awcfy1310k.htm




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

Form 10-K
 
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 30, 2013
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission file number 000-14798
 
AMERICAN WOODMARK CORPORATION
(Exact name of registrant as specified in its charter)
 
VIRGINIA
 
54-1138147
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
3102 Shawnee Drive, Winchester, Virginia
 
22601
(Address of principal executive offices)
 
(Zip Code)

Registrant's telephone number, including area code:  (540) 665-9100
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Name of each exchange on which registered
Common Stock (no par value)
 
NASDAQ Global Select Market
 
Securities registered pursuant to Section 12(g) of the Act:  None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ]  No [X]
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ]  No [X]
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [X]  No [ ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X]  No [ ]
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [ ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer    
Accelerated filer                  x
Non-accelerated filer        (Do not check if a smaller reporting company)
Smaller reporting company 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes [ ]  No [X]
 
The aggregate market value of the registrant's Common Stock, no par value, held by non-affiliates of the registrant as of October 31, 2012, the last business day of the Company’s most recent second quarter was $252,894,016.
 
As of June 17, 2013, 14,923,930 shares of the Registrant's Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the Registrant’s definitive Proxy Statement for the Annual Meeting of Shareholders to be held on August 22, 2013 (“Proxy Statement”) are incorporated by reference into Part III of this Form 10-K.

 
 

 

PART I

Item 1.
BUSINESS

American Woodmark Corporation (“American Woodmark” or the “Company”) manufactures and distributes kitchen cabinets and vanities for the remodeling and new home construction markets. American Woodmark was incorporated in 1980 by the four principal managers of the Boise Cascade Cabinet Division through a leveraged buyout of that division. American Woodmark was operated privately until 1986 when it became a public company through a registered public offering of its common stock.

American Woodmark currently offers framed stock cabinets in approximately 550 different cabinet lines, ranging in price from relatively inexpensive to medium-priced styles. Styles vary by design and color from natural wood finishes to low-pressure laminate surfaces. The product offering of stock cabinets includes 86 door designs in 18 colors. Stock cabinets consist of cabinet interiors of varying dimensions and construction options and a maple, oak, cherry, or hickory front frame, door and/or drawer front.

Products are sold under the brand names of American Woodmark®, Timberlake®, Shenandoah Cabinetry®, Potomac®, and Waypoint Living Spaces®.

American Woodmark’s products are sold on a national basis across the United States to the remodeling and new home construction markets. The Company services these markets through three primary channels: home centers, builders, and independent dealers and distributors. The Company provides complete turnkey installation services to its direct builder customers via its network of nine service centers that are strategically located throughout the United States. The Company distributes its products to each market channel directly from four assembly plants through a third party logistics network.

The primary raw materials used include hard maple, oak, cherry, soft maple, and hickory lumber and plywood. Additional raw materials include paint, particleboard, manufactured components, and hardware. The Company currently purchases paint from one supplier; however, other sources are available. Other raw materials are purchased from more than one source and are readily available.

American Woodmark operates in a highly fragmented industry that is composed of several thousand local, regional, and national manufacturers. The Company’s principal means for competition is its breadth and variety of product offering, expanded service capabilities, geographic reach and affordable quality. The Company believes it is one of the three largest manufacturers of kitchen cabinets in the United States.

The Company’s business has historically been subject to seasonal influences, with higher sales typically realized in the second and fourth fiscal quarters. General economic forces and changes in the Company’s customer mix have reduced seasonal fluctuations in revenue over the past few years. The Company does not consider its level of order backlog to be material.

In recognition of the cyclicality of the housing industry, the Company’s policy is to operate with a minimal amount of financial leverage.  The Company regularly maintains a debt to capital ratio of well below 20%, and working capital exclusive of cash of less than 6% of net sales.  At April 30, 2013, debt to capital was 13.9%, and working capital net of cash was 1.9% of net sales.

During the last fiscal year, American Woodmark had two primary customers, The Home Depot and Lowe’s Companies, Inc., which together accounted for approximately 59% of the Company’s sales in its fiscal year ended April 30, 2013 (fiscal 2013). The loss of either customer would have a material adverse effect on the Company.

As of May 31, 2013, the Company had 4,537 employees. None of the Company’s employees are represented by labor unions. The Company believes that its employee relations are good.

American Woodmark’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and all amendments to those reports are available free of
 
 
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charge on the Company’s web site at www.americanwoodmark.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission. The contents of the Company’s web site are not, however, part of this report.

Item 1A.
RISK FACTORS

There are a number of business risks and uncertainties that may affect the Company’s business, results of operations and financial condition. These risks and uncertainties could cause future results to differ from past performance or expected results, including results described in statements elsewhere in this report that constitute "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. Additional risks and uncertainties not presently known to the Company or currently believed to be immaterial also may adversely impact the business. Should any risks or uncertainties develop into actual events, these developments could have material adverse effects on the Company’s business, financial condition, and results of operations. These risks and uncertainties, which the Company considers to be most relevant to specific business activities, include, but are not limited to, the following, as well as additional risk factors included in Item 7A, "Quantitative and Qualitative Disclosures about Market Risk."  Additional risks and uncertainties that may affect the Company’s business, results of operations and financial condition are discussed elsewhere in this report, including in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the headings “Forward-Looking Statements,” “Market Risks,” and “Outlook for Fiscal 2014.”
 
The Company’s business is dependent upon remodeling activity and residential construction.  The Company’s results of operations are affected by levels of home improvement and residential construction activity, including repair and remodeling and new construction. Job creation levels, interest rates, availability of credit, energy costs, consumer confidence, national and regional economic conditions, and weather conditions and natural disasters can significantly impact levels of home improvement and residential construction activity.

 Prolonged economic downturns may adversely impact the Company’s sales, earnings and liquidity.  Although they have recently rebounded, the Company’s fiscal 2013 sales levels were 25% below their peak levels of 2006.  The Company’s industry historically has been cyclical in nature and has fluctuated with economic cycles. During economic downturns, the Company’s industry could experience longer periods of recession and greater declines than the general economy. The Company believes that its industry is significantly influenced by economic conditions generally and particularly by housing activity, consumer confidence, the level of personal discretionary spending, demographics and credit availability. These factors not only may affect the ultimate consumer of the Company’s products, but also may impact home centers, builders and the Company’s other primary customers. As a result, a worsening of current conditions could adversely affect the Company’s sales and earnings as well as its cash flow and liquidity.

The Company’s future financial performance depends in part on the success of its new product development and other growth strategies.  The Company has increased its emphasis on new product development in recent years and continues to focus solely on organic growth. Consequently, the Company’s financial performance will, in part, reflect its success in implementing its growth strategies in its existing markets and in introducing new products.

The loss of, or a reduction in business from, either of the Company’s key customers would have a material adverse effect upon its business.  The size and importance to the Company of its two largest customers is significant. These customers could make significant changes in their volume of purchases and could otherwise significantly affect the terms and conditions on which the Company does business. Sales to The Home Depot and Lowe’s Companies, Inc. were approximately 59% of total company sales for fiscal 2013. Although builders, dealers, and other retailers represent other channels of distribution for the Company's products, an unplanned loss of a substantial portion of sales to The Home Depot or Lowe’s Companies, Inc. would have a material adverse impact on the Company.

 
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Manufacturing realignments and cost savings programs similar to the Company’s 2012 Restructuring Plan could result in a decrease in the Company’s near-term earnings and liquidity.  The Company continually reviews its manufacturing operations. These reviews could result in manufacturing realignments and cost savings programs, such as the consolidation and integration of facilities, functions, systems, or procedures, which in turn could result in a charge that would decrease near-term earnings and liquidity until the expected cost reductions are achieved. Any such realignments would likely result in significant costs including, among others, severance, impairment, exit, and disposal costs and capital expenditures.

Impairment charges could reduce the Company’s profitability.  The Company has significant long-lived assets, including deferred tax assets, recorded on its balance sheets. If operating results decline or if the Company decides to restructure results as it did with the 2012 Restructuring Plan, the Company could incur impairment charges, which could have a material impact on its financial results. The Company evaluates the recoverability of the carrying amount of its long-lived assets on an ongoing basis. The outcome of future reviews could result in substantial impairment charges. Impairment assessments inherently involve judgments as to assumptions about market conditions and the Company’s ability to generate future cash flows and profitability, given those assumptions. Future events and changing market conditions may impact the Company’s assumptions as to prices, costs or other factors that may result in changes in the Company’s estimates. Although the Company believes the assumptions used in testing for impairment are reasonable, significant changes in these assumptions could produce a significantly different result.

The Company’s operating results are affected by the cost and availability of raw materials.  Because the Company is dependent on outside suppliers for raw material needs, it must obtain sufficient quantities of quality raw materials from its suppliers at acceptable prices and in a timely manner. The Company has no long-term supply contracts with its key suppliers. A substantial decrease in the availability of products from the Company’s suppliers, the loss of key supplier arrangements, or a substantial increase in the cost of its raw materials could adversely impact the Company’s results of operations.

The Company may not be able to maintain or raise the prices of its products in response to inflation and increasing costs.  Short-term market and competitive pressures may prohibit the Company from raising prices to offset inflationary raw material and freight costs, which would adversely impact profit margins.

Item 1B.
UNRESOLVED STAFF COMMENTS

None.


 
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Item 2.
PROPERTIES

American Woodmark leases its Corporate Office located in Winchester, Virginia. In addition, the Company leases 1 manufacturing facility in Hardy County, West Virginia and owns 8 manufacturing facilities located primarily in the eastern United States.  The Company also leases 9 primary service centers, 2 satellite service centers, and 3 additional office centers located throughout the United States that support the sale and distribution of products to each market channel. The Company considers its properties suitable for the business and adequate for its needs.

