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) 7/29/2023 7/30/2022 Sales $ 481,651 $ 604,091 Cost of sales 275,923 373,061 Gross profit 205,728 231,030 Selling, general and administrative expense 171,202 178,387 Operating income 34,526 52,643 Interest expense ( 122 ) ( 159 ) Interest income 3,056 474 Other income (expense), net 556 45 Income before income taxes 38,016 53,003 Income tax expense 10,090 14,063 Net income 27,926 38,940 Net income attributable to noncontrolling interests ( 447 ) ( 452 ) Net income attributable to La-Z-Boy Incorporated $ 27,479 $ 38,488 Basic weighted average common shares 43,239 43,092 Basic net income attributable to La-Z-Boy Incorporated per share $ 0.64 $ 0.89 Diluted weighted average common shares 43,333 43,142 Diluted net income attributable to La-Z-Boy Incorporated per share $ 0.63 $ 0.89 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) 7/29/2023 7/30/2022 Net income $ 27,926 $ 38,940 Other comprehensive income (loss) Currency translation adjustment 1,047 ( 2,160 ) Net unrealized gain on marketable securities, net of tax 220 86 Net pension amortization, net of tax 23 36 Total other comprehensive income (loss) 1,290 ( 2,038 ) Total comprehensive income before noncontrolling interests 29,216 36,902 Comprehensive (income) loss attributable to noncontrolling interests ( 407 ) 67 Comprehensive income attributable to La-Z-Boy Incorporated $ 28,809 $ 36,969 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) 7/29/2023 4/29/2023 Current assets Cash and equivalents $ 336,434 $ 343,374 Restricted cash 3,816 3,304 Receivables, net of allowance of $ 4,425 at 7/29/2023 and $ 4,776 at 4/29/2023 110,857 125,536 Inventories, net 269,429 276,257 Other current assets 108,944 106,129 Total current assets 829,480 854,600 Property, plant and equipment, net 277,282 278,578 Goodwill 207,488 205,008 Other intangible assets, net 41,529 39,375 Deferred income taxes – long-term 8,545 8,918 Right of use lease assets 422,894 416,269 Other long-term assets, net 60,367 63,515 Total assets $ 1,847,585 $ 1,866,263 Current liabilities Accounts payable $ 97,954 $ 107,460 Lease liabilities, short-term 77,758 77,751 Accrued expenses and other current liabilities 262,196 290,650 Total current liabilities 437,908 475,861 Lease liabilities, long-term 374,972 368,163 Other long-term liabilities 70,775 70,142 Shareholders' equity Preferred shares – 5,000 authorized; none issued — — Common shares, $ 1.00 par value – 150,000 authorized; 43,110 outstanding at 7/29/2023 and 43,318 outstanding at 4/29/2023 43,110 43,318 Capital in excess of par value 356,684 358,891 Retained earnings 557,666 545,155 Accumulated other comprehensive loss ( 4,198 ) ( 5,528 ) Total La-Z-Boy Incorporated shareholders' equity 953,262 941,836 Noncontrolling interests 10,668 10,261 Total equity 963,930 952,097 Total liabilities and equity $ 1,847,585 $ 1,866,263 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) 7/29/2023 7/30/2022 Cash flows from operating activities Net income $ 27,926 $ 38,940 Adjustments to reconcile net income to cash provided by operating activities (Gain)/loss on disposal and impairment of assets 113 ( 4 ) (Gain)/loss on sale of investments 307 30 Provision for doubtful accounts ( 405 ) 293 Depreciation and amortization 10,211 9,516 Amortization of right-of-use lease assets 17,265 18,845 Lease impairment/(settlement) ( 1,175 ) — Equity-based compensation expense 2,526 1,417 Change in deferred taxes 602 544 Change in receivables 14,769 25,098 Change in inventories 9,271 ( 25,954 ) Change in other assets ( 2,820 ) ( 1,229 ) Change in payables ( 8,565 ) 22,113 Change in lease liabilities ( 17,882 ) ( 19,256 ) Change in other liabilities ( 26,230 ) ( 37,249 ) Net cash provided by operating activities 25,913 33,104 Cash flows from investing activities Proceeds from disposals of assets 4,031 46 Capital expenditures ( 13,457 ) ( 20,999 ) Purchases of investments ( 11,407 ) ( 2,176 ) Proceeds from sales of investments 12,404 4,421 Acquisitions ( 4,250 ) ( 7,230 ) Net cash used for investing activities ( 12,679 ) ( 25,938 ) Cash flows from financing activities Payments on debt and finance lease liabilities ( 67 ) ( 31 ) Stock issued for stock and employee benefit plans, net of shares withheld for taxes ( 1,978 ) ( 1,703 ) Repurchases of common stock ( 10,007 ) ( 