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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 29 , 2016

COMMISSION FILE NUMBER 1-9656

LA-Z-BOY INCORPORATED

(Exact name of registrant as specified in its charter)

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

None

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

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes  x       No  o

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).

Yes  x       No  o

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

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 23, 2016
Common Shares, $1.00 par value		48,927,340

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LA-Z-BOY INCORPORATED
FORM 10-Q SECOND QUARTER OF FISCAL 2017

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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)		10/29/16			10/24/15
Sales		$	376,579		$	382,891
Cost of sales		227,885			237,085
Gross profit		148,694			145,806
Selling, general and administrative expense		115,526			112,412
Operating income		33,168			33,394
Interest expense		117			133
Interest income		234			164
Other income (expense), net		(279		)	512
Income before income taxes		33,006			33,937
Income tax expense		11,901			12,278
Net income		21,105			21,659
Net income attributable to noncontrolling interests		(272		)	(707		)
Net income attributable to La-Z-Boy Incorporated		$	20,833		$	20,952
Basic weighted average common shares		49,153			50,493
Basic net income attributable to La-Z-Boy Incorporated per share		$	0.42		$	0.41
Diluted weighted average common shares		49,511			51,039
Diluted net income attributable to La-Z-Boy Incorporated per share		$	0.42		$	0.41
Dividends declared per share		$	0.10		$	0.08

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)		10/29/16			10/24/15
Sales		$	717,362		$	724,314
Cost of sales		435,137			454,276
Gross profit		282,225			270,038
Selling, general and administrative expense		227,289			216,678
Operating income		54,936			53,360
Interest expense		232			245
Interest income		438			369
Other income (expense), net		(351		)	2,480
Income before income taxes		54,791			55,964
Income tax expense		19,678			20,182
Net income		35,113			35,782
Net income attributable to noncontrolling interests		(474		)	(1,154		)
Net income attributable to La-Z-Boy Incorporated		$	34,639		$	34,628
Basic weighted average common shares		49,129			50,538
Basic net income attributable to La-Z-Boy Incorporated per share		$	0.70		$	0.68
Diluted weighted average common shares		49,554			51,076
Diluted net income attributable to La-Z-Boy Incorporated per share		$	0.70		$	0.67
Dividends declared per share		$	0.20		$	0.16

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)		10/29/16			10/24/15
Net income		$	21,105		$	21,659
Other comprehensive income (loss)
Currency translation adjustment		(261		)	(433		)
Change in fair value of cash flow hedges, net of tax		139			232
Net unrealized loss on marketable securities, net of tax		(149		)	(36		)
Net pension amortization, net of tax		509			488
Total other comprehensive income		238			251
Total comprehensive income before allocation to noncontrolling interests		21,343			21,910
Comprehensive income attributable to noncontrolling interests		(199		)	(548		)
Comprehensive income attributable to La-Z-Boy Incorporated		$	21,144		$	21,362

		Six Months Ended
(Unaudited, amounts in thousands)		10/29/16			10/24/15
Net income		$	35,113		$	35,782
Other comprehensive income (loss)
Currency translation adjustment		(329		)	(3,278		)
Change in fair value of cash flow hedges, net of tax		(336		)	35
Net unrealized gain (loss) on marketable securities, net of tax		56			(313		)
Net pension amortization, net of tax		1,018			976
Total other comprehensive income (loss)		409			(2,580		)
Total comprehensive income before allocation to noncontrolling interests		35,522			33,202
Comprehensive income attributable to noncontrolling interests		(373		)	(364		)
Comprehensive income attributable to La-Z-Boy Incorporated		$	35,149		$	32,838

