LA-Z-BOY INC 10-Q

ITEM 1. FINANCIAL STATEMENTS LA-Z-BOY INCORPORATED CONSOLIDATED STATEMENT OF INCOME Quarter Ended (Unaudited, amounts in thousands, except per share data) 7/25/20 7/27/19 Sales $ 285,458 $ 413,633 Cost of sales 169,095 245,921 Gross profit 116,363 167,712 Selling, general and administrative expense 112,038 144,290 Operating income 4,325 23,422 Interest expense ( 459 ) ( 318 ) Interest income 494 727 Other income (expense), net 1,474 ( 760 ) Income before income taxes 5,834 23,071 Income tax expense 1,155 5,083 Net income 4,679 17,988 Net loss attributable to noncontrolling interests 119 81 Net income attributable to La-Z-Boy Incorporated $ 4,798 $ 18,069 Basic weighted average common shares 45,909 46,820 Basic net income attributable to La-Z-Boy Incorporated per share $ 0.10 $ 0.39 Diluted weighted average common shares 45,965 47,125 Diluted net income attributable to La-Z-Boy Incorporated per share $ 0.10 $ 0.38 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 3 Table of Contents LA-Z-BOY INCORPORATED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Quarter Ended (Unaudited, amounts in thousands) 7/25/20 7/27/19 Net income $ 4,679 $ 17,988 Other comprehensive income Currency translation adjustment 2,111 614 Change in fair value of cash flow hedges, net of tax — 4 Net unrealized gain on marketable securities, net of tax 42 108 Net pension amortization, net of tax 65 41 Total other comprehensive income 2,218 767 Total comprehensive income before allocation to noncontrolling interests 6,897 18,755 Comprehensive income attributable to noncontrolling interests ( 379 ) ( 405 ) Comprehensive income attributable to La-Z-Boy Incorporated $ 6,518 $ 18,350 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 4 Table of Contents LA-Z-BOY INCORPORATED CONSOLIDATED BALANCE SHEET (Unaudited, amounts in thousands, except par value) 7/25/20 4/25/20 Current assets Cash and equivalents $ 334,204 $ 261,553 Restricted cash 2,476 1,975 Receivables, net of allowance of $5,983 at 7/25/20 and $7,541 at 4/25/20 97,374 99,351 Inventories, net 180,401 181,643 Other current assets 89,497 81,804 Total current assets 703,952 626,326 Property, plant and equipment, net 212,933 214,767 Goodwill 161,597 161,017 Other intangible assets, net 28,614 28,653 Deferred income taxes – long-term 20,060 20,839 Right of use lease asset 310,133 318,647 Other long-term assets, net 66,458 64,640 Total assets $ 1,503,747 $ 1,434,889 Current liabilities Accounts payable $ 61,917 $ 55,511 Short-term borrowings 50,000 75,000 Lease liability, current 64,399 64,376 Accrued expenses and other current liabilities 248,230 155,282 Total current liabilities 424,546 350,169 Lease liability, long-term 262,225 270,162 Other long-term liabilities 101,977 98,252 Shareholders' equity Preferred shares – 5,000 authorized; none issued — — Common shares, $1.00 par value – 150,000 authorized; 45,989 outstanding at 7/25/20 and 45,857 outstanding at 4/25/20 45,989 45,857 Capital in excess of par value 320,067 318,215 Retained earnings 346,750 343,633 Accumulated other comprehensive loss ( 5,232 ) ( 6,952 ) Total La-Z-Boy Incorporated shareholders' equity 707,574 700,753 Noncontrolling interests 7,425 15,553 Total equity 714,999 716,306 Total liabilities and equity $ 1,503,747 $ 1,434,889 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 5 Table of Contents LA-Z-BOY INCORPORATED CONSOLIDATED STATEMENT OF CASH FLOWS Quarter Ended (Unaudited, amounts in thousands) 7/25/20 7/27/19 Cash flows from operating activities Net income $ 4,679 $ 17,988 Adjustments to reconcile net income to cash provided by (used for) operating activities (Gain)/loss on disposal of assets 14 ( 536 ) Gain on sale of investments ( 108 ) ( 4 ) Change in deferred taxes 785 ( 677 ) Provision for doubtful accounts ( 1,575 ) 116 Depreciation and amortization 8,119 7,298 Equity-based compensation expense 2,047 1,675 Change in receivables 3,745 8,535 Change in inventories 1,686 ( 527 ) Change in right-of-use lease assets 16,469 16,101 Change in other assets 4,031 ( 8,792 ) Change in payables 8,864 ( 1,391 ) Change in lease liabilities ( 15,857 ) ( 16,418 ) Change in other liabilities 73,401 ( 4,028 ) Net cash provided by operating activities 106,300 