What changed in this filing

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Item 1. Financial Statements

2020-08-18 compared with 2020-02-18 · 128 added, 367 removed, 398 unchanged (55% of the section changed)

3 unchanged sentences

Quarter Ended

Nine Months Ended

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

4 unchanged sentences

Interest income

Other expense, net

Other income (expense), net

Income before income taxes

Income tax expense

Net income attributable to noncontrolling interests

Net loss attributable to noncontrolling interests

Net income attributable to La-Z-Boy Incorporated

7 unchanged sentences

Quarter Ended

Nine Months Ended

(Unaudited, amounts in thousands)

Other comprehensive income (loss)

Other comprehensive income

Currency translation adjustment

2 unchanged sentences

Net pension amortization, net of tax

Total other comprehensive income (loss)

Total other comprehensive income

Total comprehensive income before allocation to noncontrolling interests

18 unchanged sentences

Current liabilities

Current portion of long-term debt

Accounts payable

Lease liability, short-term

Short-term borrowings

Lease liability, current

Accrued expenses and other current liabilities

Total current liabilities

Long-term debt

Lease liability, long-term

13 unchanged sentences

CONSOLIDATED STATEMENT OF CASH FLOWS

Nine Months Ended

Quarter Ended

(Unaudited, amounts in thousands)

2 unchanged sentences

(Gain)/loss on disposal of assets

Gain on sale of investments

Change in deferred taxes

2 unchanged sentences

Equity-based compensation expense

Pension plan contributions

Change in receivables

Change in inventories

Change in right-of-use lease assets

Change in other assets

Change in payables

Change in lease liabilities

Change in other liabilities

6 unchanged sentences

Proceeds from sales of investments

Net cash used for investing activities

Net cash provided by (used for) investing activities

Cash flows from financing activities

Net proceeds from credit facility

Payments on debt and finance lease liabilities

1 unchanged sentence

Purchases of common stock

Dividends paid

Dividends paid to shareholders

Dividends paid to minority interest joint venture partners (1)

Net cash used for financing activities

5 unchanged sentences

Capital expenditures included in payables

Includes dividends paid to joint venture minority partners resulting from the repatriation of dividends from our foreign earnings that we no longer consider permanently reinvested.

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

10 unchanged sentences

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

Purchases of 391 shares of common stock

Stock option and restricted stock expense

Cumulative effect adjustment for leases, net of tax (1)

Reclassification of certain income tax effects (2)

Dividends declared and paid ($0.13/share)

Dividends declared and paid (1)

At July 25, 2020

Other comprehensive income

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

Purchases of 335 shares of common stock

Stock option and restricted stock expense

Dividends declared and paid ($0.13/share)

Dividends declared not paid ($0.13/share)

At October 26, 2019

Net income (loss)

Other comprehensive income (loss)

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

Purchases of 378 shares of common stock

Stock option and restricted stock expense

Dividends declared and paid ($0.14/share)

Dividends declared not paid ($0.14/share)

At January 25, 2020

Cumulative effect adjustment of deferred gains on prior sale/leaseback transactions as a result of adopting ASU 2016-02.

Income tax effects of the Tax Cuts and Jobs Act are reclassified from Accumulated Other Comprehensive Income ("AOCI") to retained earnings due to the adoption of ASU 2018-02.

No dividends to shareholders were declared or paid during the first quarter of fiscal 2021;

amount includes dividends forfeited from restricted stock awards previously granted.

Non-controlling interests include dividends paid to joint venture minority partners resulting from the repatriation of dividends from our foreign earnings that we no longer consider permanently reinvested.

(Unaudited, amounts in thousands)

4 unchanged sentences

At April 27, 2019

Other comprehensive (loss)

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

Purchases of 257 shares of common stock

Stock option and restricted stock expense

Cumulative effect adjustment for investments, net of tax

Dividends declared and paid ($0.12/share)

At July 28, 2018

Net income (loss)

Other comprehensive income

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

Purchases of 121 shares of common stock

Stock option and restricted stock expense

Dividends declared and paid ($0.12/share)

Dividends declared not paid ($0.12/share)

At October 27, 2018

Other comprehensive loss

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

Purchases of 177 shares of common stock

Repurchases of 391 shares of common stock

Stock option and restricted stock expense

Cumulative effect adjustment for leases, net of tax (1)

Reclassification of certain income tax effects (2)

Dividends declared and paid ($0.13/share)

Dividends declared not paid ($0.13/share)

At January 26, 2019

At July 27, 2019

Cumulative effect adjustment of deferred gains on prior sale/leaseback transactions as a result of adopting ASU 2016-02.

Income tax effects of the Tax Cuts and Jobs Act are reclassified from Accumulated Other Comprehensive Income ("AOCI") to retained earnings due to the adoption of ASU 2018-02.

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

7 unchanged sentences

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 24, 2021 .

To further strengthen our supply chain footprint, on August 8, 2019, we announced our plan to close our Redlands, California upholstered furniture manufacturing facility and move production to available capacity at our other North American facilities.

The Company’s Redlands upholstered furniture plant employed about 350 people, accounted for approximately 10 % of the La-Z-Boy branded business total upholstery production, and manufactured recliners, motion sofas and classics (high-leg recliners).

