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(Exact name of registrant as specified in its charter)
iVirginia
i54-1138147
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i561 Shady Elm Road,
iWinchester,
iVirginia
i22602
(Address
of principal executive offices)
(Zip Code)
(i540) i665-9100
(Registrant's telephone number, including area code)
Not Applicable
(Former
name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon
Stock
iAMWD
iNASDAQ
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. iYes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required
to be submitted 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 such files). iYes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,
a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer,""accelerated filer,""smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether
the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes i☐No ☒
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Preferred stock, $ii1.00/
par value; ii2,000,000/ shares
authorized, iinone/ issued
i—
i—
Common
stock, iino/ par value; ii40,000,000/
shares authorized; issued and outstanding shares: at January 31, 2023: ii16,621,827/;
at April 30, 2022: ii16,570,619/
i368,539
i363,224
Retained
earnings
i463,016
i399,434
Accumulated
other comprehensive income
i11,585
i10,225
Total
shareholders' equity
i843,140
i772,883
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
$
i1,564,373
$
i1,632,496
See
notes to condensed consolidated financial statements.
Change in pension benefits, net of deferred taxes of $i18,230 and $i18,481,
for the three and nine months ended January 31, 2022, respectively
i—
i53,822
i—
i54,568
Change
in Cash flow hedges (swap), net of deferred taxes (benefit) of $(i890) and $i763, and $i461
and $i1,404 for the three and nine months ended January 31, 2023 and 2022, respectively
(i2,627)
i2,253
i1,360
i4,145
Total
Comprehensive Income
$
i12,101
$
i6,818
$
i64,942
$
i14,467
See
notes to unaudited condensed consolidated financial statements.
5
AMERICAN WOODMARK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Property, plant and equipment included in accounts payable at period end
$
i1,025
$
i2,108
Cash
paid during the period for:
Interest
$
i13,208
$
i6,945
Income
taxes
$
i34,998
$
i17,677
See
notes to unaudited condensed consolidated financial statements.
9
AMERICAN WOODMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A--iBasis
of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine-month period ended January 31, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending April 30, 2023 ("fiscal 2023"). The
unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes in the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 2022 ("fiscal 2022") filed with the U.S. Securities and Exchange Commission ("SEC").
Goodwill and Intangible Assets: Goodwill represents the excess of purchase price over the net amount of identifiable assets acquired and liabilities assumed in a business combination measured at fair value. The Company does not amortize goodwill but evaluates for impairment annually, or whenever events or changes in circumstances
indicate that the carrying value may not be recoverable.
In accordance with accounting standards, when evaluating goodwill, an entity has the option first to assess qualitative factors to determine whether events and circumstances indicate that it is more likely than not that goodwill is impaired. If after such assessment an entity concludes that it is more likely than not that the asset is not impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the asset using a quantitative impairment test, and if impaired, the associated assets must be written down to fair value. There were iino/
impairment charges related to goodwill for the three- and nine-month periods ended January 31, 2023 and 2022.
Intangible assets consist of customer relationship intangibles. The Company amortizes the cost of intangible assets over their estimated useful lives, isix years, unless such lives are deemed indefinite. There were iino/
impairment charges related to intangible assets for the three- and nine-month periods ended January 31, 2023 and 2022.
Derivative Financial Instruments: The Company uses derivatives as part of the normal business operations to manage its exposure to fluctuations in interest rates associated with variable interest rate debt and foreign exchange rates. The Company has established policies and procedures that govern the risk management of these exposures. The primary objective in managing these exposures is to add stability to interest expense, manage the
Company's exposure to interest rate movements, and manage the risk from adverse fluctuations in foreign exchange rates.
The Company uses interest rate swap contracts to manage interest rate exposures. The Company records derivatives in the condensed consolidated balance sheets at fair value. Changes in the fair value of derivatives designated as cash flow hedges are recorded in accumulated other comprehensive income (loss), and subsequently reclassified into earnings in the period the hedged forecasted transaction affects earnings. If a derivative is deemed to be ineffective, the change in fair value of the derivative is recognized
directly in earnings.
The Company also manages risks through the use of foreign exchange forward contracts. The Company recognizes its outstanding forward contracts in the condensed consolidated balance sheets at their fair values. The Company does not designate the forward contracts as accounting hedges. The changes in the fair value of the forward contracts
are recorded in other (income) expense, net in the condensed consolidated statements of income.
Reclassifications: Certain reclassifications have been made to prior period balances to conform to the current year presentation.
Note B--iNew
Accounting Pronouncements
In December 2022, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2022-06 "Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848." The amendments in this update defer the sunset date of Topic 848 from December 31, 2022 to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. In March 2020, the FASB issued ASU 2020-04 "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. ASU 2020-04 provides optional expedients and exceptions for applying
generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting
10
certain criteria, that reference the London Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued. The FASB included a sunset provision within Topic 848 based on the expectations of when the LIBOR would cease being published. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2024 and can be adopted
as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020. The Company adopted the standard as of January 31, 2023 when it amended all debt and financial instruments that used to have a LIBOR reference rate. The amendments did not have a material impact on the Company's consolidated financial statements.
Note C--iNet
Earnings Per Share
i
The following table sets forth the computation of basic and diluted net earnings per share:
Three
Months Ended
Nine Months Ended
January 31,
January 31,
(in thousands, except per share amounts)
2023
2022
2023
2022
Numerator used in basic and diluted net earnings
per
common share:
Net income (loss)
$
i14,728
$
(i49,257)
$
i63,582
$
(i44,246)
Denominator:
Denominator
for basic net earnings per common
share - weighted-average shares
i16,622
i16,570
i16,607
i16,599
Effect
of dilutive securities:
Stock options and restricted stock units
i74
i—
i54
i—
Denominator
for diluted net earnings per common
share - weighted-average shares and assumed
conversions
i16,696
i16,570
i16,661
i16,599
Net
earnings (loss) per share
Basic
$
i0.89
$
(i2.97)
$
i3.83
$
(i2.67)
Diluted
$
i0.88
$
(i2.97)
$
i3.82
$
(i2.67)
/
There
were iino/
potentially dilutive securities for the three- and nine-month periods ended January 31, 2023, which were excluded from the calculation of net earnings per diluted share. Potentially dilutive securities of i40,973 and i47,878
for the three- and nine-month periods ended January 31, 2022, respectively, have not been considered in the calculation of net loss per share as the effect would be anti-dilutive.
