

 

 

Operating Activities

 

During fiscal 2018, net cash provided by operating activities was $115.8 million. Our cash provided by operating activities was primarily attributable to net income generated during fiscal 2018 and a $6.6 million increase in accounts payable that is primarily due to standardizing payment terms with our vendors, which resulted in many payment terms being extended.

 

During fiscal 2017, net cash provided by operating activities was $148.0 million. Our cash provided by operating activities was primarily attributable to net income generated during fiscal 2017 and a $12.5 million reduction in inventory. Our ability to improve our inventory efficiency and productivity more than offset an increase in finished goods inventory during fiscal 2017.

 

During fiscal 2016, net cash provided by operating activities was $114.5 million. Our cash provided by operating activities was primarily attributable to net income generated during fiscal 2016 and cash collections of accounts receivable of $10.7 million, driven by the improvement in the financial health of our customer base, especially our independent La-Z-Boy Furniture Galleries® dealers. Somewhat offsetting these items were cash used to fund increases in inventories of $14.6 million and a contribution to our pension plan of $7.0 million. Our inventories were higher in fiscal 2016 primarily due to higher raw materials inventory, mainly leather and fabric sets, to improve our service levels to our customers.

 

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Investing Activities

 

During fiscal 2018, net cash used for investing activities was $55.2 million, which included $15.9 million to fund the acquisition of the La-Z-Boy wholesale business in the United Kingdom and Ireland, $36.3 million for capital expenditures, and $5.9 million for net investment increases. Capital expenditures during the period primarily related to spending on the construction of our new Innovation Center, manufacturing machinery and equipment, and our continued ERP system implementation. Additionally, under the terms of the purchase agreement for the La-Z-Boy wholesale business in the United Kingdom and Ireland, payment for the business was due 90 business days following the date of acquisition, and accordingly, we made that payment during the first quarter of fiscal 2018.

 

During fiscal 2017, net cash used for investing activities was $65.2 million, which included $35.9 million for acquisitions of retail stores, $20.3 million for capital expenditures, and $9.8 million for net investment increases. Capital expenditures during the period primarily related to spending on manufacturing machinery and equipment, our continued ERP system implementation, and construction of our new Innovation Center.

 

During fiscal 2016, net cash used for investing activities was $37.2 million, which included $23.3 million for acquisitions of retail stores, and $24.7 million for capital expenditures, which was somewhat offset by net investment decreases of $7.7 million. Capital expenditures during the period primarily related to spending on manufacturing machinery and equipment, our continued ERP system implementation, our e-commerce web site, and the relocation of one of our regional distribution centers. Additionally, the above uses of cash were partially offset by proceeds from the sale of assets, including assets previously held for sale.

 

Financing Activities

 

During fiscal 2018, net cash used for financing activities was $76.3 million, including $56.7 million used to purchase our common stock and $22.0 million paid to our shareholders in quarterly dividends.

 

During fiscal 2017, net cash used for financing activities was $53.4 million, including $36.0 million used to purchase our common stock and $20.7 million paid to our shareholders in quarterly dividends.

 

During fiscal 2016, net cash used for financing activities was $63.2 million, including $44.1 million used to purchase our common stock and $18.1 million paid to our shareholders in quarterly dividends.

 

Our board of directors has authorized the purchase of company stock. As of April 28, 2018, 6.7 million shares remained available for purchase pursuant to this authorization. The authorization has no expiration date. We purchased 2.0 million shares during fiscal 2018 for a total of $56.7 million. We expect to continue to be opportunistic in purchasing company stock with the cash flows we anticipate generating in fiscal 2019.

 

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Other

 

The following table summarizes our contractual obligations of the types specified:

 

 

 

 

 

Payments Due by Period

 

(Amounts in thousands)

 

Total

 

Less than
1 Year

 

1-3 Years

 

4-5 Years

 

More than
5 Years

 

Capital lease obligations

 

$

422

 

$

223

 

$

199

 

$

 

$

 

Operating lease obligations

 

360,351

 

68,108

 

119,014

 

81,914

 

91,315

 

Purchase obligations*

 

97,677

 

97,677

 

 

 

 

Contingent consideration

 

344

 

 

344

 

 

 

Toll charge tax liability**

 

228

 

228

 

 

 

 

Total contractual obligations

 

$

459,022

 

$

166,236

 

$

119,557

 

$

81,914

 

$

91,315

 

 

*We have purchase order commitments of $97.7 million related to open purchase orders, primarily with foreign and domestic casegoods, leather and fabric suppliers, which are generally cancellable if production has not begun.

