NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A — Summary of Significant Accounting Policies
American Woodmark Corporation ("American Woodmark," the "Company," "we," "our" or "us") manufactures and distributes kitchen, bath, and home organization products for the remodeling and new home construction markets. Its products are sold on a national basis directly to home centers and builders and through a network of independent dealers and distributors. The Company operates within a single reportable segment primarily within the U.S.; long-lived assets and sales outside the U.S. are not significant.
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 subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
Revenue Recognition: Our principal performance obligations are the sale of kitchen, bath, and home organization products. The Company recognizes revenue as control of our products is transferred to our customers, which is at the time of shipment or upon delivery based on the contractual terms with our customers. We also derive revenue from installations and our revenue related to installations is recognized upon delivery of cabinets to the customer as installation is typically completed in one day. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods to our customers. Payment terms on our product sales normally range from 30 to 90 days. Taxes assessed by a governmental authority that we collect are excluded from revenue. The expected costs associated with our contractual warranties are recognized as expense when the products are sold. See Note L — Commitments and Contingencies for further discussion.
When revenue is recognized, we record estimates to reduce revenue for customer programs and incentives in order to determine the amount of consideration the Company will ultimately be entitled to receive. Customer programs and incentives are considered variable consideration, and include price discounts, volume-based incentives, promotions, and cooperative advertising. The Company includes variable consideration in revenue only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the variable consideration is resolved. This determination is made based upon known customer programs and incentive offerings at the time of sale, and expected sales volume forecasts as it relates to our volume-based incentives. This determination is updated each reporting period. In addition, for certain customer program incentives, we receive an identifiable benefit (goods or services) in exchange for the consideration given and record the associated expenditure in selling, general and administrative expenses.
We account for shipping and handling costs that occur before the customer has obtained control of a product as a fulfillment activity rather than as a promised service. These costs are classified within costs of sales and distribution.
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 2023, 2022, and 2021 were $34.6 million, $32.6 million, and $34.1 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.
Inventories: Inventory costs are determined on a first-in, first-out ("FIFO") basis. Costs include materials, labor, and production overhead at normal production capacity. Costs do not exceed net realizable values. See Note C — Inventories for additional information.
Property, Plant and Equipment: Property, plant and equipment is stated on the basis of cost less accumulated depreciation. Depreciation is calculated using 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 12 years for machinery and equipment. Assets under financing 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 2023, 2022, and 2021, the Company concluded no impairment existed.
Goodwill: Goodwill represents the excess of purchase price over the fair value of net assets acquired. The Company does not amortize goodwill but evaluates for impairment annually, or whenever events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. In accordance with the accounting standards, an entity has the option first to assess qualitative factors to determine whether events and circumstances indicate that it is more likely than not that goodwill is impaired. If after such assessment an entity concludes that the asset is not more likely than not impaired, the entity is not required to take further action. However, if an entity concludes otherwise, it is required to determine the fair value of the asset using a quantitative impairment test, and if impaired, the associated assets must be written down by the amount that the carrying value exceeds the fair value of the reporting unit. During fiscal years 2023, 2022, and 2021, the Company concluded no impairment existed based on a qualitative analysis.
Intangible Assets: Intangible assets consist of customer relationship intangibles. The Company amortizes the cost of intangible assets over their estimated useful lives, six years, unless such lives are deemed indefinite. The Company reviews its intangible assets for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. During fiscal years 2023, 2022, and 2021, the Company concluded no impairment existed.
Promotional Displays: The Company invests in promotional displays in retail stores to demonstrate product features, product and quality specifications, and to serve as a training tool for retail kitchen designers. The Company invests in these long-lived productive assets to provide the aforementioned benefits. The Company's investment in promotional displays is carried at cost less applicable amortization. Amortization is calculated using the straight-line method on an individual display basis over periods of 24 to 60 months (the estimated period of benefit). Promotional display amortization expense for fiscal years 2023, 2022, and 2021 was $8.0 million, $10.0 million, and $10.0 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 to an amount that more likely than not will be realized.
Pensions: Prior to April 30, 2020, the Company had 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. Effective April 30, 2020, these plans were merged into one plan, the American Woodmark Corporation Employee Pension Plan (the "Pension Plan"). The Company recognizes the overfunded or underfunded status of its defined benefit pension plan, 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 loss, net of tax. Effective December 31, 2020 (the "Plan Termination Date"), the Pension Plan was terminated in a standard termination and benefits were distributed on December 2, 2021.
Stock-Based Compensation: The Company recognizes stock-based compensation expense based on the grant date fair value over the requisite service period. The Company records the expense for stock-based compensation awards subject to performance-based criteria vesting over the remaining service period when the Company determines that achievement of the performance criteria is probable. The Company evaluates when the achievement of performance-based criteria is probable based on the expected satisfaction of the performance criteria at each reporting date.
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 consolidated balance sheets.
Derivative Financial Instruments: The Company uses derivatives as part of the normal business operations to manage its exposure to fluctuations in interest rates associated with variable interest rate debt and foreign exchange rates. The Company has established policies and procedures that govern the risk management of these exposures. The primary objective in managing these exposures is to add stability to interest expense, manage the Company's exposure to interest rate movements, and manage the risk from adverse fluctuations in foreign exchange rates.
The Company uses interest rate swap contracts to manage interest rate exposures. The Company records derivatives in the consolidated balance sheets at fair value. Changes in the fair value of derivatives designated as cash flow hedges are recorded in accumulated other comprehensive income (loss), and subsequently reclassified into earnings in the period the hedged forecasted transaction affects earnings. If a derivative is deemed to be ineffective, the change in fair value of the derivative is recognized directly in earnings.
The Company also manages risks through the use of foreign exchange forward contracts. The Company recognizes its outstanding forward contracts in the consolidated balance sheets at their fair values. The Company does not designate the forward contracts as accounting hedges. The changes in the fair value of the forward contracts are recorded in other (income) expense, net in the consolidated statements of income.
Use of Estimates: The preparation of consolidated financial statements in conformity with GAAP 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.
Recent Accounting Pronouncements: In December 2022, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2022-06 "Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848." The amendments in this update defer the sunset date of Topic 848 from December 31, 2022 to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. In March 2020, the FASB issued ASU 2020-04 "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. ASU 2020-04 provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2024 and can be adopted as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020. The Company adopted the standard as of January 31, 2023 when it amended all debt and financial instruments that used to have a LIBOR reference rate. The amendments did not have a material impact on the Company's consolidated financial statements.
