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EX-32.1 - EXHIBIT 32.1 - AMERICAN WOODMARK CORPex-321x2016430.htm
EX-31.2 - EXHIBIT 31.2 - AMERICAN WOODMARK CORPex-312x2016430.htm
EX-31.1 - EXHIBIT 31.1 - AMERICAN WOODMARK CORPex-311x2016430.htm
EX-23.1 - EXHIBIT 23.1 - AMERICAN WOODMARK CORPex-231x2016430.htm
EX-21 - EXHIBIT 21 - AMERICAN WOODMARK CORPex-21x2016430.htm


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, 2016
 
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.  [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company”  in Rule 12b-2 of the Exchange Act.
Large accelerated filer   
[X]
Accelerated filer                 
[ ]
Non-accelerated filer     
[ ]
(Do not check if a smaller reporting company)  
Smaller reporting company
[ ]
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 30,  2015, the last business day of the Company’s most recent second quarter was $1,005,121,774.
As of June 17, 2016,  16,294,171 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 25,  2016 (“Proxy Statement”) are incorporated by reference into Part III of this Form 10-K.




American Woodmark Corporation
2016 Annual Report on Form 10-K

TABLE OF CONTENTS
 
PART I
 
 
Item 1.
Business
2
Item 1A.
Risk Factors
3
Item 1B.
Unresolved Staff Comments
4
Item 2.
Properties
5
Item 3.
Legal Proceedings
6
Item 4.
Mine Safety Disclosures
6
 
Executive Officers of the Registrant
6
 
 
 
PART II
 
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
7
Item 6.
Selected Financial Data
8
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
9
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
18
Item 8.
Financial Statements and Supplementary Data
19
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
45
Item 9A.
Controls and Procedures
45
Item 9B.
Other Information
45
 
 
 
PART III
 
 
 
 
 
Item 10.
Directors, Executive Officers and Corporate Governance
45
Item 11.
Executive Compensation
46
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
46
Item 13.
Certain Relationships and Related Transactions, and Director Independence
46
Item 14.
Principal Accounting Fees and Services
46
 
 
 
PART IV
 
 
Item 15.
Exhibits, Financial Statement Schedules
46
 
 
 
SIGNATURES
51

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 approximately 500 different cabinet lines, ranging in price from relatively inexpensive to medium-priced styles. Styles vary by design and color from natural wood finishes to low-pressure laminate surfaces. The product offering of stock cabinets includes 85 door designs in 21 colors. Stock cabinets consist of cabinet interiors of varying dimensions and construction options and a maple, oak, cherry, or hickory front frame, door and/or drawer front.
 
Products are sold under the brand names of American Woodmark®, Simply WoodmarkTM, 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, cherry, and hickory 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 offering, expanded service capabilities, geographic reach and affordable quality. The Company believes it is one of the three largest manufacturers of kitchen cabinets in the United States.
 
The Company’s business has historically been subject to seasonal influences, with higher sales typically realized in the second and fourth fiscal quarters. General economic forces and changes in the Company’s customer mix have reduced seasonal fluctuations in revenue over the past few years. The Company does not consider its level of order backlog to be material.
 
In recognition of the cyclicality of the housing industry, the Company’s policy is to operate with a minimal amount of financial leverage.  The Company regularly maintains a debt to capital ratio of well below 20%, and working capital exclusive of cash of less than 6% of net sales.  At April 30, 2016, debt to capital was 7.4%, and working capital net of cash was 3.7% of net sales.
 
During the fiscal year ended April 30, 2016 (fiscal 2016), American Woodmark had two primary customers, The Home Depot and Lowe’s Companies, Inc., which together accounted for approximately 41% 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, 2016, the Company had 5,600 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.




2



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 2017.”
 
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 41% of total company sales for fiscal 2016. 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 as it did with the 2012 Restructuring Plan, the Company could incur impairment charges, which could have a material impact on its financial results. The Company evaluates the recoverability of the carrying amount of its long-lived assets on an ongoing basis. The outcome of future reviews could result in substantial impairment charges. Impairment assessments inherently involve judgments as to assumptions about market conditions and the Company’s ability to generate future cash flows and profitability, given those 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.

Item 1B.    UNRESOLVED STAFF COMMENTS
 
None.





4



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, 10 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, 2016 include:
LOCATION
DESCRIPTION
Allegany County, MD
Manufacturing Facility
Austin, TX
Satellite Service Center*
Berryville, VA
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, 2016.
 
Also see the information under “Legal Matters” under “Note K – Commitments and Contingencies” to the Consolidated Financial Statements included in this report under Item 8. “Financial Statements and Supplementary Data.”
 
Item 4.        MINE SAFETY DISCLOSURES
 
None.
 
EXECUTIVE OFFICERS OF THE REGISTRANT
 
Executive officers of the Company are elected by the Board of Directors and generally hold office until the next annual election of officers. There are no family relationships between any executive officer and any other officer or director of the Company or any arrangement or understanding between any executive officer and any other person pursuant to which such officer was elected. The executive officers of the Company as of April 30, 2016 are as follows: 
Name
Age
 
Position(s) Held During Past Five Years
S. Cary Dunston
51
 
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
45
 
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 2011 to September 2013 for Newell Rubbermaid; Vice President – Hardware from 2009 to 2011 for Newell Rubbermaid. 
 
