LA-Z-BOY INC - Quarter Report: 2018 July (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549-1004

 

FORM 10-Q

 

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

 

FOR QUARTERLY PERIOD ENDED JULY 28, 2018

 

COMMISSION FILE NUMBER 1-9656

 

LA-Z-BOY INCORPORATED

(Exact name of registrant as specified in its charter)

 

 

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

 

None

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

 

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

 

Yes x           No o

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).

 

Yes x           No o

 

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

 

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

 

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

 

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

 

Yes o             No x

 

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

 

Class		Outstanding at August 14, 2018
Common Shares, $1.00 par value		46,687,129

 

 

Table of Contents

 

LA-Z-BOY INCORPORATED
FORM 10-Q FIRST QUARTER OF FISCAL 2019

 

TABLE OF CONTENTS

 

			Page Number(s)
PART I Financial Information (Unaudited)			3
	Item 1.	Financial Statements	3
		Consolidated Statement of Income	3
		Consolidated Statement of Comprehensive Income	4
		Consolidated Balance Sheet	5
		Consolidated Statement of Cash Flows	6
		Consolidated Statement of Changes in Equity	7
		Notes to Consolidated Financial Statements	8
		Note 1. Basis of Presentation	8
		Note 2. Restricted Cash	10
		Note 3. Inventories	10
		Note 4. Goodwill and Other Intangible Assets	10
		Note 5. Investments	11
		Note 6. Pension Plans	12
		Note 7. Product Warranties	13
		Note 8. Stock-Based Compensation	13
		Note 9. Accumulated Other Comprehensive Loss	15
		Note 10. Revenue Recognition	16
		Note 11. Segment Information	18
		Note 12. Income Taxes	19
		Note 13. Earnings per Share	20
		Note 14. Fair Value Measurements	21
		Note 15. Subsequent Events	22
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
		Cautionary Statement Concerning Forward-Looking Statements	23
		Introduction	24
		Results of Operations	26
		Liquidity and Capital Resources	30
		Critical Accounting Policies	33
		Recent Accounting Pronouncements	33
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
	Item 4.	Controls and Procedures	34
PART II Other Information			34
	Item 1A.	Risk Factors	34
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
	Item 6.	Exhibits	35
Signature Page			36

 

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PART I — FINANCIAL INFORMATION (UNAUDITED)

 

ITEM 1. FINANCIAL STATEMENTS

 

LA-Z-BOY INCORPORATED
CONSOLIDATED STATEMENT OF INCOME

 

		Quarter Ended
(Unaudited, amounts in thousands, except per share data)		7/28/18			7/29/17
Sales		$	384,695		$	357,079
Cost of sales		236,173			217,976
Gross profit		148,522			139,103
Selling, general and administrative expense		125,362			122,805
Operating income		23,160			16,298
Interest expense		104			157
Interest income		602			343
Other income (expense), net		892			1,749
Income before income taxes		24,550			18,233
Income tax expense		5,599			6,489
Net income		18,951			11,744
Net income attributable to noncontrolling interests		(648		)	(93		)
Net income attributable to La-Z-Boy Incorporated		$	18,303		$	11,651
Basic weighted average common shares		46,716			48,357
Basic net income attributable to La-Z-Boy Incorporated per share		$	0.39		$	0.24
Diluted weighted average common shares		47,161			48,846
Diluted net income attributable to La-Z-Boy Incorporated per share		$	0.39		$	0.24
Dividends declared per share		$	0.12		$	0.11

 

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

 

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LA-Z-BOY INCORPORATED
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 

		Quarter Ended
(Unaudited, amounts in thousands)		7/28/18			7/29/17
Net income		$	18,951		$	11,744
Other comprehensive income (loss)
Currency translation adjustment		(4,189		)	2,316
Change in fair value of cash flow hedges, net of tax		(333		)	478
Net unrealized gains (losses) on marketable securities, net of tax		41			(271		)
Net pension amortization, net of tax		516			517
Total other comprehensive income (loss)		(3,965		)	3,040
Total comprehensive income before noncontrolling interests		14,986			14,784
Comprehensive (income) loss attributable to noncontrolling interests		580			(498		)
Comprehensive income attributable to La-Z-Boy Incorporated		$	15,566		$	14,286

 

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

 

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LA-Z-BOY INCORPORATED

CONSOLIDATED BALANCE SHEET

 

