AMERICAN WOODMARK CORP - Annual Report: 2014 (Form 10-K)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. 

Yes [ ]  No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. 

Yes [ ]  No [X]

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [X]  No [ ]

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

Yes [X]  No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [X]

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

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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). 

Yes [ ]  No [X]

The aggregate market value of the registrant's Common Stock, no par value, held by non-affiliates of the registrant as of October 31,  2013, the last business day of the Company’s most recent second quarter was $419,419,782.

As of June 16, 2014,  15,514,527 shares of the Registrant's Common Stock were outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Registrant’s definitive Proxy Statement for the Annual Meeting of Shareholders to be held on August 21,  2014 (“Proxy Statement”) are incorporated by reference into Part III of this Form 10-K.

 

 

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TABLE OF CONTENTS

 

 

 

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PART I

 

Item 1.BUSINESS

 

American Woodmark Corporation (“American Woodmark” or the “Company”) manufactures and distributes kitchen cabinets and vanities for the remodeling and new home construction markets. American Woodmark was incorporated in 1980 by the four principal managers of the Boise Cascade Cabinet Division through a leveraged buyout of that division. American Woodmark was operated privately until 1986 when it became a public company through a registered public offering of its common stock.

 

American Woodmark currently offers framed stock cabinets in approximately 600 different cabinet lines, ranging in price from relatively inexpensive to medium-priced styles. Styles vary by design and color from natural wood finishes to low-pressure laminate surfaces. The product offering of stock cabinets includes 85 door designs in 19 colors. Stock cabinets consist of cabinet interiors of varying dimensions and construction options and a maple, oak, cherry, or hickory front frame, door and/or drawer front.

 

Products are sold under the brand names of American Woodmark®, Timberlake®, Shenandoah Cabinetry®, Potomac®, and Waypoint Living Spaces®.

 

American Woodmark’s products are sold on a national basis across the United States to the remodeling and new home construction markets. The Company services these markets through three primary channels: home centers, builders, and independent dealers and distributors. The Company provides complete turnkey installation services to its direct builder customers via its network of nine service centers that are strategically located throughout the United States. The Company distributes its products to each market channel directly from four assembly plants through a third party logistics network.

 

The primary raw materials used include hard maple, oak, cherry, soft maple, and hickory lumber and plywood. Additional raw materials include paint, particleboard, manufactured components, and hardware. The Company currently purchases paint from one supplier; however, other sources are available. Other raw materials are purchased from more than one source and are readily available.

 

American Woodmark operates in a highly fragmented industry that is composed of several thousand local, regional, and national manufacturers. The Company’s principal means for competition is its breadth and variety of product offering, expanded service capabilities, geographic reach and affordable quality. The Company believes it is one of the three largest manufacturers of kitchen cabinets in the United States.

 

The Company’s business has historically been subject to seasonal influences, with higher sales typically realized in the second and fourth fiscal quarters. General economic forces and changes in the Company’s customer mix have reduced seasonal fluctuations in revenue over the past few years. The Company does not consider its level of order backlog to be material.

 

In recognition of the cyclicality of the housing industry, the Company’s policy is to operate with a minimal amount of financial leverage.  The Company regularly maintains a debt to capital ratio of well below 20%, and working capital exclusive of cash of less than 6% of net sales.  At April 30, 2014, debt to capital was 9.7%, and working capital net of cash was 1.8% of net sales.

 

During the last fiscal year, American Woodmark had two primary customers, The Home Depot and Lowe’s Companies, Inc., which together accounted for approximately 49% of the Company’s sales in its fiscal year ended April 30, 2014 (fiscal 2014). The loss of either customer would have a material adverse effect on the Company.

 

As of May 31, 2014, the Company had 4,916 employees. None of the Company’s employees are represented by labor unions. The Company believes that its employee relations are good.

 

American Woodmark’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and all amendments to those reports are available free of charge on the Company’s web site at www.americanwoodmark.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission. The contents of the Company’s web site are not, however, part of this report.

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Item 1A.RISK FACTORS

 

There are a number of business risks and uncertainties that may affect the Company’s business, results of operations and financial condition. These risks and uncertainties could cause future results to differ from past performance or expected results, including results described in statements elsewhere in this report that constitute "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. Additional risks and uncertainties not presently known to the Company or currently believed to be immaterial also may adversely impact the Company’s business. Should any risks or uncertainties develop into actual events, these developments could have material adverse effects on the Company’s business, financial condition, and results of operations. These risks and uncertainties, which the Company considers to be most relevant to specific business activities, include, but are not limited to, the following, as well as additional risk factors included in Item 7A, "Quantitative and Qualitative Disclosures about Market Risk."  Additional risks and uncertainties that may affect the Company’s business, results of operations and financial condition are discussed elsewhere in this report, including in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the headings “Forward-Looking Statements,” “Seasonality,” and “Outlook for Fiscal 2015.”

 

The Company’s business is dependent upon remodeling activity and residential construction.  The Company’s results of operations are affected by levels of home improvement and residential construction activity, including repair and remodeling and new construction. Job creation levels, interest rates, availability of credit, energy costs, consumer confidence, national and regional economic conditions, and weather conditions and natural disasters can significantly impact levels of home improvement and residential construction activity.

 

Prolonged economic downturns may adversely impact the Company’s sales, earnings and liquidity.  Although they have recently rebounded, the Company’s fiscal 2014 sales levels were 13%  below their peak levels of 2006.  The Company’s industry historically has been cyclical in nature and has fluctuated with economic cycles. During economic downturns, the Company’s industry could experience longer periods of recession and greater declines than the general economy. The Company believes that its industry is significantly influenced by economic conditions generally and particularly by housing activity, consumer confidence, the level of personal discretionary spending, demographics and credit availability. These factors not only may affect the ultimate consumer of the Company’s products, but also may impact home centers, builders and the Company’s other primary customers. As a result, a worsening of economic conditions could adversely affect the Company’s sales and earnings as well as its cash flow and liquidity.

 

The Company’s future financial performance depends in part on the success of its new product development and other growth strategies.  The Company has increased its emphasis on new product development in recent years and continues to focus solely on organic growth. Consequently, the Company’s financial performance will, in part, reflect its success in implementing its growth strategies in its existing markets and in introducing new products.

 

The loss of, or a reduction in business from, either of the Company’s key customers would have a material adverse effect upon its business.  The size and importance to the Company of its two largest customers is significant. These customers could make significant changes in their volume of purchases and could otherwise significantly affect the terms and conditions on which the Company does business. Sales to The Home Depot and Lowe’s Companies, Inc. were approximately 49% of total company sales for fiscal 2014. Although builders, dealers, and other retailers represent other channels of distribution for the Company's products, an unplanned loss of a substantial portion of sales to The Home Depot or Lowe’s Companies, Inc. would have a material adverse impact on the Company.

 

Manufacturing expansion to add capacity could result in a decrease in the Company’s near-term earnings.  The Company continually reviews its manufacturing operations. These reviews could result in the expansion of capacity, functions, systems, or procedures, which in turn could result in inefficiencies for a period that would decrease near-term earnings until the additional capacity is in place and fully operating.  In addition, downturns in the economy could potentially have a larger impact on the Company as a result of this added capacity.    

