AMERICAN WOODMARK CORPORATION 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
2020 2019 2018
Net sales 100.0 % 100.0 % 100.0 %
Cost of sales and distribution 80.1 78.9 79.6
Gross profit 19.9 21.1 20.4
Selling and marketing expenses 5.1 5.5 6.2
General and administrative expenses 6.8 6.9 5.6
Restructuring charges, net - 0.1 -
Operating income 8.0 8.6 8.6
Interest expense/other (income) expense 1.9 1.9 1.0
Income before income taxes 6.1 6.7 7.6
Income tax expense 1.6 1.6 2.5
Net income 4.5 5.1 5.1
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 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:
• the impact of COVID-19 on our business, the global and
customers and suppliers;
• the loss of or a reduction in business from one or more of our key customers;
• negative developments in the macro-economic factors that impact our
performance such as the
rates and consumer sentiment and the impact of such developments on our and
our customers' business, operations and access to financing;
• competition from other manufacturers and the impact of such competition on
pricing and promotional levels;
• an inability to develop new products or respond to changing consumer
preferences and purchasing practices;
• a failure to effectively manage manufacturing operations, alignment and
capacity or an inability to maintain the quality of our products;
• the impairment of goodwill, other intangible assets or our long-lived assets;
• an inability to obtain raw materials in a timely manner or fluctuations in
raw material and energy costs;
• information systems interruptions or intrusions or the unauthorized release
of confidential information concerning customers, employees or other third
parties;
• the cost of compliance with, or liabilities related to, environmental or
other governmental regulations or changes in governmental or industry
regulatory standards, especially with respect to health and safety and the
environment;
17--------------------------------------------------------------------------------
• a failure to attract and retain certain members of management or other key
employees or other negative labor developments, including increases in the
cost of labor;
• risks associated with the implementation of our growth strategy;
• risks related to sourcing and selling products internationally and doing
business globally, including the imposition of tariffs or duties on those
products;
• unexpected costs resulting from a failure to maintain acceptable quality
standards;
• changes in tax laws or the interpretations of existing tax laws;
• the occurrence of significant natural disasters, including earthquakes,
fires, floods, and hurricanes or tropical storms;
• the unavailability of adequate capital for our business to grow and compete;
• increased buying power of large customers and the impact on our ability to
maintain or raise prices;
• our ability to successfully integrate RSI into our business and operations
and the risk that the anticipated economic benefits, costs savings and other
synergies in connection with the RSI Acquisition are not fully realized or
take longer to realize than expected; and
• limitations on operating our business as a result of covenant restrictions
under our indebtedness, and our ability to pay amounts due under our credit
facilities, our senior notes and our other indebtedness.
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, 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. AtApril 30, 2020 , the Company operated 18 manufacturing facilities inthe United States andMexico and eight primary service centers located throughoutthe United States . OnDecember 29, 2017 , we completed the acquisition of RSI, a leading manufacturer of kitchen, bath and home organization products. For the fiscal years endedApril 30, 2020 and 2019, the consolidated results include 12 months of RSI activity and the fiscal year endedApril 30, 2018 , only includes four months of RSI activity. COVID-19 The pandemic caused by COVID-19 was first reported inWuhan, China inDecember 2019 and has since spread throughout the world. Financial markets have been volatile in 2020, primarily due to uncertainty with respect to the severity and duration of the pandemic. The pandemic has resulted in federal, state and local governments around the world implementing increasingly stringent measures to help control the spread of the virus, including quarantines, "shelter in place" and "stay at home" orders, travel restrictions or bans, business curtailments, school closures, and other protective measures. All of our manufacturing facilities currently qualify as essential operations (or the equivalent) under applicable federal and state orders. Operations in our component plants inMexico were temporarily suspended for a period of time inApril 2020 , however, all of our manufacturing facilities and service centers are currently open and operating. We are enforcing social distancing and enhanced health, safety and sanitization measures in accordance with guidelines from theCenter for Disease Control . We have also implemented necessary procedures and support to enable a significant portion of our office personnel to work remotely. As the spread of the virus began to be identified withinthe United States inMarch 2020 , we acted by imposing travel restrictions, transitioning large meetings from in-person to virtual formats, assessing our information technology infrastructure to ensure readiness for a remote workforce, staying connected to customers, suppliers and business partners, planning for return to the workplace and making operational adjustments as needed to ensure continued safety of our workforce. 18
-------------------------------------------------------------------------------- The COVID-19 pandemic impacted our business operations and financial results beginning in the fourth quarter of fiscal 2020 and continues to impact us in fiscal 2021. Although the financial impact on our overall fiscal 2020 results is limited due to the timing of the outbreak, we face numerous uncertainties in estimating the direct and indirect effects on our present and future business operations, financial condition, results of operations, and liquidity. Due to several rapidly changing variables related to the COVID-19 pandemic, we cannot reasonably estimate future economic trends and the timing of when stability will return. Refer to Item 1A. "Risk Factors" for a disclosure of risk factors related to COVID-19.