Note D--iStock-Based Compensation
The
Company has various stock-based compensation plans. During the nine-months ended January 31, 2023, the Board of Directors of the Company approved grants of service-based restricted stock units ("RSUs") and performance-based RSUs to key employees and non-employee directors. The performance-based RSUs totaled i119,772 units
and the service-based RSUs totaled i82,848 units. The performance-based RSUs entitle the recipients to receive ione share
of the Company's common stock per unit granted if applicable performance conditions are met and the recipient remains continuously employed with the Company until the units vest. The service-based RSUs entitle the recipients to receive ione share of the
Company's common stock per unit granted if they remain continuously employed with the Company until the units vest. All of the Company's RSUs granted to employees cliff-vest ithree years from the grant date, while RSUs granted to non-employee directors vest daily over a itwo-year
period from the date of grant.
11
i
For the three- and nine-month periods ended January 31, 2023 and 2022, stock-based compensation expense was allocated as follows:
Three
Months Ended
Nine Months Ended
January 31,
January 31,
(in thousands)
2023
2022
2023
2022
Cost of sales and distribution
$
i547
$
i231
$
i1,483
$
i906
Selling
and marketing expenses
i376
i269
i1,446
i931
General
and administrative expenses
i937
i506
i2,320
i1,562
Stock-based
compensation expense
$
i1,860
$
i1,006
$
i5,249
$
i3,399
/
During
the nine months ended January 31, 2023, the Company also approved grants of i11,945 cash-settled performance-based restricted stock tracking units ("RSTUs") and i6,490 cash-settled
service-based RSTUs for more junior level employees. Each performance-based RSTU entitles the recipient to receive a payment in cash equal to the fair market value of one share of the Company's common stock as of the payment date if applicable performance conditions are met and the recipient remains continuously employed with the Company until the units vest. The service-based RSTUs entitle the recipients to receive a payment in cash equal to the fair market value of one share of the Company's common stock as of the payment date if they remain continuously employed with the Company until the units vest. All of the RSTUs cliff-vest ithree
years from the grant date. The fair value of each cash-settled RSTU award is remeasured at the end of each reporting period and the liability is adjusted, and related expense recorded, based on the new fair value. The expense recognized for the nine-month periods ended January 31, 2023 and 2022, and the liability as of January 31, 2023 and April 30, 2022, related to RSTUs is not significant.
Note E--iCustomer
Receivables
i
The components of customer receivables were:
January
31,
April 30,
(in thousands)
2023
2022
Gross customer receivables
$
i129,375
$
i168,699
Less:
Allowance
for doubtful accounts
(i377)
(i226)
Allowance
for returns and discounts
(i11,256)
(i11,512)
Net
customer receivables
$
i117,742
$
i156,961
/
Note
F--iInventories
i
The components of inventories were:
January
31,
April 30,
(in thousands)
2023
2022
Raw materials
$
i105,733
$
i90,451
Work-in-process
i54,212
i59,180
Finished
goods
i64,818
i78,628
Total
inventories
$
i224,763
$
i228,259
/
12
Note
G--iProperty, Plant and Equipment
ii
The
components of property, plant and equipment were:
January 31,
April 30,
(in thousands)
2023
2022
Land
$
i4,475
$
i4,431
Buildings
and improvements
i120,492
i119,066
Buildings
and improvements - finance leases
i11,164
i11,164
Machinery
and equipment
i328,639
i324,417
Machinery
and equipment - finance leases
i30,930
i31,341
Software
i29,229
i28,115
Construction
in progress
i27,641
i22,794
Total
property, plant and equipment
i552,570
i541,328
Less
accumulated amortization and depreciation
(i349,061)
(i327,520)
Property,
plant and equipment, net
$
i203,509
$
i213,808
//
Amortization
and depreciation expense on property, plant and equipment amounted to $i9.3 million and $i9.2 million for the three months ended January 31,
2023 and 2022, respectively, and $i28.7 million and $i28.3 million for the nine months ended
January 31, 2023 and 2022, respectively. Accumulated amortization on finance leases included in the above table amounted to $i32.8 million and $i32.8
million as of January 31, 2023 and April 30, 2022, respectively.
Note H--iIntangibles
i
The
components of customer relationship intangibles were:
January 31,
April 30,
(in thousands)
2023
2022
Customer relationship intangibles
$
i274,000
$
i274,000
Less
accumulated amortization
(i232,139)
(i197,889)
Total
$
i41,861
$
i76,111
/
Customer
relationship intangibles are amortized over the estimated useful lives on a straight-line basis over isix years. Amortization expense for the three month periods ended January 31, 2023 and 2022 was $i11.4 million
and $i11.4 million, respectively, and $i34.2 million and $i34.2 million,
respectively, for each of the nine month periods ended January 31, 2023 and 2022.
Note I--iProduct Warranty
The Company estimates outstanding
warranty costs based on the historical relationship between warranty claims and revenues. The warranty accrual is reviewed monthly to verify that it properly reflects the remaining obligation based on the anticipated expenditures over the balance of the obligation period. Adjustments are made when actual warranty claim experience differs from estimates. Warranty claims are generally made within itwo months of the original shipment date.
13
i
The
following is a reconciliation of the Company's warranty liability, which is included in other accrued expenses on the unaudited condensed consolidated balance sheets:
Nine Months Ended
January 31,
(in thousands)
2023
2022
Beginning
balance at May 1
$
i6,878
$
i5,249
Accrual
i26,566
i18,729
Settlements
(i25,777)
(i17,821)
Ending
balance at January 31
$
i7,667
$
i6,157
/
Note
J--iFair Value Measurements
The Company utilizes the hierarchy of fair value measurements to classify certain of its assets and liabilities based upon the following definitions:
Level 1- Investments with quoted prices in active markets for identical assets or liabilities. The Company's cash equivalents
are invested in money market funds, mutual funds, and certificates of deposit. The Company's mutual fund investment assets represent contributions made and invested on behalf of the Company's former named executive officers in a supplementary employee retirement plan.
Level 2- Investments with observable inputs other than Level 1 prices, such as: quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3- Investments with unobservable inputs that
are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The Company has no Level 3 assets or liabilities measured on a recurring basis.
The Company's financial instruments include cash and equivalents, marketable securities, and other investments; accounts receivable and accounts payable; interest rate swap and foreign exchange forward contracts; and short- and long-term debt. The carrying values of cash and equivalents, accounts receivable and payable, and short-term debt on the condensed consolidated balance sheets approximate their fair value due to the short maturities
of these items. The interest rate swap and foreign exchange forward contracts were marked to market and therefore represent fair value. The fair values of these contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. iThe following table summarizes the fair value of
assets that are recorded in the Company's consolidated financial statements as of January 31, 2023 and April 30, 2022 at fair value on a recurring basis (in thousands):
There
were no transfers between Level 1, Level 2, or Level 3 for assets measured at fair value on a recurring basis.