5,004 ) Dividends paid to shareholders ( 7,852 ) ( 7,097 ) Net cash used for financing activities ( 19,904 ) ( 13,835 ) Effect of exchange rate changes on cash and equivalents 242 ( 750 ) Change in cash, cash equivalents and restricted cash ( 6,428 ) ( 7,419 ) Cash, cash equivalents and restricted cash at beginning of period 346,678 248,856 Cash, cash equivalents and restricted cash at end of period $ 340,250 $ 241,437 Supplemental disclosure of non-cash investing activities Capital expenditures included in payables $ 7,188 $ 7,130 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 29, 2023 $ 43,318 $ 358,891 $ 545,155 $ ( 5,528 ) $ 10,261 $ 952,097 Net income — — 27,479 — 447 27,926 Other comprehensive income (loss) — — — 1,330 ( 40 ) 1,290 Stock issued for stock and employee benefit plans, net of cancellations and withholding tax 149 ( 221 ) ( 1,906 ) — — ( 1,978 ) Repurchases of 357 shares of common stock ( 357 ) ( 4,512 ) ( 5,138 ) — — ( 10,007 ) Stock option and restricted stock expense — 2,526 — — — 2,526 Dividends declared and paid ($ 0.1815 /share) — — ( 7,852 ) — — ( 7,852 ) Dividends declared not paid ($ 0.1815 /share) — — ( 72 ) — — ( 72 ) At July 29, 2023 $ 43,110 $ 356,684 $ 557,666 $ ( 4,198 ) $ 10,668 $ 963,930 (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 30, 2022 $ 43,089 $ 342,252 $ 431,181 $ ( 5,797 ) $ 8,897 $ 819,622 Net income — — 38,488 — 452 38,940 Other comprehensive income (loss) — — — ( 1,519 ) ( 519 ) ( 2,038 ) Stock issued for stock and employee benefit plans, net of cancellations and withholding tax 151 ( 194 ) ( 1,660 ) — — ( 1,703 ) Repurchases of 204 shares of common stock ( 204 ) — ( 4,800 ) — — ( 5,004 ) Stock option and restricted stock expense — 1,417 — — — 1,417 Dividends declared and paid ($ 0.165 /share) — — ( 7,097 ) — — ( 7,097 ) Dividends declared not paid ($ 0.165 /share) — — ( 45 ) — — ( 45 ) At July 30, 2022 $ 43,036 $ 343,475 $ 456,067 $ ( 7,316 ) $ 8,830 $ 844,092 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 29, 2023 balance sheet from our audited financial statements. We prepared the interim financial information in conformity with generally accepted accounting principles ("US GAAP"), which we applied on a basis consistent with those reflected in our fiscal 2023 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 US GAAP. In management’s opinion, the interim financial information includes all adjustments and accruals, consisting only of normal recurring adjustments (except as otherwise disclosed), that are necessary for a fair statement of results for the respective interim periods. The interim results reflected in the accompanying financial statements are not necessarily indicative of the results of operations that will occur for the full fiscal year ending April 27, 2024. At July 29, 2023, we owned investments in two privately-held companies consisting of non-marketable preferred shares, warrants to purchase common shares, and convertible notes. Each of these companies is a variable interest entity and we have not consolidated their results in our financial statements because we do not have the power to direct those activities that most significantly impact their economic performance and, therefore, are not the primary beneficiary. Accounting Pronouncements Adopted in Fiscal 2024 The following table summarizes Accounting Standards Updates ("ASUs") which were adopted in fiscal 2024, but did not have a material impact on our accounting policies or our consolidated financial statements and related disclosures. ASU Description Adoption Date ASU 2021-08 Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers Fiscal 2024 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 2023-02 Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method Fiscal 2025 Change in Accounting Policy - Distribution Center Costs In the first quarter of fiscal 2024, we made a voluntary change to the presentation of costs directly attributable to our distribution activities conducted through our distribution centers in the United States. Our policy has changed from presenting these costs within selling, general and administrative ("SG&A") expense to presenting them as cost of sales. We believe this presentation is preferable because it will enhance the comparability of our financial statements with those of our