**Under the 2017 Tax Act, we recorded a toll charge liability for the one-time deemed repatriation of unremitted foreign earnings. We expect to pay the toll charge all in one year.

 

Our consolidated balance sheet at the end of fiscal 2018 reflected a $1.0 million net liability for uncertain income tax positions. We do not expect that the net liability for uncertain income tax positions will significantly change within the next 12 months. We will either pay or release the liability for uncertain income tax positions as tax audits are completed or settled, statutes of limitation expire or other new information becomes available.

 

Continuing compliance with existing federal, state and local statutes addressing protection of the environment is not expected to have a significant effect upon our capital expenditures, earnings, competitive position or liquidity.

 

Business Outlook

 

The future for La-Z-Boy Incorporated is promising as we execute strategic initiatives to drive growth, deliver top-quartile profitability performance within the industry, and provide increasing returns to shareholders. We are making strategic investments across the company to ensure we remain a leader in the dynamic marketplace while delivering an enhanced customer experience through a combination of investments in online, in-store and in-home design options and services. Our consistent cash flow enables us to continue to invest in our brand and world-class global supply chain which we believe is a key to long-term success and meaningful financial returns for investors while providing the ability to pursue a multi-faceted e-commerce strategy to capture a new and younger consumer.  During the summer months, the furniture industry typically experiences weaker demand, and the majority of our plants shut down for one week of vacation and maintenance in July, during the first quarter.  Accordingly, the first quarter is usually the company’s weakest in terms of sales and earnings.

 

Critical Accounting Policies

 

We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles. In some cases, these principles require management to make difficult and subjective judgments regarding uncertainties and, as a result, such estimates and assumptions may significantly impact our financial results and disclosures. We base our estimates on currently known facts and circumstances, prior experience and other assumptions we believe to be reasonable. We use our best judgment in valuing these estimates and may, as warranted, use external advice. Actual results could differ from these estimates, assumptions, and judgments and these differences could be significant. We make frequent comparisons throughout the year of actual experience to our assumptions to reduce the likelihood of significant

 

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adjustments. We record adjustments when differences are known. The following critical accounting policies affect our consolidated financial statements.

 

Revenue Recognition and Related Allowances

 

Substantially all of our shipping agreements with third-party carriers transfer the risk of loss to our customers upon shipment. Accordingly, our shipments using third-party carriers are generally recognized as revenue when product is shipped. For product shipped on our company-owned trucks, we recognize revenue when the product is delivered. This revenue includes amounts we billed to customers for shipping. At the time we recognize revenue, we make provisions for estimated product returns and warranties, as well as other incentives that we may offer to customers. We also recognize revenue for amounts we receive from our customers in connection with our shared advertising cost arrangement. We import certain products from foreign ports, some of which are shipped directly to our domestic customers. In those cases, we do not recognize revenue until title passes to our customer, which normally occurs after the goods pass through U.S. Customs.

 

Incentives that we offer to our customers include cash discounts and other sales incentive programs. We record estimated cash discounts and other sales incentives as reductions of revenues when we recognize the revenue.

 

Trade accounts receivable arise from our sale of products on trade credit terms. Our management team reviews all significant accounts quarterly as to their past due balances and the collectability of the outstanding trade accounts receivable for possible write off. It is our policy to write off the accounts receivable against the allowance account when we deem the receivable to be uncollectible. Additionally, we review orders from dealers that are significantly past due, and we ship product only when our ability to collect payment for the new sales is reasonably assured.

 

Our allowance for credit losses reflects our best estimate of probable incurred losses inherent in the accounts receivable balance. We determine the allowance based on known troubled accounts, historical experience and other currently available evidence.

