UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended April 27, 2013

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

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

Title of each class
 
Name of each exchange on which registered
Common Shares, $1.00 Par Value
 
New York Stock Exchange

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

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

Yes  o
No  x

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.
 
Yes  o
No  x
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x
No  o

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

Yes  x
No  o

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

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

Based on the closing price on the New York Stock Exchange on October 26, 2012, the aggregate market value of Registrant’s common shares held by non-affiliates of the Registrant on that date was $848.1 million.

The number of common shares outstanding of the Registrant was 52,215,231 as of June 11, 2013.

DOCUMENTS INCORPORATED BY REFERENCE:
 
(1) Portions of the Registrant’s Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A for its 2013 Annual Meeting of Shareholders are incorporated by reference into Part III.
 


LA-Z-BOY INCORPORATED
FORM 10-K ANNUAL REPORT FISCAL 2013

TABLE OF CONTENTS

Page
Number(s)
3
 
PART I
Item 1.
3
Item 1A.
9
Item 1B.
12
Item 2.
12
Item 3.
13
Item 4.
13
14
 
PART II
Item 5.
15
Item 6.
19
Item 7.
23
Item 7A.
39
Item 8.
40
Item 9.
72
Item 9A.
72
Item 9B.
73
 
PART III
Item 10.
73
Item 11.
73
Item 12.
73
Item 13.
73
Item 14.
73
 
PART IV
Item 15.
74

Note: The responses to Items 10 through 14 will be included in the Company’s definitive proxy statement to be filed pursuant to Regulation 14A for the 2013 Annual Meeting of Shareholders.  The required information is incorporated into this Form 10-K by reference to that document and is not repeated herein.
 
Cautionary Statement Concerning Forward-Looking Statements
 
La-Z-Boy Incorporated and its subsidiaries (individually and collectively, “we,” “our” or the “Company”) makes forward-looking statements in this report, and its representatives may make oral forward-looking statements from time to time. Generally, forward-looking statements include information concerning possible or assumed future actions, events or results of operations. More specifically, forward-looking statements may include information regarding:

¾    future income, margins and cash flows
¾    future economic performance
¾    future growth
¾    industry and importing trends
¾    adequacy and cost of financial resources
¾    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) any court actions requiring us to return any of the Continued Dumping and Subsidy Offset Act distributions we have received; (j) changes in the domestic or international regulatory environment; (k) adoption of new accounting principles; (l) severe weather or other natural events such as hurricanes, earthquakes, flooding, tornadoes and tsunamis; (m) our ability to procure fabric rolls and leather hides or cut-and-sewn fabric and leather sets domestically or abroad; (n) fluctuations in our stock price; (o) information technology conversions or system failures; (p) effects of our brand awareness and marketing programs; (q) the discovery of defects in our products resulting in delays in manufacturing, recall campaigns, reputational damage, or increased warranty costs; (r) litigation arising out of alleged defects in our products; (s) our ability to locate new La-Z-Boy Furniture Galleries® stores (or store owners) and negotiate favorable lease terms for new or existing locations; (t) our ability to integrate acquired businesses and realize the benefit of anticipated synergies; and (u) those matters discussed in Item 1A of this Annual Report and other factors identified from time-to-time in our reports filed with the Securities and Exchange Commission. We undertake no obligation to update or revise any forward-looking statements, whether to reflect new information or new developments or for any other reason.

PART I

ITEM 1. BUSINESS.
Edward M. Knabusch and Edwin J. Shoemaker started Floral City Furniture in 1927, and in 1928 the newly formed company introduced its first recliner. In 1941, we were incorporated as La-Z-Boy Chair Company in the state of Michigan, and in 1996 our name was changed to La-Z-Boy Incorporated.  Today, our La-Z-Boy brand is the most recognized brand in the furniture industry.

La-Z-Boy Incorporated manufactures, markets, imports, distributes and retails upholstery products, accessories and casegoods (wood) furniture products.  We are the leading global producer of reclining chairs and the second largest manufacturer/distributor of residential furniture in the United States according to the May 2013 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 upholstered furniture in North America according to the May 2013 Top 100 ranking by Furniture Today.  We have nine major North American manufacturing locations to support our speed to market and customization strategy.
 
We sell our products, primarily in the United States and Canada, to furniture retailers and directly to consumers through stores owned and operated by our subsidiaries.  The centerpiece of our retail distribution strategy is our network of 313 La-Z-Boy Furniture Galleries® stores and 565 Comfort Studios® locations, each dedicated to marketing our La-Z-Boy branded products.  We consider this dedicated space to be “branded outlets” or “proprietary.”  We own 94 of the La-Z-Boy Furniture Galleries® stores.  The remainder of the La-Z-Boy Furniture Galleries® stores, as well as all 565 Comfort Studios® 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 Studios® 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 Studios® locations, our Kincaid, England and Lea operating units have their own dedicated proprietary in-store gallery programs with over 730 outlets and 4.3 million square feet of proprietary floor space.  In total, our proprietary floor space includes approximately 11.7 million square feet.

Principal Products and Industry Segments
Our reportable segments are the Upholstery segment, the Casegoods segment and the Retail segment.

Upholstery Segment.  Our Upholstery segment is our largest segment in terms of revenue and consists of three operating units: La-Z-Boy, our largest operating unit, and our Bauhaus and England operating units. The 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 Comfort Studios® locations, major dealers and other independent retailers.

Casegoods Segment.  Our Casegoods segment is an importer, marketer, manufacturer and distributor of casegoods (wood) furniture such as bedroom sets, dining room sets, entertainment centers and occasional pieces, and some coordinated upholstered furniture.  The Casegoods segment consists of two operating units, one consisting of American Drew, Lea and Hammary, and the second being Kincaid.  The Casegoods segment primarily sells to major dealers and other independent retailers.

Retail Segment.  Our Retail segment consists of 94 company-owned La-Z-Boy Furniture Galleries® stores located in 11 markets ranging from southern California to the Midwest to the east coast of the United States.  During fiscal 2013, we acquired nine La-Z-Boy Furniture Galleries® stores in the southern Ohio market that were previously independently owned and operated.  The Retail segment primarily sells upholstered furniture, in addition to some casegoods and other accessories, to the end consumer through the retail network.

Additional detailed information regarding our segments and their products is contained in Note 16 to our consolidated financial statements and our “Management’s Discussion and Analysis” section, both of which are included in this report.

Raw Materials and Parts
The principal raw materials for the Upholstery segment are purchased cover (primarily fabrics and leather), polyester batting and non-chlorofluorocarbonated polyurethane foam for cushioning and padding, lumber and plywood for frames and steel for motion mechanisms, which together total about 79% of the segment’s total upholstery material costs.  We purchase about 74% of our polyurethane foam from one supplier, and it has several facilities across the United States that deliver to our plants.  The largest raw material cost of the Upholstery segment is purchased cover, which represents about 46% of the segment’s total material costs. We purchase cover from a variety of sources, but we rely on a limited number of major suppliers.  If one of these major suppliers experienced financial or other difficulties we could experience temporary disruptions in our manufacturing process until we obtained an alternate supplier.
 
We purchase our cover either in a raw state (a roll or hide) and cut and sew it into parts, or purchase cut-and-sewn parts from third-party offshore suppliers.  Our cover material costs are evenly divided between fabric rolls and hides and cut-and-sewn parts. We have four primary suppliers of cut-and-sewn leather and fabric products.  Of the products we import from China, two suppliers manufacture over 85% of the leather cut-and-sewn sets and three suppliers manufacture approximately 99% of the fabric products.

During fiscal 2013, prices on materials we used in our upholstery manufacturing process increased approximately 3.2% compared with fiscal 2012.  We expect raw material costs to rise in fiscal 2014 due to increased global demand for steel, leather, wood, yarn, polyurethane, and other materials used in our upholstery manufacturing processes.  Additionally, costs associated with our transportation activities are sensitive to changes in crude oil pricing.

As the Casegoods segment is primarily an importer, marketer, and distributor of casegoods furniture, with some manufacturing operations, raw materials represent only about 12% of the total inventory of this segment.  The principal raw materials used by our Casegoods manufacturing facility are hardwoods, plywood and chip wood, veneers, liquid stains, paints and finishes and decorative hardware.  During the year, our Casegoods manufacturing operations discontinued lumber processing and switched to primarily a “parts assembly” model. Once we fully implement the parts assembly model, it will result in a decrease in the percentage of the segment’s material costs for lumber and an increase in the share of imported and domestically sourced component parts.  Hardwood lumber, plywood, and purchased hardwood components represented about 64% of this segment’s total material costs in fiscal 2013.

Casegoods Finished Goods Imports
The majority of finished wood furniture marketed and distributed by our Casegoods segment is imported, primarily due to the low labor (both wages and benefits) and overhead costs associated with manufacturing casegoods product overseas.  We have continued to make changes to our model in order to improve our service performance levels by improving our supply chain management and distribution networks.

During fiscal 2013, prices on imported casegoods were essentially flat compared with fiscal 2012.  We currently expect these prices and transportation costs to remain fairly stable in fiscal 2014.

Sales of imported casegoods finished goods represented about 77% and 75% of our total casegoods sales for fiscal 2013 and fiscal 2012, respectively.  Sales of imported finished goods, for all our segments, represented approximately 10% of both our fiscal 2013 and fiscal 2012 consolidated sales.

Seasonal Business
We believe that the demand for furniture generally reflects sensitivity to overall economic conditions, including consumer confidence, housing market conditions and unemployment rates.  Historically, our Upholstery and Retail segments have experienced lower levels of sales during the first fiscal quarter and higher levels during the fourth fiscal quarter.

During fiscal 2013, our Upholstery segment and our Retail segment experienced their highest level of sales during our fourth fiscal quarter while our Casegoods segment experienced its highest level of sales during our first fiscal quarter. Our Upholstery and Retail segments both experienced their lowest level of sales for fiscal 2013 during our first fiscal quarter while our Casegoods segment experienced its lowest level of sales in our fourth fiscal quarter of fiscal 2013.

When possible, we schedule production to maintain uniform manufacturing activity throughout the year.  We shut down our domestic plants for a week in July to perform routine maintenance on our equipment.

Economic Cycle and Purchasing Cycle
Of our product segments, upholstered furniture has a shorter life cycle and exhibits a less volatile sales pattern over an economic cycle than casegoods furniture.  This is because upholstered furniture is typically more fashion and design oriented, and is often purchased one or two pieces at a time.  In contrast, casegoods products are longer-lived and frequently purchased in groupings or “suites,” resulting in a much larger cost to the consumer.
 
Practices Regarding Working Capital Items
The following describes our significant practices regarding working capital items.

Inventory: We maintain raw materials and work in process inventory at our manufacturing locations.  We maintain finished goods inventory at our six regional distribution centers.  Our regional distribution centers allow us to streamline the warehousing and distribution processes for our La-Z-Boy Furniture Galleries® store network, including both company-owned stores and independently owned stores.  Regional distribution centers also allow us to reduce the number of individual warehouses we need to supply our retail outlets and help us reduce our inventory levels at our manufacturing and retail locations.  We also maintain finished goods inventory at our manufacturing locations, which primarily consists of sold orders.

Rather than manufacture to fill custom orders, we generally build or import casegoods to go into inventory to enable us to attain manufacturing efficiencies and meet our customers’ delivery requirements.  This practice results in higher levels of finished goods inventory for our casegoods products than our upholstery products as a percentage of sales.   Our company-owned La-Z-Boy Furniture Galleries® stores maintain finished goods inventory at the stores for display purposes.

During fiscal 2013 our inventory increased $2.6 million compared with fiscal 2012, but decreased 0.7 percentage points as a percentage of sales.  We will continue to manage our inventory levels to ensure they are in line with sales levels, while maintaining our focus on service to our customers.

Accounts Receivable: During fiscal 2013 our accounts receivable decreased $7.5 million compared with fiscal 2012, and decreased 1.6 percentage points as a percentage of sales.  The improvement in our cash collections was the result of an improvement in the financial health of our customer base, including our independent La-Z-Boy Furniture Galleries® dealers. We continue to monitor our customers’ accounts and limit our credit exposure to certain independent dealers, and decrease our days sales outstanding where possible.

Customers
Our customers are furniture retailers located primarily throughout the United States and Canada, though we do sell to a number of furniture retailers outside of North America.  We did not have any single customer whose purchases amounted to more than 3% of our consolidated, Upholstery segment, or Casegoods segment sales in fiscal 2013.  Sales in our Upholstery and Casegoods segments are almost entirely to furniture retailers, but we sell to consumers through our company-owned La-Z-Boy Furniture Galleries® stores that make up our Retail segment.

We have formal agreements with many furniture retailers for them to display and merchandise products from one or more of our operating units and sell them to consumers in dedicated retail space, either in stand-alone stores or dedicated proprietary galleries or studios within their stores.  We consider this dedicated space to be “proprietary.”  For our Upholstery and Casegoods segments, our 2013 customer mix based on sales was about 55% proprietary, 10% major dealers (for example, Art Van Furniture, Berkshire Hathaway, Havertys Furniture, and Raymour & Flanigan Furniture) and 35% other independent retailers.

