Table of Contents

 

 

 

GRAPHIC

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549-1004

FORM 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

FOR QUARTERLY PERIOD ENDED JANUARY 24, 2015

 

COMMISSION FILE NUMBER 1-9656

 

LA-Z-BOY INCORPORATED

(Exact name of registrant as specified in its charter)

 

MICHIGAN

 

38-0751137

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

1284 North Telegraph Road, Monroe, Michigan

 

48162-3390

(Address of principal executive offices)

 

(Zip Code)

 

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

 

None

(Former name, former address and former fiscal year, if changed since last report.)

 

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 x           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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).

 

Yes x           No o

 

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

 

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

Smaller reporting company 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 x

 

The number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

Class

 

Outstanding at February 10, 2015

Common Shares, $1.00 par value

 

51,188,212

 

 

 



Table of Contents

 

LA-Z-BOY INCORPORATED
FORM 10-Q THIRD QUARTER OF FISCAL 2015

 

TABLE OF CONTENTS

 

 

Page
Number(s)

 

 

PART I Financial Information (Unaudited)

3

 

 

Item 1.

Financial Statements

3

 

 

 

Consolidated Statement of Income

3

 

 

 

Consolidated Statement of Comprehensive Income

5

 

 

 

Consolidated Balance Sheet

6

 

 

 

Consolidated Statement of Cash Flows

7

 

 

 

Consolidated Statement of Changes in Equity

8

 

 

 

Notes to Consolidated Financial Statements

9

 

 

 

Note 1. Basis of Presentation

9

 

 

 

Note 2. Restructuring

9

 

 

 

Note 3. Discontinued Operations

9

 

 

 

Note 4. Inventories

11

 

 

 

Note 5. Goodwill and Other Intangible Assets

11

 

 

 

Note 6. Investments

11

 

 

 

Note 7. Debt

12

 

 

 

Note 8. Pension Plans

13

 

 

 

Note 9. Product Warranties

13

 

 

 

Note 10. Stock-Based Compensation

13

 

 

 

Note 11. Accumulated Other Comprehensive Loss

17

 

 

 

Note 12. Segment Information

19

 

 

 

Note 13. Income Taxes

20

 

 

 

Note 14. Earnings per Share

20

 

 

 

Note 15. Fair Value Measurements

21

 

 

 

Note 16. Recent Accounting Pronouncements

23

 

 

 

 

 

 

 

Item 2.

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

23

 

 

 

Cautionary Statement Concerning Forward-Looking Statements

24

 

 

 

Introduction

25

 

 

 

Results of Operations

26

 

 

 

Liquidity and Capital Resources

35

 

 

 

Critical Accounting Policies

38

 

 

 

 

 

 

 

 

Business Outlook

38

 

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

38

 

 

Item 4.

Controls and Procedures

38

 

 

 

 

 

PART II Other Information

39

 

 

Item 1A.

Risk Factors

39

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

39

 

 

Item 6.

Exhibits

40

 

 

 

 

 

Signature Page

41

 

2



Table of Contents

 

PART I — FINANCIAL INFORMATION (UNAUDITED)

 

ITEM 1. FINANCIAL STATEMENTS

 

LA-Z-BOY INCORPORATED
CONSOLIDATED STATEMENT OF INCOME

 

 

 

Quarter Ended

 

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

 

1/24/15

 

1/25/14

 

Sales

 

$

357,876

 

$

346,525

 

Cost of sales

 

 

 

 

 

Cost of goods sold

 

228,326

 

224,786

 

Restructuring

 

(9

)

(60

)

Total cost of sales

 

228,317

 

224,726

 

Gross profit

 

129,559

 

121,799

 

Selling, general and administrative expense

 

103,393

 

95,915

 

Restructuring

 

(762

)

 

Operating income

 

26,928

 

25,884

 

Interest expense

 

131

 

142

 

Interest income

 

232

 

183

 

Other income, net

 

805

 

849

 

Income from continuing operations before income taxes

 

27,834

 

26,774

 

Income tax expense

 

9,477

 

8,916

 

Income from continuing operations

 

18,357

 

17,858

 

Income (loss) from discontinued operations, net of tax

 

115

 

(987

)

Net income

 

18,472

 

16,871

 

Net income attributable to noncontrolling interests

 

(524

)

(388

)

Net income attributable to La-Z-Boy Incorporated

 

$

17,948

 

$

16,483

 

 

 

 

 

 

 

Net income attributable to La-Z-Boy Incorporated:

 

 

 

 

 

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

 

$

17,833

 

$

17,470

 

Income (loss) from discontinued operations

 

115

 

(987

)

Net income attributable to La-Z-Boy Incorporated

 

$

17,948

 

$

16,483

 

 

 

 

 

 

 

Basic weighted average common shares

 

51,576

 

52,516

 

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

 

 

 

 

 

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

 

$

0.35

 

$

0.33

 

Income (loss) from discontinued operations

 

 

(0.02

)

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

 

$

0.35

 

$

0.31

 

 

 

 

 

 

 

Diluted weighted average common shares

 

52,139

 

53,226

 

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

 

 

 

 

 

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

 

$

0.34

 

$

0.33

 

Income (loss) from discontinued operations

 

 

(0.02

)

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

 

$

0.34

 

$

0.31

 

 

 

 

 

 

 

Dividends declared per share

 

$

0.08

 

$

0.06

 

 

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

 

3



Table of Contents

 

LA-Z-BOY INCORPORATED
CONSOLIDATED STATEMENT OF INCOME

 

 

 

Nine Months Ended

 

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

 

1/24/15

 

1/25/14

 

Sales

 

$

1,050,457

 

$

1,004,298

 

Cost of sales

 

 

 

 

 

Cost of goods sold

 

679,873

 

658,462

 

Restructuring

 

(376

)

(115

)

Total cost of sales

 

679,497

 

658,347

 

Gross profit

 

370,960

 

345,951

 

Selling, general and administrative expense

 

298,091

 

279,184

 

Restructuring

 

(742

)

 

Operating income

 

73,611

 

66,767

 

Interest expense

 

408

 

411

 

Interest income

 

667

 

539

 

Other income, net

 

699

 

1,107

 

Income from continuing operations before income taxes

 

74,569

 

68,002

 

Income tax expense

 

25,975

 

22,786

 

Income from continuing operations

 

48,594

 

45,216

 

Income (loss) from discontinued operations, net of tax

 

2,897

 

(1,393

)

Net income

 

51,491

 

43,823

 

Net income attributable to noncontrolling interests

 

(933

)

(1,006

)

Net income attributable to La-Z-Boy Incorporated

 

$

50,558

 

$

42,817

 

 

 

 

 

 

 

Net income attributable to La-Z-Boy Incorporated:

 

 

 

 

 

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

 

$

47,661

 

$

44,210

 

Income (loss) from discontinued operations

 

2,897

 

(1,393

)

Net income attributable to La-Z-Boy Incorporated

 

$

50,558

 

$

42,817

 

 

 

 

 

 

 

Basic weighted average common shares

 

52,015

 

52,465

 

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

 

 

 

 

 

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

 

$

0.91

 

$

0.84

 

Income (loss) from discontinued operations

 

0.06

 

(0.03

)

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

 

$

0.97

 

$

0.81

 

 

 

 

 

 

 

Diluted weighted average common shares

 

52,540

 

53,379

 

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

 

 

 

 

 

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

 

$

0.90

 

$

0.82

 

Income (loss) from discontinued operations

 

0.06

 

(0.02

)

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

 

$

0.96

 

$

0.80

 

 

 

 

 

 

 

Dividends declared per share

 

$

0.20

 

$

0.14

 

 

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

 

4



Table of Contents

 

LA-Z-BOY INCORPORATED
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 

 

 

Quarter Ended

 

(Unaudited, amounts in thousands)

 

1/24/15

 

1/25/14

 

Net income

 

$

18,472

 

$

16,871

 

Other comprehensive income (loss)

 

 

 

 

 

Currency translation adjustment

 

(761

)

(1,223

)

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

 

(291

)

(165

)

Net unrealized gain (loss) on marketable securities, net of tax

 

55

 

(105

)

Net pension amortization, net of tax

 

434

 

547

 

Total other comprehensive loss

 

(563

)

(946

)

Total comprehensive income before allocation to noncontrolling interests

 

17,909

 

15,925

 

Comprehensive (income) loss attributable to noncontrolling interests

 

(474

)

23

 

Comprehensive income attributable to La-Z-Boy Incorporated

 

$

17,435

 

$

15,948

 