Note K--iLoans Payable and Long-Term Debt
On December 29, 2017, the Company entered into a credit agreement
(the "Prior Credit Agreement") with a syndicate of lenders and Wells Fargo Bank, National Association, as administrative agent. The Prior Credit Agreement provided for a $i100 million revolving loan facility with a $i25
million sub-facility for the issuance of letters of credit, a $i250 million initial term loan facility, and a $i250 million delayed draw term loan facility. The
Company borrowed the entire $i250 million under the initial term loan facility, the entire $i250 million under the delayed draw term loan facility, and approximately $i50 million
under the revolving loan facility in connection with its acquisition of RSI Home Products, Inc. ("RSI") and the refinancing of certain senior notes assumed from RSI. The facilities under the Prior Credit Agreement were scheduled to mature on December 29, 2022.
On April 22, 2021, the Company amended and restated the Prior Credit Agreement and on January 17, 2023the Company entered into an amendment of such agreement to transition the applicable interest rate from LIBOR to Secured Overnight Financing Rate ("SOFR"), effective January
31, 2023. The amended and restated credit agreement, as amended (the "A&R Credit Agreement") provides for a $i500 million revolving loan facility with a $i50 million
sub-facility for the issuance of letters of credit (the "Revolving Facility") and a $i250 million term loan facility (the "Term Loan Facility"). Also on April 22, 2021, the Company borrowed the entire $i250 million
under the Term Loan Facility and approximately $i264 million under the Revolving Facility to fund, in part, the repayment in full of the amounts then outstanding under the Prior Credit Agreement and the complete redemption of its i4.875%
Senior Notes due 2026. The Company is required to repay the Term Loan Facility in specified quarterly installments. The Revolving Facility and Term Loan Facility mature on April 22, 2026.
As of January 31, 2023 and April 30, 2022, $i225.0 million and $i237.5 million,
respectively, was outstanding on the Term Loan Facility. As of January 31, 2023 and April 30, 2022, $i210.0 million and $i263.0 million, respectively,
was outstanding under the Revolving Facility. Outstanding letters of credit under the Revolving Facility were $i12.4 million as of January 31, 2023, leaving approximately $i277.6 million
in available capacity under the Revolving Facility as of January 31, 2023. The outstanding balances noted above approximate fair value as the facilities have a floating interest rate.
Effective January 31, 2023, amounts outstanding under the Term Loan Facility and the Revolving Facility bear interest based on a fluctuating rate measured by reference to either, at the Company's option, a base rate plus an applicable margin or SOFR plus i10
basis points plus an applicable margin, with the applicable margin being determined by reference to the Company's then-current "Secured Net Leverage Ratio."The Company also incurs a quarterly commitment fee on the average daily unused portion of the Revolving Facility during the applicable quarter at a rate per annum also determined by reference to the Company's then-current "Secured Net Leverage Ratio." In addition, effective January 31, 2023, a letter of credit fee accrues on the face amount of any outstanding letters of credit at a per annum rate equal to the applicable margin on SOFR loans, payable quarterly in arrears. As of January 31,
2023, the applicable margin with respect to base rate loans and SOFR loans was i0.25% and i1.25%, respectively, and the commitment fee was i0.13%.
The
A&R Credit Agreement includes certain financial covenants that require the Company to maintain (i) a "Consolidated Interest Coverage Ratio" of no less than i2.00 to 1.00 and (ii) a "Total Net Leverage Ratio" of no greater than i4.00
to 1.00, subject, in each case, to certain limited exceptions.
The A&R Credit Agreement includes certain additional covenants, including negative covenants that restrict the ability of the Company and certain of its subsidiaries to incur additional indebtedness, create additional liens on its assets, make certain investments, dispose of its assets, or engage in a merger or other similar transaction, or engage in transactions with affiliates, subject, in each case, to the various exceptions and conditions described in the A&R Credit Agreement. The negative covenants further restrict the ability of the Company and certain
of its subsidiaries to make certain restricted payments, including, in the case of the Company, the payment of dividends and the repurchase of common stock, in certain limited circumstances.
As of January 31, 2023, the Company was in compliance with all covenants included in the A&R Credit Agreement.
The Company's obligations under the A&R Credit Agreement are guaranteed by the
Company's domestic subsidiaries, and the obligations of the Company and its domestic subsidiaries under the A&R Credit Agreement and their guarantees, respectively, are secured by a pledge of substantially all of their respective personal property.
The Company enters into interest rate swap contracts to manage variability in the amount of known or expected cash payments related to portions of its variable rate debt. On May 28, 2021, the Company entered into ifour
interest rate swaps with an aggregate notional amount of $i200 million to hedge part of the variable rate interest payments under the Term Loan Facility. The interest rate swaps became effective on May 28, 2021 and will terminate on May 30, 2025. The interest rate swaps economically convert a portion of the variable rate debt to fixed rate debt. Effective January 31, 2023, the
Company receives floating interest payments monthly based on one-month SOFR and pays a fixed rate of i0.53% to the counterparty.
The interest rate swaps are designated as cash flow hedges. Changes in fair value are recorded to other comprehensive income. The risk management objective in using interest rate swaps is to add stability to interest expense and to manage the Company's exposure to interest rate movements. Interest rate swaps designated
as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the contract agreements without exchange of the underlying notional amount. Realized gains or losses in connection with required interest payments on interest rate swaps are recorded in earnings, as a component of interest expense, net to offset variability in interest expense associated with the underlying debt's cash flows.
For the three- and nine-month periods ended January 31, 2023, unrealized gains (losses), net of deferred taxes, of ($i2.6) million
and $i1.4 million, respectively, were recorded in other comprehensive income, and $i1.8 million
and $i3.1 million, respectively, of realized gains (losses) were reclassified out of accumulated other comprehensive income (loss) to interest expense, net due to interest received from and payments made to the swap counterparties. For the three- and nine-month periods ended January 31, 2022, unrealized gains (losses), net of deferred taxes, of $i2.3 million
and $i4.1 million, respectively, were recorded in other comprehensive income, and $i0.3 million
and $i0.7 million, respectively, of realized gains (losses) were reclassified out of accumulated other comprehensive income (loss) to interest expense, net due to interest received from and payments made to the swap counterparties. As of January 31, 2023, the Company anticipates reclassifying approximately $i8.8
million of net hedging gains from accumulated other comprehensive income into earnings during the next 12 months to offset the variability of the hedged items during this period.
At January 31, 2023, the Company held forward contracts maturing from February 2023 to April 2023 to purchase i208.2 million
Mexican pesos at exchange rates ranging from i21.49 to i21.74 Mexican pesos to one U.S. dollar. An iimmaterial
asset is recorded in prepaid expense and other on the condensed consolidated balance sheet.