 

Impairment charges could reduce the Company’s profitability.  The Company has significant long-lived assets, including deferred tax assets, recorded on its balance sheets. If operating results decline or if the Company decides to restructure its operations as it did with the 2012 Restructuring Plan, the Company could incur impairment charges, which could have a material impact on its financial results. The Company evaluates the recoverability of the carrying amount of its long-lived assets on an ongoing basis. The outcome of future reviews could result in substantial impairment charges. Impairment assessments inherently involve judgments as to assumptions about market conditions and the Company’s ability to generate future cash flows and profitability, given those

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assumptions. Future events and changing market conditions may impact the Company’s assumptions as to prices, costs or other factors that may result in changes in the Company’s estimates.

 

The Company’s operating results are affected by the cost and availability of raw materials.  Because the Company is dependent on outside suppliers for raw material needs, it must obtain sufficient quantities of quality raw materials from its suppliers at acceptable prices and in a timely manner. The Company has no long-term supply contracts with its key suppliers. A substantial decrease in the availability of products from the Company’s suppliers, the loss of key supplier arrangements, or a substantial increase in the cost of its raw materials could adversely impact the Company’s results of operations.

 

The Company may not be able to maintain or raise the prices of its products in response to inflation and increasing costs.  Short-term market and competitive pressures may prohibit the Company from raising prices to offset inflationary raw material and freight costs, which would adversely impact profit margins.

 

Item 1B.UNRESOLVED STAFF COMMENTS

 

None.

 

 

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Item 2.PROPERTIES

 

American Woodmark leases its Corporate Office located in Winchester, Virginia. In addition, the Company leases 1 manufacturing facility in Hardy County, West Virginia and owns 8 manufacturing facilities located primarily in the eastern United States.  The Company also leases 9 primary service centers, 2 satellite service centers, and 3 additional office centers located throughout the United States that support the sale and distribution of products to each market channel. The Company considers its properties suitable for the business and adequate for its needs.

 

Primary properties as of April 30, 2014 include:

 

 

*Leased facility.

 

In addition, American Woodmark owns a manufacturing facility that is permanently closed.

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Item 3.LEGAL PROCEEDINGS

 

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. The Company accounts for these loss contingencies in accordance with ASC 450. 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 estimated loss stemming from the various suits and asserted and unasserted claims which were deemed to be either probable or reasonably possible was not material as of April 30, 2014.

 

Also see the information under “Legal Matters” under “Note K – Commitments and Contingencies” to the Consolidated Financial Statements included in this report under Item 8. “Financial Statements and Supplementary Data.”

 

Item 4.MINE SAFETY DISCLOSURES

 

None.

 

EXECUTIVE OFFICERS OF THE REGISTRANT

 

Executive officers of the Company are elected by the Board of Directors and generally hold office until the next annual election of officers. There are no family relationships between any executive officer and any other officer or director of the Company or any arrangement or understanding between any executive officer and any other person pursuant to which such officer was elected. The executive officers of the Company as of April 30, 2014 are as follows:

 

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PART II

 

Item 5.  MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

MARKET INFORMATION

 

American Woodmark Corporation common stock is listed on The NASDAQ Global Select Market under the “AMWD” symbol. Common stock per share market prices and cash dividends declared during the last two fiscal years were as follows:

 

 

 

 

As of May 19, 2014, there were approximately 7,300 shareholders of record of the Company's common stock. Included are approximately 86% of the Company's employees, who are shareholders through the American Woodmark Stock Ownership Plan. The Company paid dividends on its common stock during the first quarter of 2012 and then its quarterly dividend was suspended.  The determination as to the payment and the amount of any future dividends will be made by the Board of Directors from time to time and will depend on the Company’s then-current financial condition, capital requirements, results of operations and any other factors then deemed relevant by the Board of Directors.

 

 

 

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The following table details share repurchases by the Company during the fourth quarter of fiscal 2014:

 

 

 

 

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Item 6.  SELECTED FINANCIAL DATA

 

 

 

 

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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Results of Operations

 

The following table sets forth certain income and expense items as a percentage of net sales:

 

 

 

The following discussion should be read in conjunction with the Selected Financial Data and the Consolidated Financial Statements and the related notes contained elsewhere in this report.

 

Forward-Looking Statements

 

This annual report contains statements concerning the Company’s expectations, plans, objectives, future financial performance and other statements that are not historical facts. These statements may be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In most cases, the reader can identify forward-looking statements by words such as “anticipate,” “estimate,” “forecast,” “expect,” “believe,” “should,” “could,” “would,” “plan,” “may,” or other similar words. Forward-looking statements contained in this annual report, including elsewhere in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are based on current expectations and our actual results may differ materially from those projected in any forward-looking statements.  In addition, the Company participates in an industry that is subject to rapidly changing conditions and there are numerous factors that could cause the Company to experience a decline in sales and/or earnings or deterioration in financial condition.  Factors that could cause actual results to differ materially from those in forward-looking statements made in this report include but are not limited to:

 

 

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Additional information concerning the factors that could cause actual results to differ materially from those in forward-looking statements is contained in this annual report, including elsewhere in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and under Item 1A. “Risk Factors,” and Item 7A. “Quantitative and Qualitative Disclosures about Market Risk.”  While the Company believes that these risks are manageable and will not adversely impact the long-term performance of the Company, these risks could, under certain circumstances, have a material adverse impact on its operating results and financial condition.

 

Any forward-looking statement that the Company makes speaks only as of the date of this annual report.  The Company undertakes no obligation to publicly update or revise any forward-looking statements or cautionary factors, as a result of new information, future events or otherwise, except as required by law.

 

Overview

 

American Woodmark Corporation manufactures and distributes kitchen cabinets and vanities for the remodeling and new home construction markets. Its products are sold on a national basis directly to home centers, major builders and home manufacturers and through a network of independent dealers and distributors. At April 30, 2014, the Company operated 9 manufacturing facilities and 9 service centers across the country. 

 

During the Company’s fiscal year that ended on April 30, 2014 (fiscal 2014), the Company continued to experience improving housing market conditions during the first half of fiscal 2014 and generally flat market conditions during the second half of fiscal 2014 as the recovery from the housing market downturn that began in 2007 stalled.  

 

A number of positive factors evidenced the improving housing market, including:

 

 

 

 

 

 

 

Despite these positive factors, the Company is still faced with a stagnant remodeling market and the Company’s largest remodeling customers and competitors continued to utilize sales promotions in the Company’s product category during fiscal 2014 to boost sales.  The Company strives to maintain its promotional levels in line with market activity, with a goal of remaining competitive. The Company experienced promotional levels during fiscal 2014 that were slightly lower than those experienced in its prior fiscal year. The Company’s remodeling sales were relatively flat during fiscal 2014 in a remodeling market that appears to have improved slightly.    

 

The Company increased its net sales by 15% during fiscal 2014.  The Company realized strong sales gains in its new construction channel during fiscal 2014, where sales increased by more than 30%, significantly outpacing the improvement in single-family housing starts. Management believes this result indicates the Company realized market share gains in the new construction sales channel during fiscal 2014.

 

During the third quarter of fiscal 2012, the Company announced several initiatives designed to reduce its cost base (the 2012 Restructuring), including the permanent closure of two manufacturing plants, the decision to sell a previously closed manufacturing facility, and the realignment of its retirement program, including the freezing of its pension plans.  All of these initiatives were completed either prior to or just after the beginning of the Company’s

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fiscal 2013, and restructuring charges related to these actions have been reflected in the Company’s results for fiscal years 2014 and 2013.  

