UNITED STATES SECURITIES AND EXCHANGE COMMISSION | ||||||
Washington, D.C. 20549 | ||||||
FORM 10-K | ||||||
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||
For the fiscal year ended | April 30, 2017 | |||||
or | ||||||
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||
For the transition period from | to | |||||
Commission File Number: | 000-14798 | |||||
American Woodmark Corporation | ||||||
(Exact name of registrant as specified in its charter) | ||||||
Virginia | 54-1138147 | |||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||
3102 Shawnee Drive, Winchester, Virginia | 22601 | |||||
(Address of principal executive offices) | (Zip Code) | |||||
(Registrant's telephone number, including area code) | (540) 665-9100 | |||||
Securities registered pursuant to Section 12(b) of the Act: | ||||||
Title of each class | Name of each exchange on which registered | |||||
Common Stock (no par value) | NASDAQ Global Select Market | |||||
Securities registered pursuant to Section 12(g) of the Act: None | ||||||
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [X] No [ ]
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. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | [X] | Accelerated filer | [ ] | |
Non-accelerated filer | [ ] | (Do not check if a smaller reporting company) | Smaller reporting company | [ ] |
Emerging growth company | [ ] | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with an new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ] | ||||
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, 2016, the last business day of the Company’s most recent second quarter was $1,055,435,628.
As of June 19, 2017, 16,305,346 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 24, 2017 (“Proxy Statement”) are incorporated by reference into Part III of this Form 10-K.
American Woodmark Corporation
2017 Annual Report on Form 10-K
TABLE OF CONTENTS
PART I | ||
Item 1. | 2 | |
Item 1A. | 3 | |
Item 1B. | 5 | |
Item 2. | 5 | |
Item 3. | 6 | |
Item 4. | 6 | |
6 | ||
PART II | ||
Item 5. | 7 | |
Item 6. | 9 | |
Item 7. | 10 | |
Item 7A. | 19 | |
Item 8. | 20 | |
Item 9. | 46 | |
Item 9A. | 46 | |
Item 9B. | 46 | |
PART III | ||
Item 10. | 46 | |
Item 11. | 47 | |
Item 12. | 47 | |
Item 13. | 47 | |
Item 14. | 47 | |
PART IV | ||
Item 15. | 48 | |
Item 16. | 51 | |
SIGNATURES | 52 | |
1
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 514 different cabinet lines, ranging in price from relatively inexpensive to medium-priced styles. Our cabinets are offered in a broad range of sizes, contruction and decorative options to achieve a broad range of design layouts. To satisfy the fashion and style needs of the market place we offer 85 door designs with a targeted range of painted and stained finishes on maple, cherry and oak as well as engineered fronts under the DuraformTM mark.
Products are sold under the brand names of American Woodmark®, Simply Woodmark®, Timberlake®, Shenandoah Cabinetry®, Shenandoah Value Series®, 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 seven 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, soft maple, oak, and cherry lumber and plywood. Additional raw materials include paint, particleboard, medium density fiberboard, high density fiberboard, 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 offerings, 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 net of cash of less than 6% of net sales. At April 30, 2017, debt to capital was 4.2%, and working capital net of cash was 5.9% of net sales.
During the fiscal year ended April 30, 2017 ("fiscal 2017"), American Woodmark had two primary customers, The Home Depot and Lowe’s Companies, Inc., which together accounted for approximately 37% of the Company’s sales. The loss of either customer would have a material adverse effect on the Company.
The Company holds patents, patent applications, licenses, trademarks, trade names, trade secrets and proprietary manufacturing processes. The Company views its trademarks and other intellectual property rights as important to its business.
As of May 31, 2017, the Company had 5,808 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, or incorporated by reference into, 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 2018.”
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 and therefore significantly impact the Company's operations.
Prolonged economic downturns may adversely impact the Company’s sales, earnings and liquidity. 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 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 are 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 37% of total company sales for fiscal 2017. 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. A significant change in the terms and conditions on which the Company does business with The Home Depot or Lowe's Companies, Inc. could also 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, 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 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.
3
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 or otherwise increasing raw material and freight costs, which would adversely impact profit margins.
The Company's operations may be adversely affected by information systems interruptions or intrusions. The Company relies on a number of information technology systems to process, transmit, store and manage information to support its business activities. Increased global cybersecurity vulnerabilities, threats and more sophisticated and targeted attacks pose a risk to its information technology systems. The Company has established security policies, processes and layers of defense designed to help identify and protect against intentional and unintentional misappropriation or corruption of its systems and information and disruption of its operations. Despite these efforts, systems may be damaged, disrupted, or shut down due to attacks by unauthorized access, malicious software, undetected intrusion, hardware failures, or other events, and in these circumstances the Company's disaster recovery planning may be ineffective or inadequate. These breaches or intrusions could lead to business interruption, exposure of proprietary or confidential information, data corruption, damage to the Company's reputation, exposure to litigation and increased operational costs. Such events could have a material adverse impact on the Company's business, financial condition and results of operation. In addition, the Company could be adversely affected if any of its significant customers or suppliers experience any similar events that disrupt their business operations or damage their reputation.
The Company is subject to environmental regulation and potential exposure to environmental liabilities. The Company is subject to various federal, state and local environmental laws, ordinances and regulations, including those relating to the discharge of materials into the environment. Although the Company believes that its facilities and operations are in material compliance with such laws, ordinances and regulations, it could incur substantial costs, including legal expenses, as a result of noncompliance with, or liability for cleanup or other costs or damages under, such laws, ordinances and regulations. As the owner and lessee of real property, the Company can be held liable for the investigation or remediation of contamination on such properties, in some circumstances, without regard to whether the Company knew of or was responsible for such contamination. No assurance can be provided that remediation may not be required in the future as a result of spills or releases of hazardous substances, the discovery of unknown environmental conditions, more stringent standards regarding existing residual contamination, or changes in legislation, laws, rules or regulations. More burdensome environmental regulatory requirements may increase our general and administrative costs and adversely affect our financial condition, operating results and cash flows.
Unauthorized disclosure of confidential information provided to the Company by customers, employees or third parties could harm its business. The Company relies on the internet and other electronic methods to transmit confidential information and stores confidential information on its networks. If there was a disclosure of confidential information provided by, or concerning, our employees, customers or other third parties, including through inadvertent disclosure, unapproved dissemination, or unauthorized access, the Company’s reputation could be harmed and the Company could be subject to civil or criminal liability and regulatory actions.
Future costs of complying with various laws and regulations may adversely impact future operating results. The Company’s business is subject to various laws and regulations which could have a significant impact on the Company’s operations and the cost to comply with such laws and regulations could adversely impact the Company’s financial position, results of operations and liquidity. In addition, failure to comply with such laws and regulations, even inadvertently, could produce negative consequences which could adversely impact the Company’s operations.
The Company’s success depends, in part, on its ability to recruit and retain key employees. The Company’s success depends, in part, on its ability to recruit and retain certain key employees. If the Company is not successful in recruiting and retaining key employees or experienced the unexpected loss of key employees, its operations could be negatively impacted.
The Company could continue to pursue growth opportunities through either acquisitions, mergers or internally developed projects, which may be unsuccessful or may adversely affect future financial condition and operating results. The Company could continue to pursue opportunities for growth through either acquisitions, mergers or internally developed projects as part of our growth strategy. The Company cannot assure you that we will be successful in integrating an acquired business or that an internally developed project will perform at the levels we anticipate. The Company may pay for future acquisitions using cash, stock, the assumption of debt or a combination of these. Future acquisitions could result in dilution to existing shareholders and to earnings per share. In addition, the Company may fail to identify significant liabilities or risks associated with a given acquisition that
4
could adversely affect the Company’s future financial condition and operating results or result in the Company paying more for the acquired business or assets than they are worth.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
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 7 primary service centers, 11 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, 2017 include:
LOCATION | DESCRIPTION |
Allegany County, MD | Manufacturing Facility |
Austin, TX | Satellite Service Center* |
Berryville, VA | Service Center* |
Bradenton, FL | Satellite Service Center* |
Commerce City, CO | Satellite Service Center* |
Coppell, TX | Service Center* |
Fort Myers, FL | Satellite Service Center* |
Gas City, IN | Manufacturing Facility |
Hardy County, WV | Manufacturing Facility* |
Houston, TX | Satellite Service Center* |
Humboldt, TN | Manufacturing Facility |
Huntersville, NC | Service Center* |
Jackson, GA | Manufacturing Facility |
Kingman, AZ | Manufacturing Facility |
Kennesaw, GA | Service Center* |
Las Vegas, NV | Satellite Service Center* |
Montgomeryville, PA | Satellite Service Center* |
Monticello, KY | Manufacturing Facility |
Orange, VA | Manufacturing Facility |
Orlando, FL | Service Center* |
Phoenix, AZ | Service Center* |
Raleigh, NC | Satellite Service Center* |
Rancho Cordova, CA | Service Center* |
San Antonio, TX | Satellite Service Center* |
Tampa, FL | Satellite Service Center* |
Toccoa, GA | Manufacturing Facility |
Tucson, AZ | Satellite Service Center* |
Winchester, VA | Corporate Office* |
Winchester, VA | Office (Customer Service)* |
Winchester, VA | Office (IT)* |
Winchester, VA | Office (Product Development/Logistics)* |
*Leased facility.
