NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Accounting Policies
The following is a summary of significant accounting policies followed in the preparation of La-Z-Boy Incorporated and its subsidiaries' (individually and collectively, "we," "our," "us," "La-Z-Boy" or the "Company") consolidated financial statements. Our fiscal year ends on the last Saturday of April. Our 2023 and 2021 fiscal years included 52 weeks, whereas our 2022 fiscal year included 53 weeks. The additional week in fiscal 2022 was included in the fourth quarter.
Principles of Consolidation
The accompanying consolidated financial statements include the consolidated accounts of La-Z-Boy Incorporated and our majority-owned subsidiaries. The portion of less than wholly-owned subsidiaries is included as non-controlling interest. All intercompany transactions have been eliminated, including any related profit on intercompany sales.
At April 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.
Use of Estimates
The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. These principles require management to make estimates and assumptions that affect the reported amounts or disclosures of assets, liabilities (including contingent liabilities), sales, and expenses at the date of the financial statements. Actual results could differ from those estimates.
Cash and Equivalents
For purposes of the consolidated balance sheet and statement of cash flows, we consider all highly liquid debt instruments purchased with initial maturities of three months or less to be cash equivalents.
Restricted Cash
We have cash on deposit with a bank as collateral for certain letters of credit.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out ("LIFO") basis for approximately 59% and 60% of our inventories at April 29, 2023, and April 30, 2022, respectively. Cost is determined for all other inventories on a first-in, first-out ("FIFO") basis. The majority of our La-Z-Boy Wholesale segment inventory uses the LIFO method of accounting, while the FIFO method is used primarily in our Retail segment and Joybird business.
Property, Plant and Equipment
Items capitalized, including significant betterments to existing facilities, are recorded at cost. Capitalized computer software costs include internal and external costs incurred during the software's development stage. Internal costs relate primarily to employee activities for coding and testing the software under development. Computer software costs are depreciated over three to five years. All maintenance and repair costs are expensed when incurred. Depreciation is computed principally using straight-line methods over the estimated useful lives of the assets.
Disposal and Impairment of Long-Lived Assets
Retirement or dispositions of long-lived assets are recorded based on carrying value and proceeds received. Any resulting gains or losses are recorded as a component of selling, general and administrative ("SG&A") expenses.
We review the carrying value of our long-lived assets, which includes our right-of-use lease assets, for impairment if events or changes in circumstances indicate that their carrying amounts may not be recoverable. Our assessment of recoverability is based
on our best estimates using either quoted market prices or an analysis of the undiscounted projected future cash flows by asset groups in order to determine if there is any indicator of impairment requiring us to further assess the fair value of our long-lived assets. Our asset groups consist of our operating segments in our Wholesale reportable segment, each of our retail stores, our Joybird operating segment, and other corporate assets, which are evaluated at the consolidated level.
Indefinite-Lived Intangible Assets and Goodwill
Indefinite-lived intangible assets include our American Drew trade name and the reacquired right to own and operate La-Z-Boy Furniture Galleries® stores we have acquired. Prior to our retail acquisitions, we licensed the exclusive right to own and operate La-Z-Boy Furniture Galleries® stores (and to use the associated trademarks and trade name) in those markets to the dealers whose assets we acquired, and we reacquired these rights when we purchased the dealers' other assets. The reacquired right to own and operate La-Z-Boy Furniture Galleries® stores are indefinite-lived because our retailer agreements are perpetual agreements that have no specific expiration date and no renewal options. A retailer agreement remains in effect as long as the independent retailer is not in default under the terms of the agreement.
Our goodwill relates to the acquisitions of La-Z-Boy Furniture Galleries® stores, the La-Z-Boy wholesale business in the United Kingdom and Ireland, the La-Z-Boy manufacturing business in the United Kingdom, and Joybird®, an e-commerce retailer and manufacturer of upholstered furniture. The reporting unit for goodwill arising from retail store acquisitions is our Retail operating segment. We have two geographic regions which are considered components of our Retail operating segment. These two geographic regions are aggregated into one reporting unit for goodwill because they are economically similar, they operate in a consistent manner across the regions, and each store supports and benefits from common research and development projects. Additionally, the goodwill is recoverable from each of the geographic regions working in concert because we can change the composition of the regions to strategically rebalance management and distribution capacity as needed. Goodwill arising from the acquisition of our wholesale business in the United Kingdom and Ireland along with goodwill arising from the acquisition of our manufacturing business in the United Kingdom are combined into the United Kingdom reporting. These two businesses are considered components of the International operating segment and are aggregated into one reporting unit for goodwill because they are economically similar and work in concert as they represent the manufacturing and selling entities within the United Kingdom. The reporting unit for goodwill arising from the acquisition of Joybird is the Joybird operating segment.
We test indefinite-lived intangibles and goodwill for impairment on an annual basis in the fourth quarter of our fiscal year, or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. We have the option to first assess qualitative factors in order to determine if it is more likely than not that the fair value of our intangible assets or reporting units are greater than their carrying value. If the qualitative assessment leads to a determination that the intangible asset/reporting unit’s fair value may be less than its carrying value, or if we elect to bypass the qualitative assessment altogether, we are required to perform a quantitative impairment test by calculating the fair value of the intangible asset/reporting unit and comparing the fair value with its associated carrying value. When we perform the quantitative test for indefinite-lived intangible assets, we establish the fair value of our indefinite-lived trade names and reacquired rights based upon the relief from royalty method. When we perform the quantitative test for goodwill, we establish the fair value for the reporting unit based on the income approach, in which we utilize a discounted cash flow model, the market approach, in which we utilize market multiples of comparable companies, or a combination of both approaches. In situations where the fair value is less than the carrying value, an impairment charge would be recorded for the shortfall.
Amortizable Intangible Assets
We have amortizable intangible assets related to the acquisition of the La-Z-Boy wholesale business in the United Kingdom and Ireland, which primarily include acquired customer relationships. These intangible assets are amortized on a straight-line basis over their estimated useful lives, which do not exceed 15 years. We also have an amortizable intangible asset for the Joybird® trade name, which is amortized on a straight-line basis over its estimated useful life of eight years. All intangible amortization expense is recorded as a component of SG&A expense. We test amortizable intangible assets for impairment if events or changes in circumstances indicate that the assets might be impaired. If we determine an assessment for impairment is necessary, we establish the fair value of these amortizable intangible assets based on the multi-period excess earnings method, a variant of the income approach, and the relief from royalty method, as applicable.
Investments
Available-for-sale debt securities are recorded at fair value with the net unrealized gains and losses (that are deemed to be temporary) reported as a component of other comprehensive income/(loss). Equity securities are recorded at fair value with
unrealized gains and losses recorded in other income (expense), net. We also hold investments in two privately-held companies consisting of non-marketable preferred shares, warrants to purchase common shares, and convertible notes. The fair value of these equity investments (preferred shares and warrants) is not readily determinable and therefore, 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. The convertible notes are recorded at fair value with the net unrealized gains and losses (that are deemed to be temporary) reported as a component of other comprehensive income, consistent with our other available-for-sale debt securities.
Realized gains and losses for all investments, charges for other-than-temporary impairments of debt securities, and charges for impairment on our equity investments without readily determinable values are included in determining net income, with related purchase costs based on the first-in, first-out method. We evaluate our available-for-sale debt investments for possible other-than-temporary impairments by reviewing factors such as the extent to which an investment's fair value is below our cost basis, the issuer's financial condition, and our ability and intent to hold the investment for sufficient time for its market value to recover. For impairments that are other-than-temporary, an impairment loss is recognized in earnings equal to the difference between the investment's cost and its fair value at the balance sheet date of the reporting period for which the assessment is made. The fair value of the investment then becomes the new amortized cost basis of the investment and it is not adjusted for subsequent recoveries in fair value. During fiscal 2023, we recognized a $10.3 million impairment charge for one of the investments which was recorded as a component of other income (expense), net in the consolidated statement of income. There were no impairment charges recorded in the fiscal 2022 or fiscal 2021.
Life Insurance
Life insurance policies are recorded at the amount that could be realized under the insurance contract as of the date of our consolidated balance sheet. These assets are classified as other long-term assets on our consolidated balance sheet and are used to fund our executive deferred compensation plan and performance compensation retirement plan. The change in cash surrender or contract value is recorded as income or expense, in other income (expense), net, during each period.
Customer Deposits
We collect a deposit on a portion of the total merchandise price at the time a customer order is placed in one of our company-owned retail stores, and through our website, www.la-z-boy.com. We record this as a customer deposit, which is included in our accrued expenses and other current liabilities on our consolidated balance sheet. The balance of the order is paid in full prior to delivery of the product. At the time the customer places an order through www.joybird.com, we collect the entire amount owed and record this as a customer deposit.
Revenue Recognition and Related Allowances
Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to receive in exchange for those goods or services. We generate revenues primarily by manufacturing/importing and delivering upholstery and casegoods (wood) furniture products to independent furniture retailers, independently-owned La-Z-Boy Furniture Galleries® stores or the end consumer. Each unit of furniture is a separate performance obligation, and we satisfy our performance obligation when control of our product is passed to our customer, which is the point in time that our customers are able to direct the use of and obtain substantially all of the remaining economic benefit of the goods or services.
The majority of our wholesale shipping agreements are freight-on-board shipping point and risk of loss transfers to our customer once the product is out of our control. Accordingly, revenue is recognized for product shipments on third-party carriers at the point in time that our product is loaded onto the third-party container or truck and that container or truck leaves our facility. For our imported products, we recognize revenue at the point in time that legal ownership is transferred, which may not occur until after the goods have passed through U.S. Customs. In all cases, this revenue includes amounts we bill to customers for freight charges, because we have elected to treat shipping activities that occur after the customer has obtained control of our product as a fulfillment cost rather than an additional promised service. Because of this election, we recognize revenue for shipping when control of our product passes to our customer, and the shipping costs are accrued when the freight revenue is recognized. Revenue for product shipments on company-owned trucks is recognized for the product and freight at the point in time that our product is delivered to our customer's location.