Particleboard Supply
Due to a catastrophic fire at a key Southeast supplier plant inMay 2019 (fiscal 2020) and the supplier's subsequent decision to shutter operations over the next 90-days at two additional plants, the Company experienced a temporary disruption in supply of particleboard, a key input component to the build of our cabinetry. This disruption resulted in net expense of$4.2 million during fiscal 2020. Management was successful in containing the situation as to not impact our customers.
Financial Overview
A number of general market factors impacted the Company's business in fiscal 2020, including:
• The unemployment rate increased by 308% compared to
nearly all of the increase occurred in March and
• Increase in single family housing starts during the Company's fiscal 2019 of
5%, as compared to the Company's fiscal 2019, according to the
of Commerce;
• Mortgage interest rates decreased with a 30-year fixed mortgage rate of 3.31%
in
2019;
• The median price of existing homes sold in the
Company's fiscal 2020, according to data provided by the National Association
of Realtors;
• Consumer sentiment, as reported by the
lower during the Company's fiscal 2020 than in its prior fiscal year; and
•
Association (KCMA), decreased by 0.1% during fiscal 2020 versus the prior fiscal year. The Company's largest remodeling customers and competitors continued to utilize sales promotions in the Company's product category during fiscal 2020 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 2020 that were higher than those experienced in its prior fiscal year. Sales in the remodel channel decreased 3% during the fiscal year due to a decline in the made- to-order framed business which were partially offset by growth in the stock business. Sales in the new construction channel increased 6% during the fiscal year due to share penetration with our builder partners and the health of the markets where we concentrated our business during fiscal 2020.
The Company increased its net sales by 0.3% during fiscal 2020, which management believes was driven primarily by growth in the builder channel which was partially offset by declines in the home center and independent dealers and distributors channels.
Gross margin for fiscal 2020 was 19.9%, a decrease from 21.1% in fiscal 2019. The decrease in gross margin was primarily due to tariffs of$6.4 million , net cost impacts related to our particleboard supply disruption of$4.2 million , duplicate rent/move costs related to ourCalifornia facility move of$2.4 million and expenses related to the temporary suspension of operations in our component plants inMexico duringApril 2020 . The Company regularly considers the need for a valuation allowance against its deferred tax assets. The Company has been profitable for the last 8 years. As ofApril 30, 2020 , the Company had total deferred tax assets of$46.0 million net of valuation allowance, up from$14.3 million of deferred tax assets net of valuation allowance atApril 30, 2019 . The increase in deferred tax assets during fiscal 2020 was primarily due to the adoption of new leasing standards. 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 19 -------------------------------------------------------------------------------- tax assets for certain state investment tax credit ("ITC") carryforwards. These credits expire in various years beginning in fiscal 2028. The Company believes based on positive evidence of the housing industry improvement along with 8 consecutive years of profitability that the Company will more likely than not realize all other remaining 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 its long-lived assets were impaired as ofApril 30, 2020 . Results of Operations FISCAL YEARS ENDEDAPRIL 30
2020 vs. 2019 2019 vs. 2018
PERCENT PERCENT
(Dollars in thousands) 2020 2019 2018 CHANGE CHANGE
Net sales $ 1,650,333 $ 1,645,319 $ 1,250,274 - % 32 %
Gross profit 329,186 346,473 255,403 (5 ) 36
Selling and marketing expenses 83,608 89,875 77,843 (7 ) 15
General and administrative expenses 113,334 112,917 69,855
- 62
Interest expense (income), net 29,027 35,652 13,054 (19 ) 173
Net Sales
Net sales for fiscal 2020 increased 0.3% to
Net sales for fiscal 2019 increased 32% to
Gross Profit
Gross profit as a percentage of sales decreased to 19.9% in fiscal 2020 as
compared with 21.1% in fiscal 2019. The decrease in gross profit margin was
primarily due to tariffs of
Gross profit as a percentage of sales increased to 21.1% in fiscal 2019 as compared with 20.4% in fiscal 2018. The increase in gross profit margin was due primarily to higher sales volumes, price, mix and overhead cost leverage due to higher volumes. These favorable impacts were partially offset by higher transportation costs, newly enacted tariffs and raw material inflation.
