Table of Contents

 

 

 

GRAPHIC

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549-1004

FORM 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

FOR QUARTERLY PERIOD ENDED OCTOBER 25, 2014

 

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.)

 

1284 North Telegraph Road, Monroe, Michigan

 

48162-3390

(Address of principal executive offices)

 

(Zip Code)

 

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

 

None

(Former name, former address and former fiscal year, if changed since last report.)

 

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 (§ 232.405 of this chapter) 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 whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

Smaller reporting company 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

 

The number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

Class

 

Outstanding at November 11, 2014

Common Shares, $1.00 par value

 

51,772,022

 

 

 



Table of Contents

 

LA-Z-BOY INCORPORATED
FORM 10-Q SECOND QUARTER OF FISCAL 2015

 

TABLE OF CONTENTS

 

 

Page
Number(s)

 

 

PART I Financial Information (Unaudited)

3

 

 

Item 1.

Financial Statements

3

 

 

 

Consolidated Statement of Income

3

 

 

 

Consolidated Statement of Comprehensive Income

5

 

 

 

Consolidated Balance Sheet

6

 

 

 

Consolidated Statement of Cash Flows

7

 

 

 

Consolidated Statement of Changes in Equity

8

 

 

 

Notes to Consolidated Financial Statements

9

 

 

 

Note 1. Basis of Presentation

9

 

 

 

Note 2. Restructuring

9

 

 

 

Note 3. Discontinued Operations

9

 

 

 

Note 4. Inventories

11

 

 

 

Note 5. Investments

11

 

 

 

Note 6. Pension Plans

12

 

 

 

Note 7. Product Warranties

12

 

 

 

Note 8. Stock-Based Compensation

13

 

 

 

Note 9. Accumulated Other Comprehensive Loss

16

 

 

 

Note 10. Segment Information

18

 

 

 

Note 11. Income Taxes

19

 

 

 

Note 12. Earnings per Share

19

 

 

 

Note 13. Fair Value Measurements

20

 

 

 

Note 14. Recent Accounting Pronouncements

21

 

 

 

 

 

 

 

Item 2.

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

21

 

 

 

Cautionary Statement Concerning Forward-Looking Statements

22

 

 

 

Introduction

23

 

 

 

Results of Operations

24

 

 

 

Liquidity and Capital Resources

33

 

 

 

Critical Accounting Policies

35

 

 

 

 

 

 

 

 

Business Outlook

36

 

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

36

 

 

Item 4.

Controls and Procedures

36

 

 

 

 

 

PART II Other Information

37

 

 

Item 1A.

Risk Factors

37

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

37

 

 

Item 6.

Exhibits

38

 

 

 

 

 

Signature Page

39

 

2



Table of Contents

 

PART I — FINANCIAL INFORMATION (UNAUDITED)

 

ITEM 1. FINANCIAL STATEMENTS

 

LA-Z-BOY INCORPORATED
CONSOLIDATED STATEMENT OF INCOME

 

 

 

Quarter Ended

 

(Unaudited, amounts in thousands, except per share data)

 

10/25/14

 

10/26/13

 

Sales

 

$

365,601

 

$

352,271

 

Cost of sales

 

 

 

 

 

Cost of goods sold

 

235,716

 

229,727

 

Restructuring

 

(10

)

(142

)

Total cost of sales

 

235,706

 

229,585

 

Gross profit

 

129,895

 

122,686

 

Selling, general and administrative expense

 

99,683

 

96,568

 

Restructuring

 

20

 

 

Operating income

 

30,192

 

26,118

 

Interest expense

 

145

 

133

 

Interest income

 

233

 

176

 

Other income (expense), net

 

152

 

(279

)

Income from continuing operations before income taxes

 

30,432

 

25,882

 

Income tax expense

 

10,743

 

8,425

 

Income from continuing operations

 

19,689

 

17,457

 

Income (loss) from discontinued operations, net of tax

 

285

 

(440

)

Net income

 

19,974

 

17,017

 

Net income attributable to noncontrolling interests

 

(445

)

(273

)

Net income attributable to La-Z-Boy Incorporated

 

$

19,529

 

$

16,744

 

 

 

 

 

 

 

Net income attributable to La-Z-Boy Incorporated:

 

 

 

 

 

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

 

$

19,244

 

$

17,184

 

Income (loss) from discontinued operations

 

285

 

(440

)

Net income attributable to La-Z-Boy Incorporated

 

$

19,529

 

$

16,744

 

 

 

 

 

 

 

Basic average shares

 

52,279

 

52,537

 

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

 

 

 

 

 

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

 

$

0.37

 

$

0.33

 

Income (loss) from discontinued operations

 

 

(0.01

)

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

 

$

0.37

 

$

0.32

 

 

 

 

 

 

 

Diluted average shares

 

52,723

 

53,261

 

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

 

 

 

 

 

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

 

$

0.36

 

$

0.32

 

Income (loss) from discontinued operations

 

0.01

 

(0.01

)

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

 

$

0.37

 

$

0.31

 

 

 

 

 

 

 

Dividends declared per share

 

$

0.06

 

$

0.04

 

 

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

 

3



Table of Contents

 

LA-Z-BOY INCORPORATED
CONSOLIDATED STATEMENT OF INCOME

 

 

 

Six Months Ended

 

(Unaudited, amounts in thousands, except per share data)

 

10/25/14

 

10/26/13

 

Sales

 

$

692,581

 

$

657,773

 

Cost of sales

 

 

 

 

 

Cost of goods sold

 

451,547

 

433,676

 

Restructuring

 

(367

)

(55

)

Total cost of sales

 

451,180

 

433,621

 

Gross profit

 

241,401

 

224,152

 

Selling, general and administrative expense

 

194,698

 

183,269

 

Restructuring

 

20

 

 

Operating income

 

46,683

 

40,883

 

Interest expense

 

277

 

269

 

Interest income

 

435

 

356

 

Other income (expense), net

 

(106

)

258

 

Income from continuing operations before income taxes

 

46,735

 

41,228

 

Income tax expense

 

16,498

 

13,870

 

Income from continuing operations

 

30,237

 

27,358

 

Income (loss) from discontinued operations, net of tax

 

2,782

 

(406

)

Net income

 

33,019

 

26,952

 

Net income attributable to noncontrolling interests

 

(409

)

(618

)

Net income attributable to La-Z-Boy Incorporated

 

$

32,610

 

$

26,334

 

 

 

 

 

 

 

Net income attributable to La-Z-Boy Incorporated:

 

 

 

 

 

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

 

$

29,828

 

$

26,740

 

Income (loss) from discontinued operations

 

2,782

 

(406

)

Net income attributable to La-Z-Boy Incorporated

 

$

32,610

 

$

26,334

 

 

 

 

 

 

 

Basic average shares

 

52,235

 

52,440

 

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

 

 

 

 

 

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

 

$

0.57

 

$

0.51

 

Income (loss) from discontinued operations

 

0.05

 

(0.01

)

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

 

$

0.62

 

$

0.50

 

 

 

 

 

 

 

Diluted average shares

 

52,662

 

53,176

 

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

 

 

 

 

 

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

 

$

0.56

 

$

0.50

 

Income (loss) from discontinued operations

 

0.06

 

(0.01

)

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

 

$

0.62

 

$

0.49

 

 

 

 

 

 

 

Dividends declared per share

 

$

0.12

 

$

0.08

 

 

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

 

4



Table of Contents

 

LA-Z-BOY INCORPORATED
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 

 

 

Quarter Ended

 

(Unaudited, amounts in thousands)

 

10/25/14

 

10/26/13

 

Net income

 

$

19,974

 

$

17,017

 

Other comprehensive income (loss)

 

 

 

 

 

Currency translation adjustment

 

(482

)

(64

)

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

 

(305

)

(84

)

Net unrealized gain (loss) on marketable securities, net of tax

 

(112

)

372

 

Net pension amortization, net of tax

 

435

 

548

 

Total other comprehensive income (loss)

 

(464

)

772

 

Total comprehensive income before allocation to noncontrolling interests

 

19,510

 

17,789

 

Comprehensive income attributable to noncontrolling interests

 

(310

)

(277

)

Comprehensive income attributable to La-Z-Boy Incorporated

 

$

19,200

 

$

17,512

 

 

 

 

Six Months Ended

 

(Unaudited, amounts in thousands)

 

10/25/14

 

10/26/13

 

Net income

 

$

33,019

 

$

26,952

 

Other comprehensive income (loss)

 

 

 

 

 

Currency translation adjustment

 

46

 

(1,307

)

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

 

(200

)

(364

)

Net unrealized gain on marketable securities, net of tax

 

99

 

645

 

Net pension amortization, net of tax

 

869

 

1,095

 

Total other comprehensive income

 

814

 

69

 