19,340 Cash flows from investing activities Proceeds from disposals of assets 10 22 Proceeds from insurance — 642 Capital expenditures ( 9,810 ) ( 12,299 ) Purchases of investments ( 3,623 ) ( 5,288 ) Proceeds from sales of investments 14,671 4,060 Acquisitions ( 437 ) ( 5,438 ) Net cash provided by (used for) investing activities 811 ( 18,301 ) Cash flows from financing activities Payments on debt and finance lease liabilities ( 25,013 ) ( 47 ) Stock issued for stock and employee benefit plans, net of shares withheld for taxes ( 1,749 ) ( 1,417 ) Purchases of common stock — ( 12,313 ) Dividends paid to shareholders — ( 6,112 ) Dividends paid to minority interest joint venture partners (1) ( 8,507 ) — Net cash used for financing activities ( 35,269 ) ( 19,889 ) Effect of exchange rate changes on cash and equivalents 1,310 655 Change in cash, cash equivalents and restricted cash 73,152 ( 18,195 ) Cash, cash equivalents and restricted cash at beginning of period 263,528 131,787 Cash, cash equivalents and restricted cash at end of period $ 336,680 $ 113,592 Supplemental disclosure of non-cash investing activities Capital expenditures included in payables $ 881 $ 2,416 (1) 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. 6 Table of Contents LA-Z-BOY INCORPORATED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Unaudited, amounts in thousands) Common Shares Capital in Excess of Par Value Retained Earnings Accumulated Other Comprehensive Income (Loss) Non-Controlling Interests Total At April 25, 2020 $ 45,857 $ 318,215 $ 343,633 $ ( 6,952 ) $ 15,553 $ 716,306 Net income (loss) — — 4,798 — ( 119 ) 4,679 Other comprehensive income — — — 1,720 498 2,218 Stock issued for stock and employee benefit plans, net of cancellations and withholding tax 132 ( 195 ) ( 1,686 ) — — ( 1,749 ) Stock option and restricted stock expense — 2,047 — — — 2,047 Dividends declared and paid (1) — — 5 — ( 8,507 ) ( 8,502 ) At July 25, 2020 $ 45,989 $ 320,067 $ 346,750 $ ( 5,232 ) $ 7,425 $ 714,999 (1) 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) Common Shares Capital in Excess of Par Value Retained Earnings Accumulated Other Comprehensive Income (Loss) Non-Controlling Interests Total At April 27, 2019 $ 46,955 $ 313,168 $ 325,847 $ ( 3,462 ) $ 14,468 $ 696,976 Net income (loss) — — 18,069 — ( 81 ) 17,988 Other comprehensive income — — — 281 486 767 Stock issued for stock and employee benefit plans, net of cancellations and withholding tax 126 126 ( 1,669 ) — — ( 1,417 ) Repurchases of 391 shares of common stock ( 391 ) ( 3,762 ) ( 8,160 ) — — ( 12,313 ) Stock option and restricted stock expense — 1,675 — — — 1,675 Cumulative effect adjustment for leases, net of tax (1) — — 574 — — 574 Reclassification of certain income tax effects (2) — — 547 ( 547 ) — — Dividends declared and paid ($0.13/share) — — ( 6,112 ) — — ( 6,112 ) At July 27, 2019 $ 46,690 $ 311,207 $ 329,096 $ ( 3,728 ) $ 14,873 $ 698,138 (1) Cumulative effect adjustment of deferred gains on prior sale/leaseback transactions as a result of adopting ASU 2016-02. (2) 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 Table of Contents LA-Z-BOY INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1: Basis of Presentation The accompanying consolidated financial statements include the consolidated accounts of La-Z-Boy Incorporated and our majority-owned subsidiaries (collectively, the "Company"). We derived the April 25, 2020 , 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 2020 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”), 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 24, 2021 . 