Selling and Marketing Expenses
Selling and marketing expenses in fiscal 2020 were 5.1% of net sales, compared with 5.5% of net sales in fiscal 2019. Selling and marketing costs decreased by 7% despite a 0.3% increase in net sales. The improvement in the percentage of selling and marketing costs in relation to net sales was due to lower displays and incentive costs. Selling and marketing expenses in fiscal 2019 were 5.5% of net sales, compared with 6.2% of net sales in fiscal 2018. Selling and marketing costs increased by only 15% despite a 32% increase in net sales. The improvement in the percentage of selling and marketing costs in relation to net sales was due to favorable leverage from increased sales and on-going expense control.
General and Administrative Expenses
General and administrative expenses increased by$0.4 million or 0.4% during fiscal 2020 versus the prior fiscal year. General and administrative costs decreased to 6.8% of net sales in fiscal 2020 compared with 6.9% of net sales in fiscal 2019. 20
-------------------------------------------------------------------------------- General and administrative expenses increased by$43.1 million or 62% during fiscal 2019 versus the prior fiscal year. The increase was related to intangible amortization and higher compensation incentive costs. General and administrative costs increased to 6.9% of net sales in fiscal 2019 compared with 5.6% of net sales in fiscal 2018. Effective Income Tax Rates The Company generated pre-tax income of$100.5 million during fiscal 2020. The Company's effective tax rate increased from 24.5% in fiscal 2019 to 25.5% in fiscal 2020 primarily due to the benefit from the Tax Cuts and Jobs Act of 2017 (H.R. 1) (the "Tax Act") that was recognized in fiscal 2019. The higher effective tax rate was primarily due to lower federal income tax credits. The Company's effective tax rate decreased from 33.4% in fiscal 2018 to 24.5% in fiscal 2019. The lower effective tax rate in fiscal 2019 was primarily due to the overall benefit from the reduction in the tax rate enacted in connection with the Tax Act.
Non-GAAP Financial Measures
We have reported our financial results in accordance with generally accepted
accounting principles ("GAAP"). In addition, we have presented in this report
the non-GAAP measures described below.
A reconciliation of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP is set forth below.
Management believes these non-GAAP financial measures provide an additional means of analyzing the current period's results against the corresponding prior period's results. However, these non-GAAP financial measures should be viewed in addition to, and not as a substitute for, the Company's reported results prepared in accordance with GAAP. Our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP.
EBITDA, Adjusted EBITDA and Adjusted EBITDA margin
We use EBITDA, Adjusted EBITDA and Adjusted EBITDA margin in evaluating the performance of our business, and we use each in the preparation of our annual operating budgets and as indicators of business performance and profitability. We believe Adjusted EBITDA and Adjusted EBITDA margin allow us to readily view operating trends, perform analytical comparisons and identify strategies to improve operating performance. Additionally, Adjusted EBITDA is a key measurement used in our Term Loans to determine interest rates and financial covenant compliance. We define EBITDA as net income adjusted to exclude (1) income tax expense, (2) interest (income) expense, net, (3) depreciation and amortization expense and (4) amortization of customer relationship intangibles and trademarks. We define Adjusted EBITDA as EBITDA adjusted to exclude (1) expenses related to the RSI Acquisition and the subsequent restructuring charges that the Company incurred related to the acquisition, (2) inventory step-up amortization due to the increase in the fair value of inventory acquired through the RSI Acquisition, (3) non-recurring restructuring charges, (4) net gain on debt forgiveness and modification, (5) stock-based compensation expense, (6) gain/loss on asset disposals and (7) change in fair value of foreign exchange forward contracts. We believe Adjusted EBITDA, when presented in conjunction with comparable GAAP measures, is useful for investors because management uses Adjusted EBITDA in evaluating the performance of our business.