The success of our product distribution relies heavily on having retail floor space that is dedicated to displaying and marketing our products.  This distribution system originated with our La-Z-Boy Furniture Galleries® stores network, which continues to have the largest number of proprietary stores and galleries among our other operating units. According to the May 2013 Top 100 ranking by Furniture Today, an industry trade publication, the La-Z-Boy Furniture Galleries® stores retail network is the second largest retailer of single-brand upholstered furniture in North America.
 
Maintaining, updating, and expanding, when appropriate, our proprietary distribution network is a key part of our overall sales and marketing strategy.  As we continue to maintain and update our current stores, the La-Z-Boy Furniture Galleries® store network plans to open, relocate or remodel 15 to 20 stores during fiscal 2014.  All of these new stores will feature the new concept store design we developed and introduced in fiscal 2012.  We select independent dealers for our proprietary distribution network based on factors such as the management and financial qualifications of those potential dealers as well as the potential for distribution in a specific geographical area. This proprietary method of distribution is beneficial to La-Z-Boy, our dealers and the consumer. For La-Z-Boy, it allows us to have a concentration of marketing of our product by sales personnel dedicated to our entire product line, and only that line. For dealers who join this proprietary group, it allows them to take advantage of practices that have proven successful based on past experiences of other proprietary dealers.  As a part of this, we facilitate forums and communications for these dealers to share best practices among their peers.  For our consumers, these stores provide a full-service shopping experience with knowledgeable sales associates and in-home design consultants to support their purchasing process.  The La-Z-Boy Furniture Galleries® stores’ independent dealers and the Comfort Studios® locations retailers are responsible for displaying and merchandising our product within the dedicated retail space.

Orders and Backlog
Because the measure of backlog at a point in time may not be indicative of our future sales performance, we do not rely entirely on backlogs to predict future sales. Most of our operating units do not allow our customers to cancel orders after the orders have been selected for production.  Upholstery orders are primarily built to a specific dealer order as either a sold order based on a consumer’s custom order or a stock order.  Casegoods are primarily produced to our internal order (not a customer or consumer order), resulting in higher finished goods inventory on hand as a percentage of sales.

As of April 27, 2013, and April 28, 2012, our Upholstery segment backlogs were approximately $78.6 million and $65.4 million, respectively.  The timing of orders placed just before our fiscal year end accounts for the majority of this increase, and the units driving the increase in backlog are expected to be shipped primarily in the second quarter of fiscal 2014. Our Casegoods segment backlogs as of April 27, 2013, and April 28, 2012, were approximately $13.8 million and $14.0 million, respectively.

Competitive Conditions
According to the May 2013 Key Sources for the U.S. Furniture Market in Furniture Today, we are currently the second largest manufacturer/distributor of residential (living and family room, bedroom, and dining room) furniture in the United States, as measured by annual sales volume.

In the Upholstery segment, our largest competitors are Ashley, Bassett Furniture, Bernhardt, Ethan Allen, Flexsteel, Furniture Brands International, Klaussner, and Natuzzi.

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

The La-Z-Boy Furniture Galleries® stores operate in the retail furniture industry throughout North America, and they have different competitors based on their locations.  Competitors include: Arhaus, Ashley, Bassett Furniture Direct, Crate and Barrel, Ethan Allen, Restoration Hardware, Thomasville Home Furnishings Stores, several other regional competitors (for example Art Van Furniture, Raymour & Flanigan Furniture, and Havertys Furniture), and family-owned independent furniture stores.

In addition to the larger competitors listed above, a substantial number of small and medium-sized companies operate within our business segments, all of which are highly competitive.
 
Over the past decade alternative distribution channels have increasingly affected our retail markets.  Companies such as Costco, Home Depot, IKEA, Sam’s Club, Target, Wal-Mart, Williams Sonoma and others, now offer products that compete with some of our product lines.  The increased ability of consumers to purchase furniture through various furniture manufacturers’ and retailers’ internet websites has also increased competition.

The home furnishings industry competes primarily on the basis of product styling and quality, customer service (product availability and delivery), and price, and we compete on these factors through our distribution models, marketing and customization capabilities.

We compete primarily by emphasizing our brand and the value, comfort, quality, and styling of our products.  In addition, we remain committed to innovation while striving to provide outstanding customer service, exceptional dealer support, and efficient on-time delivery.  Maintaining, updating and expanding our proprietary distribution system appropriately is a key strategic initiative for us in striving to remain competitive.  We compete in the mid-to-upper-mid price point, and a shift in consumer taste and trends to lower price point products could negatively affect our competitive position.

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

Trademarks, Licenses and Patents
We own several trademarks, including La-Z-Boy, our most valuable.  The La-Z-Boy trademark is essential to the upholstery and retail segments of our business. To protect our trademarks, we have registered them in the United States and various other countries where our products are sold.  These trademarks have a perpetual life, subject to renewal every ten years.  We license the use of the La-Z-Boy trademark to our major international partners and dealers outside of North America.  We also license the use of the La-Z-Boy trademark on contract office furniture, outdoor furniture and non-furniture products for the purpose of enhancing brand awareness, broadening the perceptions of La-Z-Boy and creating visibility of the La-Z-Boy brand in channels outside of the furniture industry.  In addition, we license to our branded dealers the right to use our La-Z-Boy trademark in connection with the sale of our products and related services, on their signs, and in other ways, which we consider to be a key part of our marketing strategies.  We provide more information about those dealers, under “Customers.”

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

Compliance with Environmental Regulations
Our manufacturing operations involve the use and disposal of certain substances regulated under environmental protection laws, and we are involved in a small number of remediation actions and site investigations concerning such substances.  Based on a review of all currently known facts and our experience with previous environmental matters, we believe we have adequate reserves in respect of probable and reasonably estimable losses arising from environmental matters and currently do not anticipate any material loss.

Employees
We employed approximately 8,185 full-time equivalent employees as of April 27, 2013.  The Upholstery segment employed approximately 6,960, the Casegoods segment employed approximately 370, and the Retail segment employed approximately 660, with the remainder being corporate personnel. The majority of our employees are employed on a full-time basis, except in our Retail segment, which employs approximately 495 part-time employees. As of April 28, 2012, we had approximately 8,160 full-time equivalent employees.
 
Financial Information About Foreign and Domestic Operations and Export Sales
In fiscal 2013, our direct export sales, including sales in Canada, were approximately 13% of our total sales.  We have a manufacturing joint venture in Thailand, which distributes furniture in Australia, New Zealand, Thailand and other countries in Asia.   In addition, we have a sales and marketing joint venture in Asia, which sells and distributes furniture in Korea, Taiwan, Japan, India, Malaysia, and other Asian countries.

We also have a facility in Mexico which provides cut-and-sewn fabric sets for our domestic upholstery manufacturing facilities. Information about sales in the United States, Canada, and other countries is contained in Note 16 to our consolidated financial statements, which is included in Item 8 of this report.  Our net property, plant, and equipment value in the United States was $109.9 million and $106.0 million at the end of fiscal 2013 and fiscal 2012, respectively.  Our net property, plant, and equipment value in foreign countries was $8.2 million and $8.4 million in fiscal 2013 and fiscal 2012, respectively.

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

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

ITEM 1A. RISK FACTORS.
Our business is subject to a variety of risks.  Interest rates, consumer confidence, housing starts and the overall housing market, increased unemployment, tightening of the financial and consumer credit markets, downturns in the economy and other general economic factors that affect many other businesses are particularly significant to us because our principal products are consumer goods.

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

The slow pace of recovery from prolonged economic downturn, or any new downturn, could have a significant negative effect on our sales, results of operations and cash flows.
Our business is subject to international, national and regional economic conditions.  The global economy experienced a major recession beginning in 2008.  Although we have seen some signs of improvement in the economy, the pace of improvement in housing, consumer confidence, unemployment and access to consumer credit has not returned to historic levels. In addition, repercussions from the ongoing European debt crisis could further damage the U.S. economy.  While these factors are outside of our control, they directly affect our business.  The slow pace of recovery or any new economic downturn could cause our current and potential customers to delay their purchases or affect their ability to pay, which could reduce our future sales, results of operations and cash flows.


Our current retail markets and other markets that we enter in the future may not achieve the growth and profitability we anticipate. We could incur charges for the impairment of long-lived assets if we cannot meet our earnings expectations for these markets.
From time to time we acquire retail locations and related assets, remodel and relocate existing stores, and close underperforming stores.  Our assets include goodwill and other indefinite-lived intangible assets in connection with acquisitions.  Profitability of acquired, remodeled, and relocated stores will depend on lease rates (for stores we lease) and retail sales and profitability justifying the costs of acquisition, remodeling, and relocation.  If we cannot meet our sales or earnings expectations for these stores, we may incur charges for the impairment of long-lived assets, the impairment of goodwill, or the impairment of other indefinite-lived intangible assets.

Availability of foreign sourcing and economic uncertainty in countries outside of the United States in which we operate or from which we purchase product could adversely affect our business and results of operations.
We have operations in countries outside the United States, some of which are located in emerging markets.  Long-term economic and political uncertainty in some of the countries in which we operate, such as Mexico and Thailand, could result in the disruption of markets and negatively affect our business.  Our Casegoods segment is primarily an importer of products manufactured by foreign sources, mainly in China and Vietnam, and our Upholstery segment purchases cut-and-sewn fabric and leather sets and some finished goods from Chinese and other foreign vendors.  The majority of the cut-and-sewn leather kits that we purchase from China are from one supplier.  Our sourcing partners may not be able to produce goods in a timely fashion or the quality of their product may lead us to reject it, causing disruptions in our domestic operations and delays in our shipments to our customers.

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

Changes in regulation of our international operations could adversely affect our business and results of operations.
Because we have operations outside of the United States and sell product in various countries, we are subject to many laws governing international relations, including the Foreign Corrupt Practices Act and the U.S. Export Administration Act.  These laws include prohibitions on improper payments to government officials and restrictions on where we can do business, what products we can supply to certain countries, and what information we can provide to certain governments.  Violations of these laws, which are complex, may result in criminal penalties or sanctions that could have a significant adverse effect on our business and results of operations.  Although we have implemented policies and procedures designed to ensure compliance with these laws, there can be no assurance that our employees, contractors, or agents will not violate our policies.

Fluctuations in the price, availability and quality of raw materials could cause delays that could result in our inability to provide goods to our customers or could increase our costs, either of which could decrease our earnings.
In manufacturing furniture, we use various types of wood, fabrics, leathers, upholstered filling material, steel, and other raw materials. Because we are dependent on outside suppliers for our raw materials, fluctuations in their price, availability and quality could have a negative effect on our cost of sales and our ability to meet our customers’ demands.  Competitive and marketing pressures may prevent us from passing along price increases to our customers, and the inability to meet our customers’ demands could cause us to lose sales. Since we have a higher concentration (70%) in upholstery sales, including motion furniture, than most of our competitors, the effects of steel, polyurethane foam, leather and fabric price increases or quantity shortages are more significant for our business than for most other publicly traded furniture companies.  About 74% of our polyurethane foam comes from one supplier.  This supplier has several facilities across the United States, but severe weather or natural disasters could result in delays in shipments of polyurethane foam to our plants.  We have attempted to minimize this risk by requiring a commitment from our supplier that it would continue to supply us despite disruptions in its operations.
 
A change in the financial condition of some of our domestic and foreign fabric suppliers could impede their ability to provide their products to us in a timely manner.  Upholstered furniture is fashion oriented, and if we are not able to acquire sufficient fabric variety, or if we are unable to predict or respond to changes in fashion trends, we may lose sales and have to sell excess inventory at reduced prices.  Doing so would have a negative effect on our sales and earnings.

Inability to maintain and enhance our brand and respond to changes in our current and potential customers’ tastes and trends in a timely manner could adversely affect our business and operating results.
The success of our business depends on our ability to maintain and enhance our brands to increase our business by retaining customers and attracting new ones.  Because furniture product is fashion oriented, changes in consumers’ tastes and trends and the resultant change in our product mix could adversely affect our business and operating results.  We attempt to minimize these risks by maintaining a strong advertising and marketing campaign promoting both our brands and our current product designs, styles, quality and prices.  If these efforts are unsuccessful or require us to incur substantial costs, our business, operating results and financial or competitive condition could be adversely affected.

We may be subject to product liability claims or undertake to recall one or more products, with a negative impact on our financial results and reputation.
Millions of our products, sold over many years, are currently used by consumers.  We may be named as a defendant in lawsuits instituted by persons allegedly injured while using one of our products.  We have insurance that we believe is adequate to cover such claims, but we are self-insured for the first $1.5 million in liability and defense costs.  Furthermore, such claims could damage our brands and reputation and negatively affect our operating results.  In addition, regulation of consumer products has increased in recent years as the U.S. Consumer Product Safety Commission has acquired greater regulatory and enforcement power.  Products that we have previously sold could be the subject of one or more recalls, resulting in related expenses and potential penalties, injury to our brands and reputation, and negative impact on our operating results.

We rely extensively on computer systems to process transactions, summarize results and manage our business and that of certain independent dealers.  Disruptions in both our primary and back-up systems could adversely affect our business and operating results.
Our primary and back-up computer systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, security breaches, natural disasters and errors by employees.  Though losses arising from some of these issues would be covered by insurance, interruptions of our critical business computer systems or failure of our back-up systems could reduce our sales or result in longer production times.  If our critical business computer systems or back-up systems are damaged or cease to function properly, we may have to make a significant investment to repair or replace them.
 