5
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 estimate is determined and considered for disclosure. In determining these loss range estimates, the Company considers known values of similar claims and consults 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, 2017.
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 are as follows:
Name | Age | Position(s) Held During Past Five Years | |
S. Cary Dunston | 52 | Company President and Chief Executive Officer from August 2015 to present; Company President and Chief Operating Officer from August 2014 to August 2015; Company Executive Vice President and Chief Operating Officer from August 2013 to August 2014; Company Executive Vice President, Operations from September 2012 to August 2013; Company Senior Vice President, Manufacturing and Supply Chain Services from October 2006 to September 2012. | |
M. Scott Culbreth | 46 | Company Senior Vice President and Chief Financial Officer from February 2014 to present; Chief Financial Officer of Piedmont Hardware Brands from September 2013 to February 2014; Vice President, Finance – Various Segments from 2009 to September 2013 for Newell Rubbermaid | |
R. Perry Campbell | 52 | Company Senior Vice President of Sales and Marketing from March 2016 to present; Company Senior Vice President and General Manager, New Construction from August 2013 to March 2016; Company Vice President and General Manager, New Construction from May 2011 to August 2013; Company Vice President of Quality from February 2006 to April 2011. | |
Robert J. Adams, Jr. | 51 | Company Senior Vice President of Value Stream Operations from August 2015 to present; Company Vice President of Value Stream Operations from September 2012 to August 2015; Company Vice President of Manufacturing and Engineering from April 2012 to September 2012; Company Vice President of Engineering from July 2008 to April 2012. | |
6
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 during the last two fiscal years were as follows:
MARKET PRICE | |||
(in dollars) | High | Low | |
FISCAL 2017 | |||
First quarter | $82.34 | $60.80 | |
Second quarter | 89.57 | 72.60 | |
Third quarter | 84.15 | 69.65 | |
Fourth quarter | 93.10 | 71.75 | |
FISCAL 2016 | |||
First quarter | $67.82 | $48.34 | |
Second quarter | 74.28 | 59.23 | |
Third quarter | 89.89 | 62.77 | |
Fourth quarter | 80.00 | 57.03 | |
As of May 23, 2017, there were approximately 16,700 total shareholders of the Company's common stock, including 4,900 shareholders of record and 11,800 beneficial owners whose shares are held in "street" name by securities broker-dealers or other nominees. Included are approximately 72% of the Company's employees, who are shareholders through the American Woodmark Corporation Retirement Savings Plan. The Company suspended its quarterly dividend during fiscal 2012. The determination as to the payment of 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.
Purchases of Equity Securities by the Issuer
On November 20, 2014, the Board of Directors of the Company authorized a repurchase of up to $25 million of the Company's common shares. On November 19, 2015, the Board of Directors of the Company authorized an additional stock repurchase program of up to $20 million of the Company's common shares. On November 30, 2016, the Board of Directors authorized an additional stock repurchase program of up to $50 million of the Company's common shares. This authorization is in addition to the stock repurchase program authorized on November 19, 2015 and November 20, 2014. Repurchases may be made from time to time in the open market, or through privately negotiated transactions or otherwise, in compliance with applicable laws, rules and regulations, at prices and on terms the Company deems appropriate and subject to the Company's cash requirements for other purposes, compliance with the covenants under the Company's revolving credit facility, and other factors management deems relevant. The authorization does not obligate the Company to acquire a specific number of shares during any period, and the authorization may be modified, suspended or discontinued at any time at the discretion of the Board. Management expects to fund share repurchases using available cash and cash generated from operations. Repurchased shares will become authorized but unissued common shares. In the fourth quarter of fiscal 2017, the Company did not repurchase any common shares under the authorization. At April 30, 2017, $65.0 million remained authorized by the Company's Board of Directors to repurchase the Company's common shares.
7
Stock Performance Graph
The performance graph shown below compares the percentage change in the cumulative total shareholder return on our common stock against the cumulative total return of the Russell 2000 Index and Standard & Poor’s Household Durables Index for the period from April 30, 2012 through April 30, 2017. The graph assumes an initial investment of $100 and the reinvestment of dividends.
2012 | 2013 | 2014 | 2015 | 2016 | 2017 | |||||||
American Woodmark Corporation | $100.00 | $187.47 | $167.19 | $282.45 | $405.79 | $511.98 | ||||||
Russell 2000 Index | 100.00 | 117.69 | 141.82 | 155.58 | 146.33 | 183.84 | ||||||
S&P Household Durables Index | 100.00 | 152.57 | 179.77 | 210.71 | 218.10 | 250.47 | ||||||
The graph and related information above are not deemed to be "filed" with the Securities and Exchange ("SEC") for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any future filing made by us with the SEC, except to the extent that we specifically incorporate it by reference into any such filing.
8
Item 6. SELECTED FINANCIAL DATA
FISCAL YEARS ENDED APRIL 30 | |||||||||||||||||||
(in millions except per share data) | 2017 | 2016 | 20151 | 20141 | 20131 | ||||||||||||||
FINANCIAL STATEMENT DATA | |||||||||||||||||||
Net sales | $ | 1,030.2 | $ | 947.0 | $ | 825.5 | $ | 726.5 | $ | 630.4 | |||||||||
Operating income | 108.2 | 93.2 | 54.7 | 34.1 | 17.2 | ||||||||||||||
Net income | 71.2 | 58.7 | 35.5 | 20.5 | 9.8 | ||||||||||||||
Earnings per share: | |||||||||||||||||||
Basic | 4.38 | 3.61 | 2.25 | 1.34 | 0.67 | ||||||||||||||
Diluted | 4.34 | 3.57 | 2.21 | 1.31 | 0.66 | ||||||||||||||
Depreciation and amortization expense | 18.7 | 16.5 | 14.5 | 14.5 | 14.4 | ||||||||||||||
Total assets2 | 501.3 | 466.4 | 398.8 | 330.0 | 293.9 | ||||||||||||||
Long-term debt, less current maturities2 | 15.3 | 22.1 | 21.4 | 20.4 | 23.5 | ||||||||||||||
Total shareholders' equity | 352.4 | 280.8 | 229.8 | 190.5 | 146.2 | ||||||||||||||
Average shares outstanding | |||||||||||||||||||
Basic | 16.3 | 16.3 | 15.8 | 15.3 | 14.6 | ||||||||||||||
Diluted | 16.4 | 16.4 | 16.0 | 15.7 | 14.8 | ||||||||||||||
PERCENT OF SALES | |||||||||||||||||||
Gross profit | 21.8 | % | 21.1 | % | 18.5 | % | 17.1 | % | 16.3 | % | |||||||||
Selling, general and administrative expenses | 11.3 | 11.2 | 11.9 | 12.5 | 13.5 | ||||||||||||||
Income before income taxes | 10.6 | 9.7 | 6.6 | 4.5 | 2.7 | ||||||||||||||
Net income | 6.9 | 6.2 | 4.3 | 2.7 | 1.5 | ||||||||||||||
RATIO ANALYSIS | |||||||||||||||||||
Current ratio | 3.3 | 3.3 | 3.2 | 2.8 | 2.4 | ||||||||||||||
Inventory turnover3 | 19.6 | 19.8 | 19.9 | 19.8 | 20.4 | ||||||||||||||
Collection period - days4 | 32.5 | 31.2 | 31.6 | 32.8 | 31.4 | ||||||||||||||
Percentage of capital (long-term debt plus equity): | |||||||||||||||||||
Long-term debt, less current maturities2 | 4.2 | % | 7.4 | % | 8.5 | % | 9.7 | % | 13.8 | % | |||||||||
Equity | 95.8 | 92.6 | 91.4 | 90.3 | 86.1 | ||||||||||||||
Return on equity (average %) | 22.5 | 23.0 | 16.9 | 12.2 | 7.1 | ||||||||||||||
1 | The Company announced plans to realign its manufacturing network during fiscal 2012. During fiscal 2013, the charges related to these initiatives decreased operating income, net income and earnings per share by $1,433,000, $874,000 and $0.06, respectively. During fiscal 2014, the credits related to these initiatives increased operating income, net income and earnings per share by $234,000, $142,000 and $0.01, respectively. During fiscal 2015, the credits related to these initiatives increased operating income, net income and earnings per share by $240,000, $147,000 and $0.01, respectively. |
2 | Total assets and Long-term debt, less current maturities for fiscal 2016, 2015, 2014 and 2013 have been retrospectively revised to reflect the adoption of FASB ASU No. 2015-03, "Interest - Imputation of Interest (Subtopic 835-30) - Simplifying the Presentation of Debt Issuance Costs." |
3 | Based on average beginning and ending inventory. |
4 | Based on the ratio of average monthly customer receivables to average sales per day. |
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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:
PERCENTAGE OF NET SALES | ||||||||
Fiscal Years Ended April 30 | ||||||||
2017 | 2016 | 2015 | ||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | ||
Cost of sales and distribution | 78.2 | 78.9 | 81.5 | |||||
Gross profit | 21.8 | 21.1 | 18.5 | |||||
Selling and marketing expenses | 6.9 | 7.0 | 7.8 | |||||
General and administrative expenses | 4.4 | 4.3 | 4.1 | |||||
Operating income | 10.5 | 9.8 | 6.6 | |||||
Interest expense/other (income) expense | (0.1 | ) | 0.1 | — | ||||
Income before income taxes | 10.6 | 9.7 | 6.6 | |||||
Income tax expense | 3.7 | 3.5 | 2.3 | |||||
Net income | 6.9 | 6.2 | 4.3 | |||||
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,” "intend," "estimate," "prospect," "goal," "will," "predict," "potential" 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:
• | general economic or business conditions and instability in the financial and credit markets, including their potential impact on the Company's (i) sales and operating costs and access to financing; and (ii) customers and suppliers and their ability to obtain financing or generate the cash necessary to conduct their respective businesses; |
• | the volatility in mortgage rates and unemployment rates; |
• | slower growth in personal income and residential investment; |
• | the cyclical nature of the Company’s industry, which is particularly sensitive to changes in consumer confidence, the amount of consumers’ income available for discretionary purchases, and the availability and terms of consumer credit; |
• | economic weakness in a specific channel of distribution; |
• | the loss of sales from specific customers due to their loss of market share, bankruptcy or switching to a competitor; |
• | risks associated with domestic manufacturing operations and suppliers, including fluctuations in capacity utilization and the prices and availability of key raw materials as well as fuel, transportation, warehousing and labor costs and environmental compliance, possible import tariffs and remediation costs; |
• | the need to respond to price or product initiatives launched by a competitor; |
• | the ability to retain and motivate Company employees; |
• | the Company’s ability to successfully implement initiatives related to increasing market share, new products, maintaining and increasing its sales force and new product displays; and |
• | sales growth at a rate that outpaces the Company’s ability to install new manufacturing capacity or a sales decline that requires reduction or realignment of the Company’s manufacturing capacity. |
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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, 2017, the Company operated 9 manufacturing facilities and 7 service centers across the country.