We define Adjusted EBITDA margin as Adjusted EBITDA as a percentage of net sales.
Adjusted EPS per diluted share
We use Adjusted EPS per diluted share in evaluating the performance of our
business and profitability. Management believes that this measure provides
useful information to investors by offering additional ways of viewing the
Company's results by providing an indication of performance and profitability
excluding the impact of unusual and/or non-cash items. We define Adjusted EPS
per diluted share as diluted earnings per share excluding the per share impact
of (1) expenses related to the RSI Acquisition and the subsequent restructuring
charges that the Company incurred related to the acquisition, (2) inventory
step-up amortization due to the increase in the fair value of inventory acquired
through the RSI Acquisition, (3) non-recurring restructuring charges, (4) the
amortization of customer relationship intangibles and trademarks, (5) net gain
on debt forgiveness and modification and (6) the tax benefit of RSI Acquisition
expenses and subsequent restructuring charges, the net gain on debt forgiveness
and modification and the amortization of customer relationship intangibles and
trademarks. The amortization of intangible assets is driven by the RSI
Acquisition and will recur in future periods. Management has determined that
excluding amortization of intangible assets from our definition of Adjusted EPS
per diluted share will better help it evaluate the performance of our business
and profitability and we have also received similar feedback from some of our
investors regarding the same. During the fourth quarter of fiscal
21
--------------------------------------------------------------------------------2020, management determined that adding non-recurring restructuring charges was an appropriate adjustment due to their non-recurring nature.
Free cash flow
To better understand trends in our business, we believe that it is helpful to
subtract amounts for capital expenditures consisting of cash payments for
property, plant and equipment and cash payments for investments in displays from
cash flows from continuing operations which is how we define free cash flow.
Management believes this measure gives investors an additional perspective on
cash flow from operating activities in excess of amounts required for
reinvestment. It also provides a measure of our ability to repay our debt
obligations.
A reconciliation of these non-GAAP financial measures and the most directly
comparable measures calculated and presented in accordance with GAAP are set
forth in the following tables:
Reconciliation of EBITDA, Adjusted EBITDA and Adjusted EBITDA margin
FISCAL YEARS ENDED APRIL 30,
(Dollars in thousands) 2020 2019 2018
Net income (GAAP) $ 74,861 $ 83,688 $ 63,141
Add back:
Income tax expense 25,687 27,200 31,619
Interest expense, net 29,027 35,652 13,054
Depreciation and amortization expense 49,513 45,446 28,671
Amortization of customer relationship
intangibles and trademarks 49,000 49,000 16,333
EBITDA (Non-GAAP) $ 228,088 $ 240,986 $ 152,818
Add back:
Acquisition and restructuring related
expenses (1) 221 4,118 12,902
Inventory step-up amortization (2) - -
6,334
Change in fair value of foreign exchange forward contracts (3) 1,102 - - Net gain on debt forgiveness and modification (4) - (5,266 ) - Stock-based compensation expense 3,989 3,040 3,097 Loss on asset disposal 2,629 1,973 615 Adjusted EBITDA (Non-GAAP)$ 236,029 $ 244,851 $ 175,766 Net Sales$ 1,650,333 $ 1,645,319 $ 1,250,274 Adjusted EBITDA margin (Non-GAAP) 14.3 % 14.9
% 14.1 %
(1) Acquisition and restructuring related expenses are comprised of expenses related to the RSI Acquisition, the subsequent restructuring charges that the Company incurred related to the acquisition and restructuring charges incurred related to COVID-19. (2) The inventory step-amortization is the increase in the fair value of inventory acquired through the RSI Acquisition that was fully expensed when the inventory was sold in the quarter endedJanuary 31, 2018 . (3) In the normal course of business the Company is subject to risk from adverse fluctuations in foreign exchange rates. The Company manages these risks through the use of foreign exchange forward contracts. The changes in the fair value of the forward contracts are recorded in other expense (income) in the operating results. (4) The Company had loans and interest forgiven relating to four separate economic development loans totaling$5.5 million for fiscal year 2019 and the Company incurred$0.3 million in loan modification expense with an amendment to the credit agreement during fiscal year 2019. A reconciliation of EBITDA, Adjusted EBITDA and Adjusted EBITDA margin as projected for fiscal 2021 is not provided because we do not forecast net income as we cannot, without unreasonable effort, estimate or predict with certainty various components of net income. 