Total comprehensive income before allocation to noncontrolling interests

 

33,833

 

27,021

 

Comprehensive income attributable to noncontrolling interests

 

(387

)

(168

)

Comprehensive income attributable to La-Z-Boy Incorporated

 

$

33,446

 

$

26,853

 

 

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

 

5



Table of Contents

 

LA-Z-BOY INCORPORATED

CONSOLIDATED BALANCE SHEET

 

(Unaudited, amounts in thousands)

 

10/25/14

 

4/26/14

 

Current assets

 

 

 

 

 

Cash and equivalents

 

$

115,325

 

$

149,661

 

Restricted cash

 

5,285

 

12,572

 

Receivables, net of allowance of $11,288 at 10/25/14 and $12,368 at 4/26/14

 

156,403

 

152,614

 

Inventories, net

 

158,326

 

147,009

 

Deferred income taxes — current

 

15,566

 

15,037

 

Business held for sale

 

1,407

 

4,290

 

Other current assets

 

43,117

 

41,490

 

Total current assets

 

495,429

 

522,673

 

Property, plant and equipment, net

 

158,596

 

127,535

 

Goodwill

 

13,923

 

13,923

 

Other intangible assets

 

4,544

 

4,544

 

Deferred income taxes — long-term

 

33,227

 

32,430

 

Other long-term assets, net

 

65,007

 

70,190

 

Total assets

 

$

770,726

 

$

771,295

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

Current portion of long-term debt

 

$

353

 

$

7,497

 

Accounts payable

 

55,419

 

56,177

 

Business held for sale

 

442

 

832

 

Accrued expenses and other current liabilities

 

103,198

 

102,876

 

Total current liabilities

 

159,412

 

167,382

 

Long-term debt

 

85

 

277

 

Other long-term liabilities

 

79,303

 

73,918

 

Contingencies and commitments

 

 

 

Shareholders’ equity

 

 

 

 

 

Preferred shares — 5,000 authorized; none issued

 

 

 

Common shares, $1 par value — 150,000 authorized; 51,892 outstanding at 10/25/14 and 51,981 outstanding at 4/26/14

 

51,892

 

51,981

 

Capital in excess of par value

 

266,959

 

262,901

 

Retained earnings

 

235,400

 

238,384

 

Accumulated other comprehensive loss

 

(30,544

)

(31,380

)

Total La-Z-Boy Incorporated shareholders’ equity

 

523,707

 

521,886

 

Noncontrolling interests

 

8,219

 

7,832

 

Total equity

 

531,926

 

529,718

 

Total liabilities and equity

 

$

770,726

 

$

771,295

 

 

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

 

6



Table of Contents

 

LA-Z-BOY INCORPORATED

CONSOLIDATED STATEMENT OF CASH FLOWS

 

 

 

 

Six Months Ended

 

(Unaudited, amounts in thousands)

 

10/25/14

 

10/26/13

 

Cash flows from operating activities

 

 

 

 

 

Net income

 

$

33,019

 

$

26,952

 

Adjustments to reconcile net income to cash provided by (used for) operating activities

 

 

 

 

 

Restructuring

 

(332

)

(55

)

Deferred income tax benefit

 

(1,799

)

(391

)

Provision for doubtful accounts

 

(1,113

)

(1,994

)

Depreciation and amortization

 

10,996

 

11,661

 

Equity-based compensation expense

 

5,047

 

5,671

 

Change in receivables

 

(2,135

)

1,298

 

Change in inventories

 

(11,006

)

(10,561

)

Change in other assets

 

6,253

 

(1,920

)

Change in payables

 

(785

)

3,772

 

Change in other liabilities

 

(6,377

)

(2,020

)

Net cash provided by operating activities

 

31,768

 

32,413

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Proceeds from disposal of assets

 

6,534

 

2,241

 

Capital expenditures

 

(40,580

)

(14,323

)

Purchases of investments

 

(24,224

)

(23,180

)

Proceeds from sales of investments

 

17,827

 

18,196

 

Change in restricted cash

 

7,287

 

120

 

Net cash used for investing activities

 

(33,156

)

(16,946

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Payments on debt

 

(7,358

)

(263

)

Stock issued for stock and employee benefit plans

 

161

 

2,983

 

Excess tax benefit on stock option exercises

 

252

 

5,228

 

Purchases of common stock

 

(19,654

)

(13,681

)

Dividends paid

 

(6,274

)

(4,214

)

Net cash used for financing activities

 

(32,873

)

(9,947

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and equivalents

 

(75

)

(360

)

Change in cash and equivalents

 

(34,336

)

5,160

 

Cash and equivalents at beginning of period

 

149,661

 

131,085

 

Cash and equivalents at end of period

 

$

115,325

 

$

136,245

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing activities

 

 

 

 

 

Capital expenditures included in payables

 

$

5,339

 

$

 

 

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

 

7



Table of Contents

 

LA-Z-BOY INCORPORATED

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

 

(Unaudited, amounts in thousands)

 

Common
Shares

 

Capital in
Excess of
Par Value

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Loss

 

Non-
Controlling
Interests

 

Total

 

At April 27, 2013

 

$

52,392

 

$

241,888

 

$

226,044

 

$

(35,496

)

$

7,140

 

$

491,968

 

Net income

 

 

 

 

 

55,056

 

 

 

1,324

 

56,380

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

4,116

 

(730

)

3,386

 

Stock issued for stock and employee benefit plans, net of cancellations

 

937

 

2,395

 

(4,509

)

 

 

 

 

(1,177

)

Purchases of common stock

 

(1,348

)

(3,056

)

(27,693

)

 

 

 

 

(32,097

)

Stock option and restricted stock expense

 

 

 

8,739

 

 

 

 

 

 

 

8,739

 

Excess tax benefit from exercise of options

 

 

 

12,935

 

 

 

 

 

 

 

12,935

 

Dividends paid

 

 

 

 

 

(10,514

)

 

 

 

 

(10,514

)

Change in noncontrolling interests

 

 

 

 

 

 

 

 

 

98

 

98

 

At April 26, 2014

 

51,981

 

262,901

 

238,384

 

(31,380

)

7,832

 

529,718

 

Net income

 

 

 

 

 

32,610

 

 

 

409

 

33,019

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

836

 

(22

)

814

 

Stock issued for stock and employee benefit plans, net of cancellations

 

801

 

(1,113

)

(10,684

)

 

 

 

 

(10,996

)

Purchases of common stock

 

(890

)

(128

)

(18,636

)

 

 

 

 

(19,654

)

Stock option and restricted stock expense

 

 

 

5,047

 

 

 

 

 

 

 

5,047

 

Excess tax benefit from exercise of options

 

 

 

252

 

 

 

 

 

 

 

252

 

Dividends paid

 

 

 

 

 

(6,274

)

 

 

 

 

(6,274

)

At October 25, 2014

 

$

51,892

 

$

266,959

 

$

235,400

 

$

(30,544

)

$

8,219

 

$

531,926

 

 

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

 

8



Table of Contents

 

LA-Z-BOY INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 1: Basis of Presentation

 

The accompanying consolidated financial statements include the consolidated accounts of La-Z-Boy Incorporated and our majority-owned subsidiaries. The April 26, 2014, balance sheet was derived from our audited financial statements. The interim financial information was prepared in conformity with generally accepted accounting principles, which were applied on a basis consistent with those reflected in our fiscal 2014 Annual Report on Form 10-K filed with the Securities and Exchange Commission, but does not include all of the disclosures required by generally accepted accounting principles. In management’s opinion, the interim financial information includes all adjustments and accruals, consisting only of normal recurring adjustments (except as otherwise disclosed), which are necessary for a fair presentation of results for the respective interim period. The interim results reflected in the accompanying financial statements are not necessarily indicative of the results of operations which will occur for the full fiscal year ending April 25, 2015.

 

Note 2: Restructuring

 

During fiscal 2014, we committed to a restructuring of our casegoods business to transition to an all-import model for our wood furniture. We ceased casegoods manufacturing operations at our Hudson, North Carolina facility during the second quarter of fiscal 2015. As a result of this restructuring, we transitioned our remaining Kincaid and American Drew bedroom product lines to imported product and exited the hospitality business as we manufactured those products in our Hudson facility. We are transitioning our warehouse and repair functions from two North Wilkesboro, North Carolina facilities to Hudson. We sold one of the two North Wilkesboro facilities during the second quarter of fiscal 2015 and are currently marketing the second facility for sale. In addition, we sold most of the wood-working equipment from our Hudson plant during the first six months of fiscal 2015.