 
 
 
R. Perry Campbell
51
 
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.
50
 
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 and cash dividends declared during the last two fiscal years were as follows:
 
MARKET PRICE

DIVIDENDS
(in dollars)
High

Low

DECLARED






FISCAL 2016
 

 

 
First quarter
$67.82

$48.34

$0.00
Second quarter
74.28

59.23

0.00
Third quarter
89.89

62.77

0.00
Fourth quarter
80.00

57.03

0.00












FISCAL 2015
 

 

 
First quarter
$33.11

$25.10

$0.00
Second quarter
41.85

29.37

0.00
Third quarter
43.20

37.02

0.00
Fourth quarter
56.44

40.97

0.00
 
As of May 23, 2016, there were approximately 15,500 total shareholders of the Company's common stock, including 4,700 shareholders of record and 10,800 beneficial owners whose shares are held in "street" name by securities broker-dealers or other nominees. Included are approximately 80% of the Company's employees, who are shareholders through the American Woodmark Stock Ownership 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.

The following table details share repurchases by the Company during the fourth quarter of fiscal 2016:

Share Repurchases

Total Number of Shares Purchased
Average Price Paid
Total Number of Shares Purchased as Part of Publicly Announced
Approximate Dollar Value of Shares That May Yet Be Purchased Under the Programs (000)

(1)
Per Share
Programs
(1)
February 1 - 29, 2016
24,300

$
62.47

24,300

$
31,486

March 1 - 31, 2016
22,700

$
69.32

22,700

$
29,913

April 1 - 30, 2016
19,800

$
76.06

19,800

$
28,407

Quarter ended April 30, 2016
66,800

$
68.83

66,800

$
28,407


(1) 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. This authorization is in addition to the stock repurchase program authorized on 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

7



operations. Repurchased shares will become authorized but unissued common shares. In the fourth quarter of fiscal 2016, the Company repurchased 66,800 common shares for an aggregate purchase price of $4.6 million under the authorization, pursuant to a repurchase plan intended to comply with the requirements of Rule 10b5-1 and Rule 10b-18 under the Securities Exchange Act of 1934, as amended. At April 30, 2016, $28.4 million remained authorized by the Company's Board of Directors to repurchase the Company's common shares.

Item 6.        SELECTED FINANCIAL DATA
 
FISCAL YEARS ENDED APRIL 30
(in millions except per share data)
2016

20151

20141

20131

20121,2










FINANCIAL STATEMENT DATA
 

 

 

 

 
Net sales
$
947.0


$
825.5


$
726.5


$
630.4


$
515.8

Operating income (loss)
93.2


54.7


34.1


17.2


(33.4
)
Net income (loss)
58.7


35.5


20.5


9.8


(20.8
)
Earnings (loss) per share:




 

 

 
Basic
3.61


2.25


1.34


0.67


(1.45
)
Diluted
3.57


2.21


1.31


0.66


(1.45
)
Depreciation and amortization expense
16.5


14.5


14.5


14.4


23.4

Total assets
466.7


398.9


330.1


294.0


265.1

Long-term debt, less current maturities
22.5


21.5


20.5


23.6


23.8

Total shareholders' equity
280.8


229.8


190.5


146.2


130.0

Cash dividends declared per share








0.09

Average shares outstanding




 

 

 
Basic
16.3


15.8


15.3


14.6


14.3

Diluted
16.4


16.0


15.7


14.8


14.3











PERCENT OF SALES




 

 

 
Gross profit
21.1
%

18.5
%

17.1
%

16.3
%

12.9
 %
Selling, general and administrative expenses
11.3


11.9


12.5


13.5


16.2

Income (loss) before income taxes
9.7


6.6


4.5


2.7


(6.4
)
Net income (loss)
6.2


4.3


2.7


1.5


(4.0
)










RATIO ANALYSIS




 

 

 
Current ratio3
3.3


3.2


2.8


2.4


2.1

Inventory turnover4
19.8


19.9


19.8


20.4


19.2

Collection period - days5
35.6


31.6


32.8


31.4


30.0

Percentage of capital (long-term debt plus equity):




 

 

 
Long-term debt, less current maturities
7.4
%

8.6
%

9.7
%

13.9
%

15.5
 %
Equity
92.6


91.4


90.3


86.1


84.5

Return on equity (average %)
23.0


16.9


12.2


7.1


(14.6
)
1 
The Company announced plans to realign its manufacturing network during fiscal 2012.  The impact of these initiatives in fiscal 2012 increased operating loss, net loss and loss per share by $15,917,000, $9,710,000 and $0.68, respectively.  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 
The Company performed a reduction-in-force of salaried personnel and announced plans to realign its manufacturing network during fiscal 2009.  During fiscal 2012, these initiatives increased operating loss, net loss and loss per share by $404,000, $246,000 and $0.01, respectively.

8



 
 
3 
Current assets for fiscal 2015, 2014, 2013 and 2012 have been retrospectively revised to reflect the early adoption of FASB ASU No. 2015-17, "Balance Sheet Classification of Deferred Taxes (Topic 740)."
 
 
4 
Based on average beginning and ending inventory.
 
 
5 
Based on the ratio of average monthly customer receivables to average sales per day.

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
 
2016

2015

2014
Net sales
100.0
%

100.0
%

100.0
%
Cost of sales and distribution
78.9


81.5


82.9

Gross profit
21.1


18.5


17.1

Selling and marketing expenses
7.0


7.8


8.2

General and administrative expenses
4.3


4.1


4.3

Operating income
9.8


6.6


4.6

Interest expense/other (income) expense
0.1




0.1

Income before income taxes
9.7


6.6


4.5

Income tax expense
3.5


2.3


1.8

Net income
6.2


4.3


2.7


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 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 and remediation costs;

9



the need to respond to price or product initiatives launched by a competitor;
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.

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, 2016, the Company operated 9 manufacturing facilities and 7 service centers across the country. 
 