22 --------------------------------------------------------------------------------
Adjusted EPS per diluted share
FISCAL YEARS ENDED APRIL 30,
(Dollars in thousands, except share and
per share data) 2020 2019 2018
Net income (GAAP) $ 74,861 $ 83,688 $ 63,141
Add back:
Acquisition and restructuring related
expenses 221 4,118 12,902
Amortization of intangibles 49,000 49,000 16,333
Inventory step-up amortization - - 6,334
Net gain on debt forgiveness and
modification - (5,266 ) -
Tax benefit of add backs (12,305 ) (11,824 ) (10,970 )
Adjusted net income (Non-GAAP) $ 111,777 $ 119,716 Weighted average diluted shares 16,952,480 17,330,419
16,744,705
Adjusted EPS per diluted share (Non-GAAP)
$ 5.24 EPS per diluted share (GAAP)$ 4.42 $ 4.83 $ 3.77 Free cash flow FISCAL YEARS ENDED APRIL 30, (Dollars in thousands) 2020 2019 2018
Cash provided by operating activities
40,739 39,385 49,893
Free cash flow $ 136,803 $ 151,460 $ 36,882 (1) Capital expenditures consist of cash payments for property, plant and equipment and cash payments for investments in displays.
Outlook for Fiscal 2021
The impact on our fiscal 2021 financial results from the COVID-19 pandemic are uncertain. The Company's net sales were down 2% during the fourth quarter of fiscal 2020 but we expect net sales for the first quarter of fiscal 2021 to be down approximately high single-digit to low double-digit versus the prior year period which will negatively impact Net Income and Adjusted EBITDA. This trend could continue until the pandemic subsides and macro-economic factors improve. The Company has taken actions to improve its cash position and as ofApril 30, 2020 had$97.1 million of cash on hand and access to$94.3 million of additional availability under its revolver. As ofMay 31, 2020 , our cash position has further improved to$107.4 million . We will continue to monitor the situation closely and may implement further measures to provide additional financial flexibility as we work to protect our cash position and liquidity. 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 and cash equivalents totaled$97.1 million atApril 30, 2020 , representing a$39.4 million increase from itsApril 30, 2019 levels. AtApril 30, 2020 , total long-term debt (including current maturities) was$597.1 million , a decrease of$94.4 million from its balance atApril 30, 2019 . The Company's ratio of long-term debt to total capital was 45.9% atApril 30, 2020 , compared with 52.6% atApril 30, 2019 . The Company's main source of liquidity is its cash and cash equivalents on hand and cash generated from its operating activities. 23
-------------------------------------------------------------------------------- The Company can also borrow up to$100 million under the Revolving Facility. Approximately$94.3 million was available under this facility as ofApril 30, 2020 . The RSI Acquisition significantly affected the Company's financial condition, liquidity and cash flow. See Note B -- Acquisition ofRSI Home Products, Inc. (the "RSI Acquisition") for a table detailing the purchase price. The Company borrowed$250 million under the Initial Term Loan onDecember 29, 2017 in connection with the closing of the RSI Acquisition and borrowed an additional$250 million under the Delayed Draw Term Loan onFebruary 12, 2018 in connection with the refinancing of the RSI Notes. Amounts outstanding under the Credit Facilities bear interest based on a fluctuating rate measured by reference to either, at the Company's option, a base rate plus an applicable margin or LIBOR plus an applicable margin, with the applicable margin being determined by reference to the Company's then-current "Total Funded Debt