Production ceased at the Redlands plant as of the end of the second quarter of fiscal 2020 and in the third quarter of fiscal 2020, the facility, which is approximately 200,000 square feet, was sold for $ 10.8 million , net of closing costs.

The sale of the Redlands property resulted in a $ 9.7 million pre-tax gain, recorded in selling, general and administrative expense ("SG&A") in our consolidated statement of income.

In addition, we have transitioned the leather cut-and-sew operation from the Newton, Mississippi upholstered furniture manufacturing plant to another North American-based cut-and-sew facility.

The move of the Newton leather cut-and-sew operation impacted about 105 of the 525 employees at that location.

As a part of our supply chain optimization initiative, we may incur expenses that qualify as exit and disposal costs under ASC 420, Exit or Disposal Cost Obligations.

Other expenses that are an integral component of, and directly attributable to, restructuring activities do not qualify as exit and disposal costs, such as accelerated depreciation, asset impairments and other incremental costs.

In the first nine months of fiscal 2020, we recognized pre-tax expenses associated with this initiative of $ 5.3 million within cost of sales.

These costs do not qualify as exit and disposal costs under ASC 420.

At January 25, 2020 , we owned preferred shares of two privately held start-up 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 the results of either of these companies in our financial statements because we do not have the power to direct those activities that most significantly impact the economic performance of either of these companies and, therefore, are not the primary beneficiary.

At July 25, 2020 , we owned preferred shares and warrants to purchase common shares of two privately held companies, both of which are variable interest entities.

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.

As a part of our continued response to the impact of COVID-19, on June 4, 2020, we announced our business realignment plan, which included the immediate reduction of the Company's global workforce by approximately 10 % across our manufacturing, retail and corporate locations, including the closure of our Newton, Mississippi upholstery manufacturing facility.

Production from the Newton facility has been shifted to available capacity at the company’s Dayton, Tennessee, Neosho, Missouri, and Siloam Springs, Arkansas plants.

In the first quarter of fiscal 2021, we incurred expenses of $ 3.5 million associated with our business realignment plan, primarily due to severance costs and an impairment of the carrying value of the Newton manufacturing facility.

Given the positive trends in cash flows, during the first quarter of fiscal 2021, we repaid $ 25.0 million of the $ 75.0 million borrowed under our line of credit in the fourth quarter of 2020.

Subsequent to this financial report, in the second quarter of fiscal 2021, effective as of August 1, 2020, the temporary 50 % salary reductions for the named executive officers ended and full base salaries were reinstated, as was the Company's 401(k) match and cash compensation for the board of directors.

Further, on August 18, 2020, the board of directors elected to reinstate a regular quarterly dividend to shareholders of $ 0.07 per share, 50 % of the dividend amount paid quarterly prior to the Company's suspension of dividends.

We continue to actively manage the impact of the COVID-19 crisis and there is uncertainty regarding the impact COVID-19 will have on our financial operations in the near and long term.

Accounting pronouncement adopted in fiscal 2021

The accounting standards update (“ASU”) described in the paragraph below had a significant impact on our accounting policies and our consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), 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.

We have adopted this standard in the first quarter of fiscal 2020 using the modified retrospective approach.

See Note 5 for further information.

The following table summarizes additional ASUs which were adopted in fiscal 2021 , but did not have a material impact on our accounting policies or our consolidated financial statements and related disclosures.

Plan Accounting:

Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965):

Employee Benefit Plan Master Trust Reporting

Derivatives and Hedging (Topic 815):

Targeted Improvements to Accounting for Hedging Activities

Income Statement – Reporting Comprehensive Income (Topic 220):

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

Compensation – Stock Compensation (Topic 718):

Improvements to Nonemployee Share-Based Payment Accounting

Fair Value Measurement (Topic 820):

Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurements

Derivatives and Hedging (Topic 815):

Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes

Financial Instruments – Credit losses (Topic 326):

Measurement of Credit Losses on Financial Instruments

Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting

Accounting pronouncements not yet adopted

1 unchanged sentence

Adoption Date

Financial Instruments – Credit losses (Topic 326):

Measurement of Credit Losses on Financial Instruments

Compensation – Retirement benefits – Defined Benefit Plans – General (Subtopic 715-20):

4 unchanged sentences

Clarifying the Interactions between Topic 321, Topic 323, and Topic 815

Subsequent events

Subsequent to the end of the third quarter of fiscal 2020, one of our largest customers made a public statement that they are actively exploring a variety of options with creditors, investors and landlords in order to continue serving their customers.

As of the end of the third quarter of fiscal 2020, we had a trade receivable from this customer of approximately $ 7 million , and have not provided for any potential credit losses.

We are monitoring this fast-developing situation, including through direct discussions with this customer, and as of the date of this filing, based on all information available to us, believe that the amounts owed as of January 25, 2020 , are materially collectible.

We did not complete any acquisitions during the nine months ended January 25, 2020 .

Joybird acquisition

On July 30, 2018, we completed our acquisition of Stitch Industries, Inc.

