NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A -- Summary of Significant Accounting Policies
American Woodmark Corporation (“American Woodmark,” the “Company,” “we,” “our” or “us”) manufactures and distributes kitchen, bath and home organization products for the remodeling and new home construction markets. Its products are sold on a national basis directly to home centers, and builders and through a network of independent dealers and distributors. The Company operates within a single reportable segment primarily within the U.S.; long-lived assets and sales outside the U.S. are not significant.
The following is a description of the Company’s significant accounting policies:
Principles of Consolidation and Basis of Presentation: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
Revenue Recognition: Our principal performance obligations are the sale of kitchen, bath and home organization products. The Company recognizes revenue as control of our products is transferred to our customers, which is at the time of shipment or upon delivery based on the contractual terms with our customers. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods to our customers. Payment terms on our product sales normally range from 30 to 90 days. Taxes assessed by a governmental authority that we collect are excluded from revenue. The expected costs associated with our contractual warranties are recognized as expense when the products are sold. See Note L--Commitments and Contingencies for further discussion.
When revenue is recognized, we record estimates to reduce revenue for customer programs and incentives in order to determine that amount of consideration the Company will ultimately be entitled to receive. Customer programs and incentives are considered variable consideration, and include price discounts, volume-based incentives, promotions and cooperative advertising. The Company includes variable consideration in revenue only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the variable consideration is resolved. This determination is made based upon known customer program and incentive offerings at the time of sale, and expected sales volume forecasts as it relates to our volume-based incentives. This determination is updated each reporting period. In addition, for certain customer program incentives, we receive an identifiable benefit (goods or services) in exchange for the consideration given and record the associated expenditure in selling, general and administrative expenses.
We account for shipping and handling costs that occur before the customer has obtained control of a product as a fulfillment activity rather than as a promised service. These costs are classified within costs of sales and distribution.
Cost of Sales and Distribution: Cost of sales and distribution includes all costs associated with the manufacture and distribution of the Company’s products including the costs of shipping and handling.
Advertising Costs: Advertising costs are expensed as incurred. Advertising expenses for fiscal years 2020, 2019 and 2018 were $33.9 million, $38.9 million and $40.1 million, respectively.
Cash and Cash Equivalents: Cash in excess of operating requirements is invested in money market accounts which are carried at cost (which approximates fair value). The Company considers all highly liquid short-term investments with an original maturity of three months or less when purchased to be cash equivalents.
Investments in Certificates of Deposit: Certificates of deposit are carried at cost (which approximates fair value). Certificates of deposit with original maturities greater than three months and remaining maturities less than one year are classified as current assets. Certificates of deposit with remaining maturities greater than one year are classified as long-term assets.
Inventories: Inventories are stated at lower of cost or market. Inventory costs are determined by the last-in, first-out ("LIFO") method and for certain subsidiaries by the first-in, first-out ("FIFO") method.
The LIFO cost reserve is determined in the aggregate for inventory and is applied as a reduction to inventories determined on the FIFO method. FIFO inventory cost approximates replacement cost.
Property, Plant and Equipment: Property, plant and equipment is stated on the basis of cost less accumulated depreciation. Depreciation is provided by the straight-line method over the estimated useful lives of the related assets, which range from 15 to 30 years for buildings and improvements and 3 to 12 years for machinery and equipment. Assets under financing leases are amortized over the shorter of their estimated useful lives or the term of the related lease.
Impairment of Long-Lived Assets: The Company reviews its long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. During fiscal years 2020, 2019 and 2018, the Company concluded no impairment existed.
Goodwill: Goodwill represents the excess of purchase price over the fair value of net assets acquired. The Company does not amortize goodwill but evaluates for impairment annually, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
In accordance with the accounting standards, an entity has the option first to assess qualitative factors to determine whether events and circumstances indicate that it is more likely than not that goodwill is impaired. If after such assessment an entity concludes that the asset is not impaired, the entity is not required to take further action. However, if an entity concludes otherwise, it is required to determine the fair value of the asset using a quantitative impairment test, and if impaired, the associated assets must be written down to fair value. During fiscal years 2020, 2019 and 2018, the Company concluded no impairment existed.
Other Intangible Assets: Intangible assets consist of customer relationship intangibles and trademarks. The Company amortizes the cost of other intangible assets over their estimated useful lives, which range from three to six years, unless such lives are deemed indefinite. The Company reviews its intangible assets for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. During fiscal years 2020, 2019 and 2018, the Company concluded no impairment existed.
Promotional Displays: The Company invests in promotional displays in retail stores to demonstrate product features, product and quality specifications and to serve as a training tool for retail kitchen designers. The Company invests in these long-lived productive assets to provide the aforementioned benefits. The Company's investment in promotional displays is carried at cost less applicable amortization. Amortization is provided by the straight-line method on an individual display basis over periods of 24 to 60 months (the estimated period of benefit). Promotional display amortization expense for fiscal years 2020, 2019 and 2018 was $8.2 million, $6.4 million and $4.5 million, respectively, and is included in selling and marketing expenses.
Income Taxes: The Company accounts for deferred income taxes utilizing the asset and liability method, whereby deferred tax assets and liabilities are recognized based on the tax effects of temporary differences between the financial statement amounts and the tax basis of assets and liabilities, using enacted tax rates in effect for the year in which these items are expected to reverse. At each reporting date, the Company evaluates the need for a valuation allowance to adjust deferred tax assets and liabilities to an amount that more likely than not will be realized.
Pensions: The Company has one non-contributory defined benefit pension plan covering many of the Company’s employees hired before April 30, 2012. As of April 30, 2020, the Company's two non-contributory defined benefit pension plans were merged into one plan. Both defined benefit pension plans were frozen effective April 30, 2012. The Company recognizes the overfunded or underfunded status of its defined benefit pension plans, measured as the difference between the fair value of plan assets and the benefit obligation, in its consolidated balance sheets. The Company also recognizes the actuarial gains and losses and the prior service costs, credits and transition costs as a component of other comprehensive income (loss), net of tax.
Stock-Based Compensation: The Company recognizes stock-based compensation expense based on the grant date fair value over the requisite service period. The Company records the expense for stock-based compensation awards subject to performance-based criteria vesting over the remaining service period when the Company determines that achievement of the performance criteria is probable. The Company evaluates when the achievement of performance-based criteria is probable based on the expected satisfaction of the performance criteria at each reporting date.
Self Insurance: The Company is self-insured for certain costs related to employee medical coverage, workers’ compensation liability, general liability, auto liability and property insurance. The Company maintains stop-loss coverage with third-party insurers to limit total exposure. The Company establishes a liability at each balance sheet date based on estimates for a variety of factors that influence the Company’s ultimate cost. In the event that actual experience is substantially different from the estimates, the financial results for the period could be adversely affected. The Company believes that the methodologies used to estimate insurance liabilities are an accurate reflection of the liabilities as of the date of the consolidated balance sheets.
Foreign Exchange Forward Contracts: In the normal course of business, the Company is subject to risk from adverse fluctuations in foreign exchange rates. The Company manages these risks through the use of foreign exchange forward contracts. The Company recognizes its outstanding forward contracts in the consolidated balance sheets at their fair values. The Company does not designate the forward contracts as accounting hedges. The changes in the fair value of the forward contracts are recorded in other (income) expense, net in the consolidated statements of income.
At April 30, 2020, the Company held forward contracts maturing from May 2020 to April 2021 to purchase 327.0 million Mexican pesos at exchange rates ranging from 22.18 to 23.42 Mexican pesos to one U.S. dollar. A liability of $1.1 million is recorded in other accrued expenses on the consolidated balance sheets.
Recent Accounting Pronouncements: In February 2016, the Financial Accounting Standards Board (the "FASB") issued a new standard for leases, ASC 842, which requires lessees to recognize almost all leases on their balance sheet as a right-of-use ("ROU") asset and lease liability. The standard is effective for annual periods beginning after December 15, 2018. The standard provides for the option to elect a package of practical expedients upon adoption. The Company adopted the standard on May 1, 2019 using the modified retrospective transition approach and elected the package of practical expedients that allows it to forgo reassessment of lease classification for leases that have already commenced. The Company also elected the practical expedients to the new standard without restating comparative prior period financial information and to not recognize ROU assets and liabilities for operating leases with shorter than 12-month terms. On May 1, 2019, the Company recognized operating lease assets and operating lease liabilities of $80.4 million. The new standard did not have a material impact on the Company's results of operations, cash flows or opening retained earnings, or on its debt covenant calculations. ASC 842 also requires entities to disclose certain qualitative and quantitative information regarding the amount, timing, and uncertainty of cash flows arising from leases. Such disclosures are included in Note O--Leases.
In June 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," which modifies the methodology for recognizing loss impairments on certain types of financial instruments, including receivables. The new methodology requires an entity to estimate the credit losses expected over the life of an exposure. ASU 2016-13 is effective for the Company beginning May 1, 2020. This standard will impact the valuation of credit losses relating to receivables, however, we do not expect the standard to have a material impact on financial position or results of operations.
In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes," which simplifies the accounting for income taxes by removing certain exceptions for recognizing deferred taxes for investments, performing intraperiod tax allocations and calculating income taxes in interim periods. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12 is effective for the Company beginning May 1, 2021. Early adoption is permitted. The Company is currently reviewing the provisions of this new pronouncement and the impact, if any, the adoption of this guidance may have on financial position and results of operations.
In March 2020, the FASB issued ASU No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022 and can be adopted as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020. The Company has identified loans and other financial instruments that are directly or indirectly influenced by LIBOR and does not expect the adoption of ASU 2020-04 to have a material impact on its consolidated financial statements.
Use of Estimates: The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during each reporting period. Actual results could differ from those estimates.
