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Acquisition of RSI Home Products, Inc. (the "RSI Acquisition") | 12 Months Ended
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Apr. 30, 2020
Business Combinations [Abstract] |
Acquisition of RSI Home Products, Inc. (the RSI Acquisition) | Acquisition of RSI Home Products, Inc. (the "RSI Acquisition") On November 30, 2017, American Woodmark, Alliance Merger Sub, Inc. ("Merger Sub"), RSI and Ronald M. Simon, as the RSI stockholder representative, entered into a merger agreement (the "Merger Agreement") pursuant to which the parties agreed to merge Merger Sub with and into RSI pursuant to the terms and subject to the conditions set forth in the Merger Agreement, with RSI continuing as the surviving corporation and as a wholly owned subsidiary of American Woodmark. On December 29, 2017 (the "Acquisition Date"), the Company consummated the RSI Acquisition pursuant to the terms of the Merger Agreement. As a result of the merger of Merger Sub with and into RSI, Merger Sub’s separate corporate existence ceased, and RSI continued as the surviving corporation and a wholly owned subsidiary of American Woodmark. RSI is a leading manufacturer of kitchen and bath cabinetry and home organization products. In connection with the RSI Acquisition, on December 29, 2017, the Company entered into a credit agreement (the "Credit Agreement") with a syndicate of lenders and Wells Fargo Bank, National Association ("Wells Fargo"), as administrative agent, providing for a $100 million, 5-year revolving loan facility with a $25 million sub-facility for the issuance of letters of credit (the “Revolving Facility”), a $250 million, 5-year initial term loan facility (the "Initial Term Loan") and a $250 million delayed draw term loan facility (the "Delayed Draw Term Loan" and, together with the Revolving Facility and the Initial Term Loan, the "Credit Facilities") (See Note G -- Loans Payable and Long-Term Debt for further details). American Woodmark used the full proceeds of the Initial Term Loan and approximately $50 million in loans under the Revolving Facility, together with cash on its balance sheet, to fund the cash portion of the RSI Acquisition consideration and its transaction fees and expenses. At the closing of the RSI Acquisition, American Woodmark assumed approximately $589 million (including accrued interest) of RSI’s indebtedness consisting largely of RSI’s 6½% Senior Secured Second Lien Notes due 2023 (the "RSI Notes"). On February 12, 2018, the Company issued $350 million in aggregate principal amount of the Senior Notes and utilized the proceeds of such issuance, together with the borrowings under the Delayed Draw Term Loan and cash on hand, to fund the refinancing of the RSI Notes. (See Note G--Loans Payable and Long-Term Debt). Allocation of Purchase Price to Assets Acquired and Liabilities Assumed As consideration for the RSI Acquisition, American Woodmark paid total consideration of $554.2 million inclusive of a working capital adjustment including cash consideration of $364.4 million, net of cash acquired, and 1,457,568 newly issued shares of American Woodmark common stock valued at $189.8 million based on $130.25 per share, which was the closing stock price on the Acquisition Date. The Company accounted for the RSI Acquisition as a business combination, which requires the Company to record the assets acquired and liabilities assumed at fair value. The amount by which the purchase price exceeds the fair value of net assets acquired is recorded as goodwill. The following table summarizes the allocation of the purchase price as of the Acquisition Date, which is based on the consideration of $554.2 million, to the estimated fair value of assets acquired and liabilities assumed (in thousands):
Goodwill |  | $ | 767,612 |
Customer relationship intangibles |  |  | 274,000 |
Property, plant and equipment |  |  | 86,275 |
Inventories |  |  | 66,293 |
Customer receivables |  |  | 54,649 |
Income taxes receivable |  |  | 18,926 |
Trademarks |  |  | 10,000 |
Prepaid expenses and other |  |  | 4,571 |
Leasehold interests |  |  | 151 |
Total identifiable assets and goodwill acquired |  |  | 1,282,477 |
Debt |  |  | 602,313 |
Deferred income taxes |  |  | 67,542 |
Accrued expenses |  |  | 30,240 |
Accounts payable |  |  | 25,113 |
Notes payable |  |  | 2,988 |
Income taxes payable |  |  | 49 |
Total liabilities assumed |  |  | 728,245 |
Total accounting consideration |  | $ | 554,232 |
The fair value of the assets acquired and liabilities assumed were determined using income, market and cost valuation methodologies. The fair value of debt acquired was determined using Level 1 inputs as quoted prices in active markets for identical liabilities were available. The fair value measurements, aside from debt, were estimated using significant inputs that are not observable in the market and thus represent Level 3 measurements as defined in Accounting Standards Codification (ASC) 820. The income approach was primarily used to value the customer relationship intangibles and trademarks. The income approach determines value for an asset or liability based on the present value of cash flows projected to be generated over the remaining economic life of the asset or liability being measured. Both the amount and the duration of the cash flows are considered from a market participant perspective. The estimates of market participant net cash flows considered historical and projected product pricing, operational performance including company specific synergies, product life cycles, material and labor pricing, and other relevant customer, contractual and market