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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended April 29, 2017

COMMISSION FILE NUMBER 1-9656

LA-Z-BOY INCORPORATED
(Exact name of registrant as specified in its charter)

MICHIGAN
(State or other jurisdiction of
incorporation or organization)
  38-0751137
(I.R.S. Employer
Identification No.)

One La-Z-Boy Drive, Monroe, Michigan
(Address of principal executive offices)

 

48162-5138
(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class   Name of each exchange on which registered
Common Shares, $1.00 Par Value   New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in rule 405 of the Securities Act. Yes ý    No o

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes o    No ý

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes ý    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ý

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

Large accelerated filer ý   Accelerated filer o   Non-accelerated filer o
(Do not check if a
smaller reporting company)
  Smaller reporting company o

Emerging growth company o

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

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý

Based on the closing price on the New York Stock Exchange on October 29, 2016, the aggregate market value of Registrant's common shares held by non-affiliates of the Registrant on that date was $1,139.9 million.

The number of common shares outstanding of the Registrant was 48,301,542 as of June 13, 2017.

DOCUMENTS INCORPORATED BY REFERENCE:

(1)
Portions of the Registrant's Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A for its 2017 Annual Meeting of Shareholders are incorporated by reference into Part III.

   


Table of Contents

LA-Z-BOY INCORPORATED
FORM 10-K ANNUAL REPORT FISCAL 2017

TABLE OF CONTENTS

 
   
  Page
Number(s)
 

Cautionary Statement Concerning Forward-Looking Statements

    3  


PART I


 

 

 

 

Item 1.

 

Business

    4  

Item 1A.

 

Risk Factors

    11  

Item 1B.

 

Unresolved Staff Comments

    15  

Item 2.

 

Properties

    15  

Item 3.

 

Legal Proceedings

    15  

Item 4.

 

Mine Safety Disclosures

    15  

Executive Officers of the Registrant

    16  


PART II


 

 

 

 

Item 5.

 

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

    17  

Item 6.

 

Selected Financial Data

    20  

Item 7.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

    25  

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

    43  

Item 8.

 

Financial Statements and Supplementary Data

    44  

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

    88  

Item 9A.

 

Controls and Procedures

    88  

Item 9B.

 

Other Information

    88  


PART III


 

 

 

 

Item 10.

 

Directors, Executive Officers, and Corporate Governance

    89  

Item 11.

 

Executive Compensation

    89  

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

    89  

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

    89  

Item 14.

 

Principal Accounting Fees and Services

    89  


PART IV


 

 

 

 

Item 15.

 

Exhibits, Financial Statement Schedules

    90  

Item 16.

 

Form 10-K Summary

    92  

Note: The responses to Items 10 through 14 will be included in the Company's definitive proxy statement to be filed pursuant to Regulation 14A for the 2017 Annual Meeting of Shareholders. The required information is incorporated into this Form 10-K by reference to that document and is not repeated herein.

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Cautionary Statement Concerning Forward-Looking Statements

La-Z-Boy Incorporated and its subsidiaries (individually and collectively, "we," "our" or the "Company") make forward-looking statements in this report, and its representatives may make oral forward-looking statements from time to time. Generally, forward-looking statements include information concerning possible or assumed future actions, events or results of operations. More specifically, forward-looking statements may include information regarding:

—    future income, margins and cash flows   —    future economic performance
—    future sales   —    industry and importing trends
—    adequacy and cost of financial resources   —    management plans

Forward-looking statements also include those preceded or followed by the words "anticipates," "believes," "estimates," "hopes," "plans," "could," "intends" and "expects" or similar expressions. With respect to all forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Actual results could differ materially from those we anticipate or project due to a number of factors, including: (a) changes in consumer confidence and demographics; (b) the possibility of a recession; (c) changes in the real estate and credit markets and their effects on our customers, consumers and suppliers; (d) international political unrest, terrorism or war; (e) volatility in energy and other commodities prices; (f) the impact of logistics on imports and exports; (g) tax rate, interest rate, and currency exchange rate changes; (h) operating factors, such as supply, labor or distribution disruptions (e.g. port strikes); (i) changes in legislation or changes in the domestic or international regulatory environment (including new or increased duties); (j) adoption of new accounting principles; (k) fires, severe weather or other natural events such as hurricanes, earthquakes, flooding, tornadoes and tsunamis; (l) our ability to procure or transport fabric rolls, leather hides or cut-and-sewn fabric and leather sets domestically or abroad; (m) information technology conversions or system failures and our ability to recover from a system failure; (n) effects of our brand awareness and marketing programs; (o) the discovery of defects in our products resulting in delays in manufacturing, recall campaigns, reputational damage, or increased warranty costs; (p) litigation arising out of alleged defects in our products; (q) unusual or significant litigation; (r) our ability to locate new La-Z-Boy Furniture Galleries® stores (or store owners) and negotiate favorable lease terms for new or existing locations; (s) the impact of potential goodwill or intangible asset impairments; and (t) those matters discussed in Item 1A of this Annual Report and other factors identified from time-to-time in our reports filed with the Securities and Exchange Commission. We undertake no obligation to update or revise any forward-looking statements, whether to reflect new information or new developments or for any other reason.

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PART I

ITEM 1.    BUSINESS.

Edward M. Knabusch and Edwin J. Shoemaker started Floral City Furniture in 1927, and in 1928 the newly formed company introduced its first recliner. In 1941, we were incorporated in the state of Michigan as La-Z-Boy Chair Company, and in 1996 we changed our name to La-Z-Boy Incorporated. Today, our La-Z-Boy brand is the most recognized brand in the furniture industry and we are proud to be celebrating our 90th anniversary this fiscal year.

We manufacture, market, import, export, distribute and retail upholstery furniture products. In addition, we import, distribute and retail accessories and casegoods (wood) furniture products. We are the leading global producer of reclining chairs and the second largest manufacturer/distributor of residential furniture in the United States. The La-Z-Boy Furniture Galleries® stores retail network is the third largest retailer of single-branded furniture in the United States. We have seven major North American manufacturing locations and six regional distribution centers in the United States to support our speed-to-market and customization strategy.

We sell our products, primarily in the United States and Canada, to furniture retailers and directly to consumers through stores that we own and operate. The centerpiece of our retail distribution strategy is our network of 347 La-Z-Boy Furniture Galleries® stores and 557 Comfort Studio® locations, each dedicated to marketing our La-Z-Boy branded products. We consider this dedicated space to be "branded outlets" or "proprietary." In addition to the over 900 branded outlets dedicated to selling La-Z-Boy product (La-Z-Boy Furniture Galleries® stores and Comfort Studio® locations), approximately 1,900 other dealers also sell La-Z-Boy, including some of the best known names in the industry, such as Art Van, Nebraska Furniture Mart and Slumberland. We own 143 of the La-Z-Boy Furniture Galleries® stores. The remainder of the La-Z-Boy Furniture Galleries® stores, as well as all 557 Comfort Studio® locations, are independently owned and operated. La-Z-Boy Furniture Galleries® stores help consumers furnish their homes by combining the style, comfort, and quality of La-Z-Boy furniture with our available design services. La-Z-Boy Comfort Studio® locations are defined spaces within larger independent retailers that are dedicated to displaying and selling La-Z-Boy branded products. Our other brands, which include England, Kincaid, American Drew, and Hammary, enjoy distribution through many of the same outlets, with approximately half of Hammary's sales originating through the La-Z-Boy Furniture Galleries® store network. Kincaid and England have their own dedicated proprietary in-store programs with 527 outlets and over 1.7 million square feet of proprietary floor space. In total, our proprietary floor space encompasses approximately 9.7 million square feet.

Principal Products and Industry Segments

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

Upholstery Segment.    Our Upholstery segment is our largest business and consists primarily of two operating units: La-Z-Boy, our largest operating unit, and our England subsidiary. The Upholstery segment also includes our international businesses, including the recently acquired La-Z-Boy wholesale business in the United Kingdom and Ireland. Our Upholstery segment manufactures and imports upholstered furniture such as recliners and motion furniture, sofas, loveseats, chairs, sectionals, modulars, ottomans and sleeper sofas. The Upholstery segment sells directly to La-Z-Boy Furniture Galleries® stores, operators of Comfort Studio® locations and England Custom Comfort Center locations, major dealers, and a wide cross-section of other independent retailers.

Casegoods Segment.    Our Casegoods segment is an importer, marketer and distributor of casegoods (wood) furniture such as bedroom sets, dining room sets, entertainment centers and occasional pieces, and also manufactures some coordinated upholstered furniture. The Casegoods segment consists of

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three brands: American Drew, Hammary, and Kincaid. The Casegoods segment sells directly to major dealers, as well as La-Z-Boy Furniture Galleries® stores, and a wide cross-section of other independent retailers.

Retail Segment.    Our Retail segment consists of 143 company-owned La-Z-Boy Furniture Galleries® stores. The Retail segment primarily sells upholstered furniture, in addition to some casegoods and other accessories, to the end consumer through these stores.

We have provided additional detailed information regarding our segments and their products in Note 16 to our consolidated financial statements and our "Management's Discussion and Analysis" section, both of which are included in this report.

Raw Materials and Parts

The principal raw materials and parts used in our Upholstery segment are purchased cover (primarily fabrics and leather), polyester batting and polyurethane foam for cushioning and padding, lumber and plywood for frames, steel for motion mechanisms, and electrical components for power units. We purchase about 50% of our polyurethane foam from one supplier, which has several facilities across the United States that deliver to our plants. We purchase cover from a variety of sources, but we rely on a limited number of major suppliers. We purchase approximately 55% of our cover in a raw state (fabric rolls or leather hides) and cut and sew it into cover, and 45% in covers that have already been cut and sewn to our specifications by third-party offshore suppliers. We buy cut-and-sewn leather and fabric products from four primary suppliers. Of the products that we import, two suppliers that operate in China manufacture over 90% of the leather cut-and-sewn sets, and two other suppliers that also operate in China manufacture almost 85% of the fabric products. We primarily use these suppliers for their product design capabilities, to leverage our buying power, and to control quality and product flow, in addition to their ability to handle the volume of product we require to operate our business. If any of these suppliers experienced financial or other difficulties, we could experience temporary disruptions in our manufacturing process until we obtained alternate suppliers.

We have identified efficiencies, savings opportunities, and managed relationships with our Asian suppliers through our global trading company in Hong Kong, which procures raw materials and parts from our suppliers. During fiscal 2017, the prices of materials we used in our upholstery manufacturing process were essentially unchanged compared with fiscal 2016. We expect to experience a slight increase in raw material costs in fiscal 2018. In an effort to somewhat offset the projected rise in raw material costs we have slightly increased our selling prices.

Finished Goods Imports

We import 100% of the casegoods products that we offer for sale. In fiscal 2017, we purchased approximately 50% of this imported product from three suppliers. We primarily use these suppliers to leverage our buying power, to control quality and product flow, and because their capabilities align with our product design needs. In addition, these suppliers have the ability to handle the volume of product we require. If any of these suppliers experienced financial or other difficulties, we could experience disruptions in our product flow until we obtained alternate suppliers, which could be lengthy due to the longer lead time required for sourced wood furniture from Asian manufacturers.

We use an all-import model for our wood furniture primarily to remain competitive for these products. The prices we paid for these imported products, including associated transportation costs, decreased slightly in fiscal 2017 compared with fiscal 2016. We currently expect these prices and associated transportation costs to increase slightly in fiscal 2018 compared with fiscal 2017. Looking across our wholesale segments, imported finished goods represented 8% of our consolidated sales in both fiscal 2017 and fiscal 2016.

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Seasonal Business

We believe that the demand for furniture generally reflects sensitivity to overall economic conditions, including consumer confidence, housing market conditions and unemployment rates. The table below shows our highest and lowest sales quarters based on historical experience, including fiscal 2017, by segment:

Segment
  Highest sales
quarter
  Lowest sales
quarter

Upholstery

  4th   1st

Casegoods

  4th   1st or 3rd

Retail

  3rd   1st

We schedule production to maintain consistent manufacturing activity throughout the year whenever possible. We typically shut down our domestic plants for one week each fiscal year to perform routine maintenance on our equipment.

Economic Cycle and Purchasing Cycle

Our sales are impacted by the overall growth of the furniture industry, which is primarily influenced by consumer discretionary spending and existing and new housing activity. In addition, consumer confidence, employment rates, and other factors could affect demand. Upholstered furniture has a shorter life cycle than casegoods furniture because upholstered furniture is typically more fashion and design-oriented, and is often purchased one or two pieces at a time. Casegoods products, in contrast, are longer-lived and frequently purchased in groupings or "suites," resulting in a much larger cost to the consumer. As a result, casegoods sales are more sensitive to economic conditions, and upholstered furniture normally exhibits a less volatile sales pattern over an economic cycle.

Practices Regarding Working Capital Items

The following describes our significant practices regarding working capital items.

Inventory:    For our upholstery segment, we maintain raw materials and work-in-process inventory at our manufacturing locations. Finished goods inventory is maintained at our six regional distribution centers as well as our manufacturing locations. Our regional distribution centers allow us to streamline the warehousing and distribution processes for our La-Z-Boy Furniture Galleries® store network, including both company-owned stores and independently-owned stores. Our regional distribution centers also allow us to reduce the number of individual warehouses needed to supply our retail outlets and help us reduce inventory levels at our manufacturing and retail locations.

For our Casegoods segment, we import wood furniture from Asian vendors, resulting in long lead times on these products. To address these long lead times and meet our customers' delivery requirements, we maintain higher levels of finished goods inventory in our domestic warehouses, as a percentage of sales, of our casegoods products than our upholstery products.

Our company-owned La-Z-Boy Furniture Galleries® stores maintain finished goods inventory at the stores for display purposes.

Our inventory remained flat in dollars and as a percent of sales during fiscal 2017 compared with fiscal 2016. We will continue to manage our inventory levels to ensure they are appropriate relative to our sales, while maintaining our focus on service to our customers.

Accounts Receivable:    During fiscal 2017, our accounts receivable increased $4.3 million compared with fiscal 2016, or 0.3 percentage points as a percent of sales. This increase was mostly attributable to the timing of sales in our fiscal 2017 fourth quarter occurring late in the quarter as compared with the

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fourth quarter sales in the prior fiscal year. We monitor our customers' accounts and limit our credit exposure to certain independent dealers, and strive to decrease our days' sales outstanding where possible. Our days' sales outstanding is a measure of the time needed to collect outstanding accounts receivable once we have completed a sale. Our days' sales outstanding decreased by approximately two days during fiscal 2017.

Accounts Payable:    During fiscal 2017, our accounts payable increased $6.6 million compared with fiscal 2016, or 0.4 percentage points as a percent of sales. This increase in accounts payable is primarily due to our third quarter fiscal 2017 acquisition of the La-Z-Boy wholesale business in the United Kingdom and Ireland.

Customers

Our wholesale customers are furniture retailers located primarily throughout the United States and Canada. Sales in our Upholstery and Casegoods segments are almost entirely to furniture retailers, but we also sell directly to end consumers through our company-owned La-Z-Boy Furniture Galleries® stores that make up our Retail segment.

We have formal agreements with many furniture retailers for them to display and merchandise products from one or more of our operating units and sell them to consumers in dedicated retail space, either in stand-alone stores or dedicated proprietary galleries or studios within their stores. We consider this dedicated space to be "proprietary." For our Upholstery and Casegoods segments, our fiscal 2017 customer mix based on sales was 58% proprietary, 15% major dealers such as Art Van Furniture, Nebraska Furniture Mart and Slumberland Furniture, and 27% other independent retailers.

The success of our product distribution model relies heavily on having retail floor space that is dedicated to displaying and marketing our products. The 347-store La-Z-Boy Furniture Galleries® network is central to this approach. In addition, we sell product through proprietary space within other retail furniture stores, primarily La-Z-Boy Comfort Studio® locations, England Custom Comfort Center locations, and Kincaid Shoppes.

Maintaining, updating, and, when appropriate, expanding our proprietary distribution network is a key part of our overall sales and marketing strategy. Our 4-4-5 initiative, through which we plan to expand the La-Z-Boy Furniture Galleries® stores network to 400 stores averaging $4 million in sales per store over the five-year period that began with fiscal 2014, is a key growth strategy for us. With improved store performance we believe the network may deliver our targeted economic value over time with fewer stores. We now expect the build-out of our store network to extend beyond five years. Also, through this initiative, we intend not only to increase the number of stores in the network but also to improve their quality, including upgrading old format stores to our new concept design through remodels and relocations. At the end of fiscal 2017, less than seven percent of the La-Z-Boy Furniture Galleries® stores in the network were in the old format. As we continue to maintain and update our current stores to improve the quality of the network, the La-Z-Boy Furniture Galleries® store network plans to open, relocate or remodel 25 to 30 stores during fiscal 2018, all of which will feature the new concept store design.