Note M--iIncome Taxes
The effective income tax rates for the three- and nine-month periods ended January 31, 2023 were i25.0%
and i25.1%, respectively, compared with i26.0% and i26.3%,
respectively, in the comparable periods in the prior fiscal year. The effective rates were higher than the 21.0% U.S. statutory rate for the three- and nine-month periods ended January 31, 2023 primarily due to state income taxes. The effective rate for the periods ended January 31, 2023 was lower than the comparable periods in the prior fiscal year primarily due to unfavorable uncertain tax position booked in the comparable periods and an increase in tax credits for the current period.
16
Note N--iRevenue
Recognition
The Company disaggregates revenue from contracts with customers into major sales distribution channels as these categories depict the nature, amount, timing, and uncertainty of revenues and cash flows that are affected by economic factors. iThe following table disaggregates our consolidated revenue by major sales
distribution channels for the three and nine months ended January 31, 2023 and 2022:
Three Months Ended
Nine Months
Ended
January 31,
January 31,
(in thousands)
2023
2022
2023
2022
Home center retailers
$
i202,881
$
i225,046
$
i681,631
$
i649,712
Builders
i212,640
i177,716
i683,601
i539,154
Independent
dealers and distributors
i65,192
i56,974
i219,873
i166,614
Net
Sales
$
i480,713
$
i459,736
$
i1,585,105
$
i1,355,480
Note
O--iConcentration of Risks
Financial instruments that potentially subject the Company to concentrations of risk consist primarily of cash and cash equivalents and accounts receivable. The Company maintains its cash and cash equivalents with major financial institutions and such balances may, at times, exceed Federal Deposit
Insurance Corporation insurance limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risk with respect to cash.
Credit is extended to customers based on an evaluation of each customer's financial condition and generally collateral is not required. The Company's customers operate in the new home construction and home remodeling markets.
The Company maintains an allowance for expected credit losses based upon management's evaluation and
judgment of potential net loss. The allowance is estimated based upon historical experience, the effects of current developments and economic conditions, and each customer's current and anticipated financial condition. Estimates and assumptions are periodically reviewed and updated. Any resulting adjustments to the allowance are reflected in current operating results.
As of January 31, 2023, the Company's two largest customers, Customers A and B, represented i39.9%
and i16.4% of the Company's gross customer receivables, respectively. As of January 31, 2022, Customers A and B represented i31.3%
and i18.8% of the Company's gross customer receivables, respectively.
i
The following table
summarizes the percentage of net sales attributable to the Company's two largest customers for the three and nine months ended January 31, 2023 and 2022:
In the third quarter of fiscal 2023, the Company implemented nationwide reductions in force, which will be substantially completed in the fourth quarter of fiscal 2023. The Company recognized pre-tax restructuring charges, net of $ii1.3/
million for the three- and nine-months ended January 31, 2023, related to these reductions in force, which were primarily severance and separation costs. A reserve of $1.3 million for restructuring charges is included in accrued compensation and related expenses in the consolidated balance sheet as of January 31, 2023 which relates to employee termination costs accrued but not yet paid.
Note Q--iOther
Information
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
17
loss. As required by FASB Accounting Standards Codification Topic 450, "Contingencies,"the
Company categorizes the various suits and claims into three categories according to their likelihood for resulting in potential loss: those that are probable, those that are reasonably possible, and those that are deemed to be remote. Where losses are deemed to be probable and estimable, accruals are made. Where losses are deemed to be reasonably possible, a range of loss estimates is determined and considered for disclosure. In determining these loss range estimates, the Company considers known values of similar claims and consults with outside counsel.
Except as described below, the Company believes that the aggregate range of loss stemming from the various suits and asserted and unasserted claims that were deemed
to be either probable or reasonably possible was not material as of January 31, 2023.
Antidumping and Countervailing Duties Investigation
In February 2020, a conglomeration of domestic manufacturers filed a scope and circumvention petition seeking the imposition of antidumping (“AD”) and countervailing duties (“CVD”) with the United States Department of Commerce (“DOC”) and the United States International Trade Commission (“ITC”) against imports of hardwood plywood assembled in Vietnam using cores sourced from China. In July 2022, the DOC issued a Preliminary Scope Determination and Affirmative Preliminary Determination of Circumvention of the Antidumping and Countervailing Duty Orders (“Preliminary Determination”). Included
in the Determination is a list of Vietnamese suppliers not eligible for certification.
AD and CVD cash deposits of 206% are required for imports from the Vietnamese suppliers not eligible for certification. Many of the Vietnamese suppliers have appealed their inclusion on the ineligible for certification list. Because two of the Company’s primary Vietnamese plywood vendors are included on the ineligible for certification list, the Company has determined that it is reasonably possible that it may experience a loss due to these matters and estimates that the maximum total potential loss for prior and future purchase to be approximately $i8.0 million.
Through the third fiscal quarter of 2023, the Company has remitted deposits of $i3.9 million pursuant to the Preliminary Determination. The deposits remitted are included in other assets on the Company’s condensed consolidated balance sheet. Based on the evidence provided from the Vietnamese suppliers, the specific characteristics of the product imported and other relevant matters, the
Company intends to vigorously appeal any determination that it is subject to these duties and believes that any deposits made will ultimately be refunded upon settlement of the appeals.
Note R--iSubsequent Events
As previously disclosed, on January 25, 2016, the
Company entered into a New Markets Tax Credit (“NMTC”) financing agreement to finance working capital improvements at its Monticello, Kentucky facility. The agreement was structured with unrelated third-party financial institutions (the “Investors”), their wholly-owned investment funds (the “Investment Funds”) and certain community development entities (the “CDEs”) in connection with our participation in qualified financing transactions under the NMTC program. In exchange for substantially all of the benefits derived from the tax credits, the Investors made a contribution of $i2.3 million,
net of syndication fees, to the Investment Funds. Simultaneously, a wholly-owned subsidiary of the Company made a $i4.3 million loan to the Investment Funds. The Investment Funds used the proceeds of such equity and debt investments to acquire equity interests in the CDEs, which the CDEs in turn used to make loans to the Company aggregating $i6.6 million
for the project. These loans have terms of i30 years with an aggregate interest rate of approximately i1.2%. The original terms of the transaction included Investor put options, exercisable after i7
years, which, if exercised by the Investors, would require the Company to purchase the Investors’ interests in the Investment Funds. The Investors’ exercised such put options in February 2023 and we repurchased their interests in the Investment Funds in February 2023. The Company does not expect the impact of this transaction to have a material impact on its financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be
read in conjunction with our unaudited condensed consolidated financial statements and the related notes, both of which are included in Part I, Item 1 of this report. The Company's critical accounting policies are included in the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 2022.
