NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A--Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the
three
-month period ended
July 31, 2018
are not necessarily indicative of the results that may be expected for the fiscal year ending
April 30, 2019
. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes in the Company's Annual Report on Form 10-K for the fiscal year ended
April 30, 2018
filed with the U.S. Securities and Exchange Commission (“SEC”).
On December 29, 2017, we completed the acquisition of RSI, a leading manufacturer of kitchen and bath cabinetry and home organization products. For the three-month period ended July 31, 2018, the consolidated results include three months of RSI activity and in the prior year quarter ended July 31, 2017, no RSI activity is included.
Goodwill and Intangible Assets:
Goodwill represents the excess of purchase price over the net amount of identifiable assets acquired and liabilities assumed in a business combination measured at fair value. The Company does not amortize goodwill but evaluates for impairment annually, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
In accordance with accounting standards, when evaluating goodwill, an entity has the option first to assess qualitative factors to determine whether events and circumstances indicate that it is more likely than not that goodwill is impaired. If after such assessment an entity concludes that the asset is not impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the asset using a quantitative impairment test, and if impaired, the associated assets must be written down to fair value. There were
no
impairment charges related to goodwill for the three-month periods ended July 31, 2018 and 2017.
Intangible assets consist of customer relationship intangibles and trademarks. The Company amortizes the cost of intangible assets over their estimated useful lives, which range from 3 to 6 years, unless such lives are deemed indefinite. There were
no
impairment charges related to intangible assets for the three-month periods ended July 31, 2018 and 2017.
Foreign Exchange Forward Contracts:
In the normal course of business, the Company is subject to risk from adverse fluctuations in foreign exchange rates. The Company manages these risks through the use of foreign exchange forward contracts. The Company recognizes its outstanding forward contracts in the consolidated balance sheets at their fair values. The Company does not designate the forward contracts as accounting hedges. The changes in the fair value of the forward contracts are recorded in other income in the consolidated statements of income.
At July 31, 2018, the Company held forward contracts maturing from August 2018 to April 2019 to purchase
309.4 million
Mexican pesos at exchange rates ranging from
19.72
to
20.47
Mexican pesos to one U.S. dollar. An asset of
$0.8 million
is recorded in prepaid expenses and other assets on the consolidated balance sheets.
Reclassifications
: Certain reclassifications have been made to prior period balances to conform to the current year presentation.
Note B--New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2014-09, “Revenue from Contracts with Customers: Topic 606.” ASU 2014-09 supersedes the revenue recognition requirements in “Accounting Standard Codification 605 - Revenue Recognition” and most industry-specific guidance. The standard requires that entities recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. ASU 2014-09 permits the use of either the retrospective or cumulative effect transition method. In August 2015, the FASB issued ASU No. 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date." ASU 2015-14 defers the effective date of ASU 2014-09 by one year to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that period. The Company adopted ASU 2014-09 as of May 1, 2018 and for periods thereafter using the modified retrospective approach, which was applied to all contracts not completed as of May 1, 2018. The cumulative effect of adopting the new revenue
standard was not material. The comparative financial information has not been restated and continues to be reported under the accounting standards in effect for those periods. The adoption of this standard did not have a material impact on the quarter ended July 31, 2018 and the Company does not expect it to have a material impact on revenue or net income on an ongoing basis. See Note O, “Revenue Recognition,” for further information.
In February 2016, the FASB issued ASU 2016-02, which requires lessees to recognize almost all leases on their balance sheet as a “right-of-use” asset and lease liability but recognize related expenses in a manner similar to current accounting. The guidance also eliminates current real estate-specific provisions for all entities. In January 2018, the FASB issued ASU 2018-01, which clarifies the application of the new leases guidance to land easements. In July 2018, the FASB issued ASU 2018-10 and ASU 2018-11, which clarify certain guidance included in ASU 2016-02 and introduces a new optional transition method. The standard is effective for annual periods beginning after December 15, 2018. The Company is evaluating its lease portfolio to assess the impact on its financial statements as well as on its accounting processes, internal controls and disclosures. The Company has not yet determined the impact of adopting the standard.