(Unaudited, amounts in thousands, except par value)		7/28/18			4/28/18
Current assets
Cash and equivalents		$	134,247		$	134,515
Restricted cash		2,358			2,356
Receivables, net of allowance of $2,058 at 7/28/18 and $1,956 at 4/28/18		138,979			154,055
Inventories, net		195,015			184,841
Other current assets		55,313			42,451
Total current assets		525,912			518,218
Property, plant and equipment, net		188,088			180,882
Goodwill		74,553			75,254
Other intangible assets, net		17,874			18,190
Deferred income taxes — long-term		21,255			21,265
Other long-term assets, net		78,900			79,158
Total assets		$	906,582		$	892,967
Current liabilities
Current portion of long-term debt		$	221		$	223
Accounts payable		62,885			62,403
Accrued expenses and other current liabilities		127,708			118,721
Total current liabilities		190,814			181,347
Long-term debt		142			199
Other long-term liabilities		88,962			86,205
Contingencies and commitments
Shareholders’ equity
Preferred shares — 5,000 authorized; none issued		—			—
Common shares, $1 par value — 150,000 authorized; 46,691 outstanding at 7/28/18 and 46,788 outstanding at 4/28/18		46,691			46,788
Capital in excess of par value		300,770			298,948
Retained earnings		296,321			291,644
Accumulated other comprehensive loss		(29,573		)	(25,199		)
Total La-Z-Boy Incorporated shareholders’ equity		614,209			612,181
Noncontrolling interests		12,455			13,035
Total equity		626,664			625,216
Total liabilities and equity		$	906,582		$	892,967

 

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

 

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LA-Z-BOY INCORPORATED

CONSOLIDATED STATEMENT OF CASH FLOWS

 

		Quarter Ended
(Unaudited, amounts in thousands)		7/28/18			7/29/17
Cash flows from operating activities
Net income		$	18,951		$	11,744
Adjustments to reconcile net income to cash provided by (used for) operating activities
Change in deferred taxes		(183		)	1,344
Provision for doubtful accounts		279			(22		)
Depreciation and amortization		7,541			7,758
Equity-based compensation expense		2,040			3,558
Change in receivables		14,236			15,753
Change in inventories		(11,092		)	(2,477		)
Change in other assets		463			(10,837		)
Change in payables		2,491			(3,974		)
Change in other liabilities		(2,572		)	(3,339		)
Net cash provided by operating activities		32,154			19,508
Cash flows from investing activities
Proceeds from disposals of assets		61			459
Proceeds from property insurance		58			450
Capital expenditures		(15,873		)	(9,146		)
Purchases of investments		(4,190		)	(10,851		)
Proceeds from sales of investments		4,762			5,857
Acquisitions, net of cash acquired		—			(15,879		)
Net cash used for investing activities		(15,182		)	(29,110		)
Cash flows from financing activities
Payments on debt		(59		)	(66		)
Stock issued for stock and employee benefit plans, net of shares withheld for taxes		(2,009		)	377
Purchases of common stock		(7,944		)	(11,491		)
Dividends paid		(5,625		)	(5,337		)
Net cash used for financing activities		(15,637		)	(16,517		)
Effect of exchange rate changes on cash and equivalents		(1,601		)	851
Change in cash, cash equivalents and restricted cash		(266		)	(25,268		)
Cash, cash equivalents and restricted cash at beginning of period		136,871			150,859
Cash, cash equivalents and restricted cash at end of period		$	136,605		$	125,591
Supplemental disclosure of non-cash investing activities
Capital expenditures included in payables		$	4,122		$	1,671

 

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

 

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LA-Z-BOY INCORPORATED

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

 

(Unaudited, amounts in thousands)		Common Shares			Capital in Excess of Par Value			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Non- Controlling Interests			Total
At April 29, 2017		$	48,472		$	289,632		$	284,698		$	(32,883	)	$	11,186		$	601,105
Net income								80,866						729			81,595
Other comprehensive income											7,684			1,120			8,804
Stock issued for stock and employee benefit plans, net of cancellations and withholding tax		311			4,046			(1,380		)							2,977
Purchases of 1,995 shares of common stock		(1,995		)	(4,204		)	(50,531		)							(56,730		)
Stock option and restricted stock expense					9,474												9,474
Dividends paid								(22,009		)							(22,009		)
At April 28, 2018		46,788			298,948			291,644			(25,199		)	13,035			625,216
Net income								18,303						648			18,951
Other comprehensive loss											(2,737		)	(1,228		)	(3,965		)
Stock issued for stock and employee benefit plans, net of cancellations and withholding tax		160			(42		)	(2,127		)							(2,009		)
Purchases of 257 shares of common stock		(257		)	(176		)	(7,511		)							(7,944		)
Stock option and restricted stock expense					2,040												2,040
Cumulative effect adjustment for investments, net of tax								1,637			(1,637		)				—
Dividends paid								(5,625		)							(5,625		)
At July 28, 2018		$	46,691		$	300,770		$	296,321		$	(29,573	)	$	12,455		$	626,664