 

The Company recorded restructuring charges of $1.4 million (pre-tax) and $0.9 million (after-tax) during fiscal 2013 and $(0.2) million (pre-tax) and $(0.1) million (after-tax) during fiscal 2014 in connection with these initiatives.  Because the bulk of these restructuring efforts have been completed, the Company expects that its future out-of-pocket costs will be nominal. The Company sold a previously closed plant during fiscal 2013 and another previously closed plant during fiscal 2014 and continues to include in “Other Assets” an aggregate $1.0 million book value for the remaining plant held for sale that was included in the 2012 Restructuring.

 

Gross margin for fiscal 2014 was 17.1%, improved from 16.3% in fiscal 2013.  The increase in the Company’s gross margin rate was driven by the beneficial impact of increased sales volume, favorable sales mix and efficiencies in freight, labor and overhead, which more than offset the impact of rising materials costs. 

 

The Company regularly considers the need for a valuation allowance against its deferred tax assets.  The Company had a history of profitable operations for 16 consecutive years, from 1994 to 2009, followed by losses that coincided with the industry downturn from 2010 to 2012.  As of April 30, 2014, the Company had total deferred tax assets of $29.9 million, down from $39.2 million at April 30, 2013.  Growth in the Company’s deferred tax assets in recent fiscal years prior to fiscal 2013 resulted primarily from growth in its defined benefit pension liabilities and the impact of its recent losses prior to fiscal 2013.  The Company earned sufficient net income during fiscal 2013 to fully utilize its Federal net operating loss carryforward. To fully realize its remaining net deferred tax assets, the Company will need to, among other things, substantially reduce its unfunded pension obligation of $41.5 million at April 30, 2014.  The Company took definitive actions when it froze its pension plans as part of the 2012 Restructuring to enhance the probability that this objective is achieved in the future.

 

The Company resumed the funding of its pension plans during fiscal year 2012, and expects to continue funding these plans for the foreseeable future, which will reduce both its unfunded pension plan obligation and its deferred tax asset. These actions, coupled with the recent improvement in the U.S. housing market and the Company’s continued ability to grow its sales at a faster rate than its competitors, have enabled the Company to generate net income and reduce its deferred tax assets and unfunded pension obligation during fiscal 2013 and 2014.  The Company believes that the positive evidence of the housing industry improvement, coupled with the benefits from the Company’s successful restructuring and continued market share gains have already driven a return to profitability that is expected to continue, and that the combined impact of these positive factors outweighs the negative factor of the Company’s previous losses.  Accordingly, Management has concluded it is more likely than not that the Company will realize its deferred tax assets.

 

The Company also regularly assesses its long-lived assets to determine if any impairment has occurred.  The Company has concluded that none of the long-lived assets pertaining to its 9 manufacturing plants or any of its other long-lived assets were impaired as of April 30, 2014. 

 

Results of Operations

 

 

Net Sales

 

Net sales were $726.5 million in fiscal 2014, an increase of $96.1 million, or 15%, compared with fiscal 2013.  Overall unit volume for fiscal 2014 was 10% higher than in fiscal 2013, which was driven primarily by the

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Company’s increased new construction volume. Average revenue per unit increased 5% in fiscal 2014, driven by improvements in the Company’s sales mix and pricing.

 

Net sales for fiscal 2013 increased 22% to $630.4 million from $515.8 million in fiscal 2012.  Overall unit volume for fiscal 2013 was 17% higher than in fiscal 2012, which management believes was driven primarily by the Company’s increased market share.  Average revenue per unit increased 4% during fiscal 2013, driven primarily by improvements in product mix.

 

Gross Profit

 

Gross profit as a percentage of sales increased to 17.1% in fiscal 2014 as compared with 16.3% in fiscal 2013. The improvement in gross profit margin was due primarily to the beneficial impact of higher sales volume and improved labor efficiency.  This favorability was partially offset by an increase in material costs.   Specific changes and additional information included:

 

 

 

 

 

During fiscal 2013, the Company’s gross profit increased as a percentage of net sales to 16.3% from 12.9% in fiscal 2012.  The improvement in gross profit margin was due primarily to the beneficial impact of higher sales volume and labor and overhead cost savings associated with the Company’s two plant closures in April and May of 2012.  This favorability was partially offset by an increase in material costs.   Specific changes and additional information included:

 

 

 

 

Selling and Marketing Expenses

 

Selling and marketing expenses in fiscal 2014 were 8.2% of net sales, compared with 9.1% of net sales in fiscal 2013.  Selling and marketing costs increased by 4% despite a 15% increase in net sales.  The improvement in sales and marketing costs in relation to net sales was due to reduced spending on product launch costs, which were offset in part by increased sales compensation and staffing costs related to the Company’s increased sales levels.

 

Selling and marketing expenses were 9.1% of net sales in fiscal 2013 compared with 11.3% in fiscal 2012. The improvement in sales and marketing costs in relation to net sales was due to reduced spending on product launch costs and cost reductions related to the Company’s retirement plan changes, which were offset in part by increased sales compensation and staffing costs related to the Company’s increased sales levels.

 

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General and Administrative Expenses

 

General and administrative expenses increased by $3.3 million or 12% during fiscal 2014. The increase in cost was related to increased pay-for-performance compensation and one-time personnel related costs.  However, general and administrative costs declined to 4.3% of net sales in fiscal 2014 compared with 4.4% of net sales in fiscal 2013.

 

General and administrative expenses in fiscal 2013 increased by $2.2 million, or 9%, compared with fiscal 2012 and represented 4.4% of net sales, compared with 4.9% of net sales for fiscal 2012. The increase in cost was related to increased pay-for-performance compensation.

 

Effective Income Tax Rates

 

The Company generated pre-tax income of $33.7 million during fiscal 2014.  The Company’s effective tax rate decreased from 41.7% in fiscal 2013 to 39.2% in fiscal 2014.  The lower effective tax rate was the result of the Company operating at a higher net income than the prior year period and more favorable permanent tax differences.

 

Outlook for Fiscal 2015

 

The Company tracks several metrics, including but not limited to housing starts, existing home sales, mortgage interest rates, new jobs growth, GDP growth and consumer confidence, which it believes are leading indicators of overall demand for kitchen and bath cabinetry. The Company believes that housing prices will continue to improve, driven by employment growth and a resumption of growth in new household formation. However, the Company expects that while the cabinet remodeling market will show modest improvement during fiscal 2015 it will continue to be below historical averages.

 

The Company expects that industry-wide cabinet remodeling sales will continue to be challenged until economic trends remain consistently favorable.  Growth is expected at roughly a mid-single digit rate during the Company’s fiscal 2015. The Company expects that its home center market share will be relatively stable in fiscal 2015 and it will continue to gain market share in its growing dealer business. This combination is expected to result in remodeling sales growth that reflects the market.

 

The Company believes, based on available information, that new construction starts will grow double digit during its fiscal 2015 with stronger growth projected in the second half of the year. The Company’s new construction sales growth outperformed the new construction market during fiscal 2014, and expects that it will again outperform the new construction market during fiscal 2015 but by a lesser rate than fiscal 2014, as its comparable prior year sales levels become more challenging.

 

Inclusive of the potential for modest sales mix and pricing improvements, the Company expects that it will grow its total sales at a mid-teen rate in fiscal 2015. The Company experienced material inflation throughout fiscal 2014 as well as negative impacts in the third and fourth quarter from our decision to retain crewing and infrastructure to support our new construction business.  Although material inflation will continue in fiscal 2015, the Company expects that its gross margin rate and net income for fiscal 2015 will improve compared with its fiscal 2014 performance.