Primary properties as of April 30, 2013 include:

LOCATION
DESCRIPTION
Allegany County, MD
Manufacturing Facility
Berryville, VA
Service Center*
Coppell, TX
Service Center*
Gas City, IN
Manufacturing Facility
Hardy County, WV
Manufacturing Facility*
Houston, TX
Satellite Service Center*
Humboldt, TN
Manufacturing Facility
Huntersville, NC
Service Center*
Jackson, GA
Manufacturing Facility
Kingman, AZ
Manufacturing Facility
Kennesaw, GA
Service Center*
Montgomeryville, PA
Service Center*
Monticello, KY
Manufacturing Facility
Orange, VA
Manufacturing Facility
Orlando, FL
Service Center*
Raleigh, NC
Satellite Service Center*
Phoenix, AZ
Service Center*
Rancho Cordova, CA
Service Center*
Tampa, FL
Service Center*
Toccoa, GA
Manufacturing Facility
Winchester, VA
Corporate Office*
Winchester, VA
Office (Customer Service)*
Winchester, VA
Office (MIS)*
Winchester, VA
Office (Product Dev./Logistics)*

*Leased facility.

In addition, American Woodmark owns two manufacturing facilities that are permanently closed.



 
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Item 3.
LEGAL PROCEEDINGS

The Company is involved in suits and claims in the normal course of business, including without limitation product liability and general liability claims and claims pending before the Equal Employment Opportunity Commission. On at least a quarterly basis, the Company consults with its legal counsel to ascertain the reasonable likelihood that such claims may result in a loss. As required by ASC Topic 450, “Contingencies” (ASC 450), the Company categorizes the various suits and claims into three categories according to their likelihood for resulting in potential loss: those that are probable, those that are reasonably possible and those that are deemed to be remote. The Company accounts for these loss contingencies in accordance with ASC 450. Where losses are deemed to be probable and estimable, accruals are made. Where losses are deemed to be reasonably possible or remote, a range of loss estimates is determined and considered for disclosure. Where no loss estimate range can be made, the Company and its counsel perform a worst-case estimate. 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 estimated loss stemming from the various suits and asserted and unasserted claims which were deemed to be either probable or reasonably possible was not material as of April 30, 2013.

Also see the information under “Legal Matters” under “Note K – Commitments and Contingencies” to the Consolidated Financial Statements included in this report under Item 8, “Financial Statements and Supplementary Data.”

Item 4.
MINE SAFETY DISCLOSURES

 
None.

EXECUTIVE OFFICERS OF THE REGISTRANT

Executive officers of the Company are elected by the Board of Directors and generally hold office until the next annual election of officers. There are no family relationships between any executive officer and any other officer or director of the Company or any arrangement or understanding between any executive officer and any other person pursuant to which such officer was elected. The executive officers of the Company as of April 30, 2013 are as follows:

Name
 
Age
 
Position(s) Held During
 Past Five Years
 
Kent B. Guichard
57
Company Chairman, President and Chief Executive Officer from August 2009 to present; Company President and Chief Executive Officer from August 2007 to August 2009; Company Director from November 1997 to present.
 
Jonathan H. Wolk
51
Company Senior Vice President and Chief Financial Officer from September 2010 to present; Company Vice President and Chief Financial Officer from December 2004 to September 2010; Company Corporate Secretary from May 2005 to present.
 
S. Cary Dunston
48
Company Executive Vice President, Operations from September 2012 to present; Company Senior Vice President, Manufacturing and Supply Chain Services from October 2006 to September 2012.
 
Bradley S. Boyer
54
Company Senior Vice President, Sales and Marketing Remodel from September 2010 to present; Company Vice President, Remodeling Sales and Marketing from July 2008 to September 2010; Company Vice President, Home Center Sales and Marketing from January 2005 to July 2008.

 
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PART II

Item 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

MARKET INFORMATION

American Woodmark Corporation common stock is quoted on The NASDAQ Global Select Market under the “AMWD” symbol. Common stock per share market prices and cash dividends declared during the last two fiscal years were as follows:
 
   
MARKET PRICE
   
DIVIDENDS
 
(in dollars)
 
High
   
Low
   
DECLARED
 
                   
FISCAL 2013
                 
First quarter
  $ 18.95     $ 15.46     $ 0.00  
Second quarter
    23.30       16.45       0.00  
Third quarter
    29.28       21.66       0.00  
Fourth quarter
    36.68       27.63       0.00  
                         
                         
FISCAL 2012
                       
First quarter
  $ 22.51     $ 15.73     $ 0.09  
Second quarter
    19.87       11.53       0.00  
Third quarter
    17.99       10.88       0.00  
Fourth quarter
    19.52       13.19       0.00  

As of May 16, 2013, there were approximately 6,500 shareholders of record of the Company's common stock. Included are approximately 52% of the Company's employees, who are shareholders through the American Woodmark Stock Ownership Plan. The Company paid dividends on its common stock during the first quarter of 2012 and then its quarterly dividend was suspended.  The determination as to the payment and the amount of any future dividends will be made by the Board of Directors from time to time and will depend on the Company’s then-current financial condition, capital requirements, results of operations and any other factors then deemed relevant by the Board of Directors.

On August 24, 2007, the Company announced that the Company’s Board of Directors approved the repurchase of up to $100 million of the Company’s common stock.  This authorization has no expiration date.  In the fourth quarter of 2013, the Company did not repurchase any shares under this authorization.  At April 30, 2013, $93.3 million remained authorized by the Company’s Board of Directors to repurchase shares of the Company’s common stock.
 
 
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Item 6.
SELECTED FINANCIAL DATA

   
FISCAL YEARS ENDED APRIL 30
 
(in millions except per share data)
    2013 1     2012 1,2     2011 2     2010 2     2009 2
                                         
FINANCIAL STATEMENT DATA
                                       
Net sales
  $ 630.4     $ 515.8     $ 452.6     $ 406.5     $ 545.9  
Operating income (loss)
    17.2       (33.4 )     (31.1 )     (37.3 )     (7.2 )
Net income (loss)
    9.8       (20.8 )     (20.0 )     (22.3 )     (3.2 )
Earnings (loss) per share:
                                       
Basic
    0.67       (1.45 )     (1.40 )     (1.58 )     (0.23 )
Diluted
    0.66       (1.45 )     (1.40 )     (1.58 )     (0.23 )
Depreciation and amortization expense
    14.4       23.4       26.7       30.9       35.1  
Total assets
    294.0       265.1       268.4       282.4       303.7  
Long-term debt, less current maturities
    23.6       23.8       24.7       25.6       26.5  
Total shareholders' equity
    146.2       130.0       154.0       175.3       203.7  
Cash dividends declared per share
    0.00       0.09       0.36       0.36       0.36  
Average shares outstanding
                                       
Basic
    14.6       14.3       14.3       14.1       14.1  
Diluted
    14.8       14.3       14.3       14.1       14.1  
                                         
PERCENT OF SALES
                                       
Gross profit
    16.3 %     12.9 %     11.7 %     12.0 %     16.4 %
Selling, general and administrative expenses
    13.5       16.2       18.5       20.5       15.9  
Income (loss) before income taxes
    2.7       (6.4 )     (6.6 )     (9.1 )     (1.1 )
Net income (loss)
    1.5       (4.0 )     (4.4 )     (5.5 )     (0.6 )
                                         
RATIO ANALYSIS
                                       
Current ratio
    2.6       2.2       2.4       2.5       2.6  
Inventory turnover3
    20.4       19.2       16.1       12.3       11.5  
Collection period - days4
    31.4       30.0       30.1       32.9       33.5  
Percentage of capital (long-term debt plus equity):
                                       
Long-term debt, less current maturities
    13.9 %     15.5 %     13.8 %     12.7 %     11.5 %
Equity
    86.1       84.5       86.2       87.3       88.5  
Return on equity (average %)
    7.1       (14.6 )     (12.2 )     (11.8 )     (1.5 )

1
The Company announced plans to realign its manufacturing network during fiscal 2012.  The impact of these initiatives in fiscal 2012 increased operating loss, net loss and loss per share by $15,917,000, $9,710,000 and $0.68, respectively.  During fiscal 2013, the charges related to these initiatives decreased operating income, net income and earnings per share by $1,433,000, $874,000 and $.06, respectively.
 
2
The Company performed a reduction-in-force of salaried personnel and announced plans to realign its manufacturing network during fiscal 2009.  The impact of these initiatives in fiscal 2009 reduced operating income (loss), net income (loss) and earnings (loss) per share by $9,743,000, $6,050,000 and $0.43, respectively.  During fiscal 2010, these initiatives increased operating loss, net loss and loss per share by $2,808,000, $1,722,000 and $0.12, respectively.  During fiscal 2011, these initiatives increased operating loss, net loss and loss per share by $62,000, $39,000 and $0.00, respectively.  During fiscal 2012, these initiatives increased operating loss, net loss and loss per share by $404,000, $246,000 and $0.01, respectively.
 
3
Based on the average of beginning and ending inventory.
 
4
Based on the ratio of average monthly customer receivables to average sales per day.


 
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Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations

The following table sets forth certain income and expense items as a percentage of net sales:
 
     
PERCENTAGE OF NET SALES
     
Fiscal Years Ended April 30
 
2013
2012
2011
Net sales
100.0
%
100.0
%
100.0
%
Cost of sales and distribution
83.7
 
87.1
 
88.3
 
Gross profit
16.3
 
12.9
 
11.7
 
Selling and marketing expenses
9.1
 
11.3
 
13.5
 
General and administrative expenses
4.4
 
4.9
 
5.0
 
Restructuring charges
0.2
 
3.2
 
0.0
 
Insurance recovery
(0.1)
 
0.0
 
0.0
 
Operating income (loss)
2.7
 
(6.5)
 
(6.8)
 
Interest expense/other (income) expense
0.1
 
(0.1)
 
(0.2)
 
Income (loss) before income taxes
2.7
 
(6.4)
 
(6.6)
 
Income tax expense (benefit)
1.1
 
(2.4)
 
(2.2)
 
Net income (loss)
1.5
 
(4.0)
 
(4.4)
 
 
The following discussion should be read in conjunction with the Five-Year Selected Financial Information and the Consolidated Financial Statements and the related notes contained elsewhere herein.