Forward-Looking Statements
This report contains statements concerning the Company's
expectations, plans, objectives, future financial performance, and other statements that are not historical facts. These statements may be "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. In most cases, the reader can identify forward-looking statements by words such as "anticipate,""estimate,""forecast,""expect,""believe,""should,""could,""would,""plan,""may,""intend,""estimate,""prospect,""goal,""will,""predict,""potential," or other similar words. Forward-looking statements contained in this report, including elsewhere in "Management's Discussion and Analysis of Financial Condition and Results of Operations," are based on current expectations and our actual results may differ materially from those projected in any forward-looking statements. In
18
addition,
the Company participates in an industry that is subject to rapidly changing conditions and there are numerous factors that could cause the Company to experience a decline in sales and/or earnings or deterioration in financial condition. Factors that could cause actual results to differ materially from those in forward-looking statements made in this report include but are not limited to:
•the loss of or a reduction in business from one or more of our key customers;
•negative developments in the macro-economic factors that impact our performance such as the U.S. housing market, general economy, unemployment rates, interest rates
and consumer sentiment and the impact of such developments on our and our customers' business, operations, and access to financing;
•competition from other manufacturers and the impact of such competition on pricing and promotional levels;
•an inability to obtain raw materials in a timely manner or fluctuations in raw material, transportation, and energy costs, including due to inflation;
•a failure to attract and retain certain members of management or other key employees or other negative labor developments, including increases in the cost of labor;
•an inability to develop new products or respond to changing consumer preferences and purchasing practices;
•increased
buying power of large customers and the impact on our ability to maintain or raise prices;
•a failure to effectively manage manufacturing operations, alignment, and capacity or an inability to maintain the quality of our products;
•the impairment of goodwill, other intangible assets, or our long-lived assets;
•information systems interruptions or intrusions or the unauthorized release of confidential information concerning customers, employees, or other third parties;
•the cost of compliance with, or liabilities related to, environmental or other governmental regulations or changes in governmental or industry regulatory standards, especially with respect to health and safety and the environment;
•risks
associated with the implementation of our growth, digital transformation, and platform design strategies;
•risks related to sourcing and selling products internationally and doing business globally, including the imposition of tariffs or duties on those products, and increased transportation costs and delays;
•unexpected costs resulting from a failure to maintain acceptable quality standards;
•changes in tax laws or the interpretations of existing tax laws;
•the impact of COVID-19 on our business, the global and U.S. economy, and our employees, customers, suppliers, and logistics system;
•the occurrence of significant natural disasters,
including earthquakes, fires, floods, hurricanes, or tropical storms;
•the unavailability of adequate capital for our business to grow and compete; and
•limitations on operating our business as a result of covenant restrictions under our indebtedness, and our ability to pay amounts due under our credit facilities and our other indebtedness.
Additional information concerning factors that could cause actual results to differ materially from those in forward-looking statements is contained in this report, including elsewhere in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and also in the Company's most recent Annual Report
on Form 10-K for the fiscal year ended April 30, 2022, filed with the SEC, including under Item 1A, "Risk Factors," Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," 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 in this report speaks only as of the date of this report. The Company undertakes no obligation to publicly update or revise any forward-looking statements or cautionary factors as a result of new information, future events or otherwise, except as required by law.
Overview
American Woodmark Corporation manufactures and distributes kitchen, bath, and home organization products for the remodeling and new home construction markets. Its products are sold on a national basis directly to home centers and builders and through a network of independent dealers and distributors. As of January 31,
2023, the Company operated 17 manufacturing facilities in the United States and Mexico and eight primary service centers and one distribution center located throughout the United States.
The
Company's remodeling-based business was impacted by the following macro-economic trends during the third quarter of fiscal 2023:
•The median price per existing home sold rose during the fourth calendar quarter of 2022 compared to the same period one year ago by 15.5% according to data provided by the National Association of Realtors, and existing home sales decreased 9.7% during the fourth calendar quarter of 2022 compared to the same period in the prior year;
•The unemployment rate decreased to 3.4% as of January 2023 compared to 4.0% as of January 2022 according to data provided by the U.S. Department of Labor; additionally, the unemployment rate decreased slightly from 3.6% in April 2022;
•Mortgage interest rates increased with a thirty-year
fixed mortgage rate of approximately 6.1% in January 2023, an increase of approximately 258 basis points compared to the same period in the prior year, according to Freddie Mac;
•Consumer sentiment as tracked by Thomson Reuters/University of Michigan decreased from 67.2 in January 2022 to 64.9 in January 2023; and
•The inflation rate as of January 2023 was 6.4%, compared to 7.5% in January 2022 and 8.3% in April 2022 according to data provided by the U.S. Department of Labor.
The Company believes there is no single indicator that directly correlates with cabinet remodeling market activity. For this reason, the
Company considers other factors in addition to those discussed above as indicators of overall market activity including credit availability, home owner equity, and housing affordability.
The Company's total net sales increased 4.6% during the third quarter and 16.9% during the first nine months of fiscal 2023 compared to the same prior-year periods.
The Company's remodeling sales, which consist of our independent dealer and distributor channel sales and home center retail sales, decreased 4.9% during the third quarter and increased 10.4% during the first nine months of fiscal 2023 compared to the same prior-year periods. Our
independent dealer and distributor channel increased by 14.4% during the third quarter and 32.0% during the first nine months of fiscal 2023 compared to the comparable prior-year periods. Our home center channel decreased by 9.8% during the third quarter and increased 4.9% during the first nine months of fiscal 2023 compared to the comparable prior-year periods.
New construction sales increased 19.7% in the third quarter and 26.8% during the first nine months of fiscal 2023, compared to the same periods of fiscal 2022. The Company believes that fluctuations in single-family housing starts are the best indicator of new construction cabinet activity. Assuming a sixty to ninety day lag between housing starts and the installation of cabinetry, single-family housing starts decreased 24.6% during the third
quarter over the comparable prior year period, according to the U.S. Department of Commerce. In comparison, housing completions increased 8.1% during the third quarter of fiscal 2023 over the comparable prior year period, according to the U.S. Department of Commerce. The Company believes there is a disconnect between single-family housing starts and housing completions, which is causing the lag to be greater than the historical 90 days.
The Company earned net income of $14.7 million for the third quarter of fiscal 2023, compared with a net loss of $49.3 million in the same period of the prior year, and earned net income of $63.6 million for the first nine months of fiscal 2023, compared with a net loss of $44.2 million
in the same period of the prior year.