Note B -- Acquisition of RSI Home Products, Inc. (the "RSI Acquisition")
On November 30, 2017, American Woodmark, Alliance Merger Sub, Inc. ("Merger Sub"), RSI and Ronald M. Simon, as the RSI stockholder representative, entered into a merger agreement (the "Merger Agreement") pursuant to which the parties agreed to merge Merger Sub with and into RSI pursuant to the terms and subject to the conditions set forth in the Merger Agreement, with RSI continuing as the surviving corporation and as a wholly owned subsidiary of American Woodmark. On December 29, 2017 (the "Acquisition Date"), the Company consummated the RSI Acquisition pursuant to the terms of the Merger Agreement. As a result of the merger of Merger Sub with and into RSI, Merger Sub’s separate corporate existence ceased, and RSI continued as the surviving corporation and a wholly owned subsidiary of American Woodmark. RSI is a leading manufacturer of kitchen and bath cabinetry and home organization products.
In connection with the RSI Acquisition, on December 29, 2017, the Company entered into a credit agreement (the "Credit Agreement") with a syndicate of lenders and Wells Fargo Bank, National Association ("Wells Fargo"), as administrative agent, providing for a $100 million, 5-year revolving loan facility with a $25 million sub-facility for the issuance of letters of credit (the “Revolving Facility”), a $250 million, 5-year initial term loan facility (the "Initial Term Loan") and a $250 million delayed draw term loan facility (the "Delayed Draw Term Loan" and, together with the Revolving Facility and the Initial Term Loan, the "Credit Facilities") (See Note G -- Loans Payable and Long-Term Debt for further details). American Woodmark used the full proceeds of the Initial Term Loan and approximately $50 million in loans under the Revolving Facility, together with cash on its balance sheet, to fund the cash portion of the RSI Acquisition consideration and its transaction fees and expenses.
At the closing of the RSI Acquisition, American Woodmark assumed approximately $589 million (including accrued interest) of RSI’s indebtedness consisting largely of RSI’s 6½% Senior Secured Second Lien Notes due 2023 (the "RSI Notes"). On February 12, 2018, the Company issued $350 million in aggregate principal amount of the Senior Notes and utilized the proceeds of such issuance, together with the borrowings under the Delayed Draw Term Loan and cash on hand, to fund the refinancing of the RSI Notes. (See Note G--Loans Payable and Long-Term Debt).
Allocation of Purchase Price to Assets Acquired and Liabilities Assumed
As consideration for the RSI Acquisition, American Woodmark paid total consideration of $554.2 million inclusive of a working capital adjustment including cash consideration of $364.4 million, net of cash acquired, and 1,457,568 newly issued shares of American Woodmark common stock valued at $189.8 million based on $130.25 per share, which was the closing stock price on the Acquisition Date.
The Company accounted for the RSI Acquisition as a business combination, which requires the Company to record the assets acquired and liabilities assumed at fair value. The amount by which the purchase price exceeds the fair value of net assets acquired is recorded as goodwill.
The following table summarizes the allocation of the purchase price as of the Acquisition Date, which is based on the consideration of $554.2 million, to the estimated fair value of assets acquired and liabilities assumed (in thousands):
|
|
|
|
|
|
Goodwill
|
|
$
|
767,612
|
|
Customer relationship intangibles
|
|
|
274,000
|
|
Property, plant and equipment
|
|
|
86,275
|
|
Inventories
|
|
|
66,293
|
|
Customer receivables
|
|
|
54,649
|
|
Income taxes receivable
|
|
|
18,926
|
|
Trademarks
|
|
|
10,000
|
|
Prepaid expenses and other
|
|
|
4,571
|
|
Leasehold interests
|
|
|
151
|
|
Total identifiable assets and goodwill acquired
|
|
|
1,282,477
|
|
|
|
|
|
Debt
|
|
|
602,313
|
|
Deferred income taxes
|
|
|
67,542
|
|
Accrued expenses
|
|
|
30,240
|
|
Accounts payable
|
|
|
25,113
|
|
Notes payable
|
|
|
2,988
|
|
Income taxes payable
|
|
|
49
|
|
Total liabilities assumed
|
|
|
728,245
|
|
|
|
|
|
Total accounting consideration
|
|
$
|
554,232
|
|
The fair value of the assets acquired and liabilities assumed were determined using income, market and cost valuation methodologies. The fair value of debt acquired was determined using Level 1 inputs as quoted prices in active markets for identical liabilities were available. The fair value measurements, aside from debt, were estimated using significant inputs that are not observable in the market and thus represent Level 3 measurements as defined in Accounting Standards Codification (ASC) 820.
The income approach was primarily used to value the customer relationship intangibles and trademarks. The income approach determines value for an asset or liability based on the present value of cash flows projected to be generated over the remaining economic life of the asset or liability being measured. Both the amount and the duration of the cash flows are considered from a market participant perspective. The estimates of market participant net cash flows considered historical and projected product pricing, operational performance including company specific synergies, product life cycles, material and labor pricing, and other relevant customer, contractual and market factors. The net cash flows are discounted to present value using a discount rate that reflects the relative risk of achieving the cash flow and the time value of money. The market approach is a valuation technique that uses prices and other relevant information generated by market transactions involving identical or comparable assets, liabilities, or a group of assets or liabilities. The cost approach estimates value by determining the current cost of replacing an asset with another of equivalent economic utility. The cost to replace a given asset reflects the estimated reproduction or replacement cost for the property, less an allowance for loss in value due to depreciation. The cost and market approaches were used to value inventory, while the cost approach was the primary approach used to value property, plant and equipment.
The purchase price allocation resulted in the recognition of $767.6 million of goodwill, which is not amortizable for tax purposes. The goodwill recognized is attributable to expected revenue synergies generated by the integration of the Company’s products with RSI's, cost synergies resulting from purchasing and manufacturing activities, and intangible assets that do not qualify for separate recognition, such as the assembled workforce of RSI.
Customer receivables were recorded at the contractual amounts due of $57.1 million, less an allowance for returns and discounts of $2.4 million, and an allowance for doubtful accounts of $0.1 million, which approximates their fair value.
Determining the fair value of assets acquired and liabilities assumed requires the exercise of significant judgment, including the amount and timing of expected future cash flows, long-term growth rates and discount rates. The cash flows employed in the valuation are based on the Company’s best estimates of future sales, earnings and cash flows after considering factors such as general market conditions, expected future customer orders, contracts with suppliers, labor costs, changes in working capital, long term business plans and recent operating performance. Use of different estimates and judgments could yield different results.
Impact to Financial Results for the Fiscal Year Ended April 30, 2018
RSI’s financial results have been included in our consolidated financial results of fiscal 2018 for the period from the Acquisition Date to April 30, 2018. As a result, our consolidated financial results for the fiscal year ended April 30, 2018 do not reflect a full year of RSI results. From December 29, 2017 to April 30, 2018, RSI generated net sales of approximately $177.7 million and an operating income of approximately $9.1 million, inclusive of intangible amortization and adjustments to account for the acquisition, including a $6.3 million charge to cost of sales as a result of the step-up of inventory as of the Acquisition Date to fair value.
The Company incurred approximately $12.9 million of transaction costs associated with the RSI Acquisition during the twelve months ended April 30, 2018 which the Company expensed as incurred. These costs are included in general and administrative expenses on the Consolidated Statements of Income.
Supplemental Pro Forma Financial Information (unaudited)
The following table presents summarized unaudited pro forma financial information as if RSI had been included in the Company’s financial results for the entire fiscal year ended April 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
FISCAL YEAR ENDED
|
(in thousands)
|
|
|
|
APRIL 30, 2018
|
Net Sales
|
|
|
|
$
|
1,613,663
|
|
Net Income (1)
|
|
|
|
$
|
67,388
|
|
Net earnings per share - basic
|
|
|
|
$
|
3.83
|
|
Net earnings per share - diluted
|
|
|
|
$
|
3.80
|
|
(1) Includes stock compensation expense of $17.5 million for the fiscal year ended April 30, 2018 calculated under the intrinsic value method in measuring stock-based liability awards related to stock-based grants made by RSI prior to the RSI Acquisition.
The unaudited supplemental pro forma financial data above assumes the RSI Acquisition occurred on May 1, 2016 and has been calculated after applying the Company’s accounting policies and adjusting the historical results of RSI with pro forma adjustments, net of a statutory tax rate of 34.4% for the fiscal year ended April 30, 2018. Significant pro forma adjustments include the recognition
of additional amortization expense of $20.0 million for the fiscal year ended April 30, 2018, related to acquired intangible assets (net of historical amortization expense of RSI) and additional net interest expense of $2.4 million for the fiscal year ended April 30, 2018, related to the $300 million borrowed under the Credit Agreement to finance the acquisition. Transaction expenses, net of tax, of $8.5 million for the fiscal year ended April 30, 2018, and inventory fair value step-up expense, net of tax of $4.1 million for the fiscal year ended April 30, 2018 were also excluded from net income.
The unaudited supplemental pro forma financial information does not reflect the realization of any expected ongoing cost or revenue synergies relating to the integration of the two companies. Further, the pro forma data should not be considered indicative of the results that would have occurred if the RSI Acquisition, related financing and associated issuance of Senior Notes (defined herein) and repurchase or redemption of the RSI Notes had been actually consummated on May 1, 2016, nor are they indicative of future results.
Note C -- Customer Receivables
The components of customer receivables were:
|
|
|
|
|
|
|
|
|
|
APRIL 30
|
(in thousands)
|
2020
|
|
2019
|
Gross customer receivables
|
$
|
112,528
|
|
|
$
|
132,145
|
|
Less:
|
|
|
|
Allowance for doubtful accounts
|
(472
|
)
|
|
(249
|
)
|
Allowance for returns and discounts
|
(5,712
|
)
|
|
(5,995
|
)
|
|
|
|
|
|
|
Net customer receivables
|
$
|
106,344
|
|
|
$
|
125,901
|
|
Note D -- Inventories
The components of inventories were:
|
|
|
|
|
|
|
|
|
|
APRIL 30
|
(in thousands)
|
2020
|
|
2019
|
Raw materials
|
$
|
51,460
|
|
|
$
|
46,054
|
|
Work-in-process
|
42,381
|
|
|
43,794
|
|
Finished goods
|
32,572
|
|
|
34,873
|
|
|
|
|
|
|
|
Total FIFO inventories
|
126,413
|
|
|
124,721
|
|
Reserve to adjust inventories to LIFO value
|
(14,577
|
)
|
|
(16,193
|
)
|
|
|
|
|
|
|
Total inventories
|
$
|
111,836
|
|
|
$
|
108,528
|
|
Of the total inventory of $111.8 million, $66.0 million is carried under the FIFO method and $45.8 is carried under the LIFO method of accounting as of April 30, 2020. Of the total inventory of $108.5 million, $58.6 million is carried under the FIFO method and $49.9 million is carried under the LIFO method of accounting as of April 30, 2019.