During the Company’s fiscal year that ended on April 30, 2017 ("fiscal 2017"), the Company continued to experience improving housing market conditions from the housing market downturn that began in 2007.
A number of general market factors impacted the Company's business in fiscal 2017, including:
• | The unemployment rate improved by 12% compared to April 2016, falling to 4.4% as of April 2017 according to data provided by the U.S. Department of Labor; |
• | Increases in single family housing starts during the Company’s fiscal 2017 of 6%, as compared to the Company’s fiscal 2016, according to the U.S. Department of Commerce; |
• | Mortgage interest rates decreased with a 30-year fixed mortgage rate of 4.05% in April 2017, an improvement of approximately 44 basis points compared to April 2016; |
• | The median price of existing homes sold in the U.S. rose by 3.5% during the Company’s fiscal 2017, according to data provided by the National Association of Realtors; |
• | Consumer sentiment, as reported by the University of Michigan, averaged 2% higher during the Company’s fiscal 2016 than in its prior fiscal year; and |
• | Cabinet sales, as reported by members of the Kitchen Cabinet Manufacturers Association (KCMA), increased by 4% during fiscal 2017 versus the prior fiscal year, suggesting an increase in both new construction and remodeling sales of cabinets. |
The Company’s largest remodeling customers and competitors continued to utilize sales promotions in the Company’s product category during fiscal 2017 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 2017 that were higher than those experienced in its prior fiscal year. The Company’s remodeling sales were flat during fiscal 2017, below the overall remodeling market.
The Company increased its net sales by 9% during fiscal 2017. The Company realized strong sales gains in its new construction channel during fiscal 2017, where sales increased by more than 17%, significantly outpacing the improvement in single-family housing starts for the same period. Management believes the Company over indexed the market due to share penetration with our builder partners and the health of the markets where we concentrated our business during fiscal 2017.
Gross margin for fiscal 2017 was 21.8%, an improvement from 21.1% in fiscal 2016. The increase in the Company’s gross margin rate was driven by the beneficial impact of increased sales volume, lower labor benefit costs and improved operating efficiency.
The Company regularly considers the need for a valuation allowance against its deferred tax assets. The Company has been profitable for the last 5 years. As of April 30, 2017, the Company had total deferred tax assets of $27.5 million, down from $41.3 million at April 30, 2016. The Company's deferred tax assets decreased in fiscal 2017 primarily due to Company contributions to the pension plans as well as better than expected returns from the plans’ assets. The Company's deferred tax assets increased
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in fiscal 2016 due to an increase in the unfunded pension obligation, as a result of a decrease in the discount rate and the Company updating to the new RP-2014 mortality tables, with generational MP-2015 projections. To fully realize its remaining net deferred tax assets, the Company will need to, among other things, substantially reduce its unfunded pension obligation of $28.0 million at April 30, 2017. The Company recorded a valuation allowance related to deferred tax assets for certain state investment tax credit (ITC) carryforwards during fiscal 2016. In fiscal 2017, the Company reassessed the valuation allowance related to ITCs and released $0.6 million of the valuation allowance recorded in the fiscal 2016.
The Company expects to continue funding its pension plans for the foreseeable future, which will reduce both its unfunded pension plan obligation and its deferred tax asset. 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, enabled the Company to generate net income during fiscal 2017 like it has done since fiscal 2013. 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. 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 nine manufacturing plants or any of its other long-lived assets were impaired as of April 30, 2017.
Results of Operations
FISCAL YEARS ENDED APRIL 30 | |||||||||||||||||
(in thousands) | 2017 | 2016 | 2015 | 2017 vs. 2016 PERCENT CHANGE | 2016 vs. 2015 PERCENT CHANGE | ||||||||||||
Net sales | $ | 1,030,248 | $ | 947,045 | $ | 825,465 | 9 | % | 15 | % | |||||||
Gross profit | 224,636 | 199,694 | 152,532 | 12 | 31 | ||||||||||||
Selling and marketing expenses | 70,979 | 66,489 | 64,304 | 7 | 3 | ||||||||||||
General and administrative expenses | 45,419 | 40,045 | 33,773 | 13 | 19 | ||||||||||||
Interest expense | 885 | 378 | 515 | 134 | (27 | ) | |||||||||||
Net Sales
Net sales were $1,030.2 million in fiscal 2017, an increase of $83.2 million, or 9%, compared with fiscal 2016. Overall unit volume for fiscal 2017 was 8.0% higher than in fiscal 2016, which was driven primarily by the Company’s increased new construction and dealer volume. Average revenue per unit increased 0.8% in fiscal 2017, driven by improvements in the Company’s product mix and pricing.
Net sales were $947.0 million in fiscal 2016, an increase of $121.6 million, or 15%, compared with fiscal 2015. Overall unit volume for fiscal 2016 was 12% higher than in fiscal 2015, which was driven primarily by the Company’s increased new construction and dealer volume. Average revenue per unit increased 3% in fiscal 2016, driven by improvements in the Company’s product mix and pricing.
Gross Profit
Gross profit as a percentage of sales increased to 21.8% in fiscal 2017 as compared with 21.1% in fiscal 2016. The improvement in gross profit margin was due primarily to the beneficial impact of increased sales volume, lower labor benefit costs and improved operating efficiency.
During fiscal 2016, the Company’s gross profit increased as a percentage of net sales to 21.1% from 18.5% in fiscal 2015. The improvement in gross profit margin was due primarily to the beneficial impact of increased sales volume, customer management, product mix, pricing and improved operating efficiency. This favorability was partially offset by the impact of additional depreciation costs related to the previously announced plant expansion and costs associated with crewing and infrastructure to support higher levels of sales and installation activity.
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Selling and Marketing Expenses
Selling and marketing expenses in fiscal 2017 were 6.9% of net sales, compared with 7.0% of net sales in fiscal 2016. Selling and marketing costs increased only by 7% despite a 9% increase in net sales. The improvement in the percentage of sales and marketing costs in relation to net sales was due to favorable leverage from increased sales, on-going expense control and lower display costs and commissions.
Selling and marketing expenses were 7.0% of net sales in fiscal 2016 compared with 7.8% in fiscal 2015. The improvement in the percentage of sales and marketing costs in relation to net sales was due to favorable leverage from increased sales, on-going expense control and lower display and product launch costs.
General and Administrative Expenses
General and administrative expenses increased by $5.4 million or 13.4% during fiscal 2017. The increase was related to increased staffing costs and the incurrence of corporate business development expenses related to a potential M&A transaction that we ultimately decided not to pursue. General and administrative costs increased to 4.4% of net sales in fiscal 2017 compared with 4.3% of net sales in fiscal 2016.