In March 2017, the FASB issued ASU No. 2017-07, "Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." ASU 2017-07 requires an employer to disaggregate the service cost component from the other components of net benefit (income) cost. The other components of net benefit (income) cost are required to be presented in the income statement separately from the service cost component and outside of operating income. The amendments also allow only the service cost component of net benefit (income) cost to be eligible for capitalization. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017. The amendments in this ASU should be applied (1) retrospectively for the presentation of the service cost component and the other components of net periodic pension (income) cost and net periodic postretirement benefit (income) cost on the income statement, and (2) prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension (income) cost and net periodic postretirement benefit (income) cost in assets. The Company adopted ASU 2017-07 as of May 1, 2018 and for periods thereafter using the retrospective approach. The adoption of this standard resulted in immaterial reclassifications from operating income in prior periods. The Company does not expect the adoption of this standard to have a material effect on our financial statements on an ongoing basis.
Note C-- Acquisition of RSI Home Products, Inc. (the "RSI Acquisition")
On November 30, 2017, American Woodmark, Alliance Merger Sub, Inc. ("Merger Sub"), RSI Home Products, Inc. ("RSI") and Ronald M. Simon, as the RSI stockholder representative, entered into a merger agreement (the "Merger Agreement"), pursuant to which the parties agreed to merge Merger Sub with and into RSI pursuant to the terms and subject to the conditions set forth in the Merger Agreement, with RSI continuing as the surviving corporation and as a wholly owned subsidiary of American Woodmark. On December 29, 2017 (the "Acquisition Date"), the Company consummated the RSI Acquisition pursuant to the terms of the Merger Agreement. As a result of the merger of Merger Sub with and into RSI, Merger Sub’s separate corporate existence ceased, and RSI continued as the surviving corporation and a wholly owned subsidiary of American Woodmark. RSI is a leading manufacturer of kitchen and bath cabinetry and home organization products. The acquisition is expected to enable the Company to make further progress in implementing its business strategy of increasing operational efficiency to drive enhanced profitability, leveraging differentiated service platforms to grow revenue, and continuing to deepen relationships within its existing customer base.
In connection with the RSI Acquisition, on December 29, 2017, the Company entered into a credit agreement (the "Credit Agreement") with a syndicate of lenders and Wells Fargo Bank, National Association ("Wells Fargo"), as administrative agent, providing for a
$100 million
, 5-year revolving loan facility with a
$25 million
sub-facility for the issuance of letters of credit (the “Revolving Facility”), a
$250 million
,
5
-year initial term loan facility (the "Initial Term Loan") and a
$250 million
delayed draw term loan facility (the "Delayed Draw Term Loan" and, together with the Revolving Facility and the Initial Term Loan, the "Credit Facilities") (See Note M--
Loans Payable and Long-Term Debt
for further details). American Woodmark used the full proceeds of the Initial Term Loan and approximately
$50 million
in loans under the Revolving Facility, together with cash on its balance sheet, to fund the cash portion of the RSI Acquisition consideration and its transaction fees and expenses.
At the closing of the RSI Acquisition, American Woodmark assumed approximately
$589 million
(including accrued interest) of RSI’s indebtedness consisting largely of RSI’s 6½% Senior Secured Second Lien Notes due 2023 (the "RSI Notes"). (See Note M--
Loans Payable and Long-Term Debt
).
Preliminary Allocation of Purchase Price to Assets Acquired and Liabilities Assumed
As consideration for the RSI Acquisition, American Woodmark paid total accounting consideration of
$554.2 million
including (i) cash consideration of
$364.4 million
, net of cash acquired, and (ii)
1,457,568
newly issued shares of American Woodmark
common stock valued at
$189.8 million
based on
$130.25
per share, which was the closing stock price on the Acquisition Date. The consideration paid was subject to a working capital adjustment by which the consideration was adjusted as the amount of working capital delivered at the Acquisition Date was less than a target amount. The working capital adjustment has been finalized and the accounting consideration reflects any adjustment to the estimated working capital reflected in the consideration paid at the Acquisition Date.
The Company accounted for the RSI Acquisition as a business combination, which requires the Company to record the assets acquired and liabilities assumed at fair value. The amount by which the purchase price exceeds the fair value of net assets acquired is recorded as goodwill. The Company has obtained the appraisals necessary to assess the fair values of the tangible and intangible assets acquired and liabilities assumed and the amount of goodwill to be recognized as of the Acquisition Date. The amounts recorded for certain assets and liabilities are subject to adjustment as additional information is obtained about the facts and circumstances that existed as of the Acquisition Date. The final determination of the fair values of certain assets and liabilities will be completed within the measurement period of up to one year from the Acquisition Date as permitted under GAAP. The final values may also result in changes to depreciation and amortization expense related to certain assets such as buildings, equipment and intangible assets. Any potential adjustments made are not expected to be material in relation to the preliminary values presented in the table below.