to EBITDA Ratio." The Company also incurs a quarterly commitment fee on the average daily unused portion of the Revolving Facility during the applicable quarter at a rate per annum also determined by reference to the Company's then-current "Total Funded Debt to EBITDA Ratio." As ofApril 30, 2020 , the applicable margin with respect to base rate loans and LIBOR loans was 0.50% and 1.50%, respectively, and the commitment fee was 0.175%. The Company began repaying the aggregate outstanding amounts under its initial term loan facility and the delayed draw term loan facility in certain specified quarterly installments onApril 30, 2018 . The Credit Facilities mature onDecember 29, 2022 . OnFebruary 12, 2018 , the Company issued$350 million in aggregate principal amount of the Senior Notes and utilized the proceeds of such issuance, together with the borrowings under the Delayed Draw Term Loan as discussed above and cash on hand, to fund the refinancing of the RSI Notes, which were acquired as part of the RSI Acquisition - See Note B -- Acquisition ofRSI Home Products, Inc. (the "RSI Acquisition"). The credit agreement governing the Company's credit facilities and the indenture governing the Senior Notes restrict the ability of the Company and certain of the Company's subsidiaries to, among other things, incur additional indebtedness, create additional liens, make certain investments, dispose of assets or engage in a merger or consolidation, engage in certain transactions with affiliates, and make certain restricted payments, including the payment of dividends or the repurchase or redemption of stock, subject, in each case, to the various exceptions and conditions described in the credit agreement and the indenture. See Note G --Notes Payable and Long-Term Debt for a discussion of our compliance with the covenants in the credit agreement and the indenture.
OPERATING ACTIVITIES
Cash provided by operating activities in fiscal 2020 was$177.5 million , compared with$190.8 million in fiscal 2019. The decrease in the Company's cash from operating activities was driven primarily by a decrease in net income and decreased cash flows from income taxes receivable and accrued compensation and related expenses, which was partially offset by an increase in cash flows from customer receivables and accrued marketing expenses. Cash provided by operating activities in fiscal 2019 was$190.8 million , compared with$86.8 million in fiscal 2018. The increase in the Company's cash from operating activities was driven primarily by an increase in net income excluding non-cash items (primarily depreciation and amortization), lower pension contributions in excess of expense and a decrease in customer receivables which was partially offset by an increase in inventories and other accrued expenses. OnNovember 28, 2018 , the Board approved up to$5.0 million of discretionary funding to reduce its defined benefit pension liabilities. The Company made aggregate contributions of$7.3 million to its pension plans during fiscal 2019, including the$5.0 million of discretionary funding. The Company made contributions of$0.5 million to its pension plans during fiscal 2020.
On
INVESTING ACTIVITIES
The Company's investing activities primarily consist of capital expenditures and investments in promotional displays. Net cash used by investing activities in fiscal 2020 was$38.9 million , compared with$37.9 million in fiscal 2019 and$44.3 million in fiscal 2018. Investments in property, plant and equipment for fiscal 2020 were$31.7 million , compared with$32.1 million in fiscal 2019 and$47.6 million in fiscal 2018. Investments in promotional displays were$9.1 million in fiscal 2020, compared with$7.3 million in fiscal 2019 and$2.3 million in fiscal 2018. 24 -------------------------------------------------------------------------------- OnNovember 30, 2016 the Board approved the construction of a new corporate headquarters inWinchester, Virginia . The new space has consolidated employees that previously occupied four buildings inWinchester, Virginia andFrederick County, Virginia , during the fourth quarter of fiscal 2018. During fiscal 2020, 2019 and 2018, approximately$0.6 million ,$6.7 million and$21.1 million , respectively, was spent related to the new corporate headquarters.
