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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

(Mark One)

 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2020
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)
Virginia54-1138147
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
  
561 Shady Elm Road,Winchester,Virginia22602
(Address of principal executive offices)(Zip Code)
 

(540) 665-9100
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common StockAMWDNASDAQ

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  No
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).   Yes    No

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 filerAccelerated filer                 
Non-accelerated filerSmaller 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 any 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 by Rule 12b-2 of the Exchange Act).  Yes No
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
 
As of August 25, 2020, 16,993,260 shares of the Registrant’s Common Stock were outstanding.




AMERICAN WOODMARK CORPORATION
 
FORM 10-Q
 
INDEX
 
 
PART I.FINANCIAL INFORMATION
PAGE
NUMBER
Item 1.Financial Statements (unaudited) 
 3
 4
 5
6
 7
 9-19
Item 2.19-26
Item 3.26
Item 4.26
PART II.OTHER INFORMATION 
Item 1.26
Item 1A.26
Item 6.27
28

2


PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements
AMERICAN WOODMARK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data) 
(Unaudited) 
 July 31,
2020
April 30,
2020
ASSETS  
Current assets  
Cash and cash equivalents$128,055 $97,059 
Customer receivables, net123,301 106,344 
Inventories126,700 111,836 
Prepaid expenses and other9,913 9,933 
Total current assets387,969 325,172 
Property, plant and equipment, net199,088 203,824 
Operating lease right-of-use assets126,409 127,668 
Customer relationship intangibles, net156,028 167,444 
Trademarks, net1,389 2,222 
Goodwill767,612 767,612 
Promotional displays, net14,205 13,966 
Deferred income taxes1,015 915 
Other assets13,722 13,983 
TOTAL ASSETS$1,667,437 $1,622,806 
LIABILITIES AND SHAREHOLDERS' EQUITY  
Current liabilities  
Accounts payable$62,824 $56,342 
Current maturities of long-term debt2,087 2,216 
Short-term lease liability - operating19,566 18,896 
Accrued compensation and related expenses48,693 49,064 
Accrued marketing expenses15,717 12,361 
Other accrued expenses29,178 16,727 
Total current liabilities178,065 155,606 
Long-term debt, less current maturities595,248 594,921 
Deferred income taxes50,151 52,935 
Long-term lease liability - operating111,090 112,454 
Other long-term liabilities11,363 6,352 
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 July 31, 2020: 16,988,340; at April 30, 2020: 16,926,537
363,600 359,430 
Retained earnings408,766 392,281 
Accumulated other comprehensive loss - Defined benefit pension plans(50,846)(51,173)
Total shareholders' equity721,520 700,538 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY$1,667,437 $1,622,806 
See notes to unaudited condensed consolidated financial statements.  
3


AMERICAN WOODMARK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share data)
(Unaudited)
 
 Three Months Ended
 July 31,
 20202019
Net sales$390,087 $427,365 
Cost of sales and distribution309,949 332,846 
Gross Profit80,138 94,519 
Selling and marketing expenses19,898 20,687 
General and administrative expenses29,983 29,432 
Restructuring charges, net3,460 (19)
Operating Income26,797 44,419 
Interest expense, net6,030 8,088 
Other income, net(1,688)(7)
Income Before Income Taxes22,455 36,338 
Income tax expense5,970 9,457 
Net Income$16,485 $26,881 
Weighted Average Shares Outstanding  
Basic16,936,832 16,864,870 
Diluted17,013,444 16,907,463 
Net earnings per share  
Basic$0.97 $1.59 
Diluted$0.97 $1.59 
See notes to unaudited condensed consolidated financial statements.

4


AMERICAN WOODMARK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(Unaudited)
 
 Three Months Ended
 July 31,
 20202019
Net income$16,485 $26,881 
Other comprehensive income, net of tax:  
Change in pension benefits, net of deferred taxes of $113 and $107 for the three months ended July 31, 2020 and 2019, respectively327 315 
Total Comprehensive Income$16,812 $27,196 
See notes to unaudited condensed consolidated financial statements.