Note E -- Property, Plant and Equipment
The components of property, plant and equipment were:
|
|
|
|
|
|
|
|
|
|
APRIL 30
|
(in thousands)
|
2020
|
|
2019
|
Land
|
$
|
4,431
|
|
|
$
|
4,751
|
|
Buildings and improvements
|
120,819
|
|
|
114,421
|
|
Buildings and improvements - financing leases
|
11,636
|
|
|
11,202
|
|
Machinery and equipment
|
312,806
|
|
|
294,993
|
|
Machinery and equipment - financing leases
|
30,911
|
|
|
30,574
|
|
Construction in progress
|
8,164
|
|
|
7,002
|
|
|
488,767
|
|
|
462,943
|
|
Less accumulated amortization and depreciation
|
(284,943
|
)
|
|
(254,680
|
)
|
|
|
|
|
|
|
Total
|
$
|
203,824
|
|
|
$
|
208,263
|
|
Amortization and depreciation expense on property, plant and equipment amounted to $36.9 million, $36.2 million and $21.9 million in fiscal years 2020, 2019 and 2018, respectively. Accumulated amortization on financing leases included in the above table amounted to $32.3 million and $30.8 million as of April 30, 2020 and 2019, respectively.
Note F -- Intangible Assets and Trademarks
The components of customer relationships intangibles were:
|
|
|
|
|
|
|
|
|
|
APRIL 30
|
(in thousands)
|
2020
|
|
2019
|
Customer relationship intangibles
|
$
|
274,000
|
|
|
$
|
274,000
|
|
Less accumulated amortization
|
(106,556
|
)
|
|
(60,889
|
)
|
|
|
|
|
Total
|
$
|
167,444
|
|
|
$
|
213,111
|
|
The components of trademarks were:
|
|
|
|
|
|
|
|
|
|
APRIL 30
|
(in thousands)
|
2020
|
|
2019
|
Trademarks
|
$
|
10,000
|
|
|
$
|
10,000
|
|
Less accumulated amortization
|
(7,778
|
)
|
|
(4,445
|
)
|
|
|
|
|
Total
|
$
|
2,222
|
|
|
$
|
5,555
|
|
Customer relationship intangibles and trademarks are amortized over the estimated useful lives on a straight-line basis over six and three years, respectively. Amortization expense on customer relationship intangibles and trademarks amounted to $49.0 million for each of the years ended April 30, 2020 and 2019, respectively.
Note G -- Loans Payable and Long-Term Debt
Maturities of long-term debt are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FISCAL YEARS ENDING APRIL 30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
2025
|
|
2026 AND THERE-
AFTER
|
|
TOTAL OUTSTANDING AS OF APRIL 30, 2020
|
|
TOTAL OUTSTANDING AS OF APRIL 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loans
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
244,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
244,000
|
|
|
$
|
340,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Senior Notes
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
350,000
|
|
|
350,000
|
|
|
350,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance lease obligations
|
2,216
|
|
|
1,345
|
|
|
958
|
|
|
836
|
|
|
262
|
|
|
70
|
|
|
5,687
|
|
|
6,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term debt
|
—
|
|
|
—
|
|
|
46
|
|
|
253
|
|
|
256
|
|
|
6,104
|
|
|
6,659
|
|
|
6,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
2,216
|
|
|
$
|
1,345
|
|
|
$
|
245,004
|
|
|
$
|
1,089
|
|
|
$
|
518
|
|
|
$
|
356,174
|
|
|
$
|
606,346
|
|
|
$
|
703,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt issuance costs
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(9,209
|
)
|
|
$
|
(11,814
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,216
|
)
|
|
$
|
(2,286
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
594,921
|
|
|
$
|
689,205
|
|
Term Loans
On December 29, 2017, the Company entered into the Credit Agreement, which provides for the Revolving Facility, the Initial Term Loan and the Delayed Draw Term Loan. Also on December 29, 2017, the Company borrowed the entire $250 million available under the Initial Term Loan and approximately $50 million under the Revolving Facility to fund, in part, the cash portion of the RSI Acquisition consideration and the Company’s transaction fees and expenses related to the RSI Acquisition. On February 12, 2018, the Company borrowed the entire $250 million under the Delayed Draw Term Loan in connection with the refinancing of the RSI Notes as discussed below and to repay, in part, amounts outstanding under the Revolving Facility. In connection with its entry into the Credit Agreement, the Company terminated its prior $35 million revolving credit facility with Wells Fargo. The Company is required to make specified quarterly installments on both the Initial Term Loan and the Delayed Draw Loan. As of April 30, 2020, $122 million was outstanding on each of the Initial Term Loan and Delayed Draw Term Loan for a total of $244 million. As of April 30, 2019, $170 million was outstanding on each of the Initial Term Loan and Delayed Draw Term Loan for a total of $340 million. The outstanding balance approximates fair value as the Term Loans have a floating interest rate. There were no amounts outstanding on the Revolving Facility as of April 30, 2020 and 2019. The Credit Facilities mature on December 29, 2022.
Amounts outstanding under the Credit Facilities bear interest based on a fluctuating rate measured by reference to either, at the Company’s option, a base rate plus an applicable margin or LIBOR plus an applicable margin, with the applicable margin being determined by reference to the Company’s then-current “Total Funded Debt to EBITDA Ratio.” The Company also incurs a quarterly commitment fee on the average daily unused portion of the Revolving Facility during the applicable quarter at a rate per annum also determined by reference to the Company’s then-current “Total Funded Debt to EBITDA Ratio.” In addition, a letter of credit fee will accrue on the face amount of any outstanding letters of credit at a per annum rate equal to the applicable margin on LIBOR loans, payable quarterly in arrears. On January 25, 2019, the Company entered into an amendment to the Credit
Agreement (the “Amendment”) that reduced the applicable margin for both base rate and LIBOR rate loans and reduced the commitment fee incurred on unused portions of the Revolving Facility. As of April 30, 2020, the applicable margin with respect to base rate loans and LIBOR loans was 0.50% and 1.50%, respectively, and the commitment fee was 0.175%. As of December 31, 2021, the Company will transition to the Secured Overnight Financing Rate (SOFR) as required by the Credit Facilities. The Company expects the transition to SOFR to be materially similar to LIBOR.
The Credit Agreement includes certain financial covenants. The Amendment amended these covenants by (i) removing the requirement to maintain a “Total Secured Debt to EBITDA Ratio” of no more than 2.50 to 1.00 and (ii) setting a maximum “Total Funded Debt to EBITDA Ratio” of no more than 3.25 to 1.00 (with an increase to 3.75 to 1.00 for a certain period upon the consummation of a “Qualified Acquisition”). The Credit Agreement also requires that the Company maintain a Fixed Charge Coverage Ratio (as defined in the Credit Agreement) of no less than 1.25 to 1.00.
The Credit Agreement includes certain additional covenants, including negative covenants that restrict the ability of the Company and certain of its subsidiaries to incur additional indebtedness, create additional liens on its assets, dispose of its assets or engage in a merger or another similar transaction or engage in transactions with affiliates, subject, in each case, to the various exceptions and conditions described in the Credit Agreement. The negative covenants further restrict the Company’s ability to make certain restricted payments, including the payment of dividends and repurchase of common stock, in certain limited circumstances. In September 2018, the Company entered into an amendment to the Credit Agreement that amended the restricted payments covenant to (i) permit unlimited restricted payments so long as the “Total Funded Debt to EBITDA Ratio” would be less than or equal to 2.50 to 1.00 after giving effect to any such payment and no default or event of default has occurred and is continuing or would result from any such payment and (ii) permit up to an aggregate of $50 million in restricted payments not otherwise permitted under the Credit Agreement so long as no default or event of default has occurred and is continuing or would result from any such payment. The Amendment further amended the restricted payments covenant to increase the “Total Funded Debt to EBITDA Ratio” applicable to the exception permitting unlimited restricted payments discussed above to 2.75 to 1.00. The negative covenants in the Credit Agreement also include a covenant restricting the Company’s ability to make certain investments.
As of April 30, 2020, the Company was in compliance with the covenants included in the Credit Agreement.
The Company’s obligations under the Credit Agreement are guaranteed by the Company’s subsidiaries and the obligations of the Company and its subsidiaries are secured by a pledge of substantially all of their respective personal property.
The Senior Notes
On February 12, 2018, the Company issued $350 million in aggregate principal amount of 4.875% Senior Notes due 2026 (the “Senior Notes”). The Senior Notes mature on March 15, 2026 and interest on the Senior Notes is payable semi-annually in arrears on March 15 and September 15 of each year, which payments began on September 15, 2018. The Senior Notes are, and will be, fully and unconditionally guaranteed by each of the Company’s current and future wholly owned domestic subsidiaries that guarantee the Company’s obligations under the Credit Agreement. The indenture governing the Senior Notes restricts the ability of the Company and the Company’s “restricted subsidiaries” to, as applicable, (i) incur additional indebtedness or issue certain preferred shares, (ii) create liens, (iii) pay dividends, redeem or repurchase stock or make other distributions or restricted payments, (iv) make certain investments, (v) create restrictions on the ability of the “restricted subsidiaries” to pay dividends to the Company or make other intercompany transfers, (vi) transfer or sell assets, (vii) merge or consolidate with a third party and (viii) enter into certain transactions with affiliates of the Company, subject, in each case, to certain qualifications and exceptions as described in the indenture. As of April 30, 2020, the Company and its restricted subsidiaries were in compliance with all covenants under the indenture governing the Senior Notes.
