Table of Contents

 

 

 

 

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 OCTOBER 27, 2018

 

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.)

 

One La-Z-Boy Drive, Monroe, Michigan

 

48162-5138

(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 every Interactive Data File required to be submitted 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 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, 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 x  Accelerated filer o  Non-accelerated filer o  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 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 November 21, 2018

Common Shares, $1.00 par value

 

46,833,470

 

 

 


Table of Contents

 

LA-Z-BOY INCORPORATED
FORM 10-Q SECOND QUARTER OF FISCAL 2019

 

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. Acquisitions

11

 

 

Note 3. Restricted Cash

14

 

 

Note 4. Inventories

14

 

 

Note 5. Goodwill and Other Intangible Assets

14

 

 

Note 6. Investments

15

 

 

Note 7. Pension Plans

16

 

 

Note 8. Product Warranties

17

 

 

Note 9. Stock-Based Compensation

17

 

 

Note 10. Accumulated Other Comprehensive Loss

19

 

 

Note 11. Revenue Recognition

21

 

 

Note 12. Segment Information

23

 

 

Note 13. Income Taxes

25

 

 

Note 14. Earnings per Share

25

 

 

Note 15. Fair Value Measurements

26

 

 

 

 

Item 2.

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

28

 

 

Cautionary Statement Concerning Forward-Looking Statements

28

 

 

Introduction

29

 

 

Results of Operations

32

 

 

Liquidity and Capital Resources

37

 

 

Critical Accounting Policies

40

 

 

Recent Accounting Pronouncements

40

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

40

 

Item 4. 

Controls and Procedures

40

 

 

PART II Other Information

41

 

Item 1A.

Risk Factors

41

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

42

 

Item 6.

Exhibits

42

 

 

Signature Page

43

 

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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)

 

10/27/18

 

10/28/17

 

Sales

 

$

439,333

 

$

393,205

 

Cost of sales

 

264,928

 

238,253

 

Gross profit

 

174,405

 

154,952

 

Selling, general and administrative expense

 

145,905

 

120,683

 

Operating income

 

28,500

 

34,269

 

Interest expense

 

(501

)

(160

)

Interest income

 

392

 

376

 

Other expense, net

 

(1,997

)

(926

)

Income before income taxes

 

26,394

 

33,559

 

Income tax expense

 

6,045

 

10,353

 

Net income

 

20,349

 

23,206

 

Net income attributable to noncontrolling interests

 

(337

)

(310

)

Net income attributable to La-Z-Boy Incorporated

 

$

20,012

 

$

22,896

 

 

 

 

 

 

 

Basic weighted average common shares

 

46,888

 

47,964

 

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

 

$

0.43

 

$

0.47

 

 

 

 

 

 

 

Diluted weighted average common shares

 

47,259

 

48,297

 

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

 

$

0.42

 

$

0.47

 

 

 

 

 

 

 

Dividends declared per share

 

$

0.12

 

$

0.11

 

 

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

 

 

 

Six Months Ended

 

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

 

10/27/18

 

10/28/17

 

Sales

 

$

824,028

 

$

750,284

 

Cost of sales

 

501,101

 

456,229

 

Gross profit

 

322,927

 

294,055

 

Selling, general and administrative expense

 

271,267

 

243,488

 

Operating income

 

51,660

 

50,567

 

Interest expense

 

(605

)

(317

)

Interest income

 

994

 

719

 

Other income (expense), net

 

(1,105

)

823

 

Income before income taxes

 

50,944

 

51,792

 

Income tax expense

 

11,644

 

16,842

 

Net income

 

39,300

 

34,950

 

Net income attributable to noncontrolling interests

 

(985

)

(403

)

Net income attributable to La-Z-Boy Incorporated

 

$

38,315

 

$

34,547

 

 

 

 

 

 

 

Basic weighted average common shares

 

46,802

 

48,160

 

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

 

$

0.82

 

$

0.71

 

 

 

 

 

 

 

Diluted weighted average common shares

 

47,219

 

48,537

 

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

 

$

0.81

 

$

0.71

 

 

 

 

 

 

 

Dividends declared per share

 

$

0.24

 

$

0.22

 

 

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

 

 

 

Quarter Ended

 

(Unaudited, amounts in thousands)

 

10/27/18

 

10/28/17

 

Net income

 

$

20,349

 

$

23,206

 

Other comprehensive income (loss)

 

 

 

 

 

Currency translation adjustment

 

1,168

 

(147

)

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

 

155

 

(741

)

Net unrealized gain on marketable securities, net of tax

 

23

 

208

 

Net pension amortization, net of tax

 

517

 

517

 

Total other comprehensive income (loss)

 

1,863

 

(163

)

Total comprehensive income before allocation to noncontrolling interests

 

22,212

 

23,043

 

Comprehensive income attributable to noncontrolling interests

 

(956

)

(410

)

Comprehensive income attributable to La-Z-Boy Incorporated

 

$

21,256

 

$

22,633

 

 

 

 

Six Months Ended

 

(Unaudited, amounts in thousands)

 

10/27/18

 

10/28/17

 

Net income

 

$

39,300

 

$

34,950

 

Other comprehensive income (loss)

 

 

 

 

 

Currency translation adjustment

 

(3,021

)

2,169

 

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

 

(178

)

(263

)

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

 

64

 

(63

)

Net pension amortization, net of tax

 

1,033

 

1,034

 

Total other comprehensive income (loss)

 

(2,102

)

2,877

 

Total comprehensive income before allocation to noncontrolling interests

 

37,198

 

37,827

 

Comprehensive income attributable to noncontrolling interests

 

(376

)

(908

)

Comprehensive income attributable to La-Z-Boy Incorporated

 

$

36,822

 

$

36,919

 

 

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

 

(Unaudited, amounts in thousands, except par value)

 

10/27/18

 

4/28/18

 

Current assets

 

 

 

 

 

Cash and equivalents

 

$

93,867

 

$

134,515

 

Restricted cash

 

2,001

 

2,356

 

Receivables, net of allowance of $2,647 at 10/27/18 and $1,956 at 4/28/18

 

150,507

 

154,055

 

Inventories, net

 

214,948

 

184,841

 

Other current assets

 

76,093

 

42,451

 

Total current assets

 

537,416

 

518,218

 

Property, plant and equipment, net

 

195,327

 

180,882

 

Goodwill

 

182,116

 

75,254

 

Other intangible assets, net

 

30,500

 

18,190

 

Deferred income taxes — long-term

 

23,227

 

21,265

 

Other long-term assets, net

 

83,549

 

79,158

 

Total assets

 

$

1,052,135

 

$

892,967

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

Short-term borrowings

 

$

35,000

 

$

 

Current portion of long-term debt

 

217

 

223

 

Accounts payable

 

75,090

 

62,403

 

Accrued expenses and other current liabilities

 

176,075

 

118,721

 

Total current liabilities

 

286,382

 

181,347

 

Long-term debt

 

89

 

199

 

Other long-term liabilities

 

116,433

 

86,205

 

Contingencies and commitments

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

Preferred shares — 5,000 authorized; none issued

 

 

 

Common shares, $1 par value — 150,000 authorized; 46,905 outstanding at 10/27/18 and 46,788 outstanding at 4/28/18

 

46,905

 

46,788

 

Capital in excess of par value

 

307,701

 

298,948

 

Retained earnings

 

309,543

 

291,644

 

Accumulated other comprehensive loss

 

(28,329

)

(25,199

)

Total La-Z-Boy Incorporated shareholders’ equity

 

635,820

 

612,181

 

Noncontrolling interests

 

13,411

 

13,035

 

Total equity

 

649,231

 