industry peers and align with how we internally manage supply chain costs and margin. In accordance with US GAAP, the period presented below has been retrospectively adjusted to reflect the change to cost of sales and SG&A expense. This change had no impact to sales, income from operations, net income, earnings per share, retained earnings or other components of equity or net assets. (Unaudited, amounts in thousands) For the Quarter Ended July 30, 2022 Previously Reported Effect of Change As Adjusted Cost of sales $ 362,631 $ 10,430 $ 373,061 Gross profit 241,460 ( 10,430 ) 231,030 Selling, general and administrative expense 188,817 ( 10,430 ) 178,387 8 Table of Contents Torreón Closure During the third quarter of fiscal 2023, we made the decision to close our manufacturing facility in Torreón, Mexico as part of our initiative to drive improved efficiencies through optimized staffing levels within our plants. As a result of this action, charges were recorded within the Wholesale segment in the third and fourth quarters of fiscal 2023, totaling $ 9.2 million in SG&A expense for the impairment of various assets, primarily long-lived assets, and $ 1.6 million in cost of sales, primarily related to severance. During the first quarter of fiscal 2024, we terminated our lease on the Torreón facility and recognized a $ 1.2 million gain in SG&A expense within the Wholesale segment related to the settlement of our lease obligation on the previously impaired long-lived assets. Note 2: Acquisitions None of the below acquisitions were significant to our consolidated financial statements, and, therefore, pro-forma financial information is not presented. All of our provisional purchase accounting estimates for the acquisitions completed in fiscal 2024 are based on the information and data available to us as of the time of the issuance of these financial statements, and in accordance with Accounting Standard Codification Topic 805-10-25-15, are subject to change within the first 12 months following the acquisition as we gain additional data. Each of the following Retail acquisitions completed in fiscal 2024 and 2023 reflect a core component of our strategic priorities, which is to grow our company-owned retail business and leverage our integrated retail model (where we earn a combined profit on both the wholesale and retail sales) in suitable geographic markets, alongside the existing La-Z-Boy Furniture Galleries ® network. Prior to each Retail acquisition completed in fiscal 2024 and 2023, we licensed to the counterparty the exclusive right to own and operate the La-Z-Boy Furniture Galleries ® stores (and to use the associated trademarks and trade name) in each of their respective markets, and we reacquired these rights when we consummated the transaction. These required rights are indefinite-lived because our retailer agreements are perpetual agreements that have no specific expiration date and no renewal options. The effective settlement date of these arrangements resulted in no settlement gain or loss as the contractual terms were at market. For federal income tax purposes, we amortize and deduct these indefinite-lived intangible assets and goodwill, if any, over 15 years. Colorado Springs, Colorado Acquisition On July 17, 2023, we completed our acquisition of the Colorado Springs, Colorado business that operates two independently owned La-Z-Boy Furniture Galleries ® stores and one distribution center for $ 6.0 million, subject to customary adjustments. We paid total cash of $ 4.3 million in the first quarter of fiscal 2024 and the remaining consideration includes forgiveness of accounts receivable and payments based on working capital adjustments. As part of the acquisition, we recorded an indefinite-lived intangible asset of $ 2.3 million related to the reacquired rights described above. We also recognized $ 2.0 million of goodwill in our Retail segment related primarily to synergies we expect from the integration of the acquired stores and future benefits of these synergies. Prior Year Acquisitions Denver, Colorado Acquisition On July 18, 2022, we completed our acquisition of the Denver, Colorado business that operates five independently owned La-Z-Boy Furniture Galleries ® stores and one distribution center for $ 10.1 million, subject to customary adjustments. We paid total cash of $ 7.7 million in the first and second quarters of fiscal 2023 and the remaining consideration includes forgiveness of accounts receivable and payments based on working capital adjustments. As part of the acquisition, we recorded an indefinite-lived intangible asset of $ 4.3 million related to the reacquired rights described above. We also recognized $ 7.6 million of goodwill in our Retail segment related primarily to synergies we expect from the integration of the acquired stores and future benefits of these synergies. 