During the Company’s fiscal year that ended on April 30, 2016 (fiscal 2016), 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 2016, including:
 
The unemployment rate improved by 7% compared to April 2015, falling to 5.0% as of April 2016 according to data provided by the U.S. Department of Labor;    
A 10% improvement in Gross Private Residential Fixed Investment reported by the U.S. Department of Commerce during the most recent four quarters through the first quarter of calendar 2016, as compared with the same period one year ago;
Increases in single family housing starts during the Company’s fiscal 2016 of 10%, as compared to the Company’s fiscal 2015, according to the U.S. Department of Commerce;
Mortgage interest rates decreased with a 30-year fixed mortgage rate of 3.61% in April 2016, an improvement of approximately 6 basis points compared to April 2015;
The median price of existing homes sold in the U.S. rose by 6% during the Company’s fiscal 2016, according to data provided by the National Association of Realtors;
Consumer sentiment, as reported by the University of Michigan, averaged 3% higher during the Company’s fiscal 2015 than in its prior fiscal year; and
Cabinet sales, as reported by members of the Kitchen Cabinet Manufacturers Association (KCMA), increased by 9% during fiscal 2016, 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 2016 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 2016 that were higher than those experienced in its prior fiscal year. The Company’s remodeling sales increased by high single digits during fiscal 2016, consistent with the overall remodeling market.    
 
The Company increased its net sales by 15% during fiscal 2016.  The Company realized strong sales gains in its new construction channel during fiscal 2016, where sales increased by more than 20%, 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 2016.

10



During the third quarter of fiscal 2012, the Company announced several initiatives designed to reduce its cost base (the 2012 Restructuring), including the permanent closure of two manufacturing plants, the decision to sell a previously closed manufacturing facility, and the realignment of its retirement program, including the freezing of its pension plans.  All of these initiatives were completed either prior to or just after the beginning of the Company’s fiscal 2013, and restructuring charges related to these actions have been reflected in the Company’s results for fiscal years 2015 and 2014.  There were no restructuring charges related to these actions in fiscal 2016. For more information on the 2012 Restructuring, see Note N - Restructuring Charges in Item 8. Financial Statements and Supplementary Data herein.

The Company recorded restructuring charges of $(0.2) million (pre-tax) and $(0.1) million (after-tax) during fiscal 2014 and $(0.2) million (pre-tax) and $(0.1) million (after-tax) during fiscal 2015 in connection with these initiatives.  The Company sold a previously closed plant during fiscal 2014 and sold the remaining plant held for sale during fiscal 2015 that were included in the 2012 Restructuring.
 
Gross margin for fiscal 2016 was 21.1%, an improvement from 18.5% in fiscal 2015.  The increase in the Company’s gross margin rate was driven by the beneficial impact of increased sales volume, customer management, product mix, pricing and improved operating efficiency, which more than offset 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. 
 
The Company regularly considers the need for a valuation allowance against its deferred tax assets.  The Company had a history of profitable operations for 16 consecutive years, from 1994 to 2009, followed by losses that coincided with the industry downturn from 2010 to 2012.  As of April 30, 2016, the Company had total deferred tax assets of $41.3 million, up from $37.3 million at April 30, 2015.  Growth in the Company’s deferred tax assets in recent fiscal years resulted primarily from growth in its defined benefit pension liabilities and the impact of its recent losses prior to fiscal 2013.  To fully realize its remaining net deferred tax assets, the Company will need to, among other things, substantially reduce its unfunded pension obligation of $67.1 million at April 30, 2016.  The Company took definitive actions when it froze its pension plans as part of the 2012 Restructuring to enhance the probability that this objective is achieved in the future. The Company recorded a valuation allowance related to deferred tax assets for certain state investment tax credit (ITC) carryforwards during fiscal 2016.
 
The Company resumed the funding of its pension plans during fiscal year 2012, and expects to continue funding these plans for the foreseeable future, which will reduce both its unfunded pension plan obligation and its deferred tax asset. These actions, coupled with the recent improvement in the U.S. housing market and the Company’s continued ability to grow its sales at a faster rate than its competitors, have enabled the Company to generate net income during fiscal 2016. The Company's deferred tax assets increased in fiscal 2016 and 2015 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.  The Company believes that the positive evidence of the housing industry improvement, coupled with the benefits from the Company’s successful restructuring and continued market share gains have already driven a return to profitability that is expected to continue, and that the combined impact of these positive factors outweighs the negative factor of the Company’s previous losses.  Accordingly, Management has concluded it is more likely than not that the Company will realize its deferred tax assets.
 
The Company also regularly assesses its long-lived assets to determine if any impairment has occurred.  The Company has concluded that none of the long-lived assets pertaining to its nine manufacturing plants or any of its other long-lived assets were impaired as of April 30, 2016. 

Results of Operations
 
FISCAL YEARS ENDED APRIL 30










(in thousands)
2016

2015

2014

2016 vs. 2015 PERCENT
CHANGE

2015 vs. 2014 PERCENT
CHANGE















Net sales
$
947,045


$
825,465


$
726,515


15
 %

14
 %
Gross profit
199,694


152,532


124,177


31


23

Selling and marketing expenses
66,489


64,304


59,536


3


8

General and administrative expenses
40,045


33,773


30,881


19


9

Interest expense
378


515


728


(27
)

(29
)

11



Net Sales
 
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.

Net sales for fiscal 2015 increased 14% to $825.5 million from $726.5 million in fiscal 2014.  Overall unit volume for fiscal 2015 was 6% higher than in fiscal 2014, which was driven primarily by the Company’s increased new construction volume.  Average revenue per unit increased 7% during fiscal 2015, driven by improvements in the Company's product mix and pricing.
 
Gross Profit
 
Gross profit as a percentage of sales increased to 21.1% in fiscal 2016 as compared with 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. 
 