625,216

 

Total liabilities and equity

 

$

1,052,135

 

$

892,967

 

 

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

 

 

 

Six Months Ended

 

(Unaudited, amounts in thousands)

 

10/27/18

 

10/28/17

 

Cash flows from operating activities

 

 

 

 

 

Net income

 

$

39,300

 

$

34,950

 

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

 

 

 

 

 

Gain on disposal of assets

 

(72

)

(1,884

)

Gain on conversion of investment

 

 

(2,204

)

Change in deferred taxes

 

1,572

 

(403

)

Provision for doubtful accounts

 

315

 

74

 

Depreciation and amortization

 

15,541

 

15,869

 

Equity-based compensation expense

 

5,679

 

6,410

 

Pension plan contributions

 

(7,000

)

(2,000

)

Change in receivables

 

122

 

6,165

 

Change in inventories

 

(15,037

)

(4,096

)

Change in other assets

 

(15,781

)

(7,935

)

Change in payables

 

6,034

 

2,136

 

Change in other liabilities

 

15,411

 

4,142

 

Net cash provided by operating activities

 

46,084

 

51,224

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Proceeds from disposals of assets

 

256

 

608

 

Proceeds from property insurance

 

114

 

1,485

 

Capital expenditures

 

(26,926

)

(16,372

)

Purchases of investments

 

(5,193

)

(18,507

)

Proceeds from sales of investments

 

7,754

 

11,529

 

Acquisitions, net of cash acquired

 

(78,145

)

(15,879

)

Net cash used for investing activities

 

(102,140

)

(37,136

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Net proceeds from credit facility

 

35,000

 

 

Payments on debt

 

(116

)

(131

)

Stock issued for stock and employee benefit plans, net of shares withheld for taxes

 

4,039

 

356

 

Purchases of common stock

 

(11,610

)

(30,692

)

Dividends paid

 

(11,278

)

(10,648

)

Net cash provided by (used for) financing activities

 

16,035

 

(41,115

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and equivalents

 

(982

)

865

 

Change in cash, cash equivalents and restricted cash

 

(41,003

)

(26,162

)

Cash, cash equivalents and restricted cash at beginning of period

 

136,871

 

150,859

 

Cash, cash equivalents and restricted cash at end of period

 

$

95,868

 

$

124,697

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing activities capital expenditures included in payables

 

$

4,442

 

$

1,631

 

 

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

 

(Unaudited, amounts in thousands)

 

Common
Shares

 

Capital in
Excess of
Par Value

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Income
(Loss)

 

Non-
Controlling
Interests

 

Total

 

At April 29, 2017

 

$

48,472

 

$

289,632

 

$

284,698

 

$

(32,883

)

$

11,186

 

$

601,105

 

Net income

 

 

 

 

 

80,866

 

 

 

729

 

81,595

 

Other comprehensive income

 

 

 

 

 

 

 

7,684

 

1,120

 

8,804

 

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

 

311

 

4,046

 

(1,380

)

 

 

 

 

2,977

 

Purchases of 1,995 shares of common stock

 

(1,995

)

(4,204

)

(50,531

)

 

 

 

 

(56,730

)

Stock option and restricted stock expense

 

 

 

9,474

 

 

 

 

 

 

 

9,474

 

Dividends paid

 

 

 

 

 

(22,009

)

 

 

 

 

(22,009

)

At April 28, 2018

 

46,788

 

298,948

 

291,644

 

(25,199

)

13,035

 

625,216

 

Net income

 

 

 

 

 

38,315

 

 

 

985

 

39,300

 

Other comprehensive loss

 

 

 

 

 

 

 

(1,493

)

(609

)

(2,102

)

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

 

495

 

5,706

 

(2,162

)

 

 

 

 

4,039

 

Purchases of 378 shares of common stock

 

(378

)

(2,632

)

(8,600

)

 

 

 

 

(11,610

)

Stock option and restricted stock expense

 

 

 

5,679

 

 

 

 

 

 

 

5,679

 

Cumulative effect adjustment for investments, net of tax

 

 

 

 

 

1,637

 

(1,637

)

 

 

 

Dividends paid

 

 

 

 

 

(11,278

)

 

 

 

 

(11,278

)

Dividends declared not paid

 

 

 

 

 

(13

)

 

 

 

 

(13

)

At October 27, 2018

 

$

46,905

 

$

307,701

 

$

309,543

 

$

(28,329

)

$

13,411

 

$

649,231

 

 

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

 

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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. We derived the April 28, 2018, balance sheet from our audited financial statements. We prepared the interim financial information in conformity with generally accepted accounting principles, which we applied on a basis consistent with those reflected in our fiscal 2018 Annual Report on Form 10-K filed with the Securities and Exchange Commission, but the information does not include all of the disclosures required by generally accepted accounting principles. In management’s opinion, the interim financial information includes all adjustments and accruals, consisting only of normal recurring adjustments (except as otherwise disclosed), that are necessary for a fair statement of results for the respective interim periods. The interim results reflected in the accompanying financial statements are not necessarily indicative of the results of operations that will occur for the full fiscal year ending April 27, 2019.

 

At October 27, 2018, we owned preferred shares of two privately-held companies, both of which are variable interest entities. We also hold a warrant to purchase common shares of one of these companies. We have not consolidated the results of either of these companies in our financial statements because we do not have the power to direct those activities that most significantly impact the economic performance of either of these companies and, therefore, are not the primary beneficiary.

 

Accounting pronouncements adopted in fiscal 2019

 

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 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 beginning with our fiscal 2019. We adopted the new standard in the first quarter of fiscal 2019 with modified retrospective application. We reviewed substantially all of our contracts and other revenue streams and determined that while the application of the new standard did not have a material change in the amount of or timing for recognizing revenue, it did have a significant impact on our financial statement disclosures related to disaggregated revenue, customer deposits, other receivables and contract liabilities, as well as the presentation of other receivables and deferred revenues (contract liabilities) on our consolidated balance sheet. See Note 11 for information on these disclosures.

 

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 using the equity method of accounting or that result in consolidation of the invested entity. As of April 28, 2018, we held equity investments and recognized changes in fair value through other comprehensive income (loss) as unrealized gains (losses). We adopted the new standard in the first quarter of fiscal 2019 and consequently reclassified $2.1 million of net unrealized gains from accumulated other comprehensive income to retained earnings as a cumulative-effect adjustment during the first quarter of fiscal 2019. We also reclassified $0.5 million of tax expense related to these investments from accumulated other comprehensive loss to retained earnings. We will recognize the tax impact for these investments in the consolidated statement of income as the unrealized gains (losses) become realized. See Note 6 for additional information on our current investments.

 

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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. We adopted this standard in the first quarter of fiscal 2019. Adoption of this standard did not impact our current practices because intra-entity transfers, as the standard defines them, did not occur in the first six months of fiscal 2019.

 

In January 2017, the FASB issued a new accounting standard clarifying the definition of a business with the objective of adding guidance to entities evaluating whether a transaction should be accounted for as an acquisition. We adopted this standard in the first quarter of fiscal 2019. Adoption of this standard did not change the accounting treatment of acquisitions completed during fiscal 2019.

 

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. We are required to adopt this standard by our fiscal 2021, but the standard permits us to adopt it early. We have elected to adopt this standard in fiscal 2019, and we will perform our goodwill impairment test in the fourth quarter of fiscal 2019. We do not believe that adoption of this standard will have a material impact on our consolidated financial statements or disclosures.