The following table summarizes the allocation of the preliminary purchase price as of the Acquisition Date, which is based on the accounting consideration of
$554.2 million
, to the estimated fair value of assets acquired and liabilities assumed (in thousands):
|
|
|
|
|
|
Goodwill
|
|
$
|
767,914
|
|
Customer relationship intangibles
|
|
|
274,000
|
|
Property, plant and equipment
|
|
|
86,275
|
|
Inventories
|
|
|
66,293
|
|
Customer receivables
|
|
|
54,649
|
|
Income taxes receivable
|
|
|
18,450
|
|
Trademarks
|
|
|
10,000
|
|
Prepaid expenses and other
|
|
|
4,571
|
|
Leasehold interests
|
|
|
151
|
|
Total identifiable assets and goodwill acquired
|
|
|
1,282,303
|
|
|
|
|
|
Debt
|
|
|
602,313
|
|
Deferred income taxes
|
|
|
67,368
|
|
Accrued expenses
|
|
|
30,240
|
|
Accounts payable
|
|
|
25,113
|
|
Notes payable
|
|
|
2,988
|
|
Income taxes payable
|
|
|
49
|
|
Total liabilities assumed
|
|
|
728,071
|
|
|
|
|
|
Total accounting consideration
|
|
$
|
554,232
|
|
The fair value of the assets acquired and liabilities assumed were determined using income, market and cost valuation methodologies. The fair value of debt acquired was determined using Level 1 inputs as quoted prices in active markets for identical liabilities were available. The fair value measurements, aside from debt, were estimated using significant inputs that are not observable in the market and thus represent a Level 3 measurement as defined in Accounting Standards Codification (ASC) 820. The income approach was primarily used to value the customer relationship intangibles and trademarks. The income approach determines value for an asset or liability based on the present value of cash flows projected to be generated over the remaining economic life of the asset or liability being measured. Both the amount and the duration of the cash flows are considered from a market participant perspective. Our estimates of market participant net cash flows considered historical and projected product pricing, operational performance including company specific synergies, product life cycles, material and labor pricing, and other relevant customer, contractual and market factors. The net cash flows are discounted to present value using a discount rate that reflects the relative risk of achieving the cash flow and the time value of money. The market approach is a valuation technique that uses prices and other relevant information generated by market transactions involving identical or
comparable assets, liabilities, or a group of assets or liabilities. The cost approach estimates value by determining the current cost of replacing an asset with another of equivalent economic utility. The cost to replace a given asset reflects the estimated reproduction or replacement cost for the property, less an allowance for loss in value due to depreciation. The cost and market approaches were used to value inventory, while the cost approach was the primary approach used to value property, plant and equipment.
The preliminary purchase price allocation resulted in the recognition of
$767.9 million
of goodwill, which is not expected to be amortizable for tax purposes. The goodwill recognized is attributable to expected revenue synergies generated by the integration of the Company’s products with RSI's, cost synergies resulting from purchasing and manufacturing activities, and intangible assets that do not qualify for separate recognition, such as the assembled workforce of RSI.
Customer receivables were recorded at the contractual amounts due of
$57.1 million
, less an allowance for returns and discounts of
$2.4 million
, and an allowance for doubtful accounts of $0.1 million, which approximates their fair value.
Determining the fair value of assets acquired and liabilities assumed requires the exercise of significant judgment, including the amount and timing of expected future cash flows, long-term growth rates and discount rates. The cash flows employed in the valuation are based on the Company’s best estimates of future sales, earnings and cash flows after considering factors such as general market conditions, expected future customer orders, contracts with suppliers, labor costs, changes in working capital, long term business plans and recent operating performance. Use of different estimates and judgments could yield different results.
