Note 14: Stock-Based Compensation

In fiscal 2018, our shareholders approved the La-Z-Boy Incorporated 2017 Omnibus Incentive Plan which 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 5.9 million shares.

The table below summarizes the total stock-based compensation expense recognized for all outstanding grants in our consolidated statement of income (for the fiscal years ended):


	(52 weeks)		(52 weeks)		(52 weeks)
(Amounts in thousands)	4/27/2019		4/28/2018		4/29/2017
Equity-based awards expense	$	10,981	$	9,474	$	8,864
Liability-based awards expense		339		405		1,687
Total stock-based compensation expense	$	11,320	$	9,879	$	10,551

Stock Options. The La-Z-Boy Incorporated 2017 Omnibus Incentive Plan authorized 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. We granted 423,273 stock options to employees during the first quarter of fiscal 2019, and we also have stock options outstanding from previous grants. 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 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. Granted options outstanding under the former long-term equity award plan remain in effect and have a term of ten years.

Stock option expense recognized in selling, general and administrative expense for fiscal 2019, fiscal 2018, and fiscal 2017 was $3.5 million, $4.2 million, and $3.4 million, respectively. We received $16.2 million, $4.4 million, and $3.6 million in cash during fiscal 2019, fiscal 2018, and fiscal 2017, respectively, for exercises of stock options.

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


				Weighted
		Weighted		Average
	Number of	Average		Remaining	Aggregate
	Shares	Exercise		Contractual	Intrinsic Value
	(In Thousands)	Price		Term (Years)	(In Thousands)
Outstanding at April 28, 2018	1,837	$	24.18	7.4	$	9,407
Granted	423		33.15
Canceled	(58)		30.44
Exercised	(761)		21.28		$	9,933
Outstanding at April 27, 2019	1,441	$	28.09	7.7	$	6,557
Exercisable at April 27, 2019	516	$	25.78	6.8	$	3,450

The aggregate intrinsic value of options exercised was $2.2 million and $4.9 million in fiscal 2018 and fiscal 2017, respectively. As of April 27, 2019, our total unrecognized compensation cost related to non-vested stock option awards was $2.0 million, which we expect to recognize over a weighted-average remaining vesting term of all unvested awards of 1.7 years. During the year ended April 27, 2019, 0.5 million shares vested.

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 estimate forfeiture rates based on our employees' forfeiture history and believe they will approximate future results. The fair value of stock options granted during fiscal 2019, fiscal 2018, and fiscal 2017 were calculated using the following assumptions:


	Fiscal 2019			Fiscal 2018			Fiscal 2017
	Grant			Grant			Grant
Risk-free interest rate		2.82	%		1.84	%		1.30	%
Dividend rate		1.45	%		1.61	%		1.54	%
Expected life in years		5.0			5.0			5.0
Stock price volatility		33.07	%		32.12	%		38.87	%
Fair value per share	$	9.65		$	7.16		$	7.99

Stock Appreciation Rights. We have not granted any SARs to employees since fiscal 2014, but we have SARs outstanding from the fiscal 2013 and fiscal 2014 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. We recognized compensation expense of $0.1 million, $0.3 million, and $0.7 million related to SARs in selling, general and administrative expense for the years ended April 27, 2019, April 28, 2018, and April 29, 2017, respectively. We have no remaining unrecognized compensation cost at April 27, 2019, relating to SAR awards as they are all fully vested, but we will continue to re-measure these awards to reflect the fair value at the end of each reporting period until all awards are exercised or forfeited.

In fiscal 2013 and 2014, we granted SARs as described in our Annual Report on Form 10-K for the fiscal years ended April 27, 2013 and April 26, 2014, respectively. These awards have exceeded their expected life and are 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 April 27, 2019, the intrinsic value per share of the fiscal 2013 and 2014 awards were $20.48 and $13.39, respectively.

Restricted Stock. We awarded 112,926 shares of restricted stock to employees during fiscal 2019. 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 that was awarded in fiscal 2019 was $32.78 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 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. We recorded expense related to the restricted stock in selling, general and administrative expense of $2.5 million, $2.2 million, and $1.7 million during fiscal 2019, fiscal 2018, and fiscal 2017, respectively. Our unrecognized compensation cost at April 27, 2019, related to restricted shares was $5.2 million and is expected to be recognized over a weighted-average remaining contractual term of all unvested awards of 1.8 years.