 

 

 

Nine Months Ended

 

(Unaudited, amounts in thousands)

 

1/24/15

 

1/25/14

 

Net income

 

$

51,491

 

$

43,823

 

Other comprehensive income (loss)

 

 

 

 

 

Currency translation adjustment

 

(715

)

(2,530

)

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

 

(491

)

(529

)

Net unrealized gain on marketable securities, net of tax

 

154

 

540

 

Net pension amortization, net of tax

 

1,303

 

1,642

 

Total other comprehensive income (loss)

 

251

 

(877

)

Total comprehensive income before allocation to noncontrolling interests

 

51,742

 

42,946

 

Comprehensive income attributable to noncontrolling interests

 

(861

)

(145

)

Comprehensive income attributable to La-Z-Boy Incorporated

 

$

50,881

 

$

42,801

 

 

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

 

5



Table of Contents

 

LA-Z-BOY INCORPORATED

CONSOLIDATED BALANCE SHEET

 

(Unaudited, amounts in thousands)

 

1/24/15

 

4/26/14

 

Current assets

 

 

 

 

 

Cash and equivalents

 

$

98,410

 

$

149,661

 

Restricted cash

 

9,637

 

12,572

 

Receivables, net of allowance of $10,336 at 1/24/15 and $12,368 at 4/26/14

 

149,090

 

152,614

 

Inventories, net

 

160,133

 

147,009

 

Deferred income taxes — current

 

15,782

 

15,037

 

Business held for sale

 

 

4,290

 

Other current assets

 

42,017

 

41,490

 

Total current assets

 

475,069

 

522,673

 

Property, plant and equipment, net

 

170,880

 

127,535

 

Goodwill

 

15,164

 

13,923

 

Other intangible assets

 

5,094

 

4,544

 

Deferred income taxes — long-term

 

35,077

 

32,430

 

Other long-term assets, net

 

65,529

 

70,190

 

Total assets

 

$

766,813

 

$

771,295

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

Current portion of long-term debt

 

$

331

 

$

7,497

 

Accounts payable

 

49,490

 

56,177

 

Business held for sale

 

 

832

 

Accrued expenses and other current liabilities

 

103,250

 

102,876

 

Total current liabilities

 

153,071

 

167,382

 

Long-term debt

 

51

 

277

 

Other long-term liabilities

 

82,732

 

73,918

 

Contingencies and commitments

 

 

 

Shareholders’ equity

 

 

 

 

 

Preferred shares — 5,000 authorized; none issued

 

 

 

Common shares, $1 par value — 150,000 authorized; 51,266 outstanding at 1/24/15 and 51,981 outstanding at 4/26/14

 

51,266

 

51,981

 

Capital in excess of par value

 

267,988

 

262,901

 

Retained earnings

 

234,069

 

238,384

 

Accumulated other comprehensive loss

 

(31,057

)

(31,380

)

Total La-Z-Boy Incorporated shareholders’ equity

 

522,266

 

521,886

 

Noncontrolling interests

 

8,693

 

7,832

 

Total equity

 

530,959

 

529,718

 

Total liabilities and equity

 

$

766,813

 

$

771,295

 

 

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

 

6



Table of Contents

 

LA-Z-BOY INCORPORATED

CONSOLIDATED STATEMENT OF CASH FLOWS

 

 

 

Nine Months Ended

 

(Unaudited, amounts in thousands)

 

1/24/15

 

1/25/14

 

Cash flows from operating activities

 

 

 

 

 

Net income

 

$

51,491

 

$

43,823

 

Adjustments to reconcile net income to cash provided by (used for) operating activities

 

 

 

 

 

Restructuring

 

(1,106

)

(115

)

Impairment of business held for sale

 

 

1,149

 

Deferred income tax benefit

 

(3,987

)

(2,929

)

Provision for doubtful accounts

 

(2,060

)

(2,494

)

Depreciation and amortization

 

16,297

 

17,529

 

Equity-based compensation expense

 

6,094

 

7,371

 

Change in receivables

 

7,011

 

4,865

 

Change in inventories

 

(11,913

)

(15,166

)

Change in other assets

 

5,794

 

2,698

 

Change in payables

 

(7,659

)

2,865

 

Change in other liabilities

 

(4,898

)

3,193

 

Net cash provided by operating activities

 

55,064

 

62,789

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Proceeds from disposal of assets

 

8,940

 

2,248

 

Capital expenditures

 

(56,512

)

(23,078

)

Purchases of investments

 

(30,544

)

(40,796

)

Proceeds from sales of investments

 

23,987

 

27,974

 

Acquisitions, net of cash acquired

 

(1,774

)

(801

)

Change in restricted cash

 

2,935

 

120

 

Net cash used for investing activities

 

(52,968

)

(34,333

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Payments on debt

 

(7,413

)

(434

)

Payments for debt issuance costs

 

(164

)

 

Stock issued for stock and employee benefit plans

 

496

 

3,526

 

Excess tax benefit on stock option exercises

 

234

 

5,805

 

Purchases of common stock

 

(35,752

)

(20,276

)

Dividends paid

 

(10,416

)

(7,375

)

Net cash used for financing activities

 

(53,015

)

(18,754

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and equivalents

 

(332

)

(675

)

Change in cash and equivalents

 

(51,251

)

9,027

 

Cash and equivalents at beginning of period

 

149,661

 

131,085

 

Cash and equivalents at end of period

 

$

98,410

 

$

140,112

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing activities

 

 

 

 

 

Capital expenditures included in payables

 

$

6,275

 

$

2,183

 

 

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

 

7



Table of Contents

 

LA-Z-BOY INCORPORATED

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

 

(Unaudited, amounts in thousands)

 

Common
Shares

 

Capital in
Excess of
Par Value

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Loss

 

Non-
Controlling
Interests

 

Total

 

At April 27, 2013

 

$

52,392

 

$

241,888

 

$

226,044

 

$

(35,496

)

$

7,140

 

$

491,968

 

Net income

 

 

 

 

 

55,056

 

 

 

1,324

 

56,380

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

4,116

 

(730

)

3,386

 

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

 

937

 

2,395

 

(4,509

)

 

 

 

 

(1,177

)

Purchases of common stock

 

(1,348

)

(3,056

)

(27,693

)

 

 

 

 

(32,097

)

Stock option and restricted stock expense

 

 

 

8,739

 

 

 

 

 

 

 

8,739

 

Excess tax benefit from exercise of options

 

 

 

12,935

 

 

 

 

 

 

 

12,935

 

Dividends paid

 

 

 

 

 

(10,514

)

 

 

 

 

(10,514

)

Change in noncontrolling interests

 

 

 

 

 

 

 

 

 

98

 

98

 

At April 26, 2014

 

51,981

 

262,901

 

238,384

 

(31,380

)

7,832

 

529,718

 

Net income

 

 

 

 

 

50,558

 

 

 

933

 

51,491

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

323

 

(72

)

251

 

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

 

815

 

(793

)

(10,683

)

 

 

 

 

(10,661

)

Purchases of common stock

 

(1,530

)

(448

)

(33,774

)

 

 

 

 

(35,752

)

Stock option and restricted stock expense

 

 

 

6,094

 

 

 

 

 

 

 

6,094

 

Excess tax benefit from exercise of options

 

 

 

234

 

 

 

 

 

 

 

234

 

Dividends paid

 

 

 

 

 

(10,416

)

 

 

 

 

(10,416

)

At January 24, 2015

 

$

51,266

 

$

267,988

 

$

234,069

 

$

(31,057

)

$

8,693

 

$

530,959

 

 

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

 

8



Table of Contents

 

LA-Z-BOY INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 1: Basis of Presentation

 

The accompanying consolidated financial statements include the consolidated accounts of La-Z-Boy Incorporated and our majority-owned subsidiaries. The April 26, 2014, balance sheet was derived from our audited financial statements. The interim financial information was prepared in conformity with generally accepted accounting principles, which were applied on a basis consistent with those reflected in our fiscal 2014 Annual Report on Form 10-K filed with the Securities and Exchange Commission, but does not include all of the disclosures required by generally accepted accounting principles. In management’s opinion, the interim financial information includes all adjustments and accruals, consisting only of normal recurring adjustments (except as otherwise disclosed), which are necessary for a fair presentation of results for the respective interim period. The interim results reflected in the accompanying financial statements are not necessarily indicative of the results of operations which will occur for the full fiscal year ending April 25, 2015.