Results of Operations
Three
Months Ended
Nine Months Ended
January 31,
January 31,
(in thousands)
2023
2022
Percent Change
2023
2022
Percent Change
Net
sales
$
480,713
$
459,736
4.6
%
$
1,585,105
$
1,355,480
16.9
%
Gross profit
$
75,340
$
51,755
45.6
%
$
260,821
$
156,715
66.4
%
Selling
and marketing expenses
$
21,364
$
23,383
(8.6)
%
$
71,781
$
67,755
5.9
%
General and administrative expenses
$
28,848
$
23,281
23.9
%
$
91,129
$
71,638
27.2
%
20
Net
Sales. Net sales were $480.7 million for the third quarter of fiscal 2023, an increase of $21.0 million or 4.6% compared with the third quarter of fiscal 2022. For the first nine months of fiscal 2023, net sales were $1,585.1 million, reflecting a $229.6 million or 16.9% increase compared to the same period of fiscal 2022. The Company experienced growth of 19.7% in the third quarter and 26.8% during the first nine months of fiscal 2023 in the builder channel and growth of 14.4% during the third quarter and 32.0% during the first nine months of fiscal 2023 in the independent dealers and distributors sales channel primarily due to the impact of price increases. Our home center channel decreased by 9.8% during the third quarter and increased 4.9% during the first nine months of fiscal 2023 compared to the comparable prior-year periods.
GrossProfit. Gross profit margin for the third quarter of fiscal 2023 was 15.7% compared with 11.3% for the same period of fiscal 2022, representing a 440 basis point improvement. Gross profit margin for the first nine months of fiscal 2023 was 16.5% compared with 11.6% for the same period of fiscal 2022, representing a 490 basis point improvement. Gross profit margin in the third quarter and first nine months of the current fiscal year was positively impacted by pricing actions and operational improvements partially offset by increases in labor and logistics costs.
Selling andMarketing Expenses. Selling and marketing expenses were 4.4% of net sales in the third quarter of fiscal 2023, compared with 5.1% for the same period of fiscal 2022. Selling and
marketing expenses were 4.5% of net sales in the first nine months of fiscal 2023, compared with 5.0% for the same period of fiscal 2022.
General andAdministrative Expenses. General and administrative expenses were 6.0% of net sales in the third quarter of fiscal 2023, compared with 5.1% of net sales in the third quarter of fiscal 2022. General and administrative expenses were 5.7% of net sales in the first nine months of fiscal 2023, compared with 5.3% of net sales in the third quarter of fiscal 2022. The increase in general and administrative expenses as a percentage of net sales during the third quarter and first nine months of fiscal 2023 was driven by higher employee incentive costs, partially offset by leverage created by higher sales.
Effective
Income Tax Rates. The effective income tax rates for the three- and nine-month periods ended January 31, 2023 was 25.0% and 25.1%, respectively, compared with 26.0% and 26.3%, respectively, in the comparable periods in the prior fiscal year. The effective rates were higher than the 21.0% U.S. statutory rate for the three- and nine-month periods ended January 31, 2023 primarily due to state income taxes. The effective rate for the periods ended January 31, 2023 was lower than the comparable periods in the prior fiscal year primarily due to an unfavorable uncertain tax position booked in the prior periods and an increase in tax credits for the current period.
Non-GAAP Financial Measures. We have
reported our financial results in accordance with U.S. generally accepted accounting principles (GAAP). In addition, we have discussed our financial results using the non-GAAP measures described below.
A reconciliation of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP is set forth below.
Management believes that these non-GAAP financial measures provide an additional means of analyzing the current period's results against the corresponding prior period's results. However, these non-GAAP financial measures should be viewed in addition to, and not as a substitute for, the Company's reported results prepared in accordance with GAAP. Our
non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP.
EBITDA, Adjusted EBITDA and Adjusted EBITDA margin
We use EBITDA, Adjusted EBITDA, and Adjusted EBITDA margin in evaluating the performance of our business, and we use each in the preparation of our annual operating budgets and as indicators of business performance and profitability. We believe EBITDA, Adjusted EBITDA, and Adjusted EBITDA margin allow us to readily view operating trends, perform analytical comparisons and identify strategies to improve operating performance.
We define Adjusted
EBITDA as net income adjusted to exclude (1) income tax expense, (2) interest expense, net, (3) depreciation and amortization expense, (4) amortization of customer relationship intangibles, (5) expenses related to the acquisition of RSI Home Products, Inc. ("RSI acquisition") and the subsequent restructuring charges that the Company incurred related to the acquisition, (6) non-recurring restructuring charges, (7) stock-based compensation expense, (8) gain/loss on asset disposals, (9) change in fair value of foreign exchange forward contracts, and (10) pension settlement charges. We believe Adjusted EBITDA, when presented in conjunction with comparable GAAP measures, is useful for investors because management uses Adjusted EBITDA in evaluating the performance of our business.
21
We
define Adjusted EBITDA margin as Adjusted EBITDA as a percentage of net sales.
Adjusted EPS per diluted share
We use Adjusted EPS per diluted share in evaluating the performance of our business and profitability. Management believes that this measure provides useful information to investors by offering additional ways of viewing the Company's results by providing an indication of performance and profitability excluding the impact of unusual and/or non-cash items. We define Adjusted EPS per diluted share as diluted earnings per share excluding the per share impact of (1) expenses related to the RSI acquisition and the subsequent restructuring charges that the
Company incurred related to the RSI acquisition, (2) non-recurring restructuring charges, (3) the amortization of customer relationship intangibles, (4) pension settlement charges, and (5) the tax benefit of RSI acquisition expenses and subsequent restructuring charges, the net gain on debt forgiveness and modification and the amortization of customer relationship intangibles and trademarks. The amortization of intangible assets is driven by the RSI acquisition and will recur in future periods. Management has determined that excluding amortization of intangible assets from our definition of Adjusted EPS per diluted share will better help it evaluate the performance of our business and profitability and we have also received similar feedback from some of our investors.
Reconciliation
of EBITDA, Adjusted EBITDA and Adjusted EBITDA margin
Three Months Ended
Nine Months Ended
January 31,
January 31,
(in thousands)
2023
2022
2023
2022
Net
income (loss) (GAAP)
$
14,728
$
(49,257)
$
63,582
$
(44,246)
Add back:
Income tax
expense (benefit)
4,905
(17,310)
21,275
(15,801)
Interest expense, net
4,303
2,668
12,778
7,201
Depreciation
and amortization expense
11,814
12,507
36,578
38,453
Amortization of customer relationship intangibles
11,416
11,416
34,250
34,250
EBITDA
(Non-GAAP)
$
47,166
$
(39,976)
168,463
19,857
Add back:
Acquisition and restructuring related expenses (1)
20
20
60
60
Non-recurring
restructuring charges (2)
1,310
(127)
1,310
183
Pension settlement, net
293
69,452
48
69,452
Change
in fair value of foreign exchange forward contracts (3)
(324)
(177)
(904)
(7)
Stock-based compensation expense
1,859
1,006
5,249
3,399
Loss
on asset disposal
666
365
879
516
Adjusted EBITDA (Non-GAAP)
$
50,990
$
30,563
175,105
93,460
Net
Sales
$
480,713
$
459,736
$
1,585,105
$
1,355,480
Net income margin (GAAP)
3.1
%
(10.7)
%
4.0
%
(3.3)
%
Adjusted
EBITDA margin (Non-GAAP)
10.6
%
6.6
%
11.0
%
6.9
%
(1) Acquisition and restructuring related expenses are comprised of expenses related to the RSI acquisition and the subsequent restructuring charges that the Company incurred related to the acquisition.