("Joybird"), an e-commerce retailer and manufacturer of upholstered furniture, for guaranteed cash payments of $ 75 million , which was subject to a working capital adjustment of $ 2.5 million .

We received the working capital adjustment during the third quarter of fiscal 2019 from amounts placed in escrow at the time of the closing of the transaction.

We acquired Joybird to better position ourselves for growth in the online selling environment and increase our visibility with millennial and Gen X consumers, while simultaneously leveraging our supply chain assets.

The guaranteed payments include a closing date cash payment of $ 37.5 million in purchase price consideration (net of the working capital adjustment), $ 7.5 million in prepaid compensation, and the assumption of $ 5.0 million of liabilities that will be paid within two years following the acquisition.

The remaining $ 25 million will be paid in five annual installments of $ 5 million on the anniversary date of the acquisition, the first of which was paid in the first quarter of fiscal 2020.

The merger agreement also includes two future earn-out opportunities based on Joybird’s financial performance in fiscal 2021 and fiscal 2023.

The $ 7.5 million of prepaid compensation relates to the retention of the four Joybird founders, now our employees, each of whom will forfeit proportional amounts if one or more of them resigns in the two years following the acquisition.

We are amortizing the $ 7.5 million to SG&A expense over the two-year retention period on a straight-line basis.

In addition to the guaranteed cash payments of $ 75 million , we recorded a contingent consideration liability on the date of acquisition of $ 7.5 million , which reflects the fair value of the earn-out opportunities as of the date of acquisition.

We also recorded a finite-lived intangible asset of $ 6.4 million reflecting the fair value of the acquired Joybird ® trade name, which we are amortizing to SG&A expense on a straight-line basis over its useful life of eight years .

The undiscounted range of the contingent consideration is zero to $ 65 million and is based on sales and profitability of Joybird in fiscal 2021 and fiscal 2023.

Subsequent adjustments to the fair value of the contingent consideration will impact SG&A expense in our consolidated statement of income.

We recorded $ 78.8 million of goodwill related to the Joybird acquisition, related primarily to synergies we expect from the integration of the acquisition and the anticipated future benefits of these synergies.

The finite-lived intangible asset and goodwill asset for Joybird are not deductible for federal income tax purposes.

We included the Joybird operating segment in our other business activities which we report within our Corporate and Other reportable segment.

Refer to Note 6.

Goodwill and Other Intangible Assets and Note 16.

Fair Value Measurements for further information regarding the valuation of the contingent consideration, goodwill and intangible assets related to Joybird.

The following table summarizes the purchase price allocation for Joybird at the date of acquisition:

(Unaudited, amounts in thousands)

Joybird Acquisition

Fair value of consideration:

Cash (paid at closing)

Guaranteed payment

Acquisition earn-out

Assumption of liability

Working capital adjustment

Total fair value of consideration

Amounts recognized for assets acquired and liabilities assumed:

Other current assets

Property, plant and equipment

Finite-lived tradename

Other long-term assets

Accounts payable

Customer deposits

Other current liabilities

Other long-term liabilities

Total identifiable net liabilities acquired

The Joybird acquisition was not material to our financial position or our results of operations, and therefore, pro-forma financial information is not present ed.

Restricted Cash

13 unchanged sentences

Total inventories

During the first quarter of fiscal 2020, we adopted ASU 2016-02, Leases (Topic 842) and all related amendments.

The guidance requires lessees to recognize substantially all leases on their balance sheet as a right-of-use (“ROU”) asset and a lease liability.

The Company leases real estate for retail stores, distribution centers, warehouses, plants, showrooms and office space.

We also have equipment leases for tractors/trailers, IT and office equipment and vehicles.

We determine if a contract contains a lease at inception based on our right to control the use of an identified asset and our right to obtain substantially all the economic benefits from the use of that identified asset.

Most of our real estate leases include options to renew or terminate early.

We assess these options to determine if we are reasonably certain of exercising these options based on all relevant economic and financial factors.

Any options that meet these criteria are included in the lease term at lease commencement.

Most of our leases do not have an interest rate implicit in the lease.

As a result, for purposes of measuring our ROU asset and lease liability, we determine our incremental borrowing rate by applying a spread above the U.S.

Treasury borrowing rates.

In the case an interest rate is implicit in a lease we will use that rate as the discount rate for that lease.

Some of our leases contain variable rent payments based on a Consumer Price Index or percentage of sales.

Due to the variable nature of these costs, they are not included in the measurement of the ROU asset and lease liability.

The Company has elected to apply the practical expedients permitted under transition guidance to forgo the restatement of comparative periods and to not reassess leases entered into prior to adoption.

In addition, we have elected the practical expedient to not separate lease and non-lease components when determining the ROU asset and lease liability.

We have also made an accounting policy election to not recognize an ROU asset and lease liability on the balance sheet for those leases with an initial term of one year or less and instead, such liabilities will be expensed on a straight-line basis over the lease term.