In addition, we are implementing an enterprise resource planning or ERP system in our largest operating unit.  The implementation is expected to occur in phases over the next several years.  ERP implementations are complex and time-consuming projects that involve substantial expenditures on system software and implementation activities. ERP implementations also require transformation of business and financial processes in order to reap the benefits of the ERP system; any such transformation involves risks inherent in the conversion to a new computer system, including loss of information and potential disruption to our normal operations.  Our business and results of operations may be adversely affected if we experience operating problems and/or cost overruns during the ERP implementation process, or if the ERP system and the associated process changes do not give rise to the benefits that we expect. Additionally, if we do not effectively implement the ERP system as planned or if the system does not operate as intended, it could adversely affect the effectiveness of or cause delays in our ability to adequately assess our internal control over financial reporting.  Significant delays in documenting, reviewing and testing our internal control could cause us to fail to comply with our SEC reporting obligations related to our management’s assessment of our internal control over financial reporting.

Loss of market share and other financial or operational difficulties due to competition would likely result in a decrease in our sales, earnings, and liquidity.
The residential furniture industry is highly competitive and fragmented.  We compete with many other manufacturers and retailers, some of which offer widely advertised products, and others of which are large retail furniture dealers offering their own store-branded products.  Competition in the residential furniture industry is based on quality, style of products, perceived value, price, service to the customer, promotional activities, and advertising.  The highly competitive nature of the industry means we are constantly subject to the risk of losing market share, which would likely decrease our future sales, earnings and liquidity.  In addition, due to the large number of competitors and their wide range of product offerings, we may not be able to differentiate our products (through styling, finish, and other construction techniques) from those of our competitors.  These and other competitive pressures could result in a decrease in our sales, earnings, and liquidity.

Our business and our reputation could be adversely affected by the failure to protect sensitive employee data or to comply with evolving regulations relating to our obligation to protect such data.
Cyber-attacks designed to gain access to sensitive information by breaching security systems of large organizations leading to unauthorized release of confidential information have occurred recently at a number of major U.S. companies despite widespread recognition of the cyber-attack threat and improved data protection methods.  While we have invested in the protection of our information technology and maintain what we believe are adequate security procedures and controls over financial and employee data, a breach in our systems that results in the unauthorized release of sensitive data could nonetheless occur, have a material adverse effect on our reputation, and lead to financial losses from remedial actions or potential liability, including for possible punitive damages.  An electronic security breach resulting in the unauthorized release of sensitive data from our information systems could also materially increase the costs we already incur to protect against such risks.

ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.

ITEM 2. PROPERTIES.
We owned or leased approximately 10.9 million square feet of manufacturing, warehousing and distribution centers, office, showroom, and retail facilities, and had approximately 1.4 million square feet of idle facilities, at the end of fiscal 2013.  Of the 10.9 million square feet occupied at the end of fiscal 2013, our Upholstery segment occupied approximately 6.8 million square feet, our Casegoods segment occupied approximately 2.0 million square feet, our Retail segment occupied approximately 1.7 million square feet and our Corporate and other operations occupied the balance.
 
Our active facilities and retail locations are located in Arkansas, California, Connecticut, Delaware, Florida, Illinois, Indiana, Kansas, Kentucky, Maryland, Massachusetts, Michigan, Mississippi, Missouri, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, Tennessee, Utah, Virginia, Washington D.C., Wisconsin, Coahuila (Mexico) and Bangkok (Thailand).  All of our plants and stores are well maintained and insured. We do not expect any major land or building additions will be needed to increase capacity in the foreseeable future for our manufacturing operations.  We own all of our domestic plants, one of which has been financed under long-term industrial revenue bonds, and our Thailand plant.  We lease the majority of our retail stores and regional distribution centers, as well as our manufacturing facility in Mexico.  For information on terms of operating leases for our properties, see Note 10 to our consolidated financial statements, which is included in Item 8 of this report.

ITEM 3. LEGAL PROCEEDINGS.
We are involved in various legal proceedings arising in the ordinary course of our business.  Based on a review of all currently known facts and our experience with previous legal matters, we have recorded expense in respect of probable and reasonably estimable losses arising from legal matters and currently do not anticipate any material additional loss.

ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.

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

Kurt L. Darrow, age 58
Chairman, President and Chief Executive Officer since August 2011
President and Chief Executive Officer from September 2003 through August 2011

Louis M. Riccio, Jr., age 50
Senior Vice President of La-Z-Boy and Chief Financial Officer since July 2006
Treasurer from February 2010 through April 2010

Mark S. Bacon, Sr., age 50
Senior Vice President of La-Z-Boy and President of La-Z-Boy Branded Business since July 2011
Senior Vice President of La-Z-Boy and Chief Retail Officer from October 2008 through July 2011

Steven M. Kincaid, age 64
Senior Vice President of La-Z-Boy and President of Casegoods since November 2003
President, Kincaid Furniture Company, Incorporated since June 1983

Otis S. Sawyer, age 55
Senior Vice President of La-Z-Boy and President of Non-Branded Upholstery since February 2008
President, England, Inc. since February 2008

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

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Our board of directors has authorized the purchase of company stock. As of April 27, 2013, 4.2 million shares remained available for purchase pursuant to this authorization.  We purchased 0.7 million shares during fiscal 2013, totaling $10.3 million.  During the fourth quarter of fiscal 2013, pursuant to the existing board authorization, we adopted a plan to purchase company stock pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934. The plan was effective March 30, 2013.  Under this plan, our broker has the authority to purchase company shares on our behalf, subject to SEC regulations and the price, market volume and timing constraints specified in the plan. The plan expires at the close of business on June 30, 2013.  With the cash flows we anticipate generating in fiscal 2014 we expect to continue being opportunistic in purchasing company stock.

The following table summarizes our purchases of company stock during the fourth quarter of fiscal 2013:

(shares in thousands)
 
Total
number of
shares
purchased
   
Average 
price 
paid per
share
   
Total number
of shares
purchased as
part of
publicly
announced
plan
   
Maximum
number of
shares that
may yet be
purchased
under the
plan
 
Fiscal February (January 27 – March 2, 2013)
   
64
   
$
15.81
     
64
     
4,406
 
Fiscal March (March 3 – March 30, 2013)
   
99
   
$
18.78
     
99
     
4,307
 
Fiscal April (March 31 – April 27, 2013)
   
124
   
$
17.97
     
124
     
4,183
 
Fiscal Fourth Quarter of 2013
   
287
   
$
17.77
     
287
     
4,183
 

Recent Sales of Unregistered Securities
There were no sales of unregistered securities during fiscal year 2013.


Equity Plans
The table below provides information concerning our compensation plans under which common shares may be issued.
 
Equity Compensation Plan Information as of April 27, 2013
Plan category
 
Number of
securities to be
issued upon
exercise of
outstanding
options
(i)
   
Weighted-
average
exercise
price of
outstanding
options
(ii)
   
Number of
securities
remaining
available for
future issuance
under
equity
compensation
plans (excluding
securities
reflected in
column (i))
(iii)
 
Equity compensation plans approved by shareholders
   
1,255,890
(1
)
 
$
9.78
     
3,251,457
(2
)

Note 1: These options were issued under our 2010 Omnibus Incentive Plan, 2004 Long-Term Equity Award Plan and 1997 Incentive Stock Option Plan.  No additional options can be awarded under the 2004 or 1997 plans, but as of April 27, 2013, 421,507 and 196,525 options were still outstanding under the 2004 and 1997 plans, respectively.

Note 2: This amount is the aggregate number of shares available for future issuance under our 2010 Omnibus Incentive Plan.  The omnibus incentive plan provides for awards of stock options, restricted stock, and performance awards (awards of our common stock based on achievement of pre-set goals over a performance period) to selected key employees and non-employee directors.   We have performance awards outstanding under the plan that would reduce the number of shares remaining available for future issuance under the plan by 2,883,376 shares, assuming the maximum performance targets were achieved.


Performance Graph

The graph below shows the cumulative total return for our last five fiscal years that would have been realized (assuming reinvestment of dividends) by an investor who invested $100 on April 26, 2008 in our common shares, in the S&P 500 Composite Index and in the Dow Jones U.S. Furnishings Index.

 

Company/Index/Market
 
2008
   
2009
   
2010
   
2011
   
2012
   
2013
 
La-Z-Boy Incorporated
 
$
100
   
$
32.85
   
$
223.30
   
$
178.03
   
$
232.23
   
$
269.01
 
S&P 500 Composite Index
 
$
100
   
$
63.63
   
$
91.31
   
$
104.37
   
$
109.76
   
$
126.57
 
Dow Jones U.S. Furnishings Index
 
$
100
   
$
66.04
   
$
114.59
   
$
136.54
   
$
130.73
   
$
120.20
 


Dividend and Market Information

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

 
 
   
Market Price
 
Fiscal 2013
 Quarter
Ended
 
Dividends
Paid
   
High
   
Low
   
Close
 
July 28
 
$
   
$
16.43
   
$
10.95
   
$
12.09
 
October 27
 
$
   
$
17.13
   
$
11.46
   
$
16.18
 
January 26
 
$
0.04
   
$
17.06
   
$
13.30
   
$
15.74
 
April 27
 
$
0.04
   
$
19.43
   
$
15.00
   
$
17.69
 
 
 
$
0.08
                         
 
 
         
Market Price
 
Fiscal 2012
 Quarter
Ended
 
Dividends
Paid
   
High
   
Low
   
Close
 
July 30
 
$
   
$
11.84
   
$
8.41
   
$
8.77
 
October 29
 
$
   
$
11.00
   
$
6.76
   
$
10.62
 
January 28
 
$
   
$
13.85
   
$
9.11
   
$
13.73
 
April 28
 
$
   
$
15.44
   
$
12.96
   
$
15.34
 
 
 
$
                         

Our credit agreement would prohibit us from paying dividends or purchasing shares if excess availability, as defined in the agreement, fell below 12.5% of the revolving credit commitment or if we failed to maintain a fixed charge coverage ratio of at least 1.05 to 1.00 on a pro forma basis. The agreement would not currently prohibit us from paying dividends or repurchasing shares. Refer to Note 9 of the consolidated financial statements in Item 8 for further discussion of our credit agreement.  The payment of future cash dividends is within the discretion of our board of directors and will depend, among other factors, on our earnings, capital requirements and operating and financial condition, as well as excess availability under the credit agreement.

Shareholders
We had approximately 12,400 shareholders of record at June 11, 2013.


ITEM 6. SELECTED FINANCIAL DATA.
The following table presents our selected financial data. The table should be read in conjunction with Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. This information is derived from our audited financial statements and should be read in conjunction with those statements, including the related notes.

Consolidated Five-Year Summary of Financial Data
 
(Dollar amounts in thousands, except per share data)
 
(52 weeks)
   
(52 weeks)
   
(53 weeks)
   
(52 weeks)
   
(52 weeks)
 
Fiscal Year Ended
 
4/27/2013
   
4/28/2012
   
4/30/2011
   
4/24/2010
   
4/25/2009
 
Sales
 
$
1,332,525
   
$
1,231,676
   
$
1,187,143
   
$
1,179,212
   
$
1,226,674
 
Cost of sales
   
907,586
     
851,819
     
832,799
     
806,086
     
888,785
 
Gross profit
   
424,939
     
379,857
     
354,344
     
373,126
     
337,889
 
Selling, general and administrative
   
357,312
     
330,226
     
323,964
     
332,698
     
375,767
 
Write-down of long-lived assets
   
     
     
4,471
     
     
7,503
 
Write-down of trade names
   
     
     
     
     
5,541
 
Write-down of goodwill
   
     
     
     
     
42,136
 
Operating income (loss)
   
67,627
     
49,631
     
25,909
     
40,428
     
(93,058
)
Interest expense
   
746
     
1,384
     
2,346
     
2,972
     
5,581
 
Interest income
   
621
     
611
     
944
     
724
     
2,504
 
Income from Continued Dumping and Subsidy Offset Act, net
   
     
18,037
     
1,054
     
4,436
     
8,124
 
Other income (expense), net
   
3,208
     
(38
)
   
405
     
480
     
(7,888
)
Income (loss) before income taxes
   
70,710
     
66,857
     
25,966
     
43,096
     
(95,899
)
Income tax expense (benefit)
   
23,528
     
(22,051
)
   
8,593
     
11,737
     
26,514
 
Net income (loss)
   
47,182
     
88,908
     
17,373
     
31,359
     
(122,413
)
Net (income) loss attributable to noncontrolling interests
   
(793
)
   
(942
)
   
6,674
     
1,342
     
(252
)
Net income (loss) attributable to La-Z-Boy Incorporated
 
$
46,389
   
$
87,966
   
$
24,047
   
$
32,701
   
$
(122,665
)
 
                                       
Basic weighted average shares
   
52,351
     
51,944
     
51,849
     
51,533
     
51,460
 
Basic net income (loss) per share attributable to La-Z-Boy Incorporated
 
$
0.87
   
$
1.66
   
$
0.46
   
$
0.63
   
$
(2.39
)
Diluted weighted average shares
   
53,685
     
52,478
     
52,279
     
51,732
     
51,460
 
Diluted net income (loss) per share attributable to La-Z-Boy Incorporated
 
$
0.85
   
$
1.64
   
$
0.45
   
$
0.62
   
$
(2.39
)
Dividends declared per share
 
$
0.08
   
$
   
$
   
$
   
$
0.10
 
Book value of year-end shares outstanding (1)
 
