La-Z-Boy(LZB) - 2020 Q4 - Annual Report

Part I Business La-Z-Boy is a leading U.S. residential furniture manufacturer operating through Upholstery, Casegoods, and Retail segments, significantly impacted by COVID-19 and shifting sourcing to Vietnam - Business Segments Overview | Segment | Description | | :--- | :--- | | Upholstery | Manufactures and imports upholstered furniture (recliners, sofas, etc.) under brands like La-Z-Boy® and England, serving as the company's largest segment | | Casegoods | Imports, markets, and distributes wood furniture (bedroom, dining sets) under brands like American Drew®, Hammary®, and Kincaid® | | Retail | Consists of 154 company-owned La-Z-Boy Furniture Galleries® stores, selling upholstered furniture, casegoods, and accessories directly to consumers | | Corporate & Other | Includes shared corporate costs, royalty revenues, and the Joybird e-commerce business | - In response to the COVID-19 pandemic, the company temporarily closed U.S. manufacturing facilities and company-owned stores, furloughed approximately 70% of its global workforce, reduced salaries, and suspended its quarterly dividend and share repurchase program to preserve liquidity[23][26] - The company has shifted a significant portion of its casegoods sourcing from China to Vietnam to reduce the impact of U.S. tariffs, with approximately 87% from Vietnam in fiscal 2020 compared to 72% in fiscal 2019[34] - Fiscal Year-End Backlog (in millions) | Segment | FY 2020 | FY 2019 | Change Driver | | :--- | :--- | :--- | :--- | | Upholstery | $72.6 | $66.9 | Increased due to strong orders pre-COVID and delivery slowdowns | | Casegoods | $5.4 | $7.4 | Decreased due to the negative impact of COVID-19 | | Corporate & Other (Joybird) | $4.9 | $3.7 | Increased as online orders continued while manufacturing was closed | - The company faces competition across its segments from various players, including Ashley, Bassett, and online retailers like Wayfair and Article, with La-Z-Boy Furniture Galleries® competing with retailers such as Crate and Barrel and Ethan Allen[59][60][61] Risk Factors The company faces key risks including the COVID-19 pandemic, economic sensitivity, intense competition, cybersecurity vulnerabilities, supply chain dependencies, and potential goodwill impairment - The COVID-19 pandemic is a primary risk, causing significant disruptions to retail, manufacturing, and distribution operations, with the long-term impact on consumer behavior and demand remaining highly uncertain[71][73][74] - The business is highly sensitive to economic conditions, as furniture is a postponable consumer purchase, with declines in disposable income, consumer confidence, and housing activity negatively impacting sales[75] - The company faces cybersecurity risks, including data breaches and compliance costs associated with regulations like GDPR and CCPA, with the shift to remote work during the pandemic increasing these vulnerabilities[79][81][83] - Supply chain risks include reliance on a single supplier for about 50% of polyurethane foam and dependence on a limited number of foreign suppliers in Asia for cut-and-sewn covers and casegoods, making the company vulnerable to disruptions[88][89][91] - A non-cash goodwill impairment charge of $26.9 million was recorded for the Joybird reporting unit in fiscal 2020 due to the impact of COVID-19 and slower-than-expected performance, with future impairments remaining a risk if economic conditions worsen[95][96] Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - None[109] Properties As of April 25, 2020, La-Z-Boy operated 11.7 million square feet of property, primarily owning domestic plants and headquarters while leasing most retail and distribution facilities - Property Square Footage by Segment (in millions) | Segment | Square Feet | | :--- | :--- | | Upholstery | 6.8 | | Casegoods | 1.4 | | Retail | 3.1 | | Corporate & Other | 0.3 | | Active Facilities Total | 11.6 | | Idle Facilities | 0.1 | | Total Property | 11.7 | Legal Proceedings The company is involved in ordinary course legal proceedings, with management not expecting any material additional losses to financial statements - The company does not expect any probable additional loss from current legal proceedings that would be material to its consolidated financial statements[111] Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[112] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities La-Z-Boy's common stock trades on the NYSE, with the company eliminating its June 2020 dividend and pausing share repurchases due to COVID-19 - Due to economic uncertainties from the COVID-19 pandemic, the company took the following actions to preserve capital: - Eliminated the June quarterly dividend - Temporarily halted its share repurchase program effective March 16, 2020[116][120] - Issuer Purchases of Equity Securities (Q4 FY2020) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Fiscal February 2020 | 