Supplemental balance sheet information related to leases:

(Unaudited, amounts in thousands)

Operating leases

Lease liabilities, short-term

Lease liabilities, long-term

Finance leases

Lease liabilities, short-term

Lease liabilities, long-term

The ROU assets by segment are as follows:

(Unaudited, amounts in thousands)

Corporate & Other

Total ROU assets

The components of lease cost are as follows for the respective periods ended January 25, 2020 :

(Unaudited, amounts in thousands)

Quarter Ended

Nine Months Ended

Operating lease cost

Financing lease cost

Short-term lease cost

Variable lease cost

Sublease income

Total lease cost

The following tables present supplemental lease disclosures:

Nine Months Ended January 25, 2020

(Unaudited, amounts in thousands)

Operating Leases

Financing Leases

Cash paid for amounts included in the measurement of lease liabilities

Lease liabilities arising from new ROU assets

(Unaudited, amounts in thousands)

Operating Leases

Financing Leases

Weighted-average remaining lease term (years)

Weighted-average discount rate

The following table presents our undiscounted cash flows as of January 25, 2020 , and our minimum contractual obligations on our leases as of April 27, 2019 :

(Unaudited, amounts in thousands)

Operating Leases

Financing Leases

Operating Leases

Financing Leases

Within one year

After one year and within two years

After two years and within three years

After three years and within four years

After four years and within five years

After five years

Total lease payments

Total lease obligations

Goodwill and Other Intangible Assets

1 unchanged sentence

Reportable Segment/Unit

Reporting Unit

Related Acquisition

Upholstery segment

Acquisition of the wholesale business in the United Kingdom and Ireland

Wholesale Segment

La-Z-Boy United Kingdom

Wholesale business in the United Kingdom and Ireland

Retail Segment

Acquisitions of La-Z-Boy Furniture Galleries ® stores

La-Z-Boy Furniture Galleries ® stores

Corporate & Other

Acquisition of Joybird

The following is a roll-forward of goodwill for the nine months ended January 25, 2020 :

The following is a summary of activity of goodwill for the quarter ended July 25, 2020 :

(Unaudited, amounts in thousands)

Balance at April 25, 2020

Acquisition adjustment

Translation adjustment

Balance at January 25, 2020

Balance at July 25, 2020

We have intangible assets on our consolidated balance sheet as follows:

1 unchanged sentence

Intangible Asset

Upholstery segment

Wholesale Segment

Primarily acquired customer relationships from our acquisition of the wholesale business in the United Kingdom and Ireland

Amortizable over useful lives that do not exceed 15 years

Casegoods segment

Wholesale Segment

American Drew ® trade name

6 unchanged sentences

Amortizable over eight-year useful life

The following is a roll-forward of our other intangible assets for the nine months ended January 25, 2020 :

The following is a roll-forward of our other intangible assets for the quarter ended July 25, 2020 :

(Unaudited, amounts in thousands)

1 unchanged sentence

Translation adjustment

Balance at January 25, 2020

We test intangibles and goodwill for impairment on an annual basis in the fourth quarter of each fiscal year, and more frequently if events or changes in circumstances indicate that an asset might be impaired.

Per the annual test performed in the fourth quarter of fiscal year 2019, the relative fair value of the Joybird reporting unit and the carrying value of our goodwill were not significantly different, which is to be expected given the short duration of time between the testing date and the Joybird acquisition date.

Joybird, an e-commerce retailer, is an early stage business with an expectation of high growth.

With all business acquisitions, primarily those in the early stage, the timing on fully leveraging synergies comes with uncertainty and as a result, valuation volatility may occur.

Absent any impairment indicators, aligned with our annual testing during the fourth quarter of fiscal 2020, we will undertake a review of the Joybird business, which could result in an adjustment to the fair value of the intangible assets and goodwill related to Joybird.

Balance at July 25, 2020

We test indefinite-lived intangibles and goodwill for impairment on an annual basis in the fourth quarter of each fiscal year, and more frequently if events or changes in circumstances indicate that an asset might be impaired.

We test amortizable intangible assets for impairment if events or changes in circumstances indicate that the assets might be impaired.

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.

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.

We also hold other investments consisting of cost-basis preferred shares of two privately held start-up companies.

In the third quarter of fiscal year 2020, we recognized an other-than-temporary impairment of $ 6.0 million , which represents the full cost-basis value of the investment in one of these privately held start-up companies.

The impairment loss is recognized in Other income (expense), net on the consolidated statement of income.

Refer to Note 16, Fair Value Measurements for further information.

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:

19 unchanged sentences

Quarter Ended

Nine Months Ended

(Unaudited, amounts in thousands)

7 unchanged sentences

Within six to ten years

Employee Benefits

During the fourth quarter of fiscal 2019 , we terminated our defined benefit pension plan for eligible factory hourly employees in our La-Z-Boy operating unit.

In connection with the plan termination, we settled all future obligations under the plan through a combination of lump-sum payments to eligible participants who elected to receive them, and the transfer of any remaining benefit obligations under the plan to a highly rated insurance company.

During the second quarter of fiscal 2020 , we received a pre-tax refund of $ 1.9 million from the insurance company, representing an overpayment of the expected benefit obligations that were settled during the fourth quarter of fiscal 2019 .

The refund was recorded as a component of other income (expense), net in our consolidated statement of income.

There were no net periodic pension costs associated with the terminated pension plan in the quarter and nine months ended January 25, 2020 .