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. COVID-19 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 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. ASU Description ASU 2016-13 Financial Instruments – Credit losses (Topic 326): Measurement of Credit Losses on Financial Instruments ASU 2020-04 Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting 8 Table of Contents Accounting pronouncements not yet adopted The following table summarizes additional accounting pronouncements which we have not yet adopted, but we believe will not have a material impact on our accounting policies or our consolidated financial statements and related disclosures. ASU Description Adoption Date ASU 2018-14 Compensation – Retirement benefits – Defined Benefit Plans – General (Subtopic 715-20): Changes to the Disclosure Requirements for Defined Benefit Plans Fiscal 2022 ASU 2019-12 Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes Fiscal 2022 ASU 2020-01 Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 Fiscal 2022 Note 2: Restricted Cash We have restricted cash on deposit with a bank as collateral for certain letters of credit. All 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) 7/25/20 7/27/19 Cash and cash equivalents $ 334,204 $ 111,622 Restricted cash 2,476 1,970 Total cash, cash equivalents and restricted cash $ 336,680 $ 113,592 Note 3: Inventories A summary of inventories is as follows: (Unaudited, amounts in thousands) 7/25/20 4/25/20 Raw materials $ 90,414 $ 92,174 Work in process 14,897 14,064 Finished goods 96,535 96,850 FIFO inventories 201,846 203,088 Excess of FIFO over LIFO ( 21,445 ) ( 21,445 ) Total inventories $ 180,401 $ 181,643 Note 4: Goodwill and Other Intangible Assets We have goodwill on our consolidated balance sheet as follows: Reportable Segment/Unit Reporting Unit Related Acquisition Wholesale Segment La-Z-Boy United Kingdom Wholesale business in the United Kingdom and Ireland Retail Segment Retail La-Z-Boy Furniture Galleries ® stores Corporate & Other Joybird Joybird The following is a summary of activity of goodwill for the quarter ended July 25, 2020 : (Unaudited, amounts in thousands) Wholesale Segment Retail Segment Corporate and Other Total Goodwill Balance at April 25, 2020 $ 11,630 $ 93,941 $ 55,446 $ 161,017 Translation adjustment 408 172 — 580 Balance at July 25, 2020 $ 12,038 $ 94,113 $ 55,446 $ 161,597 9 Table of Contents We have intangible assets on our consolidated balance sheet as follows: Reportable Segment/Unit Intangible Asset Useful Life 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 Wholesale Segment American Drew ® trade name Indefinite-lived Retail Segment Reacquired rights to own and operate La-Z-Boy Furniture Galleries ® stores Indefinite-lived Corporate & Other Joybird ® trade name Amortizable over eight-year useful life The following is a roll-forward of our other intangible assets for the quarter ended July 25, 2020 : (Unaudited, amounts in thousands) Indefinite- Lived Trade Names Finite- Lived Trade Name Indefinite- Lived Reacquired Rights Other Intangible Assets Total Other Intangible Assets Balance at April 25, 2020 $ 1,155 $ 5,003 $ 19,996 $ 2,499 $ 28,653 Amortization — ( 199 ) — ( 54 ) ( 253 ) Translation adjustment — — 128 86 214 Balance at July 25, 2020 $ 1,155 $ 4,804 $ 20,124 $ 2,531 $ 28,614 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. 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 start-up 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: (Unaudited, amounts in thousands) 7/25/20 4/25/20 Short-term investments: Marketable securities $ 9,340 $ 18,634 Held-to-maturity investments 2,476 3,337 Total short-term investments 11,816 21,971 Long-term investments: Marketable securities 18,463 19,572 Cost basis investments 7,579 6,479 Total long-term investments 26,042 26,051 Total investments $ 37,858 $ 48,022 Investments to enhance returns on cash $ 16,494 $ 28,622 Investments to fund compensation/retirement plans 13,785 12,921 Other investments 7,579 6,479 Total investments $ 37,858 $ 48,022 10 Table of Contents The following is a summary of the unrealized gains, unrealized losses, and fair value by investment type: 7/25/20 4/25/20 (Unaudited, amounts in thousands) Gross Unrealized Gains Gross Unrealized Losses Fair Value Gross Unrealized Gains Gross Unrealized Losses Fair Value Equity securities $ 1,575 $ ( 19 ) $ 14,463 $ 1,011 $ ( 6,390 ) $ 12,692 Fixed income 274 ( 7 ) 19,058 268 ( 56 ) 30,213 Other 399 — 4,337 372 — 5,117 Total securities $ 2,248 $ ( 26 ) $ 37,858 $ 1,651 $ ( 6,446 ) $ 48,022 The following table summarizes sales of marketable securities: Quarter Ended (Unaudited, amounts in thousands) 7/25/20 7/27/19 Proceeds from sales $ 13,725 $ 4,060 Gross realized gains 126 6 Gross realized losses ( 18 ) ( 2 ) The following is a summary of the fair value of fixed income marketable