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) | 2023 | | 2022 |
| Gross customer receivables | $ | 130,655 | | | $ | 168,699 | |
| Less: | | | |
| Allowance for credit losses | (449) | | | (226) | |
| Allowance for returns and discounts | (11,043) | | | (11,512) | |
| | | |
| Net customer receivables | $ | 119,163 | | | $ | 156,961 | |
Note C — Inventories
The components of inventories were:
| | | | | | | | | | | |
| | APRIL 30, |
| (in thousands) | 2023 | | 2022 |
| Raw materials | $ | 80,953 | | | $ | 90,451 | |
| Work-in-process | 49,064 | | | 59,180 | |
| Finished goods | 60,682 | | | 78,628 | |
| | | |
| Total inventories | $ | 190,699 | | | $ | 228,259 | |
Note D — Property, Plant and Equipment
The components of property, plant and equipment were:
| | | | | | | | | | | |
| | APRIL 30, |
| (in thousands) | 2023 | | 2022 |
| Land | $ | 4,475 | | | $ | 4,431 | |
| Buildings and improvements | 121,903 | | | 119,066 | |
| Buildings and improvements - financing leases | 11,164 | | | 11,164 | |
| Machinery and equipment | 331,146 | | | 324,417 | |
| Machinery and equipment - financing leases | 29,869 | | | 31,341 | |
| Software | 29,322 | | | 28,115 | |
| Construction in progress | 45,710 | | | 22,794 | |
| Total property, plant and equipment | 573,589 | | | 541,328 | |
| Less accumulated amortization and depreciation | (354,174) | | | (327,520) | |
| | | |
| Property, plant and equipment, net | $ | 219,415 | | | $ | 213,808 | |
Amortization and depreciation expense on property, plant and equipment amounted to $37.9 million, $38.0 million, and $38.3 million in fiscal years 2023, 2022, and 2021, respectively. Accumulated amortization on financing leases included in the above table amounted to $31.9 million and $32.8 million as of April 30, 2023 and 2022, respectively.
Note E — Customer Relationships Intangibles
The components of customer relationships intangibles were:
| | | | | | | | | | | |
| | APRIL 30, |
| (in thousands) | 2023 | | 2022 |
| Customer relationship intangibles | $ | 274,000 | | | $ | 274,000 | |
| Less accumulated amortization | (243,556) | | | (197,889) | |
| | | |
| Total | $ | 30,444 | | | $ | 76,111 | |
Customer relationships intangibles are amortized over the estimated useful lives on a straight-line basis over six years. Amortization expense on customer relationships intangibles amounted to $45.7 million and $45.7 million for the years ended April 30, 2023 and 2022, respectively.
Note F — Loans Payable and Long-Term Debt
Maturities of long-term debt are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | FISCAL YEARS ENDING APRIL 30, | | | | |
| | | | | | | | | | | | | | | |
| (in thousands) | 2024 | | 2025 | | 2026 | | 2027 | | 2028 | | 2029 AND THERE-AFTER | | TOTAL OUTSTANDING AS OF APRIL 30, 2023 | | TOTAL OUTSTANDING AS OF APRIL 30, 2022 |
| | | | | | | | | | | | | | | |
| Term loans | $ | — | | | $ | — | | | $ | 206,250 | | | $ | — | | | $ | — | | | $ | — | | | $ | 206,250 | | | $ | 237,500 | |
| | | | | | | | | | | | | | | |
| Revolving credit | — | | | — | | | 163,750 | | | — | | | — | | | — | | | 163,750 | | | 263,000 | |
| | | | | | | | | | | | | | | |
| Finance lease obligations | 2,263 | | | 970 | | | 348 | | | 74 | | | 47 | | | — | | | 3,702 | | | 4,963 | |
| | | | | | | | | | | | | | | |
| Other long-term debt | — | | | 430 | | | — | | | — | | | — | | | — | | | 430 | | | 7,089 | |
| | | | | | | | | | | | | | | |
| Total | $ | 2,263 | | | $ | 1,400 | | | $ | 370,348 | | | $ | 74 | | | $ | 47 | | | $ | — | | | $ | 374,132 | | | $ | 512,552 | |
| | | | | | | | | | | | | | | |
| Debt issuance costs | | | | | | | | | | | | | $ | (2,473) | | | $ | (3,556) | |
| | | | | | | | | | | | | | | |
| Current maturities | | | | | | | | | | | | | $ | (2,263) | | | $ | (2,264) | |
| | | | | | | | | | | | | | | |
| Total long-term debt | | | | | | | | | | | | | $ | 369,396 | | | $ | 506,732 | |
Term Loans and Revolving Credit Facility
On December 29, 2017, the Company entered into a credit agreement (the "Prior Credit Agreement") with a syndicate of lenders and Wells Fargo Bank, National Association, as administrative agent. The Prior Credit Agreement provided for a $100 million revolving loan facility with a $25 million sub-facility for the issuance of letters of credit, a $250 million initial term loan facility and a $250 million delayed draw term loan facility. The Company borrowed the entire $250 million under the initial term loan facility, the entire $250 million under the delayed draw term loan facility and approximately $50 million under the revolving loan facility in connection with the acquisition of RSI Home Products, Inc. ("RSI") and the refinancing of certain senior notes assumed from RSI (the "RSI Notes"). The facilities under the Prior Credit Agreement were scheduled to mature on December 29, 2022.
On April 22, 2021, the Company amended and restated the Prior Credit Agreement and on January 17, 2023 the Company entered into an amendment of such agreement to transition the applicable interest rate from LIBOR to Secured Overnight Financing Rate ("SOFR"), effective January 31, 2023. The amended and restated credit agreement (the "A&R Credit Agreement") provides for a $500 million revolving loan facility with a $50 million sub-facility for the issuance of letters of credit (the "Revolving Facility") and a $250 million term loan facility (the "Term Loan Facility"). Also on April 22, 2021, the Company borrowed the entire $250 million under the Term Loan Facility and approximately $264 million under the Revolving Facility to fund, in part, the repayment in full of the amounts then outstanding under the Prior Credit Agreement and the redemption of $350 million in aggregate principal amount of 4.875% Senior Notes due 2026 (the Senior Notes). The Company is required to repay the Term Loan Facility in specified quarterly installments, which have been prepaid through April 30, 2025. The Revolving Facility and Term Loan Facility mature on April 22, 2026.
As of April 30, 2023, and 2022, $206.3 million and $237.5 million, respectively, was outstanding on the Term Loan Facility. As of April 30, 2023, and 2022, $163.8 million and $263.0 million, respectively, was outstanding under the Revolving Facility.
Outstanding letters of credit under the Revolving Facility were $13.0 million as of April 30, 2023, leaving approximately $323.2 million in available capacity under the Revolving Facility as of April 30, 2023. Outstanding letters of credit under the Revolving Facility were $11.7 million, as of April 30, 2022, leaving approximately $225.3 million in available capacity under the Revolving Facility as of April 30, 2022. The outstanding balances noted above approximate fair value as the facilities have a floating interest rate.