General and administrative expenses in fiscal 2016 increased by $6.3 million, or 18.6%, compared with fiscal 2015 and represented 4.3% of net sales, compared with 4.1% of net sales for fiscal 2015. The increase in cost was related to increased pay-for-performance compensation and staffing costs.
Effective Income Tax Rates
The Company generated pre-tax income of $108.9 million during fiscal 2017. The Company’s effective tax rate decreased from 36.0% in fiscal 2016 to 34.6% in fiscal 2017. The lower effective tax rate was primarily due to the benefit from adopting ASU 2016-09 for equity based compensation. The Company’s effective tax rate increased from 34.7% in fiscal 2015 to 36.0% in fiscal 2016. The higher effective tax rate was the result of the Company operating at a higher net income level than the prior year period and less favorable permanent tax differences.
Outlook for Fiscal 2018
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 starts will continue to improve, driven by low unemployment rates and growth in new household formation. However, the Company expects that while the cabinet remodeling market will show modest improvement during fiscal 2018 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 2018. The Company expects its home center market share to remain at normalized levels for fiscal 2018, however this is heavily dependent upon competitive promotional activity, and it will continue to gain market share in its growing dealer business. This combination is expected to result in remodeling sales growth that exceeds the market rate.
Based on available information, it is expected that new residential construction starts will grow approximately 8 to 10% during fiscal 2018. The Company’s new residential construction sales growth outperformed the new residential construction market during fiscal 2017, and management expects that it will again outperform the new residential construction market during fiscal 2018 but by a lesser rate than during fiscal 2017, as its comparable prior year sales levels become more challenging to exceed.
Inclusive of the potential for modest sales mix and pricing improvements, the Company expects that it will grow its total sales at a high-single digit rate in fiscal 2018. Despite anticipated material inflation and freight and transportation rate increases, the Company expects to improve gross margins and operating margins for fiscal 2018.
The Company had gross outlays for capital expenditures and customer display units of $25.5 million during fiscal 2017, and plans to increase its base spending level during fiscal 2018 now that it has started construction on its new corporate headquarters in Winchester, Virginia.
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
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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, cash equivalents and investments in certificates of deposit totaled $249.2 million at April 30, 2017, which represented an increase of $30.7 million from April 30, 2016. Total debt was $16.9 million at April 30, 2017, a decrease of $6.8 million over the prior fiscal year and the ratio of long-term debt, excluding current maturities, to capital was 4.2% at April 30, 2017, down from 7.4% at April 30, 2016.
The Company’s main source of liquidity is its cash and cash equivalents on hand and cash generated from its operating activities. The Company can borrow up to $35 million under its revolving credit facility with Wells Fargo Bank, N.A. (Wells Fargo), which expires on December 31, 2018. This facility had an available borrowing base of $35 million at April 30, 2017.
The Company's outstanding indebtedness and other obligations to Wells Fargo are unsecured. Under the terms of its 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 1.5 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 credit facility as of April 30, 2017, including as follows: (1) the Company’s ratio of total liabilities to tangible net worth at April 30, 2017 was 0.42 to 1.0; and (2) cash flow to fixed charges for its most recent four quarters was 4.94 to 1.0. The Company expects to be in compliance with these covenants for fiscal 2018.
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.
OPERATING ACTIVITIES
Cash provided by operating activities in fiscal 2017 was $77.1 million, compared with $74.6 million in fiscal 2016. The $2.5 million improvement was primarily attributable to the Company’s $12.5 million improvement in net income and an increase in accrued expenses, which was partially offset by an $23.1 million increase in cash used for excess pension contributions.
Cash provided by operating activities in fiscal 2016 was $74.6 million, compared with $60.2 million in fiscal 2015. The $14.4 million improvement was primarily attributable to the Company’s $23.2 million improvement in net income and a $8.9 million decrease in cash used for the Company's working capital investment in inventory and customer receivables.
On August 25, 2016, the Board of Directors of the Company approved up to $20 million of discretionary funding to reduce its defined benefit pension liabilities. The Company made aggregate contributions of $27.3 million to its pension plans during fiscal 2017, including the $20.0 million of discretionary funding during fiscal 2017.
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 2017 was $53.7 million, compared with $40.8 million in fiscal 2016 and $56.6 million in fiscal 2015. Investments in property, plant and equipment for fiscal 2017 were $21.8 million, compared with $28.7 million in fiscal 2016 and $20.0 million in fiscal 2015. Investments in promotional displays were $3.7 million in fiscal 2017, compared with $4.4 million in fiscal 2016 and $2.4 million in fiscal 2015. On August 21, 2014, the Board of Directors of the Company approved a $30.0 million capital expansion project at its West Virginia facility, which was completed during fiscal 2016.
During fiscal 2017, the Company’s increase in net cash used for investing activities was primarily driven by a $19.8 million increase in investment in certificates of deposit, offset by a $6.9 million decrease in outflows for capital expenditures.
On November 30, 2016 the Board of Directors of the Company approved the construction of a new corporate headquarters in Winchester, Virginia. The new space will consolidate employees that currently occupy four buildings in Winchester, Virginia and Frederick County, Virginia, in early calendar 2018. It is expected that the new building will be self-funded for approximately $30.0 million. During fiscal 2017, approximately $3.0 million was incurred related to the new corporate headquarters.
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FINANCING ACTIVITIES
The Company realized a net outflow of $20.8 million from financing activities in fiscal 2017 compared with a net outflow of $8.9 million in fiscal 2016, and a net inflow of $10.3 million in fiscal 2015. Proceeds were generated from the exercise of stock options of $2.4 million in fiscal 2017, $8.1 million in fiscal 2016 and $14.3 million in fiscal 2015. During fiscal 2017 $11.7 million was used to repay long-term debt, compared with approximately $1.5 million in fiscal 2016 and $1.3 million in fiscal 2015.
The Company ended fiscal 2017 with $177.0 million in cash and cash equivalents. Under a stock repurchase authorization approved by its Board of Directors on November 20, 2014, the Company was authorized to purchase up to $25 million of the Company’s common shares. On November 19, 2015, the Board of Directors of the Company authorized an additional repurchase of up to $20 million of the Company's common shares. On November 30, 2016, the Board of Directors authorized an additional stock repurchase program of up to $50 million of the Company's common shares. This authorization is in addition to the stock repurchase program authorized on November 19, 2015 and November 20, 2014. Repurchases may be made from time to time in the open market, or through privately negotiated transactions or otherwise, in compliance with applicable laws, rules and regulations, at prices and on terms the Company deems appropriate and subject to the Company's cash requirements for other purposes, compliance with the covenants under the Company’s revolving credit facility, and other factors management deems relevant. At April 30, 2017, $65.0 million remained authorized by the Company’s Board of Directors to repurchase the Company’s common shares. The Company purchased a total of 178,118 common shares, for an aggregate purchase price of $13.4 million, during fiscal 2017, under the authorizations but none were repurchased in the fourth quarter of fiscal 2017. 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 shares from time to time during fiscal 2018 subject to the Company’s financial condition, capital requirements, results of operations and any other factors then deemed relevant.
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 2018.
The timing of the Company’s contractual obligations as of April 30, 2017 is summarized in the table below:
FISCAL YEARS ENDED APRIL 30 | |||||||||||||||||||
(in thousands) | Total Amounts | 2018 | 2019-2020 | 2021-2022 | 2023 and Thereafter | ||||||||||||||
Economic development loans | $ | 4,439 | $ | — | $ | 2,189 | $ | — | $ | 2,250 | |||||||||
Capital lease obligations | 7,389 | 1,796 | 2,568 | 1,535 | 1,490 | ||||||||||||||
Other long-term debt | 5,925 | — | — | — | 5,925 | ||||||||||||||
Operating lease obligations | 5,816 | 2,884 | 2,195 | 721 | 16 | ||||||||||||||
Pension contributions1 | 18,020 | 5,720 | 5,810 | 5,210 | 1,280 | ||||||||||||||
Total | $ | 41,589 | $ | 10,400 | $ | 12,762 | $ | 7,466 | $ | 10,961 | |||||||||
1 | 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 2023 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. General economic forces and changes in the Company’s customer mix have reduced seasonal fluctuations in revenue over the past few years.
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.”
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OFF-BALANCE SHEET ARRANGEMENTS
As of April 30, 2017 and 2016, 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, workers’ compensation liability, general liability, auto liability and property insurance. The Company maintains stop-loss coverage with third-party insurers to limit total exposure. The Company establishes a liability at each balance sheet date based on estimates for a variety of factors that influence the Company’s ultimate cost. In the event that actual experience is substantially different from the estimates, the financial results for the period could be adversely affected. The Company believes that the methodologies used to estimate insurance liabilities are an accurate reflection of the liabilities as of the date of the 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. The long-term expected rate of return on plan assets reflects the current mix of the plan assets invested in equities and bonds.