During fiscal 2015, the Company’s gross profit increased as a percentage of net sales to 18.5% from 17.1% in fiscal 2014.  The improvement in gross profit margin was due primarily to the beneficial impact of higher sales volume and improved labor efficiency.  This favorability was partially offset by an increase in material costs, costs associated with crewing and infrastructure to support higher levels of sales and installation activity and inventory costs associated with new product launches. 
 
Selling and Marketing Expenses
 
Selling and marketing expenses in fiscal 2016 were 7.0% of net sales, compared with 7.8% of net sales in fiscal 2015.  Selling and marketing costs increased only by 3% despite a 15% 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 and product launch costs.
 
Selling and marketing expenses were 7.8% of net sales in fiscal 2015 compared with 8.2% in fiscal 2014. The improvement in sales and marketing costs in relation to net sales was due to due to favorable leverage from increased sales and on-going expense control.

General and Administrative Expenses
 
General and administrative expenses increased by $6.3 million or 18.6% during fiscal 2016. The increase in cost was related to increased pay-for-performance compensation and staffing costs. General and administrative costs increased to 4.3% of net sales in fiscal 2016 compared with 4.1% of net sales in fiscal 2015.
 
General and administrative expenses in fiscal 2015 increased by $2.9 million, or 9.4%, compared with fiscal 2014 and represented 4.1% of net sales, compared with 4.3% of net sales for fiscal 2014. 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 $91.8 million during fiscal 2016.  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. The Company finalized a federal research and experimentation tax credit for fiscal years 2011 through 2014 of $1.2 million during fiscal 2015.
 
Outlook for Fiscal 2017
 
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 2017 it will continue to be below historical averages.

12




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 2017. The Company expects that its home center market share will be relatively stable in fiscal 2017 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 10% during its fiscal year. The Company’s new residential construction sales growth outperformed the new residential construction market during fiscal 2016, and management expects that it will again outperform the new residential construction market during fiscal 2017 but by a lesser rate than fiscal 2016, as its comparable prior year sales levels become more challenging.

Inclusive of the potential for modest sales mix and pricing improvements, the Company expects that it will grow its total sales at a low-teen rate in fiscal 2017. Despite anticipated material inflation, costs related to two product launches and impacts in the first half of fiscal 2017 for the West Virginia plant expansion, the Company expects to maintain operating margins for fiscal 2017.

The Company had gross outlays for capital expenditures and customer display units of $33.1 million during fiscal 2016, and plans to decrease its base spending level during fiscal 2017 now that has completed its facility expansion in West 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 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 $218.5 million at April 30, 2016, which represented an increase of $33.5 million from April 30, 2015.  Total debt was $24.1 million at April 30, 2016, an increase of $1.1 million over the prior fiscal year and the ratio of long-term debt, excluding current maturities, to capital was 7.4% at April 30, 2016, down from 8.6% at April 30, 2015.

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 $25 million at April 30, 2016.    

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, 2016, including as follows: (1) the Company’s ratio of total liabilities to tangible net worth at April 30, 2016 was 0.67 to 1.0; and (2) cash flow to fixed charges for its most recent four quarters was 3.41 to 1.0. The Company expects to be in compliance with these covenants for fiscal 2017.

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 2016 was $71.8 million, compared with $58.7 million in fiscal 2015. The $13.1 million improvement was primarily attributable to the Company’s $23.2 million improvement in net income offset by an $8.9 million increase in cash used for the Company’s working capital investment in customer receivables.
 
Cash provided by operating activities in fiscal 2015 was $58.7 million, compared with $40.5 million in fiscal 2014.  The $18.2 million improvement was primarily attributable to the Company’s $15.0 million improvement in net income and a $5.1 million decrease in cash used for the Company's working capital investment in inventory and customer receivables.
 
INVESTING ACTIVITIES
 

13



The Company’s investing activities primarily consist of capital expenditures and investments in promotional displays. Net cash used by investing activities in fiscal 2016 was $40.8 million, compared with $56.6 million in fiscal 2015 and $9.6 million in fiscal 2014. Investments in property, plant and equipment for fiscal 2016 were $28.7 million, compared with $20.0 million in fiscal 2015 and $7.9 million in fiscal 2014. Investments in promotional displays were $4.4 million in fiscal 2016, compared with $2.4 million in fiscal 2015 and $3.5 million in fiscal 2014. On August 21, 2014, the Board of Directors of the Company approved a $30 million capital expansion project at its West Virginia facility, which was completed during fiscal 2016.
 
During fiscal 2016, the Company’s decrease in net cash used for investing activities was driven by a $27.0 million decrease in investment in certificates of deposit, offset by an $8.7 million increase in outflows for capital expenditures and a $2.1 million increase in outflows for promotional displays and a $0.4 million decrease in proceeds from the sale of closed plants and property, plant and equipment compared to the prior year.

FINANCING ACTIVITIES
 
The Company realized a net outflow of $6.1 million from financing activities in fiscal 2016, compared with a net inflow of $11.7 million in fiscal 2015, and a net inflow of $7.8 million in fiscal 2014.  Proceeds were generated from the exercise of stock options of $8.1 million in fiscal 2016, $14.3 million in fiscal 2015 and $15.3 million in fiscal 2014. During fiscal 2016 $1.5 million was used to repay long-term debt, compared with approximately $1.3 million in fiscal 2015 and $4.5 million in fiscal 2014.  
 
The Company ended fiscal 2016 with $174.5 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.  This authorization is in addition to the stock repurchase program authorized on 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, 2016, $28.4 million remained authorized by the Company’s Board of Directors to repurchase the Company’s common shares.  The Company purchased a total of 243,143 common shares, for an aggregate purchase price of $16.6 million, during fiscal 2016, under the authorizations. 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 2017 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 2017.