factors. The net cash flows are discounted to present value using a discount rate that reflects the relative risk of achieving the cash flow and the time value of money. The market approach is a valuation technique that uses prices and other relevant information generated by market transactions involving identical or comparable assets, liabilities, or a group of assets or liabilities. The cost approach estimates value by determining the current cost of replacing an asset with another of equivalent economic utility. The cost to replace a given asset reflects the estimated reproduction or replacement cost for the property, less an allowance for loss in value due to depreciation. The cost and market approaches were used to value inventory, while the cost approach was the primary approach used to value property, plant and equipment. The purchase price allocation resulted in the recognition of $767.6 million of goodwill, which is not amortizable for tax purposes. The goodwill recognized is attributable to expected revenue synergies generated by the integration of the Company’s products with RSI's, cost synergies resulting from purchasing and manufacturing activities, and intangible assets that do not qualify for separate recognition, such as the assembled workforce of RSI. Customer receivables were recorded at the contractual amounts due of $57.1 million, less an allowance for returns and discounts of $2.4 million, and an allowance for doubtful accounts of $0.1 million, which approximates their fair value. Determining the fair value of assets acquired and liabilities assumed requires the exercise of significant judgment, including the amount and timing of expected future cash flows, long-term growth rates and discount rates. The cash flows employed in the valuation are based on the Company’s best estimates of future sales, earnings and cash flows after considering factors such as general market conditions, expected future customer orders, contracts with suppliers, labor costs, changes in working capital, long term business plans and recent operating performance. Use of different estimates and judgments could yield different results. Impact to Financial Results for the Fiscal Year Ended April 30, 2018 RSI’s financial results have been included in our consolidated financial results of fiscal 2018 for the period from the Acquisition Date to April 30, 2018. As a result, our consolidated financial results for the fiscal year ended April 30, 2018 do not reflect a full year of RSI results. From December 29, 2017 to April 30, 2018, RSI generated net sales of approximately $177.7 million and an operating income of approximately $9.1 million, inclusive of intangible amortization and adjustments to account for the acquisition, including a $6.3 million charge to cost of sales as a result of the step-up of inventory as of the Acquisition Date to fair value. The Company incurred approximately $12.9 million of transaction costs associated with the RSI Acquisition during the twelve months ended April 30, 2018 which the Company expensed as incurred. These costs are included in general and administrative expenses on the Consolidated Statements of Income. Supplemental Pro Forma Financial Information (unaudited) The following table presents summarized unaudited pro forma financial information as if RSI had been included in the Company’s financial results for the entire fiscal year ended April 30, 2018:
|  |  |  | FISCAL YEAR ENDED
(in thousands) |  |  |  | APRIL 30, 2018
Net Sales |  |  |  | $ | 1,613,663 |
Net Income (1) |  |  |  | $ | 67,388 |
Net earnings per share - basic |  |  |  | $ | 3.83 |
Net earnings per share - diluted |  |  |  | $ | 3.80 |
(1) Includes stock compensation expense of $17.5 million for the fiscal year ended April 30, 2018 calculated under the intrinsic value method in measuring stock-based liability awards related to stock-based grants made by RSI prior to the RSI Acquisition. The unaudited supplemental pro forma financial data above assumes the RSI Acquisition occurred on May 1, 2016 and has been calculated after applying the Company’s accounting policies and adjusting the historical results of RSI with pro forma adjustments, net of a statutory tax rate of 34.4% for the fiscal year ended April 30, 2018. Significant pro forma adjustments include the recognition of additional amortization expense of $20.0 million for the fiscal year ended April 30, 2018, related to acquired intangible assets (net of historical amortization expense of RSI) and additional net interest expense of $2.4 million for the fiscal year ended April 30, 2018, related to the $300 million borrowed under the Credit Agreement to finance the acquisition. Transaction expenses, net of tax, of $8.5 million for the fiscal year ended April 30, 2018, and inventory fair value step-up expense, net of tax of $4.1 million for the fiscal year ended April 30, 2018 were also excluded from net income. The unaudited supplemental pro forma financial information does not reflect the realization of any expected ongoing cost or revenue synergies relating to the integration of the two companies. Further, the pro forma data should not be considered indicative of the results that would have occurred if the RSI Acquisition, related financing and associated issuance of Senior Notes (defined herein) and repurchase or redemption of the RSI Notes had been actually consummated on May 1, 2016, nor are they indicative of future results.

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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -URI http://asc.fasb.org/topic&trid=2303972 + Details
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