Supplemental Pro Forma Financial Information (unaudited)
The following table presents summarized unaudited pro forma financial information as if RSI had been included in the Company’s financial results for the three months ended July 31, 2017:
|
|
|
|
|
|
|
|
Three months ended
|
|
|
July 31,
|
(in thousands)
|
|
2017
|
Net Sales
|
|
$
|
418,854
|
|
Net Income
|
|
$
|
24,865
|
|
Net earnings per share - basic
|
|
$
|
1.40
|
|
Net earnings per share - diluted
|
|
$
|
1.40
|
|
The unaudited supplemental pro forma financial data for the three months ended July 31, 2017 assumes the RSI Acquisition occurred on May 1, 2016 and has been calculated after applying the Company’s accounting policies and adjusting the historical results of RSI with pro forma adjustments, net of a statutory tax rate of
40.4%
. Significant pro forma adjustments include the recognition of additional amortization expense of $6.8 million related to acquired intangible assets (net of historical amortization expense of RSI) and additional net interest expense of $1.1 million related to the
$300.0 million
borrowed under the Credit Agreement to finance the acquisition. Transaction expenses of
$0.3 million
were also excluded from net income.
There were no proforma adjustments for the three months ended July 31, 2018.
The unaudited supplemental pro forma financial information does not reflect the realization of any expected ongoing cost or revenue synergies relating to the integration of the two companies. Further, the pro forma data should not be considered indicative of the results that would have occurred if the RSI Acquisition, related financing, and associated issuance of Senior Notes and repurchase or redemption of the RSI Notes (defined herein) had been actually consummated on May 1, 2016, nor are they indicative of future results.
Note D--Net Earnings Per Share
The following table sets forth the computation of basic and diluted net earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
July 31,
|
(in thousands, except per share amounts)
|
|
2018
|
|
2017
|
Numerator used in basic and diluted net earnings
|
|
|
|
|
per common share:
|
|
|
|
|
Net income
|
|
$
|
24,767
|
|
|
$
|
22,281
|
|
Denominator:
|
|
|
|
|
Denominator for basic net earnings per common
|
|
|
|
|
share - weighted-average shares
|
|
17,534
|
|
|
16,272
|
|
Effect of dilutive securities:
|
|
|
|
|
Stock options and restricted stock units
|
|
85
|
|
|
83
|
|
Denominator for diluted net earnings per common
|
|
|
|
|
share - weighted-average shares and assumed
|
|
|
|
|
conversions
|
|
17,619
|
|
|
16,355
|
|
Net earnings per share
|
|
|
|
|
Basic
|
|
$
|
1.41
|
|
|
$
|
1.37
|
|
Diluted
|
|
$
|
1.41
|
|
|
$
|
1.36
|
|
The Company repurchased a total of
56,700
shares of its common stock during the three-month period ended July 31,
2017
. There were
no
potentially dilutive securities for the three-month periods ended
July 31, 2018
and 2017, which were excluded from the calculation of net earnings per diluted share.
Note E--Stock-Based Compensation
The Company has various stock-based compensation plans. During the three-months ended July 31, 2018, the Board of Directors of the Company approved grants of service-based restricted stock units ("RSUs") and performance-based RSUs to key employees. The employee performance-based RSUs totaled
45,615
units and the employee service-based RSUs totaled
24,595
units. The performance-based RSUs entitle the recipients to receive
one
share of the Company’s common stock per unit granted if applicable performance conditions are met and the recipient remains continuously employed with the Company until the units vest. The service-based RSUs entitle the recipients to receive
one
share of the Company’s common stock per unit granted if they remain continuously employed with the Company until the units vest. All of the Company’s RSUs granted to employees cliff-vest
three
years from the grant date.
For the three-month periods ended
July 31, 2018
and
2017
, stock-based compensation expense was allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
July 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Cost of sales and distribution
|
|
$
|
159
|
|
|
$
|
244
|
|
Selling and marketing (income) expenses
|
|
168
|
|
|
246
|
|
General and administrative expenses
|
|
459
|
|
|
455
|
|
Stock-based compensation expense
|
|
$
|
786
|
|
|
$
|
945
|
|
During the
three
months ended
July 31, 2018
, the Company also approved grants of
4,057
cash-settled performance-based restricted stock tracking units ("RSTUs") and
2,243
cash-settled service-based RSTUs for more junior level employees. Each performance-based RSTU entitles the recipient to receive a payment in cash equal to the fair market value of a share of the Company's common stock as of the payment date if applicable performance 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 the Company's common stock as of the payment date if they remain continuously employed with the Company until the units vest. All of the RSTUs cliff-vest
three
years from the grant date. 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 Company recognized expense of approximately
$0.3 million
and
$0.2 million
for the three-month periods ended
July 31, 2018
and
2017
, respectively. A liability for payment of the RSTUs is included in the consolidated balance sheets in the amount of $
0.5 million
and $
1.0 million
as of
July 31, 2018
and
April 30, 2018
, respectively.