FINANCING ACTIVITIES
The Company realized a net outflow of$99.2 million from financing activities in fiscal 2020 compared with a net outflow of$173.7 million in fiscal 2019, and a net outflow of$141.0 million in fiscal 2018. During fiscal 2020,$98.5 million was used to repay long-term debt, compared with approximately$122.2 million in fiscal 2019 and$96.6 million in fiscal 2018. Under a stock repurchase authorization approved by its Board onNovember 30, 2016 , the Company was authorized to purchase up to$50 million of the Company's common shares. The Board suspended the Company's stock repurchase program in conjunction with the RSI Acquisition. OnAugust 23, 2018 , the Board reinstated the program. OnNovember 28, 2018 , the Board authorized an additional stock repurchase program of up to$14 million of the Company's common shares. This authorization is in addition to the stock repurchase program authorized onNovember 30, 2016 . The Company funded share repurchases using available cash and cash generated from operations. Repurchased shares became authorized but unissued common shares. AtApril 30, 2019 , no funds remained from the amounts authorized by the Board to repurchase the Company's common shares. OnAugust 22, 2019 , the Board authorized a stock repurchase program of up to$50 million of the Company's common shares. The Company did not repurchase any of its shares during the fiscal year endedApril 30, 2020 . The Company repurchased$50.0 million during fiscal 2019 and$29.0 million during fiscal 2018.
Cash flow from operations combined with accumulated cash and cash equivalents on hand are expected to be more than sufficient to support forecasted working capital requirements, service existing debt obligations and fund capital expenditures for fiscal 2021.
The timing of the Company's contractual obligations (excluding interest) as of
FISCAL YEARS ENDED APRIL 30
2026 and
(in thousands) Total Amounts 2021 2022-2023 2024-2025 Thereafter
Term Loans$ 244,000 $ -$ 244,000 $ - $ - The Senior Notes 350,000 - - - 350,000 Capital lease obligations 5,687 2,216 2,303 1,098 70 Other long-term debt 6,659 - 46 509 6,104
Operating lease obligations 154,272 24,071 40,756
33,836 55,609
Total $ 760,618 $ 26,287 $ 287,105 $ 35,443 $ 411,783
SEASONALITY
Our business has been subject to seasonal influences, with higher sales
typically realized in our first and fourth fiscal quarters, although sales were
down in the fourth quarter of fiscal 2020 and we expect sales to be down in the
first quarter of fiscal 2021 due to the COVID-19 pandemic. General economic
forces and changes in our customer mix have reduced seasonal fluctuations in
revenue over the past few years. 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.
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
25
--------------------------------------------------------------------------------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.
Revenue Recognition. The Company utilizes signed sales agreements that provide for transfer of title to the customer at the time of shipment or upon delivery based on the contractual terms. The Company must estimate the amount of sales that have been transferred to third-party carriers but not delivered to customers as the carriers are not able to report real-time what has been delivered and thus there is a delay in reporting to the Company. The estimate is calculated using a lag factor determined by analyzing the actual difference between shipment date and delivery date of orders over the past 12 months. Revenue is only recognized on those shipments which the Company believes have been delivered to the customer. The Company recognizes revenue based on the invoice price less allowances for sales returns, cash discounts and other deductions as required underU.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 sheets. Pensions. Prior toApril 30, 2020 , the Company had two non-contributory defined benefit pension plans covering many of the Company's employees hired prior toApril 30, 2012 . EffectiveApril 30, 2012 , the Company froze all future benefit accruals under the Company's hourly and salaried defined benefit pension plans. EffectiveApril 30, 2020 , these plans were merged into one plan. 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. 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 $ (1.7 ) $ 1.5 Effect on projected pension benefit obligation $ (24.7 ) $ 31.3 Pension expense for fiscal 2020 and the assumptions used in that calculation are presented in Note J of the Consolidated Financial Statements. AtApril 30, 2020 , the weighted average discount rate was 3.16% compared with 4.02% atApril 30, 2019 . The expected return on plan assets was 5.0% for the year endedApril 30, 2020 and 5.5% for the year endedApril 30, 2019 . The rate of compensation increase is not applicable for periods beyondApril 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 26 -------------------------------------------------------------------------------- material deviations between results based on assumptions and the actual plan performance have resulted from changes to the discount rate used to measure the plans' benefit obligations and the actual return on plan assets. Accounting guidelines require the discount rate to be set to a current market rate at each annual measurement date. The Company strives to balance expected long-term returns and short-term volatility of