At the closing of the RSI Acquisition, American Woodmark assumed approximately $589 million (including accrued interest) of RSI’s indebtedness consisting largely of RSI’s 6½% Senior Secured Second Lien Notes due 2023 (the "RSI Notes"). On February 12, 2018, the Company utilized the proceeds of the Senior Notes, together with the borrowings under the Delayed Draw Term Loan and cash on hand, to fund the refinancing of the RSI Notes - See Note B -- Acquisition of RSI Home Products, Inc. (the “RSI Acquisition”).
At April 30, 2020, the book value of the Senior Notes was $350 million and the fair value was $330 million, based on Level 1 inputs.
Financing Lease Obligations
The Company has various financing leases which interest rates between 3.5% and 6.5%. The leases require monthly payments and expire by February 15, 2026. The outstanding amounts owed as of April 30, 2020 and 2019 were $5.7 million and $6.6 million, respectively.
Other Long-term Debt
On January 25, 2016, the Company entered into a New Markets Tax Credit ("NMTC") financing agreement, pursuant to section 45D of the Internal Revenue Code of 1986, as amended, and Kentucky Revised Statutes Sections 141.432 through 141.434, to take advantage of a tax credit related to working capital and capital improvements at its Monticello, Kentucky facility. This financing agreement was structured with unrelated third party financial institutions (the "Investors"), their wholly-owned investment funds ("Investment Funds") and their wholly-owned community development entities ("CDEs") in connection with our participation in qualified transactions under the NMTC program. In exchange for substantially all of the benefits derived from the tax credits, the Investors made a contribution of $2.3 million, net of syndication fees, to the project. Upon closing the transaction, a wholly owned subsidiary of the Company provided a $4.3 million loan receivable to the Investment Funds, which is included in other long term assets in the accompanying consolidated balance sheets. The Company also entered into loan agreements aggregating $6.6 million payable to the CDEs sponsoring the project. The loans have a term of 30 years with an aggregate interest rate of approximately 1.2%. As of April 30, 2020 and 2019, the Company had drawn $6.7 million of the loan proceeds, which is included in long-term debt in the accompanying consolidated balance sheets. The NMTC is subject to recapture for a period of seven years, the compliance period. During the compliance period, the Company is required to comply with various regulations and contractual provisions that apply to the NMTC arrangement. We do not anticipate any credit recaptures will be required in connection with this arrangement. This transaction also includes a put/call feature which becomes enforceable at the end of the compliance period whereby we may be obligated or entitled to repurchase the Investors’ interest in the Investment Funds. The value attributable to the put/call is nominal. Direct costs of $0.3 million incurred in structuring the financing arrangement are deferred and will be recognized as expense over the term of the loans (30 years).
Certain of the Company's loan agreements limit the amount and type of indebtedness the Company can incur and require the Company to maintain specified financial ratios measured on a quarterly basis. In addition to the assets previously discussed, certain of the Company’s property, plant and equipment are pledged as collateral under certain loan agreements and the capital lease arrangements. The Company was in compliance with all covenants contained in its loan agreements and financing leases at April 30, 2020.
Note H -- Earnings Per Share
The following table summarizes the computations of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FISCAL YEARS ENDED APRIL 30
|
(in thousands, except per share amounts)
|
2020
|
|
2019
|
|
2018
|
Numerator used in basic and diluted earnings per common share:
|
|
|
|
|
|
Net income
|
$
|
74,861
|
|
|
$
|
83,688
|
|
|
$
|
63,141
|
|
Denominator:
|
|
|
|
|
|
Denominator for basic earnings per common share -
|
|
|
|
|
|
weighted-average shares
|
16,908
|
|
|
17,289
|
|
|
16,631
|
|
Effect of dilutive securities:
|
|
|
|
|
|
Stock options and restricted stock units
|
44
|
|
|
41
|
|
|
114
|
|
Denominator for diluted earnings per common share -
|
|
|
|
|
|
weighted-average shares and assumed conversions
|
16,952
|
|
|
17,330
|
|
|
16,745
|
|
Net earnings per share
|
|
|
|
|
|
Basic
|
$
|
4.43
|
|
|
$
|
4.84
|
|
|
$
|
3.80
|
|
Diluted
|
$
|
4.42
|
|
|
$
|
4.83
|
|
|
$
|
3.77
|
|
An immaterial amount of anti-dilutive securities for the fiscal year ended April 30, 2019 were excluded from the calculation of net earnings per share. There were no anti-dilutive securities for the fiscal years ended April 30, 2020 and 2018, which were excluded from the calculation of net earnings per share.
Under a stock repurchase authorization approved by its Board of Directors (the "Board") on November 30, 2016, the Company was authorized to purchase up to $50 million of the Company's common shares. The Board suspended the Company's stock repurchase program in conjunction with the RSI Acquisition. On August 23, 2018, the Board reinstated the program. On November 28, 2018, the Board of Directors of the Company authorized an additional stock repurchase program of up to $14 million of the Company's common shares. This authorization was in addition to the stock repurchase program authorized on November 30, 2016. No funds remained from the amount authorized by the Board to repurchase the Company’s common shares. On August 22, 2019, the Board authorized an additional stock repurchase program of up to $50 million of the Company's common shares. The Company funded share repurchases using available cash and cash generated from operations. Repurchased shares became authorized but unissued common shares. The Company did not repurchase any of its shares during fiscal 2020. The Company purchased a total of 745,232 common shares, for an aggregate purchase price of $50.0 million and a total of 309,612 common shares for an aggregate purchase price of $29.0 million during fiscal 2019 and 2018, respectively, under the authorizations pursuant to a repurchase plan intended to comply with the requirements of Rule 10b5-1 and Rule 10b-18 under the Securities Exchange Act of 1934, as amended.
Note I -- Stock-Based Compensation
The Company has two types of stock-based compensation awards in effect for its employees and directors. The Company issued stock options until fiscal 2015 and has issued restricted stock units ("RSUs") since fiscal 2010. Total compensation expense related to stock-based awards for the fiscal years ended April 30, 2020, 2019 and 2018 was $4.0 million, $3.0 million and $3.1 million, respectively. The Company recognizes stock-based compensation costs net of an estimated forfeiture rate for those shares expected to vest on a straight-line basis over the requisite service period of the award. The Company estimates the forfeiture rates based upon its historical experience.
Stock Incentive Plans
At April 30, 2020, the Company had RSU awards outstanding under two different plans: (1) 2016 employee stock incentive plan; and (2) 2015 non-employee directors equity ownership plan. As of April 30, 2020, there were 716,027 shares of common stock available for future stock-based compensation awards under the Company’s stock incentive plans.
Methodology Assumptions
For purposes of determining the fair value of RSUs, the Company uses the closing stock price of its common stock as reported on the NASDAQ Global Select Market on the date of grant. The fair value of the Company’s RSU awards is expensed on a straight-line basis over the vesting period of the RSUs to the extent the Company believes it is probable the related performance criteria, if any, will be met. The risk-free interest rate is based on the implied yield on a U.S. Treasury constant maturity with a remaining term equal to the vesting period of the RSU grant.
Stock Option Activity
Stock options granted and outstanding under each of the Company’s plans vest evenly over a three-year period and have contractual terms of ten years. The exercise price of all stock options granted is equal to the fair market value of the Company’s common stock on the option grant date.
The Company did not grant stock options during the fiscal years ended April 30, 2020, 2019 and 2018. There were no stock options outstanding at April 30, 2020.
The following table presents a summary of the Company’s stock option activity for the fiscal years ended April 30, 2020, 2019 and 2018 (remaining contractual term in years and exercise prices are weighted-averages):
|
|
|
|
|
|
|
|
|
|
|
|
|
NUMBER OF OPTIONS
|
|
WEIGHTED AVERAGE REMAINING CONTRACTUAL TERM
|
|
WEIGHTED AVERAGE EXERCISE PRICE
|
|
AGGREGATE INTRINSIC VALUE
(in thousands)
|
Outstanding at April 30, 2017
|
54,918
|
|
|
5.6
|
|
$37.95
|
|
$
|
2,963
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
(36,950
|
)
|
|
0
|
|
34.90
|
|
1,748
|
|
Outstanding at April 30, 2018
|
17,968
|
|
|
4.5
|
|
$44.23
|
|
$
|
682
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
(12,801
|
)
|
|
0
|
|
39.04
|
|
651
|
|
Outstanding at April 30, 2019
|
5,167
|
|
|
6.1
|
|
$57.11
|
|
$
|
170
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
(5,167
|
)
|
|
0
|
|
57.11
|
|
—
|
|
Outstanding at April 30, 2020
|
—
|
|
|
0
|
|
$—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest in the future at April 30, 2020
|
—
|
|
|
0
|
|
$—
|
|
$
|
—
|
|
Exercisable at April 30, 2020
|
—
|
|
|
0
|
|
$—
|
|
$
|
—
|
|
Cash received from option exercises for the fiscal years ended April 30, 2020, 2019 and 2018, was an aggregate of $0.3 million, $0.5 million and $1.3 million, respectively. The actual tax benefit realized for the tax deduction from option exercises of stock option awards was immaterial for the fiscal years ended April 30, 2020, 2019 and 2018, respectively.
Restricted Stock Unit Activity:
The Company’s RSUs granted to employees cliff-vest over a three-year period from date of grant, while RSUs granted to non-employee directors vest daily over a two-year period from date of grant. Directors were granted service-based RSUs only, while employees were awarded both service-based and performance-based RSUs ("PBRSUs") in fiscal years 2020, 2019 and 2018. The PBRSUs granted in fiscal 2020, 2019 and 2018 are earned based on achievement of a number of goals pertaining to the Company’s financial performance during three one-year performance periods and the achievement of certain cultural goals for the three-year period. Employees who satisfy the vesting criteria will receive a proportional amount of PBRSUs based upon the Compensation Committee’s assessment of the Company’s achievement of the performance criteria.