securities, classified as available-for-sale securities, by contractual maturity: (Unaudited, amounts in thousands) 7/25/20 Within one year $ 9,366 Within two to five years 6,583 Within six to ten years 1,266 Thereafter 1,843 Total $ 19,058 Note 6: Accrued Expenses and Other Current Liabilities (Unaudited, amounts in thousands) 7/25/20 4/25/20 Payroll and other compensation $ 39,562 $ 34,980 Accrued product warranty, current portion 14,237 14,264 Customer deposits 101,771 40,721 Deferred revenue 39,747 17,086 Other current liabilities 52,913 48,231 Accrued expenses and other current liabilities $ 248,230 $ 155,282 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. 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 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 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 11 Table of Contents 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) 7/25/20 7/27/19 Balance as of the beginning of the period $ 23,255 $ 22,736 Accruals during the period 3,828 5,657 Settlements during the period ( 3,960 ) ( 5,557 ) Balance as of the end of the period (1) $ 23,123 $ 22,836 (1) $ 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. 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) 7/25/20 7/27/19 Equity-based awards expense $ 2,047 $ 1,675 Liability-based awards expense 584 ( 60 ) Total stock-based compensation expense $ 2,631 $ 1,615 Stock Options. We granted 315,584 stock options to employees during the first quarter of fiscal 2021 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 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. The fair value of stock options granted during the first quarter of fiscal 2021 were calculated using the following assumptions: (Unaudited) Fiscal 2021 grant Assumption Risk-free interest rate 0.34 % U.S. Treasury issues with term equal to expected life at grant date Dividend rate 0 % Estimated future dividend rate and common share price at grant date Expected life in years 5 Contractual term of stock option and expected employee exercise trends Stock price volatility 41.79 % Historical volatility of our common shares Fair value per share $ 10.06 Stock Appreciation Rights (“SARs”). We have not granted any SARs to employees since fiscal 2014, but we have SARs outstanding from the fiscal 2013 and fiscal 2014 grants. All outstanding SARs are 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 fair value at the end of each reporting period. 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 12 Table of Contents 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 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. 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 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 . Performance Shares. During the first quarter of fiscal 2021 , we granted 168,719 performance-based shares. We also have performance-based share awards outstanding from previous grants. 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 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. 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. The Monte Carlo valuation model uses multiple simulations to evaluate our probability of achieving various stock price levels to determine our expected performance ranking relative to our peer group. For shares that vest based on market conditions, we expense compensation cost, net of estimated forfeitures, over the vesting period regardless of whether the market condition is ultimately satisfied. Based on the Monte Carlo model, the fair value as of the grant date of the fiscal 2021 grant of shares that vest based on market conditions was $ 38.14 . 13 Table of Contents Note 9: Accumulated Other Comprehensive Income (Loss) 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) 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 25, 2020 $ ( 1,891 ) $ — $ 449 $ ( 5,510 ) $ ( 6,952 ) Changes before reclassifications 1,613 — 77 — 1,690 Amounts reclassified to net income — — ( 22 ) 87 65 Tax effect — — ( 13 ) ( 22 ) ( 35 ) Other comprehensive income attributable to La-Z-Boy Incorporated 1,613 — 42 65 1,720 Balance at July 25, 2020 $ ( 278 ) $ — $ 491 $ ( 5,445 ) $ ( 5,232 ) Balance at April 27, 2019 $ 50 $ 87 $ 6 $ ( 3,605 ) $ ( 3,462 ) Changes before reclassifications 128 — 143 — 271 Reclassification of certain income tax effects (1) — ( 97 ) 258 ( 708 ) ( 547 ) Amounts reclassified to net income — 5 — 55 60 Tax effect — ( 1 ) ( 35 ) ( 14 ) ( 50 ) Other comprehensive income (loss) attributable to La-Z-Boy Incorporated 128 ( 93 ) 366 ( 667 ) ( 266 ) Balance at July 27, 2019 $ 178 $ ( 6 ) $ 372 $ ( 4,272 ) $ ( 3,728 ) (1) Income tax effects of the Tax Cuts and Jobs Act are reclassified from AOCI to retained earnings due to adoption of ASU 2018-02. 