We select independent dealers for our proprietary La-Z-Boy Furniture Galleries® store network based on factors such as their management and financial qualifications and the potential for distribution in specific geographical areas. This proprietary distribution benefits La-Z-Boy, our dealers and our consumers. It enables La-Z-Boy to concentrate our marketing with sales personnel dedicated to our entire product line, and only that line and approved accessories. It allows dealers who join this proprietary group to take advantage of best practices with which other proprietary dealers have succeeded, and we facilitate forums for these dealers to share best practices. These La-Z-Boy Furniture Galleries® stores provide our consumers a full-service shopping experience with a large variety of products, knowledgeable sales associates, and design service consultants.

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Orders and Backlog

We typically build upholstery units based on specific dealer orders, either for dealer stock or to fill consumers' custom orders. We import casegoods product primarily to fill our internal orders, rather than customer or consumer orders, resulting in higher finished goods inventory on hand as a percentage of sales. Because the size of our backlog at a given time may not be indicative of our future sales, we do not rely entirely on backlogs to predict future sales.

Our Upholstery segment backlogs as of April 29, 2017, and April 30, 2016, were approximately $45.1 million and $50.8 million, respectively, and our Casegoods segment backlogs were approximately $6.9 million and $7.6 million, respectively. Our Upholstery segment backlog for fiscal 2017 declined compared with the prior year due to supply chain efficiencies that have improved our shipping performance, and our Casegoods segment backlog for fiscal 2017 was lower than the prior year due to being in a better in-stock position at April 29, 2017.

Competitive Conditions

We are the second largest manufacturer/distributor of residential (living and family room, bedroom, and dining room) furniture in the United States, as measured by annual sales volume.

Alternative distribution channels have increasingly affected our retail markets. Furniture companies that operate primarily online, such as JoyBird and Article, or that have developed a product that can be shipped more easily than traditional upholstered furniture, have increased competition for our products. The increased ability of consumers to purchase furniture through various furniture manufacturers' and retailers' internet websites, including companies such as Amazon, QVC, and Wayfair, which operate with lower overhead costs than a brick-and-mortar retailer, has also increased competition in the industry. Companies such as Costco, Home Depot, IKEA, Sam's Club, Target, Wal-Mart, and others, also offer products that compete with some of our product lines.

The home furnishings industry competes primarily on the basis of product styling and quality, customer service (product availability and delivery), price, and location. We compete primarily by emphasizing our brand and the value, comfort, quality, and styling of our products. In addition, we remain committed to innovation while striving to provide outstanding customer service, exceptional dealer support, and efficient on-time delivery. Maintaining, updating, and expanding our proprietary distribution system, including identifying desirable retail locations, is a key strategic initiative for us in striving to remain competitive. We compete in the mid-to-upper-mid price point, and a shift in consumer taste and trends to lower priced products could negatively affect our competitive position.

In the Upholstery segment, our largest competitors are Ashley, Bassett, Bernhardt, Best Chair, Ethan Allen, Flexsteel, Heritage Home Group, Klaussner, Man Wah, and Natuzzi.

In the Casegoods segment, our main competitors are Bassett, Bernhardt, Ethan Allen, Heritage Home Group, Hooker Furniture, Lacquer Craft, and Stanley Furniture. The Casegoods segment faces additional market pressures from foreign manufacturers entering the United States market and increased direct purchases from foreign suppliers by large United States retailers.

The La-Z-Boy Furniture Galleries® stores operate in the retail furniture industry throughout North America, and different stores have different competitors based on their geographic locations. Competitors include: Arhaus, Ashley, Bassett Furniture Direct, Crate and Barrel, Ethan Allen, Restoration Hardware, Thomasville Home Furnishings Stores, Williams-Sonoma, several other regional competitors (for example Art Van Furniture, Raymour & Flanigan Furniture, and Slumberland Furniture), and family-owned independent furniture stores.

In addition to the larger competitors listed above, a substantial number of small and medium-sized companies operate within our business segments, all of which are highly competitive.

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Research and Development Activities

We remain committed to innovation, with construction currently underway on our new state-of-the-art Innovation Center located in Dayton, Tennessee. This new facility will replace our existing structure and house a model shop, technology center, test lab, and three-dimensional printing lab. This new Innovation Center will help us continue to develop new products to meet our customers' needs.

We provide additional information regarding our research and development activities in Note 1 to our consolidated financial statements, which are included in Item 8 of this report.

Trademarks, Licenses and Patents

We own several trademarks, including the La-Z-Boy trademark, which is essential to the Upholstery and Retail segments of our business. To protect our trademarks, we have registered them in the United States and various other countries where our products are sold. These trademarks have a perpetual life, subject to renewal. We license the use of the La-Z-Boy trademark to our major international partners and dealers outside of North America. We also license the use of the La-Z-Boy trademark on contract office furniture, outdoor furniture, and non-furniture products, and these arrangements enhance our brand awareness, broaden the perceptions of La-Z-Boy, and create visibility of the La-Z-Boy brand in channels outside of the residential furniture industry. In addition, we license to our branded dealers the right to use our La-Z-Boy trademark in connection with the sale of our products and related services, on their signs, and in other ways, which we consider to be a key part of our marketing strategies. We provide more information about those dealers, under "Customers."

We hold a number of patents that we actively enforce, but we believe that the loss of any single patent or group of patents would not significantly affect our business.

Compliance with Environmental Regulations

Our manufacturing operations involve the use and disposal of certain substances regulated under environmental protection laws, and we are involved in a small number of remediation actions and site investigations concerning these substances. Based on a review of all currently known facts and our experience with previous environmental matters, we currently do not believe it is probable that we will have any additional loss for environmental matters that would be material to our consolidated financial statements.

Employees

We employed approximately 8,950 full-time equivalent employees as of April 29, 2017, compared with 8,700 employees at the end of fiscal 2016. We employed approximately 7,200 in our Upholstery segment, 200 in our Casegoods segment, 1,300 in our Retail segment, and the remaining employees as corporate personnel. Our employment growth during fiscal 2017 was primarily attributable to the new and acquired La-Z-Boy Furniture Galleries® stores in our Retail segment. We employ the majority of our employees on a full-time basis except in our Retail segment, where many of our employees are part-time.

Financial Information about Foreign and Domestic Operations and Export Sales

In fiscal 2017, our direct export sales, including sales in Canada, were approximately 11% of our total sales. In the third quarter of fiscal 2017, we acquired the La-Z-Boy wholesale business in the United Kingdom and Ireland. Prior to this acquisition, we were capturing approximately half the sales volume from this operation with the licensing agreement that was in place, and we are now in a position to realize the full value of this business. We are part of a manufacturing joint venture in Thailand which distributes furniture in Australia, New Zealand, Thailand and other countries in Asia. We also

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participate in a sales and marketing joint venture in Asia, which sells and distributes furniture in Korea, Taiwan, Japan, India, Malaysia, and other Asian countries. In addition, our global trading company in Hong Kong continues to enhance our ability to source products and materials from our Asian suppliers, and provides quality assurance and logistics expertise.

We operate a facility in Mexico which produces cut-and-sewn fabric sets for our domestic upholstery manufacturing facilities. We provide information on sales in the United States, Canada, and other countries in Note 16 to our consolidated financial statements, which are included in Item 8 of this report. Our net property, plant, and equipment value in the United States was $161.6 million and $164.2 million at the end of fiscal 2017 and fiscal 2016, respectively. Our net property, plant, and equipment value in foreign countries was $7.5 million and $7.4 million in fiscal 2017 and fiscal 2016, respectively.

See Item 1A of this report for information about the risks related to our foreign operations.

Internet Availability

Our Forms 10-K, 10-Q, 8-K, proxy statements on Schedule 14A, and amendments to those reports are available free of charge through links on our internet website, www.la-z-boy.com, as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission (SEC). Copies of any materials we file with the SEC can also be obtained free of charge through the SEC's website at www.sec.gov. The information on our website is not part of this report.

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ITEM 1A.    RISK FACTORS.

Our business is subject to a variety of risks. Interest rates, consumer confidence, housing starts and the overall housing market, increased unemployment, tightening of the financial and consumer credit markets, downturns in the economy, and other general economic factors that affect many other businesses are particularly significant to us because our principal products are consumer goods.

The risks and uncertainties described below are those that we currently believe may significantly affect our business. Additional risks and uncertainties of which we are unaware or that we do not currently deem significant may also become important factors that affect us at a later date. You should carefully consider the risks and uncertainties described below, together with the other information provided in this document and our subsequent filings with the Securities and Exchange Commission. Any of the following risks could significantly and adversely affect our business, results of operations, and financial condition.

Fluctuations in the price, availability and quality of raw materials could cause delays that could result in our inability to provide goods to our customers or could increase our costs, either of which could decrease our earnings.

In manufacturing furniture, we use various types of wood, fabrics, leathers, upholstered filling material, steel, and other raw materials. Because we are dependent on outside suppliers for our raw materials, fluctuations in their price, availability, and quality could have a negative effect on our cost of sales and our ability to meet our customers' demands. Competitive and marketing pressures may prevent us from passing along price increases to our customers, and the inability to meet our customers' demands could cause us to lose sales. We have a higher concentration (about 65%) in upholstery sales, including motion furniture, than many of our competitors, and the effects of steel, polyurethane foam, wood, electrical components for power units, leather and fabric price increases or quantity shortages could be significant to our business.

About 50% of our polyurethane foam comes from one supplier. This supplier has several facilities across the United States, but severe weather or natural disasters could result in delays in shipments of polyurethane foam to our plants.

A change in the financial condition of some of our domestic and foreign fabric suppliers could impede their ability to provide products to us in a timely manner. Upholstered furniture is fashion oriented, and if we were unable to acquire sufficient fabric variety, or to predict or respond to changes in fashion trends, we might lose sales and have to sell excess inventory at reduced prices. Doing so would have a negative effect on our sales and earnings.

Changes in United States trade policy, availability and cost of foreign sourcing, and economic uncertainty in countries outside of the United States in which we operate or from which we purchase product, could adversely affect our business and results of operations.

We have operations in countries outside the United States, some of which are located in emerging markets. Long-term economic and political uncertainty in some of the countries in which we operate, such as Mexico and Thailand, could result in the disruption of markets and negatively affect our business. Our Casegoods segment imports products manufactured by foreign sources, mainly in China and Vietnam, and our Upholstery segment purchases cut-and-sewn fabric and leather sets, electronic component parts, and some finished goods from Chinese and other foreign vendors. Our cut-and-sewn leather kits are primarily purchased from two suppliers that operate in China, and the majority of our fabric products are purchased from two other suppliers that also operate in China. Our sourcing partners may not be able to produce goods in a timely fashion or the quality of their product may lead us to reject it, causing disruptions in our domestic operations and delays in our shipments to our customers.

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There are other risks that are inherent in our operations, including the potential for changes in socio-economic conditions, changes in laws and regulations, including import, export, labor and environmental laws, port strikes, tariffs, duties and trade barriers, monetary and fiscal policies, investments, taxation, and exchange controls. Additionally, unsettled political conditions, possible terrorist attacks, organized crime, and public health concerns present a risk to our operations. All of these items could make servicing our customers more difficult or cause disruptions in our plants that could reduce our sales, earnings, or both in the future.

Changes in the political environment in the United States may also have a material adverse effect on our business in the future or require us to modify our current business practices. Because we manufacture components in Mexico and purchase components and finished goods manufactured in foreign countries including China, we are subject to risks relating to increased tariffs on U.S. imports, changes in the North American Free Trade Agreement, and other changes affecting imports. Our business in the United Kingdom could be affected by the United Kingdom's exit from the European Union, and our sales and margins there and in other foreign countries could be adversely affected by the imposition in foreign countries of import bans, quotas, and increases in tariffs.

Inability to maintain and enhance our brand and respond to changes in our current and potential consumers' tastes and trends in a timely manner could adversely affect our business and operating results.

The success of our business depends on our ability to maintain and enhance our brands to increase our business by retaining consumers and attracting new ones. Furniture product is fashion oriented so changes in consumers' tastes and trends and the resultant change in our product mix, as well as failure to offer our consumers multiple avenues for purchasing our products, could adversely affect our business and operating results. We attempt to minimize these risks by maintaining strong advertising and marketing campaigns promoting our brands. We also attempt to minimize our risk by updating our current product designs, styles, quality, prices, and options to purchase our products in-store or online. If these efforts were unsuccessful or required us to incur substantial costs, our business, operating results and financial or competitive condition could be adversely affected.

Loss of market share and other financial or operational difficulties due to competition would likely result in a decrease in our sales, earnings, and liquidity.

The residential furniture industry is highly competitive and fragmented. We compete with many other manufacturers and retailers, including online retailers, some of which offer widely advertised products, and others of which are large retail furniture dealers offering their own store-branded products. Competition in the residential furniture industry is based on quality, style of products, perceived value, price, service to the customer, promotional activities, and advertising. The highly competitive nature of the industry means we are constantly subject to the risk of losing market share, which would likely decrease our future sales, earnings, and liquidity. In addition, due to the large number of competitors and their wide range of product offerings, we may not be able to differentiate our products (through styling, finish, and other construction techniques) from those of our competitors. Additionally, a majority of our sales are to distribution channels that rely on physical stores to merchandise and sell our products and a significant shift in consumer preference to purchase product online could have a materially adverse impact on our sales and operating margin. These and other competitive pressures could result in a decrease in our sales, earnings, and liquidity.

Our current retail markets and other markets that we enter in the future may not achieve the growth and profitability we anticipate. We could incur charges for the impairment of long-lived assets, goodwill, or other intangible assets if we fail to meet our earnings expectations for these markets.

From time to time we acquire retail locations and related assets, remodel and relocate existing stores, experiment with new store formats, and close underperforming stores. Our assets include goodwill and

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other indefinite-lived intangible assets acquired in connection with these acquisitions. Profitability of acquired, remodeled, relocated, and new format stores will depend on lease rates (for stores we lease) and retail sales and profitability justifying the costs of acquisition, remodeling, and relocation. If we do not meet our sales or earnings expectations for these stores, we may incur charges for the impairment of long-lived assets, the impairment of goodwill, or the impairment of other indefinite-lived intangible assets.

We recently acquired the La-Z-Boy wholesale business in the United Kingdom and Ireland. Our assets include goodwill and other intangible assets, including acquired customer relationships, in connection with this acquisition. If we do not meet our sales or earnings expectations for this operation, we may incur charges for the impairment of long-lived assets, the impairment of goodwill, or the impairment of other intangible assets.

Changes in regulation of our international operations could adversely affect our business and results of operations.

Because we have operations outside of the United States and sell product in various countries, we are subject to many laws governing international relations, including the UK Bribery Act 2010, the U.S. Foreign Corrupt Practices Act and the U.S. Export Administration Act. These laws include prohibitions on improper payments to government officials, restrictions on where we can do business, what products we can supply to certain countries, and what information we can provide to certain governments. We are also subject to laws and regulations on the collection and use of electronic data, including the General Data Protection Regulation that will become effective in May 2018 in the European Union and will subject violators that operate in the European Union to penalties of up to 4% of their global revenue. Violations of these laws, which are complex, may result in criminal penalties or sanctions that could have a significant adverse effect on our business and results of operations. Although we have implemented policies and procedures designed to ensure compliance with these laws, there can be no assurance that our employees, contractors, or agents will not violate our policies.

We rely extensively on computer systems to process transactions, summarize results, and manage our business and that of certain independent dealers. Disruptions in both our primary and back-up systems could adversely affect our business and operating results.

Our primary and back-up computer systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, phishing attempts, security breaches, natural disasters, and errors by employees. Though losses arising from some of these issues would be covered by insurance, interruptions of our critical business computer systems or failure of our back-up systems could reduce our sales or result in longer production times. If our critical business computer systems or back-up systems were damaged or ceased to function properly, we might have to make a significant investment to repair or replace them.

We have been implementing an enterprise resource planning (ERP) system in our largest operating unit over the last several years. We expect to finish implementing the sales order management component of the system by the end of fiscal 2018. ERP implementations are complex and time-consuming projects that involve substantial expenditures on system software and implementation activities. ERP implementations also require transformation of business and financial processes in order to reap the benefits of the ERP system; any such transformation involves risks inherent in the conversion to a new computer system, including loss of information and potential disruption to our normal operations. Our business and results of operations may be adversely affected if we experience operating problems or cost overruns during the ERP implementation process, or if the ERP system and the associated process changes do not give rise to the benefits that we expect. Additionally, if we do not effectively implement the ERP system as planned, or the system does not operate as intended, the effectiveness of our internal control over financial reporting could be adversely affected or our ability

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to assess those controls adequately could be delayed. Significant delays in documenting, reviewing and testing our internal control could cause us to fail to comply with our SEC reporting obligations related to our management's assessment of our internal control over financial reporting.

We may be subject to product liability claims or undertake to recall one or more products, with a negative impact on our financial results and reputation.

Millions of our products, sold over many years, are currently used by consumers. We may be named as a defendant in lawsuits instituted by persons allegedly injured while using one of our products. We have insurance that we believe is adequate to cover such claims, but we are self-insured for the first $1.5 million in liability and for all defense costs. Furthermore, such claims could damage our brands and reputation and negatively affect our operating results. We have voluntarily recalled products in the past, and while none of those recalls has resulted in a material expense or other significant adverse effect, it is possible that recalls could result in future additional expense, penalties, and injury to our brands and reputation, and negatively impact our operating results.