The following table contains a summary of the Company’s RSU activity for the fiscal years ended April 30, 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
PERFORMANCE-BASED RSUs
|
|
SERVICE-BASED RSUs
|
|
TOTAL RSUs
|
|
WEIGHTED AVERAGE GRANT
DATE FAIR VALUE
|
Issued and outstanding, April 30, 2017
|
125,067
|
|
|
67,454
|
|
|
192,521
|
|
|
$50.09
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
33,080
|
|
|
22,250
|
|
|
55,330
|
|
|
$95.62
|
Cancelled due to non-achievement of performance goals
|
—
|
|
|
—
|
|
|
—
|
|
|
$—
|
Settled in common stock
|
(51,191
|
)
|
|
(28,447
|
)
|
|
(79,638
|
)
|
|
$32.96
|
Forfeited
|
(9,305
|
)
|
|
(6,198
|
)
|
|
(15,503
|
)
|
|
$71.91
|
Issued and outstanding, April 30, 2018
|
97,651
|
|
|
55,059
|
|
|
152,710
|
|
|
$73.34
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
45,615
|
|
|
30,335
|
|
|
75,950
|
|
|
$104.10
|
Cancelled due to non-achievement of performance goals
|
(10,352
|
)
|
|
—
|
|
|
(10,352
|
)
|
|
$80.26
|
Settled in common stock
|
(34,475
|
)
|
|
(18,778
|
)
|
|
(53,253
|
)
|
|
$60.50
|
Forfeited
|
(9,257
|
)
|
|
(5,347
|
)
|
|
(14,604
|
)
|
|
$79.49
|
Issued and outstanding, April 30, 2019
|
89,182
|
|
|
61,269
|
|
|
150,451
|
|
|
$76.91
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
61,379
|
|
|
42,691
|
|
|
104,070
|
|
|
$53.95
|
Cancelled due to non-achievement of performance goals
|
(11,305
|
)
|
|
—
|
|
|
(11,305
|
)
|
|
$85.13
|
Settled in common stock
|
(18,628
|
)
|
|
(21,521
|
)
|
|
(40,149
|
)
|
|
$67.03
|
Forfeited
|
(2,941
|
)
|
|
(3,229
|
)
|
|
(6,170
|
)
|
|
$86.68
|
Issued and outstanding, April 30, 2020
|
117,687
|
|
|
79,210
|
|
|
196,897
|
|
|
$66.68
|
As of April 30, 2020, there was $7.9 million of total unrecognized compensation expense related to unvested RSUs granted under the Company’s stock-based compensation plans. This expense is expected to be recognized over a weighted-average period of 1.6 years.
For the fiscal years ended April 30, 2020, 2019 and 2018 stock-based compensation expense was allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2020
|
|
2019
|
|
2018
|
Cost of sales and distribution
|
$
|
809
|
|
|
$
|
691
|
|
|
$
|
667
|
|
Selling and marketing expenses
|
1,006
|
|
|
649
|
|
|
756
|
|
General and administrative expenses
|
2,174
|
|
|
1,700
|
|
|
1,674
|
|
Stock-based compensation expense, before income taxes
|
$
|
3,989
|
|
|
$
|
3,040
|
|
|
$
|
3,097
|
|
Restricted Stock Tracking Units:
During fiscal 2020, the Board approved grants of 6,483 cash-settled performance-based restricted stock tracking units ("RSTUs") and 3,482 cash-settled service-based RSTUs for more junior level employees. Each performance-based RSTU entitles the recipient to receive a payment in cash equal to the fair market value of a share of the Company’s common stock as of the payment date if applicable performance and cultural conditions are met and the recipient remains continuously employed with the Company until the units vest. The service-based RSTUs entitle the recipients to receive a payment in cash equal to the fair market value of a share of our common stock as of the payment date if they remain continuously employed with the Company until the units vest. All of the RSTUs cliff-vest three years from the grant date. The fair value of each cash-settled RSTU award is remeasured at the end of each reporting period and the liability is adjusted, and related expense recorded, based on the new fair value. The Company recognized expense of $0.0 million, $0.5 million and $0.4 million related to RSTUs for the fiscal years ended April 30, 2020, 2019 and 2018, respectively. A liability for payment of the RSTUs is included in the Company's balance sheets in the amount of $0.4 million and $0.7 million as of April 30, 2020 and 2019, respectively.
Note J -- Employee Benefit and Retirement Plans
Retirement Savings Plans
In fiscal 1990, the Company instituted the American Woodmark Investment Savings Stock Ownership Plan and effective January 1, 2016 the plan name was changed to the American Woodmark Corporation Retirement Savings Plan (the "Plan"). Under the Plan, all employees who are at least 18 years old and have been employed by the Company for at least six consecutive months are eligible to receive Company stock through a discretionary profit-sharing contribution and a 401(k) matching contribution based upon the employee's contribution to the Plan.
Discretionary profit-sharing contributions ranging from 0-5% of net income, based on predetermined net income levels of the Company, may be made annually in the form of Company stock. The Company recognized expenses for profit-sharing contributions of $3.7 million, $3.8 million and $3.7 million in fiscal years 2020, 2019 and 2018, respectively.
The Company matches 100% of an employee’s annual 401(k) contributions to the Plan up to 4% of annual compensation.
Through December 31, 2018, RSI had the RSI Home Products 401K Retirement Savings Plan (the “RSI Plan”) for all non-union employees. Employees were eligible to contribute to the RSI Plan 60 days after starting employment. The Company elected to make safe harbor matching contributions of up to 4% of each participant’s eligible compensation. The Company’s safe harbor contributions vested immediately.
On January 1, 2019, the Plan merged with the RSI Plan to transfer all assets of the RSI Plan into the Plan.
Effective January 1, 2019, all new eligible participants will be automatically enrolled in the Plan at a contribution rate of 3% with the option of opting out. Beginning January 1, 2021, the contribution rate for the eligible participants as of January 1, 2019 and thereafter will automatically escalate by 1%. The automatic escalation will continue at the rate of 1% per calendar year, up to a contribution rate cap of 8%.
Participants who transferred from the RSI Plan effective January 1, 2019 will be eligible for a profit sharing contribution as of April 30, 2020. Effective April 1, 2020, union employees are eligible to participate in the Plan.
The expense for 401(k) matching contributions for both plans was $10.1 million, $9.9 million and $8.0 million, in fiscal years 2020, 2019 and 2018, respectively.
Pension Benefits
Prior to April 30, 2020, the Company had two defined benefit pension plans covering many of the Company’s employees hired prior to April 30, 2012. Effective April 30, 2020, these plans were merged into one plan and the plan name was changed to the American Woodmark Corporation Employee Pension Plan. The plan provides defined benefits based on years of service and final average earnings (for salaried employees) or benefit rate (for hourly employees).
Effective April 30, 2012, the Company froze all future benefit accruals under the Company’s defined benefit pension plan.
Included in accumulated other comprehensive loss at April 30, 2020 is $68.6 million ($51.2 million net of tax) related to net unrecognized actuarial losses that have not yet been recognized in net periodic pension benefit costs. The Company expects to recognize $1.8 million ($1.3 million net of tax) in net actuarial losses in net periodic pension benefit costs during fiscal 2021. The Company uses an April 30 measurement date for its benefit plans.
The following provides a reconciliation of benefit obligations, plan assets and funded status of the Company’s non-contributory defined benefit pension plans as of April 30:
|
|
|
|
|
|
|
|
|
|
APRIL 30
|
(in thousands)
|
2020
|
|
2019
|
CHANGE IN PROJECTED BENEFIT OBLIGATION
|
|
|
|
Projected benefit obligation at beginning of year
|
$
|
168,788
|
|
|
$
|
163,423
|
|
Interest cost
|
5,974
|
|
|
6,269
|
|
Actuarial gains
|
22,293
|
|
|
4,850
|
|
Benefits paid
|
(5,871
|
)
|
|
(5,754
|
)
|
Projected benefit obligation at end of year
|
$
|
191,184
|
|
|
$
|
168,788
|
|
|
|
|
|
CHANGE IN PLAN ASSETS
|
|
|
|
Fair value of plan assets at beginning of year
|
$
|
169,471
|
|
|
$
|
156,463
|
|
Actual return on plan assets
|
26,674
|
|
|
11,479
|
|
Company contributions
|
469
|
|
|
7,283
|
|
Benefits paid
|
(5,871
|
)
|
|
(5,754
|
)
|
Fair value of plan assets at end of year
|
$
|
190,743
|
|
|
$
|
169,471
|
|
|
|
|
|
|
|
Funded status of the plans
|
$
|
(441
|
)
|
|
$
|
683
|
|
The accumulated benefit obligation for both pension plans was $191.2 million and $168.8 million at April 30, 2020 and 2019, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
APRIL 30
|
(in thousands)
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
COMPONENTS OF NET PERIODIC PENSION BENEFIT COST
|
|
|
|
|
|
Interest cost
|
$
|
5,974
|
|
|
$
|
6,269
|
|
|
$
|
5,727
|
|
Expected return on plan assets
|
(8,327
|
)
|
|
(8,509
|
)
|
|
(8,936
|
)
|
Recognized net actuarial loss
|
1,692
|
|
|
1,648
|
|
|
1,601
|
|
Pension benefit cost
|
$
|
(661
|
)
|
|
$
|
(592
|
)
|
|
$
|
(1,608
|
)
|
The components of net periodic pension benefit cost do not include service costs or prior service costs due to the plans being frozen.