For the quarter and nine months ended January 26, 2019 , net periodic pension costs were as follows:

Quarter Ended

Nine Months Ended

Accrued Expenses and Other Current Liabilities

(Unaudited, amounts in thousands)

Interest cost

Expected return on plan assets

Net amortization

Net periodic pension cost

The components of net periodic pension cost other than the service cost were included in other income (expense), net in our consolidated statement of income.

Service cost was recorded in cost of sales in our consolidated statement of income.

Employee Vacation Policy Changes

We enacted changes to our employee vacation policies that became effective on January 1, 2019.

Our new vacation policies enhanced the amount of vacation time earned by our employees.

Additionally, under these vacation policies, our salaried and office hourly employees now accrue vacation in the current calendar year for use in the current calendar year, and any vacation time earned but not used will be forfeited at the end of each calendar yea r.

These changes reduced our salary and office hourly vacation liability and resulted in a one-time non-cash gain of $ 5.1 million in our consolidated statement of income in the third quarter of fiscal 2019.

Of the total $ 5.1 million gain recorded, $ 1.3 million was recorded in cost of sales with the remainder recorded in SG&A expense.

Our factory vacation policies for hourly employees were only changed to enhance the amount of vacation time earned by our employees, with no change to accrual methodologies, and resulted in $ 0.3 million incremental expense in the third quarter of fiscal 2019, recorded in cost of sales.

Payroll and other compensation

Accrued product warranty, current portion

Customer deposits

Deferred revenue

Other current liabilities

Accrued expenses and other current liabilities

The increase in customer deposits and deferred revenue was primarily driven by higher written Retail and Joybird sales in the first quarter of fiscal 2021.

Higher written sales also led to an increase in contract assets, which are included in other current assets on the consolidated balance sheet, consistent with the increase in deferred revenue.

Refer to Note 10, Revenue Recognition, for additional details regarding our contract assets and contract liabilities.

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 on new sales based on our historical claims experience and also provide for any additional anticipated future costs on previously sold products.

We estimate future warranty claims on new sales based on our historical 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.

Over 90 % of our warranty liability relates to our Upholstery segment as we generally warrant our products against defects for one year on fabric and leather, from one to ten years on cushions and padding, and provide a limited lifetime warranty on certain mechanisms and frames.

Our Upholstery segment warranties cover labor costs relating to our parts for one year .

We provide a limited lifetime warranty against defects on a majority of the products sold by Joybird, which is part of our Corporate and Other results.

Over 90 % of our warranty liability relates to our Wholesale 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 Wholesale segment warranties cover labor costs relating to our parts for one year .

We provide a limited lifetime warranty against defects on a majority of Joybird products, which are a part of our Corporate and Other results.

For all our manufacturer warranties, the 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.

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

Nine Months Ended

(Unaudited, amounts in thousands)

3 unchanged sentences

Balance as of the end of the period (1)

As of January 25, 2020 and April 27, 2019 , we included $ 14.3 million and $ 13.9 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.

$ 14.2 million and $ 14.3 million recorded in accrued expenses and other current liabilities as of July 25, 2020 and April 25, 2020 , respectively, while the remainder is in included 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.

2 unchanged sentences

Quarter Ended

Nine Months Ended

(Unaudited, amounts in thousands)

4 unchanged sentences

We granted 315,584 stock options to employees during the first quarter of fiscal 2021 and we have stock options outstanding from previous grants.

In fiscal 2020 , we have changed the grant mix to include fewer stock options and have replaced those awards with restricted shares.

We account for stock options as equity-based awards because when they are exercised, they will be settled in common shares.

3 unchanged sentences

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 have elected to recognize forfeitures as an adjustment to compensation expense in the same period as the forfeitures occur.

We estimate the fair value of the employee stock options at the date of grant using the Black-Scholes option-pricing model, which requires management to make certain assumptions.

We estimate expected volatility based on the historical volatility of our common shares.

We base the average expected life on the contractual term of the stock option and expected employee exercise 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 2020 using the following assumptions:

The fair value of stock options granted during the first quarter of fiscal 2021 were calculated using the following assumptions:

Fiscal 2021 grant

Risk-free interest rate

Treasury issues with term equal to expected life at grant date

Dividend rate

Estimated future dividend rate and common share price at grant date

Expected life in years

Contractual term of stock option and expected employee exercise trends

Stock price volatility

Historical volatility of our common shares

Fair value per share

3 unchanged sentences

SARs will be paid in cash upon exercise and, accordingly, we account for SARs as liability-based awards that we re-measure to 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 January 25, 2020 , we had 7,149 and 13,869 SARs outstanding for the fiscal 2013 and fiscal 2014 awards, respectively.

These awards have exceeded their expected life and will be re-measured to fair value 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 January 25, 2020 , the intrinsic value per share of the fiscal 2013 and fiscal 2014 awards were $ 20.59 and $ 13.50 , respectively.

We have no remaining unrecognized compensation cost at July 25, 2020 , relating to SARs awards as they are all fully vested, but we will continue to remeasure these awards to reflect the fair value at the end of each reporting period until all awards are exercised or forfeited.