9 Table of Contents Note 3: Cash and 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) 7/29/2023 7/30/2022 Cash and cash equivalents $ 336,434 $ 238,170 Restricted cash 3,816 3,267 Total cash, cash equivalents and restricted cash $ 340,250 $ 241,437 Note 4: Inventories A summary of inventories is as follows: (Unaudited, amounts in thousands) 7/29/2023 4/29/2023 Raw materials $ 119,477 $ 116,440 Work in process 21,512 24,328 Finished goods 174,352 181,401 FIFO inventories 315,341 322,169 Excess of FIFO over LIFO ( 45,912 ) ( 45,912 ) Total inventories $ 269,429 $ 276,257 Note 5: Goodwill and Other Intangible Assets We have goodwill on our consolidated balance sheet as follows: Reportable Segment/Unit Reporting Unit Related Acquisition Wholesale Segment United Kingdom Wholesale business in the United Kingdom and Ireland Wholesale Segment United Kingdom La-Z-Boy United Kingdom Manufacturing (Furnico) Retail Segment Retail La-Z-Boy Furniture Galleries ® stores Corporate and Other Joybird Joybird The following table summarizes changes in the carrying amount of our goodwill by reportable segment: (Unaudited, amounts in thousands) Wholesale Segment Retail Segment Corporate and Other Total Goodwill Balance at April 29, 2023 (1) $ 20,202 $ 129,360 $ 55,446 $ 205,008 Acquisitions — 1,951 — 1,951 Translation adjustment 450 79 — 529 Balance at July 29, 2023 (1) $ 20,652 $ 131,390 $ 55,446 $ 207,488 (1) Includes $ 26.9 million of accumulated impairment losses in Corporate and Other. 10 Table of Contents We have intangible assets on our consolidated balance sheet as follows: Reportable Segment 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 and Other Joybird ® trade name Amortizable over eight -year useful life The following summarizes changes in our intangible assets: (Unaudited, amounts in thousands) Indefinite- Lived Trade Names Finite-Lived Trade Name Indefinite- Lived Reacquired Rights Other Intangible Assets Total Intangible Assets Balance at April 29, 2023 $ 1,155 $ 2,594 $ 33,739 $ 1,887 $ 39,375 Acquisitions — — 2,307 — 2,307 Amortization — ( 200 ) — ( 55 ) ( 255 ) Translation adjustment — — 60 42 102 Balance at July 29, 2023 $ 1,155 $ 2,394 $ 36,106 $ 1,874 $ 41,529 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 6: 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. 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) 7/29/2023 4/29/2023 Short-term investments: Marketable securities $ 7,402 $ 5,043 Held-to-maturity investments 1,349 1,351 Total short-term investments 8,751 6,394 Long-term investments: Marketable securities 15,107 18,509 Total investments $ 23,858 $ 24,903 Investments to enhance returns on cash $ 10,646 $ 11,617 Investments to fund compensation/retirement plans 13,212 13,286 Total investments $ 23,858 $ 24,903 11 Table of Contents The following is a summary of the unrealized gains, unrealized losses, and fair value by investment type: 7/29/2023 4/29/2023 (Unaudited, amounts in thousands) Gross Unrealized Gains Gross Unrealized Losses Fair Value Gross Unrealized Gains Gross Unrealized Losses Fair Value Equity securities $ 1,890 $ ( 68 ) $ 7,446 $ 1,338 $ ( 103 ) $ 6,853 Fixed income 13 ( 297 ) 12,545 42 ( 620 ) 14,039 Other 1,170 — 3,867 1,171 — 4,011 Total securities $ 3,073 $ ( 365 ) $ 23,858 $ 2,551 $ ( 723 ) $ 24,903 The following table summarizes sales of marketable securities: Quarter Ended (Unaudited, amounts in thousands) 7/29/2023 7/30/2022 Proceeds from sales $ 12,404 $ 4,246 Gross realized gains 153 27 Gross realized losses ( 459 ) ( 56 ) 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) 7/29/2023 Within one year $ 7,398 Within two to five years 1,899 Within six to ten years — Thereafter 3,248 Total $ 12,545 Note 7: Product Warranties We accrue an estimated liability for product warranties when we recognize revenue on the sale of warrantied products. We estimate future warranty claims on product sales based on our historical claims experience and periodically adjust the provision to reflect changes in actual experience. 