Our business and our reputation could be adversely affected by the failure to protect sensitive employee, customer and consumer data, or to comply with evolving regulations relating to our obligation to protect such data.

Cyber attacks designed to gain access to sensitive information by breaching security systems of large organizations leading to unauthorized release of confidential information have occurred recently at a number of major U.S. companies despite widespread recognition of the cyber attack threat and improved data protection methods. During fiscal 2017, we were subject, and will likely continue to be subject, to attempts to breach the security of our networks and IT infrastructure through cyber attack, malware, computer viruses, and other means of unauthorized access. To the best of our knowledge, attempts to breach our systems have not been successful to date. A breach of our systems that resulted in the unauthorized release of sensitive data could adversely affect our reputation and lead to financial losses from remedial actions or potential liability, possibly including punitive damages. An electronic security breach resulting in the unauthorized release of sensitive data from our information systems could also materially increase the costs we already incur to protect against these risks. We continue to balance the additional risk with the cost to protect us against a breach. Additionally, losses arising from a breach would be covered in part by insurance that we carry.

Changes in the inputs used to calculate our acquisition related contingent consideration liabilities could have a material adverse impact on our financial results.

Our recent acquisitions included contingent consideration liabilities relating to payments based on the future performance of the operations acquired. Under generally accepted accounting principles we are required to estimate the fair value of any contingent consideration. Our estimates of fair value are based upon assumptions believed to be reasonable but which are uncertain and involve significant judgments by management. Changes in business conditions or other events could materially change the projection of future cash flows or the discount rate used in the fair value calculation of the contingent consideration. We reassess the fair value quarterly, and increases or decreases based on the actual or expected future performance of the acquired operations will be recorded in our results of operations. These quarterly adjustments could have a material effect on our results of operations.

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ITEM 1B.    UNRESOLVED STAFF COMMENTS.

None.

ITEM 2.    PROPERTIES.

We owned or leased approximately 11.1 million square feet of active manufacturing, warehousing and distribution centers, office, showroom, and retail facilities, and had approximately 0.3 million square feet of idle facilities, at the end of fiscal 2017. Of the 11.1 million square feet occupied at the end of fiscal 2017, our Upholstery segment occupied approximately 6.7 million square feet, our Casegoods segment occupied approximately 1.4 million square feet, our Retail segment occupied approximately 2.8 million square feet, and our Corporate and other operations occupied the balance.

Our active facilities and retail locations are located in Arkansas, California, Colorado, Connecticut, Delaware, Florida, Illinois, Indiana, Kansas, Kentucky, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nevada, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Virginia, Washington D.C., Wisconsin, Coahuila (Mexico), Bangkok (Thailand), Alberta and Manitoba (Canada), Dongguan (China), Hong Kong, and Berks (United Kingdom). All of our plants and stores are well maintained and insured. We do not expect any major land or building additions will be needed to increase capacity in the foreseeable future for our manufacturing operations. We own all of our domestic plants, and our joint venture owns our Thailand plant. We lease the majority of our retail stores and regional distribution centers, as well as our manufacturing facility in Mexico and our office spaces in China, Hong Kong and the United Kingdom. For information on terms of operating leases for our properties, see Note 10 to our consolidated financial statements, which are included in Item 8 of this report.

ITEM 3.    LEGAL PROCEEDINGS.

We are involved in various legal proceedings arising in the ordinary course of our business. Based on a review of all currently known facts and our experience with previous legal 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 that would be material to our consolidated financial statements.

ITEM 4.    MINE SAFETY DISCLOSURES.

Not applicable.

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EXECUTIVE OFFICERS OF THE REGISTRANT

Listed below are the names, ages and current positions of our executive officers and, if they have not held those positions for at least five years, their former positions during that period. All executive officers serve at the pleasure of the board of directors.

Kurt L. Darrow, age 62

Chairman, President and Chief Executive Officer since August 2011

Louis M. Riccio Jr., age 54

Senior Vice President and Chief Financial Officer since July 2006

J. Douglas Collier, age 50

Senior Vice President, Chief Commercial Officer and President, International since May 2017

Senior Vice President, Chief Marketing Officer, and President, International from August 2014 through May 2017

Chief Marketing Officer and President, International from August 2011 through August 2014

Darrell D. Edwards, age 53

Senior Vice President and Chief Supply Chain Officer since August 2014

Senior Vice President of Operations, Residential Division from May 2012 through August 2014

Otis S. Sawyer, age 59

Senior Vice President and President, La-Z-Boy Portfolio Brands since February 2017

Senior Vice President and President, England, Inc. from February 2008 through February 2017

President of La-Z-Boy Casegoods from November 2015 through February 2017

President of Non-Branded Upholstery from February 2008 through August 2014

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PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Dividend and Market Information

The New York Stock Exchange is the principal market on which our common stock is traded. The tables below show the high and low sale prices of our common stock on the New York Stock Exchange during each quarter of our last two fiscal years.

 
   
  Market Price  
 
  Dividends
Paid
Per Share
 
Fiscal 2017 Quarter Ended   High   Low   Close  

July 30

  $ 0.10   $ 30.27   $ 24.31   $ 30.22  

October 29

  $ 0.10   $ 31.22   $ 22.09   $ 23.25  

January 28

  $ 0.11   $ 32.90   $ 22.50   $ 28.80  

April 29

  $ 0.11   $ 29.95   $ 25.85   $ 27.90  

  $ 0.42                    

 

 
   
  Market Price  
 
  Dividends
Paid
Per Share
 
Fiscal 2016 Quarter Ended   High   Low   Close  

July 25

  $ 0.08   $ 27.68   $ 24.96   $ 24.98  

October 24

  $ 0.08   $ 29.34   $ 24.16   $ 28.50  

January 23

  $ 0.10   $ 29.23   $ 20.30   $ 21.35  

April 30

  $ 0.10   $ 27.32   $ 19.56   $ 25.87  

  $ 0.36                    

Our credit agreement allows us to pay dividends or purchase shares as long as we are not in default and our excess availability, as defined in the agreement, is above 17.5% of the revolving credit commitment. If excess availability falls between 12.5% and 17.5%, then to continue paying dividends or purchasing shares, we must maintain a fixed charge coverage ratio of at least 1.10 to 1.00 on a pro-forma basis and not be in default. Currently we are not prohibited from paying dividends or purchasing shares. Refer to Note 9 of the consolidated financial statements in Item 8 for further discussion of our credit agreement. The payment of future cash dividends is within the discretion of our board of directors and will depend on our earnings, capital requirements and operating and financial condition, as well as excess availability under the credit agreement, among other factors.

Shareholders

We had approximately 14,000 shareholders of record at June 13, 2017.

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Equity Plans

The table below provides information concerning our compensation plans under which common shares may be issued.

Equity Compensation Plan Information as of April 29, 2017

Plan category   Number of
securities to be
issued upon
exercise of
outstanding
options
(i)
  Weighted-
average exercise
price of
outstanding
options
(ii)
  Number of
securities
remaining
available for
future issuance
under equity
compensation
plans (excluding
securities
reflected in
column (i))
(iii)
 

Equity compensation plans approved by shareholders

    1,509,060 (1) $ 22.70     3,113,095 (2)

Note 1:  These options were issued under our 2010 Omnibus Incentive Plan.

Note 2:  This amount is the aggregate number of shares available for future issuance under our 2010 Omnibus Incentive Plan. The omnibus incentive plan provides for awards of stock options, restricted stock, and performance awards (awards of our common stock based on achievement of pre-set goals over a performance period) to selected key employees and non-employee directors. We have performance awards outstanding under the plan that would reduce the number of shares remaining available for future issuance under the plan by 937,825 shares, assuming the maximum performance targets were achieved.

Performance Graph

The graph below shows the cumulative total return for our last five fiscal years that would have been realized (assuming reinvestment of dividends) by an investor who invested $100 on April 28, 2012, in our common shares, in the S&P 500 Composite Index, and in the Dow Jones U.S. Furnishings Index.

GRAPHIC

Company/Index/Market   2012   2013   2014   2015   2016   2017  

La-Z-Boy Incorporated

  $ 100   $ 115.90   $ 162.19   $ 183.69   $ 175.25   $ 191.90  

S&P 500 Composite Index

  $ 100   $ 115.32   $ 138.69   $ 160.85   $ 160.35   $ 189.08  

Dow Jones U.S. Furnishings Index

  $ 100   $ 91.95   $ 101.51   $ 134.47   $ 142.28   $ 159.43  

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Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Our board of directors has authorized the purchase of company stock. As of April 29, 2017, 2.7 million shares remained available for purchase pursuant to this authorization. In June of 2017, the board of directors authorized an additional six million shares that will be added to this authorization. We spent $36.0 million in fiscal 2017 to purchase 1.4 million shares. During the fourth quarter of fiscal 2017, pursuant to the existing board authorization, we adopted a plan to purchase company stock pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934. The plan was effective February 16, 2017. Under this plan, our broker has the authority to purchase company shares on our behalf, subject to SEC regulations and the price, market volume and timing constraints specified in the plan. The plan expires at the close of business on June 22, 2017. With the cash flows we anticipate generating in fiscal 2018, we expect to continue being opportunistic in purchasing company stock.

The following table summarizes our purchases of company stock during the fourth quarter of fiscal 2017:

(Shares in thousands)   Total
number of
shares
purchased(1)
  Average
price paid
per share
  Total number
of shares
purchased
as part of
publicly
announced
plan(2)
  Maximum
number
of shares
that may yet
be purchased
under the
plan
 

Fiscal February (January 29 - March 4, 2017)

    105   $ 28.18     104     2,972  

Fiscal March (March 5 - April 1, 2017)

    174   $ 27.23     174     2,798  

Fiscal April (April 2 - April 29, 2017)

    119   $ 27.22     118     2,680  

Fiscal Fourth Quarter of 2017

    398   $ 27.47     396     2,680  
(1)
In addition to the 396,277 shares purchased during the quarter as part of our publicly announced director authorization described above, this column includes 2,003 shares purchased from employees to satisfy their withholding tax obligations upon vesting of restricted shares and performance based shares.

(2)
On October 28, 1987, our board of directors announced the authorization of the plan to repurchase company stock. The plan originally authorized 1.0 million shares, and since October 1987, 27.0 million shares were added to the plan for repurchase. The authorization has no expiration date.

Recent Sales of Unregistered Securities

There were no sales of unregistered securities during fiscal year 2017.

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ITEM 6.    SELECTED FINANCIAL DATA.

The following table presents our selected financial data. The table should be read in conjunction with Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. This information is derived from our audited financial statements and should be read in conjunction with those statements, including the related notes.


Consolidated Five-Year Summary of Financial Data

(Amounts in thousands)
Fiscal Year Ended
  (52 weeks)
4/29/2017
  (53 weeks)
4/30/2016
  (52 weeks)
4/25/2015
  (52 weeks)
4/26/2014
  (52 weeks)
4/27/2013
 

Sales

  $ 1,520,060   $ 1,525,398   $ 1,425,395   $ 1,357,318   $ 1,273,877  

Cost of sales

    913,518     943,362     920,903     892,864     857,022  

Gross profit

    606,542     582,036     504,492     464,454     416,855  

Selling, general and administrative expense

    475,961     459,647     401,327     375,158     349,252  

Operating income

    130,581     122,389     103,165     89,296     67,603  

Interest expense

    1,073     486     523     548     746  

Interest income

    981     827     1,030     761     620  

Income from Continued Dumping and Subsidy Offset Act, net

    273     102     1,212          

Other income (expense), net

    (22 )   2,211     744     2,050     3,208  

Income from continuing operations before income taxes

    130,740     125,043     105,628     91,559     70,685  

Income tax expense

    43,756     44,080     36,954     31,383     23,520  

Income from continuing operations

    86,984     80,963     68,674     60,176     47,165  

Income (loss) from discontinued operations, net of tax

            3,297     (3,796 )   17  

Net income

    86,984     80,963     71,971     56,380     47,182  

Net income attributable to noncontrolling interests

    (1,062 )   (1,711 )   (1,198 )   (1,324 )   (793 )

Net income attributable to La-Z-Boy Incorporated          

  $ 85,922   $ 79,252   $ 70,773   $ 55,056   $ 46,389  

Net income attributable to La-Z-Boy Incorporated:

                               

Income from continuing operations attributable to La-Z-Boy Incorporated

  $ 85,922   $ 79,252   $ 67,476   $ 58,852   $ 46,372  

Income (loss) from discontinued operations

            3,297     (3,796 )   17  

Net income attributable to La-Z-Boy Incorporated          

  $ 85,922   $ 79,252   $ 70,773   $ 55,056   $ 46,389  

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Consolidated Five-Year Summary of Financial Data (Continued)

(Amounts in thousands, except per share data)
Fiscal Year Ended
  (52 weeks)
4/29/2017
  (53 weeks)
4/30/2016
  (52 weeks)
4/25/2015
  (52 weeks)
4/26/2014
  (52 weeks)
4/27/2013
 

Basic weighted average shares

    48,963     50,194     51,767     52,386     52,351  

Basic net income attributable to La-Z-Boy Incorporated per share:

                               

Income from continuing operations attributable to La-Z-Boy Incorporated

  $ 1.75   $ 1.57   $ 1.30   $ 1.11   $ 0.87  

Income (loss) from discontinued operations

            0.06     (0.07 )    

Basic net income attributable to La-Z-Boy Incorporated per share

  $ 1.75   $ 1.57   $ 1.36   $ 1.04   $ 0.87  

Diluted weighted average shares

    49,470     50,765     52,346     53,829     53,685  

Diluted net income attributable to La-Z-Boy Incorporated per share:

                               

Income from continuing operations attributable to La-Z-Boy Incorporated

  $ 1.73   $ 1.55   $ 1.28   $ 1.09   $ 0.85  

Income (loss) from discontinued operations

            0.06     (0.07 )    

Diluted net income attributable to La-Z-Boy Incorporated per share

  $ 1.73   $ 1.55   $ 1.34   $ 1.02   $ 0.85  

Dividends declared per share

  $ 0.42   $ 0.36   $ 0.28   $ 0.20   $ 0.08  

Book value of year-end shares outstanding(1)

  $ 12.17   $ 11.09   $ 10.33   $ 10.04   $ 9.25  

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Consolidated Five-Year Summary of Financial Data (Continued)

(Dollar amounts in thousands)
Fiscal Year Ended
  (52 weeks)
4/29/2017
  (53 weeks)
4/30/2016
  (52 weeks)
4/25/2015
  (52 weeks)
4/26/2014
  (52 weeks)
4/27/2013
 

Return on average total equity(2)

    15.0 %   14.9 %   12.9 %   11.8 %   10.0 %

Gross profit as a percent of sales

    39.9 %   38.2 %   35.4 %   34.2 %   32.7 %

Operating income as a percent of sales

    8.6 %   8.0 %   7.2 %   6.6 %   5.3 %

Effective tax rate(3)

    33.5 %   35.3 %   35.0 %   34.3 %   33.3 %

Return on sales(3)

    5.7 %   5.3 %   4.8 %   4.4 %   3.7 %

Depreciation and amortization

  $ 29,132   $ 26,517   $ 22,283   $ 23,182   $ 23,140  

Capital expenditures

  $ 20,304   $ 24,684   $ 70,319   $ 33,730   $ 25,912  

Property, plant and equipment, net

  $ 169,132   $ 171,590   $ 174,036   $ 127,535   $ 118,060  

Working capital

  $ 318,746   $ 324,545   $ 321,560   $ 355,291   $ 350,717  

Current ratio(4)

    2.6 to 1     3.1 to 1     3.1 to 1     3.1 to 1     3.3 to 1  

Total assets

  $ 888,855   $ 800,029   $ 774,604   $ 771,295   $ 720,371  

Long-term debt, excluding current portion

  $ 296   $ 513   $ 433   $ 277   $ 7,576  

Total debt

  $ 515   $ 803   $ 830   $ 7,774   $ 8,089  

Total equity

  $ 601,105   $ 557,212   $ 533,100   $ 529,718   $ 491,968  

Debt to equity ratio(5)

    0.1 %   0.1 %   0.2 %   1.5 %   1.6 %

Debt to capitalization ratio(6)

    0.1 %   0.1 %   0.2 %   1.4 %   1.6 %
(1)
Equal to total La-Z-Boy Incorporated shareholders' equity divided by the number of outstanding shares on the last day of the fiscal year

(2)
Equal to income from continuing operations divided by average two year equity

(3)
Based on income from continuing operations

(4)
Equal to total current assets divided by total current liabilities

(5)
Equal to total debt divided by total equity

(6)
Equal to total debt divided by total debt plus total equity

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Unaudited Quarterly Financial Information Fiscal 2017

(Amounts in thousands, except per share data)
Fiscal Quarter Ended
  (13 weeks)
7/30/2016
  (13 weeks)
10/29/2016
  (13 weeks)
1/28/2017
  (13 weeks)
4/29/2017
 