 

We have recorded pre-tax restructuring charges of $7.7 million ($5.0 million after tax) since the inception of this restructuring plan, with $4.5 million pre-tax ($2.9 million after tax) related to continuing operations and $3.2 million pre-tax ($2.1 million after tax) related to discontinued operations. These charges relate to severance and benefit-related costs and various asset write-downs, including fixed assets, inventory and tradenames. During the quarter and six months ended October 25, 2014, we recorded pre-tax restructuring charges of less than $0.1 million before and after tax and restructuring income of $0.3 million ($0.2 million after tax), respectively, mainly related to inventory recoveries net of severance and benefit related costs.

 

We had a remaining restructuring liability of $0.4 million as of October 25, 2014, which we expect to be settled by the end of fiscal 2015. We included restructuring charges related to discontinued operations in our income from discontinued operations in our consolidated statement of income.

 

Note 3: Discontinued Operations

 

During the fourth quarter of fiscal 2014, we sold substantially all of the assets of our Bauhaus U.S.A. business unit to a group of investors and also classified Lea Industries, a division of La-Z-Boy Greensboro, Inc., as a business held for sale as part of a larger restructuring initiative (see Note 2 for additional information).

 

The operating results of Bauhaus and Lea Industries are reported as discontinued operations for all periods presented. We had historically reported the results of our Bauhaus business unit as a component of our Upholstery segment and Lea Industries as a component of our Casegoods segment.

 

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In the first quarter of fiscal 2015, we recorded $3.8 million of income in discontinued operations related to our previously owned subsidiary, American Furniture Company, Incorporated. We sold this subsidiary in fiscal 2007, and reported it as discontinued operations at that time. The income related to the Continued Dumping and Subsidy Offset Act of 2000, which provides for distribution of duties, collected by U.S. Customs and Border Protection from antidumping cases, to domestic producers that supported the antidumping petition related to wooden bedroom furniture imported from China. When we sold American Furniture Company, Incorporated, our contract provided that we would receive a portion of any such duties to which that entity was entitled. That entity subsequently filed for bankruptcy. The funds were distributed by U.S. Customs to the bankruptcy trustee and by the trustee to be held in trust for us during the first quarter of fiscal 2015 and were received by us early in the second quarter of fiscal 2015.

 

The results of our discontinued operations for the quarter and six months ended October 25, 2014, and October 26, 2013, were as follows:

 

 

 

Quarter Ended

 

Six Months Ended

 

(Amounts in thousands)

 

10/25/14

 

10/26/13

 

10/25/14

 

10/26/13

 

Net sales

 

$

3,301

 

$

14,132

 

$

6,788

 

$

27,543

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss) from discontinued operations

 

$

459

 

$

(699

)

$

561

 

$

(643

)

Income from Continued Dumping and Subsidy Offset Act, net

 

 

 

3,763

 

 

Income tax (expense) benefit

 

(174

)

259

 

(1,542

)

237

 

Income (loss) from discontinued operations, net of tax

 

$

285

 

$

(440

)

$

2,782

 

$

(406

)

 

The assets and liabilities of Lea Industries that we classified as held for sale were as follows:

 

(Amounts in thousands)

 

10/25/14

 

4/26/14

 

Assets

 

 

 

 

 

Receivables, net

 

$

1,015

 

$

1,190

 

Inventories, net

 

376

 

3,013

 

Other current assets

 

16

 

87

 

Total assets

 

$

1,407

 

$

4,290

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Accounts payable

 

$

9

 

$

234

 

Accrued expenses and other current liabilities

 

433

 

576

 

Other long-term liabilities

 

 

22

 

Total liabilities

 

$

442

 

$

832

 

 

In our consolidated statement of cash flows, we included the activity of these discontinued operations along with our activity from continuing operations.

 

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Note 4: Inventories

 

A summary of inventories is as follows:

 

(Unaudited, amounts in thousands)

 

10/25/14

 

4/26/14

 

Raw materials

 

$

74,707

 

$

71,247

 

Work in process

 

11,912

 

13,722

 

Finished goods

 

99,312

 

91,842

 

FIFO inventories

 

185,931

 

176,811

 

Excess of FIFO over LIFO

 

(27,605

)

(29,802

)

Inventories, net

 

$

158,326

 

$

147,009

 

 

During the second quarter of fiscal 2015, we ceased manufacturing casegoods product domestically, and as a result the stream of domestically manufactured inventory will not be replaced. This resulted in a $2.0 million reduction to our LIFO reserve during the second quarter of fiscal 2015, which we recorded as a component of cost of sales in our consolidated statement of income.

 

Note 5: Investments

 

In our consolidated balance sheet at October 25, 2014, we included $20.3 million of available-for-sale investments and $0.5 million of trading securities in other current assets and $39.1 million of available-for-sale investments in other long-term assets. In our consolidated balance sheet at April 26, 2014, we included available-for-sale investments of $15.9 million and trading securities of $1.8 million in other current assets and available-for-sale investments of $43.2 million in other long-term assets. At October 25, 2014, and April 26, 2014, $45.2 million and $44.7 million, respectively, of these investments were to enhance returns on our cash. We designated the remaining investments to fund future obligations of our non-qualified defined benefit retirement plan, our executive deferred compensation plan, and our performance compensation retirement plan. If there were a decline in the fair value of an investment below its cost and the decline was considered other-than-temporary, we would recognize the amount of decline below cost as part of our earnings.

 

The following is a summary of investments at October 25, 2014, and April 26, 2014:

 

As of October 25, 2014

 

(Unaudited, amounts in thousands)

 

Gross
Unrealized Gains

 

Gross
Unrealized Losses

 

Fair Value

 

Equity securities

 

$

1,436

 

$

(102

)

$

8,410

 

Fixed income

 

194

 

(45

)

50,802

 

Mutual funds

 

 

 

493

 

Other

 

1

 

(18

)

208

 

Total securities

 

$

1,631

 

$

(165

)

$

59,913

 

 

As of April 26, 2014

 

(Unaudited, amounts in thousands)

 

Gross
Unrealized Gains

 

Gross
Unrealized Losses

 

Fair Value

 

Equity securities

 

$

1,246

 

$

(52

)

$

8,216

 

Fixed income

 

166

 

(44

)

50,510

 

Mutual funds

 

 

 

1,787

 

Other

 

1

 

(10

)

425

 

Total securities

 

$

1,413

 

$

(106

)

$

60,938

 

 

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The following table summarizes sales of available-for-sale securities:

 

 

 

Quarter Ended

 

Six Months Ended

 

(Unaudited, amounts in thousands)

 

10/25/14

 

10/26/13

 

10/25/14

 

10/26/13

 

Proceeds from sales

 

$

7,405

 

$

9,636

 

$

17,827

 

$

18,196

 

Gross realized gains

 

31

 

32

 

45

 

45

 

Gross realized losses

 

(22

)

(29

)

(30

)

(65

)

 

The fair value of fixed income available-for-sale securities by contractual maturity was $20.3 million within one year, $28.2 million within two to five years, $1.9 million within six to ten years and $0.4 million thereafter.

 

Note 6: Pension Plans

 

Net periodic pension costs were as follows:

 

 

 

Quarter Ended

 

Six Months Ended

 

(Unaudited, amounts in thousands)

 

10/25/14

 

10/26/13

 

10/25/14

 

10/26/13

 

Service cost

 

$

279

 

$

311

 

$

558

 

$

622

 

Interest cost

 

1,267

 

1,206

 

2,534

 

2,412

 

Expected return on plan assets

 

(1,269

)

(1,700

)

(2,538

)

(3,399

)

Net amortization

 

665

 

892

 

1,330

 

1,783

 

Net periodic pension cost

 

$

942

 

$

709

 

$

1,884

 

$

1,418

 

 

Note 7: Product Warranties

 

We accrue an estimated liability for product warranties when we recognize revenue on the sale of warranted products. We estimate future warranty claims based on claims experience and any additional anticipated future costs on previously sold products. We incorporate repair costs into our liability estimates, including materials, labor and overhead amounts necessary to perform repairs and any costs associated with delivering repaired product to our customers. Approximately 95% of our warranty liability relates to our Upholstery segment as we generally warrant our products against defects for one year on fabric and leather, from one to ten years on cushions and padding, and up to a lifetime on certain mechanisms and frames. Our warranties cover labor costs relating to our parts for one year. Our warranty period begins when the consumer receives our product. We use considerable judgment in making our estimates, and we record differences between our actual and estimated costs when the differences are known.