79,000 | $31.90 | | Fiscal March 2020 | 227,000 | $24.28 | | Fiscal April 2020 | 1,000 | $22.35 | | Total Q4 2020 | 307,000 | $26.23 | Selected Financial Data This section provides a five-year summary of La-Z-Boy's consolidated financial data, including sales, net income, and key balance sheet metrics - Five-Year Financial Summary (in thousands, except per share data) | Fiscal Year End | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Sales | $1,703,982 | $1,745,401 | $1,583,947 | $1,520,060 | $1,525,398 | | Operating Income | $118,762 | $129,674 | $129,369 | $133,342 | $125,331 | | Net Income (to LZB) | $77,469 | $68,574 | $80,866 | $85,922 | $79,252 | | Diluted EPS | $1.66 | $1.44 | $1.67 | $1.73 | $1.55 | - Five-Year Balance Sheet & Cash Flow Summary (in thousands) | Fiscal Year End | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total Assets | $1,434,889 | $1,059,790 | $892,967 | $888,855 | $800,029 | | Total Equity | $716,306 | $696,976 | $625,216 | $601,105 | $557,212 | | Total Debt | $75,000 | $199 | $422 | $515 | $803 | | Cash from Operations | $164,242 | $150,745 | $115,750 | $147,990 | $114,509 | Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal 2020 saw consolidated sales decrease and operating income fall due to COVID-19 impacts, alongside a goodwill impairment, tariff rebate, and strategic liquidity preservation actions Results of Operations Fiscal 2020 consolidated sales decreased 2.4% and operating margin fell 40 bps, primarily due to COVID-19, a goodwill impairment, and increased SG&A, partially offset by gross margin improvements - Consolidated Performance (FY2020 vs. FY2019) | Metric | FY2020 | FY2019 | % Change | | :--- | :--- | :--- | :--- | | Sales | $1,703,982 | $1,745,401 | (2.4)% | | Operating Income | $118,762 | $129,674 | (8.4)% | | Operating Margin | 7.0% | 7.4% | -40 bps | - Key factors impacting operating margin included: - Goodwill Impairment: A $26.9 million charge for Joybird reduced operating margin by 150 basis points[150] - Gross Margin: Increased 200 bps, driven by a one-time tariff rebate ($16.3 million or +100 bps) and favorable sales mix (+90 bps)[154] - SG&A: Increased as a percent of sales, driven by higher bad debt expense (+80 bps) from the Art Van Furniture Group bankruptcy and an increase in the provision for credit losses due to COVID-19[154] Segment Performance In fiscal 2020, Upholstery sales declined but margin improved, Casegoods sales and margin dropped, Retail sales grew with margin improvement, and Corporate & Other's loss widened due to Joybird impairment - Segment Operating Performance (FY2020 vs. FY2019) | Segment | Sales (FY20) | Sales % Change | Operating Margin (FY20) | Margin Change (bps) | | :--- | :--- | :--- | :--- | :--- | | Upholstery | $1,204.3M | (5.0)% | 11.2% | +110 | | Casegoods | $106.0M | (7.4)% | 7.3% | (370) | | Retail | $598.6M | +5.0% | 8.1% | +140 | - The Upholstery segment's operating margin benefited from a one-time $16.3 million tariff rebate, which added 130 basis points to its gross margin[156] - The Retail segment's sales growth was driven by acquired stores ($22.2 million) and a modest same-store sales increase of 0.7%, with strong performance for the first three quarters (+3.6% same-store sales) before declining 10.0% in Q4 due to COVID-19[163] - The Corporate and Other segment's operating loss increased to $71.9 million from $48.7 million, primarily due to the $26.9 million Joybird goodwill impairment, partially offset by a $7.9 million benefit from reversing the Joybird contingent consideration liability[165][169][170] Liquidity and Capital Resources The company maintained strong liquidity in fiscal 2020 with $263.5 million cash, proactively drawing on credit and suspending capital returns to manage COVID-19 impacts - Key Liquidity and Cash Flow Metrics (in millions) | Metric | FY2020 | FY2019 | | :--- | :--- | :--- | | Cash, Cash Equivalents & Restricted Cash | $263.5 | $131.8 | | Cash Provided by Operating Activities | $164.2 | $150.7 | | Capital Expenditures | $46.0 | $48.4 | | Cash Used for Share Repurchases | $43.4 | $23.0 | | Cash Used for Dividends | $25.1 | $23.5 | - To preserve liquidity during the COVID-19 crisis, the company drew $75.0 million on its revolving credit facility, suspended share repurchases, eliminated the June 2020 dividend, and implemented temporary salary reductions and furloughs[188][190][191] - Contractual Obligations as of April 25, 2020 (in thousands) | Obligation Type | Total | Less than 1 Year | | :--- | :--- | :--- | | Operating lease obligations | $378,549 | $75,500 | | Purchase obligations | $110,051 | $110,051 | | Debt obligations | $75,000 | $75,000 | | Total (selected) | $563,600 | $260,551 | Critical Accounting Policies Management identifies critical accounting policies requiring significant judgment, including goodwill impairment, revenue recognition, income taxes, and various loss reserves - Goodwill and Intangible Assets: Impairment testing