$
9.25
   
$
8.46
   
$
6.96
   
$
6.56
   
$
5.81
 


Consolidated Five-Year Summary of Financial Data (continued)

(Dollar amounts in thousands)
 
(52 weeks)
   
(52 weeks)
   
(53 weeks)
   
(52 weeks)
   
(52 weeks)
 
Fiscal Year Ended
 
4/27/2013
   
4/28/2012
   
4/30/2011
   
4/24/2010
   
4/25/2009
 
Return on average total equity (2)
   
10.0
%
   
21.9
%
   
4.9
%
   
9.7
%
   
(32.5
)%
Gross profit as a percent of sales
   
31.9
%
   
30.8
%
   
29.8
%
   
31.6
%
   
27.5
%
Operating profit (loss) as a percent of sales
   
5.1
%
   
4.0
%
   
2.2
%
   
3.4
%
   
(7.6
)%
Effective tax rate (2)
   
33.3
%
   
(33.0
)%
   
33.1
%
   
27.2
%
   
(27.6
)%
Return on sales (2)
   
3.5
%
   
7.2
%
   
1.5
%
   
2.7
%
   
(10.0
)%
 
                                       
Depreciation and amortization
 
$
23,140
   
$
23,486
   
$
24,302
   
$
25,246
   
$
24,142
 
Capital expenditures
 
$
25,912
   
$
15,663
   
$
10,540
   
$
10,986
   
$
15,625
 
Property, plant and equipment, net
 
$
118,060
   
$
114,366
   
$
120,603
   
$
138,857
   
$
146,896
 
 
                                       
Working capital
 
$
350,717
   
$
350,241
   
$
300,119
   
$
279,768
   
$
220,401
 
Current ratio (3)
 
3.3 to 1
   
3.3 to 1
   
3.3 to 1
   
2.9 to 1
   
2.7 to 1
 
Total assets
 
$
720,371
   
$
685,739
   
$
593,455
   
$
607,783
   
$
548,330
 
 
                                       
Long-term debt, excluding current portion
 
$
7,576
   
$
7,931
   
$
29,937
   
$
46,917
   
$
52,148
 
Total debt
 
$
8,089
   
$
9,760
   
$
35,057
   
$
47,983
   
$
60,872
 
Total equity
 
$
491,968
   
$
447,815
   
$
364,140
   
$
343,114
   
$
303,419
 
Debt to equity ratio (4)
   
1.6
%
   
2.2
%
   
9.6
%
   
14.0
%
   
20.1
%
Debt to capitalization ratio (5)
   
1.6
%
   
2.1
%
   
8.8
%
   
12.3
%
   
16.7
%
 
                                       
Shareholders
   
12,400
     
13,900
     
13,900
     
17,400
     
16,700
 
Employees
   
8,185
     
8,160
     
7,910
     
8,290
     
7,730
 

(1) Equal to total equity divided by the number of outstanding shares on the last day of the fiscal year
(2) Based on income (loss) from continuing operations
(3) Equal to total current assets divided by total current liabilities
(4) Equal to total debt divided by total equity
(5) Equal to total debt divided by total debt plus total equity

Unaudited Quarterly Financial Information Fiscal 2013

(Dollar amounts in thousands, except per share data)
 
(13 weeks)
   
(13 weeks)
   
(13 weeks)
   
(13 weeks)
 
Fiscal Quarter Ended
 
7/28/2012
   
10/27/2012
   
1/26/2013
   
4/27/2013
 
Sales
 
$
301,501
   
$
322,341
   
$
349,148
   
$
359,535
 
Cost of sales
   
211,889
     
222,032
     
235,699
     
237,966
 
Gross profit
   
89,612
     
100,309
     
113,449
     
121,569
 
Selling, general and administrative expense
   
81,986
     
89,746
     
90,171
     
95,409
 
Operating income
   
7,626
     
10,563
     
23,278
     
26,160
 
Interest expense
   
173
     
191
     
148
     
234
 
Interest income
   
121
     
116
     
198
     
186
 
Other income (expense), net
   
(121
)
   
212
     
2,404
     
713
 
Income before income taxes
   
7,453
     
10,700
     
25,732
     
26,825
 
Income tax expense
   
2,758
     
3,868
     
8,569
     
8,333
 
Net income
   
4,695
     
6,832
     
17,163
     
18,492
 
Net income attributable to noncontrolling interests
   
(297
)
   
(213
)
   
(99
)
   
(184
)
Net income attributable to La-Z-Boy Incorporated
 
$
4,398
   
$
6,619
   
$
17,064
   
$
18,308
 
 
                               
Diluted weighted average shares
   
53,040
     
53,268
     
53,401
     
53,754
 
 
                               
Diluted net income per share attributable to La-Z-Boy Incorporated
 
$
0.08
   
$
0.12
   
$
0.32
   
$
0.33
 
 
                               
Dividends declared per share
 
$
   
$
   
$
0.04
   
$
0.04
 

Unaudited Quarterly Financial Information Fiscal 2012

(Dollar amounts in thousands, except per share data)
 
(13 weeks)
   
(13 weeks)
   
(13 weeks)
   
(13 weeks)
 
Fiscal Quarter Ended
 
7/30/2011
   
10/29/2011
   
1/28/2012
   
4/28/2012
 
Sales
 
$
280,094
   
$
307,679
   
$
316,515
   
$
327,388
 
Cost of sales
   
199,166
     
211,896
     
216,724
     
224,033
 
Gross profit
   
80,928
     
95,783
     
99,791
     
103,355
 
Selling, general and administrative expense
   
77,455
     
83,535
     
82,771
     
86,465
 
Operating income
   
3,473
     
12,248
     
17,020
     
16,890
 
Interest expense
   
424
     
389
     
274
     
297
 
Interest income
   
183
     
166
     
138
     
124
 
Income from Continued Dumping and Subsidy Offset Act, net
   
322
     
     
1,415
     
16,300
 
Other income (expense), net
   
373
     
(108
)
   
(89
)
   
(214
)
Income before income taxes
   
3,927
     
11,917
     
18,210
     
32,803
 
Income tax expense (benefit)
   
(41,929
)
   
4,245
     
2,864
     
12,769
 
Net income
   
45,856
     
7,672
     
15,346
     
20,034
 
Net (income) loss attributable to noncontrolling interests
   
(320
)
   
198
     
(388
)
   
(432
)
Net income attributable to La-Z-Boy Incorporated
 
$
45,536
   
$
7,870
   
$
14,958
   
$
19,602
 
 
                               
Diluted weighted average shares
   
52,443
     
52,475
     
52,379
     
52,609
 
 
                               
Diluted net income per share attributable to La-Z-Boy Incorporated
 
$
0.85
   
$
0.15
   
$
0.28
   
$
0.37
 
 
                               
Dividends declared per share
 
$
   
$
   
$
   
$
 


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

We have prepared this Management’s Discussion and Analysis as an aid to better understand our financial results.  It should be read in conjunction with the accompanying Consolidated Financial Statements and related Notes to Consolidated Financial Statements. We begin with an introduction to our key businesses and significant operational events in fiscal 2013. We then provide discussions of our results of operations, liquidity and capital resources, and critical accounting policies.

Introduction

Our Business

La-Z-Boy Incorporated manufactures, markets, imports, distributes and retails upholstery products, accessories and casegoods (wood) furniture products.  We are the leading global producer of reclining chairs and the second largest manufacturer/distributor of residential furniture in the United States according to the May 2013 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 upholstered furniture in North America according to the May 2013 Top 100 ranking by Furniture Today.  We have nine major North-American manufacturing locations to support our speed to market and customization strategy.

We sell our products, primarily in the United States and Canada, to furniture retailers and directly to consumers through stores owned and operated by our subsidiaries.  The centerpiece of our retail distribution strategy is our network of 313 La-Z-Boy Furniture Galleries® stores and 565 Comfort Studios® locations, each dedicated to marketing our La-Z-Boy branded products.  We consider this dedicated space to be “branded outlets” or “proprietary.”  We own 94 of the La-Z-Boy Furniture Galleries® stores.  The remainder of the La-Z-Boy Furniture Galleries® stores, as well as all 565 Comfort Studios® 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 Studios® 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 Studios® locations, our Kincaid, England and Lea operating units have their own dedicated proprietary in-store gallery programs with over 730 outlets and 4.3 million square feet of proprietary floor space.  In total, our proprietary floor space includes approximately 11.7 million square feet.

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

· Upholstery Segment.  Our Upholstery segment is our largest segment in terms of revenue, and consists of three operating units: La-Z-Boy, our largest operating unit, and the Bauhaus and England operating units. The 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 Comfort Studios® locations, major dealers and other independent retailers.

· Casegoods Segment.  Our Casegoods segment is an importer, marketer, manufacturer and distributor of casegoods (wood) furniture such as bedroom sets, dining room sets, entertainment centers and occasional pieces, and some coordinated upholstered furniture.  The Casegoods segment consists of two operating units, one consisting of American Drew, Lea and Hammary, and the second being Kincaid.  The Casegoods segment primarily sells to major dealers and other independent retailers.

· Retail Segment.  Our Retail segment consists of 94 company-owned La-Z-Boy Furniture Galleries® stores located in eleven markets ranging from southern California to the Midwest to the east coast of the United States. The Retail segment primarily sells upholstered furniture, in addition to some casegoods and other accessories, to the end consumer through the retail network.
 
Significant Operational Events in Fiscal 2013

During fiscal 2013, we generated $68.4 million in cash from operating activities, due to stronger sales volume and improved profitability margins in our Upholstery and Retail segments. We used the cash generated from operating activities, combined with our existing cash on hand, to fund capital expenditures, to acquire the assets of La-Z Recliner Shops, Inc., an independent operator of nine La-Z-Boy Furniture Galleries® stores and one distribution center in the southern Ohio market, to purchase shares of our stock and to pay dividends to shareholders.  In addition, we funded $29.9 million of investment purchases to enhance our returns on our excess cash, and made a $20.0 million discretionary payment into our defined benefit pension plan in order to improve the funded status of the plan and as part of our broader pension de-risking strategy.

Also during fiscal 2013, we recorded a restructuring charge of $2.7 million, mainly related to fixed asset and inventory write-downs resulting from the closure of our lumber processing operation in our Casegoods segment.  As a result of this restructuring, we will no longer process component lumber parts for our domestically produced Casegoods furniture and will instead outsource all component lumber parts.

These items are all discussed in more detail throughout this Management’s Discussion and Analysis.

Results of Operations
Fiscal Year 2013 Compared to Fiscal Year 2012

La-Z-Boy Incorporated
(Amounts in thousands, except  percentages)
 
(52 weeks)
4/27/2013
   
(52 weeks)
4/28/2012
   
Percent
change
 
Consolidated sales
 
$
1,332,525
   
$
1,231,676
     
8.2
%
Consolidated operating income
   
67,627
     
49,631
     
36.3
%
Consolidated operating margin
   
5.1
%
   
4.0
%
       

Sales
Our consolidated sales increased by $100.8 million due mainly to the combination of stronger volume, favorable changes in product mix, and the benefit of selling price increases and less promotional activity.

Operating Margin
Our consolidated operating margin increased by 1.1 percentage points in fiscal 2013.  Our Retail segment’s operating margin continued to improve in fiscal 2013 as compared to the prior year and our Upholstery segment’s operating margin also increased compared to the prior year.  These improvements were partially offset by our Casegoods segment, whose operating margin declined in fiscal 2013 as compared to fiscal 2012.

· Our gross margin increased 1.1 percentage points in fiscal 2013 as compared to fiscal 2012.
o Our Retail segment increase in gross margin was a result of mix, merchandising, and price.
o We also saw favorable absorption of fixed costs resulting from sales volume increases in our Upholstery segment.
o These improvements were partially offset by 0.2 percentage points of restructuring charges recorded during fiscal 2013, which mainly related to fixed asset and inventory write-downs associated with the closure of our lumber processing operation in our Casegoods segment during the second quarter.
 
· Selling, General, and Administrative (“SG&A”) expenses increased in dollars in fiscal 2013 as compared to fiscal 2012, but remained flat as a percent of sales.
o Increased sales resulted in favorable absorption of fixed costs.
o Offsetting the favorable fixed cost absorption was $8.8 million of additional incentive compensation expense in fiscal 2013 across all segments, or an increase of 0.7 percentage points.  This increase in incentive compensation was due to our continued improvements in sales and operating results for the full fiscal year.  As a result, we have three outstanding performance based stock awards, each with three-year performance measurement periods, for which we were recognizing expense during fiscal 2013.

Upholstery Segment
(Amounts in thousands, except  percentages)
 
(52 weeks)
4/27/2013
   
(52 weeks)
4/28/2012
   
Percent
change
 
Sales
 
$
1,067,047
   
$
975,103
     
9.4
%
Operating income
   
96,762
     
81,753
     
18.4
%
Operating margin
   
9.1
%
   
8.4
%
       

Sales
Our Upholstery segment’s sales increased $91.9 million in fiscal 2013 as compared to fiscal 2012.  Increased volume and selling price, in addition to favorable changes in product mix drove the majority of the 9.4% increase in sales.  We believe the increase in orders was a result of an effective marketing plan that led to greater customer awareness of our improved product value and styling, which drove increased volume for our La-Z-Boy branded business, as well as the improved performance of our network of retail stores, which includes our company-owned and independent-licensed stores.
 