 

A reconciliation of the changes in our product warranty liability for the quarter and six months ended October 25, 2014, and October 26, 2013, is as follows:

 

 

 

Quarter Ended

 

Six Months Ended

 

(Unaudited, amounts in thousands)

 

10/25/14

 

10/26/13

 

10/25/14

 

10/26/13

 

Balance as of the beginning of the period

 

$

15,256

 

$

15,821

 

$

16,013

 

$

15,525

 

Accruals during the period

 

4,600

 

3,884

 

8,917

 

7,672

 

Accrual adjustments

 

 

 

(953

)

 

Settlements during the period

 

(4,316

)

(3,776

)

(8,437

)

(7,268

)

Balance as of the end of the period

 

$

15,540

 

$

15,929

 

$

15,540

 

$

15,929

 

 

As of October 25, 2014, and April 26, 2014, we included $9.5 million and $9.8 million, respectively, of our product warranty liability in accrued expenses and other current liabilities in our consolidated balance sheet, and included the remainder in other long-term liabilities. We recorded accruals during the periods presented

 

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primarily to reflect charges that relate to warranties issued during the respective periods. Our accrual adjustments reflect a change in the prior estimates of our product warranty liability.

 

Note 8: Stock-Based Compensation

 

The table below summarizes the total stock-based compensation expense we recognized for all outstanding grants in our consolidated statement of income:

 

 

 

Quarter Ended

 

Six Months Ended

 

(Unaudited, amounts in thousands)

 

10/25/14

 

10/26/13

 

10/25/14

 

10/26/13

 

Equity-based awards expense

 

$

2,037

 

$

2,478

 

$

5,047

 

$

5,671

 

Liability-based awards expense

 

821

 

1,886

 

373

 

3,790

 

Total stock-based compensation expense

 

$

2,858

 

$

4,364

 

$

5,420

 

$

9,461

 

 

The table below summarizes the grants we made during the first six months of fiscal 2015:

 

(Unaudited, shares/units in thousands)

 

Shares/units
granted

 

Liability/
Equity
award

 

Settlement

 

Stock options

 

374

 

Equity

 

Common shares

 

Restricted stock

 

103

 

Equity

 

Common shares

 

Restricted stock units — directors

 

33

 

Equity

 

Common shares

 

Performance-based shares

 

192

 

Equity

 

Common shares

 

 

Stock Options. We granted 373,711 stock options to employees during the first quarter of fiscal 2015, and we also have stock options outstanding from previous grants. We account for stock options as equity-based awards because when they are exercised, they will be settled in common shares. We recognize compensation expense for stock options over the vesting period equal to the fair value on the date our compensation committee approved the awards. The vesting period for our stock options ranges from one to four years, with accelerated vesting upon retirement. We expense options granted to retirement eligible employees immediately. We estimate the fair value of the employee stock options at the date of grant using the Black-Scholes option-pricing model, which requires management to make certain assumptions. We estimate expected volatility based on the historical volatility of our common shares. We base the average expected life on 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 the grant.

 

We calculated the fair value of stock options granted during the first quarter of fiscal 2015 using the following assumptions:

 

(Unaudited)

 

7/26/14

 

Risk-free interest rate

 

1.59

%

Dividend rate

 

1.00

%

Expected life in years

 

5.0

 

Stock price volatility

 

54.40

%

Fair value per share

 

$

10.45

 

 

Stock Appreciation Rights. We did not grant any SARs to employees during the first six months of fiscal 2015, but we have SARs outstanding from previous grants. SARs will be paid in cash upon exercise and, accordingly, we account for SARs as liability-based awards that we will remeasure to reflect the fair value at the end of each

 

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reporting period. These awards vest at 25% per year, beginning one year from the grant date for a term of four years, with accelerated vesting upon retirement. We expense SARs granted to retirement eligible employees immediately. We estimate the fair value of SARs at the end of each period using the Black-Scholes option-pricing model, which requires management to make certain assumptions. We base the average expected life on the contractual term of the SARs and expected employee exercise and post-vesting employment termination trends (which is consistent with the expected life of our option awards). We base the risk-free rate on U.S. Treasury issues with a term equal to the expected life assumed at the end of the reporting period.

 

In fiscal 2014, we granted SARs as described in our Form 10-K for the fiscal year ended April 26, 2014. At October 25, 2014, we measured the fair value of the SARs granted during fiscal 2014 using the following assumptions:

 

(Unaudited)

 

10/25/14

 

Risk-free interest rate

 

1.05

%

Dividend rate

 

1.10

%

Expected life in years

 

3.63

 

Stock price volatility

 

43.20

%

Fair value per share

 

$

7.67

 

 

In fiscal 2013, we granted SARs as described in our Form 10-K for the fiscal year ended April 27, 2013. At October 25, 2014, we remeasured the fair value of the SARs granted during fiscal 2013 using the following assumptions:

 

(Unaudited)

 

10/25/14

 

Risk-free interest rate

 

1.05

%

Dividend rate

 

1.10

%

Expected life in years

 

2.71

 

Stock price volatility

 

35.22

%

Fair value per share

 

$

10.25

 

 

Restricted Stock. We awarded 102,811 shares of restricted stock to employees during the first six months of fiscal 2015. We issue restricted stock at no cost to the employees, and the shares are held in an escrow account until the vesting period ends. In the event of an employee’s termination during the escrow period, the shares are returned at no cost to the company. We account for restricted stock awards as equity-based awards because upon vesting they will be settled in common shares. The majority of the restricted stock shares were awarded in the first quarter of fiscal 2015 with a fair value of $23.63 per share, the market value of our common shares on the date of grant. We recognize compensation expense for restricted stock over the vesting period equal to the fair value on the date our compensation committee approved the awards. Restricted stock awards vest at 25% per year, beginning one year from the grant date for a term of four years.

 

Restricted Stock Units. We did not grant any restricted stock units to employees during the first six months of fiscal 2015, but we have restricted stock units outstanding from previous grants. We account for these units as liability-based awards because upon vesting these awards will be paid in cash. We measure and recognize initial compensation expense based on the market value (intrinsic value) of our common stock on the grant date and amortize the expense over the vesting period. We remeasure and adjust the liability based on the market value (intrinsic value) of our common shares on the last day of the reporting period until paid with a corresponding adjustment to reflect the cumulative amount of compensation expense. The fair value of each outstanding restricted stock unit at October 25, 2014, was $21.83, the market value of our common shares on the last day of

 

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the reporting period. Each restricted stock unit is the equivalent of one common share. Restricted stock units vest at 25% per year, beginning one year from the grant date for a term of four years.

 

During the second quarter of fiscal 2015, we granted 33,250 restricted stock units to our non-employee directors. These restricted stock units vest upon the director leaving the board. We account for these restricted stock units as equity-based awards as they will be settled in shares of our common stock upon vesting. We measure and recognize compensation expense for these awards based on the market price of our common shares on the date of grant, which was $21.81.

 

Performance Awards. During the first quarter of fiscal 2015, we granted 191,783 performance-based shares, and we also have performance-based share awards outstanding from previous grants. Payout of these grants depends on our financial performance (80%) and a market-based condition based on the total return our shareholders receive on their investment in our stock relative to returns earned through investments in other public companies (20%). The performance award opportunity ranges from 50% of the employee’s target award if minimum performance requirements are met to a maximum of 200% of the target award based on the attainment of certain financial and shareholder-return goals over a specific performance period, which is generally three fiscal years.

 

We account for performance-based shares as equity-based awards because upon vesting they will be settled in common shares. For shares that vest based on our results relative to the performance goals, we expense as compensation cost over the performance period the fair value of the shares as of the day we granted the awards, taking into account the probability that we will satisfy the performance goals. The fair value of each share in the awards we granted in fiscal 2015 based on attaining performance goals was $22.91, the market value of our common shares on the date we granted the awards less the dividends we expect to pay before the shares vest. For shares that vest based on market conditions, we use a Monte Carlo valuation model to estimate each share’s fair value as of the date of grant, and, similar to the way in which we expense awards of stock options, we expense compensation cost over the vesting period regardless of the value that award recipients ultimately receive. Based on the Monte Carlo model, the fair value as of the grant date of the fiscal 2015 and fiscal 2014 grants of shares that vest based on market conditions was $29.64 and $26.08, respectively.

 

We did not grant any performance-based units during the first six months of fiscal 2015, but we have outstanding performance-based unit awards from previous grants. We account for performance-based units as liability-based awards because upon vesting, they will be paid in cash. For units that vest based on our results relative to performance goals, we expense as compensation cost over the performance period the fair value of each unit, taking into account the probability that the performance goals will be attained. The fair value of each unit we granted in fiscal 2014 and fiscal 2013 based on attaining performance goals was $21.41 and $21.65, respectively, the market value of our common shares on the last day of the reporting period less the dividends we expect to pay before the awards vest. For performance-based units that vest based on market conditions, we use a Monte Carlo valuation model to estimate each unit’s fair value as of the last day of the reporting period. We remeasure and adjust the liability for these units based on the Monte Carlo valuation at the end of each reporting period until we pay out the units. Based on the Monte Carlo model, the fair value at October 25, 2014, of the fiscal 2014 and fiscal 2013 grants of units that vest based on market conditions was $28.22 and $32.67, respectively.