 

Long-Lived Assets

 

We review long-lived assets for impairment whenever events or changes in circumstances indicate that we may not be able to recover the carrying amount of an asset or asset group. Using either quoted market prices or an analysis of undiscounted projected future cash flows by asset groups, we determine whether there is any indicator of impairment requiring us to further assess the fair value of our long-lived assets. Our asset groups consist of our operating segments in our Upholstery reportable segment, our Casegoods segment, each of our retail stores, and other corporate assets.

 

Intangible Assets and Goodwill

 

We test intangibles and goodwill for impairment on an annual basis in the fourth quarter of each fiscal year, and more frequently if events or changes in circumstances indicate that an asset might be impaired. Indefinite-lived intangible assets include our American Drew trade name, and the reacquired right to own and operate La-Z-Boy Furniture Galleries® stores we have acquired. We have amortizable intangible assets related to the acquisition of the La-Z-Boy wholesale business in the United Kingdom and Ireland, which are primarily comprised of acquired customer relationships. We establish the fair value of our trade name and reacquired rights based upon the relief from royalty method. We establish the fair value of our other amortizable intangible assets based on the multi-period excess earnings method, a variant of the income approach, and also using the relief from royalty method.

 

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Our goodwill relates to the acquisition of La-Z-Boy Furniture Galleries® stores and the La-Z-Boy wholesale business in the United Kingdom and Ireland. The reporting unit for goodwill arising from retail store acquisitions is our Retail operating segment. The reporting unit for goodwill arising from the acquisition of the La-Z-Boy wholesale business in the United Kingdom and Ireland is that business. We establish the fair value for the reporting unit based on the discounted cash flows to determine if the fair value of our goodwill exceeds its carrying value.

 

Other Loss Reserves

 

We have various other loss exposures arising from the ordinary course of business, including inventory obsolescence, health insurance, litigation, environmental claims, insured and self-insured workers’ compensation, restructuring charges, and product liabilities. Establishing loss reserves requires us to use estimates and management’s judgment with respect to risk and ultimate liability. We use legal counsel or other experts, including actuaries as appropriate, to assist us in developing estimates. Due to the uncertainties and potential changes in facts and circumstances, additional charges related to these reserves could be required in the future.

 

We have various excess loss coverages for health insurance, auto, product liability and workers’ compensation liabilities. Our deductibles generally do not exceed $1.5 million.

 

Income Taxes

 

We use the asset and liability method to account for income taxes. We recognize deferred tax assets and liabilities based on the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. We measure deferred tax assets and liabilities using enacted tax rates in effect for the year in which we expect to recover or settle those temporary differences. When we record deferred tax assets, we are required to estimate, based on forecasts of taxable earnings in the relevant tax jurisdiction, whether we are more likely than not to recover on them. In making judgments about realizing the value of our deferred tax assets, we consider historic and projected future operating results, the eligible carry-forward period, tax law changes and other relevant considerations.

 

Pensions

 

We maintain a defined benefit pension plan for eligible factory hourly employees at our La-Z-Boy operating unit. The plan does not allow new participants, but active participants continue to earn service credits. Annual net periodic expense and benefit liabilities under the plan are determined on an actuarial basis using various assumptions and estimates including discount rates, long-term rates of return, estimated remaining years of service, and estimated life expectancy. Each year, we compare the more significant assumptions used to our actual experience, and we adjust the assumptions if warranted.

 

We evaluate our pension plan discount rate assumption annually. The discount rate is based on a single rate developed after matching a pool of high-quality bond payments to the plan’s expected future benefit payments. We used a discount rate of 4.2% at April 28, 2018, compared with a rate of 4.1% at both April 29, 2017 and April 30, 2016. We used the same methodology for determining the discount rate in fiscal 2018, fiscal 2017, and fiscal 2016.

 

We fund pension benefits through deposits with trustees and satisfy, at a minimum, the applicable funding regulations.

 

In addition to evaluating the discount rate we use to determine our pension obligation, each year we evaluate our assumption as to our expected return on plan assets, taking into account the trust’s asset allocation, investment strategy, and returns expected to be earned over the life of the plan. The rate of return

 

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assumption was 4.2% and 4.5% at April 28, 2018 and April 29, 2017, respectively. The expected rate of return assumption as of April 28, 2018, will be used to determine pension expense for fiscal 2019.