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)		10/29/16			4/30/16
Current assets
Cash and equivalents		$	105,571		$	112,358
Restricted cash		8,987			8,977
Receivables, net of allowance of $3,105 at 10/29/16 and $3,145 at 4/30/16		144,575			146,545
Inventories, net		186,710			175,589
Other current assets		39,813			38,503
Total current assets		485,656			481,972
Property, plant and equipment, net		170,620			171,590
Goodwill		47,388			37,193
Other intangible assets		11,736			8,558
Deferred income taxes - long-term		40,140			41,683
Other long-term assets, net		67,504			59,033
Total assets		$	823,044		$	800,029
Current liabilities
Current portion of long-term debt		$	254		$	290
Accounts payable		46,875			44,661
Accrued expenses and other current liabilities		116,498			112,476
Total current liabilities		163,627			157,427
Long-term debt		392			513
Other long-term liabilities		86,848			84,877
Contingencies and commitments		-			-
Shareholders' equity
Preferred shares - 5,000 authorized; none issued		-			-
Common shares, $1 par value - 150,000 authorized; 49,028 outstanding at 10/29/16 and 49,331 outstanding at 4/30/16		49,028			49,331
Capital in excess of par value		287,290			279,339
Retained earnings		258,906			252,472
Accumulated other comprehensive loss		(33,490		)	(34,000		)
Total La-Z-Boy Incorporated shareholders' equity		561,734			547,142
Noncontrolling interests		10,443			10,070
Total equity		572,177			557,212
Total liabilities and equity		$	823,044		$	800,029

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

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LA-Z-BOY INCORPORATED

CONSOLIDATED STATEMENT OF CASH FLOWS

		Six Months Ended
(Unaudited, amounts in thousands)		10/29/16			10/24/15
Cash flows from operating activities
Net income		$	35,113		$	35,782
Adjustments to reconcile net income to cash provided by (used for) operating activities
Deferred income tax expense		1,089			138
Provision for doubtful accounts		(18		)	(426		)
Depreciation and amortization		13,999			12,679
Equity-based compensation expense		5,880			5,123
Pension plan contributions		(2,300		)	(7,000		)
Change in receivables		784			4,980
Change in inventories		(3,747		)	(21,501		)
Change in other assets		(1,868		)	(5,656		)
Change in payables		1,549			(628		)
Change in other liabilities		1,898			(1,768		)
Net cash provided by operating activities		52,379			21,723
Cash flows from investing activities
Proceeds from disposal of assets		143			2,491
Capital expenditures		(10,226		)	(13,949		)
Purchases of investments		(17,814		)	(11,693		)
Proceeds from sales of investments		9,757			19,409
Acquisitions, net of cash acquired		(15,997		)	(19,232		)
Change in restricted cash		(10		)	660
Net cash used for investing activities		(34,147		)	(22,314		)
Cash flows from financing activities
Net proceeds from credit facility		-			4,000
Payments on debt		(156		)	(283		)
Stock issued for stock and employee benefit plans		3,095			253
Excess tax benefit on stock option exercises		1,826			392
Purchases of common stock		(19,766		)	(18,461		)
Dividends paid		(9,869		)	(8,112		)
Net cash used for financing activities		(24,870		)	(22,211		)
Effect of exchange rate changes on cash and equivalents		(149		)	(934		)
Change in cash and equivalents		(6,787		)	(23,736		)
Cash and equivalents at beginning of period		112,358			98,302
Cash and equivalents at end of period		$	105,571		$	74,566
Supplemental disclosure of non-cash investing activities
Capital expenditures included in payables		$	681		$	-