14



The timing of the Company’s contractual obligations as of April 30, 2016 is summarized in the table below:
 
FISCAL YEARS ENDED APRIL 30










(in thousands)
Total Amounts

2017

2018-2019

2020-2021

2022 and Thereafter















Revolving credit facility
$
10,000


$


$
10,000


$


$

Economic development loans
3,689




2,189




1,500

Capital lease obligations
7,165


1,574


2,182


1,327


2,082

Other long-term debt
3,198








3,198

Interest on long-term debt1
3,273


602


931


366


1,374

Operating lease obligations
10,671


3,143


4,863


2,649


16

Pension contributions2
42,334


7,304


15,150


13,600


6,280
















Total
$
80,330


$
12,623


$
35,315


$
17,942


$
14,450

1 
Interest commitments under interest bearing debt consist of interest under the Company’s primary loan agreement and capitalized lease agreements. Amounts outstanding under the Company’s revolving credit facility, $10 million at April 30, 2016, bear a variable interest rate determined by the London Interbank Offered Rate (LIBOR) plus 1.5%. Interest under the Company’s capitalized lease agreements is fixed at rates between 2% and 6.5%.  Interest commitments under interest bearing debt for the Company’s revolving credit facility are at LIBOR plus the spread as of April 30, 2016, throughout the remaining term of the facility.
 
2 
The estimated cost of the Company’s two defined benefit pension plans is determined annually based upon the discount rate and other assumptions at fiscal year end. Future pension funding contributions beyond fiscal 2022 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.

For additional discussion of risks that could affect the Company and its business, see “Forward-Looking Statements” above, as well as Item 1A. “Risk Factors” and Item 7A. “Quantitative and Qualitative Disclosures About Market Risk.”    
 
OFF-BALANCE SHEET ARRANGEMENTS
 
As of April 30, 2016 and 2015, 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. 
 

15



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 will decrease 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: 
(in millions)
IMPACT OF 1% INCREASE

IMPACT OF 1% DECREASE
(decrease) increase
 

 




Effect on annual pension expense
$
(1.3
)

$
1.2





Effect on projected pension benefit obligation
$
(24.3
)

$
31.5


Pension expense for fiscal 2016 and the assumptions used in that calculation are presented in Note H of the Consolidated Financial Statements.  At April 30, 2016, the discount rate was 4.06% compared with 4.19% at April 30, 2015. The expected return on plan assets was 7.5% at both April 30, 2016, and April 30, 2015. The rate of compensation increase is not applicable for periods beyond April 30, 2012 because the Company froze its pension plans as of that date.
 
The projected performance of the Company’s pension plans is largely dependent on the assumptions used to measure the obligations of the plans and to estimate future performance of the plans’ invested assets. Over the past two measurement periods, the most material deviations between results based on assumptions and the actual plan performance have resulted from changes to the discount rate used to measure the plans’ benefit obligations and the actual return on plan assets.  Accounting guidelines require the discount rate to be set to a current market rate at each annual measurement date. From the fiscal 2014 to fiscal 2015 measurement dates, the discount rate decreased from 4.56% at April 30, 2014 to 4.19% at April 30, 2015, which caused an actuarial loss of $24.2 million.  From the fiscal 2015 to fiscal 2016 measurement dates, the discount rate decreased from 4.19% to 4.06%, which caused an actuarial loss of $1.9 million.
 

16



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 (1.6)%, 6.6% and 9.4% for fiscal 2016, 2015 and 2014, respectively.
 
The fair value of plan assets at April 30, 2016 was $107.0 million compared with $108.7 million at April 30, 2015. The Company’s projected benefit obligation exceeded plan assets by $67.1 million in fiscal 2016 and by $61.3 million in fiscal 2015. The $5.8 million increase in the Company’s net under-funded position during fiscal 2016 was primarily driven by the Company’s $1.9 million actuarial loss and asset returns that were less than expected, offset by increased Company contributions.  The Company expects its pension expense to decrease from $0.3 million in fiscal 2016 to $(0.5) million in fiscal 2017, due primarily to the change to the new mortality tables, decrease in the discount rate and the spot rate approach.  The Company expects to contribute $7.3 million to its pension plans in fiscal 2017, which represents required and discretionary funding.  The Company made contributions of $5.0 million to its pension plans in fiscal 2016. 
 
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, 2016 was $5.8 million. These credits expire in various years beginning in fiscal 2020. Net of the federal impact and related valuation allowance, the Company has recorded $1.8 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, 2016, a deferred credit balance of $1.8 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 that period. The Company is currently assessing the impact ASU 2014-09 and ASU 2015-14 will have on its financial position and results of operations.

In November 2015, the FASB issued ASU No. 2015-17, "Balance Sheet Classification of Deferred Taxes (Topic 740)." ASU 2015-17 requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. The Company retrospectively adopted this guidance on April 30, 2016. As a result of the retrospective adoption of this ASU, current assets decreased and noncurrent assets increased by $9.6 million as of April 30, 2015. The adoption of ASU 2015-17 did not impact net income or any other amounts previously reported on the consolidated statements of income or comprehensive income or cash flows.

In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)." Among other things, 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.
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

17



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. Early adoption is permitted in any interim or annual period provided that the entire ASU is adopted. Even if an entity early adopts the amendments after the first interim period, the adoption date is as of the beginning of the year for the issues adopted by the cumulative-effect and prospective methods. Any adjustments to previously reported interim periods of that fiscal year should be included in the year-to-date results. If those previously reported interim results appear in any future filings, they are reported on the revised basis. The Company is currently assessing the impact that ASU 2016-09 will have on its consolidated financial statements.

 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, 2016, 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.