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 are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In most cases, the reader can identify these forward-looking statements by words such as “anticipate,” “estimate,” “forecast,” “expect,” “believe,” “should,” “could,” “would,” “plan,” “may,” or other similar words. Forward-looking statements contained in this annual report, including in Management’s Discussion and Analysis, 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.  These include but are not limited to: (1) general economic or business conditions and instability in the financial and credit markets, including their potential impact on our (i) sales and operating costs and access to financing; and (ii) customers and suppliers and their ability to obtain financing or generate the cash necessary to conduct their respective businesses; (2) the cyclical nature of the Company’s industry, which is particularly sensitive to changes in consumer confidence, the amount of consumers’ income available for discretionary purchases, and the availability and terms of consumer credit; (3) economic weakness in a specific channel of distribution; (4) the loss of sales from specific customers due to their loss of market share, bankruptcy or switching to a competitor; (5) risks associated with domestic manufacturing operations, including fluctuations in capacity utilization and the prices and availability of key raw materials as well as fuel, transportation, warehousing and labor costs and environmental compliance and remediation costs; (6) the need to respond to price or product initiatives launched by a competitor; (7) the Company’s ability to successfully implement initiatives related to increasing market share, new products, maintaining and increasing its sales force and new product displays; and (8) sales growth at a rate that outpaces the Company’s ability to install new capacity or a sales decline that requires reduction or realignment of the Company’s manufacturing capacity. Additional information concerning the factors that could cause actual results to differ materially from those in forward-looking statements is contained in this annual report, including elsewhere in “Management’s Discussion and Analysis” and also in the Company’s most recent annual report on
 
 
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Form 10-K for the fiscal year ended April 30, 2013, filed with the U.S. Securities and Exchange Commission (SEC), including under Item 1A, “Risk Factors,” and Item 7A, “Quantitative and Qualitative Disclosures about Market Risk.”  While the Company believes that these risks are manageable and will not adversely impact the long-term performance of the Company, these risks could, under certain circumstances, have a material adverse impact on its operating results and financial condition.

Any forward-looking statement that the Company makes speaks only as of the date of this annual report.  The Company undertakes no obligation to publicly update or revise any forward-looking statements or cautionary factors, as a result of new information, future events or otherwise, except as required by law.

Overview

American Woodmark Corporation manufactures and distributes kitchen cabinets and vanities for the remodeling and new home construction markets. Its products are sold on a national basis directly to home centers, major builders and home manufacturers and through a network of independent dealers and distributors. At April 30, 2013, the Company operated 9 manufacturing facilities and 9 service centers across the country.

During the Company’s fiscal year that ended on April 30, 2013 (fiscal 2013), the Company experienced improving housing market conditions for the first time since the housing market downturn that began in 2007.  

A number of positive factors evidenced the improving housing market, including:

·  
Creation of approximately 2 million private sector jobs in the U.S. during the Company’s fiscal years 2012 and 2013 (according to the U.S. Department of Labor);

·  
A 15% improvement in Gross Private Residential Fixed Investment reported by the U.S. Department of Commerce during the most recent four quarters through the first quarter of calendar 2013, as compared with the same period one year ago;

·  
Increases in total housing starts and single family housing starts during the Company’s fiscal 2013 of 32% and 28%, respectively, as compared to the Company’s fiscal 2012, according to the U.S. Department of Commerce;

·  
The median price of existing homes sold in the U.S. improved for the first time in 7 years, rising by 10% during the Company’s fiscal 2013, according to data provided by the National Association of Realtors;

·  
Consumer confidence, as reported by the University of Michigan, averaged 10% higher during the Company’s fiscal 2013 than in its prior fiscal year; and

·  
Cabinet sales, as reported by members of the Kitchen Cabinet Manufacturers Association (KCMA), increased by 11% during fiscal 2013, suggesting an increase in both new construction and remodeling sales of cabinets.

Faced with an improving but still relatively subdued remodeling market, the Company’s largest remodeling customers and competitors continued to utilize an elevated level of sales promotions in the Company’s product category during fiscal 2013 to boost sales, although a noticeable easing occurred in the second half of fiscal 2013.  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 2013 that were lower than those experienced in its prior fiscal year. The Company’s remodeling sales increased at a high-single digit pace during fiscal 2013 in a remodeling market that appears to have improved by a bit less than that level.

The Company increased its net sales by 22% during fiscal 2013.  The Company realized strong sales gains in its new construction channel during fiscal 2013, where sales increased by more than 40%, significantly outpacing the improvement in single-family housing starts. Management believes this
 
 
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result, combined with the Company’s increased remodeling sales, indicates the Company realized market share gains in both of its sales channels during fiscal 2013.

During the third quarter of fiscal 2012, the Company announced several initiatives designed to reduce its cost base (the 2012 Restructuring), including the permanent closure of two manufacturing plants, the decision to sell a previously closed manufacturing facility, and the realignment of its retirement program, including the freezing of its pension plans.  All of these initiatives were completed either prior to or just after the beginning of the Company’s fiscal 2013, and restructuring charges related to these actions have been reflected in the Company’s results during both years.

Gross margin for fiscal 2013 was 16.3%, significantly improved from 12.9% in fiscal 2012.  The increase in the Company’s gross margin rate was driven by reductions in the labor and overhead costs associated with the Company’s restructuring activities, the beneficial impact of increased sales volume and the absence of the prior year’s inventory write down, which more than offset the impact of rising materials costs.

The Company recorded restructuring charges of $15.9 million (pre-tax) and $10.0 million (after-tax) during fiscal 2012 and $1.4 million (pre-tax) and $0.9 million (after-tax) during fiscal 2013 in connection with these initiatives.  Because the bulk of these restructuring efforts have been completed, the Company expects that its future out-of-pocket costs will be nominal. The Company sold a previously closed plant during fiscal 2013 and continues to include in “Other Assets” at an aggregate $2.7 million book value the other two plants held for sale that were included in the 2012 Restructuring.

The Company regularly considers the need for a valuation allowance against its deferred tax assets.  The Company had a history of profitable operations for 16 consecutive years, from 1994 to 2009, followed by losses that coincided with the industry downturn from 2010 to 2012.  As of April 30, 2013, the Company had total deferred tax assets of $38.7 million, down from $42.1 million at April 30, 2012.  Growth in the Company’s deferred tax assets in recent fiscal years resulted primarily from growth in its defined benefit pension liabilities and the impact of its recent losses prior to fiscal 2013.  The Company earned sufficient net income during fiscal 2013 to fully utilize its Federal net operating loss carryforward. To fully realize these net deferred tax assets, the Company will need to, among other things, substantially reduce its net unfunded pension obligation of $53.7 million at April 30, 2013.  The Company took definitive actions when it froze its pension plans as part of the 2012 Restructuring to enhance the probability that this objective is achieved in the future.

The Company resumed the funding of its pension plans during fiscal year 2012, and expects to continue funding these plans for the foreseeable future, which will reduce both its unfunded pension plan obligation and its deferred tax asset. These actions, coupled with the recent improvement in the U.S. housing market and the Company’s continued ability to grow its sales at a faster rate than its competitors, have enabled the Company to generate net income and reduce its deferred tax assets and unfunded pension obligation during fiscal 2013.  The Company believes that the positive evidence of the housing industry improvement, coupled with the benefits from the Company’s successful restructuring and continued market share gains have already driven a return to profitability that is expected to continue, and that the combined impact of these positive factors outweighs the negative factor of the Company’s previous losses.  Accordingly, Management has concluded it is more likely than not that the Company will realize its deferred tax assets.

The Company also regularly assesses its long-lived assets to determine if any impairment has occurred.  The Company has concluded that none of the long-lived assets pertaining to its 9 manufacturing plants or any of its other long-lived assets were impaired as of April 30, 2013.
 
 
11

 

Results of Operations

   
FISCAL YEARS ENDED APRIL 30
 
(in thousands)
 
2013
   
2012
   
2011
   
2013 vs. 2012 PERCENT CHANGE
   
2012 vs. 2011 PERCENT CHANGE
 
                               
Net sales
  $ 630,437     $ 515,814     $ 452,589       22 %     14 %
Gross profit
    102,656       66,475       52,751       54       26  
Selling and marketing expenses
    57,402       58,271       61,034       (1 )     (5 )
General and administrative expenses
    27,575       25,329       22,709       9       12  
Interest expense
    643       527       572       22       (8 )
 
Net Sales

Net sales were $630.4 million in fiscal 2013, an increase of $114.6 million, or 22%, compared with fiscal 2012.  Overall unit volume for fiscal 2013 was 17% higher than in fiscal 2012, which management believes was driven primarily by the Company’s increased market share. Average revenue per unit increased 4% in fiscal 2013, driven by improvements in the Company’s product mix.

Net sales for fiscal 2012 increased 14% to $515.8 million from $452.6 million in fiscal 2011.  Overall unit volume for fiscal 2012 was 9% higher than in fiscal 2011, which management believes was driven primarily by the Company’s increased market share.  Average revenue per unit increased 5% during fiscal 2012, driven primarily by improvements in product mix.

Gross Profit

Gross profit as a percentage of sales increased to 16.3% in fiscal 2013 as compared with 12.9% in fiscal 2012. The improvement in gross profit margin was due primarily to the beneficial impact of higher sales volume and labor and overhead cost savings associated with the Company’s two plant closures in April and May of 2012.  This favorability was partially offset by an increase in material costs.   Specific changes and additional information included:

·  
Labor and overhead costs improved by 3.6% as a percentage of net sales compared with the prior fiscal year, as the combination of the increased sales volume and the plant closures caused both a decrease in overhead costs and improved absorption of fixed overhead costs, while labor costs became increasingly more efficient throughout fiscal 2013 as productivity gains were realized following the plant closures;

·  
Materials and freight costs increased as a percentage of net sales by 1.6% during fiscal 2013 as compared with fiscal 2012, driven primarily by inflationary pressures in finishing materials, lumber, cartons, plywood, particleboard and paint, as well as from increased levels of outsourcing following the recent plant closures; and

·  
Sales promotion costs improved by 1.4% of net sales during fiscal 2013 compared with the prior year, as a result of both an increased proportion of new construction sales to the Company’s total sales and reduced promotional activity.  Sales promotions that involved the use of free products or cash reimbursements back to the Company’s large remodeling customers were deducted from gross margin as opposed to being classified as operating expenses.