Operating Margin
Our Upholstery segment’s operating margin increased by 0.7 percentage points in fiscal 2013 compared to fiscal 2012.

· The segment’s gross margin increased 0.9 percentage points during fiscal 2013 due to a combination of factors, the most significant of which were:
o Selling price changes as well as changes in product mix resulted in a 1.6 percentage point increase in gross margin.
o Raw material cost increases resulted in a 1.1 percentage point decrease in gross margin.
· The segment’s SG&A as a percentage of sales increased 0.2 percentage points, mainly due to higher incentive compensation expense in fiscal 2013, as well as increased costs related to our ERP implementation.  These increased costs were partially offset by favorable absorption of fixed costs resulting from our sales volume increase.

Casegoods Segment
(Amounts in thousands, except  percentages)
 
(52 weeks)
4/27/2013
   
(52 weeks)
4/28/2012
   
Percent
change
 
Sales
 
$
133,994
   
$
139,639
     
(4.0
)%
Operating income
   
2,640
     
5,540
     
(52.3
)%
Operating margin
   
2.0
%
   
4.0
%
       


Sales
Our Casegoods segment’s sales decreased $5.6 million in fiscal 2013 as compared to fiscal 2012. Our casegoods sales continued to be weak during fiscal 2013.  This impact was partially offset by the increases in selling price.

Operating Margin
Our Casegoods segment’s operating margin declined 2.0 percentage points in fiscal 2013 compared to fiscal 2012.

· The segment’s gross margin decreased 0.4 percentage points in fiscal 2013 compared to fiscal 2012.  Gross margin was reduced by 1.1 percentage points due to a charge taken in the third quarter of fiscal 2013 for a probable adjustment to our import duties, combined with a decline in volume which resulted in an inability to absorb fixed costs.  Partially offsetting these declines was an increase in gross margin due to a shift to a larger mix of sales of occasional furniture, which carry better margins.
· The segment’s SG&A as a percentage of sales increased 1.6 percentage points during fiscal 2013 compared to fiscal 2012, due mainly to higher incentive compensation costs, which were driven by equity-based awards and consolidated financial performance.  The inability to absorb fixed costs due to the decline in sales volume also contributed to the increased SG&A costs as a percentage of sales.

 Retail Segment
(Amounts in thousands, except  percentages)
 
(52 weeks)
4/27/2013
   
(52 weeks)
4/28/2012
   
Percent
change
 
Sales
 
$
264,723
   
$
215,490
     
22.8
%
Operating income (loss)
   
4,099
     
(7,819
)
   
152.4
%
Operating margin
   
1.5
%
   
(3.6
)%
       

Sales
Our Retail segment’s sales increased $49.2 million in fiscal 2013 as compared to fiscal 2012.  Of this increase, $18.1 million was due to the acquisition of nine retail stores in the southern Ohio market on October 1, 2013. The remainder of the increase in sales was driven by increases in traffic and average ticket combined with an improved mix of merchandise.

Operating Margin
Our Retail segment’s operating margin improved 5.1 percentage points in fiscal 2013 compared to fiscal 2012.

· The segment’s gross margin benefitted from selling price increases, differentiated product merchandising, and lower promotional activity.
· Increased sales volume contributed to a higher operating margin, through greater leverage of SG&A expenses as a percentage of sales.


Corporate and Other

(Amounts in thousands, except  percentages)
 
(52 weeks)
4/27/2013
   
(52 weeks)
4/28/2012
   
Percent
Change
 
Sales
 
   
   
 
VIEs, net of intercompany sales eliminations
 
$
   
$
8,840
     
N/M
 
Corporate and Other
   
2,313
     
2,356
     
(1.8
)%
Eliminations
   
(135,552
)
   
(109,752
)
   
(23.5
)%
 
                       
Operating income (loss)
                       
VIEs
   
     
959
     
N/M
 
Restructuring
   
(2,715
)
   
(281
)
   
N/M
 
Corporate and Other
   
(33,159
)
   
(30,521
)
   
(8.6
)%

Sales
During the third quarter of fiscal 2012, we deconsolidated our last VIE due to the expiration of the operating agreement that previously caused us to be considered its primary beneficiary.  Eliminations increased in fiscal 2013 as compared to fiscal 2012 due to higher sales from our Upholstery and Casegoods segments to our Retail segment as a result of the increased volume in the Retail segment, which included the acquisition of the southern Ohio market.

Operating Loss
Our Corporate and Other operating loss increased $2.6 million in fiscal 2013 compared to fiscal 2012 due primarily to higher incentive compensation costs in fiscal 2013 as compared to fiscal 2012.
 
The $2.7 million restructuring charge recorded in fiscal 2013 mainly related to fixed asset and inventory write-downs associated with the closure of our lumber processing operation in our Casegoods segment.

Other Income

Other income totaled $3.2 million during fiscal 2013, compared to other expense of less than $0.1 million in fiscal 2012.  The other income generated in fiscal 2013 primarily resulted from gains realized on the sales of investments held to fund our non-qualified defined benefit retirement plan.

Income from Continued Dumping and Subsidy Offset Act

The Continued Dumping and Subsidy Offset Act of 2000 (“CDSOA”) provides for distribution of duties collected by U.S. Customs and Border Protection from antidumping cases to domestic producers that supported the antidumping petition.  We received $18.0 million during fiscal 2012 in CDSOA distributions related to the antidumping order on wooden bedroom furniture from China.  Certain domestic producers who did not support the antidumping petition (“Non-Supporting Producers”) filed actions in the U.S. Court of International Trade challenging the CDSOA’s “support requirement” and seeking a share of the distributions. As a result, Customs withheld a portion of those distributions pending resolution of the Non-Supporting Producers’ actions.  Between October 2011 and February 2012, the Court of International Trade entered judgments against the Non-Supporting Producers and dismissed their actions.  On January 1, 2012, Customs announced that it would distribute the withheld distributions.  The Non-Supporting Producers then filed motions in the Court of International Trade and, later, in the U.S. Court of Appeals for the Federal Circuit to enjoin such distributions pending their appeal of the Court of International Trade’s judgments.  On March 5, 2012, the Federal Circuit denied the Non-Supporting Producers’ motions for injunction “without prejudicing the ultimate disposition of these cases.”  In November 2012, Customs determined to withhold CDSOA distributions pending resolution of the Federal Circuit appeals.  As a result, we did not receive any CDSOA distributions in fiscal 2013. In view of the uncertainties associated with this program, we are unable to predict the amounts, if any, we may receive in the future under the CDSOA. Also, if the Federal Circuit were to reverse the judgments of the Court of International Trade and determine that the Non-Supporting Producers are entitled to CDSOA distributions, it is possible that Customs may seek to have us return all or a portion of our company’s share of the distributions.  Based on what we know today, we do not expect this will occur.
 
Income Taxes

Our effective tax rate for fiscal 2013 was 33.3% compared to a net tax benefit of (33.0)% for fiscal 2012.  Our effective tax rate varies from the 35% U.S. federal statutory rate primarily due to state income taxes and the U.S. manufacturing deduction.  In fiscal 2013, we recorded an income tax benefit of 1.6% as a result of non-taxable gain on the sale of marketable securities.  Absent this benefit and discrete items, the effective rate for fiscal 2013 would have been 35.4%.  During fiscal 2012, we recorded a substantial tax benefit as a result of releasing a portion of the valuation allowance related to U.S. federal and state deferred tax assets and other discrete items.  Absent this adjustment, our effective tax rate for fiscal 2012 would have been 37.5%.

Results of Operations
Fiscal Year 2012 Compared to Fiscal Year 2011

La-Z-Boy Incorporated
(Amounts in thousands, except  percentages)
 
(52 weeks)
4/28/2012
   
(53 weeks)
4/30/2011
   
Percent
change
 
Consolidated sales
 
$
1,231,676
   
$
1,187,143
     
3.8
%
Consolidated operating income
   
49,631
     
25,909
     
91.6
%
Consolidated operating margin
   
4.0
%
   
2.2
%
       

Sales
Fiscal 2012 includes results for a 52 week period, while fiscal 2011 includes results for a 53 week period.

Our consolidated sales increased by $44.5 million on one less week of shipments due to increased sales volume in our Upholstery and Retail segments.  We believe these improvements were the result of an effective promotional plan which drove increased volume for our La-Z-Boy branded business, as well as the improved performance of our network of retail stores, which includes our company-owned and independent-licensed stores.  The operating results of our Retail segment continued to improve, with increased sales levels resulting from increased average ticket sales on customer traffic that was slightly down.

The improvement in our Upholstery and Retail segments were partially offset by the performance of our Casegoods segment, which experienced decreased sales in fiscal 2012 as compared to fiscal 2011.  Overall Casegoods order levels decreased during fiscal 2012, as our new product introductions during the year were not as well-received as our new product introductions in the prior year.

Operating Margin
Our consolidated operating margin increased by 1.8 percentage points in fiscal 2012. Our Retail segment’s operating margin continued to improve in fiscal 2012 as compared to the prior year and our Upholstery segment’s operating margin also increased compared to the prior year. These improvements were partially offset by our Casegoods segment, whose operating margin declined in fiscal 2012 as compared to fiscal 2011.
 
· Our gross margin increased 1.0 percentage point in fiscal 2012 as compared to fiscal 2011.  Ongoing cost reductions, primarily in our Upholstery segment related to our Mexican operations, along with improvements in our Retail segment’s gross margin, drove this improvement.  Partially offsetting these items were raw material price increases in our Upholstery and Casegoods segments.
· Selling, General, and Administrative (“SG&A”) expenses increased in dollars in fiscal 2012 as compared to fiscal 2011, but as a percent of sales, SG&A decreased by 0.5 percentage points. The improvement as a percentage of sales was driven by our increased sales volume and greater leverage of SG&A expenses. The increase in dollars was driven by an increase in employee incentive and compensation expense, primarily in the Upholstery segment and in Corporate and Other, as well as increased advertising spend in the Upholstery segment.
· Our fiscal 2011 operating margin was impacted by 0.4 percentage points for the write-down of long-lived assets.

Upholstery Segment
(Amounts in thousands, except  percentages)
 
(52 weeks)
4/28/2012
   
(53 weeks)
4/30/2011
   
Percent
change
 
Sales
 
$
975,103
   
$
916,867
     
6.4
%
Operating income
   
81,753
     
72,743
     
12.4
%
Operating margin
   
8.4
%
   
7.9
%
       

Sales
Fiscal 2012 includes results for a 52 week period, while fiscal 2011 includes results for a 53 week period.

Our Upholstery segment’s sales increased $58.2 million in fiscal 2012 as compared to fiscal 2011 despite the extra week in fiscal 2011.  Increased volume drove the majority of the 6.4% increase in sales, which we believe was the result of an effective promotional plan, combined with new product introductions and accelerated sales in our stationary upholstery business, which drove increased volume for our La-Z-Boy branded business, as well as the improved performance of our network of retail stores, which includes our company-owned and independent-licensed stores.
 
Operating Margin
Our Upholstery segment’s operating margin increased by 0.5 percentage points in fiscal 2012 mainly due to the following:

· The segment’s gross margin increased 1.0 percentage point during fiscal 2012 due to a combination of factors, the most significant of which were:
o Ongoing cost reductions and efficiencies, including the favorable operating impact of our Mexican operations, resulting in a 2.0 percentage point increase in gross margin.
o Raw material cost increases resulting in a 1.6 percentage point decrease in gross margin.
· Offsetting the increase in gross margin were higher warranty costs of $1.0 million in fiscal 2012 as compared to fiscal 2011, due to a reduction in the warranty reserve recorded in fiscal 2011 related to the redesign of a mechanism that had historically experienced high claims activity. Also offsetting the increase in gross margin was higher advertising spend and increased employee incentive and compensation expenses in fiscal 2012.


Casegoods Segment
(Amounts in thousands, except  percentages)
 
(52 weeks)
4/28/2012
   
(53 weeks)
4/30/2011
   
Percent
change
 
Sales
 
$
139,639
   
$
152,534
     
(8.5
)%
Operating income
   
5,540
     
6,698
     
(17.3
)%
Operating margin
   
4.0
%
   
4.4
%
       

Sales
Fiscal 2012 includes results for a 52 week period, while fiscal 2011 includes results for a 53 week period.

Our Casegoods segment’s sales decreased $12.9 million in fiscal 2012 as compared to fiscal 2011. The decline in sales volume was driven by our new product introductions in fiscal 2012 which were not as well-received as our new product introductions in fiscal 2011.

Operating Margin
Our Casegoods segment’s operating margin decreased 0.4 percentage points in fiscal 2012 mainly due to the de-leverage of fixed costs caused by the decline in sales volume.

 Retail Segment
(Amounts in thousands, except  percentages)
 
(52 weeks)
4/28/2012
   
(53 weeks)
4/30/2011
   
Percent
change
 
Sales
 
$
215,490
   
$
176,987
     
21.8
%
Operating loss
   
(7,819
)
   
(15,078
)
   
48.1
%
Operating margin
   
(3.6
)%
   
(8.5
)%
       

Sales
Fiscal 2012 includes results for a 52 week period, while fiscal 2011 includes results for a 53 week period.