(2) Non-recurring restructuring charges
are comprised of expenses incurred related to the permanent layoffs that occurred during January 2023 and the closure of the manufacturing plant in Humboldt, Tennessee.
(3) In the normal course of business the Company is subject to risk from adverse fluctuations in foreign exchange rates. The Company manages these risks through the use of foreign exchange forward contracts. The changes in the fair value of the forward contracts are recorded in other (income) expense, net in the operating results.
A
reconciliation of Adjusted EBITDA and Adjusted EBITDA margin as projected for fiscal 2023 is not provided because we do not forecast net income (loss) as we cannot, without unreasonable effort, estimate or predict with certainty various components of net income (loss).
22
Adjusted EBITDA. Adjusted EBITDA for the third quarter of fiscal 2023 was $51.0 million or 10.6% of net sales compared to $30.6 million or 6.6% of net sales for the same quarter of the prior fiscal year. Adjusted EBITDA for the first nine months of fiscal 2023 was $175.1 million or 11.0% of net sales compared to $93.5 million or 6.9% of net sales for the same quarter of the prior fiscal year. The increase in Adjusted EBITDA for the third quarter
and first nine months of fiscal 2023 is primarily due to increased net income due to higher net sales driven by pricing actions, mix and improved efficiencies.
Reconciliation of Net Income to Adjusted Net Income
Three
Months Ended
Nine Months Ended
January 31,
January 31,
(in thousands, except share data)
2023
2022
2023
2022
Net
income (loss) (GAAP)
$
14,728
$
(49,257)
$
63,582
$
(44,246)
Add back:
Acquisition
and restructuring related expenses
20
20
60
60
Non-recurring restructuring charges
1,310
(127)
1,310
183
Pension
settlement, net
293
69,452
48
69,452
Amortization of customer relationship intangibles
11,416
11,416
34,250
34,250
Tax
benefit of add backs
(3,341)
(21,586)
(9,202)
(27,753)
Adjusted net income (Non-GAAP)
$
24,426
$
9,918
$
90,048
$
31,946
Weighted
average diluted shares (GAAP)
16,695,714
16,569,881
16,661,234
16,599,369
Add back: potentially anti-dilutive shares (1)
—
40,973
—
47,878
Weighted
average diluted shares (Non-GAAP)
16,695,714
16,610,854
16,661,234
16,647,247
EPS per diluted share (GAAP)
$
0.88
$
(2.97)
$
3.82
$
(2.67)
Adjusted
EPS per diluted share (Non-GAAP)
$
1.46
$
0.60
$
5.40
$
1.92
(1) Potentially dilutive securities for the three- and nine-months ended January 31, 2022 have not been considered in the GAAP calculation of net loss per share as the effect would be anti-dilutive.
Outlook.
Shifting our focus to the remainder of fiscal year 2023, our full year outlook remains unchanged and we expect low-double digit growth rate in net sales versus fiscal year 2022. To achieve this our fourth quarter sales are expected to be mid-single digits decline. The growth rate is highly dependent upon overall industry, economic growth trends, material constraints, labor impacts, interest rates and consumer behaviors. Our EBITDA margin expectation for Fiscal 2023 remains a low double-digit EBITDA percentage.
The Company continues to track several metrics, including but not limited to housing starts, housing completions, 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.
Additional risks and uncertainties that could affect the Company's results of operations and financial condition are discussed elsewhere in this report, including under "Forward-Looking Statements," and elsewhere in "Management's Discussion and Analysis of Financial Condition and Results of Operations," and in our Annual Report on Form 10-K for the fiscal year ended April 30, 2022, including under Item 1A. "Risk Factors," Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Item 7A. "Quantitative and Qualitative Disclosures about Market Risk."
Liquidity and Capital Resources
The
Company's cash and cash equivalents totaled $45.8 million at January 31, 2023, representing a $23.5 million increase from its April 30, 2022 levels primarily due to $110.8 million cash provided by operations in the first nine months of fiscal 2023 compared with cash used by operations of $13.1 million in the same period of the prior year, $17.1 million in payments to acquire property, plant, and equipment, and $67.3 million of net debt repayments. The increase in the Company's cash from operating activities was driven primarily by an increase in net income and cash inflows from accrued compensation and related expenses, customer receivables, inventories, accrued marketing expenses and other accrued expenses, partially offset by cash
23
outflows
from accounts payable and prepaid expenses and other assets. At January 31, 2023, total long-term debt (including current maturities) was $443.2 million. The Company's ratio of long-term debt to total capital was 34.3% at January 31, 2023, compared with 39.6% at April 30, 2022.
The Company's main source of liquidity is its cash and cash equivalents on hand and generally cash generated from its operating activities. The Company can also borrow up to $500 million under the Revolving Facility.
Approximately $277.6 million was available under this facility as of January 31, 2023.
On April 22, 2021, the Company amended and restated the Prior Credit Agreement and on January 17, 2023the Company entered into an amendment of such agreement to transition the applicable interest rate from LIBOR to SOFR, effective January 31, 2023. The amended and restated credit agreement (the "A&R Credit Agreement") provides for a $500 million revolving loan facility with a $50 million sub-facility for the issuance of letters
of credit (the "Revolving Facility") and a $250 million term loan facility (the "Term Loan Facility"). Also on April 22, 2021, the Company borrowed the entire $250 million under the Term Loan Facility and approximately $264 million under the Revolving Facility to fund, in part, the repayment in full of the amounts then outstanding under the Prior Credit Agreement and the complete redemption of its 4.875% Senior Notes due 2026. The Company is required to repay the Term Loan Facility in specified quarterly installments. The Revolving Facility and Term Loan Facility mature on April 22, 2026.
The A&R Credit
Agreement includes certain financial covenants that require the Company to maintain (i) a "Consolidated Interest Coverage Ratio" of no less than 2.00 to 1.00 and (ii) a "Total Net Leverage Ratio" of no greater than 4.00 to 1.00, subject, in each case, to certain limited exceptions.