Beginning with the April 30, 2016 measurement, the Company refined the method used to determine the service and interest cost components of its net periodic benefit cost. Previously, the cost was determined using a single weighted-average discount rate derived from the yield curve. Under the refined method, known as the spot rate approach, individual spot rates along the yield curve that correspond with the timing of each benefit payment will be used. The Company believes this change provides a more precise measurement of service and interest costs by improving the correlation between projected cash outflows and corresponding spot rates on the yield curve. Compared to the previous method, the spot rate approach decreased the service and interest components of the benefit costs in fiscal 2017. There is no impact on the total benefit obligation.
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:
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(in millions) | IMPACT OF 1% INCREASE | IMPACT OF 1% DECREASE | |||||
(decrease) increase | |||||||
Effect on annual pension expense | $ | (1.1 | ) | $ | 0.9 | ||
Effect on projected pension benefit obligation | $ | (21.5 | ) | $ | 27.4 | ||
Pension expense for fiscal 2017 and the assumptions used in that calculation are presented in Note H of the Consolidated Financial Statements. At April 30, 2017, the weighted average discount rate was 4.12% compared with 4.06% at April 30, 2016. The expected return on plan assets was 7.5% at both April 30, 2017, and April 30, 2016. 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.
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 10.3%, (1.6)% and 6.6% for fiscal 2017, 2016 and 2015, respectively.
The fair value of plan assets at April 30, 2017 was $137.1 million compared with $107.0 million at April 30, 2016. The Company’s projected benefit obligation exceeded plan assets by $28.0 million in fiscal 2017 and by $67.1 million in fiscal 2016. The $39.1 million decrease in the Company’s net under-funded position during fiscal 2017 was primarily driven by the Company’s $27.3 million contributions and actuarial gains and asset returns that were more than expected. The Company expects its pension expense to decrease from $(0.5) million in fiscal 2017 to $(1.6) million in fiscal 2018, due primarily to the improvement in the funded status of the plans, partially offset by a decrease in the expected long-term rate of return from 7.5% to 6.5%. The Company expects to contribute $5.7 million to its pension plans in fiscal 2018, which represents required and discretionary funding. The Company made contributions of $27.3 million to its pension plans in fiscal 2017.
Valuation of Deferred Tax Assets. The Company regularly considers the need for a valuation allowance against its deferred tax assets. Deferred tax assets are reduced by a valuation allowance when, after considering all positive and negative evidence, it is determined that it is more likely than not that some portion, or all, of the deferred tax asset will not be realized.
The Company has recorded a valuation allowance related to deferred tax assets for certain state investment tax credit (ITC) carryforwards. Deferred tax assets are reduced by a valuation allowance when, after considering all positive and negative evidence, it is determined that it is more likely than not that some portion, or all, of the deferred tax asset will not be realized.
The gross amount of state tax credit carryforwards related to state ITCs as of April 30, 2017 was $6.1 million. These credits expire in various years beginning in fiscal 2020. Net of the federal impact and related valuation allowance, the Company has recorded $1.6 million of deferred tax assets related to these credits. The Company accounts for ITCs under the deferral method, under which the tax benefit from the ITC is deferred and amortized into income tax expense over the book life of the related property. As of April 30, 2017, a deferred credit balance of $1.5 million is included in other liabilities on the balance sheet.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the Financial Accounting Standards Board (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
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that period. The Company does not expect the adoption of ASU 2014-09 and ASU 2015-14 to have a material impact on results of operations, cash flows and financial position. The Company is continuing to evaluate the impact of ASU 2014-09 primarily to determine the transition method to utilize at adoption and the additional disclosures required.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)." ASU 2016-02 requires lessees to recognize most leases on-balance sheet, which will increase reported assets and liabilities. Lessor accounting remains substantially similar to current U.S. GAAP. ASU 2016-02 supersedes "Topic 840 - Leases." ASU 2016-02 is effective for public companies for annual and interim periods in fiscal years beginning after December 15, 2018. ASU 2016-02 mandates a modified retrospective transition method for all entities. The Company is currently assessing the impact that ASU 2016-02 will have on its consolidated financial statements, however, if at adoption the Company has similar obligations for leases as it had at April 30, 2017, the Company believes this guidance will not have a material impact on its results of operations, cash flows and financial position.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Shares-Based Payment Accounting.” ASU 2016-09 is intended to improve the accounting for share-based payment transactions as part of the FASB’s simplification initiative. ASU 2016-09 changes several aspects of the accounting for share-based payment award transactions, including: (1) accounting for income taxes; (2) classification of excess tax benefits on the statement of cash flows; (3) forfeitures; (4) minimum statutory tax withholding requirements; and (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those years for public companies. The Company early adopted this standard as of May 1, 2016. As a result, during fiscal 2017, it recognized the excess tax benefit of $1.3 million as income tax benefit on the condensed consolidated statements of income (adopted prospectively). The adoption did not impact the existing classification of the awards. Excess tax benefits from stock based compensation is now classified in net income in the statement of cash flows instead of being separately stated in financing activities for the twelve months ended April 30, 2017 (adopted prospectively). Additionally, the Company reclassified $2.8 million and $1.4 million of employee withholding taxes paid from operating activities into financing activities in the statement of cash flows for the twelve month periods ended April 30, 2016 and 2015, respectively, as required by ASU 2016-09 (adopted retrospectively). Following the adoption of the new standard, the Company elected to continue estimating the number of awards expected to be forfeited and adjust its estimate on an ongoing basis.
In April 2015, the FASB issued ASU 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” The Company retrospectively adopted this standard on April 30, 2016, which resulted in the reclassification of approximately $0.3 million of debt issuance costs from other assets to long-term debt as of April 30, 2016. Adoption of the new guidance did not impact the Company's shareholder's equity, results of operations or statements of cash flows.
In May 2015, the FASB issued ASU No. 2015-07, Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or its Equivalent), which amends the disclosure requirements of Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures, for reporting entities that measure the fair value of an investment using the net asset value per share (or its equivalent) as a practical expedient. The amendments in ASU 2015-07 remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient and also remove the requirements to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. The Company retrospectively adopted this standard on April 30, 2017, which impacted the disclosure of investments, see Note H for additional information.
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 is evaluating the effect this guidance will have on its results of operations, cash flows and financial position.
18
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, 2017, 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.
19
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
APRIL 30 | |||||||
(in thousands, except share and per share data) | 2017 | 2016 | |||||
ASSETS | |||||||
Current Assets | |||||||
Cash and cash equivalents | $ | 176,978 | $ | 174,463 | |||
Investments - certificates of deposit | 51,750 | 25,750 | |||||
Customer receivables, net | 63,115 | 55,813 | |||||
Inventories | 42,859 | 39,319 | |||||
Prepaid expenses and other | 4,526 | 6,864 | |||||
Total Current Assets | 339,228 | 302,209 | |||||
Property, plant and equipment, net | 107,933 | 99,332 | |||||
Investments - certificates of deposit | 20,500 | 18,250 | |||||
Promotional displays, net | 5,745 | 5,377 | |||||
Deferred income taxes | 18,047 | 32,574 | |||||
Other assets | 9,820 | 8,618 | |||||
TOTAL ASSETS | $ | 501,273 | $ | 466,360 | |||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||
Current Liabilities | |||||||
Accounts payable | $ | 41,312 | $ | 35,011 | |||
Current maturities of long-term debt | 1,598 | 1,574 | |||||
Accrued compensation and related expenses | 36,162 | 35,389 | |||||
Accrued marketing expenses | 8,655 | 8,075 | |||||
Other accrued expenses | 13,770 | 12,264 | |||||
Total Current Liabilities | 101,497 | 92,313 | |||||
Long-term debt, less current maturities | 15,279 | 22,145 | |||||
Defined benefit pension liabilities | 28,032 | 67,131 | |||||
Other long-term liabilities | 4,016 | 4,010 | |||||
Shareholders' Equity | |||||||
Preferred stock, $1.00 par value; 2,000,000 shares authorized, none issued | — | — | |||||
Common stock, no par value; 40,000,000 shares authorized; issued and outstanding shares: at April 30, 2017: 16,232,775, at April 30, 2016: 16,244,041 | 168,835 | 163,290 | |||||
Retained earnings | 224,031 | 164,756 | |||||
Accumulated other comprehensive loss - | |||||||
Defined benefit pension plans | (40,417 | ) | (47,285 | ) | |||
Total Shareholders' Equity | 352,449 | 280,761 | |||||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 501,273 | $ | 466,360 | |||
See notes to consolidated financial statements.