Note F--Customer Receivables
The components of customer receivables were:
|
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
April 30,
|
(in thousands)
|
|
2018
|
|
2018
|
Gross customer receivables
|
|
$
|
137,901
|
|
|
$
|
142,622
|
|
Less:
|
|
|
|
|
Allowance for doubtful accounts
|
|
(299
|
)
|
|
(259
|
)
|
Allowance for returns and discounts
|
|
(6,204
|
)
|
|
(6,008
|
)
|
|
|
|
|
|
|
|
Net customer receivables
|
|
$
|
131,398
|
|
|
$
|
136,355
|
|
Note G--Inventories
The components of inventories were:
|
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
April 30,
|
(in thousands)
|
|
2018
|
|
2018
|
Raw materials
|
|
$
|
45,737
|
|
|
$
|
41,728
|
|
Work-in-process
|
|
47,192
|
|
|
44,905
|
|
Finished goods
|
|
36,561
|
|
|
34,111
|
|
|
|
|
|
|
|
|
Total FIFO inventories
|
|
129,490
|
|
|
120,744
|
|
|
|
|
|
|
|
|
Reserve to adjust inventories to LIFO value
|
|
(15,943
|
)
|
|
(15,943
|
)
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
113,547
|
|
|
$
|
104,801
|
|
Of the total inventory of
$113.5 million
,
$62.3
million is carried under the FIFO method of accounting and
$51.2
million is carried under the LIFO method.
Note H--Property, Plant and Equipment
The components of property, plant and equipment were:
|
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
April 30,
|
(in thousands)
|
|
2018
|
|
2018
|
Land
|
|
$
|
4,751
|
|
|
$
|
4,751
|
|
Buildings and improvements
|
|
113,139
|
|
|
112,757
|
|
Buildings and improvements - capital leases
|
|
11,202
|
|
|
11,202
|
|
Machinery and equipment
|
|
278,404
|
|
|
274,723
|
|
Machinery and equipment - capital leases
|
|
30,386
|
|
|
30,270
|
|
Construction in progress
|
|
12,133
|
|
|
10,931
|
|
|
|
450,015
|
|
|
444,634
|
|
Less accumulated amortization and depreciation
|
|
(233,715
|
)
|
|
(226,532
|
)
|
|
|
|
|
|
|
|
Total
|
|
$
|
216,300
|
|
|
$
|
218,102
|
|
Amortization and depreciation expense on property, plant and equipment amounted to
$8.8 million
and
$3.9 million
for the three months ended July 31, 2018 and 2017, respectively. Accumulated amortization on capital leases included in the above table amounted to
$30.1 million
and
$30.0 million
as of July 31, 2018 and April 30, 2018, respectively.
Note I--Intangibles
The components of intangible assets were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Weighted Average Amortization Period
|
|
Amortization Method
|
|
Cost
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
Customer relationships
|
|
6 years
|
|
Straight-line
|
|
$
|
274,000
|
|
|
$
|
26,639
|
|
|
$
|
247,361
|
|
Trademarks
|
|
3 years
|
|
Straight-line
|
|
10,000
|
|
|
1,944
|
|
|
8,056
|
|
Intangible assets, net
|
|
|
|
|
|
|
|
$
|
28,583
|
|
|
$
|
255,417
|
|
Amortization expense for the three-months ended July 31, 2018 was
$12.3 million
.
Note J--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, which is included in other accrued expenses on the balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
July 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Beginning balance at May 1
|
|
$
|
4,045
|
|
|
$
|
3,262
|
|
Accrual
|
|
6,273
|
|
|
5,144
|
|
Settlements
|
|
(5,823
|
)
|
|
(4,880
|
)
|
|
|
|
|
|
|
|
Ending balance at July 31
|
|
$
|
4,495
|
|
|
$
|
3,526
|
|
Note K--Pension Benefits
Effective April 30, 2012, the Company froze all future benefit accruals under the Company’s hourly and salary defined-benefit pension plans.