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 (Unaudited, amounts in thousands) 7/25/20 7/27/19 Balance as of the beginning of the period $ 15,553 $ 14,468 Net income ( 119 ) ( 81 ) Other comprehensive income 498 486 Dividends distributed to joint venture minority partners ( 8,507 ) — Balance as of the end of the period $ 7,425 $ 14,873 Note 10: Revenue Recognition Our revenue is primarily derived from 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 the 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 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. 14 Table of Contents 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 July 25, 2020 (Unaudited, amounts in thousands) Wholesale Retail Corporate and Other Total Motion Upholstery Furniture $ 132,264 $ 53,447 $ — $ 185,711 Stationary Upholstery Furniture 58,314 17,655 16,134 92,103 Bedroom Furniture 7,112 1,095 1,231 9,438 Dining Room Furniture 4,547 1,818 657 7,022 Occasional Furniture 8,110 3,410 729 12,249 Other (1) 13,226 13,712 ( 2,010 ) 24,928 Total $ 223,573 $ 91,137 $ 16,741 $ 331,451 Eliminations ( 45,993 ) Consolidated Net Sales $ 285,458 Quarter Ended July 27, 2019 (Unaudited, amounts in thousands) Wholesale Retail Corporate and Other Total Motion Upholstery Furniture $ 179,522 $ 85,184 $ — $ 264,706 Stationary Upholstery Furniture 91,653 29,153 22,952 143,758 Bedroom Furniture 8,193 1,447 1,182 10,822 Dining Room Furniture 5,405 2,599 394 8,398 Occasional Furniture 11,135 5,125 361 16,621 Other (1) 24,643 19,488 ( 4,337 ) 39,794 Total $ 320,551 $ 142,996 $ 20,552 $ 484,099 Eliminations ( 70,466 ) Consolidated Net Sales $ 413,633 (1) 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. 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. 15 Table of Contents 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. 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. At the beginning of fiscal 2021 , we had $ 17.1 million of other receivables. 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 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 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. Note 11: Segment Information 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 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 . Our Retail segment consists of one operating segment comprised of our 155 company-owned La-Z-Boy Furniture Galleries ® stores. The Retail segment sells primarily upholstered furniture, in addition to some casegoods and other accessories, to end consumers through these stores. Corporate & Other . Corporate & Other includes the shared costs for corporate functions, including human resources, information technology, finance and legal, in addition to revenue generated through royalty agreements with companies licensed to use the La-Z-Boy ® brand name on various products. We consider our corporate functions to be other business activities and have aggregated them with our other insignificant operating segments including our global trading company in Hong Kong and Joybird, an e-commerce retailer that manufactures upholstered furniture such as sofas, loveseats, chairs, ottomans, sleeper sofas and beds, and also imports casegoods (wood) furniture such as occasional tables and other accessories. Joybird sells to the end consumer primarily online through its website, www.joybird.com. None of the operating segments included in Corporate & Other meet the requirements of reportable segments. 