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 reportable segment, as we generally warrant our products against defects for one to three years on fabric and leather, from one to ten years on cushions and padding, and provide a limited lifetime warranty on certain mechanisms and frames, unless otherwise noted in the warranty. Additionally, 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. A reconciliation of the changes in our product warranty liability is as follows: Quarter Ended (Unaudited, amounts in thousands) 7/29/2023 (1) 7/30/2022 Balance as of the beginning of the period $ 30,984 $ 27,036 Accruals during the period 6,665 7,826 Settlements during the period ( 6,855 ) ( 7,346 ) Balance as of the end of the period $ 30,794 $ 27,516 (1) $ 20.0 million and $ 19.9 million is recorded in accrued expenses and other current liabilities as of July 29, 2023, and April 29, 2023, respectively, while the remainder is 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. 12 Table of Contents 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) 7/29/2023 7/30/2022 Equity-based awards expense $ 2,526 $ 1,417 Liability-based awards expense (1) 88 128 Total stock-based compensation expense $ 2,614 $ 1,545 (1) Includes stock appreciation rights, deferred stock units issued to Directors, restricted stock units, and performance-based units. Compensation expense for these awards is based on the market price of our common stock on the grant date and is remeasured each reporting period based on the market value of our common shares on the last day of the reported period. Restricted Stock . We granted 330,140 shares of restricted stock units to employees during the first quarter of fiscal 2024 and we also have restricted stock awards outstanding from previous grants. We issue restricted stock at no cost to the employees and account for restricted stock awards as equity-based awards because when they vest, they will be settled in common shares. We recognize compensation expense for restricted stock over the vesting period equal to the fair value on the date our Compensation and Talent Oversight Committee of our board of directors approved the awards. Restricted stock awards vest at 25 % per year, beginning one year from the grant date for a term of four years , with continued vesting upon retirement with respect to the fiscal 2023 and 2024 grants. We accelerate the expense for restricted stock 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. The weighted-average fair value of the restricted stock that was awarded in the first quarter of fiscal 2024 was $ 27.66 per share, the market value of our common shares on the date of grant. Performance Shares. During the first quarter of fiscal 2024, we granted 219,154 performance-based shares, and we also have performance-based share awards outstanding from previous grants. Payouts of these grants depend 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. We account for performance-based shares as equity-based awards because when they vest, they will be settled in common shares. In the event of an employee's termination during the vesting period, the potential right to earn shares under this program is generally forfeited and we have elected to recognize forfeitures as an adjustment to compensation expense in the same period in which 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 2024 that vest based on attaining performance goals was $ 25.48 , the market value of our common shares on the date we granted the awards less the dividends we expect to pay before the shares vest. For shares that vest based on market conditions, we use a Monte Carlo valuation model to estimate each share’s fair value as of the date of grant. 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 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 2024 grant of shares that vest based on market conditions was $ 34.15 . Stock Options. We did not grant stock options to employees during fiscal 2024, but we have stock options outstanding from grants from prior years. 