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

											Accumulated
					Capital in						Other			Non-
		Common			Excess of			Retained			Comprehensive			Controlling
(Unaudited, amounts in thousands)		Shares			Par Value			Earnings			Loss			Interests			Total
At April 25, 2015		$	50,747		$	270,032		$	235,506		$	(32,139	)	$	8,954		$	533,100
Net income								79,252						1,711			80,963
Other comprehensive loss											(1,861		)	(595		)	(2,456		)
Stock issued for stock and employee benefit plans, net of cancellations and withholding tax		243			97			(2,068		)							(1,728		)
Purchases of common stock		(1,659		)	(346		)	(42,077		)							(44,082		)
Stock option and restricted stock expense					8,292												8,292
Tax benefit from exercise of options					1,264												1,264
Dividends paid								(18,141		)							(18,141		)
At April 30, 2016		49,331			279,339			252,472			(34,000		)	10,070			557,212
Net income								34,639						474			35,113
Other comprehensive income (loss)											510			(101		)	409
Stock issued for stock and employee benefit plans, net of cancellations and withholding tax		466			2,563			(1,657		)							1,372
Purchases of common stock		(769		)	(2,318		)	(16,679		)							(19,766		)
Stock option and restricted stock expense					5,880												5,880
Tax benefit from exercise of options					1,826												1,826
Dividends paid								(9,869		)							(9,869		)
At October 29, 2016		$	49,028		$	287,290		$	258,906		$	(33,490	)	$	10,443		$	572,177

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 30, 2016 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 2016 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 29, 2017. Fiscal 2017 is a 52-week year as compared with fiscal 2016, which had 53 weeks, with the additional week occurring in the fourth quarter of fiscal 2016.

During the first six months of each of fiscal 2017 and fiscal 2016, we recorded a benefit related to legal settlements as part of cost of sales. The legal settlements increased gross margin by 0.1 percentage points and 0.4 percentage points in the second quarter and first six months of fiscal 2017, respectively, compared to an increase of 0.5 percentage points in both the second quarter and first six months of fiscal 2016.

Note 2: Acquisitions

In the second quarter of fiscal 2017, we acquired the assets of two independent operators of four La-Z-Boy Furniture Galleries ®  stores in Canada for $11.9 million, composed of $10.7 million of cash and $1.2 million of forgiveness of these dealers' accounts receivable. As part of these acquisitions, we recorded a contingent consideration liability of $2.8 million based on management's assumptions of the operating performance for some of these stores over the next three fiscal years. We began including these stores in our Retail segment results upon acquisition.

During the first quarter of fiscal 2017, we acquired the assets of an independent operator of one La-Z-Boy Furniture Galleries ®  store in Reno, Nevada for $5.3 million. We began including this store in our Retail segment results upon acquisition.

Prior to these 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. We reacquired these rights when we purchased the dealers' other assets. The effective settlement of these arrangements resulted in no settlement gain or loss as the contractual terms were at market. We recorded indefinite-lived intangible assets of $3.2 million related to the reacquired rights. We also recognized $10.2 million of goodwill, which primarily relates to the expected synergies resulting from the integration of the acquired stores and the anticipated future benefits. We recorded the goodwill and other intangible assets in our Retail segment and will amortize and deduct them for federal income tax purposes over 15 years.

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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)		10/29/16
Current assets		$	7,721
Goodwill and other intangible assets		13,374
Property, plant and equipment, net		648
Total assets acquired		21,743
Current liabilities		(1,731		)
Contingent consideration liability		(2,825		)
Total liabilities acquired		(4,556		)
Net assets acquired		$	17,187

Since the impact of these acquisitions on our results of operations was not material, pro-forma financial information is not required.

Note 3: Inventories

A summary of inventories is as follows:

(Unaudited, amounts in thousands)		10/29/16			4/30/16
Raw materials		$	89,326		$	87,905
Work in process		10,741			11,591
Finished goods		108,411			97,861
FIFO inventories		208,478			197,357
Excess of FIFO over LIFO		(21,768		)	(21,768		)
Inventories, net		$	186,710		$	175,589

Note 4: 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. 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 29, 2016, and April 30, 2016:

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(Unaudited, amounts in thousands)		10/29/16			4/30/16
Short-term investments:
Available-for-sale investments		$	13,615		$	13,491
Trading securities		434			-
Held-to-maturity investments		1,815			1,826
Total short-term investments		15,864			15,317
Long-term investments:
Available-for-sale investments		29,654			31,659
Cost basis investment		5,500			-
Total long-term investments		35,154			31,659
Total investments		$	51,018		$	46,976
Investments to enhance returns on cash		$	31,179		$	33,583
Investments to fund compensation/retirement plans		$	13,589		$	13,393
Other investments		$	6,250		$	-