 

We are planning to make a discretionary contribution of approximately $7 million to our defined benefit pension plan in fiscal 2019, although no contribution is required. After considering all relevant assumptions, we expect that the plan’s fiscal 2019 pension expense will be approximately $3.8 million, compared with $4.2 million in fiscal 2018. A 25 basis point change in our discount rate or expected return on plan assets would not have a material impact on our results of operations.

 

Product Warranties

 

We account for product warranties by accruing an estimated liability when we recognize revenue on the sale of warranted product. We estimate future warranty claims based on claim experience and any additional anticipated future costs on previously sold product. We incorporate repair costs in our liability estimates, including materials, labor, and overhead amounts necessary to perform repairs, and any costs associated with delivering repaired product to our customers and consumers. We use considerable judgment in making our estimates. We record differences between our estimated and actual costs when the differences are known.

 

Stock-Based Compensation

 

We measure stock-based compensation cost for equity-based awards on the grant date based on the awards’ fair value, and recognize expense over the vesting period. We measure stock-based compensation cost for liability-based awards on the grant date based on the awards’ fair value, and recognize expense over the vesting period. We remeasure the liability for these awards and adjust their fair value at the end of each reporting period until paid. We recognize compensation cost for stock-based awards that vest based on performance conditions ratably over the vesting periods when the vesting of such awards becomes probable. Determining the probability of award vesting requires judgment, including assumptions about future operating performance. While the assumptions we use to calculate and account for stock-based compensation awards represent management’s best estimates, these estimates involve inherent uncertainties and the application of our management’s best judgment. As a result, if we revise our assumptions and estimates, our stock-based compensation expense could be materially different in the future.

 

We estimate the fair value of each option grant using a Black-Scholes option-pricing model. We estimate expected volatility based on the historic volatility of our common shares. We estimate the average expected life using the contractual term of the stock option and expected employee exercise and post-vesting employment termination trends. We base the risk-free rate on U.S. Treasury issues with a term equal to the expected life assumed at the date of grant. We estimate forfeitures at the date of grant based on historic experience.

 

We estimate the fair value of each performance award grant that vests based on a market condition using a Monte Carlo valuation model. The Monte Carlo model incorporates more complex variables than closed-form models such as the Black-Scholes option valuation model used for option grants. The Monte Carlo valuation model simulates a distribution of stock prices to yield an expected distribution of stock prices over the remaining performance period. The stock-paths are simulated using volatilities calculated with historical information using data from a look-back period that is equal to the vesting period. The model assumes a zero-coupon, risk-free interest rate with a term equal to the vesting period. The simulations are repeated many times and the mean of the discounted values is calculated as the grant date fair value for the award. The final payout of the award as calculated by the model is then discounted back to the grant date using the risk-free interest rate.

 

Both the Monte Carlo and Black-Scholes methodologies are based, in part, on inputs for which there are little or no observable market data, requiring us to develop our own assumptions. Inherent in both of these

 

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models are assumptions related to expected stock-price volatility, expected life, risk-free interest rate, and dividend yield.

 

Recent Accounting Pronouncements

 

The following is a discussion of the recent accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”) that we are currently assessing and which we believe could have a significant impact on our financial statements or related disclosures.

 

In May 2014, the FASB issued a new accounting standard that requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new standard supersedes virtually all existing authoritative accounting guidance on revenue recognition and requires additional disclosures and greater use of estimates and judgments. During July 2015, the FASB deferred the effective date of the revenue recognition standard by one year, thus making the new accounting standard effective beginning with our fiscal 2019. We will apply the modified retrospective approach when we implement the new standard in fiscal 2019. We have reviewed substantially all of our contracts and other revenue streams and determined that while the application of the new standard will not have a material change in the amount of or timing for recognizing revenue, we anticipate that it will have a significant impact on our financial statement disclosures related to disaggregated revenue, customer deposits and contract assets and liabilities, as well as the presentation of contract assets and liabilities on our consolidated balance sheet.

 

In February 2016, the FASB issued a new accounting standard requiring all operating leases that a lessee enters into to be recorded on its balance sheet. Under this standard, the lessee is required to record an asset for the right to use the underlying asset for the lease term and a corresponding liability for the contractual lease payments. This standard will be effective beginning with our fiscal 2020. We are currently reviewing our leases and gathering the necessary information to adopt this standard when it becomes effective. We anticipate that adoption of this standard will have a material impact on our consolidated balance sheet as we have a significant number of operating leases.