 

The Company had gross outlays for capital expenditures and customer display units of $11.4 million during fiscal 2014, and plans to increase its base spending level during fiscal 2015. However, the Company is undertaking a multi-year review of its manufacturing capacity and capital expenditure plans which could cause its capital expenditures to exceed this base level.

 

Additional risks and uncertainties that could affect the Company’s results of operations and financial condition are discussed elsewhere in this annual report, including under “Forward-Looking Statements,” and elsewhere in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as under Item 1A. “Risk Factors” and Item 7A. “Quantitative and Qualitative Disclosures about Market Risk.”

 

Liquidity and Capital Resources

 

The Company’s cash and cash equivalents totaled $135.7 million at April 30, 2014, which represented an increase of $38.7 million from April 30, 2013.  Total debt was $21.6 million at April 30, 2014, $3.1 million lower than the prior fiscal year and long-term debt, excluding current maturities, to capital was 9.7% at April 30, 2014, down from 13.9% at April 30, 2013.

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The Company’s main source of liquidity is its cash and cash equivalents on hand and cash generated from its operating activities.  The Company also has a $35 million secured revolving credit facility with Wells Fargo Bank, N.A., which expires on December 31, 2015.  This facility had an available borrowing base of $25 million at April 30, 2014.    

 

OPERATING ACTIVITIES

 

Cash provided by operating activities in fiscal 2014 was $40.5 million, compared with $24.5 million in fiscal 2013. The $16.0 million improvement was primarily attributable to the Company’s $10.7 million improvement in net income and a $3.5 million decrease in cash used for the Company’s working capital investment in inventory and customer receivables.

 

Cash provided by operating activities in fiscal 2013 was $24.5 million, compared with $16.1 million in fiscal 2012.  The $8.4 million improvement was primarily attributable to the Company’s $22.9 million improvement in net income and reduction in asset impairments related to the 2012 Restructuring. This improvement was offset in part by a $13.6 million net working capital  investment in the Company’s operating assets and liabilities to fund growth and increased contributions to its pension plans of $2.0 million.

 

INVESTING ACTIVITIES

 

The Company’s investing activities primarily consist of capital expenditures and investments in promotional displays. Net cash used by investing activities in fiscal 2014 was $9.6 million, compared with $6.1 million in fiscal 2013 and $9.9 million in fiscal 2012. Investments in property, plant and equipment for fiscal 2014 were $7.9 million, compared with $8.9 million in fiscal 2013 and $6.7 million in fiscal 2012. Investments in promotional displays were $3.5 million in fiscal 2014, compared with $4.8 million in fiscal 2013 and $3.3 million in fiscal 2012. The levels of investment in property, plant and equipment and promotional displays decreased during fiscal 2014 primarily due to a decrease in the enhancements made to machinery and equipment during the fiscal year and a decrease in the number of display units deployed with customers in fiscal 2014. 

 

During fiscal 2014, the Company’s increased net cash used for investing activities was driven by a $5.7 million decrease in proceeds from the sale of assets from closed plants and insurance proceeds compared to the prior year, offset by the aggregate $2.2 million decrease in outflows for capital expenditures and promotional displays.

 

The Company generated positive free cash flow (defined as cash provided by operating activities less cash used for investing activities) of $30.9 million during fiscal 2014, compared with $18.4 million in fiscal 2013 and $6.1 million in fiscal 2012. The increase in fiscal 2014 was driven by the net improvements in cash provided by operating activities, which more than offset the increased net outflows used for investing activities. The increase in fiscal 2013 was driven by the net improvements in both cash provided by operating activities and decreased net outflows used for investing activities.

 

FINANCING ACTIVITIES

 

The Company realized a net inflow of $7.8 million from financing activities in fiscal 2014, compared with $11.9 million in fiscal 2013, and $5.1 million in fiscal 2012.  Reductions in the amount of restricted cash previously required under the Company’s credit facility drove inflows of approximately $7 million in both fiscal 2013 and 2012. Additional proceeds of $15.3 million and $5.9 million, respectively, were generated during fiscal 2014 and 2013 from the exercise of stock options. During fiscal 2014 $4.5 million was used to repay long-term debt, compared with approximately $1 million in both fiscal 2013 and 2012, while fiscal 2012 was further impacted by dividend payments to shareholders of $1.3 million.    The Company elected to suspend its quarterly dividend during fiscal 2012.

 

The Company ended fiscal 2014 with a record level of nearly $136 million in cash and cash equivalents. Under a stock repurchase authorization approved by its Board of Directors on November 21, 2013, the Company is authorized to purchase up to $10 million of the Company’s common shares.  Repurchases may be made from time to time through December 31, 2014 at prices and on terms the Company deems appropriate.  At April 30, 2014, approximately $6.9 million remained authorized by the Company’s Board of Directors to repurchase shares of the Company’s common stock.  The Company purchased a total of 100,000 shares of its common stock, for $3.1 million, during fiscal 2014. The Company continues to evaluate its cash on hand and prospects for future cash generation, and compare these against its plans for future capital expenditures. Although the evaluation of its future capital expenditures is ongoing, the Company expects that it will make repurchases of its common stock from time

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to time during fiscal 2015 subject to the Company’s financial condition, capital requirements, results of operations and any other factors then deemed relevant.

 

The Company can borrow up to $35 million under the Wells Fargo credit facility, subject to a maximum borrowing base equal to 75% of eligible accounts receivable, 50% of eligible pre bill reserves and up to $20 million for equipment value (each as defined in the agreement) less any outstanding loan balance.  At April 30, 2014, $10 million of loans and $5.3 million of letters of credit were outstanding under the Wells Fargo facility, and the Company had additional borrowing base availability of $25.0 million.  

 

The Company’s outstanding indebtedness and other obligations to Wells Fargo are secured by substantially all of the Company’s assets.  Any outstanding loan balance bears interest at the London Interbank Offered Rate (LIBOR) (0.25% at April 30, 2014) plus 2.37%.  Under the terms of the revolving credit facility, the Company must: (1) maintain at the end of each fiscal quarter a ratio of total liabilities to tangible net worth of not greater than 1.4 to 1.0; (2) maintain at the end of each fiscal quarter a ratio of cash flow to fixed charges of not less than 1.25 to 1.0 measured on a rolling four-quarter basis; and (3) comply with other customary affirmative and negative covenants.

 

The Company was in compliance with all covenants specified in the amended credit facility as of April 30, 2014, including as follows: (1) the Company’s ratio of total liabilities to tangible net worth at April 30, 2014 was 0.73 to 1.0; and (2) cash flow to fixed charges for its most recent four quarters was 3.43 to 1.0. 

 

The revolving credit facility does not limit the Company’s ability to pay dividends or repurchase its common stock as long as the Company is in compliance with these covenants. 

 

Cash flow from operations combined with accumulated cash and cash equivalents on hand are expected to be more than sufficient to support forecasted working capital requirements, service existing debt obligations and fund capital expenditures for fiscal 2015.

 

The timing of the Company’s contractual obligations as of April 30, 2014 is summarized in the table below:

 

 

1 Interest commitments under interest bearing debt consist of interest under the Company’s primary loan agreement and capitalized lease agreements. Amounts outstanding under the Company’s revolving credit facility, $10 million at April 30, 2014, bear a variable interest rate determined by the London Interbank Offered Rate (LIBOR) plus 2.37%. Interest under the Company’s capitalized lease agreements is fixed at rates between 2% and 6.5%.  Interest commitments under interest bearing debt for the Company’s revolving credit facility are at LIBOR plus the spread as of April 30, 2014, throughout the remaining term of the facility.