 

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

 

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LA-Z-BOY INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 1: Basis of Presentation

 

The accompanying consolidated financial statements include the consolidated accounts of La-Z-Boy Incorporated and our majority-owned subsidiaries. We derived the April 28, 2018, balance sheet from our audited financial statements. We prepared the interim financial information in conformity with generally accepted accounting principles, which we applied on a basis consistent with those reflected in our fiscal 2018 Annual Report on Form 10-K filed with the Securities and Exchange Commission, but the information does not include all of the disclosures required by generally accepted accounting principles. In management’s opinion, the interim financial information includes all adjustments and accruals, consisting only of normal recurring adjustments (except as otherwise disclosed), that are necessary for a fair statement of results for the respective interim periods. The interim results reflected in the accompanying financial statements are not necessarily indicative of the results of operations that will occur for the full fiscal year ending April 27, 2019.

 

At July 28, 2018, we owned preferred shares of two privately-held companies, both of which are variable interest entities. We also hold a warrant to purchase common shares of one of these companies. We have not consolidated their results in our financial statements because we do not have the power to direct those activities that most significantly impact their economic performance and, therefore, are not the primary beneficiary.

 

Accounting pronouncements adopted in fiscal 2019

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard that requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new standard supersedes virtually all existing authoritative accounting guidance on revenue recognition and requires additional disclosures and greater use of estimates and judgments. During July 2015, the FASB deferred the effective date of the revenue recognition standard by one year, thus making the new accounting standard effective beginning with our fiscal 2019. We adopted the new standard in the first quarter of fiscal 2019 with modified retrospective application. We reviewed substantially all of our contracts and other revenue streams and determined that while the application of the new standard did not have a material change in the amount of or timing for recognizing revenue, it did have a significant impact on our financial statement disclosures related to disaggregated revenue, customer deposits, other receivables and contract liabilities, as well as the presentation of other receivables and deferred revenues (contract liabilities) on our consolidated balance sheet. See Note 10 for information on these disclosures.

 

In January 2016, the FASB issued a new accounting standard that requires equity investments to be measured at fair value with the fair value changes to be recognized through net income. This standard does not apply to investments that are accounted for using the equity method of accounting or that result in consolidation of the invested entity. As of April 28, 2018, we held equity investments and recognized changes in fair value through other comprehensive income (loss) as unrealized gains (losses). We adopted the new standard in the first quarter of fiscal 2019 and consequently reclassified $2.1 million of net unrealized gains from accumulated other comprehensive income to retained earnings as a cumulative-effect adjustment during the first quarter of fiscal 2019. We also reclassified $0.5 million of tax expense related to these investments from accumulated other comprehensive loss to retained earnings. We will recognize the tax impact for these investments in the consolidated statement of income as the unrealized gains (losses) become realized. See Note 5 for additional information on our current investments.

 

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In October 2016, the FASB issued a new accounting standard that requires entities to recognize the income tax consequences of an intra-entity transfer of assets other than inventory when the transfer occurs. We adopted this standard in the first quarter of fiscal 2019. Adoption of this standard did not impact our current practices because intra-entity transfers, as the standard defines them, did not occur in the first quarter of fiscal 2019.

 

In January 2017, the FASB issued a new accounting standard clarifying the definition of a business with the objective of adding guidance to entities evaluating whether a transaction should be accounted for as an acquisition. This standard was adopted in the first quarter of fiscal 2019. Future acquisitions will be assessed under this adopted standard.

 

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

 

Accounting pronouncements not yet adopted

 

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

 

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

 

In August 2017, the FASB issued a new accounting standard designed to improve and simplify the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. This standard is intended to better align the recognition and presentation of the effects of hedging instruments with the hedged item in the financial statements, and requires additional disclosures on hedging instruments. This standard will be effective for our fiscal 2020. As of July 28, 2018, we do not have any outstanding hedging relationships or instruments that would be affected by this standard.