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 and Talent Oversight Committee of our board of directors 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 ten months after the grant date. 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 13 Table of Contents occur. Granted options outstanding under the former long-term equity award plan remain in effect and have a term of 10 years. We estimated the fair value of the employee stock options granted in prior years at their respective grant date using the Black-Scholes option-pricing model, which requires management to make certain assumptions. Note 9: Accumulated Other Comprehensive Income (Loss) Activity in accumulated other comprehensive income (loss) for the quarters ended July 29, 2023, and July 30, 2022, is as follows: (Unaudited, amounts in thousands) Translation adjustment Unrealized gain (loss) on marketable securities Net pension amortization and net actuarial loss Accumulated other comprehensive income (loss) Balance at April 29, 2023 $ ( 2,652 ) $ ( 145 ) $ ( 2,731 ) $ ( 5,528 ) Changes before reclassifications 1,087 ( 15 ) — 1,072 Amounts reclassified to net income — 307 31 338 Tax effect — ( 72 ) ( 8 ) ( 80 ) Other comprehensive income (loss) attributable to La-Z-Boy Incorporated 1,087 220 23 1,330 Balance at July 29, 2023 $ ( 1,565 ) $ 75 $ ( 2,708 ) $ ( 4,198 ) Balance at April 30, 2022 $ ( 1,961 ) $ ( 298 ) $ ( 3,538 ) $ ( 5,797 ) Changes before reclassifications ( 1,641 ) 55 — ( 1,586 ) Amounts reclassified to net income — 59 48 107 Tax effect — ( 28 ) ( 12 ) ( 40 ) Other comprehensive income (loss) attributable to La-Z-Boy Incorporated ( 1,641 ) 86 36 ( 1,519 ) Balance at July 30, 2022 $ ( 3,602 ) $ ( 212 ) $ ( 3,502 ) $ ( 7,316 ) We reclassified both the unrealized gain (loss) on marketable securities and the net pension amortization from accumulated other comprehensive loss to net income through other income (expense), net. The components of noncontrolling interest were as follows: Quarter Ended (Unaudited, amounts in thousands) 7/29/2023 7/30/2022 Balance as of the beginning of the period $ 10,261 $ 8,897 Net income 447 452 Other comprehensive income (loss) ( 40 ) ( 519 ) Balance as of the end of the period $ 10,668 $ 8,830 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 have 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 29, 2023 Quarter Ended July 30, 2022 (Unaudited, amounts in thousands) Wholesale Retail Corporate and Other Total Wholesale Retail Corporate and Other Total Upholstered Furniture $ 283,418 $ 170,714 $ 46,434 $ 500,566 $ 330,478 $ 196,802 $ 51,242 $ 578,522 Casegoods Furniture 20,376 11,833 4,708 36,917 28,006 12,454 7,728 48,188 Delivery 40,043 8,243 1,902 50,188 56,237 8,016 1,903 66,156 Other (1) ( 10,362 ) 17,453 ( 12,983 ) ( 5,892 ) 27,097 18,749 ( 12,143 ) 33,703 Total 333,475 208,243 40,061 581,779 441,818 236,021 48,730 726,569 Eliminations ( 100,128 ) ( 122,478 ) Consolidated Net Sales $ 481,651 $ 604,091 (1) Primarily includes discounts and allowances, revenue for advertising, royalties, parts, accessories, after-treatment products, surcharges, rebates and other sales incentives. In fiscal 2024, certain amounts that were previously charged as surcharges in fiscal 2023 are now included in the base product pricing and reflected in the amounts by product category. Upholstered Furniture - Includes gross revenue for upholstered furniture, such as recliners, sofas, loveseats, chairs, sectionals, modulars, and ottomans. 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. Casegoods Furniture - Includes gross revenue for casegoods furniture typically found in a bedroom, such as beds, chests, dressers, nightstands and benches; furniture typically found in the dining room, such as dining tables, storage units, and stools; and furniture typically 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. Contract Assets and Liabilities. 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 a contract asset and a corresponding deferred revenue liability. In our consolidated balance sheet, customer deposits and deferred revenue (collectively, the "contract liabilities") are reported in accrued expenses and other current liabilities while contract assets are reported as other current assets. The following table presents our contract assets and liabilities: (Unaudited, amounts in thousands) 7/29/2023 4/29/2023 Contract assets $ 41,604 $ 44,939 Customer deposits $ 97,172 $ 105,766 Deferred revenue 41,604 44,939 Total contract liabilities (1) $ 138,776 $ 150,705 (1) During the quarter ended July 29, 2023, we recognized revenue of $ 126.0 million related to our contract liability balance at April 29, 2023. Note 11: Segment Information Our reportable operating segments include the Wholesale segment and the Retail segment. 