 

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Note 9: Accumulated Other Comprehensive Loss

 

The activity in accumulated other comprehensive loss for the quarter ended October 25, 2014, and October 26, 2013, is as follows:

 

(Unaudited, amounts in thousands)

 

Translation
adjustment

 

Change in
fair value of
cash flow
hedge

 

Unrealized
gain on
marketable
securities

 

Net pension
amortization
and net
actuarial
loss

 

Accumulated
other
comprehensive
loss

 

Balance at July 26, 2014

 

$

2,870

 

$

52

 

$

1,309

 

$

(34,446

)

$

(30,215

)

Changes before reclassifications

 

(347

)

(532

)

(173

)

 

(1,052

)

Amounts reclassified to net income

 

 

40

 

(9

)

702

 

733

 

Tax effect

 

 

187

 

70

 

(267

)

(10

)

Other comprehensive income (loss) attributable to La-Z-Boy Incorporated

 

(347

)

(305

)

(112

)

435

 

(329

)

Balance at October 25, 2014

 

$

2,523

 

$

(253

)

$

1,197

 

$

(34,011

)

$

(30,544

)

 

(Unaudited, amounts in thousands)

 

Translation
adjustment

 

Change in
fair value of
cash flow
hedge

 

Unrealized
gain on
marketable
securities

 

Net pension
amortization
and net
actuarial
loss

 

Accumulated
other
comprehensive
loss

 

Balance at July 27, 2013

 

$

3,990

 

$

(49

)

$

747

 

$

(40,433

)

$

(35,745

)

Changes before reclassifications

 

(68

)

(18

)

609

 

 

523

 

Amounts reclassified to net income

 

 

(119

)

(3

)

892

 

770

 

Tax effect

 

 

53

 

(234

)

(344

)

(525

)

Other comprehensive income (loss) attributable to La-Z-Boy Incorporated

 

(68

)

(84

)

372

 

548

 

768

 

Balance at October 26, 2013

 

$

3,922

 

$

(133

)

$

1,119

 

$

(39,885

)

$

(34,977

)

 

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Table of Contents

 

The activity in accumulated other comprehensive loss for the six months ended October 25, 2014, and October 26, 2013, is as follows:

 

(Unaudited, amounts in thousands)

 

Translation
adjustment

 

Change in
fair value of
cash flow
hedge

 

Unrealized
gain on
marketable
securities

 

Net pension
amortization
and net
actuarial
loss

 

Accumulated
other
comprehensive
loss

 

Balance at April 26, 2014

 

$

2,455

 

$

(53

)

$

1,098

 

$

(34,880

)

$

(31,380

)

Changes before reclassifications

 

68

 

(380

)

174

 

 

(138

)

Amounts reclassified to net income

 

 

58

 

(15

)

1,403

 

1,446

 

Tax effect

 

 

122

 

(60

)

(534

)

(472

)

Other comprehensive income (loss) attributable to La-Z-Boy Incorporated

 

68

 

(200

)

99

 

869

 

836

 

Balance at October 25, 2014

 

$

2,523

 

$

(253

)

$

1,197

 

$

(34,011

)

$

(30,544

)

 

(Unaudited, amounts in thousands)

 

Translation
adjustment

 

Change in
fair value of
cash flow
hedge

 

Unrealized
gain on
marketable
securities

 

Net pension
amortization
and net
actuarial
loss

 

Accumulated
other
comprehensive
loss

 

Balance at April 27, 2013

 

$

4,779

 

$

231

 

$

474

 

$

(40,980

)

$

(35,496

)

Changes before reclassifications

 

(857

)

(562

)

1,030

 

 

(389

)

Amounts reclassified to net income

 

 

(31

)

20

 

1,783

 

1,772

 

Tax effect

 

 

229

 

(405

)

(688

)

(864

)

Other comprehensive income (loss) attributable to La-Z-Boy Incorporated

 

(857

)

(364

)

645

 

1,095

 

519

 

Balance at October 26, 2013

 

$

3,922

 

$

(133

)

$

1,119

 

$

(39,885

)

$

(34,977

)

 

We reclassified the unrealized gain on marketable securities from accumulated other comprehensive loss to net income through other income (expense) in our consolidated statement of income, and reclassified the change in fair value of cash flow hedge and the net pension amortization to net income through selling, general and administrative expense.

 

The components of non-controlling interest for the quarter and six months ended October 25, 2014, and October 26, 2013, were as follows:

 

 

 

Quarter Ended

 

Six Months Ended

 

(Unaudited, amounts in thousands)

 

10/25/14

 

10/26/13

 

10/25/14

 

10/26/13

 

Balance as of the beginning of the period

 

$

7,909

 

$

6,771

 

$

7,832

 

$

7,140

 

Net income

 

445

 

273

 

409

 

618

 

Other comprehensive income (loss)

 

(135

)

4

 

(22

)

(450

)

Change in non-controlling interest

 

 

359

 

 

99

 

Balance as of the end of the period

 

$

8,219

 

$

7,407

 

$

8,219

 

$

7,407

 

 

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Table of Contents

 

Note 10: Segment Information

 

Our reportable operating segments are the Upholstery segment, the Casegoods segment and the Retail segment. During fiscal 2014, we sold our Bauhaus business unit and classified Lea Industries as held for sale. These operating units are presented as discontinued operations, and we have restated prior financial information for the change in composition of our Upholstery and Casegoods segments.

 

Upholstery Segment. The Upholstery segment consists of two operating units: La-Z-Boy and England. This segment manufactures or imports upholstered furniture. Upholstered furniture includes 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® and England Custom Comfort Center locations, major dealers and other independent retailers.

 

Casegoods Segment. The Casegoods segment consists of three brands: American Drew, Hammary, and Kincaid. This segment sells imported wood furniture to furniture retailers. Casegoods product includes bedroom, dining room, entertainment centers, occasional pieces and some manufactured coordinated upholstered furniture. The Casegoods segment sells to major dealers and other independent retailers, as well as La-Z-Boy Furniture Galleries® stores and operators of Comfort Studio® locations.

 

Retail Segment. The Retail segment consists of 107 company-owned La-Z-Boy Furniture Galleries® stores. The Retail segment sells upholstered furniture, and some casegoods and other accessories, to end consumers through the retail network.

 

 

 

Quarter Ended

 

Six Months Ended

 

(Unaudited, amounts in thousands)

 

10/25/14

 

10/26/13

 

10/25/14

 

10/26/13

 

Sales

 

 

 

 

 

 

 

 

 

Upholstery segment:

 

 

 

 

 

 

 

 

 

Sales to external customers

 

$

255,044

 

$

252,123

 

$

482,200

 

$

467,670

 

Intersegment sales

 

42,223

 

34,881

 

77,926

 

65,403

 

Upholstery segment sales

 

297,267

 

287,004

 

560,126

 

533,073

 

Casegoods segment:

 

 

 

 

 

 

 

 

 

Sales to external customers

 

25,455

 

26,252

 

51,408

 

48,922

 

Intersegment sales

 

3,433

 

2,705

 

6,403

 

4,834

 

Casegoods segment sales

 

28,888

 

28,957

 

57,811

 

53,756

 

 

 

 

 

 

 

 

 

 

 

Retail segment sales

 

84,589

 

73,359

 

157,494

 

139,633

 

Corporate and Other

 

513

 

537

 

1,479

 

1,548

 

Eliminations

 

(45,656

)

(37,586

)

(84,329

)

(70,237

)

Consolidated sales

 

$

365,601

 

$

352,271

 

$

692,581

 

$

657,773

 

 

 

 

 

 

 

 

 

 

 

Operating Income (Loss)

 

 

 

 

 

 

 

 

 

Upholstery segment

 

$

32,607

 

$

32,701

 

$

54,624

 

$

54,987

 

Casegoods segment

 

2,995

 

1,170

 

4,520

 

1,620

 

Retail segment

 

3,682

 

3,251

 

3,997

 

5,177

 

Restructuring

 

(10

)

142

 

347

 

55

 

Corporate and Other

 

(9,082

)

(11,146

)

(16,805

)

(20,956

)

Consolidated operating income

 

$

30,192

 

$

26,118

 

$

46,683

 

$

40,883

 

 

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Note 11: Income Taxes

 

Our effective tax rate for continuing operations for both the second quarter and first six months of fiscal 2015 was 35.3%. Our effective tax rate varies from the 35% statutory rate primarily due to state taxes, less the benefit of the U.S. manufacturing deduction and foreign earnings in jurisdictions with lower tax rates than the U.S.