Amounts outstanding under the Term Loan Facility and the Revolving Facility bear interest based on a fluctuating rate measured by reference to either, at the Company's option, a base rate plus an applicable margin or SOFR plus 10 basis points plus an applicable margin, with the applicable margin being determined by reference to the Company's then-current "Secured Net Leverage Ratio." The Company also incurs a quarterly commitment fee on the average daily unused portion of the Revolving Facility during the applicable quarter at a rate per annum also determined by reference to the Company's then-current "Secured Net Leverage Ratio." In addition, a letter of credit fee accrues on the face amount of any outstanding letters of credit at a per annum rate equal to the applicable margin on SOFR loans, payable quarterly in arrears. As of April 30, 2023, the applicable margin with respect to base rate loans and SOFR loans was 0.25% and 1.25%, respectively, and the commitment fee was 0.13%.
The A&R Credit Agreement includes certain financial covenants that require the Company to maintain (i) a "Consolidated Interest Coverage Ratio" of no less than 2.00 to 1.00 and (ii) a "Total Net Leverage Ratio" of no greater than 4.00 to 1.00, subject, in each case, to certain limited exceptions.
The A&R Credit Agreement includes certain additional covenants, including negative covenants that restrict the ability of the Company and certain of its subsidiaries to incur additional indebtedness, create additional liens on its assets, make certain investments, dispose of its assets, or engage in a merger or other similar transaction or engage in transactions with affiliates, subject, in each case, to the various exceptions and conditions described in the A&R Credit Agreement. The negative covenants further restrict the ability of the Company and certain of its subsidiaries to make certain restricted payments, including, in the case of the Company, the payment of dividends and the repurchase of common stock, in certain limited circumstances.
As of April 30, 2023, the Company was in compliance with all covenants included in the A&R Credit Agreement.
The Company's obligations under the A&R Credit Agreement are guaranteed by the Company's domestic subsidiaries and the obligations of the Company and its domestic subsidiaries under the A&R Credit Agreement and their guarantees, respectively, are secured by a pledge of substantially all of their respective personal property.
Financing Lease Obligations
The Company has various financing leases with interest rates between 2.0% and 6.1%. The leases require monthly payments and expire by December 31, 2027. The outstanding amounts owed as of April 30, 2023, and 2022, were $3.7 million and $5.0 million, respectively.
Other Long-term Debt
On January 25, 2016, the Company entered into a New Markets Tax Credit ("NMTC") financing agreement to finance working capital and capital improvements at its Monticello, Kentucky facility. This agreement was structured with unrelated third party financial institutions (the "Investors"), their wholly-owned investment funds ("Investment Funds") and certain 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 Investment Funds. Simultaneously, a wholly owned subsidiary of the Company made a $4.3 million loan to the Investment Funds. The Investment Funds used the proceeds of such equity and debt investments to acquire equity interests in the CDEs, which the CDEs in turn used to make loans to the Company aggregating $6.6 million for the project. These loans have a term of 30 years with an aggregate interest rate of approximately 1.2%. The original terms of the transaction included Investor put options, exercisable after seven years, which, if exercised by the Investors, would require the Company to purchase the Investors’ interests in the Investment Funds. The Investors’ exercised such put options in February 2023 and the Company repurchased their interests in the Investment Funds in February 2023. As a result of the exercised put option, the Company recognized a reduction of long-term debt of $6.6 million, a reduction of loan receivable of $4.3 million and a gain on debt modification of $2.1 million, net of unamortized debt issuance costs of $0.2 million.
On March 8, 2022, the Company entered into a $0.4 million loan agreement with the West Virginia Water Development Authority acting on behalf of the West Virginia Infrastructure and Jobs Development Council and the Hardy County Rural Development Authority as part of the Company's capital improvements at the South Branch Primewood facility located in
Hardy County, West Virginia. The loan agreement expires on March 8, 2025 and bears no interest rate. The loan agreement is secured by a sole first lien on the real property and fixtures associated with the facility. It defers principal and interest during the term of the obligation and forgives any outstanding balance at March 8, 2025, if the Company complies with certain employment levels at the facility.
Certain of the Company's loan agreements limit the amount and type of indebtedness the Company can incur and require the Company to maintain specified financial ratios measured on a quarterly basis. In addition to the assets previously discussed, certain of the Company's property, plant and equipment are pledged as collateral under certain loan agreements and the capital lease arrangements. The Company was in compliance with all covenants contained in its loan agreements and financing leases at April 30, 2023.
Note G — 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) | 2023 | | 2022 | | 2021 |
| Numerator used in basic and diluted earnings per common share: | | | | | |
| Net income (loss) | $ | 93,723 | | | $ | (29,722) | | | $ | 61,193 | |
| Denominator: | | | | | |
| Denominator for basic earnings per common share - | | | | | |
| weighted-average shares | 16,614 | | | 16,592 | | | 16,970 | |
| Effect of dilutive securities: | | | | | |
| Stock options and restricted stock units | 71 | | | — | | | 67 | |
| Denominator for diluted earnings per common share - | | | | | |
| weighted-average shares and assumed conversions | 16,685 | | | 16,592 | | | 17,037 | |
| Net earnings (loss) per share | | | | | |
| Basic | $ | 5.64 | | | $ | (1.79) | | | $ | 3.61 | |
| Diluted | $ | 5.62 | | | $ | (1.79) | | | $ | 3.59 | |
There were no anti-dilutive securities for the fiscal years ended April 30, 2023 and 2021, which were excluded from the calculation of net earnings per share. Potentially dilutive securities of 48,379 for the fiscal year ended April 30, 2022, have not been considered in the calculation of net loss per share as the effect would be anti-dilutive.
On May 25, 2021, the Company's Board of Directors (the "Board") authorized a stock repurchase program of up to $100 million of the Company's common shares. The Company did not repurchase any of its shares during fiscal 2023. The Company purchased a total of 299,781 common shares, for an aggregate purchase price of $25.0 million under the plan approved on May 25, 2021 during fiscal 2022. The Company also repurchased a total of 200,046 common shares, for an aggregate purchase price of $20.0 million under the prior authorization, during fiscal 2021. The Company funded share repurchases using available cash and cash generated from operations. Repurchased shares became authorized but unissued common shares. At April 30, 2023, $75.0 million remained authorized by the Board to repurchase the Company’s common shares.