Net periodic pension (benefit) cost consisted of the following for the three-month periods ended
July 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
July 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Interest cost
|
|
$
|
1,567
|
|
|
$
|
1,432
|
|
Expected return on plan assets
|
|
(2,127
|
)
|
|
(2,234
|
)
|
Recognized net actuarial loss
|
|
412
|
|
|
400
|
|
|
|
|
|
|
|
|
Net periodic pension benefit
|
|
$
|
(148
|
)
|
|
$
|
(402
|
)
|
The Company expects to contribute
$2.3 million
to its pension plans in fiscal 2019. As of July 31, 2018,
$1.4 million
of contributions had been made. The Company made contributions of
$19.3 million
to its pension plans in fiscal 2018.
Note L--Fair Value Measurements
The Company utilizes the hierarchy of fair value measurements to classify certain of its assets and liabilities based upon the following definitions:
Level 1- Investments with quoted prices in active markets for identical assets or liabilities. The Company’s cash equivalents are invested in money market funds, mutual funds and certificates of deposit. The Company’s mutual fund investment assets represent contributions made and invested on behalf of the Company’s named executive officers in a supplementary employee retirement plan.
Level 2- Investments with observable inputs other than Level 1 prices, such as: quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3- Investments with unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The Company has no Level 3 assets or liabilities.
The Company's financial instruments include cash and equivalents, marketable securities and other investments; accounts receivable and accounts payable; and short- and long-term debt. The carrying values of cash and equivalents, accounts receivable and payable and short-term debt on the consolidated balance sheets approximate their fair value due to the short maturities of these items. The forward contracts were marked to market and therefore represent fair value. The fair values of these contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. The following table summarizes the fair value of assets that are recorded in the Company’s consolidated financial statements as of
July 31, 2018
and
April 30, 2018
at fair value on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
As of July 31, 2018
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
ASSETS:
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
7,750
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Mutual funds
|
|
1,071
|
|
|
—
|
|
|
—
|
|
Foreign exchange forward contracts
|
|
—
|
|
|
794
|
|
|
—
|
|
Total assets at fair value
|
|
$
|
8,821
|
|
|
$
|
794
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of April 30, 2018
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
ASSETS:
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
9,500
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Mutual funds
|
|
1,057
|
|
|
—
|
|
|
—
|
|
Total assets at fair value
|
|
$
|
10,557
|
|
|
$
|
—
|
|
|
$
|
—
|
|
There were no transfers between Level 1, Level 2 or Level 3 for assets measured at fair value on a recurring basis.
Note M--Loans Payable and Long-Term Debt
On December 29, 2017, the Company entered into the Credit Agreement, which provides for the Revolving Facility, the Initial Term Loan and the Delayed Draw Term Loan. Also on December 29, 2017, the Company borrowed the entire
$250 million
available under the Initial Term Loan and approximately
$50 million
under the Revolving Facility to fund, in part, the cash portion of the RSI Acquisition consideration and the Company’s transaction fees and expenses related to the RSI Acquisition. On February 12, 2018, the Company
borrowed the entire
$250 million
under the Delayed Draw Term in connection with the refinancing of the RSI Notes and to repay, in part, amounts outstanding under the Revolving Facility. In connection with its entry into the Credit Agreement, the Company terminated its prior
$35 million
revolving credit facility with Wells Fargo. The Company is required to make specified quarterly installments on both the Initial Term Loan and the Delayed Draw Loan. As of July 31, 2018,
$198.5 million
remained outstanding on each of the Initial Term Loan and the Delayed Draw Loan, which approximate fair value, and no amount was outstanding on the Revolving Facility. The Credit Facilities mature on December 29, 2022.
Amounts outstanding under the Credit Facilities bear interest based on a fluctuating rate measured by reference to either, at the Company’s option, a base rate plus an applicable margin or LIBOR plus an applicable margin, with the applicable margin being determined by reference to the Company’s then-current “Total Funded Debt to EBITDA Ratio.” The Company also incurs a quarterly commitment fee on the average daily unused portion of the Revolving Facility during the applicable quarter at a rate per annum also determined by reference to the Company’s then-current “Total Funded Debt to EBITDA Ratio.” In addition, a letter of credit fee will accrue on the face amount of any outstanding letters of credit at a per annum rate equal to the applicable margin on LIBOR loans, payable quarterly in arrears.