18



Item 8.        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  
CONSOLIDATED BALANCE SHEETS
 
APRIL 30
(in thousands, except share and per share data)
2016

2015




ASSETS
 

 
Current Assets
 

 
Cash and cash equivalents
$
174,463


$
149,541

Investments - certificates of deposit
25,750


35,500

Customer receivables, net
55,813


46,142

Inventories
39,319


35,988

Prepaid expenses and other
6,864


4,758

Total Current Assets
302,209


271,929







Property, plant and equipment, net
99,332


85,516

Investments - certificates of deposit
18,250



Promotional displays, net
5,377


4,348

Deferred income taxes
32,574


33,387

Other assets
8,951


3,724

TOTAL ASSETS
$
466,693


$
398,904





LIABILITIES AND SHAREHOLDERS' EQUITY
 

 




Current Liabilities
 

 
Accounts payable
$
35,011


$
34,288

Current maturities of long-term debt
1,574


1,457

Accrued compensation and related expenses
35,389


30,120

Accrued marketing expenses
8,075


6,471

Other accrued expenses
12,264


12,454

Total Current Liabilities
92,313


84,790







Long-term debt, less current maturities
22,478


21,498

Defined benefit pension liabilities
67,131


61,325

Other long-term liabilities
4,010


1,449







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, 2016: 16,244,041, at April 30, 2015: 16,079,671
163,290


150,001

Retained earnings
164,756


120,698

Accumulated other comprehensive loss -


 
Defined benefit pension plans
(47,285
)

(40,857
)
Total Shareholders' Equity
280,761


229,842

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
466,693


$
398,904


See notes to consolidated financial statements.


19



CONSOLIDATED STATEMENTS OF INCOME
 
 
FISCAL YEARS ENDED APRIL 30
(in thousands, except per share data)
2016

2015

2014









Net sales
$
947,045


$
825,465


$
726,515

Cost of sales and distribution
747,351


672,933


602,338

Gross Profit
199,694


152,532


124,177










Selling and marketing expenses
66,489


64,304


59,536

General and administrative expenses
40,045


33,773


30,881

Restructuring charges, net


(240
)

(234
)
Insurance proceeds




(94
)
Operating Income
93,160


54,695


34,088










Interest expense
378


515


728

Other (income) expense
996


(207
)

(310
)
Income Before Income Taxes
91,786


54,387


33,670










Income tax expense
33,063


18,888


13,209










Net Income
$
58,723


$
35,499


$
20,461







SHARE INFORMATION
 

 

 
Earnings per share
 

 

 
Basic
$
3.61


$
2.25


$
1.34

Diluted
3.57


2.21


1.31


See notes to consolidated financial statements.
 
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
FISCAL YEARS ENDED APRIL 30
(in thousands)
2016

2015

2014









Net income
$
58,723


$
35,499


$
20,461










Other comprehensive income (loss) net of tax:


 

 
Change in pension benefits, net of deferred taxes


 

 
of $4,110, $9,510 and ($3,944), respectively
(6,428
)

(14,877
)

6,170










Total Comprehensive Income
$
52,295


$
20,622


$
26,631


See notes to consolidated financial statements.


20



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, 2013
14,822,580


$
107,165


$
71,180


$
(32,150
)

$
146,195
















Net income
 



20,461




20,461

Other comprehensive loss, 
 

 

 

 

 
net of tax
 

 

 

6,170


6,170

Stock-based compensation
 

3,295


 

 

3,295

Adjustments to excess tax
 

 

 

 

 
benefit from stock-based
 

 

 

 

 
compensation
 

600


 

 

600

Exercise of stock-based
 

 

 

 

 
compensation awards, net of amounts






 

 



withheld for taxes
643,558


13,122






13,122

Stock repurchases
(100,000
)

(654
)

(2,487
)



(3,141
)
Employee benefit plan
 

 

 

 

 
contributions
110,160


3,843


 

 

3,843

Balance, April 30, 2014
15,476,298


$
127,371


$
89,154


$
(25,980
)

$
190,545
















Net income
 

 

35,499


 

35,499

Other comprehensive income, 
 

 

 

 

 
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

See notes to consolidated financial statements.

21



CONSOLIDATED STATEMENTS OF CASH FLOWS
 
FISCAL YEARS ENDED APRIL 30
(in thousands)
2016

2015

2014






OPERATING ACTIVITIES
 

 

 
Net income
$
58,723


$
35,499


$
20,461

Adjustments to reconcile net income to net cash and


 

 
cash equivalents provided by operating activities:


 

 
Depreciation and amortization
16,456


14,526


14,545

Net loss on disposal of property, plant and equipment
1,576


153


123

Gain on sales of assets held for sale


(250
)

(323
)
Gain on insurance recoveries




(94
)
Stock-based compensation expense
3,609


3,497


3,295

Deferred income taxes
11,629


4,335


7,978

Pension contributions in excess of expense
(4,732
)

(4,604
)

(2,039
)
Excess tax benefit from stock-based compensation
(4,968
)

(1,887
)

(854
)
Contributions of employer stock to employee benefit plan
1,761


6,217


3,843

Other non-cash items
(3,489
)

(1,211
)

(2,634
)
Changes in operating assets and liabilities:


 

 
Customer receivables
(9,938
)

288


(7,546
)
Inventories
(4,276
)

(5,605
)

(2,875
)
Prepaid expenses and other assets
(4,585
)

126


(1,236
)
Accounts payable
723


5,113


5,869

Accrued compensation and related expenses
5,269


1,963


1,943

Income taxes payable
(1,791
)

1,201


526

Marketing and other accrued expenses
5,811


(624
)

(447
)
Net Cash Provided by Operating Activities
71,778


58,737


40,535







INVESTING ACTIVITIES
 

 

 
Payments to acquire property, plant and equipment
(28,685
)

(20,015
)