During fiscal 2012, the Company’s gross profit increased as a percentage of net sales to 12.9% from 11.7% in fiscal 2011.  Increased sales volume in fiscal 2012 created improved labor efficiencies and more favorable absorption of manufacturing overhead costs, which were partially offset by increased sales promotion costs, material costs and diesel fuel. Specific changes and additional information included:
 
 
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·  
Labor and overhead costs improved by 3.7% as a percentage of net sales during fiscal 2012 compared with the prior fiscal year, as increased sales volume caused increased productivity of direct labor and absorption of fixed overhead costs;

·  
Materials and freight costs increased as a percentage of net sales by 1.8% during fiscal 2012 as compared with fiscal 2011, driven primarily by inflationary pressures in finishing materials, lumber, cartons, imported components, and diesel fuel; and

·  
Sales promotion costs increased by 0.7% of net sales during fiscal 2012, as the Company chose to remain competitive with competitors’ promotional offerings to drive sales growth in a challenging market.

Selling and Marketing Expenses

Selling and marketing expenses in fiscal 2013 were 9.1% of net sales, compared with 11.3% of net sales in fiscal 2012.  Selling and marketing costs decreased by 1% despite a 22% increase in net sales.  The improvement in sales and marketing costs in relation to net sales was due to reduced spending on product launch costs and cost reductions related to the Company’s retirement plan changes, which were offset in part by increased sales compensation and staffing costs related to the Company’s increased sales levels.

Selling and marketing expenses were 11.3% of net sales in fiscal 2012 compared with 13.5% in fiscal 2011. Cost savings from lower marketing collateral and branding costs, as well as reductions in product display costs more than offset the increases in employee compensation and travel costs incurred by the Company in fiscal 2012.

General & Administrative Expenses

General and administrative expenses increased by $2.2 million or 9% during fiscal 2013. The increase in cost was entirely related to increased pay-for-performance compensation.  However, G&A costs declined to 4.4% of net sales in fiscal 2013 compared with 4.9% of net sales in fiscal 2012.

General and administrative expenses in fiscal 2012 increased by $2.6 million, or 12%, compared with fiscal 2011 and represented 4.9% of net sales, compared with 5.0% of net sales for fiscal 2011. The majority of the cost increase was related to increased pay-for-performance compensation.

Effective Income Tax Rates

The Company generated pre-tax income of $16.7 million during fiscal 2013, including $1.4 million of restructuring charges.  The Company’s effective tax rate increased from 37.6% in fiscal 2012 to 41.7% in fiscal 2013.  The higher effective tax rate was the result of relatively consistent amounts of permanent tax differences in relation to the net income generated in fiscal 2013 compared with the net loss generated in the prior year.

Outlook for Fiscal 2014

The Company tracks several metrics, including but not limited to housing starts, existing home sales, mortgage interest rates, new jobs growth, GDP growth and consumer confidence, which it believes are leading indicators of overall demand for kitchen and bath cabinetry. The Company believes that housing prices finally bottomed during its fiscal 2012 and have begun what it expects will be a multi-year improvement, driven by employment growth and a resumption of growth in new household formation. However, because the number of homeowners still owing more than what their homes are worth remains at historically high levels, the Company expects that while the cabinet remodeling market will show modest improvement it will continue to be well below the historic highs reached in the previous decade.

Driven by an improving housing market, the Company expects that industry-wide cabinet remodeling sales will continue a trend that began during fiscal 2013 and improve at roughly a mid-single digit rate during its fiscal 2014. The Company expects that its home center market share will
 
 
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be relatively stable in fiscal 2014 and it will continue to gain market share in its growing dealer business. This combination is expected to result in remodeling sales growth that outpaces the market by several percentage points.

The Company agrees with the consensus estimate that new construction starts will continue to grow at a mid-20% rate during its fiscal 2014. The Company’s new construction sales growth outperformed the new construction market by approximately 20 points during fiscal 2013, and expects that it will again outperform the new construction market during fiscal 2014 but by a significantly lesser rate, as its comparable prior year sales levels become more challenging.

Inclusive of the potential for modest sales mix and pricing improvements, the Company expects that it will grow its total sales at a mid-teen rate in fiscal 2014. The Company experienced production inefficiencies during the first half of its fiscal 2013 driven by the combination of work transition issues from its closed plants, coupled with production volume increases that were driven by unexpectedly high sales levels. These issues were resolved during the third quarter of the Company’s fiscal 2013, enabling the Company’s gross margin rate to improve in the fourth quarter of fiscal 2013. The Company expects that its gross margin rate and net income for fiscal 2014 will improve compared with its fiscal 2013 performance.

The Company had gross outlays for capital expenditures and customer display units of $13.5 million during fiscal 2013, and plans to increase this spending level modestly during fiscal 2014. However, the Company is undertaking a multi-year review of its manufacturing capacity and capital expenditure plans which could cause its capital expenditures to exceed this level.

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,” as well as in the Company’s annual report on Form 10-K for the fiscal year ended April 30, 2013 filed with the SEC, including under Item 1A, “Risk Factors” and Item 7A, “Quantitative and Qualitative Disclosures about Market Risk.”

Liquidity and Capital Resources

The Company’s cash, cash equivalents and restricted cash totaled $97.0 million at April 30, 2013, which represented an increase of $23.3 million from April 30, 2012.  Total debt was $24.7 million at April 30, 2013, virtually unchanged from the prior fiscal year and long-term debt, excluding current maturities, to capital was 13.9% at April 30, 2013, down from 15.5% at April 30, 2012.

The Company’s main source of liquidity is its cash and cash equivalents on hand and cash generated from its operating activities.  During fiscal 2013 the Company renegotiated its revolving credit agreement with its primary lender and is no longer required to hold restricted cash to secure borrowings under that agreement.
 
OPERATING ACTIVITIES
 
Cash provided by operating activities in fiscal 2013 was $24.5 million, compared with $16.1 million in fiscal 2012. The $8.4 million improvement was primarily attributable to the Company’s $22.9 million improvement in net income and reduction in asset impairments related to the 2012 Restructuring. This improvement was offset in part by a $13.6 million net working capital  investment in its operating assets and liabilities to fund growth and increased contributions to its pension plans of $2.0 million.

Cash provided by operating activities in fiscal 2012 was $16.1 million, compared with $13.2 million in fiscal 2011.  The $2.9 million improvement was primarily attributable to the reduction in the Company’s operating loss exclusive of restructuring charges of $13.9 million. This improvement was offset in part by reductions in proceeds from income tax refunds of $7.1 million, from increasing funding to its pension plans of $2.9 million, and from funding restructuring costs of $1.2 million.


 
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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 2013 was $6.1 million, compared with $9.9 million in fiscal 2012 and $5.5 million in fiscal 2011. Investments in property, plant and equipment for fiscal 2013 were $8.9 million, compared with $6.7 million in fiscal 2012 and $5.0 million in fiscal 2011. Investments in promotional displays were $4.8 million in fiscal 2013, compared with $3.3 million in fiscal 2012 and $3.5 million in fiscal 2011. The increased level of investment during fiscal 2013 primarily represents machinery and equipment enhancements to enable production volume to increase and an increase in the number of display units deployed with customers.

During fiscal 2013, the Company’s reduced net cash used for investing activities was driven by the receipt of $6.4 million in proceeds from the sales of assets from closed plants and insurance proceeds of $1.0 million, which more than offset the aggregate $3.6 million increase in outflows for capital expenditures and promotional displays.

The Company generated positive free cash flow (defined as cash provided by operating activities less cash used for investing activities) of $18.4 million during fiscal 2013, compared with $6.1 million in fiscal 2012 and $7.7 million in fiscal 2011. The increase in fiscal 2013 was driven by the net improvements in both cash provided by operating activities and decreased net outflows used for investing activities. The reduction in fiscal 2012 was driven by increased net outflows used for investing activities that more than offset net improvements in cash provided by operating activities.

FINANCING ACTIVITIES

The Company realized a net inflow of $11.9 million from financing activities in fiscal 2013, compared with a $5.1 million inflow in fiscal 2012, and a net outflow of $5.5 million in fiscal 2011.  Reductions in the amount of restricted cash drove inflows of approximately $7 million in both fiscal 2013 and 2012. Additional proceeds of $5.9 million were generated during fiscal 2013 from the exercise of stock options. Approximately $1 million was used to repay long-term debt in each of the years in the three-year period ended in fiscal 2013, while fiscal 2012 and 2011 was further impacted by dividend payments to shareholders of $1.3 million and $5.1 million, respectively.

The Company elected to suspend its quarterly dividend during fiscal 2012. The Company ended fiscal 2013 with a record level of nearly $97 million in cash and cash equivalents. The Company is authorized to repurchase up to $93.3 million of its stock under an authorization approved by its Board of Directors in 2007. The Company continues to evaluate its cash on hand and prospects for future cash generation, and compare these against its go-forward reinvestment plans for future capital expenditures. Although the evaluation of its future capital expenditures is ongoing, the Company expects that it will make repurchases of its common stock from time to time during fiscal 2014.

The Company can borrow up to $35 million under the Wells Fargo credit facility, subject to a maximum borrowing base equal to 75% of eligible accounts receivable, 50% of eligible pre bill reserves and up to $20 million for equipment value (each as defined in the agreement).  At April 30, 2013, $10 million of loans and $3.7 million of letters of credit were outstanding under the Wells Fargo facility.