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 and manufacturing 15 Table of Contents businesses. We aggregate these operating segments into one reportable segment because they are economically similar and 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 175 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 and Other. Corporate and 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 and Other meet the requirements of reportable segments. The following table presents sales and operating income (loss) by segment: Quarter Ended (Unaudited, amounts in thousands) 7/29/2023 7/30/2022 Sales Wholesale segment: Sales to external customers $ 236,251 $ 323,728 Intersegment sales 97,224 118,090 Wholesale segment sales 333,475 441,818 Retail segment sales 208,243 236,021 Corporate and Other: Sales to external customers 37,157 44,342 Intersegment sales 2,904 4,388 Corporate and Other sales 40,061 48,730 Eliminations ( 100,128 ) ( 122,478 ) Consolidated sales $ 481,651 $ 604,091 Operating Income (Loss) Wholesale segment $ 23,503 $ 26,142 Retail segment 29,264 38,152 Corporate and Other ( 18,241 ) ( 11,651 ) Consolidated operating income 34,526 52,643 Interest expense ( 122 ) ( 159 ) Interest income 3,056 474 Other income (expense), net 556 45 Income before income taxes $ 38,016 $ 53,003 16 Table of Contents Note 12: Income Taxes Our effective tax rate was 26.5 % for both the quarter ended July 29, 2023 and the quarter ended July 30, 2022. Our effective tax rate varies from the 21 % federal statutory rate primarily due to state taxes. Note 13: Earnings per Share 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, except per share data) 7/29/2023 7/30/2022 Numerator (basic and diluted): Net income available to common Shareholders $ 27,479 $ 38,488 Denominator: Basic weighted average common shares outstanding 43,239 43,092 Contingent common shares 54 50 Stock option dilution 40 — Diluted weighted average common shares outstanding 43,333 43,142 Earnings per Share: Basic $ 0.64 $ 0.89 Diluted $ 0.63 $ 0.89 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 exclude the effect of options from our diluted share calculation when the weighted average exercise price of the options is higher than the average market price, since including the options' effect would be anti-dilutive. For the quarters ended July 29, 2023 and July 30, 2022, we excluded options to purchase 0.7 million shares and 1.5 million shares from the diluted share calculation, respectively. 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. 17 Table of Contents The following table presents the fair value hierarchy for those assets and liabilities we measured at fair value on a recurring basis at July 29, 2023 and April 29, 2023. There were no transfers into or out of Level 1, Level 2, or Level 3 for any of the periods presented. At July 29, 2023 Fair Value Measurements (Unaudited, amounts in thousands) Level 1 Level 2 Level 3 NAV(1) Total Assets Marketable securities $ — $ 11,815 $ — $ 10,694 $ 22,509 Held-to-maturity investments 1,349 — — — 1,349 Total assets $ 1,349 $ 11,815 $ — $ 10,694 $ 23,858 At April 29, 2023 Fair Value Measurements (Unaudited, amounts in thousands) Level 1 Level 2 Level 3 NAV(1) Total Assets Marketable securities $ — $ 16,557 $ — $ 6,995 $ 23,552 Held-to-maturity investments 1,351 — — — 1,351 Total assets $ 1,351 $ 16,557 $ — $ 6,995 $ 24,903 (1) Certain marketable securities investments are measured at fair value using net asset value per share under the practical expedient methodology. At July 29, 2023 and April 29, 2023, we held marketable securities intended to enhance returns on our cash and to fund future obligations of our non-qualified defined benefit retirement plan, our executive deferred compensation plan and our performance compensation retirement plan. 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. 18 Table of Contents