Our Retail segment’s sales increased $38.5 million in fiscal 2012 even though fiscal 2011 included an extra week.  Of this increase, $29.2 million was primarily due to the acquisition of our Southern California VIE in the fourth quarter of fiscal 2011.  The remaining increase of $9.3 million related mainly to sales increases at stores that were open in both fiscal 2012 and fiscal 2011.  This increase was the result of increased average ticket sales on customer traffic that was slightly down.  We believe the increase in average ticket sales was the result of an effective advertising campaign bringing in a more qualified consumer.

Operating Margin
Our Retail segment’s operating margin increased 4.9 percentage points in fiscal 2012 compared to fiscal 2011.  While our Retail segment improved its operating margin for the third year in a row, the segment continued to experience negative operating profit due to its high lease expense to sales volume ratio.

· The segment’s gross margin during fiscal 2012 increased 2.5 percentage points compared to fiscal 2011.
· The improved operating margin for this segment was primarily a result of the increased sales volume which resulted in a greater leverage of SG&A expenses as a percentage of sales.
· The stores acquired from our Southern California VIE were essentially break-even on an operating margin basis for fiscal 2012, a substantial improvement over fiscal 2011 when these stores generated an operating loss of $3.5 million when they were a consolidated VIE and not reported as part of the Retail segment.
 
VIEs/Corporate and Other

(Amounts in thousands, except  percentages)
 
(52 weeks)
4/28/2012
   
(53 weeks)
4/30/2011
   
Percent
change
 
Sales
 
   
   
 
VIEs, net of intercompany sales eliminations
 
$
8,840
   
$
29,105
     
(69.6
)%
Corporate and Other
   
2,356
     
1,909
     
23.4
%
Eliminations
   
(109,752
)
   
(90,259
)
   
(21.6
)%
 
                       
Operating income (loss)
                       
VIEs
   
959
     
(4,949
)
   
119.4
%
Restructuring
   
(281
)
   
(487
)
   
N/M
 
Corporate and Other
   
(30,521
)
   
(28,547
)
   
(6.9
)%

Sales
During the third quarter of fiscal 2012, we deconsolidated our last VIE due to the expiration of the operating agreement that previously caused us to be considered its primary beneficiary.  Our VIEs’ sales decreased $20.3 million (net of intercompany eliminations) in fiscal 2012 compared to fiscal 2011.  This was mainly the result of acquiring our Southern California VIE in the fourth quarter of fiscal 2011.  Prior to deconsolidation, our remaining VIE had operating income of $1.0 million in fiscal 2012, compared to an operating loss of $4.9 million in fiscal 2011 for the two VIEs we had at that time.  Eliminations increased in fiscal 2012 as compared to fiscal 2011 due to higher sales from our Upholstery and Casegoods segments to our Retail segment as a result of the increased volume in the Retail segment.

Operating Loss
Our Corporate and Other operating loss increased $1.8 million in fiscal 2012 compared to fiscal 2011 due to higher costs for incentive compensation expenses of $6.2 million as a result of improved operating performance, partially offset by lower consulting costs of $1.8 million, a gain recognized on the deconsolidation of our last VIE of $1.1 million and a $1.0 million reduction of an environmental reserve recorded in the first quarter of fiscal 2012 related to a previously sold division.

Interest Expense

Interest expense decreased $1.0 million in fiscal 2012 as compared to fiscal 2011, mainly due to a 2.1 percentage point decrease in our weighted average interest rate as a result of the May 2011 expiration of our interest rate swap.  Our average debt level decreased by $5.7 million in fiscal 2012 compared to fiscal 2011.

Income from Continued Dumping and Subsidy Offset Act

We received $18.0 million during fiscal 2012 and $1.1 million during fiscal 2011 in CDSOA distributions related to the antidumping order on wooden bedroom furniture from China.  The $18.0 million we received in fiscal 2012 included $16.3 million of previously withheld distributions received in the fourth quarter of fiscal 2012.  Please see “Fiscal Year 2013 Compared to Fiscal Year 2012-Income from Continued Dumping and Subsidy Offset Act” for more information about the CDSOA and related legal actions.


Income Taxes

Our effective tax rate for fiscal 2012 was a net tax benefit of (33.0)%.  During fiscal 2012, we reduced by $46.2 million the valuation allowances associated with certain U.S. federal, state and foreign deferred tax assets, in addition to recording other minor discrete items that together reduced our tax expense by an additional $0.9 million.  These adjustments increased diluted earnings per share by $0.88.  The reduction in the valuation allowance was the result of the following factors at the point we reduced the allowance, including primarily (i) our cumulative pre-tax income position, (ii) our most recent operating results which had exceeded both our operating plan and prior year results, and (iii) our then-current forecasts, all of which caused us to temper our concerns at that time regarding the economic environment.  Absent these adjustments, our effective tax rate for fiscal 2012 would have been 37.5%.

The effective tax rate was 33.1% for fiscal 2011.  Changes in the valuation reserve for deferred taxes due to temporary timing differences increased our fiscal 2011 effective tax rate by 13.5 percentage points.  Offsetting this rate increase was a tax benefit associated with our southern California VIE that resulted in a rate reduction of 17.6 percentage points.  This tax benefit related primarily to the amount of accounts receivable written off in excess of the fair value of the assets received from this VIE.

Liquidity and Capital Resources

Our sources of cash liquidity include cash and equivalents, short-term and long-term investments, cash from operations and amounts available under our credit facility. We believe these sources remain adequate to meet our short-term and long-term liquidity requirements, finance our long-term growth plans, meet debt service, and fulfill other cash requirements for day-to-day operations, dividends to shareholders and capital expenditures including the construction of our new world headquarters.  We had cash and equivalents of $131.1 million at April 27, 2013, compared to $152.4 million at April 28, 2012.  The decrease in cash and equivalents was primarily attributable to investment purchases to enhance our returns on our excess cash, acquisition of assets, and an increase in restricted cash for letters of credit collateral.  In addition, we made a $20.0 million discretionary payment to our defined benefit pension plan during the fourth quarter of fiscal 2013.

We maintain a revolving credit facility secured primarily by all of our accounts receivable, inventory, and cash deposit and securities accounts.  Availability under the agreement fluctuates according to a borrowing base calculated on eligible accounts receivable and inventory.  The credit agreement includes affirmative and negative covenants that apply under certain circumstances, including a 1.05 to 1.00 fixed charge coverage ratio requirement that applies when excess availability under the line is less than 12.5% of the revolving credit commitment of $150 million.  At April 27, 2013, we were not subject to the fixed charge coverage ratio requirement, had no borrowings outstanding under the agreement, and had excess availability of $143.3 million.

Capital expenditures for fiscal 2013 were $25.9 million compared with $15.7 million during fiscal 2012.  We have no material contractual commitments outstanding for future capital expenditures.  We have announced plans to begin construction on our new world headquarters in June 2013, a project that is estimated at $57 million, which we expect will be spent over the next 18 months.  We expect capital expenditures to be in the range of $60 million to $70 million in fiscal 2014.
 
In November 2012, the board of directors reinstated payment of quarterly cash dividends to our shareholders.  The board of directors has sole authority to determine if and when future dividends will be declared and on what terms.  It currently expects to continue declaring regular quarterly cash dividends for the foreseeable future but may discontinue doing so at any time.
 
We believe our present cash and equivalents balance of $131.1 million, cash flows from operations, $29.9 million of short and long-term investments, and current excess availability under our credit facility of $143.3 million will be sufficient to fund our business needs, including our fiscal 2014 contractual obligations of $134.0 million as presented in our contractual obligations table.
 
The following table illustrates the main components of our cash flows:

 
 
Year Ended
 
(Amounts in thousands)
 
4/27/2013
   
4/28/2012
 
Cash Flows Provided By (Used For)
 
   
 
Net cash provided by operating activities
 
$
68,440
   
$
82,848
 
Net cash used for investing activities
   
(78,041
)
   
(19,094
)
Net cash used for financing activities
   
(11,616
)
   
(26,517
)
Exchange rate changes
   
(68
)
   
(129
)
Change in cash and equivalents
 
$
(21,285
)
 
$
37,108
 

Operating Activities

During fiscal 2013, net cash provided by operating activities was $68.4 million.  Our cash provided by operating activities was mainly the result of pre-tax income generated during fiscal 2013.  Cash from net income net of the change in deferred taxes, depreciation and amortization and stock-based compensation expense, along with cash provided by working capital, was partially reduced by pension plan contributions.  Pension plan contributions in fiscal 2013 included a $20 million discretionary contribution made to improve the funded status of the plan and as part of our broader pension de-risking strategy.

The primary components of the increase in working capital are listed below:

· Increase in other liabilities of $11.0 million, mainly due to increases in customer deposits, warranty and freight, which have all increased as a result of our volume increases.
· Decrease in accounts payable of $6.1 million.
· Decrease in accounts receivable of $7.1 million primarily due to an increase in cash collections, which resulted in lower days sales outstanding. The improvement in our cash collections was the result of an improvement in the financial health of our customer base, including our independent La-Z-Boy Furniture Galleries® dealers.

During fiscal 2012, net cash provided by operating activities was $82.8 million, which included CDSOA funds received during the year.  We generated net income of $88.9 million during the year, partially offset by a non-cash increase in deferred taxes of $42.1 million. Depreciation and amortization totaled $23.5 million, partially offset by $5.8 million in pension contributions.  Working capital increased and the major components of the change are listed below:

· Increase in other liabilities of $12.6 million, mainly due to higher accrued incentive compensation of $6.2 million, income taxes of $3.8 million and freight of $1.5 million.
· Increase in accounts payable of $7.5 million, offset by increased inventory levels of $7.4 million. These increases were primarily due to increased raw material inventory in our Upholstery segment.
· Increase in accounts receivable of $6.2 million, driven by the increase in sales.
· Decrease in other assets of $3.3 million.

Investing Activities

During fiscal 2013, net cash used for investing activities was $78.0 million, which consisted primarily of $25.9 million in capital expenditures, a $9.8 million increase in restricted cash, a net $30.9 million in investment purchases, and the acquisition of nine retail stores and a distribution center in the southern Ohio market of $15.8 million, net of cash acquired.  Our restricted cash relates to deposits serving as collateral for certain letters of credit, and $29.9 million of our investment purchases were intended to enhance returns on our excess cash.  During fiscal 2012, net cash used for investing activities was $19.1 million, which consisted primarily of $15.7 million in capital expenditures and a $2.9 million increase in restricted cash.
 
Financing Activities

We used $11.6 million of cash for financing activities in fiscal 2013 compared to $26.5 million during fiscal 2012, both primarily related to the repayment of debt and purchases of common stock.  Cash used in fiscal 2013 also included $4.2 million of dividend payments to shareholders.

Our board of directors has authorized the purchase of company stock. As of April 27, 2013, 4.2 million shares remained available for purchase pursuant to this authorization.  We purchased 0.7 million shares during fiscal 2013, totaling $10.3 million.  During the fourth quarter of fiscal 2013, pursuant to the existing board authorization, we adopted a plan to purchase company stock pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934. The plan was effective March 30, 2013.  Under this plan, our broker has the authority to purchase company shares on our behalf, subject to SEC regulations and the price, market volume and timing constraints specified in the plan. The plan expires at the close of business on June 30, 2013.  With the cash flows we anticipate generating in fiscal 2014 we expect to continue being opportunistic in purchasing company stock.

Other

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

 
 
   
Payments Due by Period
 
(Amounts in thousands)
 
Total
   
Less than 
1 Year
   
1-3 Years
   
4-5 Years
   
More than 
5 Years
 
Long-term debt obligations
 
$
7,100
   
$
   
$
7,100
   
$
   
$
 
Capital lease obligations
   
989
     
513
     
476
     
     
 
Operating lease obligations
   
319,191
     
46,562
     
88,390
     
75,623
     
108,616
 
Interest obligations
   
14
     
13
     
1
     
     
 
Purchase obligations*
   
86,961
     
86,961
     
     
     
 
Total contractual obligations
 
$
414,255
   
$
134,049
   
$
95,967
   
$
75,623
   
$
108,616
 

*
We have purchase order commitments of $87.0 million related to open purchase orders, primarily with foreign and domestic casegoods, leather and fabric suppliers, which are generally cancellable if production has not begun.

Our consolidated balance sheet at the end of fiscal 2013 reflected a $1.4 million net liability for uncertain income tax positions.  It is reasonably possible that $0.2 million of this liability will be settled within the next 12 months.  The remaining balance will be paid or released as tax audits are completed or settled, statutes of limitations expire or other new information becomes available.

Our debt-to-capitalization ratio was 1.6% at April 27, 2013, and 2.1% at April 28, 2012.  Capitalization is defined as total debt plus total equity.

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

Business Outlook
 
We are confident the integrated retail model developed over the last several years is the right strategy to take our company forward to deliver profitable growth.  Our operating platform is efficient and that, combined with the strongest brand in the industry, positions us to continue to benefit from a strengthening economy, particularly with an ongoing recovery in the housing market.  We have much to look forward to in terms of increasing the value of our enterprise through the build out of La-Z-Boy branded outlets throughout North America and have every intention of aggressively pursuing many and varied growth opportunities.  The furniture industry typically experiences weaker demand during the summer months and, as a result, our plants shut down for one week of vacation and maintenance during the first quarter, which ends in July.  Accordingly, the first quarter is usually our weakest in terms of sales and earnings. Due to seasonality, we ship product for 12 weeks instead of the usual 13 weeks.
 