We recognize revenue for retail sales and online sales to the end consumer through our company-owned retail stores, www.la-z-boy.com or www.joybird.com once the end consumer has taken control of the furniture, at which point legal title has passed to them. This takes place when the product is delivered to the end consumer's home. Home delivery is not a promised service to
our customer, and is not a separate performance obligation, because home delivery is a fulfillment activity as the costs are incurred as part of transferring our product to the end consumer. At the time the customer places an order through our company-owned retail stores or www.la-z-boy.com, we collect a deposit on a portion of the total merchandise price. We record this as a customer deposit, which is included in accrued expenses and other current liabilities on our consolidated balance sheet. The balance of the order is paid in full prior to delivery of the product. Once the order is taken through our company-owned retail stores or www.la-z-boy.com we recognize a contract asset and a corresponding deferred revenue liability for the difference between the total order and the deposit collected. The contract asset is included in other current assets on our consolidated balance sheet and the deferred revenue is included in accrued expenses and other current liabilities on our consolidated balance sheet. At the time the customer places an order through www.joybird.com, we collect the entire amount owed and record this as a customer deposit. Because the entire amount owed is collected at the time of the order, there is no contract asset recorded for Joybird sales.
At the time we recognize revenue, we make provisions for estimated refunds, product returns, and warranties, as well as other incentives that we may offer to customers. When estimating our incentives, we utilize either the expected value method or the most likely amount to determine the amount of variable consideration. We use either method depending on which method will provide the best estimate of the variable consideration, and we only include variable consideration when it is probable that there will not be a significant reversal in the amount of cumulative revenue recognized when the uncertainty associated with the variable consideration is subsequently resolved. Incentives offered to customers include cash discounts, rebates, advertising agreements and other sales incentive programs. Our sales incentives, including cash discounts and rebates, are recorded as a reduction to revenues. Service allowances are for a distinct good or service with our customers and are recorded as a component of SG&A expense in our consolidated statement of income, and are not recorded as a reduction of revenue and are not considered variable consideration. We use substantial judgment based on the type of variable consideration or service allowance, historical experience and expected sales volume when estimating these provisions. The expected costs associated with our warranties and service allowances are recognized as expense when our products are sold. For sales tax, we elected 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.
All orders are fulfilled within one year of order date, therefore we do not have any unfulfilled performance obligations. Additionally, we elected the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component because at contract inception we expect the period between when we transfer our product to our customer and when the customer pays for the product to be one year or less.
Allowance for Credit Losses
Trade accounts receivable arise from the sale of products on trade credit terms. On a quarterly basis, we review all significant accounts as to their past due balances, as well as collectability of the outstanding trade accounts receivable for possible write off. It is our policy to write off the accounts receivable against the allowance account when we deem the receivable to be uncollectible. Additionally, we review orders from dealers that are significantly past due, and we ship product only when our ability to collect payment from our customer for the new order is probable.
Our allowances for credit losses reflect our best estimate of losses inherent in the trade accounts receivable balance. We determine the allowance based on known troubled accounts, weighing probabilities of future conditions and expected outcomes, and other currently available evidence.
Cost of Sales
Our cost of sales consists primarily of the cost to manufacture or purchase our merchandise, inspection costs, internal transfer costs, in-bound freight costs, outbound shipping costs, as well as warehousing costs, occupancy costs, and depreciation expense related to our manufacturing facilities and equipment.
Selling, General and Administrative Expenses
SG&A expenses include the costs of selling our products and other general and administrative costs. Selling expenses are primarily composed of commissions, advertising, warranty, bad debt expense, and compensation and benefits of employees performing various sales functions. Additionally, the occupancy costs of our retail facilities and the warehousing costs of our distribution centers are included as a component of SG&A. Other general and administrative expenses included in SG&A are composed primarily of compensation and benefit costs for administrative employees and other administrative costs.
Other Income (Expense), Net
Other income (expense), net is made up primarily of foreign currency exchange net gain/(loss), gain/(loss) on the sale of investments, and unrealized gain/(loss) on equity securities. Other income (expense), net for fiscal 2023 also includes a $10.3 million impairment of our investments in a privately-held start-up company and fiscal 2021 includes the benefit of $5.2 million of payroll tax credits resulting from the CARES Act.
Research and Development Costs
Research and development costs are charged to expense in the periods incurred. Expenditures for research and development costs were $9.1 million, $9.0 million, and $7.6 million for the fiscal years ended April 29, 2023, April 30, 2022, and April 24, 2021, respectively, and are included as a component of SG&A.
Advertising Expenses
Production costs of commercials, programming and costs of other advertising, promotion and marketing programs are charged to expense in the period in which the commercial or advertisement is first aired or released. Gross advertising expenses were $159.0 million, $126.8 million, and $94.6 million for the fiscal years ended April 29, 2023, April 30, 2022, and April 24, 2021, respectively.
A portion of our advertising program is a national advertising campaign. This campaign is a shared advertising program with our dealers' La-Z-Boy Furniture Galleries® stores, which reimburse us for over 20% of the cost of the program (excluding company-owned stores). Because of this shared cost arrangement, the advertising expense is reported as a component of SG&A, while the dealers' reimbursement portion is reported as a component of sales.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.
In periods when deferred tax assets are recorded, we are required to estimate whether recoverability is more likely than not (i.e. a likelihood of more than 50%), based on, among other things, forecasts of taxable earnings in the related tax jurisdiction. We consider historical and projected future results of operations, the eligible carry-forward period, tax law changes, tax planning opportunities, and other relevant considerations when making judgments about realizing the value of our deferred tax assets.
We recognize in our consolidated financial statements the benefit of a position taken or expected to be taken in a tax return when it is more likely than not that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that is more likely than not to be realized upon settlement. Changes in judgment that result in subsequent recognition, derecognition or change in a measurement date of a tax position taken in a prior annual period (including any related interest and penalties) are recognized as a discrete item in the interim period in which the change occurs.
Foreign Currency Translation
Foreign currency transaction gains and losses associated with translating assets and liabilities denominated in a currency that is different than a subsidiaries' functional currency, are recorded in cost of sales and other income (expense), net in our consolidated statement of income. Assets and liabilities of foreign subsidiaries whose functional currency is their local currency are translated at the year-end exchange rates, and revenues and expenses are translated at average exchange rates for the period, with the corresponding translation effect included as a component of other comprehensive income.
Accounting for Stock-Based Compensation
We estimate the fair value of equity-based awards, including option awards and stock-based awards that vest based on market conditions, on the date of grant using option-pricing models. The value of the portion of the equity-based awards that are
ultimately expected to vest is recognized as expense over the requisite service periods in our consolidated statement of income using a straight-line single-option method. We measure stock-based compensation cost for liability-based awards based on the fair value of the award on the grant date, and recognize it as expense over the vesting period. The liability for these awards is remeasured and adjusted to its fair value at the end of each reporting period until paid. We record compensation cost for stock-based awards that vest based on performance conditions ratably over the vesting periods when the vesting of such awards become probable.
Commitments and Contingencies
We establish an accrued liability for legal matters when those matters present loss contingencies that are both probable and reasonably estimable. As a litigation matter develops and in conjunction with any outside legal counsel handling the matter, we evaluate on an ongoing basis whether such matter presents a loss contingency that is probable and reasonably estimable. If, at the time of evaluation, the loss contingency related to a litigation matter is not both probable and reasonably estimable, the matter will continue to be monitored for further developments that would make such loss contingency both probable and reasonably estimable. Once the loss contingency related to a litigation matter is deemed to be both probable and reasonably estimable, we will establish an accrued liability with respect to such loss contingency and record a corresponding amount of litigation-related expense. We continue to monitor the matter for further developments that could affect the amount of the accrued liability that has been previously established.
Insurance/Self-Insurance
We use a combination of insurance and self-insurance for a number of risks, including workers' compensation, general liability, vehicle liability and the company-funded portion of employee-related health care benefits. Liabilities associated with these risks are estimated in part by considering historic claims experience, demographic factors, severity factors and other assumptions. Our workers' compensation reserve is an undiscounted liability. We have various excess loss coverages for employee-related health care benefits, vehicle liability, product liability, and workers' compensation liabilities. Our deductibles generally do not exceed $2.5 million.
Recent Accounting Pronouncements
Accounting pronouncement adopted in fiscal 2023
We did not adopt any Accounting Standards Updates ("ASUs") in fiscal 2023.
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.
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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 |
ASU 2021-08 | | Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities From Contracts With Customers | | Fiscal 2024 |
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 2023 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 2023, 2022 and 2021 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 2023, 2022, and 2021, we licensed to the counterparty the exclusive right to own and the operate 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.
Baton Rouge, Louisiana acquisition
On March 20, 2023, we completed our acquisition of the Baton Rouge, Louisiana business that operates one independently owned La-Z-Boy Furniture Galleries® store and one distribution center for $5.0 million, subject to customary adjustments. We paid total cash of $4.9 million during the fourth quarter 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 $0.5 million related to the reacquired rights described above.
Barboursville, West Virginia acquisition
On December 12, 2022, we completed our acquisition of the Barboursville, West Virginia business that operates one independently owned La-Z-Boy Furniture Galleries® store. This acquisition did not have a meaningful impact on our consolidated financial statements.
Spokane, Washington acquisition
On September 26, 2022, we completed our acquisition of the Spokane, Washington business that operates one independently owned La-Z-Boy Furniture Galleries® store and one distribution center for $4.7 million, subject to customary adjustments. We paid total cash of $4.0 million during the second quarter 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 $1.2 million related to the reacquired rights described above. We also recognized $3.0 million of goodwill in our Retail segment related primarily to synergies we expect from the integration of the acquired store and future benefits of these synergies.