 

2 The estimated cost of the Company’s two defined benefit pension plans is determined annually based upon the discount rate and other assumptions at fiscal year end. Future pension funding contributions beyond fiscal 2020 have not been determined at this time.

 

SEASONALITY

 

The Company’s business has historically been subjected to seasonal influences, with higher sales typically realized in the second and fourth fiscal quarters.

 

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For additional discussion of risks that could affect the Company and its business, see “Forward-Looking Statements” above, as well as Item 1A. “Risk Factors” and Item 7A. “Quantitative and Qualitative Disclosures About Market Risk.”    

 

OFF-BALANCE SHEET ARRANGEMENTS

 

As of April 30, 2014 and 2013, the Company had no off-balance sheet arrangements.

 

CRITICAL ACCOUNTING POLICIES

 

Management has chosen accounting policies that are necessary to give reasonable assurance that the Company’s operational results and financial position are accurately and fairly reported. The significant accounting policies of the Company are disclosed in Note A to the Consolidated Financial Statements included in this annual report. The following discussion addresses the accounting policies that management believes have the greatest potential impact on the presentation of the financial condition and operating results of the Company for the periods being reported and that require the most judgment.

 

Management regularly reviews these critical accounting policies and estimates with the Audit Committee of the Board of Directors.

 

Revenue Recognition.  The Company utilizes signed sales agreements that provide for transfer of title to the customer upon delivery. The Company must estimate the amount of sales that have been transferred to third-party carriers but not delivered to customers. The estimate is calculated using a lag factor determined by analyzing the actual difference between shipment date and delivery date of orders over the past 12 months. Revenue is only recognized on those shipments which the Company believes have been delivered to the customer. 

 

The Company recognizes revenue based on the invoice price less allowances for sales returns, cash discounts and other deductions as required under U.S. generally accepted accounting principles (GAAP). Collection is reasonably assured as determined through an analysis of accounts receivable data, including historical product returns and the evaluation of each customer’s ability to pay. Allowances for sales returns are based on the historical relationship between shipments and returns. The Company believes that its historical experience is an accurate reflection of future returns.

 

Self Insurance.  The Company is self-insured for certain costs related to employee medical coverage and workers’ compensation liability. 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 all factors related to employee medical coverage and workers’ compensation are an accurate reflection of the liability as of the date of the balance sheet.

 

Pensions.  The Company has two non-contributory defined benefit pension plans covering many of the Company’s employees hired prior to April 30, 2012.

 

Effective April 30, 2012, the Company froze all future benefit accruals under the Company’s hourly and salaried defined benefit pension plans.

 

The estimated expense, benefits and pension obligations of these plans are determined using various assumptions. The most significant assumptions are the long-term expected rate of return on plan assets and the discount rate used to determine the present value of the pension obligations. In fiscal 2014 and 2013, the Company determined the discount rate by referencing the Aon Hewitt AA Bond Universe Yield Curve. The Company believes that using a yield curve approach accurately reflects changes in the present value of liabilities over time since each cash flow is discounted at the rate at which it could effectively be settled. The long-term expected rate of return on plan assets reflects the current mix of the plan assets invested in equities and bonds.

 

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The following is a summary of the potential impact of a hypothetical 1% change in actuarial assumptions for the discount rate, expected return on plan assets and consumer price index:

 

 

Pension expense for fiscal 2014 and the assumptions used in that calculation are presented in Note H of the Consolidated Financial Statements.  At April 30, 2014, the discount rate was 4.56% compared with 4.21% at April 30, 2013. The expected return on plan assets was 7.5% at both April 30, 2014, and April 30, 2013. The rate of compensation increase is not applicable for periods beyond April 30, 2012 because the Company froze its pension plans as of that date.

 

The projected performance of the Company’s pension plans is largely dependent on the assumptions used to measure the obligations of the plans and to estimate future performance of the plans’ invested assets. Over the past two measurement periods, the most material deviations between results based on assumptions and the actual plan performance have resulted from changes to the discount rate used to measure the plans’ benefit obligations and the actual return on plan assets.  Accounting guidelines require the discount rate to be set to a current market rate at each annual measurement date. From the fiscal 2012 to fiscal 2013 measurement dates, the discount rate decreased from 4.66% at April 30, 2012 to 4.21% at April 30, 2013, which caused an actuarial loss of $10.8 million.  From the fiscal 2013 to fiscal 2014 measurement dates, the discount rate increased from 4.21% to 4.56% which caused an actuarial gain of $7.6 million.

 

The Company strives to balance expected long-term returns and short-term volatility of pension plan assets. Favorable and unfavorable differences between the assumed and actual returns on plan assets are generally amortized over a period no longer than the average life expectancy of the plans’ active participants. The actual rates of return on plan assets realized, net of investment manager fees, were 9.4%, 10.2% and 3.1% for fiscal 2014, 2013 and 2012, respectively.

 

The fair value of plan assets at April 30, 2014 was $102.6 million compared with $95.7 million at April 30, 2013. The Company’s projected benefit obligation exceeded plan assets by $41.5 million in fiscal 2014 and by $53.7 million in fiscal 2013. The $12.2 million decrease in the Company’s net under-funded position during fiscal 2014 was primarily driven by the Company’s $7.6 million actuarial gains, greater than expected return on plan assets and Company contributions.  The Company expects its pension expense to decrease from $0.2 million in fiscal 2014 to $(0.3) million in fiscal 2015, due primarily to the increase in assets due to investment returns and Company contributions.  The Company expects to contribute $4.3 million to its pension plans in fiscal 2015, which represents required funding.  The Company made contributions of $2.3 million to its pension plans in fiscal 2014. 

 

Valuation of Deferred Tax Assets.  The Company regularly considers the need for a valuation allowance against its deferred tax assets.  Based upon the Company’s analysis at April 30, 2014 and 2013, the Company determined in each case that a valuation allowance was not required.  The Company considered all available evidence, both positive and negative, in determining the need for a valuation allowance.  Based upon this analysis, management determined that it is more likely than not that the Company’s deferred tax assets will be realized through expected future income and the reversal of taxable temporary differences.  The Company will continue to update this analysis on a periodic basis and changes in expectations about future income or the timing of the reversal of taxable temporary differences could cause the Company to record a valuation allowance in a future period. 

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-02, “Comprehensive Income (Topic 220): Reporting Amounts Reclassified Out of Accumulated Other Comprehensive Income,” which requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component.  In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income if the amount reclassified is

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required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period.  The ASU does not change the current requirements for reporting net income or other comprehensive income in financial statements.  The Company adopted this guidance effective May 1, 2013 with no significant impact on the Company’s results of operations or financial position.

 

Item 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The costs of the Company’s products are subject to inflationary pressures and commodity price fluctuations.  The Company has generally been able, over time, to recover the effects of inflation and commodity price fluctuations through sales price increases.

 

On April 30, 2014, the Company had no material exposure to changes in interest rates for its debt agreements.

 

The Company does not currently use commodity or interest rate derivatives or similar financial instruments to manage its commodity price or interest rate risks.

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Item 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

 

CONSOLIDATED BALANCE SHEETS

 

 

 

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CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

 

 

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

 

 

 

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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

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CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note A -- Summary of Significant Accounting Policies

 

The Company manufactures and distributes kitchen cabinets and vanities for the remodeling and new home construction markets. The Company's products are sold across the United States through a network of independent dealers and distributors and directly to home centers and major builders.

 

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 subsidiary. Significant inter-company accounts and transactions have been eliminated in consolidation.