 

In June 2016, the FASB issued a new accounting standard that amends current guidance on other-than-temporary impairments of available-for-sale debt securities. This amended guidance requires the use of an allowance to record estimated credit losses on these assets when the fair value is below the amortized cost of the asset. This standard also removes the evaluation of the length of time that a security has been in a loss position to avoid recording a credit loss. We are required to adopt this standard for our fiscal 2021 and apply it through a cumulative-effect adjustment to retained earnings. We are still assessing the impact this guidance will have on our consolidated financial statements and related disclosures.

 

In January 2017, the FASB issued a new accounting standard simplifying the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. An entity should now perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. This standard permits early adoption with the requirement to adopt by our fiscal 2021.We plan to early adopt this standard in fiscal 2019. We do not believe that adoption of this standard will have a material impact on consolidated financial statements or disclosures.

 

In February 2018, the FASB issued a new accounting standard that allows entities to reclass stranded income tax effects resulting from the Tax Cuts and Jobs Act (the “Tax Act”) from accumulated other comprehensive income to retained earnings in their consolidated financial statements. Under the Tax Act, deferred taxes were adjusted to reflect the reduction of the historical corporate income tax rate to the newly enacted corporate income tax rate which left the tax effects on items within accumulated other comprehensive income stranded at the historical tax rate. This standard may be early adopted in any interim period and should be applied either in the period of adoption or retrospectively to each period that was

 

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affected by the change in the federal corporate tax rate under the Tax Act. This standard will be effective for our fiscal 2020. We are still assessing the impact this standard will have on our consolidated financial statements and related disclosures.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

While we had no variable rate borrowings at April 28, 2018, we could be exposed to market risk from changes in interest rates if we incur variable rate debt in the future. Based on our current and expected levels of exposed liabilities, management estimates that a one percentage point change in interest rates would not have a material impact on our results of operations for fiscal 2019.

 

We are exposed to market risk from changes in the value of foreign currencies primarily related to our plant in Mexico, our wholesale and retail businesses in Canada, our wholesale business in the United Kingdom, and our majority-owned joint ventures in Thailand. In Mexico, we pay wages and other local expenses in Mexican Pesos. In our Canada wholesale business we pay wages and other local expenses in Canadian Dollars. We recognize sales and pay wages and other local expenses related to our wholesale business in the United Kingdom in Great British Pounds, and our Canadian retail business in Canadian Dollars. In Thailand, we pay wages and other local expenses in the Thai Baht. Nonetheless, gains and losses resulting from market changes in the value of foreign currencies have not had and are not currently expected to have a significant effect on our consolidated results of operations. A decrease in the value of foreign currencies in relation to the U.S. Dollar could impact the profitability of some of our vendors and translate into higher prices from our suppliers, but we believe that, in that event, our competitors would experience a similar impact.

 

We are exposed to market risk with respect to commodity and transportation costs, principally related to commodities we use in producing our products, including steel, wood and polyurethane foam, in addition to transportation costs for delivering our products. As commodity prices and transportation costs increase, we determine whether a price increase to our customers to offset these increases is warranted. To the extent that an increase in these costs would have a material impact on our results of operations, we believe that our competitors would experience a similar impact.

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

Management’s Report to Our Shareholders

 

Management’s Responsibility for Financial Information

 

Management is responsible for the consistency, integrity and preparation of the information contained in this Annual Report on Form 10-K. The consolidated financial statements and other information contained in this Annual Report on Form 10-K have been prepared in accordance with accounting principles generally accepted in the United States of America and include necessary judgments and estimates by management.

 

To fulfill our responsibility, we maintain comprehensive systems of internal control designed to provide reasonable assurance that assets are safeguarded and transactions are executed in accordance with established procedures. The concept of reasonable assurance is based upon recognition that the cost of the controls should not exceed the benefit derived. We believe our systems of internal control provide this reasonable assurance.

 

The board of directors exercised its oversight role with respect to our systems of internal control primarily through its audit committee, which is comprised of independent directors. The committee oversees our systems of internal control, accounting practices, financial reporting and audits to assess whether their quality, integrity, and objectivity are sufficient to protect shareholders’ investments.