Actuarial Assumptions: The discount rate at April 30 was used to measure the year-end benefit obligations and the earnings effects for the subsequent year. Actuarial assumptions used to determine benefit obligations and earnings effects for the pension plans follow:
|
|
|
|
|
|
FISCAL YEARS ENDED APRIL 30
|
|
2020
|
|
2019
|
|
|
|
|
WEIGHTED-AVERAGE ASSUMPTIONS TO DETERMINE BENEFIT OBLIGATIONS
|
|
|
|
Discount rate
|
3.16 %
|
|
4.02 %
|
|
|
|
|
|
|
|
|
FISCAL YEARS ENDED APRIL 30
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
WEIGHTED-AVERAGE ASSUMPTIONS TO DETERMINE NET PERIODIC PENSION BENEFIT COST
|
|
|
|
|
|
Discount rate
|
4.02 %
|
|
4.18 %
|
|
4.12%
|
Expected return on plan assets
|
5.0 %
|
|
5.5 %
|
|
6.5 %
|
The Company bases the discount rate on a current yield curve developed from a portfolio of high-quality fixed-income investments with maturities consistent with the projected benefit payout period. The long-term rate of return on assets is determined based on consideration of historical and forward-looking returns and the current and expected asset allocation strategy.
The method used to determine the service and interest costs is known as the spot rate approach, under which individual spot rates along the yield curve that correspond with the timing of each benefit payment are used.
In developing the expected long-term rate of return assumption for the assets of the defined benefit pension plans, the Company evaluated input from its third party pension plan asset managers, including their review of asset class return expectations and long-term inflation assumptions.
The Company amortizes experience gains and losses, as well as the effects of changes in actuarial assumptions and plan provisions, over the average remaining lifetime of employees expected to receive benefits under the plan.
Contributions: The Company funds the pension plans in amounts sufficient to meet minimum funding requirements under applicable employee benefit and tax laws plus additional amounts the Company deems appropriate.
The Company does not expect to contribute to its pension plans in fiscal 2021. The Company made contributions of $0.5 million and $7.3 million to its pension plans in fiscal 2020 and 2019, respectively.
Estimated Future Benefit Payments: The following benefit payments are expected to be paid:
|
|
|
|
|
FISCAL YEAR
|
BENEFIT PAYMENTS (in thousands)
|
|
|
2021
|
$
|
6,913
|
|
2022
|
7,263
|
|
2023
|
7,653
|
|
2024
|
8,048
|
|
2025
|
8,413
|
|
Years 2026-2030
|
47,525
|
|
Plan Assets: Pension assets by major category and the type of fair value measurement as of April 30, 2020 and 2019 are presented in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FAIR VALUE MEASUREMENTS AT APRIL 30, 2020
|
FAIR VALUE MEASUREMENTS AT
|
FAIR VALUE MEASUREMENTS AT
|
FAIR VALUE MEASUREMENTS AT
|
FAIR VALUE MEASUREMENTS AT
|
FAIR VALUE MEASUREMENTS AT
|
FAIR VALUE MEASUREMENTS AT
|
FAIR VALUE MEASUREMENTS AT
|
FAIR VALUE MEASUREMENTS AT
|
(in thousands)
|
TOTAL
|
|
QUOTED PRICES IN ACTIVE MARKETS (LEVEL 1)
|
|
SIGNIFICANT OBSERVABLE INPUTS (LEVEL 2)
|
|
SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3)
|
Cash Equivalents
|
$
|
490
|
|
|
$
|
490
|
|
|
$
|
0
|
|
|
$
|
—
|
|
Equity Funds:
|
|
|
|
|
|
|
|
US Equity
|
37,569
|
|
|
37,569
|
|
|
—
|
|
|
—
|
|
International Equity
|
24,578
|
|
|
24,578
|
|
|
—
|
|
|
|
|
Fixed Income Funds:
|
|
|
|
|
|
|
|
Investment Grade Fixed Income
|
128,106
|
|
|
128,106
|
|
|
—
|
|
|
—
|
|
Total plan assets
|
190,743
|
|
|
190,743
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FAIR VALUE MEASUREMENTS AT APRIL 30, 2019
|
FAIR VALUE MEASUREMENTS AT
|
FAIR VALUE MEASUREMENTS AT
|
FAIR VALUE MEASUREMENTS AT
|
FAIR VALUE MEASUREMENTS AT
|
FAIR VALUE MEASUREMENTS AT
|
FAIR VALUE MEASUREMENTS AT
|
FAIR VALUE MEASUREMENTS AT
|
FAIR VALUE MEASUREMENTS AT
|
(in thousands)
|
TOTAL
|
|
QUOTED PRICES IN ACTIVE MARKETS (LEVEL 1)
|
|
SIGNIFICANT OBSERVABLE INPUTS (LEVEL 2)
|
|
SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3)
|
Cash Equivalents
|
$
|
469
|
|
|
$
|
469
|
|
|
—
|
|
|
—
|
|
Equity Funds:
|
|
|
|
|
|
|
|
US Equity
|
31,143
|
|
|
31,143
|
|
|
—
|
|
|
—
|
|
International Equity
|
20,553
|
|
|
20,553
|
|
|
|
|
|
Fixed Income Funds:
|
|
|
|
|
|
|
—
|
|
|
—
|
|
Investment Grade Fixed Income
|
117,306
|
|
|
117,306
|
|
|
—
|
|
|
—
|
|
Total plan assets
|
$
|
169,471
|
|
|
$
|
169,471
|
|
|
—
|
|
|
—
|
|
Investment Strategy: The Company has established formal investment policies for the assets associated with its pension plans. The objectives of the investment strategies include preservation of capital and long-term growth of capital while avoiding excessive risk. Target allocation percentages are established at an asset class level by the Company’s Pension Committee. Target allocation ranges are guidelines, not limitations, and the Pension Committee may approve allocations above or below a target range.
During a period of uncertainty in the equity and fixed income markets, the Pension Committee may suspend the Target Asset Allocation and manage the investment mix as it sees reasonable, prudent and in the best interest of the plans to better protect the value of the plan assets.
The Company’s pension plans’ weighted-average asset allocations at April 30, 2020 and 2019, by asset category, were as follows:
|
|
|
|
|
|
|
|
PLAN ASSET ALLOCATION
|
|
2020
|
|
2020
|
|
2019
|
APRIL 30
|
TARGET
|
|
ACTUAL
|
|
ACTUAL
|
|
|
|
|
|
|
Equity Funds
|
30.0 %
|
|
33.0 %
|
|
31.0 %
|
Fixed Income Funds
|
70.0 %
|
|
67.0 %
|
|
69.0 %
|
Total
|
100.0 %
|
|
100.0 %
|
|
100.0 %
|
Note K -- Income Taxes
In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") was signed into law in March 2020. The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017 (the "2017 Tax Act"). Among other provisions, the CARES Act makes qualified improvement property generally eligible for 15-year cost-recovery and 100% bonus depreciation. The tax effects of the CARES Act are not significant and have been recognized in the current reporting period.
Income tax expense was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FISCAL YEARS ENDED APRIL 30
|
(in thousands)
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
CURRENT EXPENSE
|
|
|
|
|
|
Federal
|
$
|
29,072
|
|
|
$
|
25,649
|
|
|
$
|
8,668
|
|
State
|
7,581
|
|
|
8,231
|
|
|
1,290
|
|
Foreign
|
533
|
|
|
1,125
|
|
|
257
|
|
Total current expense
|
37,186
|
|
|
35,005
|
|
|
10,215
|
|
|
|
|
|
|
|
DEFERRED EXPENSE
|
|
|
|
|
|
Federal
|
(7,167
|
)
|
|
(4,498
|
)
|
|
17,833
|
|
State
|
(4,190
|
)
|
|
(3,266
|
)
|
|
3,642
|
|
Foreign
|
(142
|
)
|
|
(41
|
)
|
|
(71
|
)
|
Total deferred (benefit) expense
|
(11,499
|
)
|
|
(7,805
|
)
|
|
21,404
|
|
Total expense
|
25,687
|
|
|
27,200
|
|
|
31,619
|
|
Other comprehensive income (loss)
|
(573
|
)
|
|
190
|
|
|
50
|
|
Total comprehensive income tax expense
|
$
|
25,114
|
|
|
$
|
27,390
|
|
|
$
|
31,669
|
|
The Company's effective income tax rate varied from the federal statutory rate as follows:
|
|
|
|
|
|
|
|
|
|
|
FISCAL YEARS ENDED APRIL 30
|
|
2020
|
|
2019
|
|
2018
|
Federal statutory rate
|
21.0
|
%
|
|
21.0
|
%
|
|
30.4
|
%
|
Effect of:
|
|
|
|
|
|
Federal income tax credits
|
(0.9
|
)%
|
|
(1.4
|
)%
|
|
(0.5
|
)%
|
Acquisition and integration costs
|
—
|
|
|
—
|
|
|
1.2
|
|
Stock compensation
|
(0.1
|
)
|
|
(0.5
|
)
|
|
(2.4
|
)
|
Meals and entertainment
|
0.3
|
|
|
0.3
|
|
|
0.3
|
|
Effect of Tax Act
|
—
|
|
|
(1.1
|
)
|
|
1.2
|
|
Domestic production deduction
|
—
|
|
|
—
|
|
|
(0.8
|
)
|
Valuation allowance for deferred taxes
|
0.7
|
|
|
0.6
|
|
|
—
|
|
Foreign
|
0.4
|
|
|
0.8
|
|
|
—
|
|
Other
|
0.7
|
|
|
1.2
|
|
|
0.4
|
|
Total
|
1.1
|
%
|
|
(0.1
|
)%
|
|
(0.6
|
)%
|
|
|
|
|
|
|
|
|
|
Effective federal income tax rate
|
22.1
|
%
|
|
20.9
|
%
|
|
29.8
|
%
|
State income taxes, net of federal tax effect
|
3.4
|
|
|
3.6
|
|
|
3.6
|
|
Effective income tax rate
|
25.5
|
%
|
|
24.5
|
%
|
|
33.4
|
%
|
The significant components of deferred tax assets and liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
APRIL 30
|
(in thousands)
|
2020
|
|
2019
|
Deferred tax assets:
|
|
|
|
Accounts receivable
|
$
|
1,730
|
|
|
$
|
1,852
|
|
Product liability
|
862
|
|
|
2,133
|
|
Employee benefits
|
5,189
|
|
|
6,192
|
|
Tax credit carryforwards
|
4,995
|
|
|
4,439
|
|
Operating leases
|
33,258
|
|
|
—
|
|
Other
|
4,330
|
|
|
3,272
|
|
Gross deferred tax assets, before valuation allowance
|
50,364
|
|
|
17,888
|
|
Valuation allowance
|
(4,415
|
)
|
|
(3,630
|
)
|
Gross deferred tax assets, after valuation allowance
|
45,949
|
|
|
14,258
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
Pension benefits
|
—
|
|
|
119
|
|
Inventory
|
125
|
|
|
76
|
|
Depreciation
|
24,147
|
|
|
23,721
|
|
Intangibles
|
40,677
|
|
|
53,259
|
|
Operating leases
|
32,325
|
|
|
—
|
|
Other
|
695
|
|
|
1,059
|
|
Gross deferred tax liabilities
|
97,969
|
|
|
78,234
|
|
|
|
|
|
|
|
Net deferred tax liability
|
$
|
52,020
|
|
|
$
|
63,976
|
|
We have not recorded deferred income taxes applicable to undistributed earnings of foreign subsidiaries that are indefinitely reinvested in foreign operations. Undistributed earnings that are indefinitely reinvested in foreign operations are not significant as of April 30, 2020.