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

At October 29, 2016

(Unaudited, amounts in thousands)		Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
Equity securities		$	1,400		$	(126	)	$	13,837
Fixed income		110			(39		)	34,293
Mutual funds		-			-			434
Other		1			(12		)	2,454
Total securities		$	1,511		$	(177	)	$	51,018

At April 30, 2016

(Unaudited, amounts in thousands)		Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
Equity securities		$	1,231		$	(135	)	$	8,150
Fixed income		176			(9		)	36,527
Other		1			(21		)	2,299
Total securities		$	1,408		$	(165	)	$	46,976

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

		Quarter Ended						Six Months Ended
(Unaudited, amounts in thousands)		10/29/16			10/24/15			10/29/16			10/24/15
Proceeds from sales		$	6,087		$	6,426		$	9,757		$	19,409
Gross realized gains		16			26			47			703
Gross realized losses		(2		)	(33		)	(38		)	(539		)

The fair value of fixed income available-for-sale securities by contractual maturity was $13.9 million within one year, $18.9 million within two to five years, $1.2 million within six to ten years, and $0.3 million thereafter.

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Note 5: Pension Plans

Net periodic pension costs were as follows:

		Quarter Ended						Six Months Ended
(Unaudited, amounts in thousands)		10/29/16			10/24/15			10/29/16			10/24/15
Service cost		$	319		$	333		$	638		$	666
Interest cost		1,170			1,211			2,340			2,422
Expected return on plan assets		(1,245		)	(1,226		)	(2,490		)	(2,452		)
Net amortization		764			736			1,528			1,472
Net periodic pension cost		$	1,008		$	1,054		$	2,016		$	2,108

Note 6: 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. Approximately 95% of our warranty liability relates to our Upholstery segment as we generally warrant our products against defects for one year on fabric and leather, from one to ten years on cushions and padding, and provide a limited lifetime warranty on certain mechanisms and frames. Our warranties cover labor costs relating to our parts for one year. Our warranty period begins when the consumer receives our product. We use considerable judgment in making our estimates, and we record differences between our actual and estimated costs when the differences are known.

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

		Quarter Ended						Six Months Ended
(Unaudited, amounts in thousands)		10/29/16			10/24/15			10/29/16			10/24/15
Balance as of the beginning of the period		$	20,908		$	17,230		$	20,511		$	16,870
Accruals during the period		4,719			5,651			9,854			10,762
Settlements during the period		(4,725		)	(4,820		)	(9,463		)	(9,571		)
Balance as of the end of the period		$	20,902		$	18,061		$	20,902		$	18,061

As of October 29, 2016, and April 30, 2016, we included $13.0 million and $12.4 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 primarily to reflect charges that relate to warranties issued during the respective periods.

Note 7: 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)		10/29/16			10/24/15			10/29/16			10/24/15
Equity-based awards expense		$	2,551		$	2,111		$	5,880		$	5,123
Liability-based awards (income) expense		(1,229		)	1,507			270			1,068
Total stock-based compensation expense		$	1,322		$	3,618		$	6,150		$	6,191

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Stock Options. We granted 497,198 stock options to employees during the first quarter of fiscal 2017, 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. We expense options granted to retirement-eligible employees immediately. We estimate the fair value of the employee stock options at the date of grant using the Black-Scholes option-pricing model, which requires management to make certain assumptions. We estimate expected volatility based on the historical volatility of our common shares. We base the average expected life on the contractual term of the stock option and expected employee exercise trends. We base the risk-free rate on U.S. Treasury issues with a term equal to the expected life assumed at the date of the grant.