The Credit Agreement includes certain affirmative and negative covenants, including negative covenants that restrict the ability of the Company and certain of its subsidiaries to incur additional indebtedness, create additional liens on its assets, make certain investments, dispose of its assets or engage in a merger or another similar transaction or engage in transactions with affiliates, subject, in each case, to the various exceptions and conditions described in the Credit Agreement. The negative covenants further restrict the Company’s ability to make certain restricted payments, including the payment of dividends and repurchase of common stock, in certain limited circumstances. As of July 31, 2108, the Company was in compliance with the covenants included in the Credit Agreement.
The Company’s obligations under the Credit Agreement are guaranteed by the Company’s subsidiaries and the obligations of the Company and its subsidiaries are secured by a pledge of substantially all of their respective personal property.
On February 12, 2018, the Company issued
$350 million
in aggregate principal amount of
4.875%
Senior Notes due 2026 (the “Senior Notes”). The Senior Notes mature on March 15, 2026 and interest on the Senior Notes is payable semi-annually in arrears on March 15 and September 15 of each year, beginning on September 15, 2018. The Senior Notes are, and will be, fully and unconditionally guaranteed by each of the Company’s current and future wholly-owned domestic subsidiaries that guarantee the
Company’s obligations under the Credit Agreement. The indenture governing the Senior Notes restricts the ability of the Company and the Company’s “restricted subsidiaries” to, as applicable, (i) incur additional indebtedness or issue certain preferred shares, (ii) create liens, (iii) pay dividends, redeem or repurchase stock or make other distributions or restricted payments, (iv) make certain investments, (v) create restrictions on the ability of the “restricted subsidiaries” to pay dividends to the Company or make other intercompany transfers, (vi) transfer or sell assets, (vii) merge or consolidate with a third party and (viii) enter into certain transactions with affiliates of the Company, subject, in each case, to certain qualifications and exceptions as described in the indenture. As of July 31, 2018, the Company and its restricted subsidiaries were in compliance with all covenants under the indenture governing the Senior Notes.
At July 31, 2018, the book value of the Senior Notes was
$350 million
and the fair value was
$333 million
, based on Level 2 inputs.
Note N--Income Taxes
The effective income tax rate for the three-month periods ended July 31, 2018 and 2017 was
23.8%
and
29.0%
, respectively. The decrease in the effective tax rate for the first quarter of fiscal 2019, as compared to the first quarter of fiscal 2018, was primarily due to a benefit from the reduction in the federal corporate tax rate enacted in connection with the Tax Cuts and Jobs Act of 2017 (H.R. 1) (the “Tax Act”) from 35% to 21%. This was partially offset by the decrease of the benefit from stock-based compensation transactions and the repeal of the domestic production activities deduction by the Tax Act. During the first quarters of fiscal 2019 and 2018, the Company recognized an excess tax benefit related to stock-based compensation transactions of
$0.7 million
and
$2.2 million
, respectively.
Comprehensive tax legislation enacted through the Tax Act on December 22, 2017 significantly modified U.S. corporate income tax law. In addition to its corporate income tax rate reduction, several other provisions of the Tax Act impacted the Company's financial statements and related disclosures for the year ended April 30, 2018 or will have an impact on taxes in future years.
The Company recognized the income tax effects of the Tax Act in accordance with Staff Accounting Bulletin No. 118 (“SAB 118”) which provides SEC guidance on the application of ASC 740, Income Taxes, in the reporting period in which the Tax Act was signed into law. Accordingly, the Company’s financial statements as of April 30, 2018 reflected provisional amounts for those impacts for which the accounting under ASC 740 was incomplete, but a reasonable estimate could be determined. For items under the Tax Act for which no reasonable estimate could be determined at the time, the Company continued to apply the tax law in effect prior to the enactment of the Tax Act. As of July 31, 2018, the Company is still in the process of completing the accounting for the impact of the Tax Act.
The Company recorded a provisional expense of
$1.0 million
related to the re-valuation of U.S. deferred taxes as of April 30, 2018. During the three months ended July 31, 2018, there were no changes to the provisional estimates previously recorded and no additional measurement period adjustments were recorded. The Company may further adjust this amount in future periods if our interpretation of the Tax Act changes or as additional guidance from the U.S. Treasury becomes available.