 

During the third quarter of fiscal 2015 we received a cash payment related to a legal settlement that was recorded as part of cost of sales for the quarter and first nine months ended January 24, 2015. Gross margin improved 1.5 percentage points and 0.5 percentage point in the third quarter and first nine months of fiscal 2015, respectively, due to the legal settlement.

 

Note 2: Restructuring

 

During fiscal 2014, we committed to a restructuring of our casegoods business to transition to an all-import model for our wood furniture. We ceased casegoods manufacturing operations at our Hudson, North Carolina facility during the second quarter of fiscal 2015. As a result of this restructuring, we transitioned our remaining Kincaid and American Drew bedroom product lines to imported product and exited the hospitality business as we manufactured those products in our Hudson facility. We have transitioned our warehouse and repair functions from two North Wilkesboro, North Carolina facilities to Hudson. In addition, we sold both of the North Wilkesboro facilities and most of the wood-working equipment from our Hudson plant during the first nine months of fiscal 2015.

 

We have recorded pre-tax restructuring charges of $7.0 million ($4.5 million after tax) since the inception of this restructuring plan, with $3.7 million pre-tax ($2.4 million after tax) related to continuing operations and $3.3 million pre-tax ($2.1 million after tax) related to discontinued operations. These charges relate to severance and benefit-related costs and various asset write-downs, including fixed assets, inventory and tradenames. During the quarter and nine months ended January 24, 2015, we recorded pre-tax restructuring income of $0.8 million and $1.1 million, respectively, ($0.5 million and $0.7 million after tax, respectively), mainly related to gains realized on the sale of the North Wilkesboro warehouse in the third quarter, as well as inventory recoveries. This income was slightly offset by severance and benefit related costs, as well as rent expense related to an idled showroom.

 

We had $0.3 million of restructuring liability remaining as of January 24, 2015, primarily related to severance, which we expect to be settled throughout fiscal 2016. We included restructuring charges related to discontinued operations in our income (loss) from discontinued operations in our consolidated statement of income.

 

Note 3: Discontinued Operations

 

During the fourth quarter of fiscal 2014, we sold substantially all of the assets of our Bauhaus U.S.A. business unit to a group of investors and classified Lea Industries as held for sale while we marketed that business for

 

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sale. We were unable to find a buyer for our Lea Industries business, and instead we 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 Bauhaus and Lea Industries are reported as discontinued operations for all periods presented. We had historically reported the results of our Bauhaus business unit as a component of our Upholstery segment and Lea Industries as a component of our Casegoods segment.

 

In the first quarter of 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, which provides 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. That entity subsequently filed for bankruptcy. The funds were distributed by U.S. Customs to the bankruptcy trustee and by the trustee to be held in trust for us during the first quarter of fiscal 2015 and were received by us early in the second quarter of fiscal 2015.

 

The results of our discontinued operations for the quarter and nine months ended January 24, 2015, and January 25, 2014, were as follows:

 

 

 

Quarter Ended

 

Nine Months Ended

 

(Amounts in thousands)

 

1/24/15

 

1/25/14

 

1/24/15

 

1/25/14

 

Net sales

 

$

1,075

 

$

12,951

 

$

7,863

 

$

40,494

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss) from discontinued operations

 

$

186

 

$

(1,532

)

$

747

 

$

(2,175

)

Income from Continued Dumping and Subsidy Offset Act, net

 

 

 

3,763

 

 

Income tax (expense) benefit

 

(71

)

545

 

(1,613

)

782

 

Income (loss) from discontinued operations, net of tax

 

$

115

 

$

(987

)

$

2,897

 

$

(1,393

)

 

In our consolidated statement of cash flows, we included the activity of these discontinued operations along with our activity from continuing operations.

 

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Note 4: Inventories

 

A summary of inventories is as follows:

 

(Unaudited, amounts in thousands)

 

1/24/15

 

4/26/14

 

Raw materials

 

$

78,359

 

$

71,247

 

Work in process

 

14,408

 

13,722

 

Finished goods

 

93,569

 

91,842

 

FIFO inventories

 

186,336

 

176,811

 

Excess of FIFO over LIFO

 

(26,203

)

(29,802

)

Inventories, net

 

$

160,133

 

$

147,009

 

 

During the second quarter of fiscal 2015, we ceased manufacturing casegoods product domestically, and as a result the stream of domestically manufactured inventory will not be replaced. Our LIFO reserve was reduced as we liquidated the inventory.

 

Note 5: Goodwill and Other Intangible Assets

 

During the third quarter of fiscal 2015, we acquired the assets of one independent La-Z-Boy Furniture Galleries® dealer in exchange for $1.8 million in cash and forgiveness of that dealer’s accounts receivable. We reacquired the right to own and operate one La-Z-Boy Furniture Galleries® store in that market as a result of the acquisition. In our Retail segment, we recorded an indefinite-lived intangible asset of $0.6 million related to this reacquired right and $1.2 million of goodwill, both of which will be amortized and deducted for federal income tax purposes over 15 years. This store was included in our Retail segment results upon acquisition.

 

The following is a roll-forward of goodwill for the nine months ended January 24, 2015:

 

(Unaudited, amounts in thousands)

 

Goodwill

 

Balance at April 26, 2014

 

$

13,923

 

Acquisitions

 

1,241

 

Balance at January 24, 2015

 

$

15,164

 

 

The following is a roll-forward of other intangible assets for the nine months ended January 24, 2015:

 

(Unaudited, amounts in thousands)

 

Tradenames

 

Reacquired
Rights

 

Total Other

Intangible

Assets

 

Balance at April 26, 2014

 

$

1,306

 

$

3,238

 

$

4,544

 

Acquisitions

 

 

550

 

550

 

Balance at January 24, 2015

 

$

1,306

 

$

3,788

 

$

5,094

 

 

Note 6: Investments

 

In our consolidated balance sheet at January 24, 2015, we included $18.9 million of available-for-sale investments and $0.9 million of trading securities in other current assets and $40.6 million of available-for-sale investments in other long-term assets. In our consolidated balance sheet at April 26, 2014, we included available-for-sale investments of $15.9 million and trading securities of $1.8 million in other current assets and available-for-sale investments of $43.2 million in other long-term assets. At January 24, 2015, and April 26,

 

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2014, $45.3 million and $44.7 million, respectively, of these investments were to enhance returns on our cash. We designated the remaining investments to fund future obligations of our non-qualified defined benefit retirement plan, our executive deferred compensation plan, and our performance compensation retirement plan. If there were a decline in the fair value of an investment below its cost and the decline was considered other-than-temporary, we would recognize the amount of decline below cost as part of our earnings.

 

The following is a summary of investments at January 24, 2015, and April 26, 2014:

 

As of January 24, 2015

 

(Unaudited, amounts in thousands)

 

Gross
Unrealized Gains

 

Gross
Unrealized Losses

 

Fair Value

 

Equity securities

 

$

1,567

 

$

(109

)

$

8,740

 

Fixed income

 

187

 

(72

)

50,466

 

Mutual funds

 

 

 

875

 

Other

 

1

 

(20

)

364

 

Total securities

 

$

1,755

 

$

(201

)

$

60,445

 

 

As of April 26, 2014

 

(Unaudited, amounts in thousands)

 

Gross
Unrealized Gains

 

Gross
Unrealized Losses

 

Fair Value

 

Equity securities

 

$

1,246

 

$

(52

)

$

8,216

 

Fixed income

 

166

 

(44

)

50,510

 

Mutual funds

 

 

 

1,787

 

Other

 

1

 

(10

)

425

 

Total securities

 

$

1,413

 

$

(106

)

$

60,938

 

 

The following table summarizes sales of available-for-sale securities:

 

 

 

Quarter Ended

 

Nine Months Ended

 

(Unaudited, amounts in thousands)

 

1/24/15

 

1/25/14

 

1/24/15

 

1/25/14

 

Proceeds from sales

 

$

6,160

 

$

9,778

 

$

23,987

 

$

27,974

 

Gross realized gains

 

209

 

775

 

254

 

820

 

Gross realized losses

 

(23

)

(473

)

(53

)

(538

)

 

The fair value of fixed income available-for-sale securities by contractual maturity was $18.9 million within one year, $29.6 million within two to five years, $1.5 million within six to ten years and $0.5 million thereafter.

 

Note 7: Debt

 

We maintain a revolving credit facility secured primarily by all of our accounts receivable, inventory, and cash deposit and securities accounts. We amended this agreement on December 30, 2014, extending its maturity date to December 30, 2019. 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 January 24, 2015, we were not subject to the fixed charge coverage ratio requirement, had no borrowings outstanding under the agreement, and had excess availability of $142.2 million of the $150.0 million credit commitment.