 

Revenue Recognition:  The Company recognizes revenue when product is delivered to the customer and title has passed. Revenue is based on invoice price less allowances for sales returns, cash discounts and other deductions.

 

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 2014, 2013 and 2012 were $30.4 million, $36.5 million and $37.4 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. Cash equivalents were $38.9 million at both April 30, 2014 and 2013.

 

Inventories:  Inventories are stated at lower of cost or market. Inventory costs are determined by the last-in, first-out (LIFO) method.

 

The LIFO cost reserve is determined in the aggregate for inventory and is applied as a reduction to inventories determined on the first-in, first-out method (FIFO). 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 10 years for machinery and equipment. Assets under capital 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 2014, 2013 and 2012, the Company concluded no impairment existed, except for impairments related to restructuring activities.

 

Promotional Displays:  The Company invests in promotional displays in retail stores to demonstrate product features, product and quality specifications and 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 30 to 36 months (the estimated period of benefit). Promotional display amortization expense for fiscal years 2014, 2013 and 2012 was $3.7 million, $4.0 million and $5.6 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.

 

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Pensions:  The Company has two non-contributory defined benefit pension plans covering many of the Company’s employees hired before April 30, 2012.  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. 

 

Recent Accounting Pronouncements:  In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-02, “Comprehensive Income (Topic 220): Reporting Amounts Reclassified Out of Accumulated Other Comprehensive Income,” which requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component.  In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period.  The ASU does not change the current requirements for reporting net income or other comprehensive income in financial statements.  The Company adopted this guidance effective May 1, 2013 with no significant impact on the Company’s results of operations or financial position.

 

Use of Estimates:  The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles 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.

 

Reclassifications:  Certain reclassifications have been made to prior period balances to conform to the current year presentation, including between components of property, plant and equipment.

 

Note B -- Customer Receivables

 

The components of customer receivables were:

 

 

 

 

 

 

Note C -- Inventories

 

The components of inventories were:

 

 

 

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There was no liquidation of LIFO based inventories in fiscal 2014 and 2013 to impact net income.  After tax losses were impacted by $125,000 in fiscal year 2012 as a result of liquidation of LIFO based inventories.

 

Note D -- Property, Plant and Equipment

 

The components of property, plant and equipment were:

 

 

 

 

Amortization and depreciation expense on property, plant and equipment amounted to $9.5 million, $9.2 million and $16.8 million in fiscal years 2014, 2013 and 2012, respectively.  Accumulated amortization on capital leases included in the above table amounted to $27.5 million and $26.6 million as of April 30, 2014 and 2013, respectively.

 

Note E -- Loans Payable and Long-Term Debt

 

Maturities of long-term debt are as follows:

 

 

 

The Company’s primary loan agreement is a $35 million secured revolving credit facility which expires on December 31, 2015 with Wells Fargo Bank, N.A. (Wells Fargo).  At April 30, 2014 and 2013, $10 million of loans were outstanding under this facility, and the Company had additional borrowing base availability of $25.0 million.  The Company incurs a fee for amounts not used under the revolving credit facility.  Fees paid by the Company related to non-usage of its current and former credit facilities have been included in interest expense and were $62,730, $61,000 and $54,158 for fiscal years 2014, 2013 and 2012, respectively. 

 

The Company’s outstanding indebtedness and other obligations to Wells Fargo are secured by substantially all of the

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Company’s assets.  The Company can borrow under the revolving credit facility up to the lesser of $35 million or the maximum borrowing base (which equals 75% of eligible accounts receivable, 50% of eligible pre bill reserves and up to $20 million for equipment value, each as defined in the agreement) less any outstanding loan balance.  Any outstanding loan balance bears interest at the London Interbank Offered Rate (LIBOR) (0.25% at April 30, 2014) plus 2.37%. Under the terms of the revolving credit facility, the Company must: (1) maintain at the end of each fiscal quarter a ratio of total liabilities to tangible net worth of not greater than 1.4 to 1.0; (2) maintain at the end of each fiscal quarter a ratio of cash flow to fixed charges of not less than 1.25 to 1.0 measured on a rolling four-quarter basis; and (3) comply with other customary affirmative and negative covenants. 

 

The Company was in compliance with all covenants specified in the amended revolving credit facility as of April 30, 2014,  including as follows: (1) the Company’s ratio of total liabilities to tangible net worth at April 30, 2014 was 0.73 to 1.0; and (2) cash flow to fixed charges for its most recent four quarters was 3.43 to 1.0.

 

The revolving credit facility does not limit the Company’s ability to pay dividends or repurchase its common stock as long as the Company is in compliance with these covenants.    

 

In 2009, the Company entered into a loan agreement with the Board of County Commissioners of Garrett County as part of the Company’s capital investment in land located in Garrett County, Maryland.  This loan agreement is secured by a Deed of Trust on the property and bears interest at a fixed rate of 3%.  The agreement defers principal and interest during the term of the obligation and forgives any outstanding balance at December 31, 2019, if the Company complies with certain employment levels.  The outstanding balance as of April 30, 2014 and 2013 was $1,290,000.

 

In 2005, the Company entered into two separate loan agreements with the Maryland Economic Development Corporation and the County Commissioners of Allegany County as part of the Company’s capital investment and operations at the Allegany County, Maryland site.  These loan agreements were amended in 2013 and 2008.  The aggregate balance of these loan agreements was $2,190,000 as of April 30, 2014 and 2013.  The loan agreements expire at December 31, 2018 and bear interest at a fixed rate of 3% per annum.  These loan agreements are secured by mortgages on the manufacturing facility constructed in Allegany County, Maryland.  These loan agreements defer principal and interest during the term of the obligation and forgive any outstanding balance at December 31, 2018, if the Company complies with certain employment levels at the facility. 

 

In 2002, the Company entered into a loan agreement with the Perry, Harlan, Leslie, Breathitt Regional Industrial Authority (a.k.a. Coalfields Regional Industrial Authority, Inc.) as part of the Company’s capital investment and operations at the Hazard, Kentucky site. This debt facility was a $6 million term loan, which was scheduled to expire November 13, 2017,  and bore interest at a fixed rate of 2% per annum. It was secured by a mortgage on the manufacturing facility constructed in Hazard, Kentucky. The loan required annual debt service payments consisting of principal and interest with a fixed balloon payment of $1.6 million at loan expiration. This loan was paid off during the fourth quarter of fiscal 2014.  The outstanding amount owed as of April 30, 2013 was  $3,530,000.

 

From 2012 through 2014, the Company entered into a total of ten capitalized lease agreements in the aggregate amount of $1,526,000 with First American Financial Bancorp related to financing computer equipment.  Each lease has a term of 48 months and an interest rate of 6.5%.  The leases require quarterly rental payments.  The aggregate outstanding amount under all of these leases as of April 30, 2014 and 2013 was $1,163,000 and $545,000, respectively.

 

In 2014 and 2013, the Company entered into a total of nine capitalized lease agreements in the aggregate amount of $1,034,000 with e-Plus Group related to financing computer equipment.  Each lease has a term of 51 months and an interest rate of 6.5%.  The leases require monthly rental payments.  The aggregate outstanding amount under all of these leases as of April 30, 2014 and 2013 was $825,000 and $529,000, respectively.  