 

In addition, our consolidated financial statements have been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, whose report also appears in this Annual Report on Form 10-K.

 

Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as that term is defined in Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal controls over financial reporting based upon the framework in “Internal Control — Integrated Framework” set forth by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of April 28, 2018. PricewaterhouseCoopers LLP, an independent registered public accounting firm, audited the effectiveness of the Company’s internal control over financial reporting as of April 28, 2018, as stated in its report which appears herein.

 

/s/ Kurt L. Darrow

 

Kurt L. Darrow

 

Chairman, President and Chief Executive Officer

 

June 19, 2018

 

 

 

/s/ Louis M. Riccio Jr.

 

Louis M. Riccio Jr.

 

Senior Vice President and Chief Financial Officer

 

June 19, 2018

 

 

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Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Shareholders of La-Z-Boy Incorporated

 

Opinions on the Financial Statements and Internal Control over Financial Reporting

 

We have audited the accompanying consolidated balance sheets of La-Z-Boy Incorporated and its subsidiaries as of April 28, 2018 and April 29, 2017, and the related consolidated statements of income, of comprehensive income, of changes in equity and cash flows for each of the three years in the period ended April 28, 2018, including the related notes and the financial statement schedule listed in the index appearing under Item 15(a)(2) of this Form 10-K (collectively referred to as the “consolidated financial statements”).  We also have audited the Company’s internal control over financial reporting as of April 28, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of April 28, 2018 and April 27, 2017, and the results of their operations and their cash flows for each of the three years in the period ended April 28, 2018 in conformity with accounting principles generally accepted in the United States of America.  Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of April 28, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

 

Basis for Opinions

 

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting.  Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits.  We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB.  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

 

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.  Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.  Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.  Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

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Definition and Limitations of Internal Control over Financial Reporting

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Detroit, Michigan

June 19, 2018

 

We have served as the Company’s auditor since 1968.

 

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LA-Z-BOY INCORPORATED

CONSOLIDATED STATEMENT OF INCOME

 

 

 

Fiscal Year Ended

 

(Amounts in thousands, except per share data)

 

(52 weeks)
4/28/2018

 

(52 weeks)
4/29/2017

 

(53 weeks)
4/30/2016

 

Sales

 

$

1,583,947

 

$

1,520,060

 

$

1,525,398

 

Cost of sales

 

961,200

 

910,757

 

940,420

 

Gross profit

 

622,747

 

609,303

 

584,978

 

Selling, general and administrative expense

 

493,378

 

475,961

 

459,647

 

Operating income

 

129,369

 

133,342

 

125,331

 

Interest expense

 

538

 

1,073

 

486

 

Interest income

 

1,709

 

981

 

827

 

Other income (expense), net

 

(1,650

)

(2,510

)

(629

)

Income before income taxes

 

128,890

 

130,740

 

125,043

 

Income tax expense

 

47,295

 

43,756

 

44,080

 

Net income

 

81,595

 

86,984

 

80,963

 

Net income attributable to noncontrolling interests

 

(729

)

(1,062

)

(1,711

)

Net income attributable to La-Z-Boy Incorporated

 

$

80,866

 

$

85,922

 

$

79,252

 

 

 

 

 

 

 

 

 

Basic weighted average common shares

 

47,621

 

48,963

 

50,194

 

Basic net income attributable to La-Z-Boy Incorporated per share

 

$

1.69

 

$

1.75

 

$

1.57

 

 

 

 

 

 

 

 

 

Diluted weighted average common shares

 

48,135

 

49,470

 

50,765

 

Diluted net income attributable to La-Z-Boy Incorporated per share

 

$

1.67

 

$

1.73

 

$

1.55

 

 

 

 

 

 

 

 

 

Dividends declared per share

 

$

0.46

 

$

0.42

 

$

0.36

 

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

 

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LA-Z-BOY INCORPORATED

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 

 

 

Fiscal Year Ended

 

(Amounts in thousands)

 

(52 weeks)
4/28/2018

 

(52 weeks)
4/29/2017

 

(53 weeks)
4/30/2016

 

Net income

 

$

81,595

 

$

86,984

 

$

80,963

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

Currency translation adjustment

 

4,435

 