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.
Prior Year Acquisitions
We completed the following acquisitions in fiscal 2022.
Alabama and Chattanooga, Tennessee acquisition
On December 6, 2021, we completed our acquisition of the Alabama and Chattanooga, Tennessee businesses that operate four independently owned La-Z-Boy Furniture Galleries® stores in Alabama and one in Chattanooga, Tennessee, for $8.3 million, subject to customary adjustments. We paid total cash of $8.0 million in the third quarter of fiscal 2022 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 $4.1 million related to the reacquired rights described above. We also recognized $7.4 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.
Furnico (La-Z-Boy United Kingdom Manufacturing) acquisition
On October 25, 2021, we completed the acquisition of Furnico Furniture Ltd ("Furnico"), an upholstery manufacturing business in the U.K for approximately $13.3 million, subject to customary adjustments and in the third and fourth quarters of fiscal 2022, we paid $13.9 million of cash for the purchase of the Furnico business. Furnico produces La-Z-Boy branded product for the La-Z-Boy U.K. business and also operates a wholesale business, selling white label products to key U.K. retailers. With this acquisition, we expect to realize production synergies, cost savings through materials procurement, and increases in production capacity to support growth in the La-Z-Boy U.K business.
As part of the acquisition, we recognized $9.2 million of goodwill in our Wholesale segment related primarily to synergies we expect from the integration of the acquired business and future benefits of these synergies. The goodwill asset for Furnico is not deductible for federal income tax purposes.
Long Island, New York acquisition
On August 16, 2021, we completed our acquisition of the Long Island, New York business that operates three independently owned La-Z-Boy Furniture Galleries® stores for $4.5 million, subject to customary adjustments. We paid $4.4 million of cash during the second quarter of fiscal 2022 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 $0.8 million related to the reacquired rights described above. We also recognized $4.4 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.
We completed the following acquisition in fiscal 2021.
Seattle, Washington acquisition
On September 14, 2020, we completed our asset acquisition of the Seattle, Washington business that operated six independently owned La-Z-Boy Furniture Galleries® stores and one warehouse for $13.5 million, subject to customary adjustments. We paid $2.0 million of cash during the second quarter of fiscal 2021 and the remaining consideration includes forgiveness of accounts receivable, payments based on working capital adjustments, and future guaranteed payments of $9.4 million to be paid over 36 months or fewer, with timing of payments dependent upon the achievement of sales thresholds defined in the purchase agreement. As part of the acquisition, we recorded an indefinite-lived intangible asset of $2.2 million related to the reacquired rights described above. We also recognized $12.9 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.
Note 3: Restricted Cash
We have restricted cash on deposit with a bank as collateral for certain letters of credit. All of our letters of credit have maturity dates within the next 12 months, and we expect to renew some of these letters of credit when they mature.
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(Amounts in thousands) | | 4/29/2023 | | 4/30/2022 |
Cash and cash equivalents | | $ | 343,374 | | | $ | 245,589 | |
Restricted cash | | 3,304 | | | 3,267 | |
Total cash, cash equivalents and restricted cash | | $ | 346,678 | | | $ | 248,856 | |
Note 4: Inventories
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(Amounts in thousands) | | 4/29/2023 | | 4/30/2022 |
Raw materials | | $ | 116,440 | | | $ | 146,896 | |
Work in process | | 24,328 | | | 36,834 | |
Finished goods | | 181,401 | | | 185,870 | |
FIFO inventories | | 322,169 | | | 369,600 | |
Excess of FIFO over LIFO | | (45,912) | | | (66,409) | |
Total inventories | | $ | 276,257 | | | $ | 303,191 | |
Note 5: Property, Plant and Equipment
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(Amounts in thousands) | | Estimated Useful Lives | | 4/29/2023 | | 4/30/2022 |
Buildings and building fixtures | | 3 - 30 years | | $ | 301,546 | | | $ | 250,758 | |
Machinery and equipment | | 3 - 20 years | | 193,890 | | | 184,223 | |
Information systems, hardware and software | | 3 - 15 years | | 99,703 | | | 102,861 | |
Furniture and fixtures | | 3 - 10 years | | 27,049 | | | 23,665 | |
Land improvements | | 3 - 30 years | | 24,617 | | | 23,541 | |
Transportation equipment | | 3 - 6 years | | 16,800 | | | 16,499 | |
Land | | N/A | | 8,554 | | | 8,587 | |
Construction in progress | | N/A | | 32,427 | | | 38,712 | |
| | | | 704,586 | | | 648,846 | |
Accumulated depreciation | | | | (426,008) | | | (395,702) | |
Net property, plant and equipment | | | | $ | 278,578 | | | $ | 253,144 | |
Depreciation expense for the fiscal years ended April 29, 2023, April 30, 2022, and April 24, 2021, was $39.0 million, $38.3 million, and $31.7 million, respectively.
Note 6: Leases
The Company leases real estate for retail stores, distribution centers, warehouses, manufacturing 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 right of use ("ROU") lease asset and lease liability, we determine our incremental borrowing rate by applying a spread above the U.S. Treasury borrowing rates. If 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 lease asset and lease liability.
Supplemental balance sheet information pertaining to our leases is as follows:
| | | | | | | | | | | | | | |
(Amounts in thousands) | | 4/29/2023 | | 4/30/2022 |
Operating leases | | | | |
ROU lease assets | | $ | 415,925 | | | $ | 405,287 | |
Lease liabilities, short-term | | 77,626 | | | 75,148 | |
Lease liabilities, long-term | | 367,938 | | | 354,493 | |
Finance leases | | | | |
ROU lease assets | | $ | 344 | | | $ | 468 | |
Lease liabilities, short-term | | 125 | | | 123 | |
Lease liabilities, long-term | | 225 | | | 350 | |
| | | | |
The ROU lease assets by segment are as follows:
| | | | | | | | | | | | | | |
(Amounts in thousands) | | 4/29/2023 | | 4/30/2022 |
Wholesale | | $ | 92,195 | | | $ | 90,741 | |
Retail | | 299,536 | | | 296,908 | |
Corporate & Other | | 24,538 | | | 18,106 | |
Total ROU lease assets | | $ | 416,269 | | | $ | 405,755 | |
The components of lease cost are as follows:
| | | | | | | | | | | | | | | | | | | | | | |
| | | | Fiscal Year Ended |
| | | | (52 weeks) | | (53 weeks) | | (52 weeks) |
(Amounts in thousands) | | | | 4/29/2023 | | 4/30/2022 | | 4/24/2021 |
Operating lease cost | | | | $ | 90,500 | | | $ | 83,520 | | | $ | 79,072 | |
Finance lease cost | | | | 130 | | | 130 | | | 53 | |
Short-term lease cost | | | | 2,459 | | | 2,097 | | | 545 | |
Variable lease cost | | | | 187 | | | 159 | | | (245) | |
Less: Sublease income | | | | (276) | | | (550) | | | (1,546) | |
Total lease cost | | | | $ | 93,000 | | | $ | 85,356 | | | $ | 77,879 | |
The following tables present supplemental lease disclosures:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended |
| | (52 weeks) | | (53 weeks) |
| | 4/29/2023 | | 4/30/2022 |
(Amounts in thousands) | | Operating Leases | | Finance Leases | | Operating Leases | | Finance Leases |
Cash paid for amounts included in the measurement of lease liabilities | | $ | 91,934 | | | $ | 130 | | | $ | 84,492 | | | $ | 130 | |
Lease liabilities arising from new ROU lease assets | | 92,787 | | | — | | | 140,376 | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 4/29/2023 | | 4/30/2022 |
(Amounts in thousands) | | Operating Leases | | Finance Leases | | Operating Leases | | Finance Leases |
Weighted-average remaining lease term (years) | | 7.0 | | 2.8 | | 7.2 | | 3.8 |
Weighted-average discount rate | | 3.5 | % | | 1.7 | % | | 3.0 | % | | 1.7 | % |
The following table presents our maturity of lease liabilities:
| | | | | | | | | | | | | | | | | | |
| | 4/29/2023 | | |
(Amounts in thousands) | | Operating Leases (1) | | Finance Leases | | | | |
Within one year | | $ | 91,654 | | | $ | 130 | | | | | |
After one year and within two years | | 81,605 | | | 130 | | | | | |
After two years and within three years | | 69,155 | | | 98 | | | | | |
After three years and within four years | | 58,890 | | | — | | | | | |
After four years and within five years | | 50,816 | | | — | | | | | |
After five years | | 152,855 | | | — | | | | | |
Total lease payments | | 504,975 | | | 358 | | | | | |
Less: Interest | | 59,411 | | | 8 | | | | | |
Total lease obligations | | $ | 445,564 | | | $ | 350 | | | | | |
(1)Excludes approximately $28.6 million in future lease payments for various operating leases commencing in a future period
Note 7: 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 & Other | | Joybird | | Joybird |
We test 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 it may be impaired. Under U.S. GAAP, we have the option to first assess qualitative factors in order to determine if it is more likely than not that the fair value of one of our reporting units is greater than its carrying value ("Step 0"). If the qualitative assessment leads to a determination that the reporting unit’s fair value is less than its carrying value, or if we elect to bypass the qualitative assessment altogether, we are required to perform a quantitative impairment test ("Step 1") by calculating the fair value of the reporting unit and comparing the fair value with its associated carrying value.