5


AMERICAN WOODMARK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
(Unaudited)
    ACCUMULATED   
    OTHERTOTAL
 COMMON STOCKRETAINEDCOMPREHENSIVESHAREHOLDERS'
(in thousands, except share data)SHARESAMOUNTEARNINGSLOSSEQUITY
Balance, April 30, 201916,849,026 $352,424 $317,420 $(49,491)$620,353 
Net income  26,881  26,881 
Other comprehensive income, 
net of tax   315 315 
Stock-based compensation 897   897 
Exercise of stock-based 
compensation awards, net of amounts
withheld for taxes20,923 (1,050)  (1,050)
Employee benefit plan 
contributions45,721 3,772   3,772 
Balance, July 31, 201916,915,670 $356,043 $344,301 $(49,176)$651,168 
Balance, April 30, 202016,926,537 $359,430 $392,281 $(51,173)$700,538 
Net income  16,485  16,485 
Other comprehensive income,  
net of tax   327 327 
Stock-based compensation 961   961 
Exercise of stock-based 
compensation awards, net of amounts
withheld for taxes16,212 (534)  (534)
Employee benefit plan 
contributions45,591 3,743   3,743 
Balance, July 31, 202016,988,340 $363,600 $408,766 $(50,846)$721,520 
See notes to unaudited condensed consolidated financial statements.


6



AMERICAN WOODMARK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 Three Months Ended
 July 31,
 20202019
OPERATING ACTIVITIES  
Net income$16,485 $26,881 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization26,352 24,113 
Net loss on disposal of property, plant and equipment46 66 
Reduction in the carrying amount of operating lease right-of-use assets6,706 5,344 
Amortization of debt issuance costs630 662 
Unrealized gain on foreign exchange forward contracts1,255 56 
Stock-based compensation expense961 897 
Deferred income taxes(2,855)(1,726)
Pension contributions in excess of expense(502)(461)
Contributions of employer stock to employee benefit plan3,743 3,772 
Other non-cash items750 451 
Changes in operating assets and liabilities:
Customer receivables(17,524)5,426 
Inventories(15,539)(7,137)
Prepaid expenses and other assets(465)(1,094)
Accounts payable5,979 4,876 
Accrued compensation and related expenses(371)(10,613)
Income taxes payable7,855 10,575 
Operating lease liabilities(6,142)(5,109)
Marketing and other accrued expenses12,636 5,633 
Net cash provided by operating activities40,000 62,612 
INVESTING ACTIVITIES  
Payments to acquire property, plant and equipment(5,183)(4,360)
Proceeds from sales of property, plant and equipment6 13 
Maturities of certificates of deposit 1,000 
Investment in promotional displays(2,659)(2,233)
Net cash used by investing activities(7,836)(5,580)
FINANCING ACTIVITIES  
Payments of long-term debt(634)(42,589)
Withholding of employee taxes related to stock-based compensation(534)(1,050)
Net cash used by financing activities(1,168)(43,639)
Net increase in cash and cash equivalents30,996 13,393 
7


 Three Months Ended
 July 31,
 20202019
Cash and cash equivalents, beginning of period97,059 57,656 
Cash and cash equivalents, end of period$128,055 $71,049 
Supplemental cash flow information:  
     Non-cash investing and financing activities:
          Property, plant and equipment included in accounts payable at period end$502 $1,014 
    Cash paid during the period for:
         Interest$1,195 $3,554 
       Income taxes$974 $607 
See notes to unaudited condensed consolidated financial statements.
8


AMERICAN WOODMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A--Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended July 31, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending April 30, 2021.  The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes in the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 2020 filed with the U.S. Securities and Exchange Commission (“SEC”).  