(7,903
)
Proceeds from sales of property, plant and equipment
846


22


81

Proceeds from sales of assets held for sale


1,250


1,644

Proceeds from insurance recoveries




94

Purchases of certificates of deposit
(46,750
)

(40,750
)


Maturities of certificates of deposit
38,250


5,250



Investment in promotional displays
(4,434
)

(2,363
)

(3,499
)
Net Cash Used by Investing Activities
(40,773
)

(56,606
)

(9,583
)






FINANCING ACTIVITIES
 

 

 
Payments of long-term debt
(1,547
)

(1,309
)

(4,516
)
Proceeds from long-term debt
3,196


1,500



Excess tax benefit from stock-based compensation
4,968


1,887


854

Proceeds from issuance of common stock and other
8,114


14,268


15,330

Repurchase of common stock
(16,593
)

(5,053
)

(3,141
)
Notes receivable, net
(4,221
)

417


(750
)
Net Cash Provided (Used) by Financing Activities
(6,083
)

11,710


7,777










Net Increase in Cash and Cash Equivalents
24,922


13,841


38,729










Cash and Cash Equivalents, Beginning of Year
149,541


135,700


96,971










Cash and Cash Equivalents, End of Year
$
174,463


$
149,541


$
135,700

See notes to consolidated financial statements.

22



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 2016, 2015 and 2014 were $38.1 million, $34.3 million and $30.4 million, respectively.
 
Cash and Cash Equivalents:  Cash in excess of operating requirements is invested in money market accounts which are carried at cost (which approximates fair value). The Company considers all highly liquid short-term investments with an original maturity of three months or less when purchased to be cash equivalents. Cash equivalents were $34.0 million and $33.0 million at April 30, 2016 and 2015, 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 2016, 2015 and 2014, the Company concluded no impairment existed, except for impairments related to restructuring activities.
 
Promotional Displays:  The Company invests in promotional displays in retail stores to demonstrate product features, product and quality specifications and serve as a training tool for retail kitchen designers. The Company invests in these long-lived productive assets to provide the aforementioned benefits. The Company's investment in promotional displays is carried at cost less applicable amortization. Amortization is provided by the straight-line method on an individual display basis over periods of 30 to 36 months (the estimated period of benefit). Promotional display amortization expense for fiscal years 2016, 2015 and 2014 was $3.4 million, $3.6 million and $3.7 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.

23



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 is currently assessing the impact ASU 2014-09 and ASU 2015-14 will have on its financial position and results of operations.

In November 2015, the FASB issued ASU No. 2015-17, "Balance Sheet Classification of Deferred Taxes (Topic 740)." ASU 2015-17 requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. The Company retrospectively adopted this guidance on April 30, 2016. As a result of the retrospective adoption of this ASU, current assets decreased and noncurrent assets increased by $9.6 million as of April 30, 2015. The adoption of ASU 2015-17 did not impact net income or any other amounts previously reported on the consolidated statements of income or comprehensive income or cash flows.

In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)." Among other things, 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.
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. Early adoption is permitted in any interim or annual period provided that the entire ASU is adopted. Even if an entity early adopts the amendments after the first interim period, the adoption date is as of the beginning of the year for the issues adopted by the cumulative-effect and prospective methods. Any adjustments to previously reported interim periods of that fiscal year should be included in the year-to-date results. If those previously reported interim results appear in any future filings, they are reported on the revised basis. The Company is currently assessing the impact that ASU 2016-09 will have on its consolidated financial statements.
 
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.
 

24



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)
2016

2015
Gross customer receivables
$
58,593


$
48,655

Less:


 
Allowance for doubtful accounts
(171
)

(173
)
Allowance for returns and discounts
(2,609
)

(2,340
)






Net customer receivables
$
55,813


$
46,142


Note C -- Inventories
 
The components of inventories were:
 
APRIL 30
(in thousands)
2016

2015
Raw materials
$
17,634


$
17,199

Work-in-process
18,414


18,095

Finished goods
17,475


14,797







Total FIFO inventories
53,523


50,091

Reserve to adjust inventories to LIFO value
(14,204
)

(14,103
)






Total LIFO inventories
$
39,319


$
35,988


Note D -- Property, Plant and Equipment
 
The components of property, plant and equipment were:
 
APRIL 30
(in thousands)
2016

2015
Land
$
2,311


$
5,929

Buildings and improvements
80,042


69,412

Buildings and improvements - capital leases
11,202


11,202

Machinery and equipment
182,937


159,680

Machinery and equipment - capital leases
29,357


29,052

Construction in progress
2,556


12,581


308,405


287,856

Less accumulated amortization and depreciation
(209,073
)

(202,340
)






Total
$
99,332


$
85,516


Amortization and depreciation expense on property, plant and equipment amounted to $11.6 million, $9.5 million and $9.5 million in fiscal years 2016, 2015 and 2014, respectively.  Accumulated amortization on capital leases included in the above table amounted to $29.6 million and $28.6 million as of April 30, 2016 and 2015, respectively.
 


25



Note E -- Loans Payable and Long-Term Debt
 
Maturities of long-term debt are as follows:
 
FISCAL YEARS ENDING APRIL 30














(in thousands)
2017

2018

2019

2020

2021

2022 AND THERE-
AFTER

TOTAL OUTSTANDING





















Revolving credit facility
$


$


$
10,000


$


$


$


$
10,000






















Economic development loans




2,189






1,500


3,689






















Capital lease obligations
1,574


1,265


917


710


617


2,082


7,165






















Other long-term debt










3,198


3,198






















Total
$
1,574


$
1,265


$
13,106


$
710


$
617


$
6,780


$
24,052
















Less current maturities
 

 

 

 

 

 

$
1,574
















Total long-term debt
 

 

 

 

 

 

$
22,478


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, 2016 and 2015, $10 million of loans were outstanding under this facility, and the Company had additional borrowing base availability of $25 million.  The Company incurs a fee for amounts not used under the revolving credit facility.  Fees paid by the Company related to non-usage of its current and former credit facilities have been included in interest expense and were insignificant in each of fiscal years 2016, 2015 and 2014, respectively. 
 