We calculated the fair value of stock options granted during the first quarter of fiscal 2017 using the following assumptions:

(Unaudited)		Fiscal 2017 grant
Risk-free interest rate		1.30		%
Dividend rate		1.54		%
Expected life in years		5.00
Stock price volatility		38.87		%
Fair value per share		$	7.99

Stock Appreciation Rights ("SARs"). We did not grant any SARs to employees during the first six months of fiscal 2017, but we have SARs outstanding from previous grants. SARs will be paid in cash upon exercise and, accordingly, we account for SARs as liability-based awards that we re-measure to reflect the fair value at the end of each reporting period. These awards vest at 25% per year, beginning one year from the grant date for a term of four years, with accelerated vesting upon retirement. We expense SARs granted to retirement-eligible employees immediately. We estimate the fair value of SARs at the end of each reporting period using the Black-Scholes option-pricing model, which requires management to make certain assumptions. We base the average expected life on the contractual term of the SARs and expected employee exercise trends (which is consistent with the expected life of our option awards). We base the risk-free rate on U.S. Treasury issues with a term equal to the expected life assumed at the end of the reporting period.

In fiscal 2014 and fiscal 2013, we granted SARs as described in our Annual Reports on Form 10-K for the fiscal years ended April 26, 2014, and April 27, 2013, respectively. At October 29, 2016, we measured the fair value of the SARs granted during these fiscal years using the following assumptions:

(Unaudited)		Fiscal 2014 grant			Fiscal 2013 grant
Risk-free interest rate		0.77		%	0.59		%
Dividend rate		1.72		%	1.72		%
Expected life in years		1.63			0.71
Stock price volatility		31.85		%	31.28		%
Fair value per share		$	5.56		$	11.06

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Restricted Stock . We granted 97,924 shares of restricted stock to employees during the first quarter of fiscal 2017. 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 upon vesting, they will be settled in common shares. The fair value of the restricted stock we awarded was $25.99 per share, the market value of our common shares on the date of grant. We recognize compensation expense for restricted stock over the vesting period equal to the fair value on the date our compensation committee approved the awards. Restricted stock awards vest at 25% per year, beginning one year from the grant date for a term of four years.

Restricted Stock Units.  We did not grant any restricted stock units to employees during the first six months of fiscal 2017, but we have restricted stock units outstanding from previous grants. We account for these units as liability-based awards because upon vesting, these awards will be paid in cash. We measure and recognize initial compensation expense based on the market value (intrinsic value) of our common stock on the grant date and amortize the expense over the vesting period. We re-measure and adjust the liability based on the market value (intrinsic value) of our common shares on the last day of the reporting period until paid with a corresponding adjustment to reflect the cumulative amount of compensation expense. The fair value of each outstanding restricted stock unit at October 29, 2016, was $23.25, the market value of our common shares on the last day of the reporting period. Each restricted stock unit is the equivalent of one common share. Restricted stock units vest at 25% per year, beginning one year from the grant date for a term of four years.

During the second quarter of fiscal 2017, we granted 23,624 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 as they will be settled in shares of our common stock upon vesting. We measure and recognize compensation expense for these awards based on the market price of our common shares on the date of grant, which was $27.10.

Performance Shares. During the first quarter of fiscal 2017, we granted 180,359 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 upon vesting, they will be settled in common shares. For shares that vest based on our results relative to the performance goals, we expense as compensation cost the fair value of the shares as of the day we granted the awards recognized over the performance period, taking into account the probability that we will satisfy the performance goals. The fair value of each share of the awards we granted in fiscal 2017 that vest based on attaining performance goals was $24.79, 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 2017 grant of shares that vest based on market conditions was $33.32.