 

In 2004, the Company entered into a lease agreement with the West Virginia Economic Development Authority as part of the Company’s capital investment and operations at the South Branch plant located in Hardy County, West Virginia. This capital lease agreement is a $10 million term obligation, which expires June 30, 2024, bearing interest at a fixed rate of 2% per annum. The lease requires monthly rental payments.  The outstanding amounts owed as of April 30, 2014 and 2013 were $6,131,000 and $6,665,000, respectively.

 

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 a  loan

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agreement and the capital lease arrangements. The Company was in compliance with all covenants contained in its loan agreements and capital leases at April 30, 2014.

 

Interest paid under the Company’s loan agreements and capital leases during fiscal years 2014, 2013 and 2012 was $669,000, $576,000 and $453,000, respectively.

 

Note F -- Earnings (Loss) Per Share

 

The following table summarizes the computations of basic and diluted earnings (loss) per share:

 

 

 

 

Potentially dilutive shares of 0.1 million,  1.0 million and 1.8 million issuable under the Company’s stock incentive plans have been excluded from the calculation of net earnings (loss) per share for the fiscal years ended April 30, 2014, 2013 and 2012, respectively, as the effect would be anti-dilutive.

 

Note G – Stock-Based Compensation

 

The Company has two types of stock-based compensation awards in effect for its employees and directors. The Company has issued stock options since 1986 and restricted stock units (RSUs) since fiscal 2010. Total compensation expense related to stock-based awards for the fiscal years ended April 30, 2014, 2013 and 2012 was $3.3 million, $3.5 million and $3.4 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, 2014, the Company had stock option and RSU awards outstanding under four different plans: (1) 1999 stock option plan for employees; (2) second amended and restated 2004 stock incentive plan for employees; (3) 2006 non-employee directors equity ownership plan; and (4) 2011 non-employee directors equity ownership plan.  As of April 30, 2014, there were 1,075,350 shares of common stock available for future stock-based compensation awards under the Company’s stock incentive plans.

 

Methodology Assumptions

 

For purposes of valuing stock option grants, the Company has identified one employee group and one non-employee director group, based upon observed option exercise patterns. The Company uses the Black-Scholes option-pricing model to value the Company’s stock options for each of the groups. Using this option-pricing model, the fair value of each stock option award is estimated on the date of grant. The fair value of the Company’s stock option awards is expensed on a straight-line basis over the vesting period of the stock options. The expected volatility assumption is based on the historical volatility of the Company’s stock over a term equal to the expected term of the option granted. The expected term of stock option awards granted is derived from the Company’s historical exercise experience and represents the period of time that stock option awards granted are expected to be outstanding for each of the identified groups. The expected term assumption incorporates the contractual term of an option grant, which is generally ten years for employees and from four to ten years for non-employee directors, as well as the

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vesting period of an award, which is typically three years. 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 expected term of the option granted.

 

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, reduced by the discounted value of future expected dividend payments during the vesting period, since the recipients are not entitled to dividends during the vesting period. 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.

 

The weighted-average assumptions and valuation of the Company’s stock options were as follows:

 

 

 

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 following table presents a summary of the Company’s stock option activity for the fiscal years ended April 30, 2014, 2013 and 2012 (remaining contractual term in years and exercise prices are weighted-averages):

 

 

 

The aggregate intrinsic value in the previous table of the outstanding options on April 30, 2014 represents the total pre-tax intrinsic value (the excess, if any, of the Company’s closing stock price on the last trading day of fiscal 2014 

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over the exercise price, multiplied by the number of in-the-money options) of the shares of the Company’s common stock that would have been received by the option holders had all option holders exercised their options on April 30, 2014. This amount changes based upon the fair market value of the Company’s common stock.  The total fair value of options vested for the fiscal years ended April 30, 2014, 2013 and 2012 was $0.7 million, $1.2 million and $2.4 million, respectively.

 

As of April 30, 2014, there was $0.8 million of total unrecognized compensation expense related to unvested stock options granted under the Company’s stock-based compensation plans. This expense is expected to be recognized over a weighted-average period of 1.7 years.

 

Cash received from option exercises for the fiscal years ended April 30, 2014, 2013 and 2012, was an aggregate of $14.7 million, $5.9 million and $0.0 million, respectively.  The actual tax benefit realized for the tax deduction from option exercises of stock option awards totaled $2,011,000, $729,000 and $3,000 for the fiscal years ended April 30, 2014, 2013 and 2012, respectively.

 

The following table summarizes information about stock options outstanding at April 30, 2014 (remaining lives in years and exercise prices are weighted-averages):

 

 

 

 

 

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 2014, 2013 and 2012.  The PBRSUs granted in fiscal 2014 are earned based on achievement of a number of goals pertaining to the Company’s operational and financial performance during the performance period of fiscal 2014.  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.    

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The following table contains a summary of the Company’s RSU activity for the fiscal years ended April 30, 2014, 2013 and 2012:

 

 

As of April 30, 2014, there was $2.9 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 2.0 years.

 

For the fiscal years ended April 30, 2014, 2013 and 2012 stock-based compensation expense was allocated as follows:

 

 

 

 

Restricted Stock Tracking Units:

 

During fiscal 2014, the Board of Directors of the Company approved grants of 9,486 cash-settled performance-based restricted stock tracking units (RSTUs) and 3,264 cash-settled service-based RSTUs for more junior level employees who previously received RSU grants under the Company’s shareholder approved plan.  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 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.  The RSTUs cliff-vest three years from the grant date.  Since the RSTUs will be settled in cash, the grant date fair value of these awards is recorded as a liability until the date of payment.  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

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Company recognized expense of $78 thousand related to RSTUs for the fiscal year ended April 30, 2014.

 

 

Note H – Employee Benefit and Retirement Plans

 

Employee Stock Ownership Plan

 

In fiscal 1990, the Company instituted the American Woodmark Investment Savings Stock Ownership Plan. Under this 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.

 

Beginning in fiscal 2013, discretionary profit-sharing contributions ranging from 0-5%, based on predetermined net income levels of the Company, may be made annually in the form of Company stock.  Prior to fiscal 2013, profit-sharing contributions in the form of Company stock were 3% of after-tax earnings, calculated on a quarterly basis.  The Company recognized expenses for profit-sharing contributions of $818,000 and $293,000 in fiscal years 2014 and 2013, respectively.  The Company did not make, or recognize any expenses for, discretionary profit-sharing contributions in fiscal 2012.

 

Beginning in fiscal 2013, as part of the realignment of its retirement plans, the Company increased the match on 401(k) contributions in the form of Company stock to 100% of an employee’s annual contribution to the plan up to 4% of base earnings.  Prior to fiscal 2013, the Company matched 401(k) contributions in the form of Company stock at 50% of an employee's annual contribution to the plan up to 4% of base earnings for an effective maximum Company contribution of 2% of base earnings.  The expense for 401(k) matching contributions for this plan was $4,054,000, $2,547,000 and $1,284,000, in fiscal years 2014, 2013 and 2012, respectively.

 

Pension Benefits

 

The Company has two defined benefit pension plans covering many of the Company’s employees hired prior to April 30, 2012. These plans provide 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 hourly and salaried defined benefit pension plans.

 

Included in accumulated other comprehensive loss at April 30, 2014 is $42.6 million ($26.0 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 $0.9 million ($0.5 million net of tax) in net actuarial losses in net periodic pension benefit costs during fiscal 2015.    The Company uses an April 30 measurement date for its benefit plans.

 

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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:

 

 

 

 

The accumulated benefit obligation for both pension plans was $144,142,000 and $149,429,000 at April 30, 2014 and 2013, respectively.