 

The Tax Cut and Jobs Act of 2017 (the “Tax Act”) required corporations to adjust deferred taxes to reflect the reduction of the corporate income tax rate, leaving items within accumulated other comprehensive income stranded at the historical tax rate. In February 2018, the FASB issued a new accounting standard that allows corporations in their consolidated financial statements to reclassify these stranded income tax effects from accumulated other comprehensive income to retained earnings. This standard will be effective for our fiscal 2020, and companies are permitted to adopt it in any interim period. Companies are to apply the standard either

 

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in the period they adopt or retrospectively to each period that was affected by the Tax Act’s change in the federal corporate tax rate. We are still assessing the impact this standard will have on our consolidated financial statements and related disclosures.

 

Note 2: Restricted Cash

 

We have cash on deposit with a bank as collateral for certain letters of credit. All of our letters of credit have maturity dates within the next twelve months, but we expect to renew some of these letters of credit when they mature.

 

(Unaudited, amounts in thousands)		7/28/18			7/29/17
Cash and cash equivalents		$	134,247		$	119,628
Restricted cash		2,358			5,963
Total cash, cash equivalents and restricted cash		$	136,605		$	125,591

 

Note 3: Inventories

 

A summary of inventories is as follows:

 

(Unaudited, amounts in thousands)		7/28/18			4/28/18
Raw materials		$	92,788		$	86,214
Work in process		13,224			12,254
Finished goods		111,813			109,183
FIFO inventories		217,825			207,651
Excess of FIFO over LIFO		(22,810		)	(22,810		)
Total inventories		$	195,015		$	184,841

 

Note 4: Goodwill and Other Intangible Assets

 

Goodwill relating to the acquisition of La-Z-Boy Furniture Galleries® stores is recorded in our Retail segment and totals $62.2 million at July 28, 2018. The remainder of our goodwill is related to the acquisition of the La-Z-Boy wholesale business in the United Kingdom and Ireland, which is recorded in our Upholstery reportable segment. The following is a roll-forward of goodwill for the quarter ended July 28, 2018:

 

(Unaudited, amounts in thousands)		Goodwill
Balance at April 28, 2018		$	75,254
Translation adjustment		(701		)
Balance at July 28, 2018		$	74,553

 

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The trade name in our intangible assets relates to American Drew, a brand in our Casegoods segment. Indefinite-lived reacquired rights relate to the acquisition of La-Z-Boy Furniture Galleries® stores and are recorded in our Retail segment.  Other intangible assets are primarily acquired customer relationships from the acquisition of the La-Z-Boy wholesale business in the United Kingdom and Ireland and are recorded in our Upholstery reportable segment. The following is a roll-forward of our other intangible assets for the quarter ended July 28, 2018:

 

(Unaudited, amounts in thousands)		Trade Name			Indefinite-Lived Reacquired Rights			Other Intangible Assets			Total Other Intangible Assets
Balance at April 28, 2018		$	1,155		$	13,645		$	3,390		$	18,190
Amortization		—			—			(104		)	(104		)
Translation adjustment		—			(48		)	(164		)	(212		)
Balance at July 28, 2018		$	1,155		$	13,597		$	3,122		$	17,874

 

Note 5: Investments

 

We have current and long-term investments intended to enhance returns on our cash as well as to fund future obligations of our non-qualified defined benefit retirement plan, our executive deferred compensation plan, and our performance compensation retirement plan. We also hold other investments consisting of cost-basis preferred shares of two privately-held companies. Our short-term investments are included in other current assets and our long-term investments are included in other long-term assets on our consolidated balance sheet.

 

The following summarizes our investments at July 28, 2018, and April 28, 2018:

 

(Unaudited, amounts in thousands)		7/28/18			4/28/18
Short-term investments:
Marketable securities		$	12,444		$	12,926
Held-to-maturity investments		3,038			3,340
Total short-term investments		15,482			16,266
Long-term investments:
Marketable securities		30,326			32,134
Cost basis investments		10,954			10,954
Total long-term investments		41,280			43,088
Total investments		$	56,762		$	59,354
Investments to enhance returns on cash		$	31,565		$	34,359
Investments to fund compensation/retirement plans		$	14,243		$	14,041
Other investments		$	10,954		$	10,954

 

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The following is a summary of the unrealized gains, unrealized losses, and fair value by investment type at July 28, 2018, and April 28, 2018:

 

At July 28, 2018

 