20
CONSOLIDATED STATEMENTS OF INCOME
FISCAL YEARS ENDED APRIL 30 | |||||||||||
(in thousands, except per share data) | 2017 | 2016 | 2015 | ||||||||
Net sales | $ | 1,030,248 | $ | 947,045 | $ | 825,465 | |||||
Cost of sales and distribution | 805,612 | 747,351 | 672,933 | ||||||||
Gross Profit | 224,636 | 199,694 | 152,532 | ||||||||
Selling and marketing expenses | 70,979 | 66,489 | 64,304 | ||||||||
General and administrative expenses | 45,419 | 40,045 | 33,773 | ||||||||
Restructuring charges, net | — | — | (240 | ) | |||||||
Operating Income | 108,238 | 93,160 | 54,695 | ||||||||
Interest expense | 885 | 378 | 515 | ||||||||
Other (income) expense | (1,572 | ) | 996 | (207 | ) | ||||||
Income Before Income Taxes | 108,925 | 91,786 | 54,387 | ||||||||
Income tax expense | 37,726 | 33,063 | 18,888 | ||||||||
Net Income | $ | 71,199 | $ | 58,723 | $ | 35,499 | |||||
SHARE INFORMATION | |||||||||||
Earnings per share | |||||||||||
Basic | $ | 4.38 | $ | 3.61 | $ | 2.25 | |||||
Diluted | 4.34 | 3.57 | 2.21 | ||||||||
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FISCAL YEARS ENDED APRIL 30 | |||||||||||
(in thousands) | 2017 | 2016 | 2015 | ||||||||
Net income | $ | 71,199 | $ | 58,723 | $ | 35,499 | |||||
Other comprehensive income (loss) net of tax: | |||||||||||
Change in pension benefits, net of deferred taxes | |||||||||||
of $(4,391), $4,110, and $9,510, respectively | 6,868 | (6,428 | ) | (14,877 | ) | ||||||
Total Comprehensive Income | $ | 78,067 | $ | 52,295 | $ | 20,622 | |||||
See notes to consolidated financial statements.
21
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ACCUMULATED | ||||||||||||||||||
OTHER | TOTAL | |||||||||||||||||
COMMON STOCK | RETAINED | COMPREHENSIVE | SHAREHOLDERS' | |||||||||||||||
(in thousands, except share data) | SHARES | AMOUNT | EARNINGS | LOSS | EQUITY | |||||||||||||
Balance, May 1, 2014 | 15,476,298 | $ | 127,371 | $ | 89,154 | $ | (25,980 | ) | $ | 190,545 | ||||||||
Net income | 35,499 | 35,499 | ||||||||||||||||
Other comprehensive loss, | ||||||||||||||||||
net of tax | (14,877 | ) | (14,877 | ) | ||||||||||||||
Stock-based compensation | 3,497 | 3,497 | ||||||||||||||||
Adjustments to excess tax | ||||||||||||||||||
benefit from stock-based | ||||||||||||||||||
compensation | 1,172 | 1,172 | ||||||||||||||||
Exercise of stock-based | ||||||||||||||||||
compensation awards, net of amounts | ||||||||||||||||||
withheld for taxes | 599,124 | 12,842 | 12,842 | |||||||||||||||
Stock repurchases | (163,326 | ) | (1,098 | ) | (3,955 | ) | (5,053 | ) | ||||||||||
Employee benefit plan | ||||||||||||||||||
contributions | 167,575 | 6,217 | 6,217 | |||||||||||||||
Balance, April 30, 2015 | 16,079,671 | $ | 150,001 | $ | 120,698 | $ | (40,857 | ) | $ | 229,842 | ||||||||
Net income | 58,723 | 58,723 | ||||||||||||||||
Other comprehensive loss, | ||||||||||||||||||
net of tax | (6,428 | ) | (6,428 | ) | ||||||||||||||
Stock-based compensation | 3,609 | 3,609 | ||||||||||||||||
Adjustments to excess tax | ||||||||||||||||||
benefit from stock-based | ||||||||||||||||||
compensation | 4,559 | 4,559 | ||||||||||||||||
Exercise of stock-based | ||||||||||||||||||
compensation awards, net of amounts | ||||||||||||||||||
withheld for taxes | 375,928 | 5,288 | 5,288 | |||||||||||||||
Stock repurchases | (243,143 | ) | (1,928 | ) | (14,665 | ) | (16,593 | ) | ||||||||||
Employee benefit plan | ||||||||||||||||||
contributions | 31,585 | 1,761 | 1,761 | |||||||||||||||
Balance, April 30, 2016 | 16,244,041 | $ | 163,290 | $ | 164,756 | $ | (47,285 | ) | $ | 280,761 | ||||||||
Net income | 71,199 | 71,199 | ||||||||||||||||
Other comprehensive income, | ||||||||||||||||||
net of tax | 6,868 | 6,868 | ||||||||||||||||
Stock-based compensation | 3,469 | 3,469 | ||||||||||||||||
Exercise of stock-based | ||||||||||||||||||
compensation awards, net of amounts | ||||||||||||||||||
withheld for taxes | 122,772 | 633 | 633 | |||||||||||||||
Stock repurchases | (178,118 | ) | (1,483 | ) | (11,924 | ) | (13,407 | ) | ||||||||||
Employee benefit plan | ||||||||||||||||||
contributions | 44,080 | 2,926 | 2,926 | |||||||||||||||
Balance, April 30, 2017 | 16,232,775 | $ | 168,835 | $ | 224,031 | $ | (40,417 | ) | $ | 352,449 | ||||||||
See notes to consolidated financial statements.
22
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED APRIL 30 | |||||||||||
(in thousands) | 2017 | 2016 | 2015 | ||||||||
OPERATING ACTIVITIES | |||||||||||
Net income | $ | 71,199 | $ | 58,723 | $ | 35,499 | |||||
Adjustments to reconcile net income to net cash and | |||||||||||
cash equivalents provided by operating activities: | |||||||||||
Depreciation and amortization | 18,682 | 16,456 | 14,526 | ||||||||
Net loss on disposal of property, plant and equipment | 444 | 1,576 | 153 | ||||||||
Gain on sales of assets held for sale | — | — | (250 | ) | |||||||
Stock-based compensation expense | 3,469 | 3,609 | 3,497 | ||||||||
Deferred income taxes | 9,899 | 11,629 | 4,335 | ||||||||
Pension contributions in excess of expense | (27,840 | ) | (4,732 | ) | (4,604 | ) | |||||
Excess tax benefit from stock-based compensation | — | (4,968 | ) | (1,887 | ) | ||||||
Contributions of employer stock to employee benefit plan | 2,926 | 1,761 | 6,217 | ||||||||
Other non-cash items | 318 | (663 | ) | 216 | |||||||
Changes in operating assets and liabilities: | |||||||||||
Customer receivables | (7,780 | ) | (9,938 | ) | 288 | ||||||
Inventories | (4,925 | ) | (4,276 | ) | (5,605 | ) | |||||
Prepaid expenses and other assets | (207 | ) | (4,585 | ) | 126 | ||||||
Accounts payable | 6,301 | 723 | 5,113 | ||||||||
Accrued compensation and related expenses | 773 | 5,269 | 1,963 | ||||||||
Income taxes payable | — | (1,791 | ) | 1,201 | |||||||
Marketing and other accrued expenses | 3,821 | 5,811 | (624 | ) | |||||||
Net Cash Provided by Operating Activities | 77,080 | 74,604 | 60,164 | ||||||||
INVESTING ACTIVITIES | |||||||||||
Payments to acquire property, plant and equipment | (21,811 | ) | (28,685 | ) | (20,015 | ) | |||||
Proceeds from sales of property, plant and equipment | 37 | 846 | 22 | ||||||||
Proceeds from sales of assets held for sale | — | — | 1,250 | ||||||||
Purchases of certificates of deposit | (85,000 | ) | (46,750 | ) | (40,750 | ) | |||||
Maturities of certificates of deposit | 56,750 | 38,250 | 5,250 | ||||||||
Investment in promotional displays | (3,720 | ) | (4,434 | ) | (2,363 | ) | |||||
Net Cash Used by Investing Activities | (53,744 | ) | (40,773 | ) | (56,606 | ) | |||||
FINANCING ACTIVITIES | |||||||||||
Payments of long-term debt | (11,731 | ) | (1,547 | ) | (1,309 | ) | |||||
Proceeds from long-term debt | 3,477 | 3,196 | 1,500 | ||||||||
Excess tax benefit from stock-based compensation | — | 4,968 | 1,887 | ||||||||
Proceeds from issuance of common stock and other | 2,366 | 8,114 | 14,268 | ||||||||
Repurchase of common stock | (13,407 | ) | (16,593 | ) | (5,053 | ) | |||||
Withholding of employee taxes related to stock-based compensation | (1,734 | ) | (2,826 | ) | (1,427 | ) | |||||
Notes receivable, net | 208 | (4,221 | ) | 417 | |||||||
Net Cash Provided (Used) by Financing Activities | (20,821 | ) | (8,909 | ) | 10,283 | ||||||
Net Increase in Cash and Cash Equivalents | 2,515 | 24,922 | 13,841 | ||||||||
Cash and Cash Equivalents, Beginning of Year | 174,463 | 149,541 | 135,700 | ||||||||
Cash and Cash Equivalents, End of Year | $ | 176,978 | $ | 174,463 | $ | 149,541 | |||||
See notes to consolidated financial statements.