Note H — Stock-Based Compensation
The Company has various stock-based compensation plans. The Company issues restricted stock units ("RSUs") to key employees and non-employee directors. Total compensation expense related to stock-based awards for the fiscal years ended April 30, 2023, 2022, and 2021 was $7.4 million, $4.7 million, and $4.6 million, respectively. The Company recognizes stock-based compensation costs for those shares expected to vest on a straight-line basis over the requisite service period of the award. The Company records forfeitures as they occur.
Stock Incentive Plans
At April 30, 2023, the Company had RSU awards outstanding under two different plans: (1) 2016 employee stock incentive plan; and (2) 2015 non-employee directors equity ownership plan. As of April 30, 2023, there were 370,816 shares of common stock available for future stock-based compensation awards under the Company's stock incentive plans.
Methodology Assumptions
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.
Restricted Stock Unit Activity:
The Company's RSUs granted to employees cliff-vest over a three-year period from date of grant, while RSUs granted to non-employee directors vest daily over a two-year period from date of grant. Directors were granted service-based RSUs only, while employees were awarded both service-based and performance-based RSUs ("PBRSUs") in fiscal years 2023, 2022, and 2021. The PBRSUs granted in fiscal 2023, 2022, and 2021 are earned based on achievement of a number of goals pertaining to the Company's financial performance during three one-year performance periods and the achievement of certain cultural goals for the three-year period. Employees who satisfy the vesting criteria will receive a proportional amount of PBRSUs based upon the Compensation Committee's assessment of the Company's achievement of the performance criteria.
The following table contains a summary of the Company's RSU activity for the fiscal years ended April 30, 2023, 2022, and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| | PERFORMANCE-BASED RSUs | | SERVICE-BASED RSUs | | TOTAL RSUs | | WEIGHTED AVERAGE GRANT
DATE FAIR VALUE |
| Issued and outstanding, April 30, 2020 | 117,687 | | | 79,210 | | | 196,897 | | | $66.68 |
| | | | | | | |
| Granted | 124,374 | | | 76,846 | | | 201,220 | | | $66.00 |
| Cancelled due to non-achievement of performance goals | (17,461) | | | — | | | (17,461) | | | $89.31 |
| Settled in common stock | (19,058) | | | (27,208) | | | (46,266) | | | $88.57 |
| Forfeited | (73,858) | | | (37,377) | | | (111,235) | | | $71.63 |
| Issued and outstanding, April 30, 2021 | 131,684 | | | 91,471 | | | 223,155 | | | $64.81 |
| | | | | | | |
| Granted | 57,392 | | | 85,568 | | | 142,960 | | | $76.97 |
| Cancelled due to non-achievement of performance goals | (1,975) | | | — | | | (1,975) | | | $104.10 |
| Settled in common stock | (19,930) | | | (23,242) | | | (43,172) | | | $71.47 |
| Forfeited | (12,561) | | | (6,563) | | | (19,124) | | | $72.79 |
| Issued and outstanding, April 30, 2022 | 154,610 | | | 147,234 | | | 301,844 | | | $69.10 |
| | | | | | | |
| Granted | 119,772 | | | 82,848 | | | 202,620 | | | $51.77 |
| Cancelled due to non-achievement of performance goals | (38,454) | | | — | | | (38,454) | | | $73.85 |
| Settled in common stock | (19,478) | | | (49,916) | | | (69,394) | | | $63.12 |
| Forfeited | (16,620) | | | (9,986) | | | (26,606) | | | $63.15 |
| Issued and outstanding, April 30, 2023 | 199,830 | | | 170,180 | | | 370,010 | | | $61.77 |
As of April 30, 2023, there was $14.1 million of total unrecognized compensation expense related to unvested RSUs granted under the Company's stock-based compensation plans. This expense is expected to be recognized over a weighted-average period of 1.7 years.
For the fiscal years ended April 30, 2023, 2022, and 2021 stock-based compensation expense was allocated as follows:
| | | | | | | | | | | | | | | | | |
| (in thousands) | 2023 | | 2022 | | 2021 |
| Cost of sales and distribution | $ | 2,154 | | | $ | 1,299 | | | $ | 1,461 | |
| Selling and marketing expenses | 1,941 | | | 1,266 | | | 982 | |
| General and administrative expenses | 3,301 | | | 2,143 | | | 2,155 | |
| Stock-based compensation expense, before income taxes | $ | 7,396 | | | $ | 4,708 | | | $ | 4,598 | |
Restricted Stock Tracking Units:
During fiscal 2023, the Board approved grants of 11,945 cash-settled performance-based restricted stock tracking units ("RSTUs") and 6,490 cash-settled service-based RSTUs for more junior level employees. Each performance-based RSTU entitles the recipient to receive a payment in cash equal to the fair market value of a share of the Company's common stock as of the payment date if applicable performance and cultural conditions are met and the recipient remains continuously employed with the Company until the units vest. The service-based RSTUs entitle the recipients to receive a payment in cash equal to the fair market value of a share of our common stock as of the payment date if they remain continuously employed with the Company until the units vest. All of the RSTUs cliff-vest three years from the grant date. The fair value of each cash-settled RSTU award is remeasured at the end of each reporting period and the liability is adjusted, and related expense recorded, based on the new fair value. The expense recognized in fiscal years 2023, 2022, and 2021, and the liability as of April 30, 2023 and 2022, related to RSTUs is not significant.
Note I — Employee Benefit and Retirement Plans
Retirement Savings Plan
Under the American Woodmark Corporation Retirement Savings Plan (the "Plan"), essentially all employees are immediately eligible to participate in the Plan. Participants are eligible for 401(k) matching contributions based upon the employee’s contribution to the Plan. All participants employed at the end of the fiscal year and hired prior to November 2 of the fiscal year are eligible for a discretionary profit-sharing contribution.
Discretionary profit-sharing contributions ranging from 0-5% of net income, based on predetermined net income levels of the Company, may be made annually in the form of Company stock. The Company recognized expenses for profit-sharing contributions of $4.7 million, $0.8 million, and $2.9 million in fiscal years 2023, 2022, and 2021, respectively.
The Company matches 100% of an employee's annual 401(k) contributions to the Plan up to 4% of annual compensation.
The expense for 401(k) matching contributions for the plan was $12.4 million, $11.7 million, and $11.9 million, in fiscal years 2023, 2022, and 2021, respectively.
Pension Benefits
Prior to April 30, 2020, the Company had two defined benefit pension plans covering many of the Company's employees hired prior to April 30, 2012. Effective April 30, 2012, the Company froze all future benefit accruals under the Company's defined benefit pension plans.
Effective April 30, 2020, these plans were merged into one plan (the "Pension Plan"). The Pension Plan provided defined benefits based on years of service and final average earnings (for salaried employees) or benefit rate (for hourly employees). Effective December 31, 2020 (the "Plan Termination Date"), the Pension Plan was terminated in a standard termination and benefits were distributed on December 2, 2021.