 

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Note 8: Pension Plans

 

Net periodic pension costs were as follows:

 

 

 

Quarter Ended

 

Nine Months Ended

 

(Unaudited, amounts in thousands)

 

1/24/15

 

1/25/14

 

1/24/15

 

1/25/14

 

Service cost

 

$

279

 

$

311

 

$

837

 

$

933

 

Interest cost

 

1,267

 

1,206

 

3,801

 

3,618

 

Expected return on plan assets

 

(1,269

)

(1,701

)

(3,807

)

(5,100

)

Net amortization

 

665

 

893

 

1,995

 

2,676

 

Net periodic pension cost

 

$

942

 

$

709

 

$

2,826

 

$

2,127

 

 

Note 9: Product Warranties

 

We accrue an estimated liability for product warranties when we recognize revenue on the sale of warranted products. We estimate future warranty claims based on claims experience and any additional anticipated future costs on previously sold products. We incorporate repair costs into our liability estimates, including materials, labor and overhead amounts necessary to perform repairs and any costs associated with delivering repaired product to our customers. Approximately 95% of our warranty liability relates to our Upholstery segment as we generally warrant our products against defects for one year on fabric and leather, from one to ten years on cushions and padding, and provide a limited lifetime warranty on certain mechanisms and frames. Our warranties cover labor costs relating to our parts for one year. Our warranty period begins when the consumer receives our product. We use considerable judgment in making our estimates, and we record differences between our actual and estimated costs when the differences are known.

 

A reconciliation of the changes in our product warranty liability for the quarter and nine months ended January 24, 2015, and January 25, 2014, is as follows:

 

 

 

Quarter Ended

 

Nine Months Ended

 

(Unaudited, amounts in thousands)

 

1/24/15

 

1/25/14

 

1/24/15

 

1/25/14

 

Balance as of the beginning of the period

 

$

15,540

 

$

15,929

 

$

16,013

 

$

15,525

 

Accruals during the period

 

5,094

 

3,971

 

14,011

 

11,643

 

Accrual adjustments

 

 

(945

)

(953

)

(945

)

Reclass to discontinued operations

 

 

(218

)

 

(218

)

Settlements during the period

 

(4,198

)

(3,615

)

(12,635

)

(10,883

)

Balance as of the end of the period

 

$

16,436

 

$

15,122

 

$

16,436

 

$

15,122

 

 

As of January 24, 2015, and April 26, 2014, we included $10.1 million and $9.8 million, respectively, of our product warranty liability in accrued expenses and other current liabilities in our consolidated balance sheet, and included the remainder in other long-term liabilities. We recorded accruals during the periods presented primarily to reflect charges that relate to warranties issued during the respective periods. Our accrual adjustments reflect a change in the prior estimates of our product warranty liability.

 

Note 10: Stock-Based Compensation

 

The table below summarizes the total stock-based compensation expense we recognized for all outstanding grants in our consolidated statement of income:

 

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Table of Contents

 

 

 

Quarter Ended

 

Nine Months Ended

 

(Unaudited, amounts in thousands)

 

1/24/15

 

1/25/14

 

1/24/15

 

1/25/14

 

Equity-based awards expense

 

$

1,047

 

$

1,700

 

$

6,094

 

$

7,371

 

Liability-based awards expense

 

3,322

 

2,203

 

3,695

 

5,993

 

Total stock-based compensation expense

 

$

4,369

 

$

3,903

 

$

9,789

 

$

13,364

 

 

The table below summarizes the grants we made during the first nine months of fiscal 2015:

 

(Unaudited, shares/units in thousands)

 

Shares/units
granted

 

Liability/
Equity
award

 

Settlement

 

Stock options

 

374

 

Equity

 

Common shares

 

Restricted stock

 

103

 

Equity

 

Common shares

 

Restricted stock units — directors

 

33

 

Equity

 

Common shares

 

Performance-based shares

 

192

 

Equity

 

Common shares

 

 

Stock Options. We granted 373,711 stock options to employees during the first quarter of fiscal 2015, and we also have stock options outstanding from previous grants. We account for stock options as equity-based awards because when they are exercised, they will be settled in common shares. We recognize compensation expense for stock options over the vesting period equal to the fair value on the date our compensation committee approved the awards. The vesting period for our stock options ranges from one to four years, with accelerated vesting upon retirement. We expense options granted to retirement eligible employees immediately. We estimate the fair value of the employee stock options at the date of grant using the Black-Scholes option-pricing model, which requires management to make certain assumptions. We estimate expected volatility based on the historical volatility of our common shares. We base the average expected life on the contractual term of the stock option and expected employee exercise trends. We base the risk-free rate on U.S. Treasury issues with a term equal to the expected life assumed at the date of the grant.

 

We calculated the fair value of stock options granted during the first quarter of fiscal 2015 using the following assumptions:

 

(Unaudited)

 

7/26/14

 

Risk-free interest rate

 

1.59

%

Dividend rate

 

1.00

%

Expected life in years

 

5.0

 

Stock price volatility

 

54.40

%

Fair value per share

 

$

10.45

 

 

Stock Appreciation Rights. We did not grant any SARs to employees during the first nine months of fiscal 2015, but we have SARs outstanding from previous grants. SARs will be paid in cash upon exercise and, accordingly, we account for SARs as liability-based awards that we will remeasure to reflect the fair value at the end of each reporting period. These awards vest at 25% per year, beginning one year from the grant date for a term of four years, with accelerated vesting upon retirement. We expense SARs granted to retirement eligible employees immediately. We estimate the fair value of SARs at the end of each period using the Black-Scholes option-pricing model, which requires management to make certain assumptions. We base the average expected life on the contractual term of the SARs and expected employee exercise trends (which is consistent with the expected life of our option awards). We base the risk-free rate on U.S. Treasury issues with a term equal to the expected life assumed at the end of the reporting period.

 

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In fiscal 2014, we granted SARs as described in our Annual Report on Form 10-K for the fiscal year ended April 26, 2014. At January 24, 2015, we measured the fair value of the SARs granted during fiscal 2014 using the following assumptions:

 

(Unaudited)

 

1/24/15

 

Risk-free interest rate

 

1.06

%

Dividend rate

 

1.17

%

Expected life in years

 

3.40

 

Stock price volatility

 

38.80

%

Fair value per share

 

$

10.92

 

 

In fiscal 2013, we granted SARs as described in our Annual Report on Form 10-K for the fiscal year ended April 27, 2013. At January 24, 2015, we remeasured the fair value of the SARs granted during fiscal 2013 using the following assumptions:

 

(Unaudited)

 

1/24/15

 

Risk-free interest rate

 

0.64

%

Dividend rate

 

1.17

%

Expected life in years

 

2.48

 

Stock price volatility

 

32.35

%

Fair value per share

 

$

15.00

 

 

Restricted Stock. We awarded 102,811 shares of restricted stock to employees during the first nine months of fiscal 2015. We issue restricted stock at no cost to the employees, and the shares are held in an escrow account until the vesting period ends. In the event of an employee’s termination during the escrow period, the shares are returned at no cost to the company. We account for restricted stock awards as equity-based awards because upon vesting they will be settled in common shares. The majority of the restricted stock shares were awarded in the first quarter of fiscal 2015 with a fair value of $23.63 per share, the market value of our common shares on the date of grant. We recognize compensation expense for restricted stock over the vesting period equal to the fair value on the date our compensation committee approved the awards. Restricted stock awards vest at 25% per year, beginning one year from the grant date for a term of four years.

 

Restricted Stock Units. We did not grant any restricted stock units to employees during the first nine months of fiscal 2015, but we have restricted stock units outstanding from previous grants. We account for these units as liability-based awards because upon vesting these awards will be paid in cash. We measure and recognize initial compensation expense based on the market value (intrinsic value) of our common stock on the grant date and amortize the expense over the vesting period. We remeasure and adjust the liability based on the market value (intrinsic value) of our common shares on the last day of the reporting period until paid with a corresponding adjustment to reflect the cumulative amount of compensation expense. The fair value of each outstanding restricted stock unit at January 24, 2015, was $27.36, the market value of our common shares on the last day of the reporting period. Each restricted stock unit is the equivalent of one common share. Restricted stock units vest at 25% per year, beginning one year from the grant date for a term of four years.