 

In August 2018, the FASB issued a new accounting standard that aligns the accounting for implementation costs in hosting arrangements that are service contracts with accounting for implementation costs on internal-use software. The standard allows certain implementation costs in specified phases of the project to be capitalized and expensed over the term of the hosting arrangement. We are required to adopt this standard by our fiscal 2021, but the standard permits early adoption in any interim period. We have elected to adopt this standard beginning with our second quarter of fiscal 2019. We have not capitalized any costs to date related to the implementation of hosting arrangements, but we anticipate capitalizing costs in the future. We do not expect the capitalization of these costs to have a material impact on our consolidated financial statements and related disclosures.

 

Accounting pronouncements not yet adopted

 

In February 2016, the FASB issued a new accounting standard requiring lessees to record all operating leases on their balance sheet. Under this 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 will be effective beginning with our fiscal 2020. We are currently reviewing our leases and gathering the necessary information to adopt this standard when it becomes effective. We anticipate that adopting this standard will have a material impact on our consolidated balance sheet as we have a significant number of operating leases.

 

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 new 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 2017, the FASB issued a new accounting standard designed to improve and simplify the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. This standard is intended to better align the recognition and presentation of

 

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the effects of hedging instruments with the hedged item in the financial statements, and requires additional disclosures on hedging instruments. This standard will be effective for our fiscal 2020. As of October 27, 2018, we do not have any outstanding hedging relationships or instruments that would be affected by this standard.

 

The Tax Cut and Jobs Act of 2017 (the “Tax Act”) required corporations to adjust deferred taxes to reflect the reduction of the corporate income tax rate, leaving items within accumulated other comprehensive income stranded at the historical tax rate. In February 2018, the FASB issued a new accounting standard that allows corporations in their consolidated financial statements to reclassify these stranded income tax effects from accumulated other comprehensive income to retained earnings. This standard will be effective for our fiscal 2020, and companies are permitted to adopt it in any interim period. Companies are to apply the standard either in the period they adopt or retrospectively to each period that was affected by the Tax Act’s change in the federal corporate tax rate. We are still assessing the impact this standard will have on our consolidated financial statements and related disclosures.

 

In August 2018, the FASB issued a new accounting standard that modifies the disclosure requirements for fair value measurements. The standard removes certain disclosures for transfers between levels in the fair value hierarchy and the valuation processes for Level 3 measurements. The standard adds disclosure requirements for unrealized gains/losses included in other comprehensive income related to Level 3 fair value measurements, and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This standard will be effective for our fiscal 2021, with early adoption permitted. We do not believe these changes will have a significant impact on our financial statement disclosures.

 

In August 2018, the FASB issued a new accounting standard that modifies the disclosure requirements for defined benefit pension or other postretirement obligations. The standard removes certain disclosures that are no longer considered cost beneficial, clarifies the requirements of certain other disclosures, and adds new disclosure requirements. This standard will be effective for our fiscal 2022, with early adoption permitted. We do not believe these changes will have a significant impact on our financial statement disclosures.

 

Note 2: Acquisitions

 

Retail segment acquisitions

 

On August 15, 2018 and September 30, 2018, respectively, we acquired the assets of two independent operators of La-Z-Boy Furniture Galleries® stores: one that operated nine stores and two warehouses in Arizona and one that operated one store in Massachusetts, for an aggregate $42.8 million, including $38.9 million of cash, $2.6 million of forgiveness of accounts receivable, and $1.3 million of guaranteed future payments. We will pay the guaranteed future payments over the next 34 months. These acquisitions are a core part of our strategy to grow our company-owned retail business and leverage our integrated retail model where we earn a combined profit on both the wholesale and retail sides of the business.

 

Prior to our retail acquisitions, we licensed the exclusive right to own and operate La-Z-Boy Furniture Galleries® stores (and to use the associated trademarks and trade name) in those markets to the dealers whose assets we acquired, and we reacquired these rights when we purchased the dealers’ other assets. The reacquired rights are indefinite-lived because our Retailer Agreements are perpetual agreements that have no specific expiration date and no renewal options. A Retailer Agreement remains in effect as long as the independent retailer is not in default under the terms of the agreement. 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 $6.6 million related to these reacquired rights. We also recognized $32.0 million of goodwill in fiscal 2019 related primarily to synergies we expect from the integration of the acquired stores and future

 

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benefits of these synergies. For federal income tax purposes, we will amortize and appropriately deduct all of the indefinite-lived intangible assets and goodwill assets over 15 years.

 

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

 

(Unaudited, amounts in thousands)

 

Second quarter
fiscal 2019
acquisitions

 

Fair value of consideration:

 

 

 

Cash

 

$

38,904

 

Forgiveness of accounts receivable

 

2,610

 

Guaranteed future payments

 

1,300

 

Total fair value of consideration

 

42,814

 

 

 

 

 

Amounts recognized for identifiable assets acquired and liabilities assumed:

 

 

 

Inventory

 

10,491

 

Other current assets

 

4,194

 

Property, plant and equipment

 

929

 

Indefinite-lived reacquired rights

 

6,600

 

Other long-term assets

 

183

 

Customer deposits

 

(6,515

)

Other current liabilities

 

(5,055

)

Total identifiable net assets acquired

 

10,827

 

 

 

 

 

Goodwill

 

$

31,987

 

 

All acquired stores were included in our Retail segment results upon acquisition.

 

Corporate and Other acquisitions

 

On July 30, 2018, we completed our acquisition of Stitch Industries, Inc. (“Joybird”), an e-commerce retailer and manufacturer of upholstered furniture, for guaranteed cash payments of $75 million, subject to working capital adjustments. We acquired Joybird as they are a leading e-commerce retailer and manufacturer of upholstered furniture, which positions us for growth in the online selling environment and allows us to better reach millennial and Gen X consumers, while leveraging our supply chain assets.

 

The guaranteed payments include a closing date cash payment of $37.5 million in purchase price consideration, $7.5 million in prepaid compensation, and the assumption of $5.0 million of liabilities that will be paid over the next two years, with the remaining $25 million to be paid annually in $5 million installments over the next five years. The merger agreement also includes two future earn-out opportunities based on Joybird’s financial performance in fiscal 2021 and fiscal 2023. The merger agreement also included a working capital adjustment, and as of October 27, 2018, we have recorded a receivable for approximately $2.5 million for working capital adjustments. We received this $2.5 million during the third quarter of fiscal 2019 from amounts placed in escrow at the time of the closing of the transaction.

 

The $7.5 million of prepaid compensation relates to the retention of the four Joybird founders, now our employees, who will forfeit proportional amounts if one or more of them resign in the two years following the acquisition. We are amortizing the $7.5 million to selling, general & administrative expense over the two-year

 

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retention period on a straight-line basis. In addition to the guaranteed cash payments of $75 million, we recorded a contingent consideration liability of $3.3 million, which reflects the provisional fair value of the earn-out opportunities as of the date of acquisition, and a finite-lived intangible asset of $6.4 million, which reflects the provisional fair value of the acquired Joybird® trade name, which we are amortizing to selling, general & administrative expense over its useful life of eight years on a straight-line basis. The undiscounted range of the contingent consideration is zero to $65 million based on sales and profitability of Joybird in fiscal 2021 and fiscal 2023. Subsequent adjustments to the fair value of the contingent consideration will impact selling, general & administrative expense in our consolidated statement of income.

 

We recorded $75.8 million of goodwill related to the Joybird acquisition, related primarily to synergies we expect from the integration of the acquisition and the anticipated future benefits of these synergies. The finite-lived intangible asset and goodwill asset for Joybird are not deductible for federal income tax purposes.

 

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

 

(Unaudited, amounts in thousands)

 

Second quarter
fiscal 2019
acquisitions

 

Fair value of consideration:

 

 

 

Cash

 

$

37,482

 

Guaranteed payment

 

22,489

 

Acquisition earn-out

 

3,300

 

Assumption of liability

 

5,000

 

Working capital adjustment

 

(2,486

)

Total fair value of consideration

 

65,785

 

 

 

 

 

Amounts recognized for assets acquired and liabilities assumed:

 

 

 

Inventory

 

5,258

 

Other current assets

 

3,258

 

Property, plant and equipment

 

2,057

 

Finite-lived tradename

 

6,400

 

Other long-term assets

 

4,010

 

Accounts payable

 

(8,399

)

Customer deposits

 

(9,619

)

Other current liabilities

 

(12,876

)

Other long-term liabilities

 

(150

)

Total identifiable net liabilities acquired

 

(10,061

)

 

 

 

 

Goodwill

 

$

75,846

 

 

We included the Joybird acquisition in our other business activities which we report as Corporate and Other 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. In accordance with Accounting Standard Codification Topic 805-10-25-15, the acquirer has a period of time, referred to as the measurement period, to finalize the accounting for a business combination. The measurement period provides companies with a reasonable period of time to determine, among other things, the identifiable assets acquired, liabilities assumed

 

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and consideration transferred for the acquisition, or other amount used in measuring goodwill. All of our provisional purchase accounting estimates shown above for both our Retail acquisitions and our acquisition of Joybird are based on the information and data available to us as of the time of the issuance of these financial statements, and are subject to change within the first 12 months of acquisition as we have access to additional data.

 

Note 3: Restricted Cash

 

We have cash on deposit with a bank as collateral for certain letters of credit. All of our letters of credit have maturity dates within the next twelve months, but we expect to renew some of these letters of credit when they mature.

 

(Unaudited, amounts in thousands)

 

10/27/18

 

10/28/17

 

Cash and cash equivalents

 

$

93,867

 

$

122,345

 

Restricted cash

 

2,001

 

2,352

 

Total cash, cash equivalents and restricted cash

 

$

95,868

 

$

124,697

 

 

Note 4: Inventories

 

A summary of inventories is as follows:

 

(Unaudited, amounts in thousands)

 

10/27/18

 

4/28/18

 

Raw materials

 

$

95,485

 

$

86,214

 

Work in process

 

13,816

 

12,254

 

Finished goods

 

128,457

 

109,183

 

FIFO inventories

 

237,758

 

207,651

 

Excess of FIFO over LIFO

 

(22,810

)

(22,810

)

Total inventories

 

$

214,948

 

$

184,841

 

 

Note 5: Goodwill and Other Intangible Assets

 

We have goodwill in our Retail Segment related to our acquisitions of La-Z-Boy Furniture Galleries® stores. In our Corporate and Other results, we have goodwill related to our acquisition of Joybird. The remainder of our goodwill is related to our acquisition of the La-Z-Boy wholesale business in the United Kingdom and Ireland, which we recorded in our Upholstery reportable segment. The following is a roll-forward of goodwill for the six months ended October 27, 2018:

 

(Unaudited, amounts in thousands)

 

Upholstery
Segment

 

Retail
Segment

 

Corporate
and Other

 

Total
Goodwill

 

Balance at April 28, 2018

 

$

12,967

 

$

62,287

 

$

 

$

75,254

 

Acquisitions

 

 

31,987

 

75,846

 

107,833

 

Translation adjustment

 

(894

)

(77

)

 

(971

)

Balance at October 27, 2018

 

$

12,073

 

$

94,197

 

$

75,846

 

$

182,116

 

 

Our intangible assets include the indefinite-lived trade name for American Drew®, a brand in our Casegoods segment, and the finite-lived trade name for Joybird®, a brand within Corporate and Other. Indefinite-lived reacquired rights relate to our acquisition of La-Z-Boy Furniture Galleries® stores, and are recorded in our Retail segment. Other intangible assets are primarily acquired customer relationships from our acquisition of the

 

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La-Z-Boy wholesale business in the United Kingdom and Ireland, and are recorded in our Upholstery reportable segment. The following is a roll-forward of our intangible assets for the six months ended October 27, 2018:

 

(Unaudited, amounts in thousands)

 

Indefinite-
Lived
Trade
Names

 

Finite-Lived
Trade
Names

 

Indefinite-
Lived
Reacquired
Rights

 

Other
Intangible
Assets

 

Total
Other
Intangible
Assets

 

Balance at April 28, 2018

 

$

1,155

 

$

 

$

13,645

 

$

3,390

 

$

18,190

 

Acquisitions

 

 

6,400

 

6,600

 

 

13,000

 

Amortization

 

 

(200

)

 

(204

)

(404

)

Translation adjustment

 

 

 

(57

)

(229

)

(286

)

Balance at October 27, 2018

 

$

1,155

 

$

6,200

 

$

20,188

 

$

2,957

 

$

30,500

 

 

Note 6: Investments

 

We have current and long-term investments intended to enhance returns on our cash as well as to fund future obligations of our non-qualified defined benefit retirement plan, our executive deferred compensation plan, and our performance compensation retirement plan. We also hold other investments consisting of cost-basis preferred shares of two privately-held companies. Our short-term investments are included in other current assets and our long-term investments are included in other long-term assets on our consolidated balance sheet.

 

The following summarizes our investments at October 27, 2018, and April 28, 2018:

 

(Unaudited, amounts in thousands)

 

10/27/18

 

4/28/18

 

Short-term investments:

 

 

 

 

 

Marketable securities

 

$

13,052

 

$

12,926

 

Held-to-maturity investments

 

3,218

 

3,340

 

Total short-term investments

 

16,270

 

16,266

 

 

 

 

 

 

 

Long-term investments:

 

 

 

 

 

Marketable securities

 

27,061

 

32,134

 

Cost basis investments

 

10,954

 

10,954

 

Total long-term investments

 

38,015

 

43,088

 

 

 

 

 

 

 

Total investments

 

$

54,285

 

$

59,354

 

 

 

 

 

 

 

Investments to enhance returns on cash

 

$

29,795

 

$

34,359

 

Investments to fund compensation/retirement plans

 

$

13,536

 

$

14,041

 

Other investments

 

$

10,954

 

$

10,954

 

 

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The following is a summary of the unrealized gains, unrealized losses, and fair value by investment type at October 27, 2018, and April 28, 2018:

 

At October 27, 2018

 

(Unaudited, amounts in thousands)

 

Gross
Unrealized Gains

 

Gross
Unrealized Losses

 

Fair Value

 

Equity securities

 

$

1,889

 

$

(99

)

$

18,525

 

Fixed income

 

27

 

(333

)

31,339

 

Other

 

221

 

(11

)

4,421

 

Total securities

 

$

2,137

 

$

(443

)

$

54,285

 

 

At April 28, 2018

 

(Unaudited, amounts in thousands)

 

Gross
Unrealized Gains

 

Gross
Unrealized Losses

 

Fair Value

 

Equity securities

 

$

2,142

 

$

(39

)

$

18,765

 

Fixed income

 

29

 

(418

)

36,312

 

Other

 

72

 

 

4,277

 

Total securities

 

$

2,243

 

$

(457

)

$

59,354

 

 

The following table summarizes sales of marketable securities:

 

 

 

Quarter Ended

 

Six Months Ended

 

(Unaudited, amounts in thousands)

 

10/27/18

 

10/28/17

 

10/27/18

 

10/28/17

 

Proceeds from sales

 

$

2,992

 

$

5,672

 

$

7,754

 

$

11,529

 

Gross realized gains

 

10

 

16

 

85

 

418

 

Gross realized losses

 

(11

)

(7

)

(66

)

(228

)

 

At October 27, 2018, the fair value of fixed income marketable securities, which are classified as available-for-sale securities, by contractual maturity was $13.0 million within one year, $16.3 million within two to five years, $1.2 million within six to ten years, and $0.8 million thereafter.

 

Note 7: Pension Plans

 

Net periodic pension costs were as follows:

 

 

 

Quarter Ended

 

Six Months Ended

 

(Unaudited, amounts in thousands)

 

10/27/18

 

10/28/17

 

10/27/18

 

10/28/17

 

Service cost

 

$

323

 

$

329

 

$

646

 

$

658

 

Interest cost

 

1,116

 

1,147

 

2,232

 

2,294

 

Expected return on plan assets

 

(1,136

)

(1,204

)

(2,272

)

(2,408

)

Net amortization

 

639

 

780

 

1,278

 

1,560

 

Net periodic pension cost

 

$

942

 

$

1,052

 

$

1,884

 

$

2,104

 

 

The components of net periodic pension cost other than the service cost are included in other income (expense), net in our consolidated statement of income. Service cost is recorded in cost of sales in our consolidated statement of income.

 

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Note 8: 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 our claims experience and any additional anticipated future costs on previously sold products. We incorporate repair costs into our liability estimates, including materials, labor and overhead amounts necessary to perform repairs and any costs associated with delivering repaired product to our customers. Over 80% of our warranty liability relates to our Upholstery reportable 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 Upholstery segment warranties cover labor costs relating to our parts for one year. We provide a limited lifetime warranty against defects on a majority of the products sold by Joybird, part of our Corporate and Other results. For all our manufacturer warranties, the warranty period begins when the consumer receives our product. We use considerable judgment in making our estimates, and we record differences between our actual and estimated costs when the differences are known.

 

A reconciliation of the changes in our product warranty liability is as follows:

 

 

 

Quarter Ended

 

Six Months Ended

 

(Unaudited, amounts in thousands)

 

10/27/18

 

10/28/17

 

10/27/18

 

10/28/17

 

Balance as of the beginning of the period

 

$

21,093

 

$

21,882

 

$

21,205

 

$

21,870

 

Acquisitions

 

4,100

 

 

4,100

 

 

Accruals during the period

 

5,489

 

4,648

 

10,610

 

9,501

 

Settlements during the period

 

(5,485

)

(4,924

)

(10,718

)

(9,765

)

Balance as of the end of the period

 

$

25,197

 

$

21,606

 

$

25,197

 

$

21,606

 

 

As of October 27, 2018, and April 28, 2018, we included $16.6 million and $12.7 million, respectively, of our product warranty liability in accrued expenses and other current liabilities on our consolidated balance sheet, and included the remainder in other long-term liabilities. We recorded accruals during the periods presented in the table above, primarily to reflect charges that relate to warranties issued during the respective periods. The acquired warranty liability reflects our provisional estimate of the acquired warranty liabilities of Joybird on the acquisition date. See Note 2 for further information on our acquisition of Joybird.

 

Note 9: Stock-Based Compensation

 

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

 

 

 

Quarter Ended

 

Six Months Ended

 

(Unaudited, amounts in thousands)

 

10/27/18

 

10/28/17

 

10/27/18

 

10/28/17

 

Equity-based awards expense

 

$

3,639

 

$

2,852

 

$

5,679

 

$

6,410

 

Liability-based awards (income) expense

 

(300

)

(588

)

(134

)

308

 

Total stock-based compensation expense

 

$

3,339

 

$

2,264

 

$

5,545

 

$

6,718

 

 

Stock Options. We granted 423,273 stock options to employees during the first quarter of fiscal 2019, and we have stock options outstanding from previous grants. We account for stock options as equity-based awards because when they are exercised, they will be settled in common shares. We recognize compensation expense for stock options over the vesting period equal to the fair value on the date our compensation committee approved the awards. The vesting period for our stock options ranges from one to four years, with accelerated vesting upon retirement. The vesting date for retirement-eligible employees is the later of the date they meet the

 

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criteria for retirement or the end of the fiscal year in which the grant was made. We accelerate the expense for options granted to retirement-eligible employees over the vesting period, with expense recognized from the grant date through their retirement eligibility date or over the ten months following the grant date, whichever period is longer. We estimate forfeiture rates based on our employees’ forfeiture history and believe they will approximate future results. 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 2019 using the following assumptions:

 

(Unaudited)

 

Fiscal 2019
grant

 

Risk-free interest rate

 

2.82

%

Dividend rate

 

1.45

%

Expected life in years

 

5.00

 

Stock price volatility

 

33.07

%

Fair value per share

 

$

9.65

 

 

Stock Appreciation Rights (“SARs”). We did not grant any SARs to employees during the first six months of fiscal 2019, but we have SARs outstanding from previous grants. All outstanding SARs are fully vested and have a term of ten years. SARs will be paid in cash upon exercise and, accordingly, we account for SARs as liability-based awards that we re-measure to fair value at the end of each reporting period.

 

In fiscal 2013 and fiscal 2014, we granted SARs as described in our Annual Report on Form 10-K for the fiscal year ended April 27, 2013, and April 26, 2014, respectively. As of October 27, 2018, we had 7,149 and 17,918 SARs outstanding for the fiscal 2013 and fiscal 2014 awards, respectively. These awards have exceeded their expected life and are being re-measured to fair value based on their intrinsic value, which is the market value of our common stock on the last day of the reporting period less the exercise price, until the earlier of the exercise date or the contractual term date. At October 27, 2018, the intrinsic value per share of the fiscal 2013 and fiscal 2014 awards were $15.54 and $8.45, respectively.

 

Restricted Stock. We granted 100,426 shares of restricted stock to employees during the first six months of fiscal 2019. We also have shares of restricted stock outstanding from previous grants. We issue restricted stock at no cost to the employees, and the shares are held in an escrow account until the vesting period ends. If a recipient’s employment ends during the escrow period (other than through death or disability), the shares are returned at no cost to the company. We account for restricted stock awards as equity-based awards because when they vest, they will be settled in common shares. The weighted-average fair value of the restricted stock awarded in the first six months of fiscal 2019 was $33.11 per share, the market value of our common shares on the date of grant. We estimate forfeiture rates based on our employees’ forfeiture history and believe they will approximate future results. We recognize compensation expense for restricted stock over the vesting period equal to the fair value on the grant date of the award. Restricted stock awards vest at 25% per year, beginning one year from the grant date over a term of four years.

 

Restricted Stock Units. During the second quarter of fiscal 2019, we granted 21,240 restricted stock units to our non-employee directors. These restricted stock units vest when the director leaves the board. We account for these restricted stock units as equity-based awards because when they vest, they will be settled in shares of our

 

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common stock. We measure and recognize compensation expense for these awards based on the market price of our common shares on the date of grant, which was $33.15.

 

Performance Shares. During the first quarter of fiscal 2019, we granted 146,107 performance-based shares. 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 share opportunity ranges from 50% of the employee’s target award if minimum performance requirements are met to a maximum of 200% of the target award based on the attainment of certain financial and shareholder-return goals over a specific performance period, which is generally three fiscal years.

 

We account for performance-based shares as equity-based awards because when they vest, they will be settled in common shares. We estimate forfeiture rates based on our employees’ forfeiture history and believe they will approximate future results. 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 2019 that vest based on attaining performance goals was $31.71, 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 2019 grant of shares that vest based on market conditions was $46.39.

 

Note 10: Accumulated Other Comprehensive Loss

 

The activity in accumulated other comprehensive loss for the quarter ended October 27, 2018, and October 28, 2017, 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 July 28, 2018

 

$

(573

)

$

(179

)

$

(220

)

$

(28,601

)

$

(29,573

)

Changes before reclassifications

 

549

 

140

 

30

 

 

719

 

Amounts reclassified to net income

 

 

65

 

 

686

 

751

 

Tax effect

 

 

(50

)

(7

)

(169

)

(226

)

Other comprehensive income attributable to La-Z- Boy Incorporated

 

549

 

155

 

23

 

517

 

1,244

 

Balance at October 27, 2018

 

$

(24

)

$

(24

)

$

(197

)

$

(28,084

)

$

(28,329

)

 

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(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 July 29, 2017

 

$

984

 

$

552

 

$

1,481

 

$

(33,265

)

$

(30,248

)

Changes before reclassifications

 

(247

)

(1,094

)

344

 

 

(997

)

Amounts reclassified to net income

 

 

(103

)

(8

)

836

 

725

 

Tax effect

 

 

456

 

(128

)

(319

)

9

 

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

 

(247

)

(741

)

208

 

517

 

(263

)

Balance at October 28, 2017

 

$

737

 

$

(189

)

$

1,689

 

$

(32,748

)

$

(30,511

)

 

The activity in accumulated other comprehensive loss for the six months ended October 27, 2018, and October 28, 2017, is as follows:

 

(Unaudited, amounts in thousands)

 

Translation
adjustment

 

Change in
fair value
of cash
flow hedge

 

Unrealized
gain (loss)
on
marketable
securities

 

Net pension
amortization
and net
actuarial loss

 

Accumulated
other
comprehensive
loss

 

Balance at April 28, 2018

 

$

2,388

 

$

154

 

$

1,376

 

$

(29,117

)

$

(25,199

)

Changes before reclassifications

 

(2,412

)

(369

)

103

 

 

(2,678

)

Cumulative effect adjustment for investments (1)

 

 

 

(1,637

)

 

(1,637

)

Amounts reclassified to net income

 

 

132

 

(19

)

1,372

 

1,485

 

Tax effect

 

 

59

 

(20

)

(339

)

(300

)

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

 

(2,412

)

(178

)

(1,573

)

1,033

 

(3,130

)

Balance at October 27, 2018

 

$

(24

)

$

(24

)

$

(197

)

$

(28,084

)

$

(28,329

)

 

(1)         The cumulative effect adjustment for investments is composed of $2.1 million of unrealized gains on equity investments offset by $0.5 million of tax expense. We reclassified the net $1.6 million of cumulative effect adjustment from accumulated other comprehensive loss to retained earnings as a result of adopting Accounting Standards Update 2016-01 (see Note 1 for further information).

 

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(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 29, 2017

 

$

(927

)

$

74

 

$

1,752

 

$

(33,782

)

$

(32,883

)

Changes before reclassifications

 

1,664

 

(239

)

738

 

 

2,163

 

Amounts reclassified to net income

 

 

(186

)

(840

)

1,671

 

645

 

Tax effect

 

 

162

 

39

 

(637

)

(436

)

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

 

1,664

 

(263

)

(63

)

1,034

 

2,372

 

Balance at October 28, 2017

 

$

737

 

$

(189

)

$

1,689

 

$

(32,748

)

$

(30,511

)

 

We reclassified the unrealized gain/(loss) on marketable securities from accumulated other comprehensive loss to net income through other income (expense), net in our consolidated statement of income, reclassified the change in fair value of cash flow hedges to net income through cost of sales, and reclassified the net pension amortization to net income through other income (expense), net.

 

The components of non-controlling interest for the quarter and six months ended October 27, 2018, and October 28, 2017, were as follows:

 

 

 

Quarter Ended

 

Six Months Ended

 

(Unaudited, amounts in thousands)

 

10/27/18

 

10/28/17

 

10/27/18

 

10/28/17

 

Balance as of the beginning of the period

 

$

12,455

 

$

11,684

 

$

13,035

 

$

11,186

 

Net income

 

337

 

310

 

985

 

403

 

Other comprehensive income (loss)

 

619

 

100

 

(609

)

505

 

Balance as of the end of the period

 

$

13,411

 

$

12,094

 

$

13,411

 

$

12,094

 

 

Note 11: Revenue Recognition

 

We implemented Accounting Standard Update No. 2014-09, Revenue from Contracts with Customers (Accounting Standards Codification Topic 606, “ASC 606”), in the first quarter of fiscal 2019 using the modified-retrospective approach, which required us to apply the new guidance retrospectively to revenue transactions completed on or after the effective date. Adopting this new standard did not have a material impact on our consolidated financial statements except for our enhanced presentation and disclosures. As of the beginning of our fiscal 2019, we had identified and implemented all changes required by the new standard, including those related to our accounting policies, controls, and disclosures.

 

Our revenue consists substantially of product sales. We report product sales net of discounts and recognize them when control (rights and obligations associated with the product) passes to the customer. For sales to furniture retailers or distributors, control typically transfers when we ship product. In cases where we sell directly to the end consumer, control of the product is generally transferred upon delivery.

 

For shipping and handling activities, we have elected to apply the accounting policy election permitted in ASC 606-10-25-18B, which allows an entity to account for shipping and handling activities as fulfillment activities (rather than as a promised good or service) when the activities are performed even if those activities are

 

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performed after the control of the good has been transferred. We expense shipping and handling costs at the time we recognize revenue in accordance with this election.

 

For sales tax, we elected to apply the accounting policy election permitted in ASC 606-10-32-2A, which allows an entity to exclude from the measurement of the transaction price all taxes imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer, including sales, use, excise, value-added, and franchise taxes (collectively referred to as sales taxes). This allows us to present revenue net of these certain types of taxes.

 

The following table disaggregates our revenue by product category by segment for the quarter ended October 27, 2018:

 

(Unaudited, amounts in thousands)

 

Upholstery

 

Casegoods

 

Retail

 

Corporate
and Other

 

Total

 

Motion Upholstery Furniture

 

$

202,168

 

$

 

$

85,735

 

$

 

$

287,903

 

Stationary Upholstery Furniture

 

92,246

 

4,429

 

25,701

 

23,695

 

146,071

 

Bedroom Furniture

 

 

8,234

 

1,450

 

2,460

 

12,144

 

Dining Room Furniture

 

 

6,406

 

2,613

 

819

 

9,838

 

Occasional Furniture

 

418

 

13,723

 

5,067

 

490

 

19,698

 

Other (a)

 

22,261

 

(1,415

)

19,120

 

(5,086

)

34,880

 

Total

 

$

317,093

 

$

31,377

 

$

139,686

 

$

22,378

 

510,534

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Eliminations

 

 

 

(71,201

)

 

 

 

 

Consolidated Net Sales

 

 

 

$

439,333

 

 

(a)         Primarily includes revenue for delivery, advertising, royalties, parts, accessories, after-treatment products, discounts & allowances, rebates and other sales incentives

 

The following table disaggregates our revenue by product category by segment for the six months ended October 27, 2018:

 

(Unaudited, amounts in thousands)

 

Upholstery

 

Casegoods

 

Retail

 

Corporate
and Other

 

Total

 

Motion Upholstery Furniture

 

$

389,827

 

$

 

$

160,692

 

$

 

$

550,519

 

Stationary Upholstery Furniture

 

177,536

 

8,371

 

48,865

 

23,695

 

258,467

 

Bedroom Furniture

 

 

16,598

 

2,305

 

2,460

 

21,363

 

Dining Room Furniture

 

 

12,335

 

4,196

 

819

 

17,350

 

Occasional Furniture

 

811

 

25,711

 

9,041

 

490

 

36,053

 

Other (b)

 

42,317

 

(3,252

)

33,815

 

(1,221

)

71,659

 

Total

 

$

610,491

 

$

59,763

 

$

258,914

 

$

26,243

 

955,411

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Eliminations

 

 

 

(131,383

)

 

 

 

 

Consolidated Net Sales

 

 

 

$

824,028

 

 

(b)         Primarily includes revenue for delivery, advertising, royalties, parts, accessories, after-treatment products, discounts & allowances, rebates and other sales incentives

 

Motion Upholstery Furniture — Includes gross revenue for upholstered furniture, such as recliners, sofas, loveseats, chairs, sectionals and modulars that have a mechanism that allows the back of the product to recline or the product’s footrest to extend.  This gross revenue includes sales to La-Z-Boy Furniture Galleries® stores

 

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(including company-owned stores), operators of La-Z-Boy Comfort Studio® locations, England Custom Comfort Center locations, other major dealers, independent retailers, and the end consumer.

 

Stationary Upholstery Furniture — Includes gross revenue for upholstered furniture, such as sofas, loveseats, chairs, sectionals, modulars, and ottomans that do not have a mechanism. This gross revenue includes sales to La-Z-Boy Furniture Galleries® stores (including company-owned stores), operators of La-Z-Boy Comfort Studio® locations, England Custom Comfort Center locations, other major dealers, independent retailers, and the end consumer.

 

Bedroom Furniture — Includes gross revenue for casegoods furniture typically found in a bedroom, such as beds, chests, dressers, nightstands and benches. This gross revenue includes sales to La-Z-Boy Furniture Galleries® stores (including company-owned stores), independent retailers, and the end consumer.

 

Dining Room Furniture — Includes gross revenue for casegoods furniture typically found in a dining room, such as dining tables, dining chairs, storage units and stools. This gross revenue includes sales to La-Z-Boy Furniture Galleries® stores (including company-owned stores), independent retailers, and the end consumer.

 

Occasional Furniture — Includes gross revenue for casegoods furniture found throughout the home, such as cocktail tables, chairsides, sofa tables, end tables, and entertainment centers. This gross revenue includes sales to La-Z-Boy Furniture Galleries® stores (including company-owned stores), independent retailers, and the end consumer.

 

Our consolidated balance sheet includes current assets of $19.6 million that we reported as other receivables. These other receivables represent the remaining consideration to which we are entitled prior to fulfilling our performance obligation. At the beginning of fiscal 2019, we had $12.1 million of other receivables.

 

We receive deposits from end consumers before we recognize revenue, resulting in customer deposits, and in some cases we have the unconditional right to collect the remaining portion of the order price before we fulfill our performance obligation, resulting in deferred revenue (collectively, the “contract liabilities”). At the beginning of fiscal 2019, we had $31.3 million of customer deposits and $12.1 million of deferred revenues. At October 27, 2018, we included $48.8 million of customer deposits and $19.6 million of deferred revenues in accrued expenses and other current liabilities on our consolidated balance sheet. During the quarter and six months ended October 27, 2018, we recognized $1.4 million and $41.5 million, respectively, of revenue that was recorded as a contract liability at the beginning of fiscal 2019.

 

We have elected the practical expedient permitted in ASC 606-10-32-18, which allows an entity to recognize the promised amount of consideration without adjusting for the effects of a significant financing component if the contract has a duration of one year or less. As our contracts typically are less than one year in length and do not have significant financing components, we have not adjusted consideration.

 

Note 12: Segment Information

 

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

 

Upholstery Segment. Our Upholstery reportable segment is our largest business segment and consists primarily of two operating segments: La-Z-Boy, our largest operating segment, and the operating segment for our England subsidiary. The Upholstery segment also includes our international wholesale businesses. We aggregate these operating segments into one reportable segment because they are economically similar and because they meet the other aggregation criteria for determining reportable segments. Our Upholstery segment manufactures and imports upholstered furniture such as recliners and motion furniture, sofas, loveseats, chairs,

 

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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 consists of one operating segment that sells furniture under three brands: American Drew®, Hammary®, and Kincaid®. The 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 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 one operating segment comprised of our 157 company-owned La-Z-Boy Furniture Galleries® stores. The Retail segment sells primarily upholstered furniture, in addition to some casegoods and other accessories, to end consumers through these stores.

 

Corporate & Other. Corporate & Other includes the shared costs for corporate functions, including human resources, information technology, finance and legal, in addition to revenue generated through royalty agreements with companies licensed to use the La-Z-Boy® brand name on various products. We consider our corporate functions to be other business activities and have aggregated them with our other insignificant operating segments including our global trading company in Hong Kong and Joybird, an e-commerce retailer that manufactures upholstered furniture such as sofas, loveseats, chairs, ottomans, sleeper sofas and beds, and also imports casegoods (wood) furniture such as occasional tables and other accessories. Joybird sells to the end consumer exclusively online through its website, www.joybird.com. None of the operating segments included in Corporate & Other meet the requirements of reportable segments.

 

 

 

Quarter Ended

 

Six Months Ended

 

(Unaudited, amounts in thousands)

 

10/27/18

 

10/28/17

 

10/27/18

 

10/28/17

 

Sales

 

 

 

 

 

 

 

 

 

Upholstery segment:

 

 

 

 

 

 

 

 

 

Sales to external customers

 

$

254,028

 

$

251,741

 

$

494,082

 

$

476,555

 

Intersegment sales

 

63,065

 

53,020

 

116,409

 

102,613

 

Upholstery segment sales

 

317,093

 

304,761

 

610,491

 

579,168

 

 

 

 

 

 

 

 

 

 

 

Casegoods segment:

 

 

 

 

 

 

 

 

 

Sales to external customers

 

26,242

 

23,915

 

50,645

 

44,934

 

Intersegment sales

 

5,135

 

4,150

 

9,118

 

8,641

 

Casegoods segment sales

 

31,377

 

28,065

 

59,763

 

53,575

 

 

 

 

 

 

 

 

 

 

 

Retail segment sales

 

139,686

 

116,737

 

258,914

 

227,253

 

 

 

 

 

 

 

 

 

 

 

Corporate and Other:

 

 

 

 

 

 

 

 

 

Sales to external customers

 

19,377

 

812

 

20,387

 

1,542

 

Intersegment sales

 

3,001

 

2,091

 

5,856

 

4,021

 

Corporate and Other sales

 

22,378

 

2,903

 

26,243

 

5,563

 

 

 

 

 

 

 

 

 

 

 

Eliminations

 

(71,201

)

(59,261

)

(131,383

)

(115,275

)

Consolidated sales

 

$

439,333

 

$

393,205

 

$

824,028

 

$

750,284

 

 

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Quarter Ended

 

Six Months Ended

 

(Unaudited, amounts in thousands)

 

10/27/18

 

10/28/17

 

10/27/18

 

10/28/17

 

Operating Income (Loss)

 

 

 

 

 

 

 

 

 

Upholstery segment

 

$

32,152

 

$

33,424

 

$

56,036

 

$

56,723

 

Casegoods segment

 

3,761

 

3,302

 

6,841

 

6,041

 

Retail segment

 

6,563

 

3,903

 

11,021

 

5,670

 

Corporate and Other

 

(13,976

)

(6,360

)

(22,238

)

(17,867

)

Consolidated operating income

 

28,500

 

34,269

 

51,660

 

50,567

 

Interest expense

 

(501

)

(160

)

(605

)

(317

)

Interest income

 

392

 

376

 

994

 

719

 

Other income (expense), net

 

(1,997

)

(926

)

(1,105

)

823

 

Income before income taxes

 

$

26,394

 

$

33,559

 

$

50,944

 

$

51,792

 

 

Note 13: Income Taxes

 

We determine our tax provision using an estimated annual effective tax rate and adjusting for discrete taxable events that occur during the quarter. We recognize the effects of tax legislation in the period in which the law is enacted. We re-measure our deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years we estimate the related temporary differences to reverse.