Sales

  $ 340,783   $ 376,579   $ 389,992   $ 412,706  

Cost of sales

    207,252     227,885     233,875     244,506  

Gross profit

    133,531     148,694     156,117     168,200  

Selling, general and administrative expense

    111,763     115,526     123,235     125,437  

Operating income

    21,768     33,168     32,882     42,763  

Interest expense

    115     117     562     279  

Interest income

    204     234     241     302  

Income from Continued Dumping and Subsidy Offset Act, net

            273      

Other income (expense), net

    (72 )   (279 )   638     (309 )

Income before income taxes

    21,785     33,006     33,472     42,477  

Income tax expense

    7,777     11,901     9,830     14,248  

Net income

    14,008     21,105     23,642     28,229  

Net income attributable to noncontrolling interests

    (202 )   (272 )   (356 )   (232 )

Net income attributable to La-Z-Boy Incorporated

  $ 13,806   $ 20,833   $ 23,286   $ 27,997  

Diluted weighted average common shares

    49,594     49,511     49,384     49,181  

Diluted net income attributable to La-Z-Boy Incorporated per share

  $ 0.28   $ 0.42   $ 0.47   $ 0.57  

Dividends declared per share

  $ 0.10   $ 0.10   $ 0.11   $ 0.11  

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Unaudited Quarterly Financial Information Fiscal 2016

(Amounts in thousands, except per share data)
Fiscal Quarter Ended
  (13 weeks)
7/25/2015
  (13 weeks)
10/24/2015
  (13 weeks)
1/23/2016
  (14 weeks)
4/30/2016
 

Sales

  $ 341,423   $ 382,891   $ 384,014   $ 417,070  

Cost of sales

    217,191     237,085     236,024     253,062  

Gross profit

    124,232     145,806     147,990     164,008  

Selling, general and administrative expense

    104,266     112,412     113,206     129,763  

Operating income

    19,966     33,394     34,784     34,245  

Interest expense

    112     133     120     121  

Interest income

    205     164     204     254  

Income from Continued Dumping and Subsidy Offset Act, net

            102      

Other income (expense), net

    1,968     512     (93 )   (176 )

Income before income taxes

    22,027     33,937     34,877     34,202  

Income tax expense

    7,904     12,278     12,643     11,255  

Net income

    14,123     21,659     22,234     22,947  

Net income attributable to noncontrolling interests

    (447 )   (707 )   (328 )   (229 )

Net income attributable to La-Z-Boy Incorporated

  $ 13,676   $ 20,952   $ 21,906   $ 22,718  

Diluted weighted average common shares

    51,043     51,039     50,539     50,262  

Diluted net income attributable to La-Z-Boy Incorporated per share

  $ 0.27   $ 0.41   $ 0.43   $ 0.45  

Dividends declared per share

  $ 0.08   $ 0.08   $ 0.10   $ 0.10  

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ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

We have prepared this Management's Discussion and Analysis as an aid to understanding our financial results. It should be read in conjunction with the accompanying Consolidated Financial Statements and related Notes to Consolidated Financial Statements. We begin with an introduction to our key businesses and then provide discussions of our results of operations, liquidity and capital resources, and critical accounting policies. It is important to note that our fiscal year 2017 and fiscal year 2015 included 52 weeks, whereas fiscal year 2016 included 53 weeks. The additional week in fiscal year 2016 was included in our fourth quarter.

This Management's Discussion and Analysis reflects results for only our continuing operations, unless otherwise noted. During fiscal 2014, we marketed for sale our youth furniture business, Lea Industries, a division of La-Z-Boy Casegoods, Inc. (formerly known as La-Z-Boy Greensboro, Inc.). We were unable to find a buyer for the Lea Industries business, and consequently we ceased its operations and liquidated all of its assets, consisting mostly of inventory, during fiscal 2015. In the accompanying financial statements, we reported the operating results of Lea Industries as discontinued operations for all periods presented. For the fiscal year ended April 25, 2015, we recorded a pre-tax loss of $6.0 million ($3.8 million after tax) in discontinued operations related to Lea Industries. We previously reported the results of Lea Industries as a component of our Casegoods segment.

In fiscal 2015, we also recorded $4.2 million of pre-tax income ($2.7 million after tax) in discontinued operations related to the Continued Dumping and Subsidy Offset Act of 2000 ("CDSOA"). Before the CDSOA was revised in 2007, it provided that duties collected on wooden bedroom furniture imported from China were to be distributed to domestic producers that supported the antidumping petition that resulted in the duties. Of the $4.2 million pre-tax income we received, $3.8 million related to our previously owned subsidiary, American Furniture Company, Incorporated. We sold this subsidiary in fiscal 2007 and reported it as discontinued operations at that time. When we sold the assets of American Furniture Company, Incorporated our contract provided that we would receive a portion of any such duties to which that entity was entitled. The remainder of the CDSOA pre-tax income reported in discontinued operations related to Lea Industries.

Introduction

Our Business

We manufacture, market, import, export, distribute, and retail upholstery furniture products. In addition, we import, distribute, and retail accessories and casegoods (wood) furniture products. We are the leading global producer of reclining chairs and the second-largest manufacturer/distributor of residential furniture in the United States. The La-Z-Boy Furniture Galleries® stores retail network is the third-largest retailer of single-branded furniture in the United States. We have seven major North American manufacturing locations and six regional distribution centers in the United States to support our speed-to-market and customization strategy.

We sell our products, primarily in the United States and Canada, to furniture retailers and directly to consumers through stores that we own and operate. The centerpiece of our retail distribution strategy is our network of 347 La-Z-Boy Furniture Galleries® stores and 557 Comfort Studio® locations, each dedicated to marketing our La-Z-Boy branded products. We consider this dedicated space to be "branded outlets" or "proprietary." We own 143 of the La-Z-Boy Furniture Galleries® stores. The remainder of the La-Z-Boy Furniture Galleries® stores, as well as all 557 Comfort Studio® locations, are independently owned and operated. La-Z-Boy Furniture Galleries® stores help consumers furnish their homes by combining the style, comfort, and quality of La-Z-Boy furniture with our available design services. La-Z-Boy Comfort Studio® locations are defined spaces within larger independent retailers that are dedicated to displaying and selling La-Z-Boy branded products. Our other brands,

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which include England, Kincaid, American Drew, and Hammary, enjoy distribution through many of the same outlets, with approximately half of Hammary's sales originating through the La-Z-Boy Furniture Galleries® store network. Kincaid and England have their own dedicated proprietary in-store programs with 527 outlets and over 1.7 million square feet of proprietary floor space. In total, our proprietary floor space includes approximately 9.7 million square feet.

During fiscal 2017, we acquired the La-Z-Boy wholesale business in the United Kingdom and Ireland. We sell products in the United Kingdom, Ireland and about 60 other countries outside of North America.

Our goal is to deliver value to our shareholders with improved sales and earnings over the long term through executing our strategic initiatives. The foundation of our strategic initiatives is driving profitable sales growth in all areas of our business, but most importantly in our flagship La-Z-Boy brand. We are striving for this growth in four ways:

We are expanding our branded distribution channels by executing our 4-4-5 store growth initiative, through which we plan to expand the La-Z-Boy Furniture Galleries® stores network to 400 stores averaging $4 million in annual sales per store, over the five-year period that began with fiscal 2014.

Through this initiative, we intend not only to increase the number of stores but also to improve their quality, including upgrading old format stores to our new concept design through remodels and relocations. At the end of fiscal 2017, less than seven percent of the La-Z-Boy Furniture Galleries® stores in the network were in the old format.

With improved store performance we believe the network may deliver our targeted economic value over time with fewer stores. We now expect the build-out of our store network to extend beyond five years.

In addition, we plan to increase our La-Z-Boy Comfort Studio® locations, our store-within-a-store format, as another avenue to expand our branded distribution channels, with a target of 600 La-Z-Boy Comfort Studio® locations.

We expect these initiatives to generate growth in our Retail segment through an increased company-owned store count, and to generate growth in our wholesale Upholstery segment as our proprietary distribution network expands.

We are growing the size of our company-owned retail business by acquiring La-Z-Boy Furniture Galleries® stores that are owned by our independent dealers, primarily in markets that can be serviced through our regional distribution centers, where we see opportunity for growth, or where we believe there are opportunities for further market penetration.

We are striving to increase our market share with the growth of sales through our multi-channel distribution network. In addition to the over 900 branded outlets dedicated to selling La-Z-Boy product (La-Z-Boy Furniture Galleries® stores and La-Z-Boy Comfort Studio® locations), approximately 1,900 other dealers sell La-Z-Boy products, providing us the benefit of multi-channel distribution. These outlets include some of the best known names in the industry, such as Art Van, Nebraska Furniture Mart, and Slumberland. Additionally, our other brands, including England, American Drew, Hammary, and Kincaid, enjoy distribution through many of the same outlets. We believe there is significant growth potential for our brands through these retail channels.

We are also striving to increase our market share in stationary upholstered furniture through a combination of our Live Life Comfortably® marketing campaign, featuring Brooke Shields as our brand ambassador, and our innovative and on-trend product. We continue to invest in this campaign, aimed at changing the image of our brand and widening La-Z-Boy's appeal among a broader consumer demographic. We are focused on expanding our digital marketing and ecommerce capabilities to drive traffic across our multiple digital and physical properties. Across our digital

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We continue to believe that executing our integrated strategies will drive long-term profitable sales growth that, when combined with our efficient operating platform, will continue to deliver results and returns to our shareholders. During fiscal 2017, weaker demand throughout the home furnishings sector and the extra week in fiscal 2016 contributed to the slight decline in our net sales, but due to our efficient operating platform, we were able to grow our operating margin and deliver an increase in earnings per share.

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

Upholstery Segment.  Our Upholstery segment is our largest business and consists primarily of two operating units: La-Z-Boy, our largest operating unit, and our England subsidiary. The Upholstery segment also includes our international businesses, including the La-Z-Boy wholesale business in the United Kingdom and Ireland acquired during fiscal 2017. Our Upholstery segment manufactures and imports upholstered furniture such as recliners and motion furniture, sofas, loveseats, chairs, sectionals, modulars, ottomans and sleeper sofas. The Upholstery segment sells directly to La-Z-Boy Furniture Galleries® stores, operators of La-Z-Boy Comfort Studio® locations and England Custom Comfort Center locations, major dealers, and a wide cross-section of other independent retailers.

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

Retail Segment.  Our Retail segment consists of 143 company-owned La-Z-Boy Furniture Galleries® stores. The Retail segment primarily sells upholstered furniture, in addition to some casegoods and other accessories, to the end consumer through these stores.

Results of Operations

Fiscal Year 2017, Fiscal Year 2016, and Fiscal Year 2015

La-Z-Boy Incorporated

(Amounts in thousands, except percentages)   (52 weeks)
4/29/2017
  (53 weeks)
4/30/2016
  (FY17 vs FY16)
% Change
  (52 weeks)
4/25/2015
  (FY16 vs FY15)
% Change
 

Sales

  $ 1,520,060   $ 1,525,398     (0.3 )% $ 1,425,395     7.0 %  

Operating income

    130,581     122,389     6.7 %   103,165     18.6 %

Operating margin

    8.6 %   8.0 %         7.2 %      

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Sales

Our consolidated sales decreased $5.3 million in fiscal 2017 compared with fiscal 2016, following an increase of $100.0 million in fiscal 2016 compared with fiscal 2015. As a reminder, fiscal 2016 contained 53 weeks, while fiscal 2017 and fiscal 2015 contained 52 weeks. The additional week in fiscal 2016 resulted in approximately $29 million of additional sales based on the average weekly sales for the year.

Sales were essentially flat in fiscal 2017 compared with fiscal 2016, due to lower sales in our Upholstery and Casegoods segments which were offset by higher sales in our Retail segment. The sales decline in our Upholstery and Casegoods segments were mostly due to fiscal 2017 including only 52 weeks while fiscal 2016 included 53 weeks. The sales increase in our Retail segment was driven by the sales from our new and acquired stores, partially offset by lower sales from stores that had been open a minimum of 12 months, and the impact of fiscal 2017 including one less week than fiscal 2016.

Sales were higher in fiscal 2016 compared with the prior year, driven by increased sales in our Upholstery and Retail segments. Our Upholstery segment sales increase was driven by stronger unit volume and the additional week in fiscal 2016. Our Retail segment sales increase was due to the sales from our new and acquired stores and the additional week in fiscal 2016. These improvements were partially offset by a decline in our Casegoods segment sales in fiscal 2016 compared with the prior year, due to lower volume, which was somewhat offset by the additional week in fiscal 2016.

Operating Margin

Our operating margin increased 0.6 percentage points in fiscal 2017 compared with the prior year, following an increase of 0.8 percentage points in fiscal 2016 compared with the prior year.

Our gross margin increased 1.7 percentage points during fiscal 2017 compared with fiscal 2016, following an increase of 2.8 percentage points in fiscal 2016 compared with fiscal 2015.

Our gross margin improved 0.9 percentage points in both fiscal 2017 and fiscal 2016 compared with each of the prior years, due to changes in our consolidated sales mix. Our consolidated sales mix changed due to the growth of our Retail segment, which has a higher gross margin than our wholesale segments.

Our Upholstery segment gross margin improved in both fiscal 2017 and fiscal 2016 compared with each of the prior years. Fiscal 2017 and fiscal 2016 gross margin improved due to favorable changes in our product mix, as well as improved efficiencies in our supply chain, including procurement, manufacturing operations, and logistics. Additionally, each of fiscal 2017, fiscal 2016 and fiscal 2015 included the benefit of favorable legal settlements, which provided a benefit of 0.2, 0.3, and 0.4 percentage points, respectively.

Our Retail segment gross margin improved in both fiscal 2017 and fiscal 2016 compared with each of the prior years due to an increased percentage of custom orders and design services, which generate a higher gross margin than sales of stock units.

Our Casegoods segment gross margin improved in both fiscal 2017 and fiscal 2016 compared with each of the prior years. Fiscal 2017 gross margin improved due to lower promotional activity related to discontinued product and lower freight expense on imported product. Fiscal 2016 gross margin improved due to our transition to an all-import model for our wood furniture and the consolidation of our casegoods operations.

Our selling, general, and administrative ("SG&A") expense as a percentage of sales increased 1.1 percentage points during fiscal 2017 compared with fiscal 2016, following an increase of 2.0 percentage points in fiscal 2016 compared with fiscal 2015.

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We explain these items further when we discuss each segment's results later in this Management's Discussion and Analysis.

Upholstery Segment

(Amounts in thousands, except percentages)   (52 weeks)
4/29/2017
  (53 weeks)
4/30/2016
  (FY17 vs FY16)
% Change
  (52 weeks)
4/25/2015
  (FY16 vs FY15)
% Change
 

Sales

  $ 1,191,443   $ 1,215,805     (2.0 )% $ 1,151,802     5.6 %  

Operating income

    146,235     134,193     9.0 %   121,403     10.5 %

Operating margin

    12.3 %   11.0 %         10.5 %      

Sales

Our Upholstery segment's sales decreased $24.4 million in fiscal 2017 compared with fiscal 2016, following an increase of $64.0 million in fiscal 2016 compared with fiscal 2015. The additional week in fiscal 2016 resulted in approximately $23 million of additional sales based on the average weekly sales for the year.

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The sales decline in fiscal 2017 when compared with the prior year was mostly due to fiscal 2017 including only 52 weeks while fiscal 2016 included 53 weeks.

Lower unit volume drove a 2.4% decrease in sales in fiscal 2017 when compared with fiscal 2016. We believe the decreased unit volume during fiscal 2017 reflected weaker demand throughout the home furnishings sector.

In addition, higher promotional activity in fiscal 2017 resulted in a 0.5% decrease in sales compared with fiscal 2016. The higher promotional activity was due to our strategic decision to discount product to drive sales against the weaker demand, and in connection with our phasing out certain frames and fabrics.

These items were partially offset by favorable changes in our product mix which resulted in a 0.7% increase in sales in fiscal 2017 compared with the prior year. Our product mix shifted to more motion units and more units with power in fiscal 2017, compared with the prior year. Motion units have a higher average selling price than stationary units, and units with power have a higher average selling price than units without power.

Lastly, fiscal 2017 included the benefit of four months of sales from our recently-acquired La-Z-Boy wholesale business in the United Kingdom and Ireland, which contributed $8.9 million of sales in fiscal 2017.

The sales increase in fiscal 2016 when compared with fiscal 2015 was due to several factors.

Higher unit volume drove a 4.3% increase in sales in fiscal 2016 when compared with fiscal 2015. We believe the increased unit volume during fiscal 2016 was a result of our Live Life Comfortably® marketing campaign, the strength of our stationary product introductions, and our improved product value and styling.

Favorable changes in our product mix in fiscal 2016 resulted in a 1.1% increase in sales compared with the prior year. Our product mix in fiscal 2016 shifted to more motion units and more units with power, compared with the prior year.

Operating Margin

Our Upholstery segment's operating margin increased 1.3 percentage points in fiscal 2017 compared with the prior year, following an increase of 0.5 percentage points in fiscal 2016 compared with the prior year.

The segment's gross margin increased 0.7 percentage points during fiscal 2017 compared with fiscal 2016, following an increase of 1.9 percentage points during fiscal 2016 compared with fiscal 2015.