 

During the second quarter of fiscal 2015, we granted 33,250 restricted stock units to our non-employee directors. These restricted stock units vest when a director leaves the board. We account for these restricted stock units as equity-based awards as they will be settled in shares of our common stock upon vesting. We measure and recognize compensation expense for these awards based on the market price of our common shares on the date of grant, which was $21.81.

 

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Table of Contents

 

Performance Awards. During the first quarter of fiscal 2015, we granted 191,783 performance-based shares, and we also have performance-based share awards outstanding from previous grants. Payout of these grants depends on our financial performance (80%) and a market-based condition based on the total return our shareholders receive on their investment in our stock relative to returns earned through investments in other public companies (20%). The performance award opportunity ranges from 50% of the employee’s target award if minimum performance requirements are met to a maximum of 200% of the target award based on the attainment of certain financial and shareholder-return goals over a specific performance period, which is generally three fiscal years.

 

We account for performance-based shares as equity-based awards because upon vesting they will be settled in common shares. For shares that vest based on our results relative to the performance goals, we expense as compensation cost the fair value of the shares as of the day we granted the awards recognized over the performance period, taking into account the probability that we will satisfy the performance goals. The fair value of each share of the awards we granted in fiscal 2015 that vest based on attaining performance goals was $22.91, the market value of our common shares on the date we granted the awards less the dividends we expect to pay before the shares vest. For shares that vest based on market conditions, we use a Monte Carlo valuation model to estimate each share’s fair value as of the date of grant, and, similar to the way in which we expense awards of stock options, we expense compensation cost over the vesting period regardless of the value that award recipients ultimately receive. Based on the Monte Carlo model, the fair value as of the grant date of the fiscal 2015 and fiscal 2014 grants of shares that vest based on market conditions was $29.64 and $26.08, respectively.

 

We did not grant any performance-based units during the first nine months of fiscal 2015, but we have outstanding performance-based unit awards from previous grants. We account for performance-based units as liability-based awards because upon vesting, they will be paid in cash. For units that vest based on our results relative to performance goals, we expense as compensation cost over the performance period the fair value of each unit, taking into account the probability that the performance goals will be attained. The fair value of each unit we granted in fiscal 2014 and fiscal 2013 that vest based on attaining performance goals was $26.88 and $27.20, respectively, the market value of our common shares on the last day of the reporting period less the dividends we expect to pay before the awards vest. For performance-based units that vest based on market conditions, we use a Monte Carlo valuation model to estimate each unit’s fair value as of the last day of the reporting period. We remeasure and adjust the liability for these units based on the Monte Carlo valuation at the end of each reporting period until we pay out the units. Based on the Monte Carlo model, the fair value at January 24, 2015, of the fiscal 2014 and fiscal 2013 grants of units that vest based on market conditions was $44.00 and $51.83, respectively.

 

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Note 11: Accumulated Other Comprehensive Loss

 

The activity in accumulated other comprehensive loss for the quarter ended January 24, 2015, and January 25, 2014, is as follows:

 

(Unaudited, amounts in thousands)

 

Translation
adjustment

 

Change in
fair value
of cash
flow hedge

 

Unrealized
gain on
marketable
securities

 

Net pension
amortization
and net
actuarial
loss

 

Accumulated
other
comprehensive
loss

 

Balance at October 25, 2014

 

$

2,523

 

$

(253

)

$

1,197

 

$

(34,011

)

$

(30,544

)

Changes before reclassifications

 

(711

)

(874

)

275

 

 

(1,310

)

Amounts reclassified to net income

 

 

403

 

(186

)

702

 

919

 

Tax effect

 

 

180

 

(34

)

(268

)

(122

)

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

 

(711

)

(291

)

55

 

434

 

(513

)

Balance at January 24, 2015

 

$

1,812

 

$

(544

)

$

1,252

 

$

(33,577

)

$

(31,057

)

 

(Unaudited, amounts in thousands)

 

Translation
adjustment

 

Change in
fair value of
cash flow
hedge

 

Unrealized
gain on
marketable
securities

 

Net pension
amortization
and net
actuarial
loss

 

Accumulated
other
comprehensive
loss

 

Balance at October 26, 2013

 

$

3,922

 

$

(133

)

$

1,119

 

$

(39,885

)

$

(34,977

)

Changes before reclassifications

 

(812

)

(478

)

130

 

 

(1,160

)

Amounts reclassified to net income

 

 

210

 

(302

)

893

 

801

 

Tax effect

 

 

103

 

67

 

(346

)

(176

)

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

 

(812

)

(165

)

(105

)

547

 

(535

)

Balance at January 25, 2014

 

$

3,110

 

$

(298

)

$

1,014

 

$

(39,338

)

$

(35,512

)

 

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Table of Contents

 

The activity in accumulated other comprehensive loss for the nine months ended January 24, 2015, and January 25, 2014, is as follows:

 

(Unaudited, amounts in thousands)

 

Translation
adjustment

 

Change in
fair value of
cash flow
hedge

 

Unrealized
gain on
marketable
securities

 

Net pension
amortization
and net
actuarial
loss

 

Accumulated
other
comprehensive
loss

 

Balance at April 26, 2014

 

$

2,455

 

$

(53

)

$

1,098

 

$

(34,880

)

$

(31,380

)

Changes before reclassifications

 

(643

)

(1,254

)

449

 

 

(1,448

)

Amounts reclassified to net income

 

 

461

 

(201

)

2,105

 

2,365

 

Tax effect

 

 

302

 

(94

)

(802

)

(594

)

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

 

(643

)

(491

)

154

 

1,303

 

323

 

Balance at January 24, 2015

 

$

1,812

 

$

(544

)

$

1,252

 

$

(33,577

)

$

(31,057

)

 

(Unaudited, amounts in thousands)

 

Translation
adjustment

 

Change in
fair value of
cash flow
hedge

 

Unrealized
gain on
marketable
securities

 

Net pension
amortization
and net
actuarial
loss

 

Accumulated
other
comprehensive
loss

 

Balance at April 27, 2013

 

$

4,779

 

$

231

 

$

474

 

$

(40,980

)

$

(35,496

)

Changes before reclassifications

 

(1,669

)

(1,040

)

1,161

 

 

(1,548

)

Amounts reclassified to net income

 

 

179

 

(282

)

2,676

 

2,573

 

Tax effect

 

 

332

 

(339

)

(1,034

)

(1,041

)

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

 

(1,669

)

(529

)

540

 

1,642

 

(16

)

Balance at January 25, 2014

 

$

3,110

 

$

(298

)

$

1,014

 

$

(39,338

)

$

(35,512

)

 

We reclassified the unrealized gain on marketable securities from accumulated other comprehensive loss to net income through other income in our consolidated statement of income, and reclassified the change in fair value of cash flow hedge and the net pension amortization to net income through selling, general and administrative expense.

 

The components of non-controlling interest for the quarter and nine months ended January 24, 2015, and January 25, 2014, were as follows:

 

 

 

Quarter Ended

 

Nine Months Ended

 

(Unaudited, amounts in thousands)

 

1/24/15

 

1/25/14

 

1/24/15

 

1/25/14

 

Balance as of the beginning of the period

 

$

8,219

 

$

7,407

 

$

7,832

 

$

7,140

 

Net income

 

524

 

388

 

933

 

1,006

 

Other comprehensive loss

 

(50

)

(411

)

(72

)

(861

)

Change in non-controlling interest

 

 

 

 

99

 

Balance as of the end of the period

 

$

8,693

 

$

7,384

 

$

8,693

 

$

7,384

 

 

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Note 12: Segment Information

 

Our reportable operating segments are the Upholstery segment, the Casegoods segment and the Retail segment. During fiscal 2014, we sold our Bauhaus U.S.A. business unit and classified Lea Industries as held for sale while we marketed that business for sale. We were unable to find a buyer for our Lea Industries business, and instead we liquidated all the assets, consisting mostly of inventory, and ceased operations of Lea Industries during the third quarter of fiscal 2015. Our Bauhaus and Lea Industries operating units are presented as discontinued operations, and we have restated prior financial information for the change in composition of our Upholstery and Casegoods segments.

 

Upholstery Segment. The Upholstery segment mainly consists of two operating units: La-Z-Boy and England. This segment manufactures or imports upholstered furniture. Upholstered furniture includes 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® and England Custom Comfort Center locations, major dealers and other independent retailers.

 

Casegoods Segment. The Casegoods segment consists of three brands: American Drew, Hammary, and Kincaid. This segment sells imported wood furniture to furniture retailers. Casegoods product includes bedroom, dining room, entertainment centers, occasional pieces and some manufactured coordinated upholstered furniture. The Casegoods segment sells to major dealers and other independent retailers, as well as La-Z-Boy Furniture Galleries® stores and operators of Comfort Studio® locations.