As of July 25, 2020 , we had 7,149 and 13,869 SARs outstanding for the fiscal 2013 and fiscal 2014 awards, respectively.

These awards have exceeded their expected life and will be re-measured to fair value 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 25, 2020 , the intrinsic value per share of the fiscal 2013 and fiscal 2014 awards were $ 15.53 and $ 8.44 , respectively.

Restricted Stock .

We granted 166,649 shares of restricted stock to employees during the first nine months of fiscal 2020.

We granted 119,535 shares of restricted stock to employees during the first quarter of fiscal 2021 .

We also have shares of restricted stock outstanding from previous grants.

2 unchanged sentences

We account for restricted stock awards as equity-based awards because when they vest, they will be settled in common shares.

The weighted-average fair value of the restricted stock awarded in the first nine months of fiscal 2020 was $ 30.41 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.

The weighted-average fair value of the restricted stock awarded in the first quarter of fiscal 2021 was $ 27.54 per share, the market value of our common shares on the date of grant.

We have elected to recognize forfeitures as an adjustment to compensation expense in the same period as the forfeitures occur.

We recognize compensation expense for restricted stock over the vesting period equal to the fair value on the grant date of the award.

Restricted stock awards vest at 25 % per year, beginning one year from the grant date over a term of four years .

Restricted Stock Units.

During the second quarter of fiscal 2020, we granted 28,332 restricted stock units to our non-employee directors.

These restricted stock units vest when the director leaves the board.

We account for these restricted stock units as equity-based awards because when they vest, they will be settled in shares of our common stock.

We measure and recognize compensation expense for these awards based on the market price of our common shares on the date of the grant, which was $ 31.77 .

Performance Shares.

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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 % ).

Payout of the fiscal 2021 grant depends on our financial performance ( 50 % ) 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 ( 50 % ).

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.

Grants of performance-based shares during fiscal 2019 and fiscal 2020 were weighted ( 80 % ) on financial performance and ( 20 % ) on market-based conditions consistent with those in the fiscal 2021 grant.

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.

We have elected to recognize forfeitures as an adjustment to compensation expense in the same period as the forfeitures occur.

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 2020 that vest based on attaining performance goals was $ 28.68 , 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 performance-based shares granted in the first quarter of fiscal 2021, due to COVID-19 we have deferred setting our performance targets for such and as such, the grant date requirements under ASC 718 have not been met.

Once performance goals are defined by the Compensation Committee, we will determine the awards' fair value.

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.

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Accumulated Other Comprehensive Income (Loss)

The activity in accumulated other comprehensive income (loss) for the quarters ended January 25, 2020 , and January 26, 2019 , is as follows:

The activity in accumulated other comprehensive income (loss) for the quarters ended July 25, 2020 , and July 27, 2019 , is as follows:

(Unaudited, amounts in thousands)

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Accumulated other comprehensive loss

Balance at October 26, 2019

Changes before reclassifications

Amounts reclassified to net income

Other comprehensive income attributable to La-Z-Boy Incorporated

Balance at January 25, 2020

Balance at October 27, 2018

Balance at April 25, 2020

Changes before reclassifications

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Other comprehensive income attributable to La-Z-Boy Incorporated

Balance at January 26, 2019

The activity in accumulated other comprehensive income (loss) for the nine months ended January 25, 2020 , and January 26, 2019 , 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 July 25, 2020

Balance at April 27, 2019

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

Balance at January 25, 2020

Balance at April 28, 2018

Changes before reclassifications

Cumulative effect adjustment for investments (2)

Amounts reclassified to net income

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

Balance at January 26, 2019

Balance at July 27, 2019

Income tax effects of the Tax Cuts and Jobs Act are reclassified from AOCI to retained earnings due to adoption of ASU 2018-02.

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.

We reclassified the net $ 1.6 million of cumulative effect adjustment from accumulated other comprehensive loss to retained earnings as a result of adopting ASU 2016-01.

We reclassified the unrealized gain/(loss) on marketable securities from accumulated other comprehensive loss to net income through other income (expense), net 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.

We reclassified the unrealized gain/(loss) on marketable securities from accumulated other comprehensive loss to net income through other income (expense), net, 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 were as follows:

Quarter Ended

Nine Months Ended

(Unaudited, amounts in thousands)

Balance as of the beginning of the period

Other comprehensive income (loss)

Other comprehensive income

Dividends distributed to joint venture minority partners

Balance as of the end of the period

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This allows us to present revenue net of these certain types of taxes.

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.

The following table presents our revenue disaggregated by product category and by segment or unit:

Quarter Ended January 25, 2020

Quarter Ended July 25, 2020

(Unaudited, amounts in thousands)

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Consolidated Net Sales

Quarter Ended January 26, 2019

Motion Upholstery Furniture

Stationary Upholstery Furniture

Bedroom Furniture

Dining Room Furniture

Occasional Furniture

Consolidated Net Sales

Primarily includes revenue for delivery, advertising, royalties, parts, accessories, after-treatment products, tariff surcharges, discounts & allowances, rebates and other sales incentives.