The Company recorded a valuation allowance related to deferred tax assets for certain state investment tax credit ("ITC") carryforwards and foreign tax credit ("FTC") carryforwards. Deferred tax assets are reduced by a valuation allowance when, after considering all positive and negative evidence, it is determined that it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. In fiscal 2019, the Company determined that there will not be sufficient income in states for which an ITC deferred tax asset exists and that there will not be sufficient foreign source income to utilize the FTCs. Therefore, the Company reassessed the valuation allowance and recorded an additional valuation allowance in the amount of $0.2 million and $0.5 million related to ITCs and FTCs, respectively.
The gross amount of state tax credit carryforwards related to state ITCs as of April 30, 2020 and 2019 was $3.9 million and $4.6 million. These credits expire in various years beginning in fiscal 2028. Net of the federal impact and related valuation allowance, the Company recorded $0.6 million and $0.8 million of deferred tax assets related to these credits, as of April 30, 2020 and 2019. The Company accounts for ITCs under the deferral method, under which the tax benefit from the ITC is deferred and amortized into income tax expense over the book life of the related property. As of April 30, 2020 and 2019, a deferred credit balance of $0.8 million and $1.0 million, respectively, is included in other liabilities on the balance sheet.
The gross amount of foreign tax credit carryforwards as of April 30, 2020 and 2019 is $1.2 million and $0.7 million, respectively, which begin to expire in fiscal 2029.
The following table summarizes the activity related to unrecognized tax benefits, excluding the federal tax benefit of state tax deductions:
|
|
|
|
|
|
|
|
|
|
APRIL 30
|
(in thousands)
|
2020
|
|
2019
|
Change in Unrecognized Tax Benefits
|
|
|
|
Balance at beginning of year
|
$
|
2,240
|
|
|
$
|
928
|
|
Additions based on tax positions related to the current year
|
65
|
|
|
120
|
|
Additions for tax positions of prior years
|
—
|
|
|
1,192
|
|
Balance at end of year
|
$
|
2,305
|
|
|
$
|
2,240
|
|
The Company operates in multiple tax jurisdictions and, in the normal course of business, its tax returns are subject to examination by various taxing authorities. Such examinations may result in future assessments by these taxing authorities, and the Company has accrued a liability when it believes that it is not more likely than not that it will realize the benefits of tax positions that it has taken or for the amount of any tax benefit that exceeds the cumulative probability threshold in accordance with accounting standards. As of April 30, 2020, federal tax years 2016 through 2019 remain subject to examination. The Company believes that adequate provisions have been made for all tax returns subject to examination. The Company is currently not under federal audit. If the liability for uncertain tax positions is released the entire amount would impact the Company’s effective tax rate.
Note L -- Commitments and Contingencies
Legal Matters
The Company is involved in suits and claims in the normal course of business, including without limitation product liability and general liability claims, and claims pending before the Equal Employment Opportunity Commission. On at least a quarterly basis, the Company consults with its legal counsel to ascertain the reasonable likelihood that such claims may result in a loss. As required by ASC Topic 450, “Contingencies” ("ASC 450"), the Company categorizes the various suits and claims into three categories according to their likelihood for resulting in potential loss: those that are probable, those that are reasonably possible and those that are deemed to be remote. Where losses are deemed to be probable and estimable, accruals are made. Where losses are deemed to be reasonably possible, a range of loss estimates is determined and considered for disclosure. In determining these loss range estimates, the Company considers known values of similar claims and consultation with independent counsel.
The Company believes that the aggregate range of loss stemming from the various suits and asserted and unasserted claims which were deemed to be either probable or reasonably possible is not material as of April 30, 2020.
COVID-19
The COVID-19 pandemic impacted our business operations and financial results beginning in the fourth quarter of fiscal 2020. Although the financial impact on our overall fiscal 2020 results is limited due to the timing of the outbreak, we face numerous uncertainties in estimating the direct and indirect effects on our future business operations, financial condition, results of operations, and liquidity. We will continue to monitor developments affecting our consolidated financial statements, including indicators that goodwill or other long-lived assets may be impaired, increases in valuation allowances for doubtful accounts or deferred tax assets may be necessary or other accruals that may increase or be necessary resulting from actions taken to reduce our cost structure or conserve our liquidity.
Product Warranty
The Company estimates outstanding warranty costs based on the historical relationship between warranty claims and revenues. The warranty accrual is reviewed monthly to verify that it properly reflects the remaining obligation based on the anticipated expenditures over the balance of the obligation period. Adjustments are made when actual warranty claim experience differs from estimates. Warranty claims are generally made within two months of the original shipment date.
The following is a reconciliation of the Company’s warranty liability:
|
|
|
|
|
|
|
|
|
|
APRIL 30
|
(in thousands)
|
2020
|
|
2019
|
PRODUCT WARRANTY RESERVE
|
|
|
|
Beginning balance
|
$
|
4,616
|
|
|
$
|
4,045
|
|
Accrual for warranties
|
21,886
|
|
|
24,994
|
|
Settlements
|
(22,749
|
)
|
|
(24,423
|
)
|
Ending balance at fiscal year end
|
$
|
3,753
|
|
|
$
|
4,616
|
|
Note M -- Revenue Recognition
The Company disaggregates revenue from contracts with customers into major sales distribution channels as these categories depict the nature, amount, timing and uncertainty of revenues and cash flows that are affected by economic factors. The following table disaggregates our consolidated revenue by major sales distribution channels for the years ended April 30, 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FISCAL YEARS ENDED APRIL 30
|
(in thousands)
|
2020
|
|
2019
|
|
2018
|
Home center retailers
|
$
|
768,043
|
|
|
$
|
788,803
|
|
|
$
|
493,904
|
|
Builders
|
668,765
|
|
|
631,474
|
|
|
557,382
|
|
Independent dealers and distributors
|
213,525
|
|
|
225,042
|
|
|
198,988
|
|
Net Sales
|
$
|
1,650,333
|
|
|
$
|
1,645,319
|
|
|
$
|
1,250,274
|
|
Note N -- Credit Concentration
Financial instruments that potentially subject the Company to concentrations of risk consist primarily of cash and cash equivalents and accounts receivable. The Company maintains its cash and cash equivalents with major financial institutions and such balances may, at times, exceed Federal Deposit Insurance Corporation insurance limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risk on cash.
Credit is extended to customers based on an evaluation of each customer's financial condition and generally collateral is not required. The Company's customers operate in the new home construction and home remodeling markets.
The Company maintains an allowance for bad debt based upon management's evaluation and judgment of potential net loss. The allowance is estimated based upon historical experience, the effects of current developments and economic conditions and of each customer’s current and anticipated financial condition. Estimates and assumptions are periodically reviewed and updated. Any resulting adjustments to the allowance are reflected in current operating results.
At April 30, 2020, the Company's two largest customers, Customers A and B, represented 26.4% and 22.9% of the Company's gross customer receivables, respectively. At April 30, 2019, Customers A and B represented 28.2% and 25.9% of the Company’s gross customer receivables, respectively.
The following table summarizes the percentage of net sales to the Company's two largest customers for the last three fiscal years:
|
|
|
|
|
|
|
|
PERCENT OF ANNUAL NET SALES
|
|
2020
|
|
2019
|
|
2018
|
Customer A
|
29.3%
|
|
29.3%
|
|
23.5%
|
Customer B
|
17.2%
|
|
18.6%
|
|
16.0%
|
Note O -- Leases
On May 1, 2019, the Company adopted ASC 842, Leases. Changes to the Company’s accounting policy as a result of adoption are discussed below.
Operating Leases - ROU assets related to operating leases are presented as “Operating lease right-of-use assets” on the consolidated balance sheet. Lease liabilities related to operating leases that are subject to the ASC 842 measurement requirements such as operating leases with lease terms greater than twelve months are presented in “Short-term lease liability - operating” and “Long-term lease liability - operating” on the consolidated balance sheet.
Operating lease ROU assets and lease liabilities are recognized at the commencement date based on the present value of the future lease payments over the lease term. The discount rate used to determine the present value of the lease payments is the rate implicit in the lease unless that rate cannot be readily determined, in which case, the Company utilizes its incremental borrowing rate in determining the present value of the future lease payments. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Operating lease ROU assets may also include any cumulative prepaid or accrued rent when the lease payments are uneven throughout the lease term. The ROU assets and lease liabilities may also include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The ROU asset includes any lease payments made and lease incentives received prior to the commencement date. The Company has lease arrangements with lease and non-lease components which are accounted for separately. Non-lease components of the lease payments are expensed as incurred and are not included in determining the present value.