An amendment to the revolving credit facility and modifications to related security arrangements completed on March 18, 2013 eliminated the requirement that 50% of the Company’s outstanding indebtedness and other obligations to Wells Fargo be secured by cash and securities held in certain of the Company’s accounts with Wells Fargo. The Company’s outstanding indebtedness and other obligations to Wells Fargo are secured by substantially all of the Company’s assets.  The Company can borrow under the revolving credit facility up to the lesser of $35 million or the maximum borrowing base (which equals 75% of eligible accounts receivable, 50% of eligible pre bill reserves and up to $20 million for equipment value, each as defined in the agreement) less any outstanding loan balance.  Any outstanding loan balance bears interest at the London Interbank Offered Rate (LIBOR) (0.25% at April 30, 2013) plus 2.625%. Under the terms of the revolving credit facility, the Company must: (1) maintain at the end of each fiscal quarter a ratio of total liabilities to tangible net
 
 
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worth of not greater than 1.4 to 1.0; (2) maintain at the end of each fiscal quarter a ratio of cash flow to fixed charges of not less than 1.25 to 1.0 measured on a rolling four-quarter basis; (3) maintain at least $1.00 in net income for the fiscal quarter ending April 30, 2013 and at least $1.00 in net income on a rolling four-quarter basis for the fiscal quarter ending July 31, 2013; and comply with other customary affirmative and negative covenants.

The Company was in compliance with all covenants specified in the amended credit facility as of April 30, 2013, as follows: (1) the Company’s ratio of total liabilities to tangible net worth at April 30, 2013 was 1.0 to 1.0; (2) cash flow to fixed charges for its most recent four quarters was 2.72 to 1.0; and (3) its net income for the fiscal quarter ended April 30, 2013 was $5.2 million.

The revolving credit facility does not limit the Company’s ability to pay dividends or repurchase its common stock as long as the Company is in compliance with these covenants.

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 2014.

The timing of the Company’s contractual obligations as of April 30, 2013 is summarized in the table below:

   
FISCAL YEARS ENDED APRIL 30
 
(in thousands)
 
Total Amounts
   
2014
      2015-2016       2017-2018    
2019 and Thereafter
 
                                   
Revolving credit facility
  $ 10,000     $ --     $ 10,000     $ --     $ --  
Economic development loans
    3,480       --       --       --       3,480  
Term loans
    3,530       349       763       2,418       --  
Capital lease obligations
    7,739       806       1,689       1,356       3,888  
Interest on long-term debt1
    2,622       659       1,113       488       362  
Operating lease obligations
    10,926       3,411       5,870       1,553       92  
Pension contributions2
    33,208       2,258       10,020       15,700       5,230  
                                         
Total
  $ 71,505     $ 7,483     $ 29,455     $ 21,515     $ 13,052  

 
1 Interest commitments under interest bearing debt consist of interest under the Company’s primary loan agreement, term loans and capitalized lease agreements. Amounts outstanding under the Company’s revolving credit facility, $10 million at April 30, 2013, bear a variable interest rate determined by the London Interbank Offered Rate (LIBOR) plus 2.625%. Interest under the Company’s term loans and capitalized lease agreements is fixed at rates between 2% and 6.5%.  Interest commitments under interest bearing debt for the Company’s revolving credit facility are at LIBOR plus the spread as of April 30, 2013, throughout the remaining term of the facility.

 
2 The estimated cost of the Company’s two defined benefit pension plans is determined annually based upon the discount rate and other assumptions at fiscal year end. Future pension funding contributions beyond fiscal 2019 have not been determined at this time.

MARKET RISKS

The Company’s business has historically been subjected to seasonal influences, with higher sales typically realized in the second and fourth fiscal quarters.

The costs of the Company’s products are subject to inflationary pressures and commodity price fluctuations.  The Company has generally been able, over time, to recover the effects of inflation and commodity price fluctuations through sales price increases.

On April 30, 2013, the Company had no material exposure to changes in interest rates for its debt agreements.
 
 
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The Company does not currently use commodity or interest rate derivatives or similar financial instruments to manage its commodity price or interest rate risks.

For additional discussion of risks that could affect the Company and its business, see “Forward-Looking Statements” above and “Risk Factors” in the Company’s most recent annual report on Form 10-K filed with the SEC.

OFF-BALANCE SHEET ARRANGEMENTS

As of April 30, 2013 and 2012, the Company had no off-balance sheet arrangements.

CRITICAL ACCOUNTING POLICIES

Management has chosen accounting policies that are necessary to give reasonable assurance that the Company’s operational results and financial position are accurately and fairly reported. The significant accounting policies of the Company are disclosed in Note A to the Consolidated Financial Statements included in this annual report. The following discussion addresses the accounting policies that management believes have the greatest potential impact on the presentation of the financial condition and operating results of the Company for the periods being reported and that require the most judgment.

Management regularly reviews these critical accounting policies and estimates with the Audit Committee of the Board of Directors.

Long-lived Asset Impairment.  The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable.  For purposes of assessing if impairment exists, assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets.  To determine whether an impairment has occurred, the Company compares estimates of the future undiscounted net cash flows of groups of assets to their carrying values.  The Company has not recognized impairments of long-lived assets in the last three years other than the impairments related to restructuring activities.

Revenue Recognition.  The Company utilizes signed sales agreements that provide for transfer of title to the customer upon delivery. The Company must estimate the amount of sales that have been transferred to third-party carriers but not delivered to customers. The estimate is calculated using a lag factor determined by analyzing the actual difference between shipment date and delivery date of orders over the past 12 months. Revenue is only recognized on those shipments which the Company believes have been delivered to the customer.

The Company recognizes revenue based on the invoice price less allowances for sales returns, cash discounts and other deductions as required under U.S. generally accepted accounting principles (GAAP). Collection is reasonably assured as determined through an analysis of accounts receivable data, including historical product returns and the evaluation of each customer’s ability to pay. Allowances for sales returns are based on the historical relationship between shipments and returns. The Company believes that its historical experience is an accurate reflection of future returns.

Self Insurance.  The Company is self-insured for certain costs related to employee medical coverage and workers’ compensation liability. 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 all factors related to employee medical coverage and workers’ compensation are an accurate reflection of the liability as of the date of the balance sheet.

Pensions.  The Company has two non-contributory defined benefit pension plans covering many of the Company’s employees hired prior to April 30, 2012.
 
 
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Effective April 30, 2012, the Company froze all future benefit accruals under the Company’s hourly and salary defined benefit pension plans.

The estimated expense, benefits and pension obligations of these plans are determined using various assumptions. The most significant assumptions are the long-term expected rate of return on plan assets and the discount rate used to determine the present value of the pension obligations. In fiscal 2013 and 2012, the Company determined the discount rate by referencing the Aon Hewitt AA Bond Universe Yield Curve. In fiscal 2011, the Company referred to the Hewitt Above Median Yield Curve in establishing the discount rate.  This change was caused by the merger of Aon and Hewitt and the corresponding elimination of the Hewitt Above Median Yield Curve.  The Company believes that using a yield curve approach accurately reflects changes in the present value of liabilities over time since each cash flow is discounted at the rate at which it could effectively be settled. 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
  $ (1.1 )   $ 1.1  
                 
Effect on projected pension benefit obligation
  $ (21.1 )   $ 26.9  

Pension expense for fiscal 2013 and the assumptions used in that calculation are presented in Note H of the Consolidated Financial Statements.  At April 30, 2013, the discount rate was 4.21% compared with 4.66% at April 30, 2012. The expected return on plan assets was 7.5% at both April 30, 2013, and April 30, 2012. The assumed rate of increase in compensation levels was 4.0% for the fiscal years ended April 30, 2012 and 2011.  The rate of compensation increase is not applicable for periods beyond April 30, 2012 because the Company froze its pension plans as of that date.

The projected performance of the Company’s pension plans is largely dependent on the assumptions used to measure the obligations of the plans and to estimate future performance of the plans’ invested assets. Over the past two measurement periods, the most material deviations between results based on assumptions and the actual plan performance have resulted from changes to the discount rate used to measure the plans’ benefit obligations and the actual return on plan assets.  Accounting guidelines require the discount rate to be set to market at each annual measurement date. From the fiscal 2011 to fiscal 2012 measurement dates, the discount rate decreased from 5.66% at April 30, 2011 to 4.66% at April 30, 2012, which caused an actuarial loss of $26.3 million.  From the fiscal 2012 to fiscal 2013 measurement dates, the discount rate decreased from 4.66% to 4.21% which caused an actuarial loss of $10.8 million.

The Company strives to balance expected long-term returns and short-term volatility of pension plan assets. Favorable and unfavorable differences between the assumed and actual returns on plan assets are generally amortized over a period no longer than the average life expectancy of the plans’ active participants. The actual rates of return on plan assets realized, net of investment manager fees, were 10.2%, 3.1% and 11.9% for fiscal 2013, 2012 and 2011, respectively.

The fair value of plan assets at April 30, 2013 was $95.7 million compared with $85.7 million at April 30, 2012. The Company’s projected benefit obligation exceeded plan assets by $53.7 million in fiscal 2013 and by $50.5 million in fiscal 2012. The $3.2 million increase in the Company’s net under-funded position during fiscal 2013 was primarily driven by the Company’s $10.8 million actuarial losses, offset in part by a higher return on plan assets and Company contributions.  The Company expects its pension expense to decrease from $0.6 million in fiscal 2013 to $0.2 million in fiscal 2014, due primarily to a higher expected return on plan assets.  The Company expects to contribute $2.3 million to its pension plans in fiscal 2014, which represents required funding.  The Company made contributions of $4.9 million to its pension plans in fiscal 2013.
 
 
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Promotional Displays.  The Company invests in promotional displays in retail stores to demonstrate product features, product and quality specifications and serve as a training tool for designers. The investment is carried at cost less applicable amortization. Amortization is provided by the straight-line method on an individual display basis over the estimated period of economic benefit, approximately 30 to 36 months. The Company believes that the estimated period of economic benefit provides an accurate reflection of the value of displays as of the date of the balance sheet based on historical experience.

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 Company’s remaining obligation based on 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.

Stock-Based Compensation Expense.  The calculation of stock-based compensation expense involves estimates that require management’s judgment. These estimates include the fair value of each stock option and restricted stock unit award granted. Stock option awards are estimated on the date of grant using a Black-Scholes option pricing model. There are two significant inputs into the Black-Scholes option pricing model: expected volatility and expected term. The Company estimates expected volatility based on the historical volatility of the Company’s stock over a term equal to the expected term of the option granted. The expected term of stock option awards granted is derived from historical exercise experience under the Company’s stock option plans and represents the period of time that stock option awards granted are expected to be outstanding.