Nine Months Ended January 25, 2020

Quarter Ended July 27, 2019

(Unaudited, amounts in thousands)

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Consolidated Net Sales

Nine Months Ended January 26, 2019

Motion Upholstery Furniture

Stationary Upholstery Furniture

Bedroom Furniture

Dining Room Furniture

Occasional Furniture

Consolidated Net Sales

Primarily includes revenue for delivery, advertising, royalties, parts, accessories, after-treatment products, tariff surcharges, discounts & allowances, rebates and other sales incentives .

Primarily includes revenue for delivery, advertising, royalties, parts, accessories, after-treatment products, tariff surcharges, discounts and allowances, rebates and other sales incentives.

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.

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This gross revenue includes sales to La-Z-Boy Furniture Galleries ® stores (including company-owned stores), independent retailers, and the end consumer.

At January 25, 2020 , our consolidated balance sheet includes current assets of $ 25.3 million that we reported as other receivables.

At July 25, 2020 , our consolidated balance sheet includes current assets of $ 39.7 million that we reported as other receivables.

These other receivables represent the remaining consideration to which we are entitled prior to fulfilling our performance obligation.

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We receive customer deposits from end consumers before we recognize revenue 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 January 25, 2020 , we included $ 60.9 million of customer deposits and $ 25.3 million of deferred revenues in accrued expenses and other current liabilities on our consolidated balance sheet.

At July 25, 2020 , we included $ 101.8 million of customer deposits and $ 39.7 million of deferred revenues in accrued expenses and other current liabilities on our consolidated balance sheet.

At the beginning of fiscal 2021 , we had $ 40.7 million of customer deposits and $ 17.1 million of deferred revenues.

During the quarter and nine months ended January 25, 2020 we recognized revenue of $ 0.5 million and $ 55.0 million , respectively, related to our contract liability balance at April 27, 2019 .

As our contracts typically are less than one year in length and do not have significant financing components, we have not adjusted consideration.

During the quarter ended July 25, 2020 , we recognized revenue of $ 49.7 million related to our contract liability balance at April 25, 2020 .

The increase in our contract assets and contract liabilities at July 25, 2020 was primarily the result of increased written sales during the first quarter of fiscal 2021 compared with those in the fourth quarter of fiscal 2020.

Segment Information

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

Upholstery Segment .

Our Upholstery 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:

Our reportable operating segments include the Wholesale segment and the Retail segment.

Effective in the first quarter of fiscal 2021, in order to better align with the manner in which we view and manage the business, coupled with economic and customer channel similarities, we revised our reportable operating segments by aggregating the former Upholstery segment with the former Casegoods segment to form the newly combined Wholesale segment.

The change in our reportable operating segments reflects how the Company evaluates financial information used to make operating decisions.

There were no changes to our Retail operating segment or Corporate & Other as part of this revision.

Prior period results disclosed in the tables below have been revised to reflect these changes.

Wholesale Segment .

Our Wholesale segment consists primarily of three operating segments:

La-Z-Boy, our largest operating segment, our England subsidiary, and our casegoods 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.

The Wholesale 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 Wholesale segment manufactures and imports upholstered furniture such as recliners and motion furniture, sofas, loveseats, chairs, sectionals, modulars, ottomans and sleeper sofas and imports casegoods (wood) furniture such as bedroom sets, dining room sets, entertainment centers and occasional pieces.

The Wholesale segment sells directly to La-Z-Boy Furniture Galleries ® stores, operators of La-Z-Boy Comfort Studio ® locations, England Custom Comfort Center locations, major dealers, and a wide cross-section of other independent retailers.

Retail Segment .

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Quarter Ended

Nine Months Ended

(Unaudited, amounts in thousands)

Upholstery segment:

Sales to external customers

Intersegment sales

Upholstery segment sales

Casegoods segment:

Wholesale segment:

Sales to external customers

Intersegment sales

Casegoods segment sales

Wholesale segment sales

Retail segment sales

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Operating Income (Loss)

Upholstery segment

Casegoods segment

Wholesale segment

Retail segment

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Income before income taxes

Our effective tax rate was 26.0 % and 25.3 % for the third quarter and nine months ended January 25, 2020 , respectively.

Our effective tax rate was 26.9 % and 24.6 % for the third quarter and nine months ended January 26, 2019 , respectively.

Our effective tax rate was 19.8 % for the quarter ended July 25, 2020 , compared with 22.0 % for the quarter ended July 27, 2019 .

Absent discrete adjustments, primarily related to tax deductions from stock-based compensation, our effective tax rate in the first quarter of fiscal 2021 would have been 26.1 % .

Our effective tax rate varies from the 21 % federal statutory rate primarily due to state taxes.

Absent discrete adjustments, our effective tax rate in the third quarter of fiscal 2020 would have been 25.8 % .

Earnings per Share

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Prior to fiscal 2019, we granted restricted stock awards that contained non-forfeitable rights to dividends on unvested shares, and we are required to include these participating securities in calculating our basic earnings per common share, using the two-class method.

The restricted stock awards we granted in fiscal 2019 and fiscal 2020 do not have non-forfeitable rights to dividends and therefore are not considered participating securities.