16 Table of Contents The following table presents sales and operating income (loss) by segment: Quarter Ended (Unaudited, amounts in thousands) 7/25/20 7/27/19 Sales Wholesale segment: Sales to external customers $ 179,755 $ 252,773 Intersegment sales 43,818 67,778 Wholesale segment sales 223,573 320,551 Retail segment sales 91,137 142,996 Corporate and Other: Sales to external customers 14,566 17,864 Intersegment sales 2,175 2,688 Corporate and Other sales 16,741 20,552 Eliminations ( 45,993 ) ( 70,466 ) Consolidated sales $ 285,458 $ 413,633 Operating Income (Loss) Wholesale segment $ 17,940 $ 28,864 Retail segment ( 6,627 ) 8,477 Corporate and Other ( 6,988 ) ( 13,919 ) Consolidated operating income 4,325 23,422 Interest expense ( 459 ) ( 318 ) Interest income 494 727 Other income (expense), net 1,474 ( 760 ) Income before income taxes $ 5,834 $ 23,071 Note 12: Income Taxes 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. Note 13: Earnings per Share Certain share-based compensation awards that entitle their holders to receive non-forfeitable dividends prior to vesting are considered participating securities. 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. 17 Table of Contents The following is a reconciliation of the numerators and denominators we used in our computations of basic and diluted earnings per share: Quarter Ended (Unaudited, amounts in thousands) 7/25/20 7/27/19 Numerator (basic and diluted): Net income attributable to La-Z-Boy Incorporated $ 4,798 $ 18,069 Income allocated to participating securities ( 4 ) ( 39 ) Net income available to common Shareholders $ 4,794 $ 18,030 Denominator: Basic weighted average common shares outstanding 45,909 46,820 Add: Contingent common shares 47 130 Stock option dilution 9 175 Diluted weighted average common shares outstanding 45,965 47,125 Earnings per Share: Basic $ 0.10 $ 0.39 Diluted $ 0.10 $ 0.38 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 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 ended July 27, 2019 . Note 14: Fair Value Measurements Accounting standards require that we put financial assets and liabilities into one of three categories based on the inputs we use to value them: • Level 1 — Financial assets and liabilities, the values of which are based on unadjusted quoted market prices for identical assets and liabilities in an active market that we have the ability to access. • Level 2 — Financial assets and liabilities, the values of which are based on quoted prices in markets that are not active or on model inputs that are observable for substantially the full term of the asset or liability. • Level 3 — Financial assets and liabilities, the values of which are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Accounting standards require that in making fair value measurements, we use observable market data when available. When inputs used to measure fair value fall within different levels of the hierarchy, we categorize the fair value measurement as being in the lowest level that is significant to the measurement. We recognize transfers between levels of the fair value hierarchy at the end of the reporting period in which they occur. In addition to assets and liabilities that we record at fair value on a recurring basis, we are required to record assets and liabilities at fair value on a non-recurring basis. We measure non-financial assets such as 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. 18 Table of Contents 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 July 25, 2020 Fair Value Measurements (Unaudited, amounts in thousands) Level 1 Level 2 Level 3 NAV(1) Total Assets Marketable securities $ — $ 20,608 $ — $ 7,195 $ 27,803 Held-to-maturity investments 2,476 — — — 2,476 Cost basis investments — — 7,579 — 7,579 Total assets $ 2,476 $ 20,608 $ 7,579 $ 7,195 $ 37,858 At April 25, 2020 Fair Value Measurements (Unaudited, amounts in thousands) Level 1 Level 2 Level 3 NAV(1) Total Assets Marketable securities $ — $ 31,691 $ — $ 6,515 $ 38,206 Held-to-maturity investments 3,337 — — — 3,337 Cost basis investment — — 6,479 — 6,479 Total assets $ 3,337 $ 31,691 $ 6,479 $ 6,515 $ 48,022 (1) Certain marketable securities investments are measured at fair value using net asset value per share under the practical expedient methodology. 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 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 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 . 19 Table of Contents