The A&R Credit Agreement includes certain additional covenants, including negative covenants that restrict the ability of the Company and certain of its subsidiaries to incur additional indebtedness, create additional liens on its assets, make certain investments, dispose of its assets or engage in a merger or other similar transaction
or engage in transactions with affiliates, subject, in each case, to the various exceptions and conditions described in the A&R Credit Agreement. The negative covenants further restrict the ability of the Company and certain of its subsidiaries to make certain restricted payments, including, in the case of the Company, the payment of dividends and the repurchase of common stock, in certain limited circumstances. We were in compliance with all the covenants under the A&R Credit Agreement as of January 31, 2023.
As of January 31,
2023, $225 million was outstanding on the Term Loan Facility and $210 million was outstanding under the Revolving Facility. As of January 31, 2023, the applicable margin with respect to base rate loans and SOFR loans was 0.25% and 1.25%, respectively, and the commitment fee was 0.13%.
See Note K — Loans Payable and Long-Term Debt for further information around our indebtedness and compliance with covenants.
The Company's investing activities primarily consist of investment in property, plant and equipment and promotional displays. Net cash used for investing activities was $19.3 million in the first nine months of fiscal
2023, compared with $35.8 million in the comparable period of fiscal 2022.
During the first nine months of fiscal 2023, net cash used by financing activities was $68.1 million, compared with $41.4 million in the comparable period of the prior fiscal year. The increase in cash used during the first nine months of fiscal 2023 was primarily driven by the net debt repayments of $67.3 million during the first nine months of fiscal 2023 compared to $15.3 million in the same period of the prior fiscal year and the absence of $25.0 million of common stock repurchases that occurred during the prior year.
On May 25, 2021, the Company's Board of Directors (the "Board") authorized
a stock repurchase program of up to $100 million of the Company's common shares. Repurchases may be made from time to time in the open market, or through privately negotiated transactions or otherwise, in compliance with applicable laws, rules and regulations, at prices and on terms the Company deems appropriate and subject to the Company's cash requirements for other purposes, compliance with the covenants under the A&R Credit Agreement, and other factors management deems relevant. The authorization does not obligate the Company to acquire a specific number of shares during any period, and the authorization may be modified, suspended
or discontinued at any time at the discretion of the Board. Management generally expects to fund any share repurchases using available cash and cash generated from operations. Repurchased shares will become authorized but unissued common shares. The Company did not repurchase any of its common shares during the third quarter or first nine months of fiscal 2023. As of January 31, 2023, $75.0 million of funds remained available from the amounts authorized by the Board to repurchase the Company's common stock.
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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 the remainder of fiscal 2023.
Seasonal and Inflationary Factors
Our business has been subject to seasonal influences, with higher sales typically realized in our first and fourth fiscal quarters. General economic forces and changes in our customer mix have reduced seasonal fluctuations in revenue over the past few years. The costs of the Company's products are subject to inflationary pressures
and commodity price fluctuations. The Company has generally been able, over time, to recover the effects of inflation and commodity price fluctuations through sales price increases.
Critical Accounting Policies
The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions. There have been no significant changes to the Company's critical accounting policies as disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 2022.
Item 3. 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 although there may be a lag in the recovery.
The A&R Credit Agreement includes a variable interest rate component. As a result, we are subject to interest rate risk with respect to such floating-rate debt. A 100 basis point increase in the variable interest rate component of our borrowings as of January 31, 2023 would increase our annual interest expense by approximately $2.4 million. See Note K — Loans Payable and Long-Term Debtfor further discussion.
In
May 2021, we entered into interest rate swaps to hedge approximately $200 million of our variable interest rate debt. See Note L — Derivative Financial Instruments for further discussion.
The Company enters into foreign exchange forward contracts principally to offset currency fluctuations in transactions denominated in certain foreign currencies, thereby limiting our exposure to risk that would otherwise result from changes in exchange rates. The periods of the foreign exchange forward contracts correspond to the periods of the transactions denominated in foreign currencies.
The
Company does not currently use commodity or similar financial instruments to manage its commodity price risks.
Item 4. Controls and Procedures
Senior management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures as of January 31, 2023. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures were not effective as of January 31, 2023 due to the material weaknesses in internal control over financial reporting involving ineffective information technology change management and risk assessment, control activities and monitoring activities related to new system implementation that were disclosed in Part II, Item 9A of our Annual Report on Form 10-K for the fiscal year ended April 30, 2022 (our "2022 Annual Report").
During the quarter ended January 31, 2023, we completed our remediation plans described in Part II, Item 9A of our 2022 Annual Report with respect to the material weakness concerning information technology change management, including the execution of new and enhanced processes to ensure
timeliness of review and approval for emergency and scheduler changes, the removal of developer access to database monitoring logs, and an update of the development deployment process to require additional approvals as appropriate. The enhanced controls are currently being tested.
During the quarter ended January 31, 2023, we fully implemented the necessary monitoring activities to mitigate the risks associated with privileged user access. These controls are currently being tested to ensure their effectiveness. We also continue to evaluate available remediation options for an automated solution to the material weakness concerning control and monitoring
25
activities
related to new system implementation. We will continue to provide additional details concerning progress on our remediation plan for this material weakness in future periodic reports.
During the remainder of fiscal 2023, we are committed to maintaining a strong internal control environment and implementing measures designed to help ensure that control deficiencies contributing to the material weaknesses are remediated. Management will test and evaluate the implementation of the new processes established and the related internal controls to ascertain whether they are designed and operating effectively to provide reasonable assurance that they will prevent or detect a material error in the financial statements. Notwithstanding the identified material weaknesses, management believes the condensed consolidated financial statements included in this Form 10-Q fairly present, in all material
respects, our financial condition, results of operations and cash flows at January 31, 2023 and for the periods presented in accordance with U.S. GAAP.
Except as described above, there has been no change in the Company's internal control over financial reporting that occurred during the quarter ended January 31, 2023 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
PART
II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in various suits and claims in the normal course of business all of which constitute ordinary, routine litigation incidental to the Company's business. The Company is not party to any material litigation that does not constitute ordinary, routine litigation incidental to its business. See Note Q — Other Information for further
discussion of the antidumping and countervailing duties investigation.
Item 1A. Risk Factors
Risk factors that may affect the Company's business, results of operations and financial condition are described in Part I, Item 1A, "Risk Factors" of the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 2022 and there have been no material changes from the risk factors disclosed. Additional risks 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" and "Outlook."
Amendment Agreement, dated as of January 17, 2023, to the Amended and Restated Credit Agreement dated as of April 22, 2021, among American Woodmark Corporation, as Borrower, the lenders from time to time party thereto
and Wells Fargo Bank, National Association, as Administrative Agent. (Filed Herewith)
Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed Herewith).
101
Interactive Data File for the
Registrant's Quarterly Report on Form 10-Q for the quarter ended January 31, 2023 formatted in Inline XBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Income, (iii) Condensed Consolidated Statements of Comprehensive Income, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements (Filed Herewith).
104
Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101).
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SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