 

 

 

 

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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:

 

 

 

 

 

 

 

In fiscal years 2014, 2013 and 2012, the Company determined the discount rate by referencing the Aon Hewitt AA Bond Universe Yield Curve.  The Company believes that using a yield curve approach accurately reflects changes in the present value of liabilities over time since each cash flow is discounted at the rate at which it could effectively be settled.

 

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 also considered the related historical ten-year average asset returns at April 30, 2014.

 

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 the active participants.

 

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 expects to contribute $4.3 million to its pension plans in fiscal 2015.  The Company made contributions of $2.3 million and $4.9 million to its pension plans in fiscal 2014 and 2013, respectively. 

 

Estimated Future Benefit Payments: The following benefit payments, which reflect expected future service, are expected to be paid:

 

 

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Plan Assets:  Pension assets by major category and the type of fair value measurement as of April 30, 2014 and 2013 are presented in the following tables:

 

 

 

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.

 

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The Company’s pension plans’ weighted-average asset allocations at April 30, 2014 and 2013, by asset category, were as follows:

 

 

 

Within the broad categories outlined in the preceding table, the Company has targeted the following specific allocations as a percentage of total funds invested:  17% Capital Preservation, 33% Bond, 20% Large Capital Growth, 20% Large Capital Value, 6% Small Capital and 4% International.

 

Note I -- Income Taxes

 

Income tax expense was comprised of the following:

 

 

 

 

The Company's effective income tax rate varied from the federal statutory rate as follows:

 

 

 

Income taxes paid were $4,334,000,  $1,219,000 and $229,000 for fiscal years 2014, 2013 and 2012, respectively.

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The significant components of deferred tax assets and liabilities were as follows:

 

 

 

 

The net operating loss carryforward value for April 30, 2014 and 2013 contained in the above table includes amounts pertaining to various state net operating loss carryforwards with various expiration dates.

 

Management believes it is more likely than not that the Company will realize its gross deferred tax assets due to expected future taxable income and the reversal of taxable temporary differences.

 

Note J -- Accounting for Uncertainty in Income Taxes

 

The Company accounts for its income tax uncertainties in accordance with ASC Topic 740, “Income Taxes.”  The Company had no liability relating to uncertain tax positions for the years ended April 30, 2014 and 2013.

 

With minor exceptions, the Company is currently open to audit by tax authorities for tax years ending April 30, 2011 through April 30, 2014.  The Company is currently not under federal audit.

 

Note K -- 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 was not material as of April 30, 2014.  

 

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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:

 

 

 

 

Lease Agreements

 

The Company leases certain office buildings, manufacturing buildings, service centers and equipment. Total rental expenses under operating leases amounted to approximately $8,005,000, $7,378,000 and $7,206,000, in fiscal years 2014, 2013 and 2012, respectively. Minimum rental commitments as of April 30, 2014, under noncancelable leases with terms in excess of one year are as follows:

 

 

 

Related Parties

 

During fiscal 1985, prior to becoming a publicly held corporation, the Company entered into an agreement with a partnership which includes certain former executive officers and current significant shareholders of the Company, including one current member of the Board of Directors of the Company, to lease the Company’s headquarters building which was constructed and is owned by the partnership. The Company has subsequently renewed this lease in accordance with Company policy and procedures which includes approval by the Board of Directors. As of April 30, 2014, the Company is in the fourth year of the latest five-year renewal period, which expires in 2016. Under this agreement, rental expense was $470,000, $461,000 and $460,000, in fiscal years 2014, 2013 and 2012, respectively. Rent during the remaining term of approximately $927,000 (included in the preceding table) is subject to annual increases of 2%  through the remaining term of the lease.

 

Note L -- Credit Concentration

 

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

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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, 2014, the Company's two largest customers, Customers A and B, represented 21.0% and 21.4% of the Company's gross customer receivables, respectively. At April 30, 2013, Customers A and B represented 21.1% and 21.1% of the Company’s gross customer receivables, respectively.

 

The following table summarizes the percentage of sales to the Company's two largest customers for the last three fiscal years:

 

 

 

Note M -- 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 United States Treasury instruments.  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.  The Company has no Level 2 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.

The following table summarizes the fair value of assets that are recorded in the Company’s consolidated financial statements as of April 30, 2014 and 2013 at fair value on a recurring basis:

 

 

 

The fair value measurement of assets held by the Company’s defined benefit pension plans is discussed in Note H.

 

Note N -- Restructuring Charges

 

In the third quarter of fiscal 2012, the Company announced a restructuring initiative (“2012 Restructuring Plan”) that committed to the closing of two of the Company’s manufacturing plants located in Hardy County, West

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Virginia and Hazard, Kentucky, offering its previously idled plant in Tahlequah, Oklahoma for sale, and realigning its retirement program, including freezing the Company’s defined benefit pension plans.  Operations ceased at the Hazard plant in April 2012 and at the Hardy County plant in May 2012.   The 2012 Restructuring Plan was adopted to reduce costs and increase the Company’s capacity utilization rates. 

 

 

In the fourth quarter of fiscal 2009, the Company announced a restructuring plan (“2009 Restructuring Plan”) to close two of its manufacturing plants, located in Berryville, Virginia and Moorefield, West Virginia and suspend operations in a third manufacturing plant located in Tahlequah, Oklahoma.  These actions were completed during the first quarter of fiscal 2010.  These initiatives were intended to increase the Company’s capacity utilization rates and decrease overhead costs.  In addition to these initiatives, the Company made other staffing reductions during the fourth quarter of fiscal 2009.

 

During fiscal years 2014, 2013 and 2012, the Company recognized total pre-tax restructuring charges for both the 2012 Restructuring Plan and the 2009 Restructuring Plan of $(234,000), $1.4 million and $16.3 million, respectively.  The Company recognized recurring operating costs for the facilities closed as part of the 2012 Restructuring Plan of $0.3 million in fiscal 2014.  These costs will continue until the remaining closed plant is sold.

 

The Company has one manufacturing plant classified as held for sale, which was closed in the 2012 Restructuring Plan.  During the fourth quarter of fiscal 2014, the Company sold its closed plant located in Hazard, Kentucky and recognized a gain of $0.3 million on the sale.  The gain was included in restructuring charges on the Company’s statements of operations.  The Company believes that the remaining $1.0 million net book value of the property classified as held for sale is fully recoverable.  This asset is included in Other Assets on the Company’s balance sheet at April 30, 2014.

 

Note O -- Quarterly Financial Data (Unaudited)

 

 

 

 

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Report of Independent Registered Public Accounting Firm

 

The Board of Directors and Shareholders of American Woodmark Corporation:

 

We have audited the accompanying consolidated balance sheets of American Woodmark Corporation and subsidiary (the Company), as of April 30, 2014 and 2013, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for each of the years in the three‑year period ended April 30, 2014. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects the financial position of American Woodmark Corporation and subsidiary as of April 30, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the three year period ended April 30, 2014, in conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of April 30, 2014, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated June 30, 2014 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

/s/ KPMG LLP

 

 

Richmond, Virginia
June 30, 2014

 

 

 

 

 

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Management's Annual Report on Internal Control over Financial Reporting

 

Management has responsibility for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Management has assessed the effectiveness of the Company’s internal control over financial reporting as of April 30, 2014. In making its assessment, Management has utilized the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (1992). Management concluded that based on its assessment, American Woodmark Corporation’s internal control over financial reporting was effective as of April 30, 2014. The Company’s internal control over financial reporting as of April 30, 2014, has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report, which appears in this Annual Report on Form 10-K.