 

Our effective tax rate for continuing operations in the second quarter and first six months of fiscal 2014 was 32.5% and 33.6%, respectively. The effective tax rate was lower in fiscal 2014 because we released a portion of our valuation allowance relating to our U.S. state deferred tax assets, resulting in a net tax benefit of $0.9 million. We determined during the second quarter of fiscal 2014 that we should reverse the valuation allowance because it had become more likely than not that we would realize the value of those deferred tax assets, a result primarily of our assessment of our cumulative pre-tax income in one jurisdiction. Absent this discrete adjustment, our effective tax rate would have been 36.0% for the second quarter of fiscal 2014 and 35.8% for the first six months of fiscal 2014.

 

Our consolidated balance sheet at the end of the second quarter of fiscal 2015 reflected a $1.1 million net liability for uncertain income tax positions. We do not expect this net liability to change significantly in 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.

 

Note 12: Earnings per Share

 

Certain share-based compensation awards that entitle their holders to receive non-forfeitable dividends prior to vesting are considered participating securities. We grant restricted stock awards that contain non-forfeitable rights to dividends on unvested shares, and we are required to include these participating securities in calculating our basic earnings per common share, using the two-class method.

 

The following is a reconciliation of the numerators and denominators we used in our computations of basic and diluted earnings per share:

 

 

 

Quarter Ended

 

Six Months Ended

 

(Unaudited, amounts in thousands)

 

10/25/14

 

10/26/13

 

10/25/14

 

10/26/13

 

Numerator (basic and diluted):

 

 

 

 

 

 

 

 

 

Net income attributable to La-Z-Boy Incorporated

 

$

19,529

 

$

16,744

 

$

32,610

 

$

26,334

 

Income allocated to participating securities

 

(103

)

(111

)

(187

)

(248

)

Net income available to common shareholders

 

$

19,426

 

$

16,633

 

$

32,423

 

$

26,086

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

52,279

 

52,537

 

52,235

 

52,440

 

Add:

 

 

 

 

 

 

 

 

 

Contingent common shares

 

161

 

320

 

132

 

305

 

Stock option dilution

 

283

 

404

 

295

 

431

 

Diluted weighted average common shares outstanding

 

52,723

 

53,261

 

52,662

 

53,176

 

 

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The above values for contingent common shares reflect the dilutive effect of common shares that we would have issued to employees under the terms of performance-based share awards if the relevant performance period for the award had been the reporting period.

 

For the quarter and six months ended October 25, 2014, we had outstanding options to purchase 0.4 million shares with a weighted average exercise price of $23.63. We excluded the effect of these options from our diluted share calculation since, for each period presented, the weighted average exercise price of the options was higher than the average market price, and including the options’ effect would have been anti-dilutive. We did not exclude any outstanding options from the diluted share calculation for the quarter and six months ended October 26, 2013.

 

Note 13: Fair Value Measurements

 

Accounting standards require that we put financial assets and liabilities into one of three categories based on the inputs we use to value them:

 

·                  Level 1 — Financial assets and liabilities that we value based on unadjusted quoted market prices for identical assets and liabilities in an active market that we have the ability to access.

 

·                  Level 2 — Financial assets and liabilities that we value based on quoted prices in markets that are not active or on model inputs that are observable for substantially the full term of the asset or liability.

 

·                  Level 3 — Financial assets and liabilities that we value based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement.

 

Accounting standards require that in making fair value measurements, we use observable market data when it is available. If we measure the fair value of an asset or liability using multiple inputs from different levels of the hierarchy, we are required to categorize the asset or liability as belonging to the lowest level with an input that is significant to the fair value measurement. We recognize transfers between levels at the end of the reporting period in which they occur.

 

In addition to assets and liabilities that we record at fair value on a recurring basis, we are required to record assets and liabilities at fair value on a non-recurring basis. We measure non-financial assets such as trade names, goodwill, and other long-lived assets at fair value when there is an indicator of impairment, and we record them at fair value only when we recognize an impairment loss.

 

The following table presents the fair value hierarchy for those assets we measured at fair value on a recurring basis at October 25, 2014, and April 26, 2014:

 

As of October 25, 2014

 

 

 

Fair Value Measurements

 

(Unaudited, amounts in thousands)

 

Level 1(a)

 

Level 2(a)

 

Level 3

 

Assets

 

 

 

 

 

 

 

Available-for-sale securities

 

$

1,194

 

$

58,226

 

$

 

Trading securities

 

 

493

 

 

Total

 

$

1,194

 

$

58,719

 

$

 

 

(a)         There were no transfers between Level 1 and Level 2 during fiscal 2015.

 

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As of April 26, 2014

 

 

 

Fair Value Measurements

 

(Unaudited, amounts in thousands)

 

Level 1(b)

 

Level 2(b)

 

Level 3

 

Assets

 

 

 

 

 

 

 

Available-for-sale securities

 

$

1,521

 

$

57,630

 

$

 

Trading securities

 

 

1,787

 

 

Total

 

$

1,521

 

$

59,417

 

$

 

 

(b)         There were no transfers between Level 1 and Level 2 during fiscal 2014.

 

At October 25, 2014, and April 26, 2014, we held available-for-sale marketable securities intended to enhance returns on our cash and to fund future obligations of our non-qualified defined benefit retirement plan, as well as trading securities to fund future obligations of our executive deferred compensation plan and our performance compensation retirement plan. The fair value measurements for our securities are based upon quoted prices in active markets, as well as through broker quotes and independent valuation providers, multiplied by the number of shares owned exclusive of any transaction costs.

 

Note 14: Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“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 the use of more estimates and judgments than the present standards as well as additional disclosures. The new accounting standard is effective for our fiscal year 2018, and we are assessing the potential impact to our consolidated financial statements and financial statement disclosures.

 

ITEM 2. 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 better understand our financial results. It should be read in conjunction with the accompanying Consolidated Financial Statements and related Notes to Consolidated Financial Statements. After a cautionary note about forward-looking statements, we begin with an introduction to our key businesses. We then provide discussions of our results of operations, liquidity and capital resources, and critical accounting policies.

 

This Management’s Discussion and Analysis only reflects results of our continuing operations, unless otherwise noted. During fiscal 2014, we sold substantially all of the assets of our Bauhaus U.S.A. business unit, and we marketed for sale our youth furniture business, Lea Industries, a division of La-Z-Boy Greensboro, Inc. In the accompanying financial statements, we reported the operating results of Bauhaus and Lea Industries as discontinued operations for all periods presented, and classified the assets and liabilities of Lea Industries as held for sale as of October 25, 2014, and as of April 26, 2014. For the quarter and six months ended October 25, 2014, we recorded pre-tax income of $0.5 million and $4.3 million, respectively ($0.3 million and $2.8 million after tax, respectively) compared with a pre-tax loss of $0.7 million and $0.6 million ($0.4 million and $0.4 million after tax) for the quarter and six months ended October 26, 2013, respectively, in discontinued operations related to these businesses. We previously reported results of Bauhaus as a component of our Upholstery segment, and Lea Industries as a component of our Casegoods segment.

 

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Also in the first quarter of fiscal 2015, we recorded $3.8 million of pre-tax income ($2.4 million after tax) in discontinued operations related to our previously owned subsidiary, American Furniture Company, Incorporated. We sold this subsidiary in fiscal 2007, and reported it as discontinued operations at that time. The income related to the Continued Dumping and Subsidy Offset Act of 2000, which provides for distribution of duties, collected by U.S. Customs and Border Protection from antidumping cases, to domestic producers that supported the antidumping petition related to wooden bedroom furniture imported from China. When we sold American Furniture Company, Incorporated, our contract provided that we would receive a portion of any such duties to which that entity was entitled. That entity subsequently filed for bankruptcy. The funds were distributed by U.S. Customs to the bankruptcy trustee and by the trustee to be held in trust for us during the first quarter of fiscal 2015 and were received by us early in the second quarter.

 

Cautionary Statement Concerning Forward-Looking Statements

 

We make forward-looking statements in this report, and our 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 growth

 

· adequacy and cost of financial resources

 

· future economic performance

 

· industry and importing trends

 

· management plans

 

 

Forward-looking statements also include those preceded or followed by the words “anticipates,” “believes,” “estimates,” “hopes,” “plans,” “intends” and “expects” or similar expressions. With respect to all forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

 

Actual results could differ materially from those we anticipate or project due to a number of factors, including: (a) changes in consumer confidence and demographics; (b) speed of economic recovery or the possibility of another recession; (c) changes in the real estate and credit markets and their effects on our customers and suppliers; (d) international political unrest, terrorism or war; (e) volatility in energy and other commodities prices; (f) the impact of logistics on imports; (g) interest rate and currency exchange rate changes; (h) operating factors, such as supply, labor or distribution disruptions; (i) changes in the domestic or international regulatory environment; (j) adoption of new accounting principles; (k) severe weather or other natural events such as hurricanes, earthquakes, flooding, tornadoes and tsunamis; (l) our ability to procure fabric rolls and leather hides or cut-and-sewn fabric and leather sets domestically or abroad; (m) information technology conversions or system failures; (n) effects of our brand awareness and marketing programs; (o) the discovery of defects in our products resulting in delays in manufacturing, recall campaigns, reputational damage, or increased warranty costs; (p) litigation arising out of alleged defects in our products; (q) our ability to locate new La-Z-Boy Furniture Galleries® stores (or store owners) and negotiate favorable lease terms for new or existing locations; (r) the results of our restructuring actions; and (s) those matters discussed in Item 1A of our fiscal 2014 Annual Report on Form 10-K 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.