Finance Leases - ROU assets related to finance leases are presented in "Property, plant and equipment, net” on the consolidated balance sheet. Lease liabilities related to finance leases are presented in “Current maturities of long-term debt” and “Long-term debt, less current maturities” on the consolidated balance sheet.
Finance lease ROU assets and lease liabilities are recognized at the commencement date based on the present value of the future lease payments over the lease term. The discount rate used to determine the present value of the lease payments is the rate implicit in the lease unless that rate cannot be readily determined, in which case, the Company utilizes its incremental borrowing rate in determining the present value of the future lease payments. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.
The components of lease costs were as follows:
|
|
|
|
|
|
|
|
FISCAL YEAR ENDED
|
(in thousands)
|
|
APRIL 30, 2020
|
Finance lease cost:
|
|
|
|
Reduction in the carrying value of right-of-use assets
|
|
$
|
2,582
|
|
Interest on lease liabilities
|
|
205
|
|
Operating lease cost
|
|
25,405
|
|
Additional information related to leases was as follows:
|
|
|
|
|
|
|
|
FISCAL YEAR ENDED
|
(in thousands)
|
|
APRIL 30, 2020
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
Operating cash flows for finance leases
|
|
$
|
205
|
|
Operating cash flows for operating leases
|
|
22,595
|
|
Financing cash flows for financing leases
|
|
2,512
|
|
Right-of-use assets obtained in exchange for new finance lease liabilities
|
|
1,650
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
|
72,703
|
|
|
|
|
Weighted average remaining lease term (years)
|
|
|
Weighted average remaining lease term - finance leases
|
|
3.36
|
|
Weighted average remaining lease term - operating leases
|
|
7.41
|
|
|
|
|
Weighted average discount rate
|
|
|
Weighted average discount rate - finance leases
|
|
3.19
|
%
|
Weighted average discount rate - operating leases
|
|
4.27
|
%
|
The following is a reconciliation of future undiscounted cash flows to the operating and finance lease liabilities, and the related ROU assets, presented on the consolidated balance sheet as of April 30, 2020:
|
|
|
|
|
|
|
|
|
|
FISCAL YEAR
|
|
OPERATING (in thousands)
|
|
FINANCING (in thousands)
|
2021
|
|
$
|
24,071
|
|
|
$
|
2,359
|
|
2022
|
|
20,886
|
|
|
1,423
|
|
2023
|
|
19,870
|
|
|
1,003
|
|
2024
|
|
17,977
|
|
|
858
|
|
2025
|
|
15,859
|
|
|
267
|
|
Thereafter
|
|
55,609
|
|
|
71
|
|
Total lease payments
|
|
154,272
|
|
|
5,981
|
|
Less imputed interest
|
|
(22,922
|
)
|
|
(294
|
)
|
Total lease liability
|
|
$
|
131,350
|
|
|
$
|
5,687
|
|
Current maturities
|
|
(18,896
|
)
|
|
(2,216
|
)
|
Lease liability - long-term
|
|
$
|
112,454
|
|
|
$
|
3,471
|
|
Lease assets
|
|
$
|
127,668
|
|
|
$
|
10,248
|
|
As we have not restated prior year information for our adoption of ASC 842, the following presents our future minimum lease payments for operating and capital leases under ASC 840 on April 30, 2019:
|
|
|
|
|
|
|
|
|
|
FISCAL YEAR
|
|
OPERATING (in thousands)
|
|
CAPITAL (in thousands)
|
2020
|
|
$
|
17,943
|
|
|
$
|
2,456
|
|
2021
|
|
17,649
|
|
|
1,953
|
|
2022
|
|
12,435
|
|
|
1,013
|
|
2023
|
|
10,636
|
|
|
705
|
|
2024
|
|
9,854
|
|
|
701
|
|
Thereafter
|
|
38,871
|
|
|
166
|
|
|
|
$
|
107,388
|
|
|
$
|
6,994
|
|
Less amounts representing interest (2% - 6.5%)
|
|
|
|
(349
|
)
|
|
|
|
|
$
|
6,645
|
|
NOTE P -- Restructuring Charges
In the fourth quarter of fiscal 2020, the Company implemented a nationwide reduction in force. Severance and outplacement charges relating to the reduction in force totaled approximately $0.2 million and the reduction in force was substantially completed in fiscal 2020.
In the first quarter of fiscal 2019, the Company implemented a nationwide reduction in force. Severance and outplacement charges relating to the reduction in force totaled approximately $1.8 million and the reduction in force was substantially completed during fiscal 2019.
During fiscal years 2020 and 2019, the Company recognized total pre-tax restructuring charges of $18,000 and $2.0 million, respectively.
A reserve for restructuring charges is included in accrued compensation and related expenses in the consolidated balance sheets as of April 30, 2020 and 2019 which relates to employee termination costs accrued but not yet paid as follows:
|
|
|
|
|
|
|
|
|
|
APRIL 30
|
(in thousands)
|
2020
|
|
2019
|
Restructuring reserve balance, beginning of year
|
$
|
387
|
|
|
$
|
—
|
|
Expense
|
(18
|
)
|
|
1,987
|
|
Payments and adjustments
|
(180
|
)
|
|
(1,600
|
)
|
Restructuring reserve balance, end of year
|
$
|
189
|
|
|
$
|
387
|
|
Note Q -- Fair Value Measurements
The Company utilizes the hierarchy of fair value measurements to classify certain of its assets and liabilities based upon the following definitions:
Level 1 – Investments with quoted prices in active markets for identical assets or liabilities. The Company’s cash equivalents are invested in money market funds, mutual funds and certificates of deposit. The Company’s mutual fund investment assets represent contributions made and invested on behalf of the Company’s named executive officers in a supplementary employee retirement plan.
Level 2 – Investments with observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Investments with unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The Company has no Level 3 assets or liabilities measured on a recurring basis.
The fair value measurement of assets held by the Company’s defined benefit pension plans is discussed in Note J.
The Company's financial instruments include cash and equivalents, marketable securities and other investments; accounts receivable and accounts payable; and short- and long-term debt. The carrying values of cash and equivalents, accounts receivable and payable and short-term debt on the consolidated balance sheets approximate their fair value due to the short maturities of these items. The forward contracts were marked to market and therefore represent fair value. The fair values of these contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. The following table summarizes the fair value of assets and liabilities that are recorded in the Company’s consolidated financial statements as of April 30, 2020 and 2019 at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FAIR VALUE MEASUREMENTS AS OF APRIL 30, 2020
|
(in thousands)
|
LEVEL 1
|
|
LEVEL 2
|
|
LEVEL 3
|
ASSETS:
|
|
|
|
|
|
Mutual funds
|
$
|
773
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
—
|
|
|
(1,102
|
)
|
|
0
|
|
|
|
|
|
|
|
|
FAIR VALUE MEASUREMENTS AS OF APRIL 30, 2019
|
(in thousands)
|
LEVEL 1
|
|
LEVEL 2
|
|
LEVEL 3
|
ASSETS:
|
|
|
|
|
|
Certificates of deposit
|
$
|
1,500
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Mutual funds
|
1,604
|
|
|
—
|
|
|
—
|
|
Total assets at fair value
|
$
|
3,104
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Note R -- Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FISCAL 2020
|
07/31/19
|
|
10/31/19
|
|
01/31/20
|
|
04/30/20
|
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
Net sales
|
$
|
427,365
|
|
|
$
|
428,016
|
|
|
$
|
395,755
|
|
|
$
|
399,197
|
|
Gross profit
|
94,519
|
|
|
87,050
|
|
|
72,348
|
|
|
75,269
|
|
Income before income taxes
|
36,338
|
|
|
29,978
|
|
|
17,274
|
|
|
16,958
|
|
Net income
|
26,881
|
|
|
22,163
|
|
|
12,804
|
|
|
13,013
|
|
Earnings per share
|
|
|
|
|
|
|
|
Basic
|
$
|
1.59
|
|
|
$
|
1.31
|
|
|
$
|
0.76
|
|
|
$
|
0.77
|
|
Diluted
|
$
|
1.59
|
|
|
$
|
1.31
|
|
|
$
|
0.75
|
|
|
$
|
0.77
|
|
|
|
|
|
|
|
|
|
FISCAL 2019
|
07/31/18
|
|
10/31/18
|
|
01/31/19
|
|
04/30/19
|
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
Net sales
|
$
|
428,962
|
|
|
$
|
424,878
|
|
|
$
|
384,080
|
|
|
$
|
407,399
|
|
Gross profit
|
95,736
|
|
|
86,762
|
|
|
76,853
|
|
|
87,122
|
|
Income before income taxes
|
32,539
|
|
|
25,409
|
|
|
24,126
|
|
|
28,814
|
|
Net income
|
24,767
|
|
|
18,488
|
|
|
18,409
|
|
|
22,024
|
|
Earnings per share
|
|
|
|
|
|
|
|
Basic
|
$
|
1.41
|
|
|
$
|
1.05
|
|
|
$
|
1.07
|
|
|
$
|
1.31
|
|
Diluted
|
$
|
1.41
|
|
|
$
|
1.05
|
|
|
$
|
1.07
|
|
|
$
|
1.30
|
|
Note S -- Subsequent Events
During May 2020, the Company implemented a nationwide reduction in force. Severance and outplacement charges relating to the reduction in force will total approximately $1.5 million and is expected to be completed during fiscal 2021.
During June 2020, the Company's Board of Directors approved the closure and eventual disposal of its manufacturing plant located in Humboldt, Tennessee. The manufacturing plant is expected to cease operations in September 2020. The Company expects to incur total pre-tax restructuring costs of $3.0 million to $5.0 million related to the closing of the plant, net of building proceeds. The restructuring costs consist of employee severance and separation costs of approximately $0.5 million to $1.0 million, and charges for asset impairment of property, equipment and inventory of approximately $2.5 million to $4.0 million. The Company expects to recognize substantially all of these costs during fiscal 2021.