The dividends on the restricted stock awards granted in fiscal 2019 and fiscal 2020 are, and will continue to be held in escrow, until the stock awards vest at which time we will pay any accumulated dividends.

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

Quarter Ended

Nine Months Ended

(Unaudited, amounts in thousands)

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

We had outstanding options to purchase 0.3 million shares for the quarter and nine months ended January 25, 2020 , with a weighted average exercise price of $ 33.15 .

We had outstanding options to purchase 1.5 million shares for the quarter ended July 25, 2020 , with a weighted average exercise price of $ 29.08 .

We excluded the effect of these options from our diluted share calculation since the weighted average exercise price of the options was higher than the average market price and including the options’ effect would have been anti-dilutive.

Similarly, we excluded options to purchase 0.4 million shares from the diluted share calculation for the quarter and nine months ended January 26, 2019 .

Similarly, we excluded options to purchase 0.4 million shares from the diluted share calculation for the quarter ended July 27, 2019 .

Fair Value Measurements

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We measure non-financial assets such as other intangible assets, goodwill, and other long-lived assets at fair value when there is an indicator of impairment, and we record them at fair value only when we recognize an impairment loss.

The following table presents the fair value hierarchy for those assets and liabilities we measured at fair value on a recurring basis at January 25, 2020 and April 27, 2019 .

The following table presents the fair value hierarchy for those assets we measured at fair value on a recurring basis at July 25, 2020 and April 25, 2020 .

There were no transfers into or out of Level 1, Level 2, or Level 3 for any of the periods presented.

At January 25, 2020

At July 25, 2020

Fair Value Measurements

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Cost basis investments

Contingent consideration liability

At April 25, 2020

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Cost basis investment

Contingent consideration liability

Certain marketable securities investments are measured at fair value using net asset value per share under the practical expedient methodology.

At January 25, 2020 and April 27, 2019 , we held marketable securities intended to enhance returns on our cash and to fund future obligations of our non-qualified defined benefit retirement plan, as well as marketable securities to fund future obligations of our executive deferred compensation plan and our performance compensation retirement plan.

At July 25, 2020 and April 25, 2020 , we held marketable securities intended to enhance returns on our cash and to fund future obligations of our non-qualified defined benefit retirement plan, as well as marketable securities to fund future obligations of our executive deferred compensation plan and our performance compensation retirement plan.

We also held other fixed income and cost basis investments.

The fair value measurements for our Level 1 and Level 2 securities are based on quoted prices in active markets, as well as through broker quotes and independent valuation providers, multiplied by the number of shares owned exclusive of any transaction costs.

At January 25, 2020 , our Level 3 assets included non-marketable preferred shares of two privately held start-up companies, and a warrant to purchase common shares of one of these privately held start-up companies.

At July 25, 2020 , our Level 3 assets included non-marketable preferred shares and warrants to purchase common shares of two privately held start-up companies.

The fair value for our Level 3 investments is not readily determinable so we estimate the fair value as costs minus impairment, if any, plus or minus adjustments resulting from observable price changes in orderly transactions for identical or similar investments with the same issuer.

During the quarter ended October 26, 2019 , we invested an additional $ 0.5 million in one of these privately held start-up companies.

Subsequently and during the quarter ended January 25, 2020 , with respect to the same investee, we recorded an impairment charge of $ 6.0 million for the full carrying value as it was determined the value of the investment was not recoverable.

For non-marketable equity investments, the measurement of fair value requires significant judgment and includes quantitative and qualitative analysis of identified events or circumstances that impact the fair value of the investment.

Among other factors, we assessed the investee’s ability to meet business milestones, its financial condition and near-term prospects (including the rate at which the investee was using its cash), the investee’s need for possible additional funding at a lower valuation, and the competitive environment in which the investee operates its business.

There were no other changes to the fair value of our Level 3 assets during the quarter and nine months ended January 25, 2020 .

Our Level 3 liability includes our contingent consideration liability from the Joybird acquisition.

We estimated the contingent consideration liability based on future revenues and earnings in fiscal 2021 and fiscal 2023.

The fair value was determined using a variation of the income approach, known as the real options method, whereby revenue and earnings were simulated over the earn-out periods in a risk-neutral framework using Geometric Brownian Motion.

For each simulation path, the potential earn-out payments were calculated based on management’s probability estimates for achievement of the revenue and earnings milestones and then were discounted to the valuation date using a discount rate of 4.2 % for the fiscal 2021 milestone

and 4.7 % for the fiscal 2023 milestone.

There were no changes to the fair value of our Level 3 liabilities during the first nine months of fiscal 2020.

However, our integration efforts related to the acquired Joybird business are taking longer than anticipated.

Consistent with our policy of testing of non-financial assets annually in the fourth quarter or more frequently, if an impairment indicator is identified, we will be undertaking a review of the Joybird business next quarter, which will include future revenue and earnings projections, and which could result in an adjustment to the fair value of the contingent consideration liability as well as intangible assets and goodwill related to Joybird.

During the quarter ended July 25, 2020 , we invested an additional $ 1.1 million in one of these privately held start-up companies.

There were no other changes to the fair value of our Level 3 assets during the quarter ended July 25, 2020 .

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements