Note 16: Stock-Based Compensation

In the second quarter of fiscal 2014, our shareholders amended the La-Z-Boy Incorporated 2010 Omnibus Incentive Plan which was approved in fiscal 2011. This plan provides for the grant of stock options, stock appreciation rights, restricted stock, stock units (including deferred stock units), unrestricted stock, dividend equivalent rights, and short-term cash incentive awards. Under this plan, as amended, the aggregate number of common shares that may be issued through awards of any form is 8.7 million shares. No grants may be issued under our previous plans.

The table below summarizes the grants made during fiscal 2014:

(Shares/units in thousands)

Shares/units

granted

Liability/

Equity

award

Settlement

Stock options

175

Equity

Common shares

Stock appreciation rights (“SARs”)

142

Liability

Cash

Restricted stock units – employees

125

Liability

Cash

Restricted stock units – directors

Equity

Common shares

Performance-based units

Liability

Cash

Performance-based shares

191

Equity

Common shares

The table below summarizes the total stock-based compensation expense recognized in our consolidated statement of income:

(Amounts in thousands)	4/26/2014		4/27/2013		4/28/2012
Equity-based awards expense	$	8,739	$	11,458	$	5,718
Liability-based awards expense		5,736		2,170		405
Total stock-based compensation expense	$	14,475	$	13,628	$	6,123

Stock Options. The La-Z-Boy Incorporated 2010 Omnibus Incentive Plan authorizes grants to certain employees and directors to purchase common shares at a specified price, which may not be less than 100% of the current market price of the stock at the date of grant. Compensation expense for stock options is equal to the fair value on the date the award was approved and is recognized over the vesting period. The vesting period for our stock options ranges from one to four years. Options granted to retirement eligible employees are expensed immediately because they vest upon retirement. Granted options outstanding under the former long-term equity award plan remain in effect and have a term of five or ten years.

Stock option expense recognized in selling, general and administrative expense for fiscal years 2014, 2013, and 2012 was $2.1 million, $2.3 million, and $1.9 million, respectively. We received $3.6 million, $2.9 million, and $4.9 million in cash during fiscal 2014, fiscal 2013, and fiscal 2012, respectively, for exercises of stock options.

Plan activity for stock options under the above plans is as follows:

	Number of Shares (In Thousands)			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Outstanding at April 27, 2013		1,256		$	9.78		4.7	$	10,537
Granted		175			19.06
Exercised		(589	)		9.00			$	8,335
Expired		(42	)		20.44
Canceled		(2	)		21.68
Outstanding at April 26, 2014		798		$	11.79		7.5	$	10,185
Exercisable at April 26, 2014		287		$	8.78		6.3	$	4,531

The aggregate intrinsic value of options exercised was $6.0 million and $4.5 million in fiscal 2013 and 2012, respectively. As of April 26, 2014, there was $1.0 million of total unrecognized compensation cost related to non-vested stock option awards, which is expected to be recognized over a weighted-average remaining vesting term of all unvested awards of 2.3 years. During the year ended April 26, 2014, 0.5 million shares vested.

The fair value of each option grant was estimated at the date of the grant using a Black-Scholes option-pricing model, which requires management to make certain assumptions. Expected volatility was estimated based on the historical volatility of our common shares. The average expected life was based on the contractual term of the stock option and expected employee exercise and post-vesting employment termination trends. The risk-free rate was based on U.S. Treasury issues with a term equal to the expected life assumed at the date of grant. The turnover rate was estimated at the date of grant based on historical experience. The fair value of stock options granted during fiscal 2014, fiscal 2013, and fiscal 2012 were calculated using the following assumptions:

	4/26/2014			4/27/2013			4/28/2012
Risk-free interest rate		0.84	%		0.75	%		1.5	%
Dividend rate		0.84	%		0	%		0	%
Expected life in years		5.0			5.0			5.5
Stock price volatility		81.3	%		83.8	%		88.8	%
Turnover rate		0	%		0	%		4.0	%
Fair value per share	$	11.63		$	7.87		$	6.68

Stock Appreciation Rights. Under the La-Z-Boy Incorporated 2010 Omnibus Incentive Plan, the Compensation Committee of the board of directors is authorized to award stock appreciation rights to certain employees. SARs will be paid in cash upon vesting and as such were accounted for as liability-based awards that will be remeasured 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. The fair value for the SARs is estimated at the end of each period using the Black-Scholes option-pricing model, which requires management to make certain assumptions. The average expected life was based on the contractual term of the SARs and expected employee exercise and post-vesting employment termination trends (which is consistent with the expected life of our option awards). The risk-free rate was based on U.S. Treasury issues with a term equal to the expected life assumed at the end of the reporting period. Compensation expense of $1.1 million and $0.6 million related to SARs was recognized in selling, general and administrative expense for the years ended April 26, 2014, and April 27, 2013, respectively. The unrecognized compensation cost at April 26, 2014, related to SARs was $1.4 million and is expected to be recognized over a weighted-average remaining contractual term of all unvested awards of 2.3 years.

The fair value of the SARs granted during fiscal 2014 was remeasured at April 26, 2014, using the following assumptions:

	4/26/2014
Risk-free interest rate		1.64	%
Dividend rate		1.0	%
Expected life in years		4.1
Stock price volatility		49.5	%
Fair value per share	$	11.11

The fair value of the SARs granted during fiscal 2013 was remeasured at April 26, 2014, using the following assumptions:

	4/26/2014
Risk-free interest rate		0.82	%
Dividend rate		1.0	%
Expected life in years		3.2
Stock price volatility		44.4	%
Fair value per share	$	13.39

Restricted Shares. Under the La-Z-Boy Incorporated 2010 Omnibus Incentive Plan, the Compensation Committee of the board of directors is authorized to award restricted common shares to certain employees. The shares are offered at no cost to the employees, and the plan requires that all shares be 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. Compensation expense for restricted stock is equal to the market value of our common shares on the date the award is approved and is recognized over the service period. Expense relating to the restricted shares recorded in selling, general and administrative expense was $0.5 million, $1.0 million, and $1.6 million during fiscal 2014, fiscal 2013, and fiscal 2012, respectively. The unrecognized compensation cost at April 26, 2014, related to restricted shares was $0.4 million and is expected to be recognized over a weighted-average remaining contractual term of all unvested awards of 1.2 years.

The following table summarizes information about non-vested share awards as of and for the year ended April 26, 2014:

	Number of Shares (In Thousands)			Weighted Average Grant Date Fair Value
Non-vested shares at April 27, 2013		530		$	6.67
Vested		(413	)		21.32
Canceled		(15	)		8.05
Non-vested shares at April 26, 2014		102		$	7.77
Awards granted during fiscal 2012				$	6.58

Restricted Stock Units. Under the La-Z-Boy Incorporated 2010 Omnibus Incentive Plan, the Compensation Committee of the board of directors is authorized to award restricted stock units to certain employees and our non-employee directors.

The restricted stock units granted to employees are accounted for as liability-based awards because upon vesting these awards will be paid in cash. Compensation expense is initially measured and recognized based on the market value (intrinsic value) of our common stock on the grant date and amortized over the vesting period. The liability is remeasured and adjusted 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 the restricted stock units at April 26, 2014, was $24.55. 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. Compensation expense of $1.6 million and $0.5 million related to restricted stock units granted to employees was recognized in selling, general and administrative expense for the years ended April 26, 2014, and April 27, 2013, respectively. The unrecognized compensation cost at April 26, 2014, related to employee restricted stock units was $4.2 million and is expected to be recognized over a weighted-average remaining contractual term of all unvested awards of 2.7 years.

The following table summarizes information about non-vested stock units as of and for the year ended April 26, 2014:

	Number of Units (In Thousands)			Weighted Average Grant Date Fair Value
Non-vested units at April 27, 2013		156		$	11.91
Granted		125			19.28
Vested		(41	)		11.54
Canceled		(19	)		14.75
Non-vested units at April 26, 2014		221		$	15.90

Restricted stock units granted to directors are offered at no cost to the directors and vest upon the director’s leaving the board. These awards will be paid in shares of our common stock and we therefore account for them as equity based awards. Compensation expense for these awards is measured and recognized on the grant date based on the market price of our common shares at the date the grant was awarded. During fiscal 2014, fiscal 2013, and fiscal 2012 we granted less than 0.1 million restricted stock units each year to our non-employee directors. Expense relating to the non-employee directors restricted stock units recorded in selling, general and administrative expense was $0.7 million in fiscal 2014, fiscal 2013, and fiscal 2012.

Performance Awards. Under the La-Z-Boy Incorporated 2010 Omnibus Incentive Plan, the Compensation Committee of the board of directors is authorized to award common shares and stock units to certain employees based on the attainment of certain financial goals over a given performance period. The awards are offered at no cost to the employees. In the event of an employee's termination during the vesting period, the potential right to earn shares/units under this program is generally forfeited.

Payout of these grants depends on our financial performance (80%) and a market-based condition based on the total return that 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. These performance awards are offered at no cost to the employees. The number of performance-based units/shares granted were as follows:

Performance-based awards granted (Shares/units in thousands)	Number of Units		Number of Shares
Fiscal 2012 grant		2		690
Fiscal 2013 grant		146		133
Fiscal 2014 grant		35		191

Based on our financial results for fiscal 2014, certain performance conditions were met for some of our outstanding performance-based awards. The number of awards earned based on performance conditions were as follows:

Performance-based awards earned (Shares/units in thousands)	Number of Shares/Units
Fiscal 2012 performance-based shares		1,175
Fiscal 2012 performance-based units		5
Fiscal 2013 performance-based shares		95
Fiscal 2013 performance-based units		91
Fiscal 2014 performance-based shares		67
Fiscal 2014 performance-based units		11

The fiscal 2013 and fiscal 2014 shares will be settled in shares and the fiscal 2013 and fiscal 2014 units will be settled in cash if service conditions are met, requiring employees to remain employed with the company through the end of the three year performance periods.

The performance-based units are accounted for as liability-based awards because upon vesting they will be paid in cash. For performance-based units that vest based on performance conditions, the fair value of each unit was $24.01 and $24.25 at April 26, 2014, for the awards granted in fiscal 2014 and in fiscal 2013, respectively, which was the market value of our common shares on the last day of the reporting period less expected dividends to be paid prior to vesting, and compensation cost is expensed based on the probability that the performance goals will be obtained. For performance-based units that vest based on market conditions, the fair value of the award was estimated using a Monte Carlo valuation model on the last day of the reporting period, and compensation cost is expensed over the vesting period. The liability for these units is remeasured and adjusted based on the Monte Carlo valuation at the end of each reporting period until paid. Based on the Monte Carlo valuation, the fair value of each performance-based unit that vests based on market conditions was $36.22 and $41.54 at April 26, 2014, for the awards granted in fiscal 2014 and in fiscal 2013, respectively. During fiscal 2014 and fiscal 2013 we recognized $2.2 million and $0.7 million, respectively, of expense related to performance-based units. The unrecognized compensation cost at April 26, 2014, related to performance-based units was $2.0 million based on the current share price and current estimates of the number of awards that will vest, and is expected to be recognized over a weighted-average remaining contractual term of all unvested awards of 1.1 years.

The performance-based shares are accounted for as equity-based awards because upon vesting they will be settled in common shares. The grant date fair value of performance-based shares is expensed over the service period. For performance-based shares that vest based on performance conditions, the fair value of the award was $18.58, $11.97, and $9.35 for fiscal 2014, fiscal 2013, and fiscal 2012, respectively, which was the market value of our common shares on the date of grant less expected dividends to be paid prior to vesting, and compensation cost is expensed based on the probability that the performance goals will be obtained. For performance-based shares that vest based on market conditions, the fair value of the award was estimated using a Monte Carlo valuation model on the date of grant, and compensation cost is expensed over the vesting period, regardless of the ultimate vesting of the award, similar to the expensing of a stock option award. The fair value for the performance-based shares that vest based on market conditions, as determined by the Monte Carlo valuation, at the grant date was $26.08, $15.41, and $15.12 for the fiscal 2014 grant, fiscal 2013 grant, and fiscal 2012 grant, respectively. The unrecognized compensation cost at April 26, 2014, related to performance-based shares was $3.0 million based on the current estimates of the number of awards that will vest, and is expected to be recognized over a weighted-average remaining contractual term of all unvested awards of 1.4 years.

Equity-based compensation expenses related to performance-based shares recognized in our consolidated statement of income were as follows (for the fiscal years ended):

(Amounts in thousands)	4/26/2014		4/27/2013		4/28/2012
Fiscal 2011 grant	$	—	$	1,707	$	200
Fiscal 2012 grant		3,603		5,442		1,409
Fiscal 2013 grant		849		440		—
Fiscal 2014 grant		1,006		—		—

Previously Granted Deferred Stock Units. Awards under our deferred stock unit plan for non-employee directors are accounted for as liability-based awards because upon exercise these awards will be paid in cash. Compensation expense is initially measured and recognized based on the market price of our common stock on the grant date. The liability is re-measured and adjusted at the end of each reporting period until paid. For purposes of dividends and for measuring the liability, each deferred stock unit is the equivalent of one common share. As of April 26, 2014, we had 0.1 million deferred stock units outstanding. Expense relating to the deferred stock units recorded in selling, general and administrative expense was $0.8 million, $0.3 million, and $0.4 million during fiscal 2014, fiscal 2013, and fiscal 2012, respectively. The liability related to these awards was $3.0 million and $2.2 million at April 26, 2014, and April 27, 2013, respectively, and is included as a component of other long-term liabilities on our consolidated balance sheet.