Changes in our product mix resulted in an improvement of 0.7 percentage points in fiscal 2017 compared with fiscal 2016. The improvement was primarily due to a shift to more motion units with power, as well as a shift to more recliners in fiscal 2017 compared with the prior year.

Improved efficiencies in our supply chain, including procurement, manufacturing operations and logistics, resulted in an improvement of 0.5 percentage points and 1.8 percentage points in the segment's gross margin during fiscal 2017 and fiscal 2016, respectively, compared with each of the prior years.

Higher promotional activity related to our strategic decision to discount product to drive sales against the weaker demand in the home furnishings sector, and in connection with our phasing out certain frames and fabric, resulted in a reduction of 0.3 percentage points in the segment's gross margin during fiscal 2017 compared with the prior year.

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The segment's SG&A expense as a percentage of sales decreased 0.6 percentage points during fiscal 2017 compared with fiscal 2016, following an increase of 1.4 percentage points during fiscal 2016 compared with fiscal 2015.

Professional fees and legal costs were 0.9 percentage points lower as a percent of sales during fiscal 2017 compared with fiscal 2016, but were 1.0 percentage point higher as a percentage of sales during fiscal 2016 compared with fiscal 2015. We incurred higher legal costs in fiscal 2016 related to a legal dispute over a contract that the other party contends requires us to pay royalties on certain power units. The legal matter required fewer resources in fiscal 2017 as we awaited a court ruling on our affirmative defenses. In third quarter of fiscal 2017, the court ruled against us on our affirmative defenses and we subsequently appealed the judgment entered against us.

Advertising expense was 0.2 percentage points higher as a percentage of sales during fiscal 2017 compared with fiscal 2016, as we strategically increased spending on our Live Life Comfortably® marketing campaign.

Warranty expense was 0.3 percentage points higher as a percentage of sales during fiscal 2016 compared with fiscal 2015. Our warranty expense was higher primarily due to higher replacement part costs and labor costs from our more complex product lines. Additionally, our warranty expense was higher during fiscal 2016 due to favorable accrual adjustments during fiscal 2015 which reflected a change in the prior estimates of our product warranty liability during that time period.

Casegoods Segment

(Amounts in thousands, except percentages)   (52 weeks)
4/29/2017
  (53 weeks)
4/30/2016
  (FY17 vs FY16)
% Change
  (52 weeks)
4/25/2015
  (FY16 vs FY15)
% Change
 

Sales

  $ 100,228   $ 102,540     (2.3 )% $ 109,713     (6.5 )%

Operating income

    8,623     7,734     11.5 %   6,408     20.7 %

Operating margin

    8.6 %   7.5 %         5.8 %      

Sales

Our Casegoods segment's sales decreased $2.3 million in fiscal 2017 compared with fiscal 2016, following a decrease of $7.2 million in fiscal 2016 compared with fiscal 2015. The additional week in fiscal 2016 resulted in approximately $2 million of additional sales based on the average weekly sales for the year.

The segment's sales decrease in fiscal 2017 was mostly due to fiscal 2017 including only 52 weeks while fiscal 2016 included 53 weeks, in addition to a decline in unit volume. We believe the lower volume resulted from weaker demand throughout the home furnishings sector, which has been more prominent for casegoods product than for other product categories. The volume decline was somewhat offset by lower promotional activity on discontinued product.

The segment's sales decrease in fiscal 2016 was due to eliminating our hospitality product line when we ceased domestic manufacturing of our wood furniture. The elimination of this product line resulted in $3.7 million lower sales in fiscal 2016 compared with fiscal 2015. In addition, as we have shifted our product line to more transitional and casual styles over the last few years, we have been selling through older product lines. Higher promotional activity related to these older product lines during fiscal 2015 resulted in higher sales during that period.

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Operating Margin

Our Casegoods segment's operating margin increased 1.1 percentage points in fiscal 2017 compared with the prior year, following an increase of 1.7 percentage points in fiscal 2016 compared with the prior year.

The segment's gross margin increased 1.4 percentage points during fiscal 2017 compared with fiscal 2016, following an increase of 0.9 percentage points during fiscal 2016 compared with fiscal 2015.

During fiscal 2017, the segment's gross margin increased due to lower promotional activity related to discontinued product and lower freight expense on imported product.

During fiscal 2016, the transition to an all-import model for our wood furniture and the consolidation of our casegoods operations, as well as less discounting due to lower promotional activity in fiscal 2016, drove the improved gross margin for the segment.

The segment's SG&A expense as a percentage of sales increased 0.3 percentage points during fiscal 2017 compared with fiscal 2016, following a decrease of 0.8 percentage points during fiscal 2016 compared with fiscal 2015.

During fiscal 2017, the increased SG&A expense was primarily due to our inability to absorb fixed SG&A costs on the lower sales volume.

During fiscal 2016, the decreased SG&A expense was mainly due to lower incentive compensation resulting from lower financial performance of the segment against the incentive-based targets compared with our financial performance in fiscal 2015 against the prior year targets. Also, we decreased our SG&A expense through the consolidation of our casegoods operations into one corporate office and the elimination of redundant expenses.

Retail Segment

(Amounts in thousands, except percentages)   (52 weeks)
4/29/2017
  (53 weeks)
4/30/2016
  (FY17 vs FY16)
% Change
  (52 weeks)
4/25/2015
  (FY16 vs FY15)
% Change
 

Sales

  $ 443,238   $ 402,479     10.1 % $ 333,978     20.5 %  

Operating income

    19,205     25,567     (24.9 )%   11,466     123.0 %

Operating margin

    4.3 %   6.4 %         3.4 %      

Sales

Our Retail segment's sales increased $40.8 million in fiscal 2017 compared with fiscal 2016, following an increase of $68.5 million in fiscal 2016 compared with fiscal 2015. The additional week in fiscal 2016 resulted in approximately $8 million of additional sales based on the average weekly sales for the year.

In fiscal 2017, the segment's sales increased $55.8 million from our acquired stores and $10.8 million from our new stores. These increases were somewhat offset by a $25.8 million decrease in sales from stores that had been open a minimum of 12 months, a decline of 7.2% of which about 2% relates to the extra week. The decrease in sales from these stores was primarily driven by lower store traffic, but an increase in our average ticket, resulting from increases in design services and custom orders, lessened the impact of the lower traffic.

In fiscal 2016, the segment's sales increase was due to our acquired stores, which added $22.4 million in sales for the segment in fiscal 2016. Additionally, sales from stores that had been open for a minimum of 12 months increased by $14.0 million, or 7.5% of which about 2% relates to the extra week. The increased volume was primarily a result of an increase in average ticket resulting from higher custom orders, increased design services, and a shift to more powered units. The remainder of the sales increase came from our new stores.

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Operating Margin

Our Retail segment's operating margin decreased 2.1 percentage points in fiscal 2017 compared with the prior year, following an increase of 3.0 percentage points in fiscal 2016 compared with the prior year.

The segment's gross margin increased 0.1 percentage point during fiscal 2017 compared with fiscal 2016, following an increase of 1.3 percentage points in fiscal 2016 compared with fiscal 2015.

During fiscal 2017 and fiscal 2016, a higher percentage of custom orders and increased design services drove the increase in gross margin compared with the prior years. Additionally, during fiscal 2016, a shift to more powered units increased the segment's gross margin compared with fiscal 2015.

The segment's SG&A expense as a percentage of sales increased 2.2 percentage points during fiscal 2017 compared with fiscal 2016, following a decrease of 1.7 percentage points in fiscal 2016 compared with fiscal 2015.

SG&A expenses as a percentage of sales were higher in fiscal 2017 compared with fiscal 2016, due to a 1.2 percentage point increase in advertising expense, as we strategically increased spending on our Live Life Comfortably® marketing campaign and on promotional marketing to enhance our share of voice in selected markets. The remainder of the increase in SG&A expense as a percentage of sales was the result of the fixed nature of many of our costs (primarily occupancy and administrative costs) in relation to the decline in sales from stores that had been open a minimum of 12 months.

SG&A expense in fiscal 2016 was lower than in fiscal 2015 as a percentage of sales, driven by our sales volume increase in fiscal 2016 from stores that had been open for a minimum of 12 months, which allowed us to leverage our fixed SG&A expenses (primarily occupancy and administrative costs) as a percentage of sales in fiscal 2016 compared with fiscal 2015. This impact was partially offset because we increased advertising spending by 0.4 percentage points as a percentage of sales on our Live Life Comfortably® marketing campaign and on promotional marketing to support our retail stores and enhance our share of voice in selected markets.

Corporate and Other

(Amounts in thousands, except percentages)   (52 weeks)
4/29/2017
  (53 weeks)
4/30/2016
  (FY17 vs FY16)
% Change
  (52 weeks)
4/25/2015
  (FY16 vs FY15)
% Change
 

Sales:

                               

Corporate and Other

  $ 9,161   $ 6,423     42.6 % $ 2,294     180.0 %  

Eliminations

    (224,010 )   (201,849 )   (11.0 )%   (172,392 )   (17.1 )%

Operating loss:

                               

Corporate and Other

    (43,482 )   (45,105 )   3.6 %   (36,112 )   (24.9 )%

Sales

Corporate and Other sales increased in fiscal 2017 and fiscal 2016 compared with the prior years due to intercompany commission revenue charged to our reportable segments by our global trading company in Hong Kong. Operations of our global trading company were just beginning in early fiscal 2016 and resulted in lower commissions charged during fiscal 2016 and no commissions charged during fiscal 2015.

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Eliminations increased in both fiscal 2017 and fiscal 2016 compared with the prior years due to higher sales from our Upholstery and Casegoods segments to our Retail segment, mainly due to our new stores and store acquisitions. The elimination of the intercompany commission revenue of our global trading company in Hong Kong also contributed to the increase in eliminations in both fiscal years.

Operating Margin

Our Corporate and Other operating loss was $1.6 million lower in fiscal 2017 compared with fiscal 2016, due to lower net expense associated with our global trading company in Hong Kong. Net expenses of our global trading company were lower in fiscal 2017 compared with fiscal 2016 due to the increased intercompany commission revenue charged to our reportable segments.

Our Corporate and Other operating loss was $8.0 million higher in fiscal 2016 compared with fiscal 2015, primarily due to higher incentive compensation costs of $2.2 million, as well as higher costs associated with our global trading company in Hong Kong and increased depreciation expense for our new world headquarters.

Interest Expense

Interest expense was $0.6 million higher in fiscal 2017 compared with fiscal 2016. As a result of the judgment entered against us in a legal dispute over whether we owe royalties on certain power units, we recognized $0.5 million of interest expense during fiscal 2017. Interest expense was flat in fiscal 2016 compared with fiscal 2015.

Other Income (Expense)

Other income (expense) was $2.2 million lower in fiscal 2017 compared with fiscal 2016, due to lower foreign currency exchange rate gains realized during fiscal 2017 than in fiscal 2016.

Other income (expense) was $1.5 million higher in fiscal 2016 compared with fiscal 2015, due to higher foreign currency exchange rate gains realized during fiscal 2016 than in fiscal 2015.

Income from Continued Dumping and Subsidy Offset Act

The Continued Dumping and Subsidy Offset Act of 2000 provided for distribution of duties collected by U.S. Customs and Border Protection from antidumping cases to domestic producers that supported the antidumping petition related to wooden bedroom furniture imported from China. We received pre-tax distributions of $0.3 million and $0.1 million during fiscal 2017 and fiscal 2016, respectively. We received pre-tax distributions of $1.2 million related to continuing operations and $4.2 million related to discontinued operations during fiscal 2015.

Income Taxes

Our effective tax rate for continuing operations was 33.5% for fiscal 2017, 35.3% for fiscal 2016, and 35.0% for fiscal 2015.

Impacting our effective tax rate for fiscal 2017 was a net tax benefit of $1.4 million primarily from the release of valuation allowances relating to certain U.S. state deferred tax assets and state income tax credits. Absent discrete adjustments, the effective tax rate for continuing operations in fiscal 2017 would have been 34.6%.

Impacting our effective tax rate for fiscal 2016 was a net tax benefit of $0.3 million for the release of valuation allowances relating to certain U.S. state deferred tax assets. Absent discrete adjustments, the effective tax rate for continuing operations in fiscal 2016 would have been 35.6%.

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Impacting our effective tax rate for fiscal 2015 was a net tax benefit of $0.4 million for the release of valuation allowances relating to certain U.S. state deferred tax assets. Absent discrete adjustments, the effective tax rate for continuing operations in fiscal 2015 would have been 35.4%.

Liquidity and Capital Resources

Our sources of liquidity include cash and equivalents, short-term and long-term investments, cash from operations, and amounts available under our credit facility. We believe these sources remain adequate to meet our short-term and long-term liquidity requirements, finance our long-term growth plans, and fulfill other cash requirements for day-to-day operations, dividends to shareholders, and capital expenditures. We had cash and equivalents of $141.9 million at April 29, 2017, compared with $112.4 million at April 30, 2016. In addition, we had investments to enhance our returns on cash of $33.1 million at April 29, 2017, compared with $33.6 million at April 30, 2016.

We maintain a revolving credit facility secured primarily by all of our accounts receivable, inventory, and cash deposit and securities accounts. Availability under the agreement fluctuates according to a borrowing base calculated on eligible accounts receivable and inventory. The credit agreement includes affirmative and negative covenants that apply under certain circumstances, including a fixed-charge coverage ratio requirement that applies when excess availability under the line is less than certain thresholds. At April 29, 2017, we were not subject to the fixed-charge coverage ratio requirement, had no borrowings outstanding under the agreement, and had excess availability of $141.9 million of the $150.0 million credit commitment.

Capital expenditures for fiscal 2017 were $20.3 million compared with $24.7 million for fiscal 2016. We believe capital expenditures will be in the range of $50 to $55 million for all of fiscal 2018. We started construction on our new Innovation Center and other upgrades to our largest manufacturing campus in Dayton, Tennessee in the fourth quarter of fiscal 2017, and we expect that construction will continue into fiscal 2020. We currently estimate that we will incur approximately $14 million related to the new Innovation Center in fiscal 2018. Additionally, we currently anticipate increased capital expenditures in fiscal 2018 related to other facility and manufacturing equipment upgrades.

Our board of directors has sole authority to determine if and when we will declare future dividends and on what terms. We expect the board to continue declaring regular quarterly cash dividends for the foreseeable future, but it may discontinue doing so at any time.

We believe our cash flows from operations, present cash and equivalents balance of $141.9 million, short and long-term investments to enhance returns on cash of $33.1 million, and current excess availability under our credit facility of $141.9 million, will be sufficient to fund our business needs, including fiscal 2018 contractual obligations of $159.2 million as presented in our contractual obligations table. Included in our cash and cash equivalents at April 29, 2017, is $51.3 million held by foreign subsidiaries for which we have determined the amounts to be permanently reinvested. Included in that $51.3 million is cash that we transferred to one of our foreign subsidiaries in anticipation of our payment, due in fiscal 2018, for the acquisition of the La-Z-Boy wholesale business in the United Kingdom and Ireland.

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The following table illustrates the main components of our cash flows:

 
  Year Ended  
(Amounts in thousands)   4/29/2017   4/30/2016   4/25/2015  

Cash Flows Provided By (Used For)

                   

Net cash provided by operating activities

  $ 146,174   $ 112,361   $ 86,751  

Net cash used for investing activities

    (65,253 )   (36,570 )   (66,673 )

Net cash used for financing activities

    (51,597 )   (61,047 )   (71,156 )

Exchange rate changes

    178     (688 )   (281 )

Change in cash and equivalents

  $ 29,502   $ 14,056   $ (51,359 )

Operating Activities

During fiscal 2017, net cash provided by operating activities was $146.2 million. Our cash provided by operating activities was primarily attributable to net income generated during fiscal 2017 and a $12.5 million reduction in inventory. Our ability to improve our inventory efficiency and productivity more than offset an increase in finished goods inventory during fiscal 2017.

During fiscal 2016, net cash provided by operating activities was $112.4 million. Our cash provided by operating activities was primarily attributable to net income generated during fiscal 2016 and cash collections of accounts receivable of $10.7 million, driven by the continued improvement in the financial health of our customer base, especially our independent La-Z-Boy Furniture Galleries® dealers. Somewhat offsetting these items were cash used to fund increases in inventories of $14.6 million and a contribution to our pension plan of $7.0 million. Our inventories were higher in fiscal 2016 primarily due to higher raw materials inventory, mainly leather and fabric sets, to improve our service levels to our customers.

During fiscal 2015, net cash provided by operating activities was $86.8 million. Our cash provided by operating activities was primarily attributable to net income generated during fiscal 2015. Partly offsetting net income was cash used to fund increases in inventories and to settle incentive compensation awards. The $7.6 million increase in inventories in fiscal 2015 was primarily due to higher raw materials inventory in our Upholstery segment as we positioned our inventory levels to meet our customer demands at that time.

Investing Activities

During fiscal 2017, net cash used for investing activities was $65.3 million, which included $35.9 million to fund the acquisition of retail stores, $20.3 million for capital expenditures, and $9.8 million for net investment increases. Capital expenditures during the period primarily related to spending on manufacturing machinery and equipment, our continued ERP system implementation, and construction of our new Innovation Center.