For performance-based restricted stock units, the Company estimates the number of shares that will be granted upon satisfaction of the performance conditions, based upon actual and expected future operating results. The assumptions used in calculating the fair value of stock-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of significant management judgment. As a result, if factors change or the Company uses different assumptions, stock-based compensation expense could be materially different in the future. In addition, the Company is required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. If the Company’s actual forfeiture rate is materially different from its estimate, the stock-based compensation expense could be significantly different from what the Company has recorded in the current period. See Note G to the Consolidated Financial Statements for further discussion on stock-based compensation.

Valuation of Deferred Tax Assets.  The Company regularly considers the need for a valuation allowance against its deferred tax assets.  Based upon the Company’s analysis at April 30, 2013 and 2012, the Company determined in each case that a valuation allowance was not required.  The Company considered all available evidence, both positive and negative, in determining the need for a valuation allowance.  Based upon this analysis, management determined that it is more likely than not that the Company’s deferred tax assets will be realized through expected future income and the reversal of taxable temporary differences.  The Company will continue to update this analysis on a periodic basis and changes in expectations about future income or the timing of the reversal of taxable temporary differences could cause the Company to record a valuation allowance in a future period.

RECENT ACCOUNTING PRONOUNCEMENTS

In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-02, “Comprehensive Income (Topic 220): Reporting Amounts Reclassified Out of Accumulated Other Comprehensive Income,” which requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component.  In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period.  The ASU does not change the current requirements for reporting net income or other comprehensive income in
 
 
19

 
 
financial statements.  The ASU is effective prospectively for fiscal years and interim periods within those years beginning after December 15, 2012.  The adoption of ASU 2013-02 is not expected to have a significant impact on the Company’s results of operations or financial position.

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income,” which requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income, or in two separate but consecutive statements.  Additionally, ASU 2011-05 eliminates the option to present comprehensive income and its components as part of the statement of shareholders’ equity.  The ASU does not change the items that must be reported in other comprehensive income.  The Company adopted this guidance effective May 1, 2012 and now includes Statements of Comprehensive Income (Loss) in its financial statements.

In December 2011, the FASB issued ASU No. 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date of Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU No. 2011-05.”  The amendments were made to allow FASB time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income.

Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The costs of the Company’s products are subject to inflationary pressures and commodity price fluctuations.  The Company has generally been able, over time, to recover the effects of inflation and commodity price fluctuations through sales price increases.

On April 30, 2013, the Company had no material exposure to changes in interest rates for its debt agreements.

The Company does not currently use commodity or interest rate derivatives or similar financial instruments to manage its commodity price or interest rate risks.



 
20

 



Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


CONSOLIDATED BALANCE SHEETS

   
APRIL 30
 
(in thousands, except share and per share data)
 
2013
   
2012
 
             
ASSETS
           
Current Assets
           
Cash and cash equivalents
  $ 96,971     $ 66,620  
Customer receivables, net
    39,044       32,533  
Inventories
    29,338       22,340  
Prepaid expenses and other
    3,084       2,523  
Deferred income taxes
    9,481       7,086  
Total Current Assets
    177,918       131,102  
                 
Property, plant and equipment, net
    74,064       75,375  
Restricted cash
    --       7,064  
Promotional displays, net
    5,811       5,073  
Deferred income taxes
    29,262       34,969  
Other assets
    6,938       11,538  
TOTAL ASSETS
  $ 293,993     $ 265,121  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
                 
Current Liabilities
               
Accounts payable
  $ 23,306     $ 19,492  
Current maturities of long-term debt
    1,155       875  
Accrued compensation and related expenses
    26,213       21,963  
Accrued marketing expenses
    10,159       8,756  
Other accrued expenses
    8,275       8,135  
Total Current Liabilities
    69,108       59,221  
                 
Long-term debt, less current maturities
    23,594       23,790  
Defined benefit pension liabilities
    53,696       50,547  
Other long-term liabilities
    1,400       1,543  
                 
Shareholders' Equity
               
Preferred stock, $1.00 par value; 2,000,000 shares authorized, none issued
    --       --  
Common stock, no par value; 40,000,000 shares authorized; issued and outstanding shares:  at April 30, 2013: 14,822,580, at April 30, 2012: 14,395,273
    107,165       96,205  
Retained earnings
    71,180       61,422  
Accumulated other comprehensive loss -
               
Defined benefit pension plans
    (32,150 )     (27,607 )
Total Shareholders' Equity
    146,195       130,020  
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
  $ 293,993     $ 265,121  
                 
See notes to consolidated financial statements.
               


 
21

 


CONSOLIDATED STATEMENTS OF OPERATIONS
 
   
FISCAL YEARS ENDED APRIL 30
 
(in thousands, except per share data)
 
2013
   
2012
   
2011
 
                   
Net sales
  $ 630,437     $ 515,814     $ 452,589  
Cost of sales and distribution
    527,781       449,339       399,838  
Gross Profit
    102,656       66,475       52,751  
                         
Selling and marketing expenses
    57,402       58,271       61,034  
General and administrative expenses
    27,575       25,329       22,709  
Restructuring charges
    1,433       16,321       62  
Insurance proceeds
    (975 )     --       --  
Operating Income (Loss)
    17,221       (33,446 )     (31,054 )
                         
Interest expense
    643       527       572  
Other income
    (162 )     (685 )     (1,666 )
Income (Loss) Before Income Taxes
    16,740       (33,288 )     (29,960 )
                         
Income tax expense (benefit)
    6,982       (12,502 )     (9,942 )
                         
Net Income (Loss)
  $ 9,758     $ (20,786 )   $ (20,018 )
                         
                         
SHARE INFORMATION
                       
Earnings (loss) per share
                       
Basic
  $ 0.67     $ (1.45 )   $ (1.40 )
Diluted
    0.66       (1.45 )     (1.40 )
                         
Cash dividends per share
    0.00       0.09       0.36  
                         
See notes to consolidated financial statements.
                       

 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
   
FISCAL YEARS ENDED APRIL 30
 
(in thousands)
 
2013
   
2012
   
2011
 
                   
Net income (loss)
  $ 9,758     $ (20,786 )   $ (20,018 )
                         
Other comprehensive loss net of tax:
                       
Change in pension benefits, net of deferred taxes
                       
 of $2,905, $3,624 and $294, respectively
    (4,543 )     (5,669 )     (460 )
                         
Total Comprehensive Income (Loss)
  $ 5,215     $ (26,455 )   $ (20,478 )
                         
See notes to consolidated financial statements.
                       
                         


 
22

 

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 
                     
ACCUMULATED
       
                     
OTHER
   
TOTAL
 
   
COMMON STOCK
   
RETAINED
   
COMPREHENSIVE
   
SHAREHOLDERS'
 
(in thousands, except share data)
 
SHARES
   
AMOUNT
   
EARNINGS
   
LOSS
   
EQUITY
 
Balance, May 1, 2010
    14,205,462     $ 88,153     $ 108,643     $ (21,478 )   $ 175,318  
                                         
Net loss
                    (20,018 )             (20,018 )
Other comprehensive loss,
                                       
net of tax
                            (460 )     (460 )
Stock-based compensation
            3,995                       3,995  
Adjustments to excess tax
                                       
benefit from stock-based
                                       
compensation
            (1,347 )                     (1,347 )
Cash dividends
                    (5,130 )             (5,130 )
Exercise of stock-based
                                       
compensation awards
    27,401       394                       394  
Employee benefit plan
                                       
contributions
    62,677       1,213                       1,213  
Balance, April 30, 2011
    14,295,540     $ 92,408     $ 83,495     $ (21,938 )   $ 153,965  
                                         
Net loss
                    (20,786 )             (20,786 )
Other comprehensive loss,
                                       
net of tax
                            (5,669 )     (5,669 )
Stock-based compensation
            3,413                       3,413  
Adjustments to excess tax
                                       
benefit from stock-based
                                       
compensation
            (859 )                     (859 )
Cash dividends
                    (1,287 )             (1,287 )
Exercise of stock-based
                                       
compensation awards
    19,410       12                       12  
Employee benefit plan
                                       
contributions
    80,323       1,231                       1,231  
Balance, April 30, 2012
    14,395,273     $ 96,205     $ 61,422     $ (27,607 )   $ 130,020  
                                         
Net income
                    9,758               9,758  
Other comprehensive loss,
                                       
net of tax
                            (4,543 )     (4,543 )
Stock-based compensation
            3,509                       3,509  
Adjustments to excess tax
                                       
benefit from stock-based
                                       
compensation
            (650 )                     (650 )
Exercise of stock-based
                                       
compensation awards
    328,490       5,768                       5,768  
Employee benefit plan
                                       
contributions
    98,817       2,333                       2,333  
Balance, April 30, 2013
    14,822,580     $ 107,165     $ 71,180     $ (32,150 )   $ 146,195  
                                         
See notes to consolidated financial statements.
                         