(428

)

(2,557

)

Change in fair value of cash flow hedges, net of tax

 

80

 

360

 

274

 

Net unrealized gains (losses) on marketable securities, net of tax

 

(376

)

694

 

(547

)

Net pension amortization and actuarial gain, net of tax

 

4,665

 

545

 

374

 

Total other comprehensive income (loss)

 

8,804

 

1,171

 

(2,456

)

Total comprehensive income before noncontrolling interests

 

90,399

 

88,155

 

78,507

 

Comprehensive income attributable to noncontrolling interests

 

(1,849

)

(1,116

)

(1,116

)

Comprehensive income attributable to La-Z-Boy Incorporated

 

$

88,550

 

$

87,039

 

$

77,391

 

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

 

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LA-Z-BOY INCORPORATED

CONSOLIDATED BALANCE SHEET

 

(Amounts in thousands, except par value)

 

4/28/2018

 

4/29/2017

 

Current assets

 

 

 

 

 

Cash and equivalents

 

$

134,515

 

$

141,860

 

Restricted cash

 

2,356

 

8,999

 

Receivables, net of allowance of $1,956 at 4/28/18 and $2,563 at 4/29/17

 

154,055

 

150,846

 

Inventories, net

 

184,841

 

175,114

 

Other current assets

 

42,451

 

40,603

 

Total current assets

 

518,218

 

517,422

 

Property, plant and equipment, net

 

180,882

 

169,132

 

Goodwill

 

75,254

 

74,245

 

Other intangible assets, net

 

18,190

 

18,489

 

Deferred income taxes — long-term

 

21,265

 

40,131

 

Other long-term assets, net

 

79,158

 

69,436

 

Total assets

 

$

892,967

 

$

888,855

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

Current portion of long-term debt

 

$

223

 

$

219

 

Accounts payable

 

62,403

 

51,282

 

Accrued expenses and other current liabilities

 

118,721

 

147,175

 

Total current liabilities

 

181,347

 

198,676

 

Long-term debt

 

199

 

296

 

Other long-term liabilities

 

86,205

 

88,778

 

Contingencies and commitments

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

Preferred shares — 5,000 authorized; none issued

 

 

 

Common shares, $1 par value — 150,000 authorized; 46,788 outstanding at 4/28/18 and 48,472 outstanding at 4/29/17

 

46,788

 

48,472

 

Capital in excess of par value

 

298,948

 

289,632

 

Retained earnings

 

291,644

 

284,698

 

Accumulated other comprehensive loss

 

(25,199

)

(32,883

)

Total La-Z-Boy Incorporated shareholders’ equity

 

612,181

 

589,919

 

Noncontrolling interests

 

13,035

 

11,186

 

Total equity

 

625,216

 

601,105

 

Total liabilities and equity

 

$

892,967

 

$

888,855

 

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

 

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LA-Z-BOY INCORPORATED

CONSOLIDATED STATEMENT OF CASH FLOWS

 

 

 

Fiscal Year Ended

 

(Amounts in thousands)

 

(52 weeks)
4/28/2018

 

(52 weeks)
4/29/2017

 

(53 weeks)
4/30/2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income

 

$

81,595

 

$

86,984

 

$

80,963

 

Adjustments to reconcile net income to cash provided by operating activities

 

 

 

 

 

 

 

(Gain) loss on disposal of assets

 

(2,108

)

(224

)

384

 

Gain on conversion of investment

 

(2,204

)

 

 

Gain on sale of investments

 

(770

)

(471

)

(436

)

Change in deferred taxes

 

17,261

 

569

 

4,581

 

Change in provision for doubtful accounts

 

276

 

(291

)

(660

)

Depreciation and amortization

 

31,767

 

29,131

 

26,517

 

Stock-based compensation expense

 

9,474

 

8,864

 

8,292

 

Pension plan contributions

 

(2,000

)

(2,300

)

(7,000

)

Change in receivables

 

(2,801

)

(7,850

)

10,730

 

Change in inventories

 

(8,009

)

12,517

 

(14,621

)

Change in other assets

 

(3,245

)

(1,211

)

4,148

 

Change in accounts payable

 

6,602

 

4,541

 

(1,007

)

Change in other liabilities

 

(10,088

)</