 

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law. Most of its provisions are effective for tax years beginning on or after January 1, 2018. Because we are a fiscal year U.S. taxpayer, the majority of the provisions, such as elimination of the domestic manufacturing deduction, new taxes on certain foreign-sourced income and new limitations on certain business deductions, began applying to us in fiscal 2019. In December of 2017, the SEC staff issued SAB 118, which provides that companies that have not completed their accounting for the effects of the Tax Act but can determine a reasonable estimate of those effects should include in their financial statements a provisional amount based on their reasonable estimate. The guidance in SAB 118 also allows companies to adjust the provisional amounts during a one year measurement period similar to the measurement period used when accounting for business combinations. We continue to analyze provisions of the Tax Act and review guidance issued from regulators to determine if they will impact our effective tax rate in fiscal 2019 or in the future. As of October 27, 2018, we have not recorded any adjustments to the provisional estimates we previously recorded as of the prior year end related to the transition tax. We will continue to refine our provisional adjustments through the permissible measurement period, which is not to extend beyond one year of the enactment date.

 

Our effective tax rate for the second quarter and six months ended October 27, 2018, was 22.9%. For the second quarter and six months ended October 28, 2017, our effective tax rate was 30.8% and 32.5%, respectively. Our effective tax rate varies from the 21% federal statutory rate primarily due to state taxes. Absent discrete adjustments, our effective tax rate in the second quarter of fiscal 2019 would have been 24.7%.

 

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. Prior to fiscal 2019, we granted restricted stock awards that contained non-forfeitable rights to dividends on unvested shares, and we are required to include these participating securities in calculating our basic earnings per common share, using the two-class method. The restricted stock awards we granted in fiscal 2019 do not have non-forfeitable rights to dividends and therefore are not considered participating securities. The dividends on the restricted stock awards granted in fiscal 2019

 

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are and will continue to be held in escrow until the stock awards vest at which time we will pay any accumulated dividends.

 

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

 

 

 

Quarter Ended

 

Six Months Ended

 

(Unaudited, amounts in thousands)

 

10/27/18

 

10/28/17

 

10/27/18

 

10/28/17

 

Numerator (basic and diluted):

 

 

 

 

 

 

 

 

 

Net income attributable to La-Z-Boy Incorporated

 

$

20,012

 

$

22,896

 

$

38,315

 

$

34,547

 

Income allocated to participating securities

 

(63

)

(117

)

(139

)

(172

)

Net income available to common shareholders

 

$

19,949

 

$

22,779

 

$

38,176

 

$

34,375

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

46,888

 

47,964

 

46,802

 

48,160

 

Add:

 

 

 

 

 

 

 

 

 

Contingent common shares

 

85

 

96

 

85

 

99

 

Stock option dilution

 

286

 

237

 

332

 

278

 

Diluted weighted average common shares outstanding

 

47,259

 

48,297

 

47,219

 

48,537

 

 

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

 

We had outstanding options to purchase 0.4 million shares for the quarter and six months ended October 27, 2018, with a weighted average exercise price of $33.15. We excluded the effect of these options from our diluted share calculation since the weighted average exercise price of the options was higher than the average market price and including the options’ effect would have been anti-dilutive. We did not exclude any outstanding options from the diluted share calculation for the quarter and six months ended October 28, 2017.

 

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 the values of which are based on unadjusted quoted market prices for identical assets and liabilities in an active market that we have the ability to access.

 

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

 

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

 

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Accounting standards require that in making fair value measurements, we use observable market data when available. When inputs used to measure fair value fall within different levels of the hierarchy, we categorize the fair value measurement as being in the lowest level that is significant to the measurement. We recognize transfers between levels of the fair value hierarchy at the end of the reporting period in which they occur.

 

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

 

The following table presents the fair value hierarchy for those assets we measured at fair value on a recurring basis at October 27, 2018, and April 28, 2018. There were no transfers into or out of Level 1, Level 2, or Level 3 for any of the periods presented.

 

At October 27, 2018

 

 

 

Fair Value Measurements

 

(Unaudited, amounts in thousands)

 

Level 1

 

Level 2

 

Level 3

 

Assets

 

 

 

 

 

 

 

Marketable securities

 

$

969

 

$

32,377

 

$

 

Held-to-maturity investments

 

3,218

 

 

 

Cost basis investments

 

 

 

10,954

 

Total assets

 

$

4,187

 

$

32,377

 

$

10,954

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Contingent consideration liability

 

$

 

$

 

$

3,621

 

 

At April 28, 2018

 

 

 

Fair Value Measurements

 

(Unaudited, amounts in thousands)

 

Level 1

 

Level 2

 

Level 3

 

Assets

 

 

 

 

 

 

 

Marketable securities

 

$

1,141

 

$

37,173

 

$

 

Held-to-maturity investments

 

3,340

 

 

 

Cost basis investment

 

 

 

10,954

 

Total assets

 

$

4,481

 

$

37,173

 

$

10,954

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Contingent consideration liability

 

$

 

$

 

$

344

 

 

At October 27, 2018, and April 28, 2018, we held marketable securities intended to enhance returns on our cash and to fund future obligations of our non-qualified defined benefit retirement plan, as well as marketable securities to fund future obligations of our executive deferred compensation plan and our performance compensation retirement plan. We also held other fixed income and cost basis investments.

 

The fair value measurements for our Level 1 and Level 2 securities are based on quoted prices in active markets, as well as through broker quotes and independent valuation providers, multiplied by the number of shares owned exclusive of any transaction costs. At October 27, 2018, our Level 3 investments included preferred shares of two privately-held companies, and a warrant to purchase common shares of one of these privately-held companies. Our Level 3 liability includes our contingent consideration liabilities on recent acquisitions. We estimated the provisional fair value of the $3.3 million contingent consideration liability for the acquisition of Joybird (see Note 2 for more information). The fair value of contingent consideration is based on future revenues and earnings in fiscal 2021 and fiscal 2023. The fair value was determined using a variation

 

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of the income approach, known as the real options method, whereby revenue and earnings was simulated over the earn-out periods in a risk-neutral framework using Geometric Brownian Motion. For each simulation path, the earn-out payments were calculated based on management’s probability estimates for achievement of the revenue and earnings milestones and then were discounted to the valuation date using a discount rate of 4.65% for the fiscal 2021 milestone and 5.05% for the fiscal 2023 milestone. We estimated the fair value of the remainder of our Level 3 contingent consideration liabilities using the present value of the probability-weighted future cash flows.

 

There were no changes to the fair value of our Level 3 assets during the first six months of fiscal 2019. The following table is a reconciliation of our Level 3 liabilities recorded at fair value using significant unobservable inputs:

 

(Unaudited, amounts in thousands)

 

Level 3

 

Liabilities

 

 

 

Balance at April 28, 2018

 

$

344

 

Acquisitions

 

3,300

 

Translation adjustment

 

(23

)

Balance at October 27, 2018

 

$

3,621

 

 

Our asset leveling presented above does not include certain marketable securities investments that are measured at fair value using net asset value per share under the practical expedient methodology. These investments are still included in the total fair value column of the table in our investment footnote (see Note 6). The fair value of the investments measured using net asset value at October 27, 2018, and April 28, 2018, was $6.8 million and $6.7 million, respectively.

 

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 understanding 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 introductio