 

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Introduction

 

Our Business

 

La-Z-Boy Incorporated and its subsidiaries manufacture, market, import, 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 according to the May 2014 Key Sources for the U.S. Furniture Market in Furniture Today. The La-Z-Boy Furniture Galleries® stores retail network is the second largest retailer of single-branded furniture in the United States according to the May 2014 Top 100 ranking by Furniture Today. In addition, the La-Z-Boy Furniture Galleries® stores retail network is ranked number 10 in the Top 100 U.S. furniture stores according to the May 2014 ranking by Furniture Today. We have seven major North American manufacturing locations to support our speed to market and customization strategy.

 

We sell our products, primarily in the United States and Canada, to furniture retailers and directly to consumers through stores that our subsidiaries own and operate. The centerpiece of our retail distribution strategy is our network of 325 La-Z-Boy Furniture Galleries® stores and 564 Comfort Studio® locations, each dedicated to marketing our La-Z-Boy branded products. We consider this dedicated space to be “branded outlets” or “proprietary.” We own 107 of the La-Z-Boy Furniture Galleries® stores. The remainder of the La-Z-Boy Furniture Galleries® stores, as well as all 564 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 in-home design service. Comfort Studio® locations are defined spaces within larger independent retailers that are dedicated to displaying and selling La-Z-Boy branded products. In addition to the La-Z-Boy Comfort Studio® locations, our Kincaid and England operating units have their own dedicated in-store gallery programs with over 495 outlets and 1.7 million square feet of proprietary floor space. In total, our proprietary floor space includes approximately 9.3 million square feet.

 

Our goal is to deliver improved sales and earnings to shareholders over the long term through execution of our strategic initiatives. The foundation of our strategic initiatives is driving sales growth in all areas of our business, but most importantly in our flagship La-Z-Boy brand. We are driving this growth through our Live Life Comfortably marketing campaign, featuring Brooke Shields as our brand ambassador. We continue to invest in this campaign, aimed at changing the image of our brand and widening La-Z-Boy’s appeal among a broader consumer demographic. We also are driving growth of our La-Z-Boy brand through a steady cadence of new product introductions, most recently with our new Urban Attitudes collection of smaller-scale furniture targeted at a more style-conscious demographic, as well as younger consumers and those living in more confined spaces in urban locations.

 

We believe a key strategy for growing our La-Z-Boy brand is the continued expansion of our branded distribution channels. We expect to achieve this growth through the execution of our 4-4-5 initiative, through which we expect to expand the La-Z-Boy Furniture Galleries® stores network to 400 stores averaging $4 million in sales per store over the five-year period that began with fiscal 2014. We are in the second year of this initiative. In addition, we are increasing our La-Z-Boy Comfort Studio® locations, our store-within-a-store format, as another avenue to expand our branded distribution channels. We expect this initiative to generate growth in our Retail segment through increased company-owned store count, and to generate growth in our wholesale Upholstery segment as the proprietary distribution network is expanded.

 

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Table of Contents

 

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

 

·                  Upholstery Segment. Our Upholstery segment is our largest segment and consists of two operating units: La-Z-Boy, our largest operating unit, and our England subsidiary. Our Upholstery segment manufactures or 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® and England Custom Comfort Center locations, major dealers and other independent retailers.

 

·                  Casegoods Segment. 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 consists of three brands: American Drew, Hammary, and Kincaid. The Casegoods segment sells primarily to major dealers and other independent retailers, as well as La-Z-Boy Furniture Galleries® stores and operators of Comfort Studio® locations.

 

·                  Retail Segment. Our Retail segment consists of 107 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 our retail network.

 

During fiscal 2014, we committed to a restructuring of our casegoods business to transition to an all-import model for our wood furniture. We ceased casegoods manufacturing operations at our Hudson, North Carolina facility during the second quarter of fiscal 2015. As a result of this restructuring, we transitioned our remaining Kincaid and American Drew bedroom product lines to imported product and exited the hospitality business as we manufactured those products in our Hudson facility. We are transitioning our warehouse and repair functions from two North Wilkesboro, North Carolina facilities to Hudson. We sold one of the two North Wilkesboro facilities during the second quarter of fiscal 2015 and are currently marketing the second facility for sale. In addition, we sold most of the wood-working equipment from our Hudson plant during the first six months of fiscal 2015. We marketed for sale our youth furniture business, Lea Industries, in connection with the restructuring, as it does not align with our long-term strategic objectives. The impact of this restructuring is discussed in more detail throughout this Management’s Discussion and Analysis.

 

Results of Operations

Fiscal 2015 Second Quarter Compared to Fiscal 2014 Second Quarter

 

La-Z-Boy Incorporated

 

(Unaudited, amounts in thousands, except percentages)

 

10/25/14

 

10/26/13

 

Percent
Change

 

Consolidated sales

 

$

365,601

 

$

352,271

 

3.8

%

Consolidated operating income

 

30,192

 

26,118

 

15.6

%

Consolidated operating margin

 

8.3

%

7.4

%

 

 

 

Sales

 

Consolidated sales increased $13.3 million in the second quarter of fiscal 2015 compared to the second quarter of fiscal 2014, an increase of 3.8%, due to higher sales in our Upholstery and Retail segments. Sales in our Casegoods segment declined slightly in the second quarter of fiscal 2015 compared to the second quarter of fiscal 2014. Our Upholstery segment sales increase was driven by stronger volume, partly offset by an unfavorable change in product mix. Our Retail segment sales increase was due to the sales volume of

 

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Table of Contents

 

our new and acquired stores, as well as sales increases for our currently active stores which have been opened for a minimum of 12 months.

 

These items are further explained in the discussion of each segment’s results later in this Management’s Discussion and Analysis.

 

Operating Margin

 

Our operating margin increased 0.9 percentage point for the second quarter of fiscal 2015 compared to the second quarter of fiscal 2014.

 

·                  Our gross margin improved 0.7 percentage point in the second quarter of fiscal 2015 compared to the second quarter of fiscal 2014 due to an improvement in our Casegoods segment, mostly due to the benefit of a reduction to our last-in, first-out (“LIFO”) reserve for domestically manufactured inventory. In addition, our consolidated gross margin increased due in part to fiscal 2015’s higher weighting of sales in our Retail segment, which carry a higher gross margin than our wholesale segments. Partly offsetting the impact of these items was a decline in gross margin in our Upholstery segment, driven by disruptions to our manufacturing operations, and a decline in gross margin in our Retail segment, due to higher promotional activity in the second quarter of fiscal 2015 compared to the second quarter of fiscal 2014. These items are further explained in the discussion of each segment’s results later in this Management’s Discussion and Analysis.

 

·                  Selling, General, and Administrative (“SG&A”) expenses as a percentage of sales were 0.2 percentage point lower in the second quarter of fiscal 2015 compared to the second quarter of fiscal 2014.

 

·                  We recorded incentive compensation costs that were $3.1 million lower in the second quarter of fiscal 2015 compared to the second quarter of fiscal 2014, a decrease of 1.0 percentage point. The main driver of this decrease was a smaller increase in our share price during the second quarter of fiscal 2015 compared to the increase in our share price during the second quarter of fiscal 2014. Several of our share-based compensation awards are liability-based awards, and their cumulative expense to date is adjusted at the end of each quarter based on the share price on the last day of the reporting period. In addition, our prior year results were stronger against the incentive-based targets than current year, contributing to the decrease in compensation costs in the second quarter of fiscal 2015 compared to the second quarter of fiscal 2014.

·                  Partly offsetting the lower incentive compensation costs was spending for investment in our business during the quarter. The most significant of these was investment in technology improvements, including our ERP system and the replacement of our website and e-commerce platform, which increased 0.4 percentage point in the second quarter of fiscal 2015 compared to the second quarter of fiscal 2014. In addition, distribution costs increased 0.3 percentage point in the second quarter of fiscal 2015 compared to the second quarter of fiscal 2014, mainly due to the impact of expanding our regional distribution centers network.