 

Retail Segment. The Retail segment consists of 108 company-owned La-Z-Boy Furniture Galleries® stores. The Retail segment sells upholstered furniture, and some casegoods and other accessories, to end consumers through the retail network.

 

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Quarter Ended

 

Nine Months Ended

 

(Unaudited, amounts in thousands)

 

1/24/15

 

1/25/14

 

1/24/15

 

1/25/14

 

Sales

 

 

 

 

 

 

 

 

 

Upholstery segment:

 

 

 

 

 

 

 

 

 

Sales to external customers

 

$

243,390

 

$

242,492

 

$

725,590

 

$

710,162

 

Intersegment sales

 

42,946

 

37,780

 

120,872

 

103,183

 

Upholstery segment sales

 

286,336

 

280,272

 

846,462

 

813,345

 

Casegoods segment:

 

 

 

 

 

 

 

 

 

Sales to external customers

 

24,134

 

23,417

 

75,542

 

72,339

 

Intersegment sales

 

1,866

 

2,337

 

8,269

 

7,171

 

Casegoods segment sales

 

26,000

 

25,754

 

83,811

 

79,510

 

 

 

 

 

 

 

 

 

 

 

Retail segment sales

 

89,791

 

80,212

 

247,285

 

219,845

 

Corporate and Other

 

561

 

404

 

2,040

 

1,952

 

Eliminations

 

(44,812

)

(40,117

)

(129,141

)

(110,354

)

Consolidated sales

 

$

357,876

 

$

346,525

 

$

1,050,457

 

$

1,004,298

 

 

 

 

 

 

 

 

 

 

 

Operating Income (Loss)

 

 

 

 

 

 

 

 

 

Upholstery segment

 

$

31,479

 

$

31,560

 

$

86,103

 

$

86,547

 

Casegoods segment

 

860

 

394

 

5,380

 

2,014

 

Retail segment

 

4,202

 

3,087

 

8,199

 

8,264

 

Restructuring

 

771

 

60

 

1,118

 

115

 

Corporate and Other

 

(10,384

)

(9,217

)

(27,189

)

(30,173

)

Consolidated operating income

 

$

26,928

 

$

25,884

 

$

73,611

 

$

66,767

 

 

Note 13: Income Taxes

 

Our effective tax rate for continuing operations for the third quarter and first nine months of fiscal 2015 was 34.0% and 34.8%, respectively. Our effective tax rate varies from the 35% statutory rate primarily due to state taxes, less the benefit of the U.S. manufacturing deduction and foreign earnings in jurisdictions with lower tax rates than the U.S.

 

Our effective tax rate for continuing operations for the third quarter and first nine months of fiscal 2014 was 33.3% and 33.5%, respectively. Items impacting our effective tax rate for the third quarter of fiscal 2014 were a net tax benefit of $0.2 million primarily from adjustments to deferred taxes as a result of Mexico tax law changes. Additionally, the first nine months of fiscal 2014 included a tax benefit of $0.9 million for the release of a valuation allowance relating to certain U.S. state deferred tax assets. Absent discrete adjustments, the effective tax rate for continuing operations for the third quarter and first nine months of fiscal 2014 would have been 34.0% and 35.1%, respectively.

 

Our consolidated balance sheet at the end of the third quarter of fiscal 2015 reflected a $1.1 million net liability for uncertain income tax positions. We do not expect this net liability to change significantly in 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.

 

Note 14: Earnings per Share

 

Certain share-based compensation awards that entitle their holders to receive non-forfeitable dividends prior to vesting are considered participating securities. We grant restricted stock awards that contain non-forfeitable

 

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rights to dividends on unvested shares, and we are required to include these participating securities in calculating our basic earnings per common share, using the two-class method.

 

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

 

 

 

Quarter Ended

 

Nine Months Ended

 

(Unaudited, amounts in thousands)

 

1/24/15

 

1/25/14

 

1/24/15

 

1/25/14

 

Numerator (basic and diluted):

 

 

 

 

 

 

 

 

 

Net income attributable to La-Z-Boy Incorporated

 

$

17,948

 

$

16,483

 

$

50,558

 

$

42,817

 

Income allocated to participating securities

 

(97

)

(100

)

(283

)

(354

)

Net income available to common shareholders

 

$

17,851

 

$

16,383

 

$

50,275

 

$

42,463

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

51,576

 

52,516

 

52,015

 

52,465

 

Add:

 

 

 

 

 

 

 

 

 

Contingent common shares

 

210

 

361

 

223

 

501

 

Stock option dilution

 

353

 

349

 

302

 

413

 

Diluted weighted average common shares outstanding

 

52,139

 

53,226

 

52,540

 

53,379

 

 

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

 

For the nine months ended January 24, 2015, we had outstanding options to purchase 0.4 million shares with a weighted average exercise price of $23.63. We excluded the effect of these options from our diluted share calculation since, for that period, the weighted average exercise price of the options was higher than the average market price, and including the options’ effect would have been anti-dilutive. We did not exclude any outstanding options from the diluted share calculation for the quarter ended January 24, 2015, or the quarter and nine months ended January 25, 2014.

 

Note 15: Fair Value Measurements

 

Accounting standards require that we put financial assets and liabilities into one of three categories based on the inputs we use to value them:

 

·                  Level 1 — Financial assets and liabilities that we value based on unadjusted quoted market prices for identical assets and liabilities in an active market that we have the ability to access.

 

·                  Level 2 — Financial assets and liabilities that we value based on quoted prices in markets that are not active or on model inputs that are observable for substantially the full term of the asset or liability.

 

·                  Level 3 — Financial assets and liabilities that we value based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement.

 

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Accounting standards require that in making fair value measurements, we use observable market data when it is available. If we measure the fair value of an asset or liability using multiple inputs from different levels of the hierarchy, we are required to categorize the asset or liability as belonging to the lowest level with an input that is significant to the fair value measurement. We recognize transfers between levels at the end of the reporting period in which they occur.

 

In addition to assets and liabilities that we record at fair value on a recurring basis, we are required to record assets and liabilities at fair value on a non-recurring basis. We measure non-financial assets such as trade names, goodwill, and other long-lived assets at fair value when there is an indicator of impairment, and we record them at fair value only when we recognize an impairment loss.

 

The following table presents the fair value hierarchy for those assets we measured at fair value on a recurring basis at January 24, 2015, and April 26, 2014:

 

As of January 24, 2015

 

 

 

Fair Value Measurements

 

(Unaudited, amounts in thousands)

 

Level 1(a)

 

Level 2(a)

 

Level 3

 

Assets

 

 

 

 

 

 

 

Available-for-sale securities

 

$

1,353

 

$

58,217

 

$

 

Trading securities

 

 

875

 

 

Total

 

$

1,353

 

$

59,092

 

$

 

 

(a)         There were no transfers between Level 1 and Level 2 during fiscal 2015.

 

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As of April 26, 2014

 

 

 

Fair Value Measurements

 

(Unaudited, amounts in thousands)

 

Level 1(b)

 

Level 2(b)

 

Level 3

 

Assets

 

 

 

 

 

 

 

Available-for-sale securities

 

$

1,521

 

$

57,630

 

$

 

Trading securities

 

 

1,787

 

 

Total

 

$

1,521

 

$

59,417

 

$

 

 

(b)         There were no transfers between Level 1 and Level 2 during fiscal 2014.

 

At January 24, 2015, and April 26, 2014, we held available-for-sale marketable securities intended to enhance returns on our cash and to fund future obligations of our non-qualified defined benefit retirement plan, as well as trading securities to fund future obligations of our executive deferred compensation plan and our performance compensation retirement plan. The fair value measurements for our securities are based upon quoted prices in active markets, as well as through broker quotes and independent valuation providers, multiplied by the number of shares owned exclusive of any transaction costs.

 

Note 16: Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“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 the use of more estimates and judgments than the present standards as well as additional disclosures. The new accounting standard is effective for our fiscal year 2018, and we are assessing the potential impact to our consolidated financial statements and financial statement disclosures.

 

ITEM 2. 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 better understand our financial results. It should be read in conjunction with the accompanying Consolidated Financial Statements and related Notes to Consolidated Financial Statements. After a cautionary note about forward-looking statements, we begin with an introduction to our key businesses. We then provide discussions of our results of operations, liquidity and capital resources, and critical accounting policies.