The following provides a reconciliation of benefit obligations, plan assets and funded status of the Company's non-contributory Pension Plan as of:
| | | | | | | | | | | |
| | APRIL 30, |
| (in thousands) | 2023 | | 2022 |
| CHANGE IN PROJECTED BENEFIT OBLIGATION | | | |
| Projected benefit obligation at beginning of year | $ | — | | | $ | 196,537 | |
| Interest cost | — | | | 3,147 | |
| Actuarial gains (losses) | — | | | (3,738) | |
| Benefits paid | — | | | (4,214) | |
| Settlements | — | | | (191,732) | |
| Projected benefit obligation at end of year | $ | — | | | $ | — | |
| | | |
| CHANGE IN PLAN ASSETS | | | |
| Fair value of plan assets at beginning of year | $ | 979 | | | $ | 193,552 | |
| Actual return on plan assets | 27 | | | 3,373 | |
| Benefits paid | — | | | (4,214) | |
| Settlements | — | | | (191,732) | |
| Transfer to defined contribution plan | (1,006) | | | — | |
| Fair value of plan assets at end of year | $ | — | | | $ | 979 | |
| | | |
| Funded status of the plan | $ | — | | | $ | 979 | |
| | | | | | | | | | | | | | | | | |
| | | | APRIL 30, |
| (in thousands) | | | 2022 | | 2021 |
| | | | | |
| COMPONENTS OF NET PERIODIC PENSION BENEFIT COST | | | | | |
| Interest cost | | | $ | 3,147 | | | $ | 4,662 | |
| Expected return on plan assets | | | (3,601) | | | (8,430) | |
| Recognized net actuarial loss | | | — | | | 1,761 | |
| Amortization of net loss from prior years | | | 1,164 | | | — | |
| Settlement charge | | | 68,473 | | | — | |
| Pension benefit cost | | | $ | 69,183 | | | $ | (2,007) | |
The components of net periodic pension benefit cost do not include service costs or prior service costs due to the Pension Plan being frozen.
Actuarial Assumptions: The discount rate at April 30 was used to measure the year-end benefit obligations and the earnings effects for the subsequent year. Actuarial assumptions used to determine benefit obligations and earnings effects for the Pension Plan follows:
| | | | | | | | | | | | | | | | | |
| | | | FISCAL YEARS ENDED APRIL 30, |
| | | | 2022 | | 2021 |
| | | | | |
| WEIGHTED-AVERAGE ASSUMPTIONS TO DETERMINE NET PERIODIC PENSION BENEFIT COST | | | | | |
| Discount rate | | | 2.80 % | | 3.16% |
| Expected return on plan assets | | | — % | | 3.3 % |
The Company based the discount rate on a current yield curve developed from a portfolio of high-quality fixed-income investments with maturities consistent with the projected benefit payout period. The long-term rate of return on assets was determined based on consideration of historical and forward-looking returns and the current and expected asset allocation strategy.
The method used to determine the service and interest costs is known as the spot rate approach, under which individual spot rates along the yield curve that correspond with the timing of each benefit payment are used.
In developing the expected long-term rate of return assumption for the assets of the Pension Plan, the Company evaluated input from its third party pension plan asset managers, including their review of asset class return expectations and long-term inflation assumptions.
The Company amortized experience gains and losses, as well as the effects of changes in actuarial assumptions and plan provisions, over the average remaining lifetime of employees expected to receive benefits under the Pension Plan.
Contributions: The Company funded the Pension Plan in amounts sufficient to meet minimum funding requirements under applicable employee benefit and tax laws plus additional amounts the Company deemed appropriate.
The Company made no contributions to its Pension Plan in fiscal 2022.
Plan Assets: Pension assets by major category and the type of fair value measurement as of April 30, 2022 are presented in the following table:
| | | | | | | | | | | | | | | | | | | | | | | |
| FAIR VALUE MEASUREMENTS AT APRIL 30, 2022 |
| | | | | | | |
| (in thousands) | TOTAL | | QUOTED PRICES IN ACTIVE MARKETS (LEVEL 1) | | SIGNIFICANT OBSERVABLE INPUTS (LEVEL 2) | | SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3) |
| Cash Equivalents | $ | 979 | | | $ | 979 | | | $ | — | | | $ | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total plan assets | $ | 979 | | | $ | 979 | | | $ | — | | | $ | — | |
Note J--Derivative Financial Instruments
Interest Rate Swap Contracts
The Company enters into interest rate swap contracts to manage variability in the amount of known or expected cash payments related to portions of its variable rate debt. On May 28, 2021, the Company entered into four interest rate swaps with an aggregate notional amount of $200 million to hedge part of the variable rate interest payments under the Term Loan Facility. The interest rate swaps became effective on May 28, 2021 and will terminate on May 30, 2025. The interest rate swaps economically convert a portion of the variable rate debt to fixed rate debt. The Company receives floating interest payments monthly based on one-month SOFR and pays a fixed rate of 0.53% to the counterparty.
The interest rate swaps are designated as cash flow hedges. Changes in fair value are recorded to other comprehensive income. The risk management objective in using interest rate swaps is to add stability to interest expense and to manage the Company's exposure to interest rate movements. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the contract agreements without exchange of the underlying notional amount. Realized gains or losses in connection with required interest payments on interest rate swaps are recorded in earnings, as a component of interest expense, net to offset variability in interest expense associated with the underlying debt's cash flows.
For the year ended April 30, 2023, unrealized gains, net of deferred taxes, of $3.9 million, were recorded in other comprehensive income, and $3.8 million of realized gains were reclassified out of accumulated other comprehensive loss to interest expense, net due to interest received from and payments made to the swap counterparties. For the year ended April 30, 2022, unrealized gains, net of deferred taxes, of $10.2 million, were recorded in other comprehensive income, and $0.9 million of realized losses were reclassified out of accumulated other comprehensive loss to interest expense due to payments made to the swap counterparties.
As of April 30, 2023, the Company anticipates reclassifying approximately $8.4 million of net hedging gains from accumulated other comprehensive income into earnings during the next 12 months to offset the variability of the hedged items during this period.
The fair value of the derivative instruments are included in other assets on the consolidated balance sheets.
Foreign Exchange Forward Contracts
At April 30, 2023, the Company held no forward contracts.