 

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Table of Contents

 

Upholstery Segment

 

(Unaudited, amounts in thousands, except percentages)

 

10/25/14

 

10/26/13

 

Percent
Change

 

Sales

 

$

297,267

 

$

287,004

 

3.6

%

Operating income

 

32,607

 

32,701

 

(0.3

)%

Operating margin

 

11.0

%

11.4

%

 

 

 

Sales

 

Our Upholstery segment’s sales increased $10.3 million in the second quarter of fiscal 2015 compared to the second quarter of fiscal 2014, an increase of 3.6%. Increased unit volume drove a 3.9% increase in sales, partly offset by unfavorable change in product mix. Selling prices were essentially flat in the second quarter of fiscal 2015 compared to the second quarter of fiscal 2014. The increase in units sold during the second quarter of fiscal 2015 compared to the prior year included a shift to more stationary units, including sofas and occasional chairs. We believe the increase in unit volume was a result of our continued investment in our Live Life Comfortably marketing campaign, through which we intend to widen our La-Z-Boy brand’s appeal to a broader consumer demographic. This includes our new Urban Attitudes collection, which is intended to deliver market share gains by expanding our customer base to include younger consumers. While we benefitted from the increased unit volume in the second quarter of fiscal 2015, the change in product mix to more stationary sofas and fewer motion sofas negatively impacted the comparison of sales dollars in the second quarter of fiscal 2015 compared to the second quarter of fiscal 2014, as stationary sofas have a lower average selling price than motion sofas. We also saw a shift to more fabric units and fewer leather units, also resulting in an unfavorable impact on sales dollars, as fabric units have a lower average selling price than leather units.

 

Operating Margin

 

Our Upholstery segment’s operating margin was 0.4 percentage point lower in the second quarter of fiscal 2015 compared to the second quarter of fiscal 2014.

 

·                  The segment’s gross margin declined 0.8 percentage point during the second quarter of fiscal 2015 compared to the second quarter of fiscal 2014 due to a combination of factors. The shift in our product mix to more stationary units from motion units during the second quarter of fiscal 2015 caused disruptions in our ability to allocate production between our manufacturing facilities efficiently. We also experienced disruptions resulting from the ongoing implementation of our ERP system. These items amounted to a 0.9 percentage point decline in gross margin in the second quarter of fiscal 2015 compared to the second quarter of fiscal 2014. In addition, raw material costs increased 0.5 percentage point. Partly offsetting these items was higher unit volume, as well as operational efficiencies in our supply chain, which together provided a 0.6 percentage point benefit.

 

·                  The segment’s SG&A expense as a percentage of sales improved 0.4 percentage point in the second quarter of fiscal 2015 compared to the second quarter of fiscal 2014, mainly as a result of lower incentive compensation expense, partly offset by higher costs for investment in technology improvements, including our ERP system and the replacement of our website and e-commerce platform.

 

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Table of Contents

 

Casegoods Segment

 

(Unaudited, amounts in thousands, except percentages)

 

10/25/14

 

10/26/13

 

Percent
Change

 

Sales

 

$

28,888

 

$

28,957

 

(0.2

)%

Operating income

 

2,995

 

1,170

 

156.0

%

Operating margin

 

10.4

%

4.0

%

 

 

 

Sales

 

Our Casegoods segment’s sales were $0.1 million lower in the second quarter of fiscal 2015 compared to the second quarter of fiscal 2014, a decrease of 0.2%. This decrease was mainly due to higher promotional activity, as we phase out room groups and shift our product styling to more casual transitional and contemporary product.

 

Operating Margin

 

Our Casegoods segment’s operating margin improved 6.4 percentage points in the second quarter of fiscal 2015 compared to the second quarter of fiscal 2014.

 

·                  The segment’s gross margin increased 7.4 percentage points during the second quarter of fiscal 2015 compared to the second quarter of fiscal 2014. Gross margin in the second quarter of fiscal 2015 was 7.0 percentage points higher than the second quarter of fiscal 2014 due to a $2.0 million reduction to our LIFO reserve for domestically manufactured inventory. We ceased manufacturing product domestically during the second quarter of fiscal 2015, and as a result the stream of domestically manufactured inventory will not be replaced, and our LIFO reserve for this inventory was reduced accordingly. The remainder of the improvement in gross margin was due to the transition to an all-import model for our wood furniture.

 

·                  The segment’s SG&A expense as a percentage of sales increased 1.0 percentage point, mainly due to higher incentive compensation due to the improved financial performance for our Casegoods segment.

 

Retail Segment

 

(Unaudited, amounts in thousands, except percentages)

 

10/25/14

 

10/26/13

 

Percent
Change

 

Sales

 

$

84,589

 

$

73,359

 

15.3

%

Operating income

 

3,682

 

3,251

 

13.3

%

Operating margin

 

4.4

%

4.4

%

 

 

 

Sales

 

Our Retail segment’s sales increased $11.2 million in the second quarter of fiscal 2015 compared to the second quarter of fiscal 2014, partly due to the sales volume of our new and acquired stores. In addition, we were able to positively convert lower traffic into an increase in ticket count and units per ticket, which resulted in a 4.6% sales increase for our currently active stores which have been opened for a minimum of 12 months. We believe the increase in sales in the second quarter of fiscal 2015 compared to the second quarter of fiscal 2014 was due to our Live Life Comfortably marketing campaign, the strength of our stationary product introductions and our improved product value and styling.

 

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Operating Margin

 

Our Retail segment’s operating margin was 4.4% in the second quarter of fiscal 2015 and fiscal 2014.

 

·                  The segment’s gross margin was 0.7 percentage point lower in the second quarter of fiscal 2015 compared to the second quarter of fiscal 2014, due to the impact of higher promotional activity, which drove our ability to convert lower traffic into an increase in ticket count and units per ticket.

 

·                  The segment’s SG&A costs as a percent of sales decreased 0.7 percentage point in the second quarter of fiscal 2015 compared to the second quarter of fiscal 2014, primarily as a result of lower advertising expense of 0.5 percentage point, as well as lower incentive compensation expense of 0.5 percentage point. The lower advertising expense, as a percentage of sales, was a result of some advertising and promotional calendar shifts in the second quarter of fiscal 2015 compared to the prior year.

 

·                  Operating margin remained flat for the second quarter of fiscal 2015 as compared to the second quarter of fiscal 2014 as a result of spending for investment in our business. The investments included costs related to new store openings, for the five company-owned La-Z-Boy Furniture Galleries® stores opened during the second quarter of fiscal 2015, and one of the company-owned La-Z-Boy Furniture Galleries® stores which is expected to open in the third quarter of fiscal 2015. As we execute our growth strategy over the next few years, our SG&A costs will increase for items such as pre-opening rent, staffing, advertising and technology-related expenses. These investments, which reduced operating income by approximately $1.2 million in the second quarter of fiscal 2015, did not allow us to grow our operating margin on the additional sales volume.

 

Corporate and Other

 

(Unaudited, amounts in thousands, except percentages)

 

10/25/14

 

10/26/13

 

Percent
Change

 

Sales

 

 

 

 

 

 

 

Corporate and Other

 

$

513

 

$

537

 

(4.5

)%

Eliminations

 

(45,656

)

(37,586

)

(21.5

)%

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

 

 

 

 

 

Restructuring

 

(10

)

142

 

N/M

 

Corporate and Other

 

(9,082

)

(11,146

)

18.5

%

 

N/M — not meaningful

 

 

 

 

 

 

 

 

Sales

 

Eliminations increased in the second quarter of fiscal 2015 compared to the same period in the prior year due to higher sales from our Upholstery segment to our Retail segment as a result of the increased volume in the Retail segment.

 

Operating Loss

 

Our Corporate and Other operating loss was lower in the second quarter of fiscal 2015 compared to the second quarter of fiscal 2014, mainly due to lower incentive compensation costs of $1.3 million.

 

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Income Taxes

 

Our effective tax rate for continuing operations for the second quarter of fiscal 2015 was 35.3%. Our effective tax rate varies from the 35% statutory rate primarily due to state taxes, less the benefit of the U.S. manufacturing deduction and foreign earnings in jurisdictions with lower tax rates than the U.S.

 

Our effective tax rate for continuing operations for the second quarter of fiscal 2014 was 32.5%. Impacting our effective tax rate for the second quarter and first six months of fiscal 2014 was the release of a portion of the valuation allowance relating to our U.S. state deferred tax assets, resulting in a net tax benefit of $0.9 million. During the second quarter of fiscal 2014 we determined that the valuation allowance should be reversed because we believed that it had become more likely than not that the value of those deferred tax assets would be realized. This determination was primarily the result of our assessment of our cumulative pre-tax income in a certain jurisdiction. Absent this discrete adjustment, the effective tax rate for the second quarter of fiscal 2014 would have been 36.0%.

 

Results of Operations
Fiscal 2015 Six Months Compared to Fiscal 2014 Six Months

 

La-Z-Boy Incorporated

 

(Unaudited, amounts in thousands, except percentages)

 

10/25/14

 

10/26/13

 

Percent
Change

 

Consolidated sales

 

$

692,581

 

$

657,773