During fiscal 2016, net cash used for investing activities was $36.6 million, which included $23.3 million to fund the acquisition of retail stores, and $24.7 million for capital expenditures, which was somewhat offset by net investment decreases of $7.7 million. Capital expenditures during the period primarily related to spending on manufacturing machinery and equipment, our continued ERP system implementation, our e-commerce web site, and the relocation of one of our regional distribution centers. Additionally, the above uses of cash were partially offset by proceeds from the sale of assets, including assets previously held for sale, as well as a reduction in restricted cash, which secures our outstanding letters of credit, of $3.7 million.

During fiscal 2015, net cash used for investing activities was $66.7 million, which included $70.3 million for capital expenditures. Capital expenditures during the period primarily related to spending on our

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new world headquarters, as well as spending on new stores and manufacturing machinery and equipment. In addition, we invested $6.6 million of cash in fiscal 2015, primarily to purchase life insurance contracts related to our executive deferred compensation plan and our performance compensation retirement plan. Partly offsetting these items were proceeds from the sale of assets, including assets previously held for sale, as well as a reduction in restricted cash, which secures our outstanding letters of credit, of $12.0 million.

Financing Activities

During fiscal 2017, net cash used for financing activities was $51.6 million, including $36.0 million used to purchase our common stock and $20.7 million paid to our shareholders in quarterly dividends.

During fiscal 2016, net cash used for financing activities was $61.0 million, including $44.1 million used to purchase our common stock and $18.1 million paid to our shareholders in quarterly dividends.

During fiscal 2015, net cash used for financing activities was $71.2 million, including $51.9 million used to purchase our common stock and $14.5 million paid to our shareholders in quarterly dividends. Additionally, we used $7.6 million of cash to pay down debt.

Our board of directors has authorized the purchase of company stock. As of April 29, 2017, 2.7 million shares remained available for purchase pursuant to this authorization. The authorization has no expiration date. We purchased 1.4 million shares during fiscal 2017 for a total of $36.0 million. In June of 2017, the board of directors authorized an additional six million shares that will be added to this authorization and with the cash flows we anticipate generating in fiscal 2018, we expect to continue being opportunistic in purchasing company stock.

Other

The following table summarizes our contractual obligations of the types specified:

 
   
  Payments Due by Period  
(Amounts in thousands)   Total   Less than
1 Year
  1 - 3
Years
  4 - 5
Years
  More than
5 Years
 

Capital lease obligations

  $ 515   $ 219   $ 291   $ 5   $  

Operating lease obligations

    384,558     68,898     118,809     93,708     103,143  

Purchase obligations*

    74,131     74,131              

Purchase price liability**

    15,920     15,920              

Contingent consideration

    1,248         1,248          

Total contractual obligations

  $ 476,372   $ 159,168   $ 120,348   $ 93,713   $ 103,143  

*  We have purchase order commitments of $74.1 million related to open purchase orders, primarily with foreign and domestic casegoods, leather and fabric suppliers, which are generally cancellable if production has not begun.

**  We acquired the La-Z-Boy wholesale business in the United Kingdom and Ireland during fiscal 2017. Per the terms of the purchase agreement, payment for the business is due 90 business days following the date of acquisition and accordingly, we have recorded a purchase price liability. The liability is based on exchange rates on April 29, 2017.

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Our consolidated balance sheet at the end of fiscal 2017 reflected a $0.9 million net liability for uncertain income tax positions. We do not expect that the net liability for uncertain income tax positions will significantly change within the next 12 months. We will either pay or release the liability for uncertain income tax positions as tax audits are completed or settled, statutes of limitation expire or other new information becomes available.

Continuing compliance with existing federal, state and local statutes addressing protection of the environment is not expected to have a significant effect upon our capital expenditures, earnings, competitive position or liquidity.

Business Outlook

We are optimistic about the opportunities before us. Given the strength of the La-Z-Boy brand, we believe the company is solidly positioned in the marketplace with a core demographic that will continue to expand. Investments in our digital platforms will provide for additional growth opportunities as we will be able to effectively leverage those initiatives to expose more people to the brand as well as to continue to make other strategic investments in our business to drive long-term sales and earnings growth. During the summer months, however, the furniture industry typically experiences weaker demand, and the majority of our plants shut down for one week of vacation and maintenance in July, during the first quarter. Accordingly, the first quarter is usually the company's weakest in sales and earnings.

Critical Accounting Policies

We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles. In some cases, these principles require management to make difficult and subjective judgments regarding uncertainties and, as a result, such estimates and assumptions may significantly impact our financial results and disclosures. We base our estimates on currently known facts and circumstances, prior experience and other assumptions we believe to be reasonable. We use our best judgment in valuing these estimates and may, as warranted, use external advice. Actual results could differ from these estimates, assumptions, and judgments and these differences could be significant. We make frequent comparisons throughout the year of actual experience to our assumptions to reduce the likelihood of significant adjustments. We record adjustments when we know such differences. The following critical accounting policies affect our consolidated financial statements.

Revenue Recognition and Related Allowances

Substantially all of our shipping agreements with third-party carriers transfer the risk of loss to our customers upon shipment. Accordingly, our shipments using third-party carriers are generally recognized as revenue when product is shipped. For product shipped on our company-owned trucks, we recognize revenue when the product is delivered. This revenue includes amounts we billed to customers for shipping. At the time we recognize revenue, we make provisions for estimated product returns and warranties, as well as other incentives that we may offer to customers. We also recognize revenue for amounts we receive from our customers in connection with our shared advertising cost arrangement. We import certain products from foreign ports, some of which are shipped directly to our domestic customers. In those cases, we do not recognize revenue until title passes to our customer, which normally occurs after the goods pass through U.S. Customs.

Incentives that we offer to our customers include cash discounts and other sales incentive programs. We record estimated cash discounts and other sales incentives as reductions of revenues when we recognize the revenue.

Trade accounts receivable arise from our sale of products on trade credit terms. Our management team reviews all significant accounts quarterly as to their past due balances and the collectability of the

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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 for the new sales is reasonably assured.

Our allowance for credit losses reflects our best estimate of probable incurred losses inherent in the accounts receivable balance. We determine the allowance based on known troubled accounts, historical experience and other currently available evidence.

Long-Lived Assets

We review long-lived assets for impairment whenever events or changes in circumstances indicate that we may not be able to recover the carrying amount of an asset or asset group. Using either quoted market prices or an analysis of undiscounted projected future cash flows by asset groups, we determine whether 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 units in our Upholstery segment (La-Z-Boy and England), our Casegoods segment, and each of our retail stores.

Intangible Assets and Goodwill

We test intangibles and goodwill for impairment on an annual basis in the fourth quarter of each fiscal year, and more frequently if events or changes in circumstances indicate that an asset might be impaired. Indefinite-lived intangible assets include our American Drew trade name, and the reacquired right to own and operate La-Z-Boy Furniture Galleries® stores in markets we have acquired. Amortizable intangible assets include the reacquired right to sell La-Z-Boy branded product in the United Kingdom and Ireland and other intangible assets related to the acquisition of the La-Z-Boy wholesale business in the United Kingdom and Ireland, including acquired customer relationships. We establish the fair value of our trade name and reacquired rights based upon the relief from royalty method. We establish the fair value of our other amortizable intangible assets based on the multi-period excess earnings method, a variant of the income approach, and also the relief from royalty method. Our goodwill relates to the acquisition of La-Z-Boy Furniture Galleries® stores in various geographic markets and the La-Z-Boy wholesale business in the United Kingdom and Ireland. The reporting units for goodwill arising from retail acquisitions are the geographic markets the acquired stores become part of upon acquisition, because the operations of the acquired stores benefit these geographic markets. The reporting unit for goodwill arising from the acquisition of the La-Z-Boy wholesale business in the United Kingdom and Ireland is that business. We establish the fair value for the reporting unit based on the discounted cash flows to determine if the fair value of our goodwill exceeds its carrying value.

Other Loss Reserves

We have various other loss exposures arising from the ordinary course of business, including inventory obsolescence, health insurance, litigation, environmental claims, insured and self-insured workers' compensation, restructuring charges, and product liabilities. Establishing loss reserves requires us to use estimates and management's judgment with respect to risk and ultimate liability. We use legal counsel or other experts, including actuaries as appropriate, to assist us in developing estimates. Due to the uncertainties and potential changes in facts and circumstances, additional charges related to these reserves could be required in the future.

We have various excess loss coverages for health insurance, auto, product liability and workers' compensation liabilities. Our deductibles generally do not exceed $1.5 million.

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Income Taxes

We use the asset and liability method to account for income taxes. We recognize deferred tax assets and liabilities based on 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. We measure deferred tax assets and liabilities using enacted tax rates in effect for the year in which we expect to recover or settle those temporary differences. When we record deferred tax assets, we are required to estimate, based on forecasts of taxable earnings in the relevant tax jurisdiction, whether we are more likely than not to recover on them. In making judgments about realizing the value of our deferred tax assets, we consider historic and projected future operating results, the eligible carry-forward period, tax law changes and other relevant considerations.

Pensions

We maintain a defined benefit pension plan for eligible factory hourly employees at our La-Z-Boy operating unit. The plan does not allow new participants, but active participants continue to earn service credits. Annual net periodic expense and benefit liabilities under the plan are determined on an actuarial basis using various assumptions and estimates including discount rates, long-term rates of return, estimated remaining years of service, and estimated life expectancy. Each year, we compare the more significant assumptions used to our actual experience, and we adjust the assumptions if warranted.

We evaluate our pension plan discount rate assumption annually. The discount rate is based on a single rate developed after matching a pool of high-quality bond payments to the plan's expected future benefit payments. We used a discount rate of 4.1% at April 29, 2017 and April 30, 2016, compared with a rate of 4.2% at April 25, 2015. We used the same methodology for determining the discount rate in fiscal 2017, fiscal 2016, and fiscal 2015.

We fund pension benefits through deposits with trustees and satisfy, at a minimum, the applicable funding regulations.

In addition to evaluating the discount rate we use to determine our pension obligation, each year we evaluate our assumption as to our expected return on plan assets, taking into account the trust's asset allocation, investment strategy, and returns expected to be earned over the life of the plan. The rate of return assumption was 4.5% at April 29, 2017 and April 30, 2016. The expected rate of return assumption as of April 29, 2017, will be used to determine pension expense for fiscal 2018.

We are planning to make a discretionary contribution of approximately $2 million to our defined benefit pension plan in fiscal 2018, although no contribution is required. After considering all relevant assumptions, we expect that the plan's fiscal 2018 pension expense will be approximately $4.2 million, compared with $4.0 million in fiscal 2017. A 25 basis point change in our discount rate or expected return on plan assets would not have a material impact on our results of operations.

Product Warranties

We account for product warranties by accruing an estimated liability when we recognize revenue on the sale of warranted product. We estimate future warranty claims based on claim experience and any additional anticipated future costs on previously sold product. We incorporate repair costs in our liability estimates, including materials, labor, and overhead amounts necessary to perform repairs, and any costs associated with delivering repaired product to our customers and consumers. We use considerable judgment in making our estimates. We record differences between our estimated and actual costs when the differences are known.

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Stock-Based Compensation

We measure stock-based compensation cost for equity-based awards on the grant date based on the awards' fair value, and recognize expense over the vesting period. We measure stock-based compensation cost for liability-based awards on the grant date based on the awards' fair value, and recognize expense over the vesting period. We remeasure the liability for these awards and adjust their fair value at the end of each reporting period until paid. We recognize compensation cost for stock-based awards that vest based on performance conditions ratably over the vesting periods when the vesting of such awards becomes probable. Determining the probability of award vesting requires judgment, including assumptions about future operating performance. While the assumptions we use to calculate and account for stock-based compensation awards represent management's best estimates, these estimates involve inherent uncertainties and the application of our management's best judgment. As a result, if we revise our assumptions and estimates, our stock-based compensation expense could be materially different in the future.

We estimate the fair value of each option grant using a Black-Scholes option-pricing model. We estimate expected volatility based on the historic volatility of our common shares. We estimate the average expected life using the contractual term of the stock option and expected employee exercise and post-vesting employment termination trends. We base the risk-free rate on U.S. Treasury issues with a term equal to the expected life assumed at the date of grant. We estimate forfeitures at the date of grant based on historic experience.

We estimate the fair value of each performance award grant that vests based on a market condition using a Monte Carlo valuation model. The Monte Carlo model incorporates more complex variables than closed-form models such as the Black-Scholes option valuation model used for option grants. The Monte Carlo valuation model simulates a distribution of stock prices to yield an expected distribution of stock prices over the remaining performance period. The stock-paths are simulated using volatilities calculated with historical information using data from a look-back period that is equal to the vesting period. The model assumes a zero-coupon, risk-free interest rate with a term equal to the vesting period. The simulations are repeated many times and the mean of the discounted values is calculated as the grant date fair value for the award. The final payout of the award as calculated by the model is then discounted back to the grant date using the risk-free interest rate.

Both the Monte Carlo and Black-Scholes methodologies are based, in part, on inputs for which there are little or no observable market data, requiring us to develop our own assumptions. Inherent in both of these models are assumptions related to expected stock-price volatility, expected life, risk-free interest rate, and dividend yield.

Recent Accounting Pronouncements

The following is a discussion of the recent accounting pronouncements issued by the Financial Accounting Standards Board ("FASB") that we are currently assessing and which we believe could have a significant impact on our financial statements or related disclosures.

In May 2014, the FASB issued a new accounting standard that requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new standard supersedes virtually all existing authoritative accounting guidance on revenue recognition and requires additional disclosures and greater use of estimates and judgments. During July 2015, the FASB deferred the effective date of the revenue recognition standard by one year, thus making the new accounting standard effective for our fiscal 2019. We are currently reviewing our contracts and other revenue streams, gathering documentation, and developing our new accounting policy related to this standard. At this time, we believe we will ultimately choose the modified retrospective approach to implementing the new standard when it becomes effective for our fiscal 2019,

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but we are still assessing the overall impact this standard will have on our consolidated financial statements and financial statement disclosures.

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

In March 2016, the FASB issued a new accounting standard focused on simplifying the accounting for share-based payments. The standard includes changes to the accounting for income taxes related to share-based payments as well as changes to the presentation of these tax impacts on the statement of cash flows. We will adopt this standard in the first quarter of our fiscal 2018. Any increased volatility in our consolidated statement of income as a result of applying the provisions of this standard will be dependent on future vesting activity and volatility in our stock price. We plan to continue to estimate expected forfeitures.

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

In October 2016, the FASB issued a new accounting standard that requires entities to recognize the income tax consequences of an intra-entity transfer of assets other than inventory when the transfer occurs. This standard will be applicable for our fiscal 2019. We are still assessing the impact this standard will have on our consolidated financial statements and related disclosures.

In January 2017, the FASB issued a new accounting standard clarifying the definition of a business with the objective of adding guidance to evaluating whether a transaction should be accounted for as an acquisition. This standard will be applicable for our fiscal 2019. We are still assessing the impact this standard will have on our consolidated financial statements and related disclosures.

In January 2017, the FASB issued a new accounting standard simplifying the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. An entity should now perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. This standard will be applicable for our fiscal 2021. We are still assessing the impact this standard will have on our consolidated financial statements and related disclosures.

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ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

While we had no variable rate borrowings at April 29, 2017, we could be exposed to market risk from changes in interest rates if we incur variable rate debt in the future. Based on our current and expected levels of exposed liabilities, management estimates that a one percentage point change in interest rates would not have a material impact on our results of operations for fiscal 2018.

We are exposed to market risk from changes in the value of foreign currencies primarily related to our plant in Mexico, our wholesale and retail businesses in Canada, our wholesale business in the United Kingdom, and our majority-owned joint ventures in Thailand. In Mexico, we pay wages and other local expenses in Mexican pesos. In our Canada wholesale business we pay wages and other local expenses in Canadian Dollars. We recognize sales and pay wages and other local expenses related to our wholesale business in the United Kingdom in Great British Pounds, and our Canadian retail business in Canadian Dollars. In Thailand, we pay wages and other local expenses in the Thai Baht. Nonetheless, gains and losses resulting from market changes in the value of foreign currencies have not had and are not currently expected to have a significant effect on our consolidated results of operations. A decrease in the value of foreign currencies in relation to the U.S. dollar could impact the profitability of some of our vendors and translate into higher prices for our supplies, but we believe that, in that event, our competitors would experience a similar impact.

We are exposed to market risk with respect to commodity and fuel price fluctuations, principally related to commodities we use in producing our products, including steel, wood and polyurethane foam. As commodity prices increase, we determine whether a price increase to our customers to offset these increases is warranted. To the extent that an increase in these commodity costs would have a material impact on our results of operations, we believe that our competitors would experience a similar impact.

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Management's Report to Our Shareholders

Management's Responsibility for Financial Information

Management is responsible for the consistency, integrity and preparation of the information contained in this Annual Report on Form 10-K. The consolidated financial statements and other information contained in this Annual Report on Form 10-K have been prepared in accordance with accounting principles generally accepted in the United States of America and include necessary judgments and estimates by management.