Step 0 Assessment
During our fiscal 2023 annual impairment test, we first assessed goodwill recoverability qualitatively using the Step 0 approach for each of our reporting units. For our qualitative assessment, we considered the most recent quantitative analysis, which was performed during the fourth quarter of fiscal 2020, including assumptions used, such as discount rates and tax rates, indicated fair values, and the amounts in which those fair values exceeded their carrying amounts. Further, we compared actual performance in fiscal 2023, along with future financial projections to the internal financial projections used in the prior quantitative analysis. Additionally, we considered various other factors including macroeconomic conditions, relevant industry and market trends, and factors specific to the Company that could indicate a potential change in the fair value of our reporting units. Lastly, we evaluated whether any events have occurred or any circumstances have changed since the fourth quarter of fiscal 2020 that would indicate that our goodwill may have become impaired since our last quantitative test.
Based on these qualitative assessments, we determined that it is more likely than not that the fair value of our Retail reporting unit exceeded its carrying value and as such, our goodwill for the Retail reporting unit was not considered impaired as of April 29, 2023 and the Step 1 quantitative goodwill impairment analysis was not necessary. However, for our United Kingdom and Joybird reporting units, we determined that the quantitative Step 1 goodwill impairment test was necessary as noted below.
Step 1 Assessment
United Kingdom Reporting Unit
Our United Kingdom reporting unit includes the goodwill from our wholesale business in the United Kingdom and Ireland along with our manufacturing business in the United Kingdom, both of which were considered their own reporting unit in fiscal 2022. In fiscal 2023, we determined that in accordance with ASC 350, these businesses, or components, should be aggregated into a single reporting unit as they have similar economic characteristics. As this represented a change in our reporting unit structure, we elected to perform the quantitative Step 1 goodwill impairment test for the new United Kingdom reporting unit.
To estimate the fair value of this reporting unit, we applied the income approach using discounted future cash flows. Sales and operating income projections were based on assumptions driven by the current economic conditions. Other key assumptions used in the quantitative assessment of the reporting units' goodwill were a discount rate of 8.7%, reflecting a market participant weighted average cost of capital, and a tax rate of 25.0%, which was specific to the United Kingdom reporting unit. Based on our testing, the fair value of the United Kingdom reporting unit exceeded its carrying value as of April 29, 2023 and no impairment was recorded.
Joybird Reporting Unit
Due to a decline in Joybird's financial performance in fiscal 2023, we deemed it necessary to perform the quantitative Step 1 goodwill impairment test for the Joybird reporting unit. To estimate the fair value of this reporting unit, we applied a combination of the income approach and the market approach, weighted 75% and 25%, respectively. The income approach used discounted future cash flows in which sales and operating income projections were based on assumptions driven by current economic conditions and assumed a 2.0% terminal growth rate. Other key assumptions used in the discounted future cash flow model were a discount rate of 18.0%, reflecting a market participant weighted average cost of capital assuming Joybird would be sold as a stand-alone business, and a tax rate of 24.9%, which was specific to the Joybird reporting unit.
The market approach used the guideline public company method, which derives a valuation from market multiples based on revenue for comparable public companies and was adjusted for a control premium based on recent merger and acquisition transaction data of target companies similar to the Joybird reporting unit. Based on our testing, the fair value of the Joybird reporting unit exceeded its carrying value as of April 29, 2023 by approximately 50% and no impairment was recorded.
Further, a sensitivity analysis was performed on key assumptions used in the valuation, primarily the discount rate and terminal growth rate, and using a range of reasonable inputs, the fair value of the Joybird reporting unit exceeded its carrying value in the various scenarios analyzed. However, changes to other valuation inputs or failure to meet our forecasts, in particular our sales and operating income projections, could reduce the fair value of the Joybird reporting unit and thus increase the possibility that our goodwill may be impaired in the future.
The following table summarizes changes in the carrying amount of our goodwill by reportable segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Amounts in thousands) | | Wholesale Segment | | Retail Segment | | Corporate and Other | | Total Goodwill | | |
Balance at April 24, 2021 (1) | | $ | 13,052 | | | $ | 107,316 | | | $ | 55,446 | | | $ | 175,814 | | | |
Acquisitions | | 9,207 | | | 11,748 | | | — | | | 20,955 | | | |
| | | | | | | | | | |
Translation adjustment | | (2,052) | | | (113) | | | — | | | (2,165) | | | |
Balance at April 30, 2022 (1) | | 20,207 | | | 118,951 | | | 55,446 | | | 194,604 | | | |
Acquisitions | | — | | | 10,598 | | | — | | | 10,598 | | | |
| | | | | | | | | | |
Translation adjustment | | (5) | | | (189) | | | — | | | (194) | | | |
Balance at April 29, 2023 (1) | | $ | 20,202 | | | $ | 129,360 | | | $ | 55,446 | | | $ | 205,008 | | | |
(1) Includes $26.9 million of accumulated impairment losses in Corporate and Other.
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 & Other | | Joybird® trade name | | Amortizable over eight-year useful life |
We test amortizable intangible assets and indefinite-lived intangible assets for impairment on an annual basis in the fourth quarter of our fiscal year, or more frequently if events or changes in circumstances indicate that the assets might be impaired. Similar to our goodwill testing, we used the qualitative Step 0 approach to assess if it was more likely than not that the fair values of our indefinite-lived intangible assets were greater than their carrying values. Based on the same qualitative factors outlined above, we determined that it is more likely than not that the fair value of each of our indefinite-lived intangible assets exceeded their respective carrying value and as such, our indefinite-lived intangible assets were not considered impaired as of April 29, 2023, and the Step 1 quantitative impairment analysis was not necessary.
The following summarizes changes in our intangible assets:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Amounts in thousands) | | Indefinite-Lived Trade Names | | Finite-Lived Trade Name | | Indefinite-Lived Reacquired Rights | | Other Intangible Assets | | Total Intangible Assets |
Balance at April 24, 2021 | | $ | 1,155 | | | $ | 4,205 | | | $ | 22,507 | | | $ | 2,564 | | | $ | 30,431 | |
Acquisitions | | — | | | — | | | 4,896 | | | — | | | 4,896 | |
Amortization | | — | | | (813) | | | — | | | (236) | | | (1,049) | |
Translation adjustment | | — | | | — | | | (84) | | | (223) | | | (307) | |
Balance at April 30, 2022 | | $ | 1,155 | | | $ | 3,392 | | | $ | 27,319 | | | $ | 2,105 | | | $ | 33,971 | |
Acquisitions | | — | | | — | | | 6,562 | | | — | | | 6,562 | |
Amortization | | — | | | (798) | | | — | | | (208) | | | (1,006) | |
Translation adjustment | | — | | | — | | | (142) | | | (10) | | | (152) | |
Balance at April 29, 2023 | | $ | 1,155 | | | $ | 2,594 | | | $ | 33,739 | | | $ | 1,887 | | | $ | 39,375 | |
For our intangible assets recorded as of April 29, 2023, we estimate annual amortization expense to be $1.0 million for each of the three succeeding fiscal years, $0.4 million in the fourth succeeding fiscal year, and $0.2 million in the fifth succeeding fiscal year.
Note 8: 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 investments of two privately-held companies consisting of non-marketable preferred shares, warrants to purchase common shares, and convertible notes. In the fourth quarter of fiscal 2023, we recognized an impairment of $10.3 million, consisting of $7.6 million in cost-basis investments and $2.7 million in convertible notes, which in total 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 20, Fair Value Measurement for additional 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:
| | | | | | | | | | | | | | |
(Amounts in thousands) | | 4/29/2023 | | 4/30/2022 |
Short-term investments: | | | | |
Marketable securities | | $ | 5,043 | | | $ | 16,022 | |
Held-to-maturity investments | | 1,351 | | | 1,337 | |
Total short-term investments | | 6,394 | | | 17,359 | |
Long-term investments: | | | | |
Marketable securities | | 18,509 | | | 26,599 | |
Cost basis investments | | — | | | 7,579 | |
Total long-term investments | | 18,509 | | | 34,178 | |
Total investments | | $ | 24,903 | | | $ | 51,537 | |
| | | | |
Investments to enhance returns on cash | | $ | 11,617 | | | $ | 27,239 | |
Investments to fund compensation/retirement plans | | 13,286 | | | 14,219 | |
Other investments | | — | | | 10,079 | |
Total investments | | $ | 24,903 | | | $ | 51,537 | |
The following is a summary of the unrealized gains, unrealized losses, and fair value by investment type:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 4/29/2023 | | 4/30/2022 |
(Amounts in thousands) | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Equity securities | | $ | 1,338 | | | $ | (103) | | | $ | 6,853 | | | $ | 1,448 | | | $ | (86) | | | $ | 13,905 | |
Fixed income | | 42 | | | (620) | | | 14,039 | | | 28 | | | (809) | | | 33,521 | |
Other | | 1,171 | | | — | | | 4,011 | | | 1,250 | | | — | | | 4,111 | |
Total securities | | $ | 2,551 | | | $ | (723) | | | $ | 24,903 | | | $ | 2,726 | | | $ | (895) | | | $ | 51,537 | |
The following table summarizes sales of marketable securities:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended |
| | (52 weeks) | | (53 weeks) | | (52 weeks) |
(Amounts in thousands) | | 4/29/2023 | | 4/30/2022 | | 4/24/2021 |
Proceeds from sales | | $ | 24,483 | | | $ | 35,116 | | | $ | 33,631 | |
Gross realized gains | | 94 | | | 879 | | | 1,026 | |
Gross realized losses | | (242) | | | (402) | | | (71) | |
The following is a summary of the fair value of fixed income marketable securities, classified as available-for-sale securities, by contractual maturity:
| | | | | | | | |
(Amounts in thousands) | | 4/29/2023 |
Within one year | | $ | 5,038 | |
Within two to five years | | 6,612 | |
Within six to ten years | | 674 | |
Thereafter | | 1,715 | |
Total | | $ | 14,039 | |
Note 9: Accrued Expenses and Other Current Liabilities
| | | | | | | | | | | | | | |
(Amounts in thousands) | | 4/29/2023 | | 4/30/2022 |
Payroll and other compensation | | $ | 63,342 | | | $ | 62,373 | |
Accrued product warranty, current portion | | 19,893 | | | 16,436 | |
Customer deposits | | 105,766 | | | 183,233 | |
Deferred revenue | | 44,939 | | | 139,006 | |
Other current liabilities | | 56,710 | | | 95,345 | |
Accrued expenses and other current liabilities | | $ | 290,650 | | | $ | 496,393 | |
Customer deposits and deferred revenue decreased during fiscal 2023 as we continue to work down the backlog built up in prior periods back to pre-pandemic levels.