Note K — Income Taxes
Income tax expense was comprised of the following:
| | | | | | | | | | | | | | | | | |
| | FISCAL YEARS ENDED APRIL 30, |
| (in thousands) | 2023 | | 2022 | | 2021 |
| | | | | |
| CURRENT | | | | | |
| Federal | $ | 39,180 | | | $ | 8,748 | | | $ | 25,683 | |
| State | 12,937 | | | 3,295 | | | 5,639 | |
| Foreign | 998 | | | 417 | | | 1,018 | |
| Total current expense | 53,115 | | | 12,460 | | | 32,340 | |
| | | | | |
| DEFERRED | | | | | |
| Federal | (20,195) | | | (21,316) | | | (10,741) | |
| State | (3,869) | | | (4,049) | | | (1,896) | |
| Foreign | (88) | | | (352) | | | (203) | |
| Total deferred benefit | (24,152) | | | (25,717) | | | (12,840) | |
| Total expense (benefit) | 28,963 | | | (13,257) | | | 19,500 | |
| Other comprehensive income (loss) | (50) | | | 21,944 | | | (1,156) | |
| Total comprehensive income tax expense | $ | 28,913 | | | $ | 8,687 | | | $ | 18,344 | |
The Company's effective income tax rate varied from the federal statutory rate as follows:
| | | | | | | | | | | | | | | | | |
| | FISCAL YEARS ENDED APRIL 30, |
| | 2023 | | 2022 | | 2021 |
| Federal statutory rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
| Effect of: | | | | | |
| Federal income tax credits | (2.7) | | | 5.4 | | | (1.2) | |
| Stock compensation | 0.2 | | | (0.3) | | | 0.2 | |
| Uncertain tax positions | (0.2) | | | 1.7 | | | — | |
| Meals and entertainment | 0.2 | | | (0.4) | | | 0.1 | |
| Valuation allowance for deferred taxes | — | | | — | | | — | |
| Foreign | 0.3 | | | 0.6 | | | 0.6 | |
| Other | (0.4) | | | (0.6) | | | 0.2 | |
| State income taxes, net of federal tax effect | 5.2 | | | 3.4 | | | 3.2 | |
| Effective income tax rate | 23.6 | % | | 30.8 | % | | 24.1 | % |
The significant components of deferred tax assets and liabilities were as follows:
| | | | | | | | | | | |
| | APRIL 30, |
| (in thousands) | 2023 | | 2022 |
| Deferred tax assets: | | | |
| Accounts receivable | $ | 2,755 | | | $ | 1,941 | |
| | | |
| Inventory | 900 | | | — | |
| Product liability | 2,031 | | | 1,739 | |
| Employee benefits | 6,824 | | | 5,604 | |
| Tax credit carryforwards | 5,920 | | | 5,542 | |
| Operating leases liabilities | 26,884 | | | 29,255 | |
| Section 174 research and development | 5,258 | | | — | |
| Section 263A costs | 1,002 | | | 386 | |
| Other | 1,892 | | | 1,476 | |
| Gross deferred tax assets, before valuation allowance | 53,466 | | | 45,943 | |
| Valuation allowance | (5,573) | | | (5,122) | |
| Gross deferred tax assets, after valuation allowance | 47,893 | | | 40,821 | |
| | | |
| Deferred tax liabilities: | | | |
| Pension benefits | 227 | | | 194 | |
| Inventory | — | | | 1,095 | |
| Depreciation | 22,464 | | | 27,178 | |
| Intangibles | 6,830 | | | 18,085 | |
| Operating leases right-of-use assets | 24,681 | | | 26,980 | |
| Interest rate swaps | 3,518 | | | 3,457 | |
| Other | 634 | | | 703 | |
| Gross deferred tax liabilities | 58,354 | | | 77,692 | |
| | | |
| Net deferred tax liability | $ | 10,461 | | | $ | 36,871 | |
We have not recorded deferred income taxes applicable to undistributed earnings of foreign subsidiaries that are indefinitely reinvested in foreign operations. Undistributed earnings that are indefinitely reinvested in foreign operations are not significant as of April 30, 2023.
The Company recorded a valuation allowance related to deferred tax assets for certain state investment tax credit ("ITC") carryforwards and foreign tax credit ("FTC") 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 Company determined that there will not be sufficient foreign source income to fully utilize the current year and carry forward FTCs. Therefore, the Company updated the valuation allowance for the current year activity of $0.3 million related to FTCs.
The gross amount of state tax credit carryforwards related to state ITCs as of April 30, 2023 and 2022 was $3.6 million and $3.7 million, respectively. These credits expire in various years beginning in fiscal 2028. Net of the federal impact and related valuation allowance, the Company recorded $0.3 million and $0.4 million of deferred tax assets related to these credits as of April 30, 2023 and 2022, respectively. 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, 2023 and 2022, a deferred credit balance of $0.3 million and $0.4 million, respectively, is included in other liabilities on the consolidated balance sheets.
The gross amount of FTC carryforwards as of April 30, 2023 and 2022 is $2.2 million and $1.9 million, respectively, which begin to expire in fiscal 2029.
The following table summarizes the activity related to unrecognized tax benefits, excluding the federal tax benefit of state tax deductions:
| | | | | | | | | | | |
| | APRIL 30, |
| (in thousands) | 2023 | | 2022 |
| Change in Unrecognized Tax Benefits | | | |
| Balance at beginning of year | $ | 2,070 | | | $ | 1,491 | |
| Additions based on tax positions related to the current year | — | | | 49 | |
| Additions based on tax positions of prior years | 1,568 | | | 1,286 | |
| Statute of limitations lapses | — | | | (756) | |
| Reductions for tax positions of prior years settlements | (746) | | | — | |
| | | |
| Balance at end of year | $ | 2,892 | | | $ | 2,070 | |
The Company operates in multiple tax jurisdictions and, in the normal course of business, its tax returns are subject to examination by various taxing authorities. Such examinations may result in future assessments by these taxing authorities, and the Company has accrued a liability when it believes that it is not more likely than not that it will realize the benefits of tax positions that it has taken or for the amount of any tax benefit that exceeds the cumulative probability threshold in accordance with accounting standards. As of April 30, 2023, federal tax years 2019 through 2022 remain subject to examination. The Company believes that adequate provisions have been made for all tax returns subject to examination. The Company is currently not under federal audit. If the liability for uncertain tax positions is released the entire amount would impact the Company's effective tax rate.
Note L — Commitments and Contingencies
Legal Matters
The Company is involved in suits and claims in the normal course of business, including without limitation product liability and general liability claims, and claims pending before the Equal Employment Opportunity Commission. On at least a quarterly basis, the Company consults with its legal counsel to ascertain the reasonable likelihood that such claims may result in a loss. As required by FASB Accounting Standards Codification Topic 450, "Contingencies", the Company categorizes the various suits and claims into three categories according to their likelihood for resulting in potential loss: those that are probable, those that are reasonably possible and those that are deemed to be remote. Where losses are deemed to be probable and estimable, accruals are made. Where losses are deemed to be reasonably possible, a range of loss estimates is determined and considered for disclosure. In determining these loss range estimates, the Company considers known values of similar claims and consultation with independent counsel.