23
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 2017, 2016 and 2015 were $41.0 million, $38.1 million and $34.3 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 $50.1 million and $34.0 million at April 30, 2017 and 2016, respectively.
Investments in Certificates of Deposit: The Company invests excess cash in certificates of deposit which are carried at cost (which approximates fair value). Certificates of deposit with original maturities greater than three months and remaining maturities less than one year are classified as current assets. Certificates of deposit with remaining maturities greater than one year are classified as long-term assets.
Inventories: Inventories are stated at lower of cost or market. Inventory costs are determined by the last-in, first-out (LIFO) method.
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 2017, 2016 and 2015, 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 to serve as a training tool for retail kitchen designers. The Company invests in these long-lived productive assets to provide the aforementioned benefits. The Company's investment in promotional displays is carried at cost less applicable amortization. Amortization is provided by the straight-line method on an individual display basis over periods of 30 to 36 months (the estimated period of benefit). Promotional display amortization expense for fiscal years 2017, 2016 and 2015 was $3.4 million, $3.4 million and $3.6 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.
24
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.
Self Insurance: The Company is self-insured for certain costs related to employee medical coverage, workers’ compensation liability, general liability, auto liability and property insurance. The Company maintains stop-loss coverage with third-party insurers to limit total exposure. The Company establishes a liability at each balance sheet date based on estimates for a variety of factors that influence the Company’s ultimate cost. In the event that actual experience is substantially different from the estimates, the financial results for the period could be adversely affected. The Company believes that the methodologies used to estimate insurance liabilities are an accurate reflection of the liabilities as of the date of the balance sheet.
Recent Accounting Pronouncements: In May 2014, the Financial Accounting Standards Board (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 does not expect the adoption of ASU 2014-09 and ASU 2015-14 to have a material impact on results of operations, cash flows and financial position. The Company is continuing to evaluate the impact of ASU 2014-09 primarily to determine the transition method to utilize at adoption and the additional disclosures required.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)." ASU 2016-02 requires lessees to recognize most leases on-balance sheet, which will increase reported assets and liabilities. Lessor accounting remains substantially similar to current U.S. GAAP. ASU 2016-02 supersedes "Topic 840 - Leases." ASU 2016-02 is effective for public companies for annual and interim periods in fiscal years beginning after December 15, 2018. ASU 2016-02 mandates a modified retrospective transition method for all entities. The Company is currently assessing the impact that ASU 2016-02 will have on its consolidated financial statements, however, if at adoption the Company has similar obligations for leases as it had at April 30, 2017, the Company believes this guidance will not have a material impact on its results of operations, cash flows and financial position.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Shares-Based Payment Accounting.” ASU 2016-09 is intended to improve the accounting for share-based payment transactions as part of the FASB’s simplification initiative. ASU 2016-09 changes several aspects of the accounting for share-based payment award transactions, including: (1) accounting for income taxes; (2) classification of excess tax benefits on the statement of cash flows; (3) forfeitures; (4) minimum statutory tax withholding requirements; and (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those years for public companies. The Company early adopted this standard as of May 1, 2016. As a result, during fiscal 2017, it recognized the excess tax benefit of $1.3 million as income tax benefit on the condensed consolidated statements of income (adopted prospectively). The adoption did not impact the existing classification of the awards. Excess tax benefits from stock based compensation is now classified in net income in the statement of cash flows instead of being separately stated in financing activities for the twelve months ended April 30, 2017 (adopted prospectively). Additionally, the Company reclassified $2.8 million and $1.4 million of employee withholding taxes paid from operating activities into financing activities in the statement of cash flows for the twelve month periods ended April 30, 2016 and 2015, respectively, as required by ASU 2016-09 (adopted retrospectively). Following the adoption of the new standard, the Company elected to continue estimating the number of awards expected to be forfeited and adjust its estimate on an ongoing basis.
In April 2015, the FASB issued ASU 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” The Company retrospectively adopted this standard on April 30, 2016, which resulted in the reclassification of approximately $0.3 million of debt issuance costs from other assets to long-term debt as of April 30, 2016. Adoption of the new guidance did not impact the Company's shareholder's equity, results of operations or statements of cash flows.
25
In May 2015, the FASB issued ASU No. 2015-07, Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or its Equivalent), which amends the disclosure requirements of Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures, for reporting entities that measure the fair value of an investment using the net asset value per share (or its equivalent) as a practical expedient. The amendments in ASU 2015-07 remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient and also remove the requirements to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. The Company retrospectively adopted this standard on April 30, 2017, which impacted the disclosure of investments, see Note H for additional information.
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 is evaluating the effect this guidance will have on its results of operations, cash flows and 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.
Note B -- Customer Receivables
The components of customer receivables were:
APRIL 30 | |||||||
(in thousands) | 2017 | 2016 | |||||
Gross customer receivables | $ | 66,373 | $ | 58,593 | |||
Less: | |||||||
Allowance for doubtful accounts | (148 | ) | (171 | ) | |||
Allowance for returns and discounts | (3,110 | ) | (2,609 | ) | |||
Net customer receivables | $ | 63,115 | $ | 55,813 | |||
26
Note C -- Inventories
The components of inventories were:
APRIL 30 | |||||||
(in thousands) | 2017 | 2016 | |||||
Raw materials | $ | 18,230 | $ | 17,634 | |||
Work-in-process | 18,704 | 18,414 | |||||
Finished goods | 19,372 | 17,475 | |||||
Total FIFO inventories | 56,306 | 53,523 | |||||
Reserve to adjust inventories to LIFO value | (13,447 | ) | (14,204 | ) | |||
Total LIFO inventories | $ | 42,859 | $ | 39,319 | |||
Note D -- Property, Plant and Equipment
The components of property, plant and equipment were:
APRIL 30 | |||||||
(in thousands) | 2017 | 2016 | |||||
Land | $ | 3,581 | $ | 2,311 | |||
Buildings and improvements | 81,172 | 80,042 | |||||
Buildings and improvements - capital leases | 11,202 | 11,202 | |||||
Machinery and equipment | 187,836 | 182,937 | |||||
Machinery and equipment - capital leases | 29,378 | 29,357 | |||||
Construction in progress | 10,838 | 2,556 | |||||
324,007 | 308,405 | ||||||
Less accumulated amortization and depreciation | (216,074 | ) | (209,073 | ) | |||
Total | $ | 107,933 | $ | 99,332 | |||
Amortization and depreciation expense on property, plant and equipment amounted to $14.2 million, $11.6 million and $9.5 million in fiscal years 2017, 2016 and 2015, respectively. Accumulated amortization on capital leases included in the above table amounted to $29.7 million and $29.6 million as of April 30, 2017 and 2016, respectively.
27
Note E -- Loans Payable and Long-Term Debt
Maturities of long-term debt are as follows:
FISCAL YEARS ENDING APRIL 30 | |||||||||||||||||||||||||||
(in thousands) | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 AND THERE- AFTER | TOTAL OUTSTANDING | ||||||||||||||||||||
Economic development loans | $ | — | $ | 2,189 | $ | — | $ | — | $ | — | $ | 2,250 | $ | 4,439 | |||||||||||||
Capital lease obligations | 1,598 | 1,268 | 1,081 | 810 | 635 | 1,456 | 6,848 | ||||||||||||||||||||
Other long-term debt | — | — | — | — | — | 5,925 | 5,925 | ||||||||||||||||||||
Debt issuance costs | (18 | ) | (17 | ) | (17 | ) | (17 | ) | (17 | ) | (249 | ) | (335 | ) | |||||||||||||
Total | $ | 1,580 | $ | 3,440 | $ | 1,064 | $ | 793 | $ | 618 | $ | 9,382 | $ | 16,877 | |||||||||||||
Current maturities | $ | (1,598 | ) | ||||||||||||||||||||||||
Total long-term debt | $ | 15,279 | |||||||||||||||||||||||||
The Company’s primary loan agreement is a $35 million unsecured revolving credit facility which expires on December 31, 2018 with Wells Fargo Bank, N.A. ("Wells Fargo"). At April 30, 2017 and 2016, $0 and $10 million, respectively, of loans were outstanding under this facility. 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 insignificant in each of fiscal years 2017, 2016 and 2015.
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") (0.995% at April 30, 2017) plus 1.5%. 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 1.5 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, 2017, including as follows: (1) the Company’s ratio of total liabilities to tangible net worth at April 30, 2017 was 0.42 to 1.0; and (2) cash flow to fixed charges for its most recent four quarters was 4.94 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 was secured by a Deed of Trust on the property and bears interest at a fixed rate of 3%. The agreement deferred principal and interest during the term of the obligation and forgives any outstanding balance at December 31, 2019, if the Company complied with certain employment levels. The value of the land and associated site improvements totaled $3.5 million. During the fourth quarter of fiscal 2016, the Company conveyed the property for full settlement of the loan and accrued interest totaling $1.6 million. The Company recorded a loss on the transaction of $1.9 million. The loss was included in other (income) expense on the Company’s statements of income.