(Unaudited, amounts in thousands)		Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
Equity securities		$	2,462		$	(44	)	$	19,038
Fixed income		29			(366		)	33,587
Other		169			(13		)	4,137
Total securities		$	2,660		$	(423	)	$	56,762

 

At April 28, 2018

 

(Unaudited, amounts in thousands)		Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
Equity securities		$	2,142		$	(39	)	$	18,765
Fixed income		29			(418		)	36,312
Other		72			—			4,277
Total securities		$	2,243		$	(457	)	$	59,354

 

The following table summarizes sales of marketable securities:

 

		Quarter Ended
(Unaudited, amounts in thousands)		7/28/18			7/29/17
Proceeds from sales		$	4,762		$	5,857
Gross realized gains		75			402
Gross realized losses		(55		)	(221		)

 

At July 28, 2018, the fair value of fixed income marketable securities, which are classified as available-for-sale securities, by contractual maturity was $12.5 million within one year, $18.9 million within two to five years, $1.2 million within six to ten years, and $1.0 million thereafter.

 

Note 6: Pension Plans

 

Net periodic pension costs were as follows:

 

		Quarter Ended
(Unaudited, amounts in thousands)		7/28/18			7/29/17
Service cost		$	323		$	329
Interest cost		1,116			1,147
Expected return on plan assets		(1,136		)	(1,204		)
Net amortization		639			780
Net periodic pension cost		$	942		$	1,052

 

The components of net periodic pension cost other than the service cost are included in other income (expense), net in our consolidated statement of income. Service cost is recorded in cost of sales in our consolidated statement of income.

 

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Note 7: Product Warranties

 

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

 

A reconciliation of the changes in our product warranty liability is as follows:

 

		Quarter Ended
(Unaudited, amounts in thousands)		7/28/18			7/29/17
Balance as of the beginning of the period		$	21,205		$	21,870
Accruals during the period		5,121			4,853
Settlements during the period		(5,233		)	(4,841		)
Balance as of the end of the period		$	21,093		$	21,882

 

As of July 28, 2018, and April 28, 2018, we included $12.6 million and $12.7 million, respectively, of our product warranty liability in accrued expenses and other current liabilities on our consolidated balance sheet, and included the remainder in other long-term liabilities. We recorded accruals during the periods presented in the table above, primarily to reflect charges that relate to warranties issued during the respective periods.

 

Note 8: Stock-Based Compensation

 

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

 

		Quarter Ended
(Unaudited, amounts in thousands)		7/28/18			7/29/17
Equity-based awards expense		$	2,040		$	3,558
Liability-based awards expense		166			896
Total stock-based compensation expense		$	2,206		$	4,454

 

Stock Options. We granted 423,273 stock options to employees during the first quarter of fiscal 2019, and we have stock options outstanding from previous grants. We account for stock options as equity-based awards because when they are exercised, they will be settled in common shares. We recognize compensation expense for stock options over the vesting period equal to the fair value on the date our compensation committee approved the awards. The vesting period for our stock options ranges from one to four years, with accelerated vesting upon retirement. The vesting date for retirement-eligible employees is the later of the date they meet the criteria for retirement or the end of the fiscal year in which the grant was made. We accelerate the expense for options granted to retirement-eligible employees over the vesting period, with expense recognized from the grant date through their retirement eligibility date or over the ten months following the grant date, whichever period is longer. We estimate forfeiture rates based on our employees’ forfeiture history and believe they will approximate future results. We estimate the fair value of the employee stock options at the date of grant using

 

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the Black-Scholes option-pricing model, which requires management to make certain assumptions. We estimate expected volatility based on the historical volatility of our common shares. We base the average expected life on the contractual term of the stock option and expected employee exercise trends. We base the risk-free rate on U.S. Treasury issues with a term equal to the expected life assumed at the date of the grant.

 

We calculated the fair value of stock options granted during the first quarter of fiscal 2019 using the following assumptions:

 

(Unaudited)		Fiscal 2019 grant
Risk-free interest rate		2.82		%
Dividend rate		1.45		%
Expected life in years		5.00
Stock price volatility		33.07		%
Fair value per share		$	9.65

 

Stock Appreciation Rights (“SARs”). We did not grant any SARs to employees during the first quarter of fiscal 2019, but we have SARs outstanding from previous grants which are all fully vested and have a term of ten years. SARs will be paid in cash upon exercise and, accordingly, we account for SARs as liability-based awards that we re-measure to reflect the fair value at the end of each reporting period.