Critical Accounting Policies
 
Our consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles.  In some cases, these principles require management to make difficult and subjective judgments regarding uncertainties and, as a result, such estimates and assumptions may significantly impact our financial results and disclosures.   Estimates are based on currently known facts and circumstances, prior experience and other assumptions believed to be reasonable.  We use our best judgment in valuing these estimates and may, as warranted, use external advice.  Actual results could differ from these estimates, assumptions, and judgments and these differences could be significant.  We make frequent comparisons throughout the year of actual experience to our assumptions in order to mitigate the likelihood of significant adjustments.  Adjustments are recorded when the differences are known.  The following critical accounting policies affect our consolidated financial statements.

Revenue Recognition and Related Allowances

Substantially all of our shipping agreements with third-party carriers transfer the risk of loss to our customers upon shipment.  Accordingly, our shipments using third-party carriers are generally recognized as revenue upon shipment of the product.  In all cases, for product shipped on our company-owned trucks, revenue is recognized upon delivery. This revenue includes amounts billed to customers for shipping. Provisions are made at the time revenue is recognized for estimated product returns and warranties, as well as other incentives that may be offered to customers. We also recognize revenue for amounts received from our customers in connection with our shared advertising cost arrangement.  We import certain products from foreign ports, which are shipped directly to our domestic customers.  In this case, revenue is not recognized until title is assumed by our customer, which is normally after the goods pass through U.S. Customs.

Incentives offered to customers include cash discounts and other sales incentive programs. Estimated cash discounts and other sales incentives are recorded as a reduction of revenues when the revenue is recognized.

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

We have notes receivable balances due to us from various customers.  These notes receivable generally relate to past due accounts receivable which were converted to a note receivable in order to secure further collateral from the customer.  The collateral from the customer is generally in the form of inventory or real estate.  Additionally, we have personal guarantees from some of these customers on these notes receivable.  In cases where we do not have sufficient collateral to support the carrying value of the note receivable, we recognize an allowance for credit losses for this difference.

The allowance for credit losses reflects our best estimate of probable incurred losses inherent in the accounts and notes receivable balances. We determine the allowance based on known troubled accounts, historical experience and other currently available evidence.
 
Investments
 
We evaluate our available for sale investments periodically for possible other-than-temporary impairments by reviewing factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and our ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery of market value.  If the impairment is determined to be other-than-temporary, the amount of the impairment is recognized as part of earnings.  If the impairment is determined to be temporary, then the resulting change in market value is recorded as part of other comprehensive income/(loss) in our consolidated statement of changes in equity.
 
Long-lived Assets
 
We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable.  Our assessment of recoverability is based on our best estimates using either quoted market prices or an analysis of the undiscounted projected future cash flows by asset groups in order to determine if the fair value of our long-lived assets exceed their carrying value.  Our asset groups consist of our operating units in our Upholstery and Casegoods segments (La-Z-Boy, England, Bauhaus, American Drew, Lea and Hammary, Kincaid) and each of our retail stores.
 
Indefinite-lived Intangible Assets and Goodwill
 
We test indefinite-lived intangibles and goodwill for impairment on an annual basis in the fourth quarter of our fiscal year, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Indefinite-lived intangible assets include certain of our trade names and the reacquired right to own and operate La-Z-Boy Furniture Galleries® stores in the southern Ohio market.  Goodwill is tested for impairment by comparing the fair value of our reporting unit to its carrying value. The reporting unit for our goodwill is our southern Ohio retail market because the acquisition of this market is where the goodwill was generated. The fair value for the reporting unit is established based upon the discounted cash flows in order to determine if the fair value of our goodwill exceeds its carrying value.
 
Other Loss Reserves
 
We have various other loss exposures arising from the ordinary course of business, including inventory obsolescence, health insurance, litigation, environmental claims, insured and self-insured workers’ compensation and product liabilities. Establishing loss reserves requires estimates and the judgment of management with respect to risk and ultimate liability. We use legal counsel or other experts, including actuaries as appropriate, to assist in developing estimates. Due to the uncertainties and potential changes in facts and circumstances, additional charges related to these reserves could be required in the future.
 
We have various excess loss coverages for auto, product liability and workers’ compensation liabilities.  Our deductibles generally do not exceed $1.0 to $1.5 million.
 
Income Taxes
 
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards.  Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.  In periods when deferred tax assets are recorded, we are required to estimate whether recoverability is more likely than not, based on forecasts of taxable earnings in the related tax jurisdiction. We consider historic and projected future operating results, the eligible carry-forward period, tax law changes and other relevant considerations when making judgments about realizing the value of our deferred tax assets.


Pensions
 
We maintain a defined benefit pension plan for eligible factory hourly employees at some operating units.  The plan does not allow new participants. Active participants at some operating units continue to earn service credits.  Annual net periodic expense and benefit liabilities under our defined benefit pension plan are determined on an actuarial basis using various assumptions and estimates including discount rates, long-term rates of return, estimated remaining years of service and estimated life expectancy.  Each year, we compare the actual experience to the more significant assumptions used, and if warranted, we make adjustments to the assumptions.
 
Our pension plan discount rate assumption is evaluated annually. The discount rate is based upon a single rate developed after matching a pool of high quality bond payments to the plan’s expected future benefit payments.  We used a discount rate of 4.0% at April 27, 2013, compared with a rate of 4.6% at April 28, 2012, and 5.6% at April 30, 2011.  We used the same methodology for determining the discount rate in fiscal 2013, fiscal 2012 and fiscal 2011.
 
Pension benefits are funded through deposits with trustees and satisfy, at a minimum, the applicable funding regulations.
 
Besides evaluating the discount rate used to determine our pension obligation, we also evaluate our assumption relating to the expected return on plan assets annually. In selecting the expected long-term rate of return on assets, we considered the average rate of earnings expected on the funds invested or to be invested to provide the benefits of this plan. This included considering the trust’s asset allocation, investment strategy, and the expected returns likely to be earned over the life of the plan. The rate of return assumption as of April 27, 2013 was 6.3% compared with 7.8% at April 28, 2012.  The expected rate of return assumption as of April 27, 2013, will be used to determine pension expense for fiscal 2014.
 
For fiscal 2014, we will use liability driven investing to more closely match the profile of our assets to the pension plan liabilities.  Initially we will invest 70% of the plan’s assets in fixed rate investments with a duration that approximates the duration of its liabilities.  The allocation to fixed rate investments may be increased depending on the performance of the assets and changes in market interest rates.
 
We are not required to make contributions to our defined benefit pension plan in fiscal 2014.  We expect that the fiscal 2014 pension expense for the defined benefit pension plan, after considering all relevant assumptions will be approximately $2.7 million, unchanged from fiscal 2013.  A 25 basis point change in our discount rate or our expected return on plan assets would not have a material impact on our results of operations.
 
Product Warranties
 
We account for product warranties by accruing an estimated liability at the time the revenue is recognized. We estimate future warranty claims based on claim experience and any additional anticipated future costs on previously sold product.  Our liability estimates incorporate the cost of repairs including materials consumed, labor and overhead amounts necessary to perform the repair and any costs associated with delivery of the repaired product to the customer.  Considerable judgment is used in making our estimates.  Differences between actual and estimated costs are recorded when the differences are known.

Stock-Based Compensation

We measure stock-based compensation cost for equity-based awards at the grant date based on the fair value of the award and recognize it as expense over the vesting period. We measure stock-based compensation cost for liability-based awards based on the fair value of the award on the last day of the reporting period and recognize it as expense over the vesting period.  The liability for these awards is remeasured and adjusted to its fair value at the end of each reporting period until paid.  Determining the fair value of stock-based awards at the grant date requires judgment, including estimating expected dividends, future stock-price volatility, expected option lives and the amount of share-based awards that are expected to be forfeited. While the assumptions used to calculate and account for stock-based compensation awards represent management’s best estimates, these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if revisions are made to our assumptions and estimates, our stock-based compensation expense could be materially different in the future.
 
We record compensation cost for stock-based awards that vest based on performance conditions ratably over the vesting periods when the vesting of such awards become probable. Determining the probability of award vesting requires judgment, including assumptions about future operating performance.

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

The fair value of the performance award grant that vests based on a market condition was estimated using a Monte Carlo valuation model. The Monte Carlo model was used to incorporate more complex variables than closed-form models such as the Black-Scholes option valuation model used for option grants. The Monte Carlo valuation model simulates a distribution of stock prices to yield an expected distribution of stock prices over the remaining performance period.  The stock-paths are simulated using volatilities calculated with historical information using data from a look-back period that is equal to the vesting period. The model assumes a zero-coupon, risk-free interest rate with a term equal to the vesting period. The simulations are repeated many times (100,000 in this valuation) and the mean of the discounted values is calculated as the grant date fair value for the award. The final payout of the award as calculated by the model is then discounted back to the grant date using the risk-free interest rate.

Both the Monte Carlo and Black-Scholes methodologies are based, in part, upon inputs for which there is little or no observable market data, requiring us to develop our own assumptions.  Inherent in both of these models are assumptions related to expected stock-price volatility, expected life, risk-free interest rate and dividend yield.

Regulatory Developments

Recent Accounting Pronouncements
 
In February 2013, the Financial Accounting Standards Board issued accounting guidance related to reporting amounts reclassified out of accumulated other comprehensive income. The guidance amends the comprehensive income reporting standards to require items that are reclassified in their entirety to net income from accumulated other comprehensive income in the same reporting period to be reported separately from other amounts in other comprehensive income.  These amounts may be disclosed on the face of the financial statements where net income is presented or in the notes to the financial statements.  The guidance does not amend any existing disclosures around net income or other comprehensive income; it is only intended to improve the transparency of items in other comprehensive income.  We adopted this guidance in our fourth quarter of fiscal 2013 and it had no significant impact on our consolidated financial statements.


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

We are exposed to market risk from changes in interest rates. Our exposure to interest rate risk results from our variable rate debt, under which we had $7.1 million of borrowings at April 27, 2013.  Management estimates that a one percentage point change in interest rates would not have a material impact on our results of operations for fiscal 2014 based upon our current and expected levels of exposed liabilities.
 
We are exposed to market risk from changes in the value of foreign currencies primarily related to our plant in Mexico, as wages and other local expenses are paid in Mexican pesos. Nonetheless, gains and losses resulting from market changes in the value of foreign currencies have not had and are not expected to have a significant effect on our consolidated results of operations.  A decrease in the value of foreign currencies in relation to the U.S. dollar could impact the profitability of some of our vendors which could translate into higher prices on our supplies, but we believe any impact would be similar for our competitors.

We are exposed to market risk with respect to commodity and fuel price fluctuations, principally related to commodities used in the production of our products, including steel, wood and polyurethane.  As commodity prices increase, we determine whether a price increase to our customers to offset these increases is warranted.  We do not believe that an increase in these commodity costs would have a material impact on our results of operations.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Management’s Report to our Shareholders

Management’s Responsibility for Financial Information
Management of La-Z-Boy Incorporated is responsible for the preparation, integrity and objectivity of La-Z-Boy Incorporated’s consolidated financial statements and other financial information contained in this Annual Report on Form 10-K. Those consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America. In preparing those consolidated financial statements, management was required to make certain estimates and judgments, which are based upon currently available information and management’s view of current conditions and circumstances.

The Audit Committee of the board of directors, which consists solely of independent directors, oversees our process of reporting financial information and the audit of our consolidated financial statements. The Audit Committee is informed of the financial condition of La-Z-Boy Incorporated and regularly reviews management’s critical accounting policies, the independence of our independent auditors, our internal controls and the objectivity of our financial reporting. Both the independent auditors and the internal auditors have free access to the Audit Committee and meet with the Audit Committee periodically, both with and without management present.

Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal controls over financial reporting based upon the framework in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of April 27, 2013.  The effectiveness of the Company’s internal control over financial reporting as of April 27, 2013, has been audited by PricewaterhouseCoopers, LLP, an independent registered public accounting firm, as stated in their report which appears herein.