As of April 30, 2018, the Company recorded a reduction in deferred tax assets related to executive compensation of
$0.1 million
. Since guidance on this provision of the Tax Act was issued by the Internal Revenue Service after July 31, 2018, the Company has not recorded a change to the estimate of the impact during the three months ended July 31, 2018. This estimate is provisional and the Company may further adjust these amounts in future periods if its interpretation of the Tax Act changes or as further additional guidance from the U.S. Treasury becomes available.
Note O--Revenue Recognition
Our principal performance obligations are the sale of kitchen, bath and home organization products. We recognize revenue for the sale of goods based on our assessment of when control transfers to our customers. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods to our customers. Payment terms on our product sales normally range from 30 to 90 days. Taxes assessed by a governmental authority that we collect are excluded from revenue. The expected costs associated with our contractual warranties will continue to be recognized as expense when the products are sold. See Note J--Product Warranty for further discussion.
We record estimates to reduce revenue for customer programs and incentives, which are considered variable consideration, and include price discounts, volume-based incentives, promotions and cooperative advertising when revenue is recognized in order to determine the amount of consideration the Company will ultimately be entitled to receive. These estimates are based on historical data and projections for each type of customer. In addition, for certain customer program incentives, we receive an identifiable
benefit (goods or services) in exchange for the consideration given and record the associated expenditure in selling, general and administrative expenses.
We account for shipping and handling costs that occur before the customer has obtained control of a product as a fulfillment activity rather than as a promised service. These costs are classified within selling, general and administrative expenses.
The Company disaggregates revenue from contracts with customers into major sales distribution channels as these categories depict the nature, amount, timing and uncertainty of revenues and cash flows that are affected by economic factors. The following table disaggregates our consolidated revenue by major sales distribution channels for the three-months ended July 31, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
July 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Home center retailers
|
|
$
|
205,049
|
|
|
$
|
89,723
|
|
Builders
|
|
165,084
|
|
|
137,972
|
|
Independent dealers and distributors
|
|
58,829
|
|
|
49,132
|
|
Net Sales
|
|
$
|
428,962
|
|
|
$
|
276,827
|
|
Note P--Concentration of Risks
Financial instruments that potentially subject the Company to concentrations of risk consist primarily of cash and cash equivalents and accounts receivable. The Company maintains its cash and cash equivalents with major financial institutions and such balances may, at times, exceed Federal Deposit Insurance Corporation insurance limits. The Company has not experienced any losses in such accounts and believes
it is not exposed to any significant risk on cash
.
Credit is extended to customers based on an evaluation of each customer's financial condition and generally collateral is not required. The Company's customers operate in the new home construction and home remodeling markets.
The Company maintains an allowance for bad debt based upon management's evaluation and judgment of potential net loss. The allowance is estimated based upon historical experience, the effects of current developments and economic conditions and of each customer’s current and anticipated financial condition. Estimates and assumptions are periodically reviewed and updated. Any resulting adjustments to the allowance are reflected in current operating results.
At July 31, 2018, the Company's two largest customers, Customers A and B, represented
28.4%
and
22.0%
of the Company's gross customer receivables, respectively. At July 31, 2017, Customers A and B represented
10.3%
and
15.6%
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 three months ended July 31, 2018 and 2017:
|
|
|
|
|
|
PERCENT OF NET SALES
|
|
Three Months Ended
|
|
July 31,
|
|
2018
|
|
2017
|
Customer A
|
29.1
|
|
18.4
|
Customer B
|
18.7
|
|
13.9
|
NOTE Q—Restructuring Charges
On June 1, 2018, the Company implemented a reduction in force of approximately
68
employees nationwide. Severance and outplacement charges relating to the reduction in force will total approximately
$2.4 million
and is expected to be substantially completed during fiscal 2019. A reserve for restructuring charges of
$2.3 million
is included in accrued compensation and related expenses in the consolidated balance sheets.
|
|
|
|
Restructuring reserve balance as of May 1, 2018
|
$
|
—
|
Expense
|
|
2,441
|
Payments
|
|
(182)
|
Restructuring reserve balance as of July 31, 2018
|
$
|
2,259
|
Note R--Other Information
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 FASB Accounting Standards Codification Topic 450, “Contingencies”, 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 consults with outside counsel.
The Company believes that the aggregate range of loss stemming from the various suits and asserted and unasserted claims that were deemed to be either probable or reasonably possible was not material as of
July 31, 2018
.