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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.
Change in pension benefits, net of deferred taxes of $111 and $107, and $338 and $322 for the three and nine months ended January 31, 2021 and 2020, respectively
i328
i315
i984
i946
Total
Comprehensive Income
$
i17,523
$
i13,119
$
i56,920
$
i62,794
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
$
i1,130
$
i1,953
Cash
paid during the period for:
Interest
$
i11,757
$
i17,322
Income
taxes
$
i31,830
$
i35,870
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, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending April 30, 2021. 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, 2020 filed with the U.S. Securities and Exchange Commission (“SEC”).
COVID-19: The COVID-19 pandemic impacted our business operations and financial results beginning in the fourth quarter of fiscal 2020 and continues to impact us in fiscal 2021. Although the financial impact on our overall fiscal 2020 results was limited due to the timing of the outbreak, we saw more material impacts on our results for the first quarter of fiscal 2021. Although the impacts from the COVID-19 pandemic lessened in the second and third
quarter of fiscal 2021, we continue to face numerous uncertainties in estimating the direct and indirect effects of COVID-19 on our present and future business operations, financial condition, results of operations and liquidity. Due to several rapidly changing variables related to the COVID-19 pandemic, we cannot reasonably estimate future economic trends and the timing