/s/ Kurt L. Darrow
Kurt L. Darrow
Chairman, President and Chief Executive Officer

/s/ Louis M. Riccio, Jr.
Louis M. Riccio, Jr.
Senior Vice President and Chief Financial Officer

Report of Independent Registered Public Accounting Firm

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

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of comprehensive income, of changes in equity and of cash flows present fairly, in all material respects, the financial position of La-Z-Boy Incorporated and its subsidiaries at April 27, 2013 and April 28, 2012, and the results of their operations and their cash flows for each of the three years in the period ended April 27, 2013 in conformity with accounting principles generally accepted in the United States of America.  Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of April 27, 2013, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting on the preceding page.  Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits.  We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects.  Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

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

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

/s/ PricewaterhouseCoopers LLP
Detroit, Michigan
June 18, 2013


LA-Z-BOY INCORPORATED
CONSOLIDATED STATEMENT OF INCOME

 
 
Fiscal Year Ended
 
(Amounts in thousands, except per share data)
 
(52 weeks)
4/27/2013
   
(52 weeks)
4/28/2012
   
(53 weeks)
4/30/2011
 
Sales
 
$
1,332,525
   
$
1,231,676
   
$
1,187,143
 
Cost of sales
   
907,586
     
851,819
     
832,799
 
Gross profit
   
424,939
     
379,857
     
354,344
 
Selling, general and administrative expense
   
357,312
     
330,226
     
323,964
 
Write-down of long-lived assets
   
     
     
4,471
 
Operating income
   
67,627
     
49,631
     
25,909
 
Interest expense
   
746
     
1,384
     
2,346
 
Interest income
   
621
     
611
     
944
 
Income from Continued Dumping and Subsidy Offset Act, net
   
     
18,037
     
1,054
 
Other income (expense), net
   
3,208
     
(38
)
   
405
 
Income before income taxes
   
70,710
     
66,857
     
25,966
 
Income tax expense (benefit)
   
23,528
     
(22,051
)
   
8,593
 
Net income
   
47,182
     
88,908
     
17,373
 
Net (income) loss attributable to noncontrolling interests
   
(793
)
   
(942
)
   
6,674
 
Net income attributable to La-Z-Boy Incorporated
 
$
46,389
   
$
87,966
   
$
24,047
 
 
                       
Basic average shares
   
52,351
     
51,944
     
51,849
 
 
                       
Basic net income per share attributable to La-Z-Boy Incorporated
 
$
0.87
   
$
1.66
   
$
0.46
 
 
                       
Diluted average shares
   
53,685
     
52,478
     
52,279
 
 
                       
Diluted net income per share attributable to La-Z-Boy Incorporated
 
$
0.85
   
$
1.64
   
$
0.45
 
 
                       
Dividends declared per share
 
$
0.08
   
$
   
$
 

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

 LA-Z-BOY INCORPORATED
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 
 
Fiscal Year Ended
 
(Amounts in thousands)
 
4/27/2013
   
4/28/2012
   
4/30/2011
 
Net income
 
$
47,182
   
$
88,908
   
$
17,373
 
Other comprehensive income (loss)
                       
Currency translation adjustment
   
1,089
     
(132
)
   
55
 
Change in fair value of cash flow hedges, net of tax
   
231
     
28
     
548
 
Net unrealized gains (losses) on marketable securities, net of tax
   
(2,543
)
   
(331
)
   
590
 
Net pension amortization and actuarial gain (loss), net of tax
   
(2,653
)
   
(12,209
)
   
640
 
Total other comprehensive income (loss)
   
(3,876
)
   
(12,644
)
   
1,833
 
Total comprehensive income before allocation to noncontrolling interests
   
43,306
     
76,264
     
19,206
 
Comprehensive (income) loss  attributable to noncontrolling interests
   
(1,132
)
   
(775
)
   
6,321
 
Comprehensive income attributable to La-Z-Boy Incorporated
 
$
42,174
   
$
75,489
   
$
25,527
 


LA-Z-BOY INCORPORATED
CONSOLIDATED BALANCE SHEET

 
 
As of
 
(Amounts in thousands, except par value)
 
4/27/2013
   
4/28/2012
 
Current assets
 
   
 
Cash and equivalents
 
$
131,085
   
$
152,370
 
Restricted cash
   
12,686
     
2,861
 
Receivables, net of allowance of $21,607 at 4/27/13 and $22,254 at 4/28/12
   
160,005
     
167,232
 
Inventories, net
   
146,343
     
143,787
 
Deferred income taxes – current
   
20,640
     
19,081
 
Other current assets
   
30,121
     
14,669
 
Total current assets
   
500,880
     
500,000
 
Property, plant and equipment, net
   
118,060
     
114,366
 
Goodwill
   
12,837
     
 
Other intangible assets
   
4,838
     
3,028
 
Deferred income taxes – long term
   
30,572
     
33,649
 
Other long-term assets, net
   
53,184
     
34,696
 
Total assets
 
$
720,371
   
$
685,739
 
 
               
Current liabilities
               
Current portion of long-term debt
 
$
513
   
$
1,829
 
Accounts payable
   
50,542
     
56,630
 
Accrued expenses and other current liabilities
   
99,108
     
91,300
 
Total current liabilities
   
150,163
     
149,759
 
Long-term debt
   
7,576
     
7,931
 
Other long-term liabilities
   
70,664
     
80,234
 
Contingencies and commitments
   
     
 
Shareholders' equity
               
Preferred shares – 5,000 authorized; none issued
   
     
 
Common shares, $1 par value – 150,000 authorized; 52,392 outstanding at 4/27/13 and 52,244 outstanding at 4/28/12
   
52,392
     
52,244
 
Capital in excess of par value
   
241,888
     
231,332
 
Retained earnings
   
226,044
     
189,609
 
Accumulated other comprehensive loss
   
(35,496
)
   
(31,281
)
Total La-Z-Boy Incorporated shareholders’ equity
   
484,828
     
441,904
 
Noncontrolling interests
   
7,140
     
5,911
 
Total equity
   
491,968
     
447,815
 
Total liabilities and equity
 
$
720,371
   
$
685,739
 

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

LA-Z-BOY INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS

 
 
Fiscal Year Ended
 
(Amounts in thousands)
 
4/27/2013
   
4/28/2012
   
4/30/2011
 
Cash flows from operating activities
 
   
   
 
Net income
 
$
47,182
   
$
88,908
   
$
17,373
 
Adjustments to reconcile net income to cash provided by operating activities
                       
(Gain) loss on disposal of assets
   
(659
)
   
45
     
201
 
Gain on sale of investments
   
(3,170
)
   
(519
)
   
(529
)
Gain on deconsolidation of VIE
   
     
(1,125
)
   
 
Write-down of long-lived assets
   
     
     
4,471
 
Deferred income tax expense (benefit)
   
3,198
     
(42,146
)
   
(120
)
Restructuring
   
2,715
     
281
     
487
 
Provision for doubtful accounts
   
1,005
     
4,196
     
7,197
 
Depreciation and amortization
   
23,140
     
23,486
     
24,302
 
Stock-based compensation expense
   
11,458
     
5,718
     
3,720
 
Pension plan contributions
   
(23,480
)
   
(5,798
)
   
(4,495
)
Change in receivables
   
7,139
     
(6,182
)
   
1,599
 
Change in inventories
   
391
     
(7,414
)
   
(10,531
)
Change in other assets
   
(5,407
)
   
3,318
     
(563
)
Change in payables
   
(6,088
)
   
7,470
     
(4,429
)
Change in other liabilities
   
11,016
     
12,610
     
(10,837
)
Net cash provided by operating activities
   
68,440
     
82,848
     
27,846
 
Cash flows from investing activities
                       
Proceeds from disposals of assets
   
4,455
     
372
     
506
 
Capital expenditures
   
(25,912
)
   
(15,663
)
   
(10,540
)
Purchases of investments
   
(49,589
)
   
(7,944
)
   
(10,200
)
Proceeds from sales of investments
   
18,662
     
8,649
     
10,655
 
Cash effects on deconsolidation of VIE
   
     
(971
)
   
(632
)
Acquisitions, net of cash acquired
   
(15,832
)
   
     
 
Change in restricted cash
   
(9,825
)
   
(2,861
)
   
 
Other
   
     
(676
)
   
(49
)
Net cash used for investing activities
   
(78,041
)
   
(19,094
)
   
(10,260
)
Cash flows from financing activities
                       
Proceeds from debt
   
     
     
30,585
 
Payments on debt
   
(2,511
)
   
(25,936
)
   
(41,618
)
Payments for debt issuance costs
   
     
(568
)
   
 
Stock issued for stock and employee benefit plans
   
2,901
     
4,943
     
270
 
Excess tax benefit on stock option exercises
   
2,563
     
223
     
 
Purchases of common stock
   
(10,333
)
   
(5,179
)
   
 
Dividends paid
   
(4,236
)
   
     
 
Net cash used for financing activities
   
(11,616
)
   
(26,517
)
   
(10,763
)
Effect of exchange rate changes on cash and equivalents
   
(68
)
   
(129
)
   
12
 
Change in cash and equivalents
   
(21,285
)
   
37,108
     
6,835
 
Cash and equivalents at beginning of period
   
152,370
     
115,262
     
108,427
 
Cash and equivalents at end of period
 
$
131,085
   
$
152,370
   
$
115,262
 

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

LA-Z-BOY INCORPORATED
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(Amounts in thousands)
 
Common
Shares
   
Capital in
Excess of Par
Value
   
Retained
Earnings
   
Accumulated Other
Comprehensive
Income (Loss)
   
Non-
Controlling
Interests
   
Total
 
At April 24, 2010
 
$
51,770
   
$
218,622
   
$
89,717
   
$
(20,284
)
 
$
3,289
   
$
343,114
 
Net income (loss)
                   
24,047
             
(6,674
)
   
17,373
 
Other comprehensive income
                           
1,480
     
353
     
1,833
 
Stock issued for stock and employee benefit plans, net of cancellations
   
139
             
(244
)
                   
(105
)
Stock option and restricted stock expense
           
3,717
                             
3,717
 
Acquisition of VIE and other
                   
(8,573
)
           
8,633
     
60
 
Cumulative effect of change in accounting for noncontrolling interests
                   
925
             
(2,777
)
   
(1,852
)
At April 30, 2011
   
51,909
     
222,339
     
105,872
     
(18,804
)
   
2,824
     
364,140
 
Net income
                   
87,966
             
942
     
88,908
 
Other comprehensive loss
                           
(12,477
)
   
(167
)
   
(12,644
)
Stock issued for stock and employee benefit plans, net of cancellations
   
835
     
4,011
     
(509
)
                   
4,337
 
Purchases of common stock
   
(500
)
   
(958
)
   
(3,721
)
                   
(5,179
)
Stock option and restricted stock expense
           
5,717
     
1
                     
5,718
 
Tax benefit from exercise of options
           
223
                             
223
 
Changes in noncontrolling interest upon deconsolidation of VIE and other changes in noncontrolling interests
                                   
2,312
     
2,312
 
At April 28, 2012
   
52,244
     
231,332
     
189,609
     
(31,281
)
   
5,911
     
447,815
 
Net income
                   
46,389
             
793
     
47,182
 
Other comprehensive income (loss)
                           
(4,215
)
   
339
     
(3,876
)
Stock issued for stock and employee benefit plans, net of cancellations
   
817
     
1,849
     
(1,368
)
                   
1,298
 
Purchases of common stock
   
(669
)
   
(5,314
)
   
(4,350
)
                   
(10,333
)
Stock option and restricted stock expense
           
11,458
                             
11,458
 
Tax benefit from exercise of options
           
2,563
                             
2,563
 
Dividends paid
                   
(4,236
)
                   
(4,236
)
Change in noncontrolling interests
                                   
97
     
97
 
At April 27, 2013
 
$
52,392
   
$
241,888
   
$
226,044
   
$
(35,496
)
 
$
7,140
   
$
491,968
 
 
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Accounting Policies
The following is a summary of significant accounting policies followed in the preparation of La-Z-Boy Incorporated and its subsidiaries’ (individually and collectively, “we,” “our” or the “Company”) consolidated financial statements. Our fiscal year ends on the last Saturday of April.  Our 2013 and 2012 fiscal years included 52 weeks, while fiscal year 2011 included 53 weeks. The additional week in fiscal 2011 was included in our fourth fiscal quarter.

Principles of Consolidation
The accompanying consolidated financial statements include the consolidated accounts of La-Z-Boy Incorporated and our majority-owned subsidiaries. The portion of less than wholly-owned subsidiaries is included as non-controlling interest. All intercompany transactions have been eliminated, including any related profit on intercompany sales. Additionally, our consolidated financial statements previously included the accounts of certain entities in which we held a controlling interest based on exposure to economic risks and potential rewards (variable interests) for the periods in which we were the primary beneficiary. As of April 28, 2012, we no longer had any such arrangements where we were the primary beneficiary.

Use of Estimates
The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America.  These principles require management to make estimates and assumptions that affect the reported amounts or disclosures of assets, liabilities (including contingent assets and liabilities) sales and expenses at the date of the financial statements. Actual results could differ from those estimates.

Cash and Equivalents
For purposes of the consolidated balance sheet and statement of cash flows, we consider all highly liquid debt instruments purchased with initial maturities of three months or less to be cash equivalents.

Restricted Cash
We have cash on deposit with a bank as collateral for certain letters of credit.

Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out (“LIFO”) basis for approximately 67% and 72% of our inventories at April 27, 2013, and April 28, 2012, respectively. Cost is determined for all other inventories on a first-in, first-out (“FIFO”) basis.  The FIFO method of accounting is mainly used for our Retail segment’s inventory and the smaller operating companies within our Upholstery segment.

Property, Plant and Equipment
Items capitalized, including significant betterments to existing facilities, are recorded at cost.  Capitalized computer software costs include internal and external costs incurred during the software's development stage.  Internal costs relate primarily to employee activities related to coding and testing the software under development.  Computer software costs are depreciated over three to ten years.  All maintenance and repair costs are expensed when incurred. Depreciation is computed principally using straight-line methods over the estimated useful lives of the assets.

Disposal and Impairment of Long-Lived Assets
Retirement or dispositions of long-lived assets are recorded based on carrying value and proceeds received.  Any resulting gains or losses are recorded as a component of selling, general and administrative expenses.
 
We review the carrying value of our long-lived assets for impairment annually or whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Our assessment of recoverability is based on our best estimates using either quoted market prices or an analysis of the undiscounted projected future cash flows by asset groups in order to determine if the fair value of our long-lived assets exceed their carrying value.  Our asset groups consist of our operating units in our Upholstery and Casegoods segments (La-Z-Boy, England, Bauhaus, American Drew, Le