 
23

 

CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
FISCAL YEARS ENDED APRIL 30
 
(in thousands)
 
2013
   
2012
   
2011
 
                   
OPERATING ACTIVITIES
                 
Net income (loss)
  $ 9,758     $ (20,786 )   $ (20,018 )
Adjustments to reconcile net income (loss) to net cash provided
                       
by operating activities:
                       
Depreciation and amortization
    14,431       23,387       26,703  
Net loss on disposal of property, plant and equipment
    231       180       209  
Impairment loss related to restructuring activities
    270       7,913       --  
(Gain) loss on sales of assets held for sale
    (481 )     111       (982 )
Gain on insurance recoveries
    (975 )     --       --  
Stock-based compensation expense
    3,509       3,413       3,995  
Deferred income taxes
    5,789       (12,290 )     (8,185 )
Pension contributions (in excess of) less than expense
    (4,299 )     4,528       6,907  
Tax benefit from stock-based compensation
    (18 )     --       (80 )
Other non-cash items
    944       867       (971 )
Changes in operating assets and liabilities:
                       
Customer receivables
    (6,825 )     (1,533 )     (3,514 )
Inventories
    (7,068 )     115       331  
Prepaid expenses and other assets
    (1,669 )     (320 )     5,709  
Accounts payable
    3,814       923       4,534  
Accrued compensation, marketing and other accrued expenses
    7,116       9,545       (1,442 )
Net Cash Provided by Operating Activities
    24,527       16,053       13,196  
                         
                         
INVESTING ACTIVITIES
                       
Payments to acquire property, plant and equipment
    (8,860 )     (6,679 )     (4,952 )
Proceeds from sales of property, plant and equipment
    80       15       3  
Proceeds from sales of assets held for sale
    6,447       56       2,939  
Proceeds from insurance recoveries
    975       --       --  
Investment in promotional displays
    (4,759 )     (3,310 )     (3,456 )
Net Cash Used by Investing Activities
    (6,117 )     (9,918 )     (5,466 )
                         
                         
FINANCING ACTIVITIES
                       
Payments of long-term debt
    (1,019 )     (1,021 )     (892 )
Change in restricted cash
    7,064       7,355       --  
Tax benefit from stock-based compensation
    18       --       80  
Proceeds from issuance of common stock and other
    5,878       18       399  
Payment of dividends
    --       (1,287 )     (5,130 )
Net Cash Provided (Used) by Financing Activities
    11,941       5,065       (5,543 )
                         
Net Increase in Cash and Cash Equivalents
    30,351       11,200       2,187  
                         
Cash and Cash Equivalents, Beginning of Year
    66,620       55,420       53,233  
                         
Cash and Cash Equivalents, End of Year
  $ 96,971     $ 66,620     $ 55,420  
                         
See notes to consolidated financial statements.
                       


 
24

 

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note A -- Summary of Significant Accounting Policies

The Company manufactures and distributes kitchen cabinets and vanities for the remodeling and new home construction markets. The Company's products are sold across the United States through a network of independent dealers and distributors and directly to home centers and major builders.

The following is a description of the Company’s significant accounting policies:

Principles of Consolidation and Basis of Presentation:  The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. Significant inter-company accounts and transactions have been eliminated in consolidation.

Revenue Recognition:  The Company recognizes revenue when product is delivered to the customer and title has passed. Revenue is based on invoice price less allowances for sales returns, cash discounts and other deductions.

Cost of Sales and Distribution:  Cost of sales and distribution includes all costs associated with the manufacture and distribution of the Company’s products including the costs of shipping and handling.

Advertising Costs:  Advertising costs are expensed as incurred. Advertising expenses for fiscal years 2013, 2012 and 2011 were $36.5 million, $37.4 million and $30.0 million, respectively.

Cash and Cash Equivalents:  Cash in excess of operating requirements is invested in money market accounts which are carried at cost (which approximates fair value). The Company considers all highly liquid short-term investments with an original maturity of three months or less when purchased to be cash equivalents. Cash equivalents were $38.9 million and $31.8 million at April 30, 2013 and 2012, respectively.

Inventories:  Inventories are stated at lower of cost or market. Inventory costs are determined by the last-in, first-out (LIFO) method.

The LIFO cost reserve is determined in the aggregate for inventory and is applied as a reduction to inventories determined on the first-in, first-out method (FIFO). FIFO inventory cost approximates replacement cost.

Property, Plant and Equipment:  Property, plant and equipment is stated on the basis of cost less accumulated depreciation. Depreciation is provided by the straight-line method over the estimated useful lives of the related assets, which range from 15 to 30 years for buildings and improvements and 3 to 10 years for machinery and equipment. Assets under capital leases are amortized over the shorter of their estimated useful lives or the term of the related lease.

Impairment of Long-Lived Assets:  The Company reviews its long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. During fiscal years 2013, 2012 and 2011, the Company concluded no impairment existed, except for impairments related to restructuring activities.

Promotional Displays:  The Company invests in promotional displays in retail stores to demonstrate product features, product and quality specifications and serve as a training tool for retail kitchen designers. The Company invests in these long-lived productive assets to provide the aforementioned benefits. The Company's investment in promotional displays is carried at cost less applicable amortization. Amortization is provided by the straight-line method on an individual display basis over periods of 30 to 36 months (the estimated period of benefit). Promotional display amortization expense for fiscal years 2013, 2012 and 2011 was $4.0 million, $5.6 million and $7.9 million, respectively, and is included in selling and marketing expenses.

Income Taxes:  The Company accounts for deferred income taxes utilizing the asset and liability method, whereby deferred tax assets and liabilities are recognized based on the tax effects of temporary differences between the financial statement amounts and the tax basis of assets and liabilities, using enacted tax rates in effect for the year in which these items are expected to reverse. At each reporting date, the Company evaluates the need for a valuation allowance to adjust deferred tax assets and liabilities to an amount that more likely than not will be realized.
 
 
25

 

Pensions:  The Company has two non-contributory defined benefit pension plans covering many of the Company’s employees hired before April 30, 2012.  Both defined benefit pension plans were frozen effective April 30, 2012.  The Company recognizes the overfunded or underfunded status of its defined benefit pension plans, measured as the difference between the fair value of plan assets and the benefit obligation, in its consolidated balance sheets. The Company also recognizes the actuarial gains and losses and the prior service costs, credits and transition costs as a component of other comprehensive income (loss), net of tax.

Stock-Based Compensation:  The Company recognizes stock-based compensation expense based on the grant date fair value over the requisite service period.

Recent Accounting Pronouncements:  In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-02, “Comprehensive Income (Topic 220): Reporting Amounts Reclassified Out of Accumulated Other Comprehensive Income,” which requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component.  In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period.  The ASU does not change the current requirements for reporting net income or other comprehensive income in financial statements.  The ASU is effective prospectively for fiscal years and interim periods within those years beginning after December 15, 2012.  The adoption of ASU 2013-02 is not expected to have a significant impact on the Company’s results of operations or financial position.

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income,” which requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income, or in two separate but consecutive statements.  Additionally, ASU 2011-05 eliminates the option to present comprehensive income and its components as part of the statement of shareholders’ equity.  The ASU does not change the items that must be reported in other comprehensive income.  The Company adopted this guidance effective May 1, 2012 and now includes Statements of Comprehensive Income (Loss) in its financial statements.

In December 2011, the FASB issued ASU No. 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date of Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU No. 2011-05.”  The amendments were made to allow FASB time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income.

Use of Estimates:  The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during each reporting period. Actual results could differ from those estimates.

Note B -- Customer Receivables

The components of customer receivables were:
 
   
APRIL 30
 
(in thousands)
 
2013
   
2012
 
Gross customer receivables
  $ 41,397     $ 34,572  
Less:
               
Allowance for doubtful accounts
    (148 )     (93 )
Allowance for returns and discounts
    (2,205 )     (1,946 )
                 
Net customer receivables
  $ 39,044     $ 32,533  
 

 
26

 

Note C -- Inventories

The components of inventories were:
 
             
   
APRIL 30
 
(in thousands)
 
2013
   
2012
 
Raw materials
  $ 11,823     $ 9,412  
Work-in-process
    17,170       14,543  
Finished goods
    11,318       8,734  
                 
Total FIFO inventories
    40,311       32,689  
Reserve to adjust inventories to LIFO value
    (10,973 )     (10,349 )
                 
Total LIFO inventories
  $ 29,338     $ 22,340  

There was no liquidation of LIFO based inventories in fiscal 2013 to impact net income.  After tax losses were impacted by $125,000 and $34,000 in fiscal years 2012 and 2011, respectively, as a result of liquidation of LIFO based inventories.

Note D -- Property, Plant and Equipment

The components of property, plant and equipment were:
 
             
   
APRIL 30
 
(in thousands)
 
2013
   
2012
 
Land
  $ 5,929     $ 5,929  
Buildings and improvements
    65,245       65,750  
Buildings and improvements - capital leases
    11,202       11,202  
Machinery and equipment
    177,393       169,406  
Machinery and equipment - capital leases
    26,966       26,685  
Construction in progress
    1,494       2,908  
      288,229       281,880  
Less accumulated amortization and depreciation
    (214,165 )     (206,505 )
                 
Total
  $ 74,064     $ 75,375  

Amortization and depreciation expense on property, plant and equipment amounted to $9.2 million, $16.8 million and $18.1 million in fiscal years 2013, 2012 and 2011, respectively.  Accumulated amortization on capital leases included in the above table amounted to $26.6 million as of both April 30, 2013 and 2012.

 
27

 

Note E -- Loans Payable and Long-Term Debt

Maturities of long-term debt are as follows:
 
   
FISCAL YEARS ENDING APRIL 30
 
(in thousands)
 
2014
   
2015
   
2016
   
2017
   
2018
   
2019 AND THERE- AFTER
   
TOTAL OUTSTAND- ING
 
                                           
Revolving credit facility
  $ --     $ --     $ 10,000     $ --     $ --     $ --     $ 10,000  
                                                         
Economic development loans
    --       --       --       --       --       3,480       3,480  
                                                         
Term loans
    349       370       393       411       2,007       --       3,530  
                                                         
Capital lease obligations
    806       835       854       763       593       3,888       7,739  
                                                         
Total
  $ 1,155     $ 1,205     $ 11,247     $ 1,174     $ 2,600     $ 7,368     $ 24,749  
                                                         
Less current maturities
                                                  $ 1,155  
                                                         
Total long-term debt
                                                  $ 23,594  

The Company’s primary loan agreement is a $35 million secured revolving credit facility which expires on December 31, 2015 with Wells Fargo Bank, N.A. (Wells Fargo).  The Company incurs a fee for amounts not used under the revolving credit facility.  Fees paid by the Company related to non-usage of its current and former credit facilities have been included in interest expense and were $61,000, $54,158 and $54,002 for fiscal years 2013, 2012 and 2011, respectively.