 

This Management’s Discussion and Analysis only reflects results of our continuing operations, unless otherwise noted. During fiscal 2014, we sold substantially all of the assets of our Bauhaus U.S.A. business unit, and we marketed for sale our youth furniture business, Lea Industries, a division of La-Z-Boy Greensboro, Inc. We were unable to find a buyer for our Lea Industries business, and instead we liquidated all the assets, consisting mostly of inventory, and ceased operations of Lea Industries during the third quarter of fiscal 2015. In the accompanying financial statements, we reported the operating results of Bauhaus and Lea Industries as discontinued operations for all periods presented. For the quarter and nine months ended January 24, 2015, we recorded pre-tax income of $0.2 million and $0.7 million, respectively ($0.1 million and $0.5 million after tax, respectively) compared with a pre-tax loss of $1.5 million and $2.2 million ($1.0 million and $1.4 million after tax) for the quarter and nine months ended January 25, 2014, respectively, in discontinued operations related to these businesses. We previously reported results of Bauhaus as a component of our Upholstery segment, and Lea Industries as a component of our Casegoods segment.

 

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Also in the first quarter of fiscal 2015, we recorded $3.8 million of pre-tax income ($2.4 million after tax) 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, which provides 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. That entity subsequently filed for bankruptcy. The funds were distributed by U.S. Customs to the bankruptcy trustee and by the trustee to be held in trust for us during the first quarter of fiscal 2015 and were received by us early in the second quarter of fiscal 2015.

 

Cautionary Statement Concerning Forward-Looking Statements

 

We make forward-looking statements in this report, and our 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 growth

·                  adequacy and cost of financial resources

·                  future economic performance

·                  industry and importing trends

·                  management plans

 

Forward-looking statements also include those preceded or followed by the words “anticipates,” “believes,” “estimates,” “hopes,” “plans,” “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) speed of economic recovery or the possibility of another recession; (c) changes in the real estate and credit markets and their effects on our customers and suppliers; (d) international political unrest, terrorism or war; (e) volatility in energy and other commodities prices; (f) the impact of logistics on imports; (g) interest rate and currency exchange rate changes; (h) operating factors, such as supply, labor or distribution disruptions; (i) changes in the domestic or international regulatory environment; (j) adoption of new accounting principles; (k) severe weather or other natural events such as hurricanes, earthquakes, flooding, tornadoes and tsunamis; (l) our ability to procure fabric rolls and leather hides or cut-and-sewn fabric and leather sets domestically or abroad; (m) information technology conversions or system failures; (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) our ability to defend ourselves from 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 results of our restructuring actions; and (t) those matters discussed in Item 1A of our fiscal 2014 Annual Report on Form 10-K 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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Introduction

 

Our Business

 

La-Z-Boy Incorporated and its subsidiaries manufacture, market, import, 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 according to the May 2014 Key Sources for the U.S. Furniture Market in Furniture Today. The La-Z-Boy Furniture Galleries® stores retail network is the second largest retailer of single-branded furniture in the United States according to the May 2014 Top 100 ranking by Furniture Today. In addition, the La-Z-Boy Furniture Galleries® stores retail network is ranked number 10 in the Top 100 U.S. furniture stores according to the May 2014 ranking by Furniture Today. We have seven major North American manufacturing locations 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 326 La-Z-Boy Furniture Galleries® stores and 567 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 108 of the La-Z-Boy Furniture Galleries® stores. The remainder of the La-Z-Boy Furniture Galleries® stores, as well as all 567 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 in-home design service. Comfort Studio® locations are defined spaces within larger independent retailers that are dedicated to displaying and selling La-Z-Boy branded products. In addition to the La-Z-Boy Comfort Studio® locations, our Kincaid and England operating units have their own dedicated in-store gallery programs with over 515 outlets and 1.8 million square feet of proprietary floor space. In total, our proprietary floor space includes approximately 9.5 million square feet.

 

Our goal is to deliver improved sales and earnings to shareholders over the long term through execution of our strategic initiatives. The foundation of our strategic initiatives is driving sales growth in all areas of our business, but most importantly in our flagship La-Z-Boy brand. We are driving this growth through our Live Life Comfortably marketing campaign, featuring Brooke Shields as our brand ambassador. 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 also are driving growth of our La-Z-Boy brand through a steady cadence of new product introductions, most recently with our new Urban Attitudes collection of smaller-scale furniture targeted at a more style-conscious demographic, as well as younger consumers and those living in more confined spaces in urban locations.

 

We believe a key strategy for growing our La-Z-Boy brand is the continued expansion of our branded distribution channels. We expect to achieve this growth through the execution of 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. We are in the second year of this initiative. In addition, we are increasing our La-Z-Boy Comfort Studio® locations, our store-within-a-store format, as another avenue to expand our branded distribution channels. We expect this initiative to generate growth in our Retail segment through increased company-owned store count, and to generate growth in our wholesale Upholstery segment as the proprietary distribution network is expanded.

 

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

 

·                  Upholstery Segment. Our Upholstery segment is our largest segment and mainly consists of two operating units: La-Z-Boy, our largest operating unit, and our England subsidiary. Our Upholstery

 

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segment manufactures or 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® and England Custom Comfort Center locations, major dealers and 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 primarily to major dealers and other independent retailers, as well as La-Z-Boy Furniture Galleries® stores and operators of Comfort Studio® locations.

 

·                  Retail Segment. Our Retail segment consists of 108 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 our retail network.

 

During fiscal 2014, we committed to a restructuring of our casegoods business to transition to an all-import model for our wood furniture. We ceased casegoods manufacturing operations at our Hudson, North Carolina facility during the second quarter of fiscal 2015. As a result of this restructuring, we transitioned our remaining Kincaid and American Drew bedroom product lines to imported product and exited the hospitality business as we manufactured those products in our Hudson facility. We transitioned our warehouse and repair functions from two North Wilkesboro, North Carolina facilities to Hudson. In addition, we sold both of our North Wilkesboro facilities and most of the wood-working equipment from our Hudson plant during the first nine months of fiscal 2015. We marketed for sale our youth furniture business, Lea Industries, in connection with the restructuring, as it did not align with our long-term strategic objectives. We were unable to find a buyer for our Lea Industries business, and instead we liquidated all the assets, consisting mostly of inventory, and ceased operations of Lea Industries during the third quarter of fiscal 2015. The impact of this restructuring is discussed in more detail throughout this Management’s Discussion and Analysis.

 

Results of Operations

Fiscal 2015 Third Quarter Compared to Fiscal 2014 Third Quarter

 

La-Z-Boy Incorporated

 

(Unaudited, amounts in thousands, except percentages)

 

1/24/15

 

1/25/14

 

Percent
Change

 

Consolidated sales

 

$

357,876

 

$

346,525

 

3.3

%

Consolidated operating income

 

26,928

 

25,884

 

4.0

%

Consolidated operating margin

 

7.5

%

7.5

%

 

 

 

Sales

 

Consolidated sales increased $11.4 million in the third quarter of fiscal 2015 compared to the third quarter of fiscal 2014, an increase of 3.3%, due to higher sales in all three of our segments. Our Upholstery segment sales increase was driven by stronger volume and selling price increases, somewhat offset by an unfavorable change in product mix. Our Casegoods segment sales increase was the result of stronger volume, partly offset by the impact of higher promotional activity. The increase in sales in our Retail segment was due to sales increases for our currently active stores that have been open for a minimum of 12 months, as well as the sales volume of our new and acquired stores.

 

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These items are further explained in the discussion of each segment’s results later in this Management’s Discussion and Analysis.

 

Operating Margin

 

Our consolidated operating margin was flat for the third quarter of fiscal 2015 compared to the third quarter of fiscal 2014.

 

·                  Our consolidated gross margin improved 1.1 percentage points in the third quarter of fiscal 2015 compared to the third quarter of fiscal 2014 due to a combination of factors.

 

·                  Gross margin improved 1.5 percentage points in the third quarter of fiscal 2015 due to a benefit of a legal settlement in our Upholstery segment.

·                  We achieved a higher gross margin rate in our Casegoods segment due to the transition to an all-import model for our wood furniture.

·                  Our consolidated gross margin rate increased due to fiscal 2015’s higher weighting of sales in our Retail segment, which carry a higher gross margin than our wholesale segments.

·                  Partly offsetting the impact of these improvements were disruptions to our Upholstery segment’s manufacturing operations due to our ERP implementation and a decline in gross margin in our Retail segment due to higher promotional activity in the third quarter of fiscal 2015 compared to the third quarter of fiscal 2014.