The Company believes that the aggregate range of loss stemming from the various suits and asserted and unasserted claims which were deemed to be either probable or reasonably possible is not material as of April 30, 2023.
Antidumping and Countervailing Duties Investigation
In February 2020, a conglomeration of domestic manufacturers filed a scope and circumvention petition seeking the imposition of antidumping (“AD”) and countervailing duties (“CVD”) with the United States Department of Commerce (“DOC”) and the United States International Trade Commission (“ITC”) against imports of hardwood plywood assembled in Vietnam using cores sourced from China. In July 2022, the DOC issued a Preliminary Scope Determination and Affirmative Preliminary Determination of Circumvention of the Antidumping and Countervailing Duty Orders (“Preliminary Determination”). Included in the Determination is a list of Vietnamese suppliers not eligible for certification.
AD and CVD cash deposits of 206% are required for imports from the Vietnamese suppliers not eligible for certification. Many of the Vietnamese suppliers have appealed their inclusion on the ineligible for certification list. Because two of the Company’s primary Vietnamese plywood vendors are included on the ineligible for certification list, the Company has determined that it is reasonably possible that it may experience a loss due to these matters and estimates that the maximum total potential loss for prior purchases to be approximately $4.0 million, net of tax. As of April 30, 2023, the Company has remitted deposits of $3.9 million pursuant to the Preliminary Determination. The deposits remitted are included in other assets on the Company’s consolidated balance sheet. The final determination remains outstanding as of the date of this filing. Based on the evidence provided from the Vietnamese suppliers, the specific characteristics of the product imported and other relevant matters, the Company intends to vigorously appeal any determination that it is subject to these duties and believes that any deposits made will ultimately be refunded upon settlement of the appeals.
Product Warranty
The Company estimates outstanding warranty costs based on the historical relationship between warranty claims and revenues. The warranty accrual is reviewed monthly to verify that it properly reflects the remaining obligation based on the anticipated expenditures over the balance of the obligation period. Adjustments are made when actual warranty claim experience differs from estimates. Warranty claims are generally made within two months of the original shipment date. In May 2023, the Company issued a recall in cooperation with the U.S. Consumer Product Safety Commission for certain cabinets manufactured between February 2022 and September 2022. An immaterial reserve has been recorded as of April 30, 2023 for this recall and is not included in the table below.
The following is a reconciliation of the Company's warranty liability:
| | | | | | | | | | | |
| | APRIL 30, |
| (in thousands) | 2023 | | 2022 |
| PRODUCT WARRANTY RESERVE | | | |
| Beginning balance | $ | 6,878 | | | $ | 5,249 | |
| | | |
| Accrual for warranties | 34,620 | | | 26,580 | |
| Settlements | (33,484) | | | (24,951) | |
| Ending balance at fiscal year end | $ | 8,014 | | | $ | 6,878 | |
Note M — Revenue Recognition
The Company disaggregates revenue from contracts with customers into major sales distribution channels as these categories depict the nature, amount, timing, and uncertainty of revenues and cash flows that are affected by economic factors. The following table disaggregates our consolidated revenue by major sales distribution channels for the years ended April 30, 2023, 2022, and 2021:
| | | | | | | | | | | | | | | | | |
| FISCAL YEARS ENDED APRIL 30, |
| (in thousands) | 2023 | | 2022 | | 2021 |
| Home center retailers | $ | 892,721 | | | $ | 890,554 | | | $ | 848,898 | |
| Builders | 885,650 | | | 731,048 | | | 673,307 | |
| Independent dealers and distributors | 287,829 | | | 235,584 | | | 221,809 | |
| Net Sales | $ | 2,066,200 | | | $ | 1,857,186 | | | $ | 1,744,014 | |
Note N — Credit Concentration
Financial instruments that potentially subject the Company to concentrations of risk consist primarily of cash and cash equivalents and accounts receivable. The Company maintains its cash and cash equivalents with major financial institutions and such balances may, at times, exceed Federal Deposit Insurance Corporation insurance limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risk on cash.
Credit is extended to customers based on an evaluation of each customer's financial condition and generally collateral is not required. The Company's customers to whom credit is extended operate in the new home construction and home remodeling markets.
The Company maintains an allowance for credit losses based upon management's evaluation and judgment of potential net loss. The allowance is estimated based upon historical experience, the effects of current developments and economic conditions and of each customer's current and anticipated financial condition. Estimates and assumptions are periodically reviewed and updated. Any resulting adjustments to the allowance are reflected in current operating results.
At April 30, 2023, the Company's two largest customers, Customers A and B, represented 40.4% and 18.4% of the Company's gross customer receivables, respectively. At April 30, 2022, Customers A and B represented 33.8% and 19.9% of the Company's gross customer receivables, respectively.
The following table summarizes the percentage of net sales to the Company's two largest customers for the last three fiscal years:
| | | | | | | | | | | | | | | | | |
| | PERCENT OF ANNUAL NET SALES |
| | 2023 | | 2022 | | 2021 |
| Customer A | 29.6% | | 31.9% | | 30.8% |
| Customer B | 13.6% | | 16.1% | | 17.9% |
Note O — Leases
Operating Leases - ROU assets related to operating leases are presented as Operating lease right-of-use assets on the consolidated balance sheet. Lease liabilities related to operating leases with lease terms greater than twelve months are presented in Short-term lease liability - operating and Long-term lease liability - operating on the consolidated balance sheet.
Operating lease ROU assets and lease liabilities are recognized at the commencement date based on the present value of the future lease payments over the lease term. The discount rate used to determine the present value of the lease payments is the rate implicit in the lease unless that rate cannot be readily determined, in which case, the Company utilizes its incremental borrowing rate in determining the present value of the future lease payments. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Operating lease ROU assets may also include any cumulative prepaid or accrued rent when the lease payments are uneven throughout the lease term. The ROU assets and lease liabilities may also include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The ROU asset includes any lease payments made and lease incentives received prior to the commencement date. The Company has lease arrangements with lease and non-lease components, which are accounted for separately. Non-lease components of the lease payments are expensed as incurred and are not included in determining the present value.
Finance Leases - ROU assets related to finance leases are presented in Property, plant and equipment, net on the consolidated balance sheet. Lease liabilities related to finance leases are presented in Current maturities of long-term debt and Long-term debt, less current maturities on the consolidated balance sheet.