To fulfill our responsibility, we maintain comprehensive systems of internal control designed to provide reasonable assurance that assets are safeguarded and transactions are executed in accordance with established procedures. The concept of reasonable assurance is based upon recognition that the cost of the controls should not exceed the benefit derived. We believe our systems of internal control provide this reasonable assurance.

The board of directors exercised its oversight role with respect to our systems of internal control primarily through its audit committee, which is comprised of independent directors. The committee oversees our systems of internal control, accounting practices, financial reporting and audits to assess whether their quality, integrity, and objectivity are sufficient to protect shareholders' investments.

In addition, our consolidated financial statements have been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, whose report also appears in this Annual Report on Form 10-K.

Management's Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as that term is defined in Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal controls over financial reporting based upon the framework in "Internal Control—Integrated Framework" set forth by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of April 29, 2017. PricewaterhouseCoopers LLP, an independent registered public accounting firm, audited the effectiveness of the Company's internal control over financial reporting as of April 29, 2017, as stated in its report which appears herein.

/s/ Kurt L. Darrow
Kurt L. Darrow
Chairman, President and Chief Executive Officer
June 20, 2017

/s/ Louis M. Riccio Jr.
Louis M. Riccio Jr.
Senior Vice President and Chief Financial Officer
June 20, 2017

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of La-Z-Boy Incorporated:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of comprehensive income, of changes in equity and cash flows present fairly, in all material respects, the financial position of La-Z-Boy Incorporated and its subsidiaries at April 29, 2017 and April 30, 2016, and the results of their operations and their cash flows for each of the three years in the period ended April 29, 2017 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in Item 15(a)(2) of this Form 10-K presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of April 29, 2017, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Detroit, Michigan
June 20, 2017

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LA-Z-BOY INCORPORATED

CONSOLIDATED STATEMENT OF INCOME

 
  Fiscal Year Ended  
(Amounts in thousands)   (52 weeks)
4/29/2017
  (53 weeks)
4/30/2016
  (52 weeks)
4/25/2015
 

Sales

  $ 1,520,060   $ 1,525,398   $ 1,425,395  

Cost of sales

    913,518     943,362     920,903  

Gross profit

    606,542     582,036     504,492  

Selling, general and administrative expense

    475,961     459,647     401,327  

Operating income

    130,581     122,389     103,165  

Interest expense

    1,073     486     523  

Interest income

    981     827     1,030  

Income from Continued Dumping and Subsidy Offset Act, net

    273     102     1,212  

Other income (expense), net

    (22 )   2,211     744  

Income from continuing operations before income taxes          

    130,740     125,043     105,628  

Income tax expense

    43,756     44,080     36,954  

Income from continuing operations

    86,984     80,963     68,674  

Income from discontinued operations, net of tax

            3,297  

Net income

    86,984     80,963     71,971  

Net income attributable to noncontrolling interests

    (1,062 )   (1,711 )   (1,198 )

Net income attributable to La-Z-Boy Incorporated

  $ 85,922   $ 79,252   $ 70,773  

   

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

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LA-Z-BOY INCORPORATED

CONSOLIDATED STATEMENT OF INCOME (Continued)

 
  Fiscal Year Ended  
(Amounts in thousands, except per share data)   (52 weeks)
4/29/2017
  (53 weeks)
4/30/2016
  (52 weeks)
4/25/2015
 

Net income attributable to La-Z-Boy Incorporated:

                   

Income from continuing operations attributable to La-Z-Boy Incorporated

  $ 85,922   $ 79,252   $ 67,476  

Income from discontinued operations

            3,297  

Net income attributable to La-Z-Boy Incorporated

  $ 85,922   $ 79,252   $ 70,773  

Basic weighted average common shares

    48,963     50,194     51,767  

Basic net income attributable to La-Z-Boy Incorporated per share:

   
 
   
 
   
 
 

Income from continuing operations attributable to La-Z-Boy Incorporated

  $ 1.75   $ 1.57   $ 1.30  

Income from discontinued operations, net of tax

            0.06  

Basic net income attributable to La-Z-Boy Incorporated per share

  $ 1.75   $ 1.57   $ 1.36  

Diluted weighted average common shares

    49,470     50,765     52,346  

Diluted net income attributable to La-Z-Boy Incorporated per share:

   
 
   
 
   
 
 

Income from continuing operations attributable to La-Z-Boy Incorporated

  $ 1.73   $ 1.55   $ 1.28  

Income from discontinued operations, net of tax

            0.06  

Diluted net income attributable to La-Z-Boy Incorporated per share

  $ 1.73   $ 1.55   $ 1.34  

Dividends declared per share

  $ 0.42   $ 0.36   $ 0.28  

   

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

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LA-Z-BOY INCORPORATED

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 
  Fiscal Year Ended  
(Amounts in thousands)   (52 weeks)
4/29/2017
  (53 weeks)
4/30/2016
  (52 weeks)
4/25/2015
 

Net income

  $ 86,984   $ 80,963   $ 71,971  

Other comprehensive income (loss)

                   

Currency translation adjustment

    (428 )   (2,557 )   (1,014 )

Change in fair value of cash flow hedges, net of tax

    360     274     (507 )

Net unrealized gains (losses) on marketable securities, net of tax

    694     (547 )   507  

Net pension amortization and actuarial gain, net of tax

    545     374     179  

Total other comprehensive income (loss)

    1,171     (2,456 )   (835 )

Total comprehensive income before noncontrolling interests          

    88,155     78,507     71,136  

Comprehensive income attributable to noncontrolling interests

    (1,116 )   (1,116 )   (1,122 )

Comprehensive income attributable to La-Z-Boy Incorporated

  $ 87,039   $ 77,391   $ 70,014  

   

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

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LA-Z-BOY INCORPORATED

CONSOLIDATED BALANCE SHEET

(Amounts in thousands, except par value)   4/29/2017   4/30/2016  

Current assets

             

Cash and equivalents

  $ 141,860   $ 112,358  

Restricted cash

    8,999     8,977  

Receivables, net of allowance of $2,563 at 4/29/17 and $3,145 at 4/30/16

    150,846     146,545  

Inventories, net

    175,114     175,589  

Other current assets

    40,603     38,503  

Total current assets

    517,422     481,972  

Property, plant and equipment, net

    169,132     171,590  

Goodwill

    74,245     37,193  

Other intangible assets, net

    18,489     8,558  

Deferred income taxes—long-term

    40,131     41,683  

Other long-term assets, net

    69,436     59,033  

Total assets

  $ 888,855   $ 800,029  

Current liabilities

             

Current portion of long-term debt

  $ 219   $ 290  

Accounts payable

    51,282     44,661  

Accrued expenses and other current liabilities

    147,175     112,476  

Total current liabilities

    198,676     157,427  

Long-term debt

    296     513  

Other long-term liabilities

    88,778     84,877  

Contingencies and commitments

         

Shareholders' equity

             

Preferred shares—5,000 authorized; none issued

         

Common shares, $1 par value—150,000 authorized; 48,472 outstanding at 4/29/17 and 49,331 outstanding at 4/30/16

    48,472     49,331  

Capital in excess of par value

    289,632     279,339  

Retained earnings

    284,698     252,472  

Accumulated other comprehensive loss

    (32,883 )   (34,000 )

Total La-Z-Boy Incorporated shareholders' equity

    589,919     547,142  

Noncontrolling interests

    11,186     10,070  

Total equity

    601,105     557,212  

Total liabilities and equity

  $ 888,855   $ 800,029  

   

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

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LA-Z-BOY INCORPORATED

CONSOLIDATED STATEMENT OF CASH FLOWS

 
  Fiscal Year Ended  
(Amounts in thousands)   (52 weeks)
4/29/2017
  (53 weeks)
4/30/2016
  (52 weeks)
4/25/2015
 

Cash flows from operating activities

                   

Net income

  $ 86,984   $ 80,963   $ 71,971  

Adjustments to reconcile net income to cash provided by operating activities

                   

(Gain) loss on disposal of assets

    (224 )   384     (499 )

Gain on sale of investments

    (471 )   (436 )   (214 )

Deferred income tax expense

    569     4,581     1,030  

Provision for doubtful accounts

    (291 )   (660 )   (2,290 )

Depreciation and amortization

    29,131     26,517     22,283  

Stock-based compensation expense

    8,864     8,292     6,780  

Pension plan contributions

    (2,300 )   (7,000 )    

Change in receivables

    (7,850 )   10,730     (2,595 )

Change in inventories

    12,517     (14,621 )   (7,644 )

Change in other assets

    (1,211 )   4,148     4,154  

Change in accounts payable

    4,541     (1,007 )   (5,206 )

Change in other liabilities

    15,915     470     (1,019 )

Net cash provided by operating activities

    146,174     112,361     86,751  

Cash flows from investing activities

                   

Proceeds from disposals of assets

    761     3,054     9,061  

Capital expenditures

    (20,304 )   (24,684 )   (70,319 )

Purchases of investments

    (29,763 )   (21,009 )   (40,327 )

Proceeds from sales of investments

    19,954     28,721     33,750  

Acquisitions, net of cash acquired

    (35,878 )   (23,311 )   (1,774 )

Change in restricted cash

    (23 )   659     2,936  

Net cash used for investing activities

    (65,253 )   (36,570 )   (66,673 )

Cash flows from financing activities

                   

Payments on debt

    (288 )   (508 )   (7,571 )

Payments for debt issuance costs

            (208 )

Stock issued for stock and employee benefit plans

    3,566     420     1,397  

Excess tax benefit on stock option exercises

    1,737     1,264     1,592  

Purchases of common stock

    (35,957 )   (44,082 )   (51,853 )

Dividends paid

    (20,655 )   (18,141 )   (14,513 )

Net cash used for financing activities

    (51,597 )   (61,047 )   (71,156 )

Effect of exchange rate changes on cash and equivalents

    178     (688 )   (281 )

Change in cash and equivalents

    29,502     14,056     (51,359 )

Cash and equivalents at beginning of period

    112,358     98,302     149,661  

Cash and equivalents at end of period

  $ 141,860   $ 112,358   $ 98,302  

Supplemental disclosure of non-cash investing activities

                   

Capital expenditures included in accounts payable

  $ 1,795   $   $ 500  

   

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

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LA-Z-BOY INCORPORATED

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(Amounts in thousands)   Common
Shares
  Capital in
Excess of
Par Value
  Retained
Earnings
  Accumulated
Other
Comprehensive
Income (Loss)
  Non-
Controlling
Interests
  Total  

At April 26, 2014

  $ 51,981   $ 262,901   $ 238,384   $ (31,380 ) $ 7,832   $ 529,718  

Net income

                70,773           1,198     71,971  

Other comprehensive loss

                      (759 )   (76 )   (835 )

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

    898     26     (10,684 )               (9,760 )

Purchases of common stock

    (2,132 )   (1,267 )   (48,454 )               (51,853 )

Stock option and restricted stock expense

          6,780                       6,780  

Tax benefit from exercise of options

          1,592                       1,592  

Dividends paid

                (14,513 )               (14,513 )

At April 25, 2015

    50,747     270,032     235,506     (32,139 )   8,954     533,100  

Net income

                79,252           1,711     80,963  

Other comprehensive loss

                      (1,861 )   (595 )   (2,456 )

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

    243     97     (2,068 )               (1,728 )

Purchases of common stock

    (1,659 )   (346 )   (42,077 )               (44,082 )

Stock option and restricted stock expense

          8,292                       8,292  

Tax benefit from exercise of options

          1,264                       1,264  

Dividends paid

                (18,141 )               (18,141 )

At April 30, 2016

    49,331     279,339     252,472     (34,000 )   10,070     557,212  

Net income

                85,922           1,062     86,984  

Other comprehensive income

                      1,117     54     1,171  

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

    504     2,992     (1,747 )               1,749  

Purchases of common stock

    (1,363 )   (3,300 )   (31,294 )               (35,957 )

Stock option and restricted stock expense

          8,864                       8,864  

Tax benefit from exercise of options

          1,737                       1,737  

Dividends paid

                (20,655 )               (20,655 )

At April 29, 2017

  $ 48,472   $ 289,632   $ 284,698   $ (32,883 ) $ 11,186   $ 601,105  

   

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

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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," or the "Company") consolidated financial statements. It is important to note that our fiscal year 2017 and fiscal year 2015 included 52 weeks, whereas fiscal year 2016 included 53 weeks. The additional week in fiscal year 2016 was included in our 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.

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 assets and 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 63% and 70% of our inventories at April 29, 2017, and April 30, 2016, respectively. Cost is determined for all other inventories on a first-in, first-out ("FIFO") basis. The LIFO method of accounting is used for our La-Z-Boy U.S. wholesale business inventory and our Casegoods Segment inventory, while the FIFO method is used for the remainder of our inventory.

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 related to coding and testing the software under development. Computer software costs are depreciated over three to ten 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 1: Accounting Policies (Continued)

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 expenses.

We review the carrying value of our long-lived assets for impairment annually or whenever 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 units in our Upholstery segment (La-Z-Boy and England), our Casegoods segment, and each of our retail stores.

Indefinite-Lived Intangible Assets and Goodwill

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 asset might be impaired. Indefinite-lived intangible assets include our American Drew trade name, and the reacquired right to own and operate La-Z-Boy Furniture Galleries® stores in markets we have acquired. We establish the fair value of our trade name and reacquired rights based upon the relief from royalty method. Our goodwill relates to the acquisition of La-Z-Boy Furniture Galleries® stores in various geographic markets and the acquisition of the La-Z-Boy wholesale business in the United Kingdom and Ireland. The reporting units for goodwill related to store acquisitions are the geographic markets the acquired stores become part of upon acquisition, because the operations of the acquired stores benefit these geographic markets. The reporting unit for goodwill arising from the acquisition of the La-Z-Boy wholesale business in the United Kingdom and Ireland is that business. The estimated fair value for the reporting unit is determined based upon discounted cash flows. In situations where the fair value is less than the carrying value, indicating a potential impairment, a second comparison is performed using a calculation of implied fair value of goodwill to measure any such impairment.

Amortizable Intangible Assets

In fiscal 2017, we acquired the La-Z-Boy wholesale business in the United Kingdom and Ireland and recorded $4.1 million of intangible assets ($3.6 million of which related to acquired customer relationships) on the acquisition date. These intangible assets will be amortized between one and 15 years on a straight-line basis. We established the fair value of these amortizable intangible assets based on the multi-period excess earnings method, a variant of the income approach, and also the relief from royalty method. We will test these assets for impairment on an annual basis in the fourth quarter of our fiscal year, beginning in fiscal 2018. These assets were not tested during the fourth quarter of fiscal 2017, as we finalized the purchase accounting for the acquisition during that quarter, and assessed the fair value of the assets at that time.

Investments

Available-for-sale 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). Realized gains and losses and charges for other-than-temporary impairments are included in determining net income, with related purchase costs based on the first-in, first-out method. We evaluate our

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 1: Accounting Policies (Continued)

available-for-sale investments for possible other-than-temporary impairments by reviewing factors such as the extent to which, and length of time, an investment's fair value has been 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.

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. The change in cash surrender or contract value is recorded as income or expense during each period.

Revenue Recognition and Related Allowances for Credit Losses

Substantially all of our shipping agreements with third-party carriers transfer the risk of loss to our customers upon shipment. Accordingly, our shipments using third-party carriers are generally recognized as revenue when product is shipped. In all cases, for product shipped on our company-owned trucks, we recognize revenue when the product is delivered. This revenue includes amounts we billed to customers for shipping. At the time we recognize revenue, we make provisions for estimated product returns and warranties, as well as other incentives that we may offer to customers. We also recognize revenue for amounts we receive from our customers in connection with our shared advertising cost arrangement. We import certain products from foreign ports, some of which are shipped directly to our domestic customers. In this case, revenue is not recognized until title is assumed by our customer, which is normally after the goods pass through U.S. Customs.

Incentives offered to customers include cash discounts and other sales incentive programs. Estimated cash discounts and other sales incentives are recorded as a reduction of revenues when the revenue is recognized.

Trade accounts receivable arise from the sale of products on trade credit terms. On a quarterly basis, our management team reviews 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 for the new sales is reasonably assured.

Our allowances for credit losses reflect our best estimate of probable losses inherent in the trade accounts receivable balance. We determine the allowance based on known troubled accounts, historic experience, and other currently available evidence. We had no gross notes receivable amounts outstanding and no corresponding allowance for credit losses on notes receivable at April 29, 2017, or at April 30, 2016.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 1: Accounting Policies (Continued)

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.

During fiscal 2017, fiscal 2016, and fiscal 2015, we recorded a benefit related to legal settlements as part of cost of sales. Gross margin benefited 0.2 percentage points, 0.3 percentage points and 0.4 percentage points for fiscal 2017, fiscal 2016, and fiscal 2015, respectively, as a result of legal settlements.

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 regional 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 administration 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 certain pension costs.