An amendment to the revolving credit facility and modifications to related security arrangements completed on March 18, 2013 eliminated the requirement that 50% of the Company’s outstanding indebtedness and other obligations to Wells Fargo be secured by cash and securities held in certain of the Company’s accounts with Wells Fargo. The Company’s outstanding indebtedness and other obligations to Wells Fargo are secured by substantially all of the Company’s assets.  The Company can borrow under the revolving credit facility up to the lesser of $35 million or the maximum borrowing base (which equals 75% of eligible accounts receivable, 50% of eligible pre bill reserves and up to $20 million for equipment value, each as defined in the agreement) less any outstanding loan balance.  Any outstanding loan balance bears interest at the London Interbank Offered Rate (LIBOR) (0.25% at April 30, 2013) plus 2.625%. Under the terms of the revolving credit facility, the Company must: (1) maintain at the end of each fiscal quarter a ratio of total liabilities to tangible net worth of not greater than 1.4 to 1.0; (2) maintain at the end of each fiscal quarter a ratio of cash flow to fixed charges of not less than 1.25 to 1.0 measured on a rolling four-quarter basis; (3) maintain at least $1.00 in net income for the fiscal quarter ending April 30, 2013 and at least $1.00 in net income on a rolling four-quarter basis for the fiscal quarter ending July 31, 2013; and comply with other customary affirmative and negative covenants.

The Company was in compliance with all covenants specified in the amended revolving credit facility as of April 30, 2013, as follows: (1) the Company’s ratio of total liabilities to tangible net worth at April 30, 2013 was 1.0 to 1.0; (2) cash flow to fixed charges for its most recent four quarters was 2.72 to 1.0; and (3) its net income for the fiscal quarter ended April 30, 2013 was $5.2 million.

The revolving credit facility does not limit the Company’s ability to pay dividends or repurchase its common stock as long as the Company is in compliance with these covenants.

In 2009, the Company entered into a loan agreement with the Board of County Commissioners of Garrett County as part of the Company’s capital investment in land located in Garrett County, Maryland.  This loan agreement is secured by a Deed of Trust on the property and bears interest at a fixed rate of 3%.  The agreement defers principal
 
 
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and interest during the term of the obligation and forgives any outstanding balance at December 31, 2019, if the Company complies with certain employment levels.  The outstanding balance as of April 30, 2013 and 2012 was $1,290,000.

In 2005, the Company entered into two separate loan agreements with the Maryland Economic Development Corporation and the County Commissioners of Allegany County as part of the Company’s capital investment and operations at the Allegany County, Maryland site.  These loan agreements were amended in 2013 and 2008.  The aggregate balance of these loan agreements was $2,190,000 and $2,234,000 for fiscal years ended April 30, 2013 and 2012, respectively.  The loan agreements expire at December 31, 2018 and bear interest at a fixed rate of 3% per annum.  These loan agreements are secured by mortgages on the manufacturing facility constructed in Allegany County, Maryland.  These loan agreements defer principal and interest during the term of the obligation and forgive any outstanding balance at December 31, 2018, if the Company complies with certain employment levels at the facility.

In 2002, the Company entered into a loan agreement with the Perry, Harlan, Leslie, Breathitt Regional Industrial Authority (a.k.a. Coalfields Regional Industrial Authority, Inc.) as part of the Company’s capital investment and operations at the Hazard, Kentucky site. This debt facility is a $6 million term loan, which expires November 13, 2017, bearing interest at a fixed rate of 2% per annum. It is secured by a mortgage on the manufacturing facility constructed in Hazard, Kentucky. The loan requires annual debt service payments consisting of principal and interest with a fixed balloon payment of $1.6 million at loan expiration. The outstanding amounts owed as of April 30, 2013 and 2012 were $3,530,000 and $3,858,000, respectively.

In 2013 and 2012, the Company entered into a total of six capitalized lease agreements in the aggregate amount of $639,000 with First American Financial Bancorp related to financing computer equipment.  Each lease has a term of 48 months and an interest rate of 6.5%.  The leases require quarterly rental payments.  The aggregate outstanding amount under all of these leases as of April 30, 2013 and 2012 was $545,000 and $95,000, respectively.

During 2013, the Company entered into five capitalized lease agreements in the aggregate amount of $568,000 with e-Plus Group related to financing computer equipment.  Each lease has a term of 51 months and an interest rate of 6.5%.  The leases require monthly rental payments.  The aggregate outstanding amount under all of these leases as of April 30, 2013 was $529,000.

In 2004, the Company entered into a lease agreement with the West Virginia Economic Development Authority as part of the Company’s capital investment and operations at the South Branch plant located in Hardy County, West Virginia. This capital lease agreement is a $10 million term obligation, which expires June 30, 2024, bearing interest at a fixed rate of 2% per annum. The lease requires monthly rental payments.  The outstanding amounts owed as of April 30, 2013 and 2012 were $6,665,000 and $7,188,000, respectively.

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 term loan agreements and capital lease arrangements. The Company was in compliance with all covenants contained in its loan agreements and capital leases at April 30, 2013.

Interest paid under the Company’s loan agreements and capital leases during fiscal years 2013, 2012 and 2011 was $576,000, $453,000 and $467,000, respectively.

 
 
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Note F -- Earnings (Loss) Per Share

The following table summarizes the computations of basic and diluted earnings (loss) per share:
 
   
FISCAL YEARS ENDED APRIL 30
 
(in thousands, except per share amounts)
 
2013
   
2012
   
2011
 
Numerator used in basic and diluted earnings (loss) per common share:
                 
Net income (loss)
  $ 9,758     $ (20,786 )   $ (20,018 )
Denominator:
                       
Denominator for basic earnings (loss) per common share -
                       
weighted-average shares
    14,563       14,344       14,252  
Effect of dilutive securities:
                       
Stock options and restricted stock units
    270       --       --  
Denominator for diluted earnings (loss) per common share -
                       
weighted-average shares and assumed conversions
    14,833       14,344       14,252  
Net earnings (loss) per share
                       
Basic
  $ 0.67     $ (1.45 )   $ (1.40 )
Diluted
  $ 0.66     $ (1.45 )   $ (1.40 )

Potentially dilutive shares of 1.0 million, 1.8 million and 1.7 million issuable under the Company’s stock incentive plans have been excluded from the calculation of net earnings (loss) per share for the fiscal years ended April 30, 2013, 2012 and 2011, respectively, as the effect would be anti-dilutive.

Note G – Stock-Based Compensation

The Company has two types of stock-based compensation awards in effect for its employees and directors. The Company has issued stock options since 1986 and restricted stock units (RSUs) since fiscal 2010. Total compensation expense related to stock-based awards for the fiscal years ended April 30, 2013, 2012 and 2011 was $3.5 million, $3.4 million and $4.0 million, respectively.  The Company recognizes stock-based compensation costs net of an estimated forfeiture rate for those shares expected to vest on a straight-line basis over the requisite service period of the award. The Company estimates the forfeiture rates based upon its historical experience.

Stock Incentive Plans

At April 30, 2013, the Company had stock option and RSU awards outstanding under four different plans: (1) 1999 stock option plan for employees; (2) amended and restated 2004 stock incentive plan for employees; (3) 2006 non-employee directors equity ownership plan; and (4) 2011 non-employee directors equity ownership plan.  As of April 30, 2013, there were 1,133,999 shares of common stock available for future stock-based compensation awards under the Company’s stock incentive plans.

Methodology Assumptions

For purposes of valuing stock option grants, the Company has identified two employee groups and one non-employee director group, based upon observed option exercise patterns. The Company uses the Black-Scholes option-pricing model to value the Company’s stock options for each of the three groups. Using this option-pricing model, the fair value of each stock option award is estimated on the date of grant. The fair value of the Company’s stock option awards is expensed on a straight-line basis over the vesting period of the stock options. The expected volatility assumption is based on the historical volatility of the Company’s stock over a term equal to the expected term of the option granted. The expected term of stock option awards granted is derived from the Company’s historical exercise experience and represents the period of time that stock option awards granted are expected to be outstanding for each of the three identified groups. The expected term assumption incorporates the contractual term of an option grant, which is generally ten years for employees and from four to ten years for non-employee directors, as well as the vesting period of an award, which is typically three years. The risk-free interest rate is based on the implied yield on a U.S. Treasury constant maturity with a remaining term equal to the expected term of the option granted.

For purposes of determining the fair value of RSUs, the Company uses the closing stock price of its common stock as reported on the NASDAQ Global Select Market on the date of grant, reduced by the discounted value of future
 
 
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expected dividend payments during the vesting period, since the recipients are not entitled to dividends during the vesting period. The fair value of the Company’s RSU awards is expensed on a straight-line basis over the vesting period of the RSUs to the extent the Company believes it is probable the related performance criteria, if any, will be met.  The risk-free interest rate is based on the implied yield on a U.S. Treasury constant maturity with a remaining term equal to the vesting period of the RSU grant.

The weighted-average assumptions and valuation of the Company’s stock options were as follows:
 
     
FISCAL YEARS ENDED APRIL 30
 
     
2013
     
2012
     
2011
 
Weighted-average fair value of grants
 
$
7.39
   
$
5.43
   
$
8.87
 
Expected volatility
   
42.5
%
   
35.1
%
   
49.1
%
Expected term in years
   
6.1
     
6.0
     
6.2
 
Risk-free interest rate
   
1.09
%
   
2.24
%
   
2.64
%
Expected dividend yield
   
0.0
%
   
2.0
%
   
1.7
%

Stock Option Activity

Stock options granted and outstanding under each of the Company’s plans vest evenly over a three-year period and have contractual terms of ten years. The exercise price of all stock options granted is equal to the fair market value of the Company’s common stock on the option grant date.

The following table presents a summary of the Company’s stock option activity for the fiscal years ended April 30, 2013, 2012 and 2011 (remaining contractual term in years and exercise prices are weighted-averages):
 
   
NUMBER OF OPTIONS
   
REMAINING CONTRACTUAL TERM
   
WEIGHTED AVERAGE EXERCISE PRICE
   
AGGREGATE INTRINSIC VALUE (in thousands)
 
Outstanding at April 30, 2010
    2,105,515       5.6     $ 29.03     $ 295  
                                 
Granted
    115,000       9.1       20.87       --  
Exercised
    (27,000 )     --       14.80       216  
Cancelled or expired
    (588,159 )     --       29.58       --  
Outstanding at April 30, 2011
    1,605,356       5.7     $ 28.48     $ 29  
                                 
Granted
    130,000       9.1       18.16