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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 $2.2 million as of April 30, 2017 and 2016. 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.
From 2013 through 2017, the Company entered into a total of 22 capitalized lease agreements in the aggregate amount of $3.5 million with First American Financial Bancorp related to financing computer equipment. Each lease has a term of 48 months and an interest rate between 3.5% and 6.5%. The leases require quarterly rental payments. The aggregate outstanding amount under all of these leases as of April 30, 2017 and 2016 was $1.4 million and $1.1 million, respectively.
From 2013 through 2017, the Company entered into a total of 21 capitalized lease agreements in the aggregate amount of $2.3 million with e-Plus Group related to financing computer equipment. Each lease has a term of 51 months and an interest rate between 3.5% and 6.5%. The leases require monthly rental payments. The aggregate outstanding amount under all of these leases as of April 30, 2017 and 2016 was $1.0 million.
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, 2017 and 2016 were $4.4 million and $5.0 million, respectively.
In 2015, the Company entered into a $1.5 million loan 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. The loan agreement expires on February 1, 2025 and bears interest at a fixed rate of 3% per annum. The loan agreement is secured by certain equipment. It defers principal and interest during the term of the obligation and forgives any outstanding balance at December 31, 2018, if the Company complies with certain employment levels at the facility.
In 2016, the Company entered into a $0.8 million loan 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. The loan agreement expires on June 1, 2026 and bears interest at a fixed rate of 3% per annum. The loan agreement is secured by certain equipment. It defers principal and interest during the term of the obligation and forgives any outstanding balance at December 31, 2018, if the Company complies with certain employment levels at the facility.
On January 25, 2016 the Company entered into a New Markets Tax Credit ("NMTC") financing agreement, pursuant to section 45D of the Internal Revenue Code of 1986, as amended, and Kentucky Revised Statutes Sections 141.432 through 141.434, to take advantage of a tax credit related to working capital and capital improvements at its Monticello, Kentucky facility. This financing agreement was structured with unrelated third party financial institutions (the "Investors"), their wholly-owned investment funds ("Investment Funds") and their wholly-owned community development entities ("CDEs") in connection with our participation in qualified transactions under the NMTC program. In exchange for substantially all of the benefits derived from the tax credits, the Investors made a contribution of $2.3 million, net of syndication fees, to the project. Upon closing the transaction, a wholly owned subsidiary of the Company provided a $4.3 million loan receivable to the Investment Funds, which is included in other long term assets in the accompanying consolidated balance sheets. The Company also entered into loan agreements aggregating $6.6 million payable to the CDEs sponsoring the project. The loans have a term of thirty years with an aggregate interest rate of approximately 1.2%. As of April 30, 2017 and 2016, the Company had drawn $5.9 million and $3.2 million, respectively, of the loan proceeds, which is included in long-term debt in the accompanying consolidated balance sheets. The NMTC is subject to recapture for a period of seven years, the compliance period. During the compliance period, the Company is required to comply with various regulations and contractual provisions that apply to the NMTC arrangement. We do not anticipate any credit recaptures will be required in connection with this arrangement. This transaction also includes a put/call feature which becomes enforceable at the end of the compliance period whereby we may be obligated or entitled to repurchase the Investors’ interest in the Investment Funds. The value attributable to the put/call is nominal. Direct costs of $0.3 million incurred in structuring the financing arrangement are deferred and will be recognized as expense over the term of the loans (30 years).
Certain of the Company's loan agreements limit the amount and type of indebtedness the Company can incur and require the Company to maintain specified financial ratios measured on a quarterly basis. In addition to the assets previously discussed, certain of the Company’s property, plant and equipment are pledged as collateral under certain loan agreements and the capital lease
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arrangements. The Company was in compliance with all covenants contained in its loan agreements and capital leases at April 30, 2017.
Interest paid under the Company’s loan agreements and capital leases during fiscal years 2017, 2016 and 2015 was $0.6 million, $0.5 million and $0.5 million, respectively.
Note F -- Earnings Per Share
The following table summarizes the computations of basic and diluted earnings per share:
FISCAL YEARS ENDED APRIL 30 | |||||||||||
(in thousands, except per share amounts) | 2017 | 2016 | 2015 | ||||||||
Numerator used in basic and diluted earnings per common share: | |||||||||||
Net income | $ | 71,199 | $ | 58,723 | $ | 35,499 | |||||
Denominator: | |||||||||||
Denominator for basic earnings per common share - | |||||||||||
weighted-average shares | 16,259 | 16,256 | 15,764 | ||||||||
Effect of dilutive securities: | |||||||||||
Stock options and restricted stock units | 139 | 186 | 273 | ||||||||
Denominator for diluted earnings per common share - | |||||||||||
weighted-average shares and assumed conversions | 16,398 | 16,442 | 16,037 | ||||||||
Net earnings per share | |||||||||||
Basic | $ | 4.38 | $ | 3.61 | $ | 2.25 | |||||
Diluted | $ | 4.34 | $ | 3.57 | $ | 2.21 | |||||
There were no potentially dilutive securities for the fiscal year ended April 30, 2017 and 2016, which were excluded from the calculation of net earnings per share. Potentially dilutive shares of 0.1 million issuable under the Company’s stock incentive plans have been excluded from the calculation of net earnings per share for the fiscal year ended April 30, 2015, 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, 2017, 2016 and 2015 was $3.5 million, $3.6 million and $3.5 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, 2017, the Company had stock option and RSU awards outstanding under four different plans: (1) second amended and restated 2004 stock incentive plan for employees; (2) 2006 non-employee directors equity ownership plan; (3) 2011 non-employee directors equity ownership plan; and (4) 2015 non-employee directors equity ownership plan. As of April 30, 2017, there were 881,010 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
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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 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. 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 for fiscal years ended April 30, 2016 and 2015. The Company did not grant stock options during the fiscal year ended April 30, 2017.
FISCAL YEARS ENDED APRIL 30 | |||||||
2016 | 2015 | ||||||
Weighted-average fair value of grants | $ | 18.59 | $ | 9.25 | |||
Expected volatility | 29.8 | % | 27.4 | % | |||
Expected term in years | 5.8 | 5.9 | |||||
Risk-free interest rate | 2.16 | % | 2.19 | % | |||
Expected dividend yield | 0.0 | % | 0.0 | % | |||
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, 2017, 2016 and 2015 (remaining contractual term in years and exercise prices are weighted-averages):
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NUMBER OF OPTIONS | WEIGHTED AVERAGE REMAINING CONTRACTUAL TERM | WEIGHTED AVERAGE EXERCISE PRICE | AGGREGATE INTRINSIC VALUE (in thousands) | |||||||
Outstanding at April 30, 2014 | 851,314 | 4.3 | $28.16 | $ | 3,121 | |||||
Granted | 66,600 | 9.1 | 29.92 | — | ||||||
Exercised | (508,639 | ) | — | 28.05 | 7,209 | |||||
Cancelled or expired | (11,200 | ) | — | 32.64 | — | |||||
Outstanding at April 30, 2015 | 398,075 | 5.0 | $28.46 | $ | 8,851 | |||||
Granted | 30,700 | 9.1 | 57.11 | — | ||||||
Exercised | (287,975 | ) | — | 27.99 | 11,089 | |||||
Cancelled or expired | (14,167 | ) | — | 40.43 | — | |||||
Outstanding at April 30, 2016 | 126,633 | 5.8 | $35.15 | $ | 4,773 | |||||
Granted | — | — | — | — | ||||||
Exercised | (71,715 | ) | — | 33.00 | 2,597 | |||||
Cancelled or expired | — | — | — | — | ||||||
Outstanding at April 30, 2017 | 54,918 | 5.6 | $37.95 | $ | 2,963 | |||||
Vested and expected to vest in the future at April 30, 2017 | 52,283 | 5.5 | $37.76 | $ | 2,830 | |||||
Exercisable at April 30, 2017 | 17,949 | 1.4 | $28.13 | $ | 1,145 | |||||
The aggregate intrinsic value in the previous table of the outstanding options on April 30, 2017 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 2017 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, 2017. 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, 2017, 2016 and 2015 was $0.6 million, $0.7 million and $0.7 million, respectively.
As of April 30, 2017, there was $0.2 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 1.0 year.
Cash received from option exercises for the fiscal years ended April 30, 2017, 2016 and 2015, was an aggregate of $2.4 million, $8.1 million and $14.3 million, respectively. The actual tax benefit realized for the tax deduction from option exercises of stock option awards totaled $1.0 million, $4.3 million and $2.8 million for the fiscal years ended April 30, 2017, 2016 and 2015, respectively.
The following table summarizes information about stock options outstanding at April 30, 2017 (remaining lives in years and exercise prices are weighted-averages):
OPTIONS OUTSTANDING | OPTIONS EXERCISABLE | ||||||||||
OPTION PRICE | REMAINING | EXERCISE | |||||||||