Note 10: Debt
On October 15, 2021, we entered into a new five-year $200 million unsecured revolving credit facility (the “Credit Facility”). Borrowings under the Credit Facility may be used by the Company for general corporate purposes. We may increase the size of the facility, either in the form of additional revolving commitments or new term loans, subject to the discretion of each lender to participate in such increase, up to an additional amount of $100 million. The Credit Facility will mature on October 15, 2026 and provides us the ability to extend the maturity date for two additional one-year periods, subject to the satisfaction of customary conditions. As of April 29, 2023, we have no borrowings outstanding under the Credit Facility.
The Credit Facility contains certain restrictive loan covenants, including, among others, financial covenants requiring a maximum consolidated net lease adjusted leverage ratio and a minimum consolidated fixed charge coverage ratio, as well as customary covenants limiting our ability to incur indebtedness, grant liens, make acquisitions, merge or consolidate, and dispose of certain assets. As of April 29, 2023, we were in compliance with our financial covenants under the Credit Facility.
The Credit Facility replaced our previous $150.0 million revolving credit facility, which had been secured primarily by all of our accounts receivable, inventory, cash deposits, and securities accounts. The previous revolving credit facility was terminated on October 15, 2021, and is no longer in effect.
Cash paid for interest during fiscal years 2023, 2022, and 2021 was $0.3 million, $0.5 million and $0.8 million, respectively.
Note 11: Employee Benefits
The table below summarizes the total costs associated with our employee retirement and welfare plans.
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended |
| | (52 weeks) | | (53 weeks) | | (52 weeks) |
(Amounts in thousands) | | 4/29/2023 | | 4/30/2022 | | 4/24/2021 |
401(k) Retirement Plan | | $ | 12,877 | | | $ | 11,763 | | | $ | 7,313 | |
Performance Compensation Retirement Plan | | 160 | | | 1,654 | | | 3,810 | |
Deferred Compensation Plan | | 202 | | | 242 | | | 24 | |
Non-Qualified Defined Benefit Retirement Plan (1) | | 748 | | | 763 | | | 803 | |
(1)Primarily related to interest cost
401(k) Retirement Plan. Voluntary 401(k) retirement plans are offered to eligible employees within certain U.S. operating units. For most operating units, we make matching contributions based on specific formulas.
Performance Compensation Retirement Plan. A performance compensation retirement plan ("PCRP") is maintained for eligible highly compensated employees. Beginning in fiscal 2023, contributions into the plan are no longer being made. Prior year contributions were based on achievement of performance targets. Employees vest in these prior period contributions if they achieve certain age and years of service with the Company and can elect to receive benefit payments over a period ranging between five to twenty years after they leave the Company. While the Company no longer makes contributions, the outstanding liability balance related to the plan is as follows:
| | | | | | | | | | | | | | |
(Amounts in thousands) | | 4/29/2023 | | 4/30/2022 |
Short-term obligation included in other current liabilities | | $ | 2,103 | | | $ | 1,922 | |
Long-term obligation included in other long-term liabilities | | 11,895 | | | 13,898 | |
Executive Deferred Compensation Plan. We maintain an executive deferred compensation plan for eligible highly compensated employees, an element of which may include Company contributions. Further information related to the plan is as follows:
| | | | | | | | | | | | | | |
(Amounts in thousands) | | 4/29/2023 | | 4/30/2022 |
Plan obligation included in other long-term liabilities | | $ | 21,689 | | | $ | 24,595 | |
Cash surrender value on life insurance contracts included in other long-term assets (1) | | 40,723 | | | 42,699 | |
| | | | |
(1)Life insurance contracts are related to the Executive Deferred Compensation Plan and the PCRP.
Non-Qualified Defined Benefit Retirement Plan. We maintain a non-qualified defined benefit retirement plan for certain former salaried employees. We hold available-for-sale marketable securities to fund future obligations of this plan in a Rabbi trust (refer to Note 8, Investments, and Note 20, Fair Value Measurements, for additional information on these investments). We are not required to fund the non-qualified defined benefit retirement plan in fiscal 2024; however, we have the discretion to make contributions to the Rabbi trust. Further information related to the plan is as follows:
| | | | | | | | | | | | | | |
(Amounts in thousands) | | 4/29/2023 | | 4/30/2022 |
Short-term plan obligation included in other current liabilities | | $ | 1,053 | | | $ | 1,059 | |
Long-term plan obligation included in other long-term liabilities | | 11,053 | | | 12,461 | |
Discount rate used to determine obligation | | 5.3 | % | | 4.3 | % |
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended |
| | (52 weeks) | | (53 weeks) | | (52 weeks) |
(Amounts in thousands) | | 4/29/2023 | | 4/30/2022 | | 4/24/2021 |
Actuarial loss recognized in AOCI | | $ | 193 | | | $ | 306 | | | $ | 347 | |
Benefit payments (1) | | 1,091 | | | 1,182 | | | 1,091 | |
(1)Benefit payments are scheduled to be between $1.0 million and $1.1 million annually for the next 10 years.
Note 12: 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 the 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:
| | | | | | | | | | | | | | |
(Amounts in thousands) | | 4/29/2023 | | 4/30/2022 |
Balance as of the beginning of the year | | $ | 27,036 | | | $ | 23,636 | |
Acquisitions | | — | | | 548 | |
Accruals during the year | | 35,276 | | | 30,146 | |
Settlements during the year | | (31,328) | | | (27,294) | |
Balance as of the end of the year (1) | | $ | 30,984 | | | $ | 27,036 | |
(1)$19.9 million and $16.4 million is recorded in accrued expenses and other current liabilities as of April 29, 2023, and April 30, 2022, 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.
Note 13: Commitments and Contingencies
We have been named as a defendant in various lawsuits arising in the ordinary course of business and as a potentially responsible party at certain environmental clean-up sites, the effect of which are not considered significant. Based on a review of all currently known facts and our experience with previous legal and environmental matters, we have recorded expense in respect of probable and reasonably estimable losses arising from legal matters, and we currently do not believe it is probable that we will have any additional loss for legal or environmental matters that would be material to our consolidated financial statements.
In view of the inherent difficulty of predicting the outcome of litigation, particularly where the claimants seek very large or indeterminate damages or where the matters present novel legal theories, we generally cannot predict the eventual outcome, timing, or related loss, if any, of pending matters.
Note 14: Stock-Based Compensation
In fiscal 2023, our shareholders approved the La-Z-Boy Incorporated 2022 Omnibus Incentive Plan which provides for the grant of stock options, stock appreciation rights, restricted stock and restricted stock units, unrestricted stock, performance awards, dividend equivalent rights, and short-term cash incentive awards. Under this plan, the aggregate number of common shares that may be issued through awards of any form is 2.8 million shares, reduced by the number of shares subject to awards granted under the La-Z-Boy Incorporated 2017 Omnibus Incentive Plan after April 30, 2022 and prior to the Annual Meeting of Shareholders of La-Z-Boy Incorporated held on August 30, 2022.
Awards granted in fiscal 2023 were made under our La-Z-Boy Incorporated 2017 Omnibus Incentive Plan. As of the end of fiscal 2023, no grants may be issued under this plan or any of our previous plans.
The table below summarizes the total stock-based compensation expense we recognized for all outstanding grants. Stock-based compensation expense is recorded in SG&A in the consolidated statement of income:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended |
| | (52 weeks) | | (53 weeks) | | (52 weeks) |
(Amounts in thousands) | | 4/29/2023 | | 4/30/2022 | | 4/24/2021 |
Equity-based awards expense | | | | | | |
Stock options | | $ | 2,076 | | | $ | 1,973 | | | $ | 2,959 | |
Restricted stock | | 5,069 | | | 3,720 | | | 3,367 | |
Restricted stock units issued to Directors | | 1,020 | | | 1,194 | | | 840 | |
Performance-based shares | | 4,293 | | | 4,971 | | | 5,505 | |
Total equity-based awards expense | | 12,458 | | | 11,858 | | | 12,671 | |
Liability-based awards expense (1) | | 162 | | | (1,131) | | | 1,878 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Total stock-based compensation expense | | $ | 12,620 | | | $ | 10,727 | | | $ | 14,549 | |
(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.
Stock Options. The La-Z-Boy Incorporated 2017 Omnibus Incentive Plan authorized grants to certain employees and directors to purchase common shares at a specified price, which may not be less than 100% of the current market price of the stock at the date of grant. We granted 318,411 stock options to employees during the first quarter of fiscal 2023, and we also 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 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 occur. Granted options outstanding under the former long-term equity award plan remain in effect and have a term of 10 years.