 

In fiscal 2013 and fiscal 2014, we granted SARs as described in our Annual Report on Form 10-K for the fiscal year ended April 27, 2013, and April 26, 2014, respectively. As of July 28, 2018, we had 7,149 and 20,438 SARs outstanding for the fiscal 2013 and fiscal 2014 awards, respectively. These awards have exceeded their expected life and are re-measured based on their intrinsic value, which is the market value of our common stock on the last day of the reporting period less the exercise price, until the earlier of the exercise date or the contractual term date. At July 28, 2018, the intrinsic value per share of the fiscal 2013 and fiscal 2014 awards were $18.93 and $11.84, respectively.

 

Restricted Stock. We granted 99,426 shares of restricted stock to employees during the first quarter of fiscal 2019. We also have shares of restricted stock outstanding from previous grants. We issue restricted stock at no cost to the employees, and the shares are held in an escrow account until the vesting period ends. If a recipient’s employment ends during the escrow period (other than through death or disability), the shares are returned at no cost to the company. We account for restricted stock awards as equity-based awards because when they vest, they will be settled in common shares. The fair value of the restricted stock awarded in the first quarter of fiscal 2019 was $33.15 per share, the market value of our common shares on the date of grant. We estimate forfeiture rates based on our employees’ forfeiture history and believe they will approximate future results. We recognize compensation expense for restricted stock over the vesting period equal to the fair value on the date our compensation committee approved the awards. Restricted stock awards vest at 25% per year, beginning one year from the grant date for a term of four years.

 

Performance Shares. During the first quarter of fiscal 2019, we granted 146,107 performance-based shares. We also have performance-based share awards outstanding from previous grants. Payout of these grants depends on our financial performance (80%) and a market-based condition based on the total return our shareholders receive on their investment in our stock relative to returns earned through investments in other public companies (20%). The performance share opportunity ranges from 50% of the employee’s target award if minimum performance requirements are met to a maximum of 200% of the target award based on the attainment of certain financial and shareholder-return goals over a specific performance period, which is generally three fiscal years.

 

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We account for performance-based shares as equity-based awards because when they vest, they will be settled in common shares. We estimate forfeiture rates based on our employees’ forfeiture history and believe they will approximate future results. For shares that vest based on our results relative to the performance goals, we expense as compensation cost the fair value of the shares as of the day we granted the awards recognized over the performance period, taking into account the probability that we will satisfy the performance goals. The fair value of each share of the awards we granted in fiscal 2019 that vest based on attaining performance goals was $31.71, the market value of our common shares on the date we granted the awards less the dividends we expect to pay before the shares vest. For shares that vest based on market conditions, we use a Monte Carlo valuation model to estimate each share’s fair value as of the date of grant, and, similar to the way in which we expense awards of stock options, we expense compensation cost over the vesting period regardless of the value that award recipients ultimately receive. Based on the Monte Carlo model, the fair value as of the grant date of the fiscal 2019 grant of shares that vest based on market conditions was $46.39.

 

Note 9: Accumulated Other Comprehensive Loss

 

The activity in accumulated other comprehensive loss for the quarter ended July 28, 2018, and July 29, 2017, is as follows:

 

(Unaudited, amounts in thousands)		Translation adjustment			Change in fair value of cash flow hedge			Unrealized gain (loss) on marketable securities			Net pension amortization and net actuarial loss			Accumulated other comprehensive loss
Balance at April 28, 2018		$	2,388		$	154		$	1,376		$	(29,117	)	$	(25,199	)
Changes before reclassifications		(2,961		)	(509		)	73			—			(3,397		)
Cumulative effect adjustment for investments (1)		—			—			(1,637		)	—			(1,637		)
Amounts reclassified to net income		—			67			(19		)	686			734
Tax effect		—			109			(13		)	(170		)	(74		)
Other comprehensive income (loss) attributable to La-Z-Boy Incorporated		(2,961		)	(333		)	(1,596		)	516			(4,374		)
Balance at July 28, 2018		$	(573	)	$	(179	)	$	(220	)	$	(28,601	)	$	(29,573	)

 

(1)         The cumulative effect adjustment for investments is composed of $2.1 million of unrealized gains on equity investments offset by $0.5 million of tax expense. The net $1.6 million of cumulative effect adjustment was reclassed from accumulated other comprehensive loss to retained earnings as a result of adoption of Accounting Standards Update 2016-01 (see Note 1 for further information).