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Note 8: Accumulated Other Comprehensive Loss

The activity in accumulated other comprehensive loss for the quarter ended October 29, 2016, and October  24, 2015, 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 30, 2016		$	(485	)	$	(761	)	$	1,263		$	(33,818	)	$	(33,801	)
Changes before reclassifications		(188		)	(200		)	(226		)	-			(614		)
Amounts reclassified to net income		-			424			(14		)	823			1,233
Tax effect		-			(85		)	91			(314		)	(308		)
Other comprehensive income (loss) attributable to La-Z-Boy Incorporated		(188		)	139			(149		)	509			311
Balance at October 29, 2016		$	(673	)	$	(622	)	$	1,114		$	(33,309	)	$	(33,490	)

(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 25, 2015		$	(697	)	$	(757	)	$	1,328		$	(34,213	)	$	(34,339	)
Changes before reclassifications		(274		)	(269		)	(65		)	-			(608		)
Amounts reclassified to net income		-			645			6			788			1,439
Tax effect		-			(144		)	23			(300		)	(421		)
Other comprehensive income (loss) attributable to La-Z-Boy Incorporated		(274		)	232			(36		)	488			410
Balance at October 24, 2015		$	(971	)	$	(525	)	$	1,292		$	(33,725	)	$	(33,929	)

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The activity in accumulated other comprehensive loss for the six months ended October 29, 2016, and October  24, 2015, is as follows:

(Unaudited, amounts in thousands)		Translation adjustment			Change in fair value of cash flow hedge			Unrealized gain on marketable securities			Net pension amortization and net actuarial loss			Accumulated other comprehensive loss
Balance at April 30, 2016		$	(445	)	$	(286	)	$	1,058		$	(34,327	)	$	(34,000	)
Changes before reclassifications		(228		)	(1,479		)	100			-			(1,607		)
Amounts reclassified to net income		-			936			(9		)	1,645			2,572
Tax effect		-			207			(35		)	(627		)	(455		)
Other comprehensive income (loss) attributable to La-Z-Boy Incorporated		(228		)	(336		)	56			1,018			510
Balance at October 29, 2016		$	(673	)	$	(622	)	$	1,114		$	(33,309	)	$	(33,490	)

(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 25, 2015		$	1,517		$	(560	)	$	1,605		$	(34,701	)	$	(32,139	)
Changes before reclassifications		(2,488		)	(1,055		)	(341		)	-			(3,884		)
Amounts reclassified to net income		-			1,112			(165		)	1,577			2,524
Tax effect		-			(22		)	193			(601		)	(430		)
Other comprehensive income (loss) attributable to La-Z-Boy Incorporated		(2,488		)	35			(313		)	976			(1,790		)
Balance at October 24, 2015		$	(971	)	$	(525	)	$	1,292		$	(33,725	)	$	(33,929	)

We reclassified the unrealized gain on marketable securities from accumulated other comprehensive loss to net income through other income in our consolidated statement of income, 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 selling, general and administrative expense.

The components of non-controlling interest for the quarter and six months ended October 29, 2016, and October 24, 2015, were as follows:

		Quarter Ended						Six Months Ended
(Unaudited, amounts in thousands)		10/29/16			10/24/15			10/29/16			10/24/15
Balance as of the beginning of the period		$	10,244		$	8,770		$	10,070		$	8,954
Net income		272			707			474			1,154
Other comprehensive loss		(73		)	(159		)	(101		)	(790		)
Balance as of the end of the period		$	10,443		$	9,318		$	10,443		$	9,318

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Note 9: Segment Information

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

Upholstery Segment . The Upholstery segment consists primarily of two operating units: La-Z-Boy and England. This segment manufactures and imports upholstered furniture. Upholstered furniture includes recliners and motion furniture, sofas, loveseats, chairs, sectionals, modulars, ottomans and sleeper sofas. The Upholstery segment sells directly to La-Z-Boy Furniture Galleries ®  stores, operators of La-Z-Boy Comfort Studio ®  locations and England Custom Comfort Center locations, major dealers, and a wide cross-section of other independent retailers.