Finance lease ROU assets and lease liabilities are recognized at the commencement date based on the present value of the future lease payments over the lease term. The discount rate used to determine the present value of the lease payments is the rate implicit in the lease unless that rate cannot be readily determined, in which case, the Company utilizes its incremental borrowing rate in determining the present value of the future lease payments. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.
The components of lease costs were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | FISCAL YEARS ENDED APRIL 30, |
| (in thousands) | | 2023 | | 2022 | | 2021 |
| Finance lease cost: | | | | | | |
| Reduction in the carrying value of right-of-use assets | | $ | 1,720 | | | $ | 1,404 | | | $ | 635 | |
| Interest on lease liabilities | | $ | 105 | | | $ | 106 | | | $ | 73 | |
| Operating lease cost | | $ | 26,592 | | | $ | 27,610 | | | $ | 27,192 | |
Additional information related to leases was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | FISCAL YEARS ENDED APRIL 30, |
| (dollars in thousands) | | 2023 | | 2022 | | 2021 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | | |
| Operating cash flows for finance leases | | $ | 105 | | | $ | 106 | | | $ | 73 | |
| Operating cash flows for operating leases | | $ | 26,906 | | | $ | 25,100 | | | $ | 24,371 | |
| Financing cash flows for financing leases | | $ | 1,714 | | | $ | 1,379 | | | $ | 608 | |
| Right-of-use assets obtained in exchange for new finance lease liabilities | | $ | 1,138 | | | $ | 1,862 | | | $ | 2,222 | |
| Right-of-use assets obtained in exchange for new operating lease liabilities | | $ | 11,109 | | | $ | 7,482 | | | $ | 8,914 | |
| | | | | | |
| Weighted average remaining lease term (years) | | | | | | |
| Weighted average remaining lease term - finance leases | | 1.99 | | 2.32 | | 2.95 |
| Weighted average remaining lease term - operating leases | | 4.84 | | 5.77 | | 6.62 |
| | | | | | |
| Weighted average discount rate | | | | | | |
| Weighted average discount rate - finance leases | | 3.69 | % | | 2.91 | % | | 2.95 | % |
| Weighted average discount rate - operating leases | | 3.35 | % | | 3.2 | % | | 3.23 | % |
The Company has signed a lease in Monterrey, Mexico and a lease for the expansion in Hamlet, North Carolina. These leases are expected to commence once construction of the facilities is complete, which is anticipated in the third quarter of fiscal 2024.
The following is a reconciliation of future undiscounted cash flows to the operating and finance lease liabilities, and the related ROU assets, presented on the consolidated balance sheet as of April 30, 2023:
| | | | | | | | | | | | | | |
| FISCAL YEAR | | OPERATING (in thousands) | | FINANCING (in thousands) |
| 2024 | | $ | 27,907 | | | $ | 2,359 | |
| 2025 | | 24,014 | | | 1,009 | |
| 2026 | | 21,181 | | | 361 | |
| 2027 | | 16,647 | | | 78 | |
| 2028 | | 14,604 | | | 48 | |
| Thereafter | | 10,615 | | | — | |
| Total lease payments | | 114,968 | | | 3,855 | |
| Less imputed interest | | (8,820) | | | (153) | |
| Total lease liability | | $ | 106,148 | | | $ | 3,702 | |
| Current maturities | | (24,778) | | | (2,263) | |
| Long-term lease liability | | $ | 81,370 | | | $ | 1,439 | |
| Lease right-of-use assets | | $ | 99,526 | | | $ | 9,101 | |
NOTE P — Restructuring Charges
In the third quarter of fiscal 2023, the Company implemented nationwide reductions in force, which were substantially completed in the fourth quarter of fiscal 2023. The Company recognized pre-tax restructuring charges, net of $1.5 million for the year ended April 30, 2023, related to these reductions in force, which were primarily severance and separation costs. A reserve of $0.8 million for restructuring charges is included in accrued compensation and related expenses in the consolidated balance sheet as of April 30, 2023 which relates to employee termination costs accrued but not yet paid.
During June 2020, the Company's Board approved the closure and eventual disposal of its manufacturing plant located in Humboldt, Tennessee. Operations ceased at the Humboldt plant in July 2020. During the third quarter of fiscal 2021, the Company sold the Humboldt plant and recognized a gain of $2.3 million on the sale. During fiscal 2022 and 2021, the
Company recognized pre-tax restructuring charges, net of $0.3 million and $4.4 million, respectively, related to the closure of the plant.
During fiscal years 2023, 2022, and 2021, the Company recognized total pre-tax restructuring charges, net of $1.5 million, $0.2 million, and $5.8 million, respectively.
Note Q — Fair Value Measurements
The Company utilizes the hierarchy of fair value measurements to classify certain of its assets and liabilities based upon the following definitions:
Level 1 – Investments with quoted prices in active markets for identical assets or liabilities. The Company's cash equivalents are invested in money market funds, mutual funds and certificates of deposit. The Company's mutual fund investment assets represent contributions made and invested on behalf of the Company's named executive officers in a supplementary employee retirement plan.
Level 2 – Investments with observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Investments with unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The Company has no Level 3 assets or liabilities measured on a recurring basis.
The fair value measurement of assets held by the Company's defined benefit pension plans is discussed in Note I — Employee Benefit and Retirement Plans.
The Company's financial instruments include cash and equivalents, marketable securities, and other investments; accounts receivable and accounts payable; interest rate swap contracts; and short- and long-term debt. The carrying values of cash and equivalents, accounts receivable and payable, and short-term debt on the consolidated balance sheets approximate their fair value due to the short maturities of these items. The interest rate swap contracts were marked to market and therefore represent fair value. The fair values of these contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. The following table summarizes the fair value of assets and liabilities that are recorded in the Company's consolidated financial statements as of April 30, 2023 and 2022 at fair value on a recurring basis (in thousands):
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| | FAIR VALUE MEASUREMENTS AS OF APRIL 30, 2023 |
| LEVEL 1 | | LEVEL 2 | | LEVEL 3 |
| ASSETS: | | | | | |
| Mutual funds | $ | 191 | | | $ | — | | | $ | — | |
| Interest rate swap contracts | — | | | 13,885 | | | — | |
| | | | | |
| Total assets at fair value | $ | 191 | | | $ | 13,885 | | | $ | — | |
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| | FAIR VALUE MEASUREMENTS AS OF APRIL 30, 2022 |
| LEVEL 1 | | LEVEL 2 | | LEVEL 3 |
| ASSETS: | | | | | |
| Mutual funds | $ | 404 | | | $ | — | | | $ | — | |
| Interest rate swap contracts | — | | | 13,687 | | | — | |
| Total assets at fair value | $ | 404 | | | $ | 13,687 | | | $ | — | |
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