pension plan assets. Favorable and unfavorable differences between the assumed and actual returns on plan assets are generally amortized over a period no longer than the average life expectancy of the plans' active participants. The actual rates of return on plan assets realized, net of investment manager fees, were 15.6%, 7.0% and 3.5% for fiscal 2020, 2019 and 2018, respectively. The fair value of plan assets atApril 30, 2020 was$190.7 million compared with$169.5 million atApril 30, 2019 . The Company's projected benefit obligation exceeded plan assets by$0.4 million in fiscal 2020 and the plan assets exceeded the projected benefit obligation by$0.7 million in fiscal 2019. The$1.1 million increase in the Company's unfunded position during fiscal 2020 was primarily driven by the decrease in the discount rate from 4.02% to 3.16%, partially offset by better than assumed asset returns. The Company expects its pension benefit to increase from$0.7 million in fiscal 2020 to$2.0 million in fiscal 2021, due primarily to asset returns, partially offset by a decrease in the expected long-term rate of return from 5.0% to 4.5%. The Company does not expect to contribute to its pension plans in fiscal 2021. The Company made contributions of$0.5 million to its pension plans in fiscal 2020.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 or changes in circumstances indicate that the carrying value may not be recoverable. 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 impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the asset using a quantitative impairment test, and if impaired, the associated assets must be written down to fair value. There were no impairment charges related to goodwill for the fiscal years ended 2020 and 2019. Other Intangible Assets. Other intangible assets consist of customer relationship intangibles and trademarks. The Company amortizes the cost of other intangible assets over their estimated useful lives, which range from three to 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. There were no impairment charges related to other intangible assets for the fiscal years ended 2020 and 2019.
RECENT ACCOUNTING PRONOUNCEMENTS
InFebruary 2016 , theFinancial Accounting Standards Board (the "FASB") issued a new standard for leases, ASC 842, which requires lessees to recognize almost all leases on their balance sheet as a right-of-use ("ROU") asset and lease liability. The standard is effective for annual periods beginning afterDecember 15, 2018 . The standard provides for the option to elect a package of practical expedients upon adoption. The Company adopted the standard onMay 1, 2019 using the modified retrospective transition approach and elected the package of practical expedients that allows it to forgo reassessment of lease classification for leases that have already commenced. The Company also elected the practical expedients to the new standard without restating comparative prior period financial information and to not recognize ROU assets and liabilities for operating leases with shorter than 12-month terms. OnMay 1, 2019 , the Company recognized operating lease assets and operating lease liabilities of$80.4 million . The new standard did not have a material impact on the Company's results of operations, cash flows or opening retained earnings, or on its debt covenant calculations. ASC 842 also requires entities to disclose certain qualitative and quantitative information regarding the amount, timing, and uncertainty of cash flows arising from leases. Such disclosures are included in Note O--Leases. InJune 2016 , the FASB issued Accounting Standards Update ("ASU") No. 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," which modifies the methodology for recognizing loss impairments on certain types of financial instruments, including receivables. The new methodology requires an entity to estimate the credit losses expected over the life of an exposure. ASU 2016-13 is effective for the Company beginningMay 1, 2020 . This standard will impact the valuation of credit losses relating to receivables, however, we do not expect the standard to have a material impact on financial position or results of operations. InDecember 2019 , the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes," which simplifies the accounting for income taxes by removing certain exceptions for recognizing deferred taxes for 27
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investments, performing intraperiod tax allocations and calculating income taxes in interim periods. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12 is effective for the Company beginningMay 1, 2021 . Early adoption is permitted. The Company is currently reviewing the provisions of this new pronouncement and the impact, if any, the adoption of this guidance may have on financial position and results of operations. InMarch 2020 , the FASB issued ASU No. 2020-04 "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as ofMarch 12, 2020 throughDecember 31, 2022 and can be adopted as of any date from the beginning of an interim period that includes or is subsequent toMarch 12, 2020 . The Company has identified loans and other financial instruments that are directly or indirectly influenced by LIBOR and does not expect the adoption of ASU 2020-04 to have a material impact on its consolidated financial statements.
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