The following table summarizes information about non-vested share awards as of and for the year ended April 27, 2019:


		Weighted Average
	Shares	Grant Date
	(In Thousands)	Fair Value
Non-vested shares at April 28, 2018	233	$	26.56
Granted	113		32.78
Vested	(89)		26.03
Canceled	(10)		27.92
Non-vested shares at April 27, 2019	247	$	29.55

Restricted Stock Units. Restricted stock units granted to our non-employee directors are offered at no cost to the directors and vest when a director leaves the board. During fiscal 2019, fiscal 2018, and fiscal 2017 we granted less than 0.1 million of restricted stock each year to our non-employee directors. We account for these restricted stock units as equity-based awards because when they vest, they will be settled in shares of our 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, $23.85, and $27.10 for the awards granted in fiscal 2019, fiscal 2018, and fiscal 2017, respectively. Expense relating to the restricted stock units which we recorded in selling, general and administrative expense was $0.7 million, $0.7 million and $0.6 million in fiscal 2019, fiscal 2018 and fiscal 2017, respectively.

Performance Awards. Under the La-Z-Boy Incorporated 2017 Omnibus Incentive Plan, the Compensation Committee of the board of directors was authorized to award common shares 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 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 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.

The number of awards that will vest, as well as unearned and canceled awards, depend on the achievement of certain financial and shareholder-return goals over the three-year performance periods, and will be settled in shares if service conditions are met, requiring employees to remain employed with the company through the end of the three- year performance periods. The following table summarizes the performance-based shares outstanding at the maximum award amounts based upon the respective performance share agreements:


		Weighted Average
	Shares	Grant Date
	(In Thousands)	Fair Value
Outstanding shares at April 28, 2018	541	$	25.52
Granted	292		31.71
Vested	(139)		25.73
Unearned or cancelled	(171)		27.05
Outstanding shares at April 27, 2019	523	$	28.43

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, fiscal 2018, and fiscal 2017 that vest based on attaining performance goals was $31.71, $25.93, and $24.79,respectively, 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. The Monte Carlo valuation model uses multiple simulations to evaluate our probability of achieving various stock price levels to determine our expected performance ranking relative to our peer group. Similar to the way in which we expense the awards of stock options, we expense compensation cost, net of estimated forfeitures, over the vesting period regardless of whether the market condition is ultimately satisfied. Based on the Monte Carlo model, the fair value as of the grant date of the fiscal 2019, fiscal 2018, and fiscal 2017 grants of shares that vest based on market conditions was $46.39, $36.24, and $33.32, respectively. Our unrecognized compensation cost at April 27, 2019, related to performance-based shares was $5.3 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):


	(52 weeks)		(52 weeks)		(52 weeks)
(Amounts in thousands)	4/27/2019		4/28/2018		4/29/2017
Fiscal 2015 grant	$	—	$	—	$	675
Fiscal 2016 grant		—		1,052		1,284
Fiscal 2017 grant		1,044		455		1,109
Fiscal 2018 grant		1,402		887		—
Fiscal 2019 grant		1,774		—		—
Total expense	$	4,220	$	2,394	$	3,068

Previously Granted Deferred Stock Units. We account for awards under our deferred stock unit plan for non-employee directors as liability-based awards because upon exercise these awards will be paid in cash. We measure and recognize compensation expense based on the market price of our common stock on the grant date. We remeasure and adjust the liability based on the market value (intrinsic value) of our common shares on the last day of the reporting period until paid with a corresponding adjustment to reflect the cumulative amount of compensation expense. For purposes of dividends and for measuring the liability, each deferred stock unit is the equivalent of one common share. As of April 27, 2019, we had 0.1 million deferred stock units outstanding. We recorded expense relating to deferred stock units in selling, general and administrative of $0.2 million, $0.1 million, and $0.2 million during fiscal 2019, fiscal 2018, and fiscal 2017, respectively. Our liability related to these awards was $2.2 million and $2.0 million at April 27, 2019, and April 28, 2018, respectively, and is included as a component of other long-term liabilities on our consolidated balance sheet.