We estimate the fair value of the employee stock options at the grant date using the Black-Scholes option-pricing model, which requires management to make certain assumptions. The fair value of stock options granted during fiscal years 2023, 2022, and 2021 were calculated using the following assumptions:
| | | | | | | | | | | | | | | | | | | | | | | |
| Grant Year | | |
| Fiscal 2023 | | Fiscal 2022 | | Fiscal 2021 | | Assumption |
Risk-free interest rate | 2.87% | | 0.82% | | 0.34% | | U.S. Treasury issues with term equal to expected life at grant date |
Dividend rate | 2.70% | | 1.58% | | —% | | Estimated future dividend rate and common share price at grant date |
Expected life | 5.0 years | | 5.0 years | | 5.0 years | | Contractual term of stock option and expected employee exercise trends |
Stock price volatility | 42.78% | | 42.16% | | 41.79% | | Historical volatility of our common shares |
Fair value per option | $ | 7.90 | | | $ | 12.29 | | | $ | 10.06 | | | |
Plan activity for stock options under the above plans was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of Shares (In Thousands) | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value (In Thousands) |
Outstanding at April 30, 2022 | 1,516 | | | $ | 30.51 | | | 6.6 | | $ | 24 | |
Granted | 318 | | | 24.41 | | | N/A | | N/A |
Canceled | (37) | | | 30.46 | | | N/A | | N/A |
| | | | | | | |
Exercised | (176) | | | 26.64 | | | N/A | | 1,047 | |
Outstanding at April 29, 2023 | 1,621 | | | 29.73 | | | 6.7 | | 2,175 | |
| | | | | | | |
Exercisable at April 29, 2023 | 1,076 | | | $ | 30.15 | | | 5.7 | | $ | 776 | |
The aggregate intrinsic value of options exercised was $0.3 million and $5.1 million in fiscal 2022 and fiscal 2021, respectively. As of April 29, 2023, our total unrecognized compensation cost related to non-vested stock option awards was $2.7 million, which we expect to recognize over a weighted-average remaining vesting term of all unvested awards of 1.6 years. During the year ended April 29, 2023, stock options with respect to 0.3 million shares vested.
We received $4.7 million, $1.1 million, and $10.8 million in cash during fiscal 2023, 2022, and 2021, respectively, for exercises of stock options.
Restricted Stock. We granted 256,128 shares of restricted stock units to employees during fiscal 2023. 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 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 fiscal 2023 was $24.58 per share, the market value of our common shares on the date of grant.
The following table summarizes information about non-vested awards as of and for the year ended April 29, 2023:
| | | | | | | | | | | | | | |
| | Shares or Units (In Thousands) | | Weighted Average Grant Date Fair Value |
Non-vested awards at April 30, 2022 | | 287 | | | $ | 33.45 | |
Granted | | 256 | | | 24.58 | |
Vested | | (107) | | | 32.81 | |
Canceled | | (43) | | | 31.15 | |
Non-vested awards at April 29, 2023 | | 393 | | | 28.10 | |
Unrecognized compensation cost related to non-vested restricted shares was $6.7 million and is expected to be recognized over a weighted-average remaining contractual term of all unvested awards of 1.5 years.
Restricted Stock Units Issued to Directors. Restricted stock units granted to our non-employee directors are offered at no cost to the directors and vest the earlier of the date a director ceases to be a member of the board (for any reason other than the termination of service for cause) or the one-year anniversary of the grant date. During fiscal 2023, fiscal 2022, and fiscal 2021 we granted less than 0.1 million restricted stock units each year to our non-employee directors. 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 grant. The weighted-average fair value of the restricted stock units that were granted during fiscal 2023, fiscal 2022, and fiscal 2021 was $26.49, $35.34, and $32.08, respectively.
Performance Shares. Under the La-Z-Boy Incorporated 2017 Omnibus Incentive Plan, the Compensation and Talent Oversight Committee of our board of directors is authorized to award common shares to certain employees based on the attainment of certain financial goals over a given performance period. The awards are offered at no cost to the employees. In the event of an employee's termination during the vesting period, the potential right to earn shares under this program is generally forfeited.
During the first quarter of fiscal 2023, we granted 240,833 performance-based shares, and we also have performance-based share awards outstanding from grants in fiscal 2022 and fiscal 2021. Payout 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.
The number of awards that will vest, as well as unearned and canceled awards, depend on the achievement of certain financial and shareholder-return goals over the three-year performance periods, and will be settled in shares if service conditions are met, requiring employees to remain employed with the Company through the end of the three-year performance periods.
The following table summarizes the performance-based shares outstanding at the maximum award amounts based upon the respective performance share agreements: | | | | | | | | | | | | | | |
| | Shares (In Thousands) | | Weighted Average Grant Date Fair Value |
Outstanding shares at April 30, 2022 | | 621 | | | $ | 32.28 | |
Granted | | 482 | | | 24.41 | |
Vested | | (122) | | | 28.68 | |
Unearned or canceled | | (218) | | | 30.21 | |
Outstanding shares at April 29, 2023 | | 763 | | | 28.47 | |
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 2023, fiscal 2022, and fiscal 2021 that vest based on attaining performance goals was $22.43, $36.13, and $30.75, respectively, 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. Similar to the way in which we expense the awards of stock options, 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 2023, fiscal 2022, and fiscal 2021 grants of shares that vest based on market conditions was $36.63, $51.85, and $38.14, respectively. Our unrecognized compensation cost at April 29, 2023, related to performance-based shares was $6.7 million based on the current estimates of the number of awards that will vest, and is expected to be recognized over a weighted-average remaining contractual term of all unvested awards of 1.4 years.
Equity-based compensation expenses related to performance-based shares recognized in our consolidated statement of income were as follows (for the fiscal years ended): | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended |
| | (52 weeks) | | (53 weeks) | | (52 weeks) |
(Amounts in thousands) | | 4/29/2023 | | 4/30/2022 | | 4/24/2021 |
Fiscal 2019 grant | | $ | — | | | $ | — | | | $ | 1,545 | |
Fiscal 2020 grant | | — | | | 1,066 | | | 2,051 | |
Fiscal 2021 grant | | 548 | | | 2,195 | | | 1,909 | |
Fiscal 2022 grant | | 1,649 | | | 1,710 | | | — | |
Fiscal 2023 grant | | 2,096 | | | — | | | — | |
Total expense | | $ | 4,293 | | | $ | 4,971 | | | $ | 5,505 | |
Note 15: Accumulated Other Comprehensive Loss
Activity in accumulated other comprehensive loss was as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Amounts in thousands) | | Translation adjustment | | | | 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 | | 4,932 | | | | | (96) | | | 428 | | | 5,264 | |
| | | | | | | | | | |
| | | | | | | | | | |
Amounts reclassified to net income | | — | | | | | (9) | | | 347 | | | 338 | |
Tax effect | | — | | | | | 26 | | | (197) | | | (171) | |
Other comprehensive income (loss) attributable to La-Z-Boy Incorporated | | 4,932 | | | | | (79) | | | 578 | | | 5,431 | |
Balance at April 24, 2021 | | $ | 3,041 | | | | | $ | 370 | | | $ | (4,932) | | | $ | (1,521) | |
Changes before reclassifications | | (5,002) | | | | | (947) | | | 1,539 | | | (4,410) | |
| | | | | | | | | | |
| | | | | | | | | | |
Amounts reclassified to net income | | — | | | | | 59 | | | 306 | | | 365 | |
Tax effect | | — | | | | | 220 | | | (451) | | | (231) | |
Other comprehensive income (loss) attributable to La-Z-Boy Incorporated | | (5,002) | | | | | (668) | | | 1,394 | | | (4,276) | |
Balance at April 30, 2022 | | $ | (1,961) | | | | | $ | (298) | | | $ | (3,538) | | | $ | (5,797) | |
Changes before reclassifications | | (691) | | | | | (27) | | | 879 | | | 161 | |
| | | | | | | | | | |
| | | | | | | | | | |
Amounts reclassified to net income | | — | | | | | 231 | | | 193 | | | 424 | |
Tax effect | | — | | | | | (51) | | | (265) | | | (316) | |
Other comprehensive income (loss) attributable to La-Z-Boy Incorporated | | (691) | | | | | 153 | | | 807 | | | 269 | |
Balance at April 29, 2023 | | $ | (2,652) | | | | | $ | (145) | | | $ | (2,731) | | | $ | (5,528) | |
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:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended |
| | (52 weeks) | | (53 weeks) | | (52 weeks) |
(Amounts in thousands) | | 4/29/2023 | | 4/30/2022 | | 4/24/2021 |
Balance as of the beginning of the year | | $ | 8,897 | | | $ | 8,648 | | | $ | 15,553 | |
Net income | | 1,277 | | | 2,311 | | | 1,068 | |
Other comprehensive income (loss) | | 87 | | | (802) | | | 534 | |
Dividends distributed to joint venture minority partners | | — | | | (1,260) | | | (8,507) | |
| | | | | | |
Balance as of the end of the year | | $ | 10,261 | | | $ | 8,897 | | | $ | 8,648 | |
Note 16: Revenue Recognition
The following table presents our revenue disaggregated by product category and by segment or unit:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended April 29, 2023 |
(Amounts in thousands) | | Wholesale | | Retail | | Corporate and Other | | Total |
Upholstered Furniture | | $ | 1,326,327 | | | $ | 811,955 | | | $ | 179,815 | | | $ | 2,318,097 | |
Casegoods Furniture | | 108,098 | | | 58,455 | | | 24,673 | | | 191,226 | |
Delivery | | 210,963 | | | 32,653 | | | 7,652 | | | 251,268 | |
Other (1) | | 44,860 | | | 78,980 | | | (45,950) | | | 77,890 | |
Total | | $ | 1,690,248 | | | $ | 982,043 | | | $ | 166,190 | | | $ | 2,838,481 | |
| | | | | | | | |
| | | | Eliminations | | | | (489,048) | |
| | Consolidated Net Sales | | | | $ | 2,349,433 | |
| | | | | | | | |
| | Year Ended April 30, 2022 |
(Amounts in thousands) | | Wholesale | | Retail | | Corporate and Other | | Total |
Upholstered Furniture | | $ | 1,378,577 | | | $ | 654,272 | | | $ | 219,967 | | | $ | 2,252,816 | |
Casegoods Furniture | | 110,126 | | | 47,162 | | | 24,559 | | | 181,847 | |
Delivery | | 190,110 | | | 30,171 | | | 7,999 | | | 228,280 | |
Other (1) | | 90,025 | | | 72,789 | | | (56,566) | | | 106,248 | |
Total | | $ | 1,768,838 | | | $ | 804,394 | | | $ | 195,959 | | | $ | 2,769,191 | |
| | | | | | | | |
| | | | Eliminations | | | | (412,380) | |
| | Consolidated Net Sales | | | | $ | 2,356,811 | |
| | | | | | | | |
| | |
| | | | | | | | |
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| | | | | | | | |
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(1)Primarily includes revenue for advertising, royalties, parts, accessories, after-treatment products, surcharges, discounts & allowances, rebates and other sales incentives.