 

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(Unaudited, amounts in thousands)		Translation adjustment			Change in fair value of cash flow hedge			Unrealized gain on marketable securities			Net pension amortization and net actuarial loss			Accumulated other comprehensive loss
Balance at April 29, 2017		$	(927	)	$	74		$	1,752		$	(33,782	)	$	(32,883	)
Changes before reclassifications		1,911			855			394			—			3,160
Amounts reclassified to net income		—			(83		)	(832		)	835			(80		)
Tax effect		—			(294		)	167			(318		)	(445		)
Other comprehensive income (loss) attributable to La-Z-Boy Incorporated		1,911			478			(271		)	517			2,635
Balance at July 29, 2017		$	984		$	552		$	1,481		$	(33,265	)	$	(30,248	)

 

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

 

The components of non-controlling interest for the quarter ended July 28, 2018, and July 29, 2017, were as follows:

 

		Quarter Ended
(Unaudited, amounts in thousands)		7/28/18			7/29/17
Balance as of the beginning of the period		$	13,035		$	11,186
Net income		648			93
Other comprehensive income (loss)		(1,228		)	405
Balance as of the end of the period		$	12,455		$	11,684

 

Note 10: Revenue Recognition

 

We implemented Accounting Standard Update No. 2014-09, Revenue from Contracts with Customers (Accounting Standards Codification Topic 606, “ASC 606”), in the first quarter of fiscal 2019 using the modified-retrospective approach, which required us to apply the new guidance retrospectively to revenue transactions completed on or after the effective date. Adopting this new standard did not have a material impact on our consolidated financial statements except for our enhanced presentation and disclosures. As of the beginning of our fiscal 2019, we had identified and implemented all changes required by the new standard, including those related to our accounting policies, controls, and disclosures.

 

Our revenue consists substantially of product sales. We report product sales net of discounts and recognize them when control (rights and obligations associated with the product) passes to the customer. For sales to furniture retailers or distributors, control typically transfers when we ship product. In cases where we sell directly to the end consumer, control of the product is generally transferred upon delivery.

 

For shipping and handling activities, we have elected to apply the accounting policy election permitted in ASC 606-10-25-18B, which allows an entity to account for shipping and handling activities as fulfillment activities (rather than as a promised good or service) when the activities are performed even if those activities are

 

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performed after the control of the good has been transferred. We expense shipping and handling costs at the time we recognize revenue in accordance with this election.

 

For sales tax, we elected to apply the accounting policy election permitted in ASC 606-10-32-2A, which allows an entity to exclude from the measurement of the transaction price all taxes imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer, including sales, use, excise, value-added, and franchise taxes (collectively referred to as sales taxes). This allows us to present revenue net of these certain types of taxes.

 

The following table disaggregates our revenue by product category by segment for the quarter ended July 28, 2018:

 

(Unaudited, amounts in thousands)		Upholstery			Casegoods			Retail			Total
Motion Upholstery Furniture		$	187,659		$	—		$	74,957		$	262,616
Stationary Upholstery Furniture		85,290			3,942			23,164			112,396
Bedroom Furniture		—			8,364			855			9,219
Dining Room Furniture		—			5,929			1,583			7,512
Occasional Furniture		393			11,988			3,974			16,355
Other (a)		20,056			(1,837		)	14,695			32,914
Total		$	293,398		$	28,386		$	119,228		441,012
					Corporate and Other (b)						3,865
					Eliminations						(60,182		)
					Consolidated Net Sales						$	384,695

 

(a)         Primarily includes revenue for delivery, advertising, royalties, parts, accessories, after-treatment products, discounts & allowances, rebates and other sales incentives

(b)         Primarily includes revenue for royalties and intercompany commissions

 

Motion Upholstery Furniture — Includes gross revenue for upholstered furniture, such as recliners, sofas, loveseats, chairs, sectionals and modulars that have a mechanism that allows the back of the product to recline or the product’s footrest to extend.  This gross revenue includes sales to La-Z-Boy Furniture Galleries® stores (including company-owned stores), operators of La-Z-Boy Comfort Studio® locations, England Custom Comfort Center locations, other major dealers, independent retailers, and the end consumer.

 

Stationary Upholstery Furniture — Includes gross revenue for upholstered furniture, such as sofas, loveseats, chairs, sectionals, modulars, and ottomans that do not have a mechanism. This gross revenue includes sales to La-Z-Boy Furniture Galleries® stores (including company-owned stores), operators of La-Z-Boy Comfort Studio® locations, England Custom Comfort Center locations, other major dealers, independent retailers, and the end consumer.