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

Retail Segment . The Retail segment consists of 132 company-owned La-Z-Boy Furniture Galleries ®  stores. The Retail segment sells upholstered furniture, and some casegoods and other accessories, to end consumers through these stores.

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		Quarter Ended						Six Months Ended
(Unaudited, amounts in thousands)		10/29/16			10/24/15			10/29/16			10/24/15
Sales
Upholstery segment:
Sales to external customers		$	244,898		$	260,080		$	468,707		$	492,564
Intersegment sales		50,891			45,737			94,498			85,929
Upholstery segment sales		295,789			305,817			563,205			578,493
Casegoods segment:
Sales to external customers		23,567			25,787			44,152			46,989
Intersegment sales		2,321			2,432			6,774			4,623
Casegoods segment sales		25,888			28,219			50,926			51,612
Retail segment sales		107,365			96,480			203,085			183,131
Corporate and Other:
Sales to external customers		749			544			1,418			1,630
Intersegment sales		1,563			750			2,773			1,266
Corporate and Other sales		2,312			1,294			4,191			2,896
Eliminations		(54,775		)	(48,919		)	(104,045		)	(91,818		)
Consolidated sales		$	376,579		$	382,891		$	717,362		$	724,314
Operating Income (Loss)
Upholstery segment		$	37,530		$	37,040		$	67,339		$	61,634
Casegoods segment		2,847			2,634			4,994			4,324
Retail segment		3,007			5,716			5,190			10,445
Corporate and Other		(10,216		)	(11,996		)	(22,587		)	(23,043		)
Consolidated operating income		33,168			33,394			54,936			53,360
Interest expense		117			133			232			245
Interest income		234			164			438			369
Other income (expense), net		(279		)	512			(351		)	2,480
Income before income taxes		$	33,006		$	33,937		$	54,791		$	55,964

Note 10: Income Taxes

Our effective tax rate for the second quarter and six months ended October 29, 2016, was 36.1% and 35.9%, respectively. For the second quarter and six months ended October 24, 2015, our effective tax rate was 36.2% and 36.1%, respectively. Our effective tax rate varies from the 35% statutory rate primarily due to state taxes, less the benefit of the U.S. manufacturing deduction and foreign earnings in jurisdictions with lower tax rates than the U.S.

Our consolidated balance sheet at the end of the second quarter of fiscal 2017 reflected a $0.8 million net liability for uncertain income tax positions. We do not expect this net liability to change significantly in the next 12 months. We will either pay or release the liability for uncertain income tax positions as tax audits are completed or settled, statutes of limitation expire or other new information becomes available.

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Note 11: Earnings per Share

Certain share-based compensation awards that entitle their holders to receive non-forfeitable dividends prior to vesting are considered participating securities. We grant restricted stock awards that contain non-forfeitable rights to dividends on unvested shares, and we are required to include these participating securities in calculating our basic earnings per common share, using the two-class method.

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

		Quarter Ended						Six Months Ended
(Unaudited, amounts in thousands)		10/29/16			10/24/15			10/29/16			10/24/15
Numerator (basic and diluted):
Net income attributable to La-Z-Boy Incorporated		$	20,833		$	20,952		$	34,639		$	34,628
Income allocated to participating securities		(103		)	(107		)	(172		)	(185		)
Net income available to common shareholders		$	20,730		$	20,845		$	34,467		$	34,443
Denominator:
Basic weighted average common shares outstanding		49,153			50,493			49,129			50,538
Add:
Contingent common shares		100			178			100			178
Stock option dilution		258			368			325			360
Diluted weighted average common shares outstanding		49,511			51,039			49,554			51,076

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

For the quarter ended October 29, 2016, we had outstanding options to purchase 0.4 million shares with a weighted average exercise price of $26.69. We excluded the effect of these options from our diluted share calculation since, for each period presented, 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 for the six months ended October 29, 2016, or for the quarter and six months ended October 24, 2015.

Note 12: 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.

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· 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.