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) | | 4/29/2023 | | 4/30/2022 |
Contract assets | | $ | 44,939 | | | $ | 139,006 | |
| | | | |
Customer deposits | | $ | 105,766 | | | $ | 183,233 | |
Deferred revenue | | 44,939 | | | 139,006 | |
Total contract liabilities (1) | | $ | 150,705 | | | $ | 322,239 | |
(1)During the year ended April 29, 2023, we recognized revenue of $293.7 million related to our contract liability balance at April 30, 2022.
Contract assets, customer deposits and deferred revenue decreased during fiscal 2023 as we continue to work down the backlog built up in prior periods back to pre-pandemic levels.
Note 17: 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 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 171 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.
The accounting policies of the operating segments are the same as those described in Note 1, Accounting Policies. We account for intersegment revenue transactions between our segments consistent with independent third-party transactions, that is, at current market prices. As a result, the manufacturing profit related to sales to our Retail segment is included within the Wholesale segment. Operating income realized on intersegment revenue transactions is therefore generally consistent with the operating income realized on our revenue from independent third-party transactions. Segment operating income is based on profit or loss from operations before interest expense, interest income, other income (expense), net and income taxes. Identifiable assets are cash and equivalents, notes and accounts receivable, net inventories, net property, plant and equipment, right-of-use lease assets, goodwill and other intangible assets. Our unallocated assets include deferred income taxes, corporate assets (including a portion of cash and equivalents), and various other assets. Sales are attributed to countries on the basis of the customer's location.
The following table presents sales and operating income (loss) by segment:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended |
| | (52 weeks) | | (53 weeks) | | (52 weeks) |
(Amounts in thousands) | | 4/29/2023 | | 4/30/2022 | | 4/24/2021 |
Sales | | | | | | |
Wholesale segment: | | | | | | |
Sales to external customers | | $ | 1,215,429 | | | $ | 1,371,602 | | | $ | 1,006,377 | |
Intersegment sales | | 474,819 | | | 397,236 | | | 294,921 | |
Wholesale segment sales | | 1,690,248 | | | 1,768,838 | | | 1,301,298 | |
| | | | | | |
Retail segment sales | | 982,043 | | | 804,394 | | | 612,906 | |
| | | | | | |
Corporate and Other: | | | | | | |
Sales to external customers | | 151,961 | | | 180,815 | | | 114,961 | |
Intersegment sales | | 14,229 | | | 15,144 | | | 12,409 | |
Corporate and Other sales | | 166,190 | | | 195,959 | | | 127,370 | |
| | | | | | |
Eliminations | | (489,048) | | | (412,380) | | | (307,330) | |
Consolidated sales | | $ | 2,349,433 | | | $ | 2,356,811 | | | $ | 1,734,244 | |
| | | | | | |
Operating Income (Loss) | | | | | | |
Wholesale segment | | $ | 115,215 | | | $ | 134,013 | | | $ | 134,312 | |
Retail segment | | 161,571 | | | 109,546 | | | 46,724 | |
Corporate and Other | | (65,347) | | | (36,803) | | | (44,300) | |
Consolidated operating income | | 211,439 | | | 206,756 | | | 136,736 | |
Interest expense | | (536) | | | (895) | | | (1,390) | |
Interest income | | 6,670 | | | 1,338 | | | 1,101 | |
| | | | | | |
Other income (expense), net | | (11,784) | | | (1,708) | | | 9,466 | |
Income before income taxes | | $ | 205,789 | | | $ | 205,491 | | | $ | 145,913 | |
The following tables present additional financial information by segment and location.
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended |
| | (52 weeks) | | (53 weeks) | | (52 weeks) |
(Amounts in thousands) | | 4/29/2023 | | 4/30/2022 | | 4/24/2021 |
Depreciation and Amortization | | | | | | |
Wholesale segment | | $ | 23,327 | | | $ | 24,520 | | | $ | 19,029 | |
Retail segment | | 7,922 | | | 6,320 | | | 4,894 | |
Corporate and Other | | 8,944 | | | 8,931 | | | 9,098 | |
Consolidated depreciation and amortization | | $ | 40,193 | | | $ | 39,771 | | | $ | 33,021 | |
| | | | | | |
Capital Expenditures | | | | | | |
Wholesale segment | | $ | 38,491 | | | $ | 49,373 | | | $ | 27,303 | |
Retail segment | | 22,285 | | | 19,426 | | | 8,958 | |
Corporate and Other | | 8,036 | | | 7,781 | | | 1,699 | |
Consolidated capital expenditures | | $ | 68,812 | | | $ | 76,580 | | | $ | 37,960 | |
| | | | | | |
Sales by Country | | | | | | |
United States | | 89% | | 89% | | 91% |
Canada | | 6% | | 6% | | 5% |
Other | | 5% | | 5% | | 4% |
Total | | 100% | | 100% | | 100% |
| | | | | | | | | | | | | | |
(Amounts in thousands) | | 4/29/2023 | | 4/30/2022 |
Assets | | | | |
Wholesale segment | | $ | 688,238 | | | $ | 741,150 | |
Retail segment | | 615,752 | | | 587,083 | |
Unallocated assets | | 562,273 | | | 603,856 | |
Consolidated assets | | $ | 1,866,263 | | | $ | 1,932,089 | |
| | | | |
Long-Lived Assets by Geographic Location | | | | |
Domestic | | $ | 865,556 | | | $ | 798,089 | |
International | | 73,674 | | | 89,385 | |
Consolidated long-lived assets | | $ | 939,230 | | | $ | 887,474 | |
Note 18: Income Taxes
Income before income taxes consists of the following:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended |
| | (52 weeks) | | (53 weeks) | | (52 weeks) |
(Amounts in thousands) | | 4/29/2023 | | 4/30/2022 | | 4/24/2021 |
United States | | $ | 177,940 | | | $ | 164,432 | | | $ | 124,547 | |
Foreign | | 27,849 | | | 41,059 | | | 21,366 | |
Total | | $ | 205,789 | | | $ | 205,491 | | | $ | 145,913 | |
Income tax expense (benefit) consists of the following components:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended |
| | (52 weeks) | | (53 weeks) | | (52 weeks) |
(Amounts in thousands) | | 4/29/2023 | | 4/30/2022 | | 4/24/2021 |
Federal | | | | | | |
Current | | $ | 31,945 | | | $ | 30,793 | | | $ | 18,327 | |
Deferred | | 4,960 | | | 2,303 | | | 6,771 | |
State | | | | | | |
Current | | 10,345 | | | 9,191 | | | 6,475 | |
Deferred | | 1,537 | | | 1,060 | | | 2,339 | |
Foreign | | | | | | |
Current | | 7,237 | | | 11,632 | | | 4,451 | |
Deferred | | (2,176) | | | (1,816) | | | 21 | |
Total income tax expense | | $ | 53,848 | | | $ | 53,163 | | | $ | 38,384 | |
Our effective tax rate differs from the U.S. federal income tax rate for the following reasons:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended |
| | (52 weeks) | | (53 weeks) | | (52 weeks) |
(% of income before income taxes) | | 4/29/2023 | | 4/30/2022 | | 4/24/2021 |
Statutory tax rate | | 21.0 | % | | 21.0 | % | | 21.0 | % |
Increase (reduction) in income taxes resulting from: | | | | | | |
| | | | | | |
State income taxes, net of federal benefit | | 4.5 | % | | 3.9 | % | | 4.3 | % |
| | | | | | |
Losses/(gains) on corporate owned life insurance | | 0.2 | % | | — | % | | (1.2) | % |
| | | | | | |
| | | | | | |
| | | | | | |
Fair value adjustment of contingent consideration liability | | (0.1) | % | | (0.3) | % | | 2.0 | % |
| | | | | | |
Miscellaneous items | | 0.6 | % | | 1.3 | % | | 0.2 | % |
Effective tax rate | | 26.2 | % | | 25.9 | % | | 26.3 | % |
For our Canada and Mexico foreign operating units, we permanently reinvest the earnings and consequently do not record a deferred tax liability relative to the undistributed earnings. We have reinvested approximately $61.0 million of the earnings. After enactment of the Tax Cuts and Jobs Act in 2017, the potential deferred tax attributable to these earnings would be approximately $2.6 million, primarily related to foreign withholding taxes and state income taxes. The Company is not permanently reinvested on undistributed earnings for its Thailand and United Kingdom foreign operating units and has provided for deferred tax attributable to those earnings of approximately $1.2 million in fiscal 2023.