 

Bedroom Furniture — Includes gross revenue for casegoods furniture typically found in a bedroom, such as beds, chests, dressers, nightstands and benches. This gross revenue includes sales to La-Z-Boy Furniture Galleries® stores (including company-owned stores), independent retailers, and the end consumer.

 

Dining Room Furniture — Includes gross revenue for casegoods furniture typically found in a dining room, such as dining tables, dining chairs, storage units and stools. This gross revenue includes sales to La-Z-Boy Furniture Galleries® stores (including company-owned stores), independent retailers, and the end consumer.

 

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Occasional Furniture — Includes gross revenue for casegoods furniture found throughout the home, such as cocktail tables, chairsides, sofa tables, end tables, and entertainment centers. This gross revenue includes sales to La-Z-Boy Furniture Galleries® stores (including company-owned stores), independent retailers, and the end consumer.

 

We have current assets on our consolidated balance sheet which we reported as other receivables, that represents the remaining amount of consideration to which we are entitled prior to fulfilling our performance obligation. Our other receivables are included in other current assets on our consolidated balance sheet, and were $13.8 million at July 28, 2018.  At the beginning of fiscal 2019, we had $12.1 million of other receivables.

 

We receive deposits from end consumers before we recognize revenue, resulting in customer deposits, and in some cases we have the unconditional right to collect the remaining portion of the order price before we fulfill our performance obligation, resulting in deferred revenue, (collectively, the “contract liabilities”). At July 28, 2018, we included $32.5 million of customer deposits and $13.8 million of deferred revenues in accrued expenses and other current liabilities on our consolidated balance sheet. At the beginning of fiscal 2019, we had $31.3 million of customer deposits and $12.1 million of deferred revenues. During the quarter ended July 28, 2018, we recognized revenue of $40.1 million related to our contract liabilities.

 

We have elected the practical expedient permitted in ASC 606-10-32-18, which allows an entity to recognize the promised amount of consideration without adjusting for the effects of a significant financing component if the contract has a duration of one year or less. As our contracts typically are less than one year in length and do not have significant financing components, we have not adjusted consideration.

 

Note 11: Segment Information

 

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

 

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

 

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

 

Retail Segment. Our Retail segment consists of one operating segment which includes our 147 company-owned La-Z-Boy Furniture Galleries® stores. The Retail segment primarily sells upholstered furniture, in addition to some casegoods and other accessories, to end consumers through these stores.

 

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		Quarter Ended
(Unaudited, amounts in thousands)		7/28/18			7/29/17
Sales
Upholstery segment:
Sales to external customers		$	240,054		$	224,814
Intersegment sales		53,344			49,593
Upholstery segment sales		293,398			274,407
Casegoods segment:
Sales to external customers		24,403			21,019
Intersegment sales		3,983			4,491
Casegoods segment sales		28,386			25,510
Retail segment sales		119,228			110,516
Corporate and Other:
Sales to external customers		1,010			730
Intersegment sales		2,855			1,930
Corporate and Other sales		3,865			2,660
Eliminations		(60,182		)	(56,014		)
Consolidated sales		$	384,695		$	357,079
Operating Income (Loss)
Upholstery segment		$	23,884		$	23,299
Casegoods segment		3,080			2,739
Retail segment		4,458			1,767
Corporate and Other		(8,262		)	(11,507		)
Consolidated operating income		23,160			16,298
Interest expense		104			157
Interest income		602			343
Other income (expense), net		892			1,749
Income before income taxes		$	24,550		$	18,233

 

Note 12: Income Taxes

 

We determine our tax provision using an estimated annual effective tax rate and adjusting for discrete taxable events that occur during the quarter. We recognize the effects of tax legislation in the period in which the law is enacted. We re-measure our deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years we estimate the related temporary differences to reverse.

 

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law. Most of its provisions are effective for tax years beginning on or after January 1, 2018. Because we are a fiscal year U.S. taxpayer, the majority of the provisions, such as eliminating the domestic manufacturing deduction, new taxes on certain foreign-sourced income and new limitations on certain business deductions, began applying to us in fiscal 2019. In December of 2017, the SEC staff issued SAB 118, which provides that companies that have not completed their accounting for the effects of the Tax Act but can determine a reasonable estimate of those effects should include a provisional amount based on their reasonable estimate in their financial statements. The guidance in

 

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