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) (0.495% at April 30, 2016) 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, 2016, including as follows: (1) the Company’s ratio of total liabilities to tangible net worth at April 30, 2016 was 0.67 to 1.0; and (2) cash flow to fixed charges for its most recent four quarters was 3.41 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. The outstanding balance as of April 30, 2016 and 2015 was $0 and $1.3 million, respectively.
 

26



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, 2016 and 2015.  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 2012 through 2016, the Company entered into a total of eighteen capitalized lease agreements in the aggregate amount of $2.5 million with First American Financial Bancorp related to financing computer equipment.  Each lease has a term of 48 months and an interest rate of 6.5%.  The leases require quarterly rental payments.  The aggregate outstanding amount under all of these leases as of April 30, 2016 and 2015 was $1.1 million and $1.3 million, respectively.
 
From 2013 through 2016, the Company entered into a total of seventeen capitalized lease agreements in the aggregate amount of $1.9 million with e-Plus Group related to financing computer equipment.  Each lease has a term of 51 months and an interest rate of 6.5%.  The leases require monthly rental payments.  The aggregate outstanding amount under all of these leases as of April 30, 2016 and 2015 was $1.0 million and $1.0 million, respectively.  

In 2004, the Company entered into a lease agreement with the West Virginia Economic Development Authority as part of the Company’s capital investment and operations at the South Branch plant located in Hardy County, West Virginia. This capital lease agreement is a $10 million term obligation, which expires June 30, 2024, bearing interest at a fixed rate of 2% per annum. The lease requires monthly rental payments.  The outstanding amounts owed as of April 30, 2016 and 2015 were $5.0 million and $5.6 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.
 
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, 2016 the Company had drawn $3.2 million of the loan proceeds, which is included in long-term debt in the accompanying consolidated balance sheets. The NMTC is subject to recapture for a period of seven years, the compliance period. During the compliance period, the Company is required to comply with various regulations and contractual provisions that apply to the NMTC arrangement.  We do not anticipate any credit recaptures will be required in connection with this arrangement. This transaction also includes a put/call feature which becomes enforceable at the end of the compliance period whereby we may be obligated or entitled to repurchase the Investors’ interest in the Investment Funds. The value attributable to the put/call is nominal. Direct costs of $0.3 million incurred in structuring the financing arrangement are deferred and will be recognized as expense over the term of the loans (30 years).

Certain of the Company's loan agreements limit the amount and type of indebtedness the Company can incur and require the Company to maintain specified financial ratios measured on a quarterly basis. In addition to the assets previously discussed, certain of the Company’s property, plant and equipment are pledged as collateral under a loan agreement and the capital lease arrangements. The Company was in compliance with all covenants contained in its loan agreements and capital leases at April 30, 2016.
 
Interest paid under the Company’s loan agreements and capital leases during fiscal years 2016, 2015 and 2014 was $0.5 million, $0.5 million and $0.7 million, respectively.



27



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)
2016

2015

2014
Numerator used in basic and diluted earnings per common share:
 

 

 
Net income
$
58,723


$
35,499


$
20,461

Denominator:
 

 

 
Denominator for basic earnings per common share -
 

 

 
weighted-average shares
16,256


15,764


15,299

Effect of dilutive securities:


 

 
Stock options and restricted stock units
186


273


354

Denominator for diluted earnings per common share -
 

 

 
weighted-average shares and assumed conversions
16,442


16,037


15,653

Net earnings per share
 

 

 
Basic
$
3.61


$
2.25


$
1.34

Diluted
$
3.57


$
2.21


$
1.31


There were no potentially dilutive securities for the fiscal year ended April 30, 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 each of the fiscal years ended April 30, 2015 and 2014, 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, 2016, 2015 and 2014 was $3.6 million, $3.5 million and $3.3 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, 2016, 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; and (3) 2011 non-employee directors equity ownership plan.  As of April 30, 2016, there were 935,626 shares of common stock available for future stock-based compensation awards under the Company’s stock incentive plans.
 
Methodology Assumptions
 
For purposes of valuing stock option grants, the Company has identified one employee group and one non-employee director group, based upon observed option exercise patterns. The Company uses the Black-Scholes option-pricing model to value the Company’s stock options for each of the groups. Using this option-pricing model, the fair value of each stock option award is estimated on the date of grant. The fair value of the Company’s stock option awards is expensed on a straight-line basis over the vesting period of the stock options. The expected volatility assumption is based on the historical volatility of the Company’s stock over a term equal to the expected term of the option granted. The expected term of stock option awards granted is derived from the Company’s historical exercise experience and represents the period of time that stock option awards granted are expected to be outstanding for each of the identified groups. The expected term assumption incorporates the contractual term of an option grant, which is generally ten years for employees and from four to ten years for non-employee directors, as well as the 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.
 

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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:
 
FISCAL YEARS ENDED APRIL 30
 
2016

2015

2014
Weighted-average fair value of grants
$
18.59


$
9.25


$
14.46

Expected volatility
29.8
%

27.4
%

38.2
%
Expected term in years
5.8


5.9


6.1

Risk-free interest rate
2.16
%

2.19
%

1.59
%
Expected dividend yield
%

%

%

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, 2016, 2015 and 2014 (remaining contractual term in years and exercise prices are weighted-averages):
 
NUMBER OF OPTIONS

REMAINING CONTRACTUAL TERM

WEIGHTED AVERAGE EXERCISE PRICE