In making fair value measurements, accounting standards require that 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 trade names, goodwill, and other long-lived assets at fair value when there is an indicator of impairment, and we record them at fair value only when we recognize an impairment loss.

The following table presents the fair value hierarchy for those assets we measured at fair value on a recurring basis at October 29, 2016, and April 30, 2016:

At October 29, 2016		Fair Value Measurements
(Unaudited, amounts in thousands)		Level 1(a)			Level 2(a)			Level 3(b)
Assets
Available-for-sale investments		$	1,003		$	33,908		$	750
Trading securities		-			434			-
Held-to-maturity investments		1,816			-			-
Cost basis investment		-			-			5,500
Total assets		$	2,819		$	34,342		$	6,250
Liabilities
Contingent consideration liability		$	-		$	-		$	2,755

(a) There were no transfers between Level 1 and Level 2 during fiscal 2017.

(b) There were no transfers into or out of Level 3 during fiscal 2017.

At April 30, 2016		Fair Value Measurements
(Unaudited, amounts in thousands)		Level 1(c)			Level 2(c)			Level 3(d)
Assets
Available-for-sale investments		$	1,177		$	36,802		$	-
Held-to-maturity investments		1,826			-			-
Total		$	3,003		$	36,802		$	-

(c) There were no transfers between Level 1 and Level 2 during fiscal 2016.

(d) There were no transfers into or out of Level 3 during fiscal 2016.

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. Our Level 3 investments are valued at the cost basis as of the date of purchase, because it is not practicable to estimate fair value. Our Level 3 liability is a contingent consideration liability, and we estimate the fair value of this liability based on the present value of the probability-weighted future cash flows which are unobservable inputs that are not supported by market activity.

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The following table is a reconciliation of our Level 3 assets and liabilities recorded at fair value using significant unobservable inputs:

(Unaudited, amounts in thousands)		Level 3
Assets
Balance at April 30, 2016		$	-
Purchases		6,250
Balance at October 29, 2016		$	6,250
Liabilities
Balance at April 30, 2016		$	-
Acquisitions		2,825
Translation adjustment		(70		)
Balance at October 29, 2016		$	2,755

We hold certain available-for-sale investments that are measured at fair value using net asset value per share under the practical expedient. In accordance with recently issued accounting standards, we no longer include these investments in our asset leveling using the fair value hierarchy. Adoption of this standard had no effect on our consolidated financial statements, but as a result of this updated standard, we have reclassified the fiscal 2016 table above to conform to the fiscal 2017 presentation by removing our available-for-sale securities that are measured using net asset value. These investments are still included in the total fair value column of the table in our investment footnote (see Note 4). The fair value of the investments measured using net asset value at October 29, 2016, and April 30, 2016, was $7.6 million and $7.2 million, respectively.

Note 13: Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued a new accounting standard that requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new standard supersedes virtually all existing authoritative accounting guidance on revenue recognition and requires additional disclosures and greater use of estimates and judgments. During July 2015, the FASB deferred the effective date of the revenue recognition guidance by one year, thus making the new accounting standard effective for our fiscal year 2019. We are assessing the impact this guidance will have on our consolidated financial statements and financial statement 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 under the equity method of accounting, or that result in consolidation of the invested entity. We currently hold equity investments that are measured at fair value at the end of each reporting period, and we recognize the fair value changes through other comprehensive income (loss) as unrealized gains (losses). Based on the fair value of our unrealized loss as of April 30, 2016, adoption of this standard would be immaterial to our consolidated financial statements. Adoption of this standard will be required for our fiscal year 2019 financial statements.

In February 2016, the FASB issued a new accounting standard requiring all operating leases that a lessee enters into to be recorded on its balance sheet. The lessee will record an asset for the right to use the underlying asset for the lease term and a liability for the contractual lease payments. This guidance is effective for our fiscal year 2020. We are assessing the impact this guidance will have on our consolidated financial statements and related disclosures.

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