COVID-19: The COVID-19 pandemic impacted our business operations and financial results beginning in the fourth quarter of fiscal 2020 and continues to impact us in fiscal 2021. Although the financial impact on our overall fiscal 2020 results was limited due to the timing of the outbreak, we saw more material impacts on our results for the first quarter of fiscal 2021. We continue to face numerous uncertainties in estimating the direct and indirect effects of COVID-19 on our present and future business operations, financial condition, results of operations, and liquidity. Due to several rapidly changing variables related to the COVID-19 pandemic, we cannot reasonably estimate future economic trends and the timing of when stability will return.

Goodwill and Intangible Assets: Goodwill represents the excess of purchase price over the net amount of identifiable assets acquired and liabilities assumed in a business combination measured at fair value. The Company does not amortize goodwill but evaluates for impairment annually, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

In accordance with accounting standards, when evaluating goodwill, an entity has the option first to assess qualitative factors to determine whether events and circumstances indicate that it is more likely than not that goodwill is impaired. If after such assessment an entity concludes that the asset is not impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the asset using a quantitative impairment test, and if impaired, the associated assets must be written down to fair value. There were no impairment charges related to goodwill for the three-month periods ended July 31, 2020 and 2019.

Intangible assets consist of customer relationship intangibles and trademarks. The Company amortizes the cost of intangible assets over their estimated useful lives, which range from 3 to 6 years, unless such lives are deemed indefinite. There were no impairment charges related to intangible assets for the three-month periods ended July 31, 2020 and 2019.

Foreign Exchange Forward Contracts: In the normal course of business, the Company is subject to risk from adverse fluctuations in foreign exchange rates. The Company manages these risks through the use of foreign exchange forward contracts. The Company recognizes its outstanding forward contracts in the condensed consolidated balance sheets at their fair values. The Company does not designate the forward contracts as accounting hedges. The changes in the fair value of the forward contracts are recorded in other income, net in the condensed consolidated statements of income.

At July 31, 2020, the Company held forward contracts maturing from August 2020 to April 2021 to purchase 226.0 million Mexican pesos at exchange rates ranging from 22.48 to 23.42 Mexican pesos to one U.S. dollar. An asset of $0.2 million is recorded in prepaid expenses and other on the condensed consolidated balance sheets.

Note B--New Accounting Pronouncements
 
In March 2020, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022 and can be adopted as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020. The Company has identified loans
9


and other financial instruments that are directly or indirectly influenced by LIBOR and does not expect the adoption of ASU 2020-04 to have a material impact on its consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes," which simplifies the accounting for income taxes by removing certain exceptions for recognizing investments, performing intraperiod tax allocations and calculating income taxes in interim periods. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12 is effective for the Company beginning May 1, 2021. Early adoption is permitted. The Company is currently reviewing the provisions of this new pronouncement and the impact, if any, the adoption of this guidance may have on financial position and results of operations.

In June 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," which modifies the methodology for recognizing loss impairments on certain types of financial instruments, including receivables. The new methodology requires an entity to estimate the credit losses expected over the life of an exposure. ASU 2016-13 is effective for the Company beginning May 1, 2020. The adoption did not have a material impact on our consolidated financial statements.

Note C--Net Earnings Per Share
 
The following table sets forth the computation of basic and diluted net earnings per share:
 Three Months Ended
 July 31,
(in thousands, except per share amounts)20202019
Numerator used in basic and diluted net earnings  
per common share:  
Net income$16,485 $26,881 
Denominator:  
Denominator for basic net earnings per common  
share - weighted-average shares16,937 16,865 
Effect of dilutive securities:  
Stock options and restricted stock units77 43 
Denominator for diluted net earnings per common  
share - weighted-average shares and assumed  
conversions17,013 16,907 
Net earnings per share  
Basic$0.97 $1.59 
Diluted$0.97 $1.59 

There were no potentially dilutive securities for the three-month periods ended July 31, 2020 and 2019, which were excluded from the calculation of net earnings per diluted share.