is performed annually or when impairment indicators arise, requiring significant management judgment in projecting future sales, operating margins, and selecting a discount rate, which are critical for determining the fair value of reporting units like Retail and Joybird[213][214] - Revenue Recognition: Revenue is recognized when control of goods transfers to the customer, requiring significant judgment in estimating provisions for variable consideration such as refunds, returns, warranties, and other sales incentives[205][208] - Income Taxes: The company must estimate whether it is "more likely than not" that it will recover its deferred tax assets, which requires forecasting future taxable earnings, and changes in these forecasts could lead to material adjustments to the valuation allowance[217] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks including foreign currency fluctuations, commodity and transportation cost volatility, and changes in duties and tariffs - The company is exposed to market risks from: - Foreign Currency: Fluctuations in the Mexican Peso, Canadian Dollar, Great British Pound, and Thai Baht[225] - Commodity & Transportation Costs: Price changes for steel, wood, polyurethane foam, and freight[227] - Duties and Tariffs: Changes in trade policies affecting imported materials and finished goods[228] Financial Statements and Supplementary Data This section presents the consolidated financial statements and PwC's unqualified audit opinion, highlighting the Joybird goodwill impairment as a Critical Audit Matter - The independent auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion, stating the financial statements are presented fairly and the company maintained effective internal control over financial reporting[237] - The auditor identified the "Goodwill Impairment Assessment - Joybird Reporting Unit" as a Critical Audit Matter due to the significant management judgment required to estimate the unit's fair value, particularly in projecting revenue growth, operating margins, and selecting a discount rate[246][247] - Consolidated Income Statement Highlights (in thousands) | | FY 2020 | FY 2019 | FY 2018 | | :--- | :--- | :--- | :--- | | Sales | $1,703,982 | $1,745,401 | $1,583,947 | | Operating Income | $118,762 | $129,674 | $129,369 | | Net Income (to LZB) | $77,469 | $68,574 | $80,866 | - Consolidated Balance Sheet Highlights (in thousands) | | April 25, 2020 | April 27, 2019 | | :--- | :--- | :--- | | Total Current Assets | $626,326 | $541,118 | | Total Assets | $1,434,889 | $1,059,790 | | Total Current Liabilities | $350,169 | $238,636 | | Total Equity | $716,306 | $696,976 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting principles or financial disclosure - None[442] Controls and Procedures Management concluded that disclosure controls and internal controls over financial reporting were effective as of April 25, 2020, with no material changes - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures are effective[443] - There were no changes in internal control over financial reporting during the fourth quarter of fiscal 2020 that materially affected, or are reasonably likely to materially affect, internal controls[445] Other Information The company reports no other information for this item - None[446] Part III Part III incorporates information by reference from the company's 2020 proxy statement, covering directors, executive compensation, security ownership, related transactions, and accounting fees - The information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's definitive proxy statement for its 2020 Annual Meeting of Shareholders[9][449][450] Directors, Executive Officers, and Corporate Governance Information required for this item is incorporated by reference from the company's 2020 Annual Meeting of Shareholders proxy statement Executive Compensation Information required for this item is incorporated by reference from the company's 2020 Annual Meeting of Shareholders proxy statement Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information required for this item is incorporated by reference from the company's 2020 Annual Meeting of Shareholders proxy statement Certain Relationships and Related Transactions, and Director Independence Information required for this item is incorporated by reference from the company's 2020 Annual Meeting of Shareholders proxy statement Principal Accounting Fees and Services Information required for this item is incorporated by reference from the company's 2020 Annual Meeting of Shareholders proxy statement Part IV Exhibits, Financial Statement Schedules This section lists all financial statements, schedules, and 28 exhibits filed as part of the Form 10-K report - This section contains the list of all financial statements, schedules (specifically Schedule II), and exhibits filed with the report[457][458][459] Form 10-K Summary The company did not provide a Form 10-K summary - None[461]