Research and Development Costs

Research and development costs are charged to expense in the periods incurred. Expenditures for research and development costs were $8.0 million, $6.3 million, and $6.1 million for the fiscal years ended April 29, 2017, April 30, 2016, and April 25, 2015, 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 ad is first aired or released. Gross advertising expenses were $82.1 million, $70.8 million, and $63.3 million for the fiscal years ended April 29, 2017, April 30, 2016, and April 25, 2015, respectively.

A portion of our advertising program is a national advertising campaign. This campaign is a shared advertising program with our La-Z-Boy Furniture Galleries® stores, which reimburse us for about 30% 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.

Operating Leases

We record rent expense related to operating leases on a straight-line basis for minimum lease payments starting with the beginning of the lease term based on the date that we have the right to control the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 1: Accounting Policies (Continued)

leased property. Our minimum lease payments may incorporate step rent provisions or rent escalations. We also record rental income from subleases on a straight-line basis for minimum lease payments.

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 operating results, 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

The functional currency of our wholesale Canadian and Mexico subsidiaries is the U.S. dollar. Transaction gains and losses associated with translating our wholesale Canadian and Mexico subsidiaries' assets and liabilities, which are non-U.S. dollar denominated, are recorded in other income (expense), net in our consolidated statement of income. The functional currency of each of our other foreign subsidiaries is its respective local currency. Assets and liabilities of those 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. In connection with our Mexico subsidiary we have entered into foreign currency forward contracts, designated as cash flow hedges, to hedge certain forecasted expenses.

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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 1: Accounting Policies (Continued)

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 estimable. As a litigation matter develops, we, in conjunction with any outside counsel handling the matter, evaluate on an ongoing basis whether such matter presents a loss contingency that is probable and estimable. When a loss contingency is not both probable and estimable, we do not establish an accrued liability. If, at the time of evaluation, the loss contingency related to a litigation matter is not both probable and estimable, the matter will continue to be monitored for further developments that would make such loss contingency both probable and estimable. Once the loss contingency related to a litigation matter is deemed to be both probable and 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.

Discontinued Operations

During fiscal 2014, we classified Lea Industries as held for sale. We were unable to find a buyer for our Lea Industries business and, consequently, we ceased its operations and liquidated all the assets, consisting mostly of inventory, and ceased operations of Lea Industries during the third quarter of fiscal 2015. The operating results of Lea Industries are reported as discontinued operations in our consolidated statement of income for fiscal 2015.

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 $1.5 million.

Recent Accounting Pronouncements

In May 2014, the FASB issued a new accounting standard that requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new standard supersedes virtually all existing authoritative accounting guidance on revenue recognition and requires additional disclosures and greater use of estimates and judgments. During July 2015, the FASB deferred the effective date of the revenue recognition standard by one year, thus making the new accounting standard effective for our fiscal 2019. We are currently reviewing our contracts and other revenue streams, gathering documentation, and developing our new accounting policy related to this standard. At this time, we believe we will ultimately choose the modified retrospective approach to implementing the new standard when it becomes effective for our fiscal 2019, but we are still assessing the overall impact this standard will have on our consolidated financial statements and financial statement disclosures.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 1: Accounting Policies (Continued)

In January 2016, the FASB issued a new accounting standard that requires equity investments to be measured at fair value with the fair value changes to be recognized through net income. This standard does not apply to investments that are accounted for under the equity method of accounting, or that result in consolidation of the invested entity. We currently hold equity investments that are measured at fair value at the end of each reporting period, and we recognize the fair value changes through other comprehensive income (loss) as unrealized gains (losses). Based on the fair value of our unrealized gain as of April 29, 2017, adoption of this standard would be immaterial to our consolidated financial statements. Adoption of this standard will be required for our fiscal 2019 financial statements.

In February 2016, the FASB issued a new accounting standard requiring all operating leases that a lessee enters into to be recorded on their balance sheet. Under this new standard, the lessee is required to record an asset for the right to use the underlying asset for the lease term and a corresponding liability for the contractual lease payments. This standard is effective for our fiscal 2020. We are currently reviewing our leases and gathering the necessary information and tools to adopt this standard when it becomes effective for our fiscal 2020. We anticipate that adoption of this standard will have a significant impact on our consolidated balance sheet as we have a significant number of operating leases. See Note 10 for more information on our operating leases as of April 29, 2017.

In March 2016, the FASB issued a new accounting standard focused on simplifying the accounting for share-based payments. The standard includes changes to the accounting for income taxes related to share-based payments as well as changes to the presentation of these tax impacts on the statement of cash flows. We will adopt this standard in the first quarter of our fiscal 2018. Any increased volatility in our consolidated statement of income as a result of applying the provisions of this standard will be dependent on future vesting activity and volatility in our stock price. We plan to continue to estimate expected forfeitures.

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

In August 2016, the FASB issued a new accounting standard that provides guidance on the classification of eight cash receipts and cash payments issues on the statement of cash flows. The intent of this standard is to help reduce diversity in practice regarding cash flow presentation. We plan to early adopt this standard in our fiscal 2018. We do not believe that adoption of this standard will have a material impact on our statement of cash flows presentation.

In October 2016, the FASB issued a new accounting standard that requires entities to recognize the income tax consequences of an intra-entity transfer of assets other than inventory when the transfer occurs. This standard will be applicable for our fiscal 2019. We are still assessing the impact this standard will have on our consolidated financial statements and related disclosures.

In November 2016, the FASB issued a new accounting standard that requires the statement of cash flows to explain the change during the period in the total cash, cash equivalents, and amount generally described as restricted cash. Amounts generally described as restricted cash should be included with

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Note 1: Accounting Policies (Continued)

cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. We plan to early adopt this standard in our fiscal 2018. We do not believe that adoption of this standard will have a material impact on our statement of cash flows presentation.

In January 2017, the FASB issued a new accounting standard clarifying the definition of a business with the objective of adding guidance to evaluating whether a transaction should be accounted for as an acquisition. This standard will be applicable for our fiscal 2019. We are still assessing the impact this standard will have on our consolidated financial statements and related disclosures.

In January 2017, the FASB issued a new accounting standard simplifying the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. An entity should now perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. This standard will be applicable for our fiscal 2021. We are still assessing the impact this standard will have on our consolidated financial statements and related disclosures.

In March 2017, the FASB issued a new accounting standard that will change the presentation of pension costs in our consolidated statement of income. Under this new standard, pension service costs will be presented in our consolidated statement of income with the related compensation costs. All other components of pension costs will be presented in non-operating expense in our consolidated statement of income. We plan to early adopt this standard in our fiscal 2018. Adoption of this standard will not have a material impact on our consolidated statement of income but will change the presentation of this statement by reclassifying certain components of pension costs from operating expenses to non-operating expenses.

Note 2: Acquisitions

Upholstery segment acquisitions

In fiscal 2017, we acquired the La-Z-Boy wholesale business in the United Kingdom and Ireland. Per the terms of the purchase agreement, payment for the business was due 90 business days following the date of acquisition, and accordingly, we have recorded a purchase price liability of $16.9 million, which includes $1.0 million of contingent consideration at April 29, 2017, related to this acquisition, based on current exchange rates. At April 29, 2017, based on current exchange rates, we had $4.1 million of intangible assets ($3.6 million of which related to acquired customer relationships) recorded, which will be amortized between one and 15 years on a straight-line basis, and $12.2 million of goodwill, which primarily relates to the expected synergies resulting from the integration of the acquired wholesale business with our domestic wholesale business and the anticipated future benefits of these synergies. The intangible assets, excluding the acquired customer relationships will be amortized and deducted for income tax purposes between one and two years. We recorded the acquisition in our Upholstery segment.

Retail segment acquisitions

During fiscal 2017, we acquired the assets of four independent operators of 14 La-Z-Boy Furniture Galleries® stores in Nevada, Canada, Pennsylvania, New York and New Jersey for $38.7 million,

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Note 2: Acquisitions (Continued)

including $0.2 million of contingent consideration, $35.9 million of cash and $2.6 million of forgiveness of accounts receivable owed by these dealers.

During fiscal 2016, we acquired the assets of four independent operators of 11 La-Z-Boy Furniture Galleries® stores in Colorado, Wisconsin, North and South Carolina, and Ohio for $26.3 million, composed of $23.3 million of cash and $3.0 million of forgiveness of certain of these dealers' accounts receivable and prepaid expenses.

During fiscal 2015, we acquired the assets of two independent La-Z-Boy Furniture Galleries® dealers in exchange for $1.8 million in cash and forgiveness of these dealers' net accounts and notes receivable of $1.0 million.

In the three years of acquisitions above, we agreed to forgive the dealers' accounts and notes receivable as part of the negotiation of the purchase price with the dealers.

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 effective settlement of these arrangements resulted in no settlement gain or loss as the contractual terms were at market. We recorded an indefinite-lived intangible asset of $5.9 million, $3.1 million, and $1.0 million in fiscal 2017, fiscal 2016, and fiscal 2015, respectively, related to these reacquired rights. We also recognized $24.9 million, $22.0 million, and $1.2 million of goodwill in fiscal 2017, fiscal 2016, and fiscal 2015, respectively, which primarily relates to the expected synergies resulting from the integration of the acquired stores and the anticipated future benefits of these synergies. All of the indefinite-lived intangible assets and goodwill assets for stores acquired in the United States will be amortized and deducted for federal income tax purposes over 15 years. A portion of the indefinite-lived intangible assets and goodwill assets for stores acquired in Canada will be amortized and deducted for income tax purposes on a declining balance until fully amortized.

We based the purchase price allocations on fair values at the dates of acquisition, and summarize them in the following table:

(Amounts in thousands)   Fiscal 2017
Acquisitions
  Fiscal 2016
Acquisitions
 

Current assets

  $ 12,175   $ 4,146  

Goodwill and other intangible assets

    46,921     25,129  

Property, plant and equipment

    1,106     202  

Total assets acquired

    60,202     29,477  

Current liabilities acquired

   
(4,023

)
 
(3,217

)

Purchase price liability

    (15,103 )    

Contingent consideration liability

    (1,204 )    

Total liabilities

    (20,330 )   (3,217 )

Total purchase price

  $ 39,872   $ 26,260  

All acquired stores were included in our Retail segment results upon acquisition. None of the above acquisitions were material to our financial position or our results of operations, and, therefore, pro-forma financial information is not presented.

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Note 3: Discontinued Operations

During the fourth quarter of fiscal 2014, we classified Lea Industries, a division of La-Z-Boy Casegoods, Inc. (formerly La-Z-Boy Greensboro, Inc.), as held for sale while we marketed that business for sale. We were unable to find a buyer for our Lea Industries business, and consequently, we ceased its operations and liquidated all the assets, consisting mostly of inventory, and ceased operations of Lea Industries during the third quarter of fiscal 2015. The operating results of Lea Industries are reported as discontinued operations for fiscal 2015. We had historically reported the results of our Lea Industries business unit as a component of our Casegoods segment.

In fiscal 2015, we recorded $3.8 million of income in discontinued operations related to our previously owned subsidiary, American Furniture Company, Incorporated. We sold this subsidiary in fiscal 2007, and reported it as discontinued operations at that time. The income related to the Continued Dumping and Subsidy Offset Act of 2000 ("CDSOA"), which provided for distribution of duties, collected by U.S. Customs and Border Protection from antidumping cases, to domestic producers that supported the antidumping petition related to wooden bedroom furniture imported from China. When we sold American Furniture Company, Incorporated our contract provided that we would receive a portion of any such duties to which that entity was entitled. The remainder of the CDSOA income reported in discontinued operations in fiscal 2015 related to Lea Industries.

The results of our discontinued operations for the fiscal year ended April 25, 2015, was as follows:

(Amounts in thousands)   4/25/2015  

Net sales

  $ 7,850  

Operating income from discontinued operations

 
$

869
 

Interest expense

    8  

Income from Continued Dumping and Subsidy Offset Act, net

    4,211  

Income tax expense

    (1,775 )

Income from discontinued operations, net of tax

  $ 3,297  

In the consolidated statement of cash flows, the activity of these operating units was included along with our activity from continuing operations for fiscal 2015.

Note 4: Inventories

(Amounts in thousands)   4/29/2017   4/30/2016  

Raw materials

  $ 83,371   $ 87,905  

Work in process

    11,320     11,591  

Finished goods

    101,444     97,861  

FIFO inventories

    196,135     197,357  

Excess of FIFO over LIFO

    (21,021 )   (21,768 )

Total inventories

  $ 175,114   $ 175,589  

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Note 5: Property, Plant and Equipment

(Amounts in thousands)   Estimated
Useful
Lives
  4/29/2017   4/30/2016  

Buildings and building fixtures

    3 - 40 years   $ 196,817   $ 192,211  

Machinery and equipment

    3 - 15 years     141,071     143,561  

Information systems and software

    3 - 10 years     76,684     72,275  

Land

        14,565     14,346  

Land improvements

    3 - 30 years     15,178     15,007  

Transportation equipment

    3 - 10 years     14,905     15,728  

Furniture and fixtures

    3 - 15 years     20,390     19,397  

Construction in progress

          11,247     10,465  

          490,857     482,990  

Accumulated depreciation

          (321,725 )   (311,400 )

Net property, plant and equipment

        $ 169,132   $ 171,590  

Depreciation expense from continuing operations for the fiscal years ended April 29, 2017, April 30, 2016, and April 25, 2015, was $25.4 million, $23.3 million, and $19.3 million, respectively.

Note 6: Goodwill and Other Intangible Assets

Our goodwill, reacquired rights, and other intangible assets on our consolidated balance sheet relate to our acquisitions of La-Z-Boy Furniture Galleries® stores over the past several fiscal years and our recent acquisition of the La-Z-Boy wholesale business in the United Kingdom and Ireland. Details about these acquisitions can be found in Note 2. Our other intangible assets also include a trade name for American Drew.

We test goodwill annually for impairment, using a qualitative approach for some items of goodwill if possible, and use a quantitative two-step approach for the rest. The key assumptions used in the two-step assessment of our goodwill at April 29, 2017, were a discount rate of 9.3% and a terminal growth rate of 2.0%. The relative fair value of our reporting units significantly exceeds the carrying value of our goodwill as of April 29, 2017. As of April 29, 2017, $62.1 million of our goodwill relates to our Retail segment, and we recorded the remainder in our Upholstery segment. We did not have any goodwill impairment in fiscal 2017, fiscal 2016, or fiscal 2015.

The following is a roll-forward of goodwill for the fiscal years ended April 29, 2017, and April 30, 2016:

(Amounts in thousands)   Goodwill  

Balance at April 25, 2015

  $ 15,164  

Acquisitions

    22,029  

Balance at April 30, 2016

    37,193  

Acquisitions

    36,584  

Translation adjustment

    468  

Balance at April 29, 2017

  $ 74,245  

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Note 6: Goodwill and Other Intangible Assets (Continued)

The following is a roll-forward of our other intangible assets for the fiscal years ended April 29, 2017, and April 30, 2016:

(Amounts in thousands)   Trade Names   Reacquired
Rights
  Other
Intangible
Assets
  Total Other
Intangible
Assets
 

Balance at April 25, 2015

  $ 1,195   $ 4,263   $   $ 5,458  

Acquisitions

        3,100         3,100  

Balance at April 30, 2016

    1,195     7,363         8,558  

Acquisitions

        6,807     3,530     10,337  

Impairment charges

    (40 )           (40 )

Amortization

        (336 )   (127 )   (463 )

Translation adjustment

        (87 )   184     97  

Balance at April 29, 2017

  $ 1,155   $ 13,747   $ 3,587   $ 18,489  

Note 7: Investments

We have current and long-term investments intended to enhance returns on our cash as well as to fund future obligations of our non-qualified defined benefit retirement plan, our executive deferred compensation plan, and our performance compensation retirement plan. We also hold other investments including an available-for-sale convertible debt security and cost-basis preferred shares of a privately-held company. Our short-term investments are included in other current assets and our long-term investments are included in other long-term assets on our consolidated balance sheet. The following summarizes our investments at April 29, 2017, and April 30, 2016:

(Amounts in thousands)   4/29/2017   4/30/2016  

Short-term investments:

             

Available-for-sale investments

  $ 15,040   $ 13,491  

Trading securities

    6      

Held-to-maturity investments

    1,867     1,826  

Total short-term investments

    16,913     15,317  

Long-term investments:

             

Available-for-sale investments

    31,264     31,659  

Cost basis investment

    5,500      

Total long-term investments

    36,764     31,659  

Total investments

  $ 53,677   $ 46,976  

Investments to enhance returns on cash

  $ 33,087   $ 33,583  

Investments to fund compensation/retirement plans

  $ 13,690   $ 13,393  

Other investments

  $ 6,900   $  

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Note 7: Investments (Continued)

The following is a summary of the unrealized gains, unrealized losses, and fair value by investment type at April 29, 2017, and April 30, 2016:

Fiscal 2017

(Amounts in thousands)   Gross Unrealized Gains   Gross Unrealized Losses   Fair Value  

Equity securities

  $ 1,796   $ (83 ) $ 13,610  

Fixed income

    729     (72 )   37,580  

Mutual funds

            6  

Other

    1     (8 )   2,481  

Total securities

  $ 2,526   $ (163 ) $ 53,677