Note D--Stock-Based Compensation
 
The Company has various stock-based compensation plans. During the three-months ended July 31, 2020, the Board of Directors of the Company approved grants of service-based restricted stock units ("RSUs") and performance-based RSUs to key employees. The performance-based RSUs totaled 124,374 units and the service-based RSUs totaled 67,006 units. The performance-based RSUs entitle the recipients to receive one share of the Company’s common stock per unit granted if applicable performance conditions are met and the recipient remains continuously employed with the Company until the units vest.  The service-based RSUs entitle the recipients to receive one share of the Company’s common stock per unit granted if they remain continuously employed with the Company until the units vest.  All of the Company’s RSUs granted to employees cliff-vest three years from the grant date.

For the three-month periods ended July 31, 2020 and 2019, stock-based compensation expense was allocated as follows: 
10


 Three Months Ended 
 
July 31,
(in thousands)20202019
Cost of sales and distribution$299 $215 
Selling and marketing expenses(21)208 
General and administrative expenses683 474 
Stock-based compensation expense$961 $897 
 
During the three months ended July 31, 2020, the Company also approved grants of 11,456 cash-settled performance-based restricted stock tracking units ("RSTUs") and 6,229 cash-settled service-based RSTUs for more junior level employees.  Each performance-based RSTU entitles the recipient to receive a payment in cash equal to the fair market value of one share of the Company's common stock as of the payment date if applicable performance conditions are met and the recipient remains continuously employed with the Company until the units vest.  The service-based RSTUs entitle the recipients to receive a payment in cash equal to the fair market value of one share of the Company's common stock as of the payment date if they remain continuously employed with the Company until the units vest.  All of the RSTUs cliff-vest three years from the grant date.  Since the RSTUs will be settled in cash, the grant date fair value of these awards is recorded as a liability until the date of payment.  The fair value of each cash-settled RSTU award is remeasured at the end of each reporting period and the liability is adjusted, and related expense recorded, based on the new fair value.  The Company recognized expense of $0.3 million and $0.0 million for the three-month periods ended July 31, 2020 and 2019, respectively. A liability for payment of the RSTUs is included in the condensed consolidated balance sheets in the amount of $0.4 million and $0.4 million as of July 31, 2020 and April 30, 2020, respectively.

Note E--Customer Receivables
 
The components of customer receivables were: 
 July 31,April 30,
(in thousands)20202020
Gross customer receivables$129,989 $112,528 
Less:
Allowance for doubtful accounts(408)(472)
Allowance for returns and discounts(6,280)(5,712)
Net customer receivables$123,301 $106,344 
  

Note F--Inventories
 
The components of inventories were: 
 July 31,April 30,
(in thousands)20202020
Raw materials$50,869 $51,460 
Work-in-process49,129 42,381 
Finished goods41,279 32,572 
Total FIFO inventories141,277 126,413 
Reserve to adjust inventories to LIFO value(14,577)(14,577)
Total inventories$126,700 $111,836 
11


 
Of the total inventory of $126.7 million at July 31, 2020, $78.7 million is carried under the FIFO method of accounting and $48.0 million is carried under the LIFO method. Of the total inventory of $111.8 million at April 30, 2020, $66.0 million is carried under the FIFO method and $45.8 million is carried under the LIFO method.
 
Note G--Property, Plant and Equipment

The components of property, plant and equipment were:
 July 31,April 30,
(in thousands)20202020
Land$4,431 $4,431 
Buildings and improvements120,995 120,819 
Buildings and improvements - finance leases11,636 11,636 
Machinery and equipment313,661 312,806 
Machinery and equipment - finance leases30,972 30,911 
Construction in progress9,158 8,164 
490,853 488,767 
Less accumulated amortization and depreciation(291,765)(284,943)
Total$199,088 $203,824 

Amortization and depreciation expense on property, plant and equipment amounted to $11.6 million and $9.1 million for the three months ended July 31, 2020 and 2019, respectively. The three months ended July 31, 2020 includes accelerated depreciation expense of $1.1 million related to the closure of the Humboldt plant. Accumulated amortization on finance leases included in the above table amounted to $32.8 million and $32.3 million as of July 31, 2020 and April 30, 2020, respectively.

Note H--Intangibles

The components of customer relationship intangibles were:
 July 31,April 30,
(in thousands)20202020
Customer relationship intangibles$274,000 $274,000 
Less accumulated amortization(117,972)(106,556)
Total$156,028 $167,444 

The components of trademarks were:
 July 31,April 30,
(in thousands)20202020
Trademarks$10,000 $10,000 
Less accumulated amortization(8,611)(7,778)
Total$1,389 $2,222 

Customer relationship intangibles and trademarks are amortized over the estimated useful lives on a straight-line basis over six and three years, respectively. Amortization expense for each of the three month periods ended July 31, 2020 and 2019 was $12.3 million.

Note I--Product Warranty
 
12


The Company estimates outstanding warranty costs based on the historical relationship between warranty claims and revenues.  The warranty accrual is reviewed monthly to verify that it properly reflects the remaining obligation based on the anticipated expenditures over the balance of the obligation period.  Adjustments are made when actual warranty claim experience differs from estimates.  Warranty claims are generally made within two months of the original shipment date.
 
The following is a reconciliation of the Company’s warranty liability, which is included in other accrued expenses on the unaudited condensed consolidated balance sheets: 
 Three Months Ended
 July 31,
(in thousands)20202019
Beginning balance at May 1$3,753 $4,616 
Accrual4,303 6,453 
Settlements(4,138)(6,219)
Ending balance at July 31$3,918 $4,850 

Note J--Pension Benefits
 
Prior to April 30, 2020, the Company had two defined benefit pension plans covering many of the Company's employees hired prior to April 30, 2012. Effective April 30, 2012, the Company froze all future benefit accruals under the Company’s defined-benefit pension plan. Effective April 30, 2020, these plans were merged into one plan.
 
Net periodic pension benefit cost consisted of the following for the three-month periods ended July 31, 2020 and 2019: 
 Three Months Ended
 July 31,
(in thousands)20202019
Interest cost$1,165 $1,493 
Expected return on plan assets(2,107)(2,081)
Recognized net actuarial loss440 423 
Net periodic pension benefit$(502)$(165)
 
The Company did not contribute to its pension plan in the first three months of fiscal 2021 and does not expect to contribute any funds during the remainder of fiscal 2021. The Company made contributions of $0.5 million to its pension plans in fiscal 2020. 

Note K--Fair Value Measurements
 
The Company utilizes the hierarchy of fair value measurements to classify certain of its assets and liabilities based upon the following definitions:
Level 1- Investments with quoted prices in active markets for identical assets or liabilities. The Company’s cash equivalents are invested in money market funds, mutual funds and certificates of deposit.  The Company’s mutual fund investment assets represent contributions made and invested on behalf of the Company’s named executive officers in a supplementary employee retirement plan.

Level 2- Investments with observable inputs other than Level 1 prices, such as: quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3- Investments with unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The Company has no Level 3 assets or liabilities measured on a recurring basis.

13


The Company's financial instruments include cash and equivalents, marketable securities and other investments; accounts receivable and accounts payable; and short- and long-term debt. The carrying values of cash and equivalents, accounts receivable and payable and short-term debt on the condensed consolidated balance sheets approximate their fair value due to the short maturities of these items. The forward contracts were marked to market and therefore represent fair value. The fair values of these contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. The following table summarizes the fair value of assets and liabilities that are recorded in the Company’s consolidated financial statements as of July 31, 2020 and April 30, 2020 at fair value on a recurring basis (in thousands):
 Fair Value Measurements
 As of July 31, 2020
 Level 1Level 2Level 3
ASSETS:   
Mutual funds$884 $ $ 
Foreign exchange forward contracts 153  
Total assets at fair value$884 $153 $ 
 As of April 30, 2020
 Level 1Level 2Level 3
ASSETS:   
Mutual funds$773 $ $ 
LIABILITIES:
Foreign exchange forward contracts$ $(1,102)$ 

There were no transfers between Level 1, Level 2 or Level 3 for assets measured at fair value on a recurring basis.

Note L--Loans Payable and Long-Term Debt

On December 29, 2017, the Company entered into a credit agreement (as subsequently amended, the "Credit Agreement") with a syndicate of lenders and Wells Fargo Bank, National Association, as administrative agent, providing for a $100 million, 5-year revolving loan facility with a $25 million sub-facility for the issuance of letters of credit (the “Revolving Facility”), a $250 million, 5-year initial term loan facility (the "Initial Term Loan") and a $250 million delayed draw term loan facility (the "Delayed Draw Term Loan" and, together with the Revolving Facility and the Initial Term Loan, the "Credit Facilities"). The Company borrowed the entire $250 million available under each of the Initial Term Loan and the Delayed Draw Term Loan on December 29, 2017 and February 12, 2018, respectively, in connection with its acquisition of RSI Home Products, Inc. (“RSI”) and subsequent refinancing of RSI’s debt. The Company is required to make specified quarterly installments on both the Initial Term Loan and the Delayed Draw Loan. As of July 31, 2020 and April 30, 2020, $122 million was outstanding on each of the Initial Term Loan and the Delayed Draw Loan for a total of $244 million. The outstanding balance approximates fair value as the Initial Term Loan and Delayed Draw Term Loan have a floating interest rate. There were no amounts outstanding on the Revolving Facility as of July 31, 2020 or April 30, 2020. The Credit Facilities mature on December 29, 2022.

Amounts outstanding under the Credit Facilities bear interest based on a fluctuating rate measured by reference to either, at the Company’s option, a base rate plus an applicable margin or LIBOR plus an applicable margin, with the applicable margin being determined by reference to the Company’s then-current “Total Funded Debt to EBITDA Ratio.” The Company also incurs a quarterly commitment fee on the average daily unused portion of the Revolving Facility during the applicable quarter at a rate per annum also determined by reference to the Company’s then-current “Total Funded Debt to EBITDA Ratio.” In addition, a letter of credit fee will accrue on the face amount of any outstanding letters of credit at a per annum rate equal to the applicable margin on LIBOR loans, payable quarterly in arrears. As of July 31, 2020, the applicable margin with respect to base rate loans and LIBOR loans was 0.50% and 1.50%, respectively, and the commitment fee was 0.175%. As of December 31, 2021, the Company will transition to the Secured Overnight Financial Rate ("SOFR") as required by the Credit Facilities. The Company expects the transition to SOFR to be materially similar to LIBOR.

14


The Credit Agreement includes certain financial covenants, including a maximum “Total Funded Debt to EBITDA Ratio” of no more than 3.25 to 1.00 (with an increase to 3.75 to 1.00 for a certain period upon the consummation of a “Qualified Acquisition”). The Company is also required to maintain a “Fixed Charge Coverage Ratio” of no less than 1.25 to 1.00. 

The Credit Agreement includes certain additional covenants, including negative covenants that restrict the ability of the Company and certain of its subsidiaries to incur additional indebtedness, create additional liens on its assets, dispose of its assets or engage in a merger or another similar transaction or engage in transactions with affiliates, subject, in each case, to the various exceptions and conditions described in the Credit Agreement. The negative covenants also restrict the Company’s ability to make certain investments and to make certain restricted payments, including the payment of dividends and repurchase of common stock, in certain limited circumstances. The Company is, however, permitted to make unlimited investments so long as the "Total Funded Debt to EBITDA Ratio" is less than or equal to 3.00 to 1.00 after giving effect to any such investment and no default or event of default has occurred and is continuing or would result from any such investment. The Company is also permitted to make (i) unlimited restricted payments so long as the “Total Funded Debt to EBITDA Ratio” would be less than or equal to 2.75 to 1.00 after giving effect to any such payment and no default or event of default has occurred and is continuing or would result from any such payment and (ii) up to an aggregate of $50 million in restricted payments not otherwise permitted under the Credit Agreement so long as no default or event of default has occurred and is continuing or would result from any such payment.
As of July 31, 2020, the Company's Total Funded Debt to EBITDA Ratio was 2.69 and the Fixed Charge Coverage Ratio was 4.84. As of July 31, 2020, the Company was in compliance with the covenants included in the Credit Agreement.

The Company’s obligations under the Credit Agreement are guaranteed by the Company’s subsidiaries and the obligations of the Company and its subsidiaries are secured by a pledge of substantially all of their respective personal property.

On February 12, 2018, the Company issued $350 million in aggregate principal amount of 4.875% Senior Notes due 2026 (the “Senior Notes”). The Senior Notes mature on March 15, 2026 and interest on the Senior Notes is payable semi-annually in arrears on March 15 and September 15 of each year. The Senior Notes are fully and unconditionally guaranteed by each of the Company’s current and future wholly-owned domestic subsidiaries that guarantee the Company’s obligations under the Credit Agreement. The indenture governing the Senior Notes restricts the ability of the Company and the Company’s “restricted subsidiaries” to, as applicable, (i) incur additional indebtedness or issue certain preferred shares, (ii) create liens, (iii) pay dividends, redeem or repurchase stock or make other distributions or restricted payments, (iv) make certain investments, (v) create restrictions on the ability of the “restricted subsidiaries” to pay dividends to the Company or make other intercompany transfers, (vi) transfer or sell assets, (vii) merge or consolidate with a third party and (viii) enter into certain transactions with affiliates of the Company, subject, in each case, to certain qualifications and exceptions as described in the indenture. As of July 31, 2020, the Company and its restricted subsidiaries were in compliance with all covenants under the indenture governing the Senior Notes.

At July 31, 2020, the book value of the Senior Notes was $350 million and the fair value was $357.5 million, based on Level 1 inputs.

Note M--Income Taxes

The effective income tax rate for the three-month periods ended July 31, 2020 and 2019 was 26.6% and 26.0%, respectively. The increase in the effective tax rate for the first quarter of fiscal 2021 as compared to the comparable period in the prior fiscal year was primarily due to a decrease in the benefit from stock-based compensation transactions. During the first quarters of fiscal 2021 and 2020, the Company recognized a tax detriment related to stock-based compensation transactions of $0.2 million and a tax benefit of $0.1 million, respectively.

Note N--Revenue Recognition

The Company disaggregates revenue from contracts with customers into major sales distribution channels as these categories depict the nature, amount, timing and uncertainty of revenues and cash flows that are affected by economic factors. The following table disaggregates our consolidated revenue by major sales distribution channels for the three-months ended July 31, 2020 and 2019:
15


Three months ended
July 31,
(in thousands)20202019
Home center retailers$173,995 $198,751 
Builders164,348 172,589 
Independent dealers and distributors51,744 56,025 
Net Sales$390,087 $427,365 

Note O--Concentration of Risks

Financial instruments that potentially subject the Company to concentrations of risk consist primarily of cash and cash equivalents and accounts receivable. The Company maintains its cash and cash equivalents with major financial institutions and such balances may, at times, exceed Federal Deposit Insurance Corporation insurance limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risk with respect to cash.

Credit is extended to customers based on an evaluation of each customer's financial condition and generally collateral is not required. The Company's customers operate in the new home construction and home remodeling markets. 
 
The Company maintains an allowance for bad debt based upon management's evaluation and judgment of potential net loss. The allowance is estimated based upon historical experience, the effects of current developments and economic conditions and each customer’s current and anticipated financial condition. Estimates and assumptions are periodically reviewed and updated. Any resulting adjustments to the allowance are reflected in current operating results.

At July 31, 2020, the Company's two largest customers, Customers A and B, represented 29.0% and 25.1% of the Company's gross customer receivables, respectively. At July 31, 2019, Customers A and B represented 29.3% and 20.4% of the Company’s gross customer receivables, respectively.

The following table summarizes the percentage of net sales attributable to the Company's two largest customers for the three- and three-months ended July 31, 2020 and 2019:
Three months ended
July 31,
 20202019
Customer A27.7%28.8%
Customer B16.9%17.7%

Note P--Leases

Operating Leases - ROU assets related to operating leases are presented as “Operating lease right-of-use assets” on the unaudited condensed consolidated balance sheet. Lease liabilities related to operating leases that are subject to the ASC 842 measurement requirements such as operating leases with lease terms greater than twelve months are presented in “Short-term lease liability - operating” and “Long-term lease liability - operating” on the unaudited condensed consolidated balance sheets.

Operating lease ROU assets and lease liabilities are recognized at the commencement date based on the present value of the future lease payments over the lease term. The discount rate used to determine the present value of the lease payments is the rate implicit in the lease unless that rate cannot be readily determined, in which case, the Company utilizes its incremental borrowing rate in determining the present value of the future lease payments. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Operating lease ROU assets may also include any cumulative prepaid or accrued rent when the lease payments are uneven throughout the lease term. The ROU assets and lease liabilities may also include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The ROU asset includes any lease payments made and lease incentives received prior to the commencement date. The Company has lease arrangements with lease and non-lease components which are accounted for separately. Non-lease components of the lease payments are expensed as incurred and are not included in determining the present value.

16


Finance Leases - ROU assets related to finance leases are presented in "Property, plant and equipment, net” on the unaudited condensed consolidated balance sheet. Lease liabilities related to finance leases are presented in “Current maturities of long-term debt” and “Long-term debt, less current maturities” on the unaudited condensed consolidated balance sheet.

Finance lease ROU assets and lease liabilities are recognized at the commencement date based on the present value of the future lease payments over the lease term. The discount rate used to determine the present value of the lease payments is the rate implicit in the lease unless that rate cannot be readily determined, in which case, the Company utilizes its incremental borrowing rate in determining the present value of the future lease payments. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.

The components of lease costs were as follows:
 Three months ended
 July 31,
(in thousands)20202019
Finance lease cost:
Reduction in the carrying value of right-of-use assets$98 $612 
Interest on lease liabilities14 53 
Operating lease cost6,706 5,344 

Additional information related to leases was as follows:
 Three months ended
 July 31,
(in thousands)20202019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for finance leases$14 $53 
Operating cash flows for operating leases6,142 5,109 
Financing cash flows for financing leases92 589 
Right-of-use assets obtained in exchange for new finance lease liabilities109 485 
Right-of-use assets obtained in exchange for new operating lease liabilities155 21,118 
Weighted average remaining lease term (years)
Weighted average remaining lease term - finance leases3.223.52
Weighted average remaining lease term - operating leases7.336.71
Weighted average discount rate
Weighted average discount rate - finance leases3.08 %3.23 %
Weighted average discount rate - operating leases3.54 %4.25 %

The following is a reconciliation of future undiscounted cash flows to the operating and finance lease liabilities, and the related ROU assets, presented on the unaudited condensed consolidated balance sheet as of July 31, 2020:
17


(in thousands)Operating leasesFinancing leases
Year ending April 30,
2021$18,080 $1,759 
202220,889 1,508 
202319,870 1,041 
202417,977 864 
202515,859 267 
Thereafter55,609 71 
Total lease payments148,284 5,510 
Less imputed interest(17,628)(255)
Total lease liability$130,656 $5,255 
Current maturities(19,566)(2,087)
Lease liability - long-term$111,090 $3,168 
Lease assets$