The primary components of our deferred tax assets and (liabilities) were as follows:
| | | | | | | | | | | | | | | | |
(Amounts in thousands) | | 4/29/2023 | | 4/30/2022 | | |
Assets | | | | | | |
Leases | | $ | 110,993 | | | $ | 108,108 | | | |
Deferred and other compensation | | 19,475 | | | 21,309 | | | |
State income tax—net operating losses, credits and other | | 5,126 | | | 5,795 | | | |
Warranty | | 7,213 | | | 6,402 | | | |
Inventory | | — | | | 2,274 | | | |
Workers' compensation | | 1,817 | | | 2,292 | | | |
Bad debt | | 1,475 | | | 1,216 | | | |
Employee benefits | | 2,159 | | | 2,170 | | | |
Federal net operating losses, credits | | 530 | | | 908 | | | |
| | | | | | |
Other | | 2,198 | | | 81 | | | |
Valuation allowance | | (3,468) | | | (3,517) | | | |
Total deferred tax assets | | 147,518 | | | 147,038 | | | |
Liabilities | | | | | | |
Right of use lease assets | | (104,067) | | | (102,978) | | | |
Property, plant and equipment | | (19,936) | | | (20,412) | | | |
Inventory | | (1,802) | | | — | | | |
Goodwill and other intangibles | | (14,128) | | | (11,914) | | | |
Tax on undistributed foreign earnings | | (1,152) | | | (1,102) | | | |
| | | | | | |
| | | | | | |
Net deferred tax assets | | $ | 6,433 | | | $ | 10,632 | | | |
The deferred tax assets associated with loss carry forwards and the related expiration dates are as follows:
| | | | | | | | | | | | | | |
(Amounts in thousands) | | Amount | | Expiration |
Federal net operating losses | | $ | 530 | | | Fiscal 2039 |
Various U.S. state net operating losses (excluding federal tax effect) | | 2,074 | | | Fiscal 2024 - 2038 |
Foreign capital losses | | 147 | | | Indefinite |
Foreign net operating losses | | 131 | | | Indefinite |
We evaluate our deferred taxes to determine if a valuation allowance is required. Accounting standards require that we assess whether a valuation allowance should be established based on the consideration of all available evidence using a "more likely than not" standard with significant weight being given to evidence that can be objectively verified.
The evaluation of the amount of net deferred tax assets expected to be realized necessarily involves forecasting the amount of taxable income that will be generated in future years. We have forecasted future results using estimates management believes to be reasonable. We based these estimates on objective evidence such as expected trends resulting from certain leading economic indicators. Based upon our net deferred tax asset position at April 29, 2023, we estimate that approximately $13.6 million of future taxable income would need to be generated to fully recover our net deferred tax assets. The realization of deferred income tax assets is dependent on future events and actual results may vary from management's forecasts due to economic volatility and uncertainty along with unpredictable complexities in the global supply chain. Such variances could result in adjustments to the valuation allowance on deferred tax assets in future periods, and such adjustments could be material to the financial statements.
A summary of the valuation allowance by jurisdiction is as follows:
| | | | | | | | | | | | | | | | | | | | |
(Amounts in thousands) | | 4/29/2023 | | 4/30/2022 | | Change |
U.S. Federal | | $ | 1,822 | | | $ | 1,460 | | | $ | 362 | |
U.S. State | | 1,496 | | | 1,907 | | | (411) | |
Foreign | | 150 | | | 150 | | | — | |
Total | | $ | 3,468 | | | $ | 3,517 | | | $ | (49) | |
The remaining valuation allowance of $3.5 million is primarily related to certain U.S. federal, state and foreign deferred tax assets. The U.S. federal deferred taxes are primarily due to limitations on the realization of deferred taxes related to executive compensation. The U.S. state deferred taxes are primarily related to state net operating losses.
As of April 29, 2023, we had a gross unrecognized tax benefit of $1.1 million related to uncertain tax positions in various jurisdictions. A reconciliation of the beginning and ending balance of these unrecognized tax benefits is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended |
| | (52 weeks) | | (53 weeks) | | (52 weeks) |
(Amounts in thousands) | | 4/29/2023 | | 4/30/2022 | | 4/24/2021 |
Balance at the beginning of the period | | $ | 1,037 | | | $ | 1,069 | | | $ | 1,030 | |
Additions: | | | | | | |
Positions taken during the current year | | 109 | | | 121 | | | 176 | |
Positions taken during the prior year | | 83 | | | 10 | | | 35 | |
Reductions: | | | | | | |
Positions taken during the prior year | | — | | | (23) | | | (19) | |
Decreases related to settlements with taxing authorities | | — | | | — | | | — | |
Reductions resulting from the lapse of the statute of limitations | | (145) | | | (140) | | | (153) | |
Balance at the end of the period | | $ | 1,084 | | | $ | 1,037 | | | $ | 1,069 | |
We recognize interest and penalties associated with uncertain tax positions in income tax expense. We had approximately $0.4 million accrued for interest and penalties as of April 29, 2023 and April 30, 2022.
If recognized, $0.9 million of the total $1.1 million of unrecognized tax benefits would decrease our effective tax rate. We do not expect that the net liability for uncertain income tax positions will significantly change within the next 12 months. The remaining balance will be settled or released as tax audits are effectively settled, statutes of limitation expire, or other new information becomes available.
Our U.S. federal income tax returns for fiscal years 2020 and subsequent are still subject to audit. In addition, we conduct business in various states. The major states in which we conduct business are subject to audit for fiscal years 2019 and subsequent. Our foreign operations are subject to audit for fiscal years 2013 and subsequent.
Cash paid for taxes (net of refunds received) during the fiscal years ended April 29, 2023, April 30, 2022, and April 24, 2021, was $69.9 million, $38.6 million, and $40.5 million, respectively.
Note 19: 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:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended |
| | (52 weeks) | | (53 weeks) | | (52 weeks) |
(Amounts in thousands) | | 4/29/2023 | | 4/30/2022 | | 4/24/2021 |
Numerator (basic and diluted): | | | | | | |
Net income attributable to La-Z-Boy Incorporated | | $ | 150,664 | | | $ | 150,017 | | | $ | 106,461 | |
Income allocated to participating securities (1) | | — | | | (7) | | | (46) | |
Net income available to common Shareholders | | $ | 150,664 | | | $ | 150,010 | | | $ | 106,415 | |
| | | | | | |
Denominator: | | | | | | |
Basic weighted average common shares outstanding | | 43,148 | | | 44,023 | | | 45,983 | |
Contingent common shares | | 91 | | | 79 | | | 171 | |
Stock option dilution | | 1 | | | 192 | | | 213 | |
Diluted weighted average common shares outstanding | | 43,240 | | | 44,294 | | | 46,367 | |
| | | | | | |
Earnings per Share: | | | | | | |
Basic | | $ | 3.49 | | | $ | 3.41 | | | $ | 2.31 | |
Diluted | | $ | 3.48 | | | $ | 3.39 | | | $ | 2.30 | |
(1)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 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. We excluded options to purchase 1.4 million and 0.2 million shares from the diluted share calculation for the years ended April 29, 2023 and April 30, 2022, respectively. We did not exclude any outstanding options from the diluted share calculation for the fiscal year ended April 24, 2021.
Note 20: 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.
The following table presents the fair value hierarchy for those assets and liabilities we measured at fair value on a recurring basis at April 29, 2023 and April 30, 2022. There were no transfers into or out of Level 1, Level 2, or Level 3 for any of the periods presented.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At April 29, 2023 | | | | | | | | | | |
| | Fair Value Measurements |
(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 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At April 30, 2022 | | | | | | | | | | |
| | Fair Value Measurements |
(Amounts in thousands) | | Level 1 | | Level 2 | | Level 3 | | NAV (1) | | Total |
Assets | | | | | | | | | | |
Marketable securities | | $ | — | | | $ | 33,578 | | | $ | 2,500 | | | $ | 6,543 | | | $ | 42,621 | |
Held-to-maturity investments | | 1,337 | | | — | | | — | | | — | | | 1,337 | |
Cost basis investment | | — | | | — | | | 7,579 | | | — | | | 7,579 | |
Total assets | | $ | 1,337 | | | $ | 33,578 | | | $ | 10,079 | | | $ | 6,543 | | | $ | 51,537 | |
| | | | | | | | | | |
Liabilities | | | | | | | | | | |
Contingent consideration liability | | $ | — | | | $ | — | | | $ | 800 | | | $ | — | | | $ | 800 | |
(1)Certain marketable securities investments are measured at fair value using net asset value per share under the practical expedient methodology.
At April 29, 2023 and April 30, 2022, 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. 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 April 29, 2023, our Level 3 assets included investments in two privately-held companies consisting of non-marketable preferred shares, warrants to purchase common shares, and convertible notes. The fair value for our Level 3 equity 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 third quarter of fiscal 2023, we invested an additional $0.2 million in convertible notes in one of these privately-held start-up companies. Subsequently and during the fourth quarter of fiscal 2023, with respect to the same investee, we recorded an impairment charge of $10.3 million to other income (expense), net in the consolidated statement of income for the full carrying value of the preferred shares ($7.6 million) and convertible notes ($2.7 million), as it was determined the value of the investments 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 cash and its current debt obligations and impending debt maturities), the investee's need for additional funding, and the competitive environment in which the investee operates its business.
Our Level 3 liability included our contingent consideration liability resulting from the Joybird acquisition. The fair value of our contingent consideration liability as of April 29, 2023 reflects our expectation that no additional consideration will be owed based on our most recent financial projections and the terms of the earnout agreement. As a result, during the second quarter of fiscal 2023, we reduced the fair value of the contingent consideration liability by its full carrying value of $0.8 million which was recorded as a favorable impact to selling, general and administrative expense in our consolidated statement of income.
The following table is a reconciliation of our Level 3 assets and liabilities recorded at fair value using significant unobservable inputs:
| | | | | | | | | | | | | | |
(Amounts in thousands) | | Assets | | Liabilities |
Balance at April 24, 2021 | | $ | 7,579 | | | $ | 14,100 | |
Purchases | | 2,500 | | | — | |
Settlements | | — | | | (10,000) | |
Fair value adjustment | | — | | | (3,300) | |
| | | | |
Balance at April 30, 2022 | | 10,079 | | | 800 | |
Purchases | | 237 | | | — | |
| | | | |
Impairment | | (10,316) | | | — | |
Fair value adjustment | | — | | | (800) | |
Balance at April 29, 2023 | | $ | — | | | $ | — | |