 

These items are further explained in the discussion of each segment’s results later in this Management’s Discussion and Analysis.

 

·                  Selling, General, and Administrative (“SG&A”) expenses as a percentage of sales were 1.1 percentage points higher in the third quarter of fiscal 2015 compared to the third quarter of fiscal 2014.

 

·                  The comparison to the prior year was negatively impacted by a 0.5 percentage point increase in warranty expense. A favorable adjustment to our product warranty liability recorded in the third quarter of fiscal 2014, which reflected a change in prior estimates of our product warranty liability at that time, coupled with higher parts and labor costs incurred to service our warranty claims during the third quarter of fiscal 2015, resulted in the unfavorable comparison.

·                  We continued investing in technology improvements during the third quarter of fiscal 2015, which increased our SG&A costs by 0.3 percentage point compared to the third quarter of fiscal 2014. These expenses related to the continued implementation of our ERP system and the replacement of our website and e-commerce platform.

·                  Also impacting SG&A costs during the third quarter of fiscal 2015 were costs associated with the construction of our new world headquarters, which we expect to move into during the fourth quarter of fiscal 2015.

·                  Somewhat offsetting the above items were incentive compensation costs that were $2.3 million lower in the third quarter of fiscal 2015 compared to the third quarter of fiscal 2014, decreasing SG&A by 0.7 percentage point. The decrease was driven by our prior year results that were stronger against the incentive-based targets than the current year, partly offset by a larger increase in our share price during the third quarter of fiscal 2015 compared to the third quarter of fiscal 2014. Several of our share-based compensation awards are liability-based awards, and their cumulative expense to date is adjusted at the end of each quarter based on the share price on the last day of the reporting period.

 

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Upholstery Segment

 

(Unaudited, amounts in thousands, except percentages)

 

1/24/15

 

1/25/14

 

Percent
Change

 

Sales

 

$

286,336

 

$

280,272

 

2.2

%

Operating income

 

31,479

 

31,560

 

(0.3

)%

Operating margin

 

11.0

%

11.3

%

 

 

 

Sales

 

Our Upholstery segment’s sales increased $6.1 million in the third quarter of fiscal 2015 compared to the third quarter of fiscal 2014, an increase of 2.2%. Increased unit volume drove a 1.3% increase, and higher selling prices resulted in a 1.5% increase in sales in the third quarter of fiscal 2015, partly offset by an unfavorable change in product mix. We experienced a shift to more fabric units and fewer leather units which negatively impacted the comparison of sales from third quarter of fiscal 2015 to the third quarter of fiscal 2014, as fabric units have a lower average selling price than leather units.

 

Our wholesale upholstery written business grew 10.3%, with the pace of business accelerating in the second half of the quarter. With a business model that emphasizes customization, coupled with a four-to-six-week lead time for deliveries, many orders were not scheduled during the period and will roll into delivered sales for the fourth quarter.

 

Operating Margin

 

Our Upholstery segment’s operating margin was 0.3 percentage point lower in the third quarter of fiscal 2015 compared to the third quarter of fiscal 2014.

 

·                  The segment’s gross margin increased 0.6 percentage point during the third quarter of fiscal 2015 compared to the third quarter of fiscal 2014 due to a combination of factors.

 

·                  The benefit of a legal settlement provided a 2.0 percentage point improvement in the gross margin rate during the third quarter of fiscal 2015.

·                  Higher unit volume and selling prices, as well as operational efficiencies in our supply chain, together provided a 1.7 percentage point benefit.

·                  Somewhat offsetting these benefits were inefficiencies in our manufacturing operations, partly resulting from the ongoing implementation of our ERP system, which resulted in a 1.4 percentage point decline in gross margin in the third quarter of fiscal 2015 compared to the third quarter of fiscal 2014.

·                  In addition, we incurred raw material cost increases of 1.3 percentage points.

 

·                  The segment’s SG&A expense as a percentage of sales increased 0.9 percentage point in the third quarter of fiscal 2015 compared to the third quarter of fiscal 2014. The comparison to the prior year was negatively impacted by a 0.7 percentage point increase in warranty expense. A favorable adjustment to our product warranty liability recorded in the third quarter of fiscal 2014, which reflected a change in prior estimates of our product warranty liability at that time, coupled with higher parts and labor costs incurred to service our warranty claims during the third quarter of fiscal 2015, resulted in the unfavorable comparison. In addition, the increase in SG&A expense as a percent of sales in the third quarter of fiscal 2015 was a result of higher costs of 0.3 percentage point for investment in technology improvements, including our ERP system and the replacement of our

 

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website and e-commerce platform. These items were somewhat offset by a decrease in incentive compensation expense.

 

Casegoods Segment

 

(Unaudited, amounts in thousands, except percentages)

 

1/24/15

 

1/25/14

 

Percent
Change

 

Sales

 

$

26,000

 

$

25,754

 

1.0

%

Operating income

 

860

 

394

 

118.3

%

Operating margin

 

3.3

%

1.5

%

 

 

 

Sales

 

Our Casegoods segment’s sales were $0.2 million higher in the third quarter of fiscal 2015 compared to the third quarter of fiscal 2014, an increase of 1.0%. The increase was mainly due to an increase in unit volume, which was partly offset by higher promotional activity as we reduce our mix of traditional styling and shift our product to more transitional and casual styles to appeal to a wider consumer base.

 

Operating Margin

 

Our Casegoods segment’s operating margin improved 1.8 percentage points in the third quarter of fiscal 2015 compared to the third quarter of fiscal 2014.

 

·                  The segment’s gross margin increased 2.5 percentage points during the third quarter of fiscal 2015 compared to the third quarter of fiscal 2014 primarily due to the transition to an all-import model for our wood furniture.

 

·                  The segment’s SG&A expense as a percentage of sales increased 0.7 percentage point, mainly due to higher incentive compensation costs resulting from the improved financial performance of the segment.

 

Retail Segment

 

(Unaudited, amounts in thousands, except percentages)

 

1/24/15

 

1/25/14

 

Percent
Change

 

Sales

 

$

89,791

 

$

80,212

 

11.9

%

Operating income

 

4,202

 

3,087

 

36.1

%

Operating margin

 

4.7

%

3.8

%

 

 

 

Sales

 

Our Retail segment’s sales increased $9.6 million in the third quarter of fiscal 2015 compared to the third quarter of fiscal 2014. We were able to increase our ticket count and units per ticket on flat traffic, significantly increasing our conversion compared with the third quarter of fiscal 2014. The increased ticket count and units per ticket resulted in a 4.7% sales increase for our currently active stores that have been open for a minimum of 12 months. In addition, sales were higher in the third quarter of fiscal 2015 compared to the prior year quarter due to the sales volume of our new and acquired stores. We believe the increase in sales in the third quarter of fiscal 2015 compared to the third quarter of fiscal 2014 was due to our Live Life Comfortably marketing campaign, the strength of our stationary product introductions and our improved product value and styling.

 

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Table of Contents

 

Operating Margin

 

Our Retail segment’s operating margin was 0.9 percentage point higher in the third quarter of fiscal 2015 compared to the third quarter of fiscal 2014.

 

·                  The segment’s gross margin was 0.9 percentage point lower in the third quarter of fiscal 2015 compared to the third quarter of fiscal 2014, due to the impact of higher promotional activity, which drove our ability to convert flat traffic into an increase in ticket count and units per ticket.

 

·                  The segment’s SG&A costs as a percent of sales decreased 1.8 percentage points in the third quarter of fiscal 2015 compared to the third quarter of fiscal 2014, primarily because our sales increase allowed us to leverage our fixed SG&A expenses (primarily occupancy and administrative costs) as a percentage of sales. Additionally, our incentive compensation expense was lower in the segment. This was somewhat offset by spending for investment in our business. The investments included costs related to new store openings for the two company-owned La-Z-Boy Furniture Galleries® stores opened during the third quarter of fiscal 2015. As we execute our growth strategy over the next few years, our SG&A costs will increase for items such as pre-opening rent, staffing, advertising and technology-related expenses. These investments reduced operating income by approximately $0.7 million in the third quarter of fiscal 2015.

 

Corporate and Other

 

(Unaudited, amounts in thousands, except percentages)

 

1/24/15

 

1/25/14

 

Percent
Change

 

Sales

 

 

 

 

 

 

 

Corporate and Other

 

$

561

 

$

404

 

38.9

%

Eliminations

 

(44,812

)

(40,117

)

(11.7

)%

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

 

 

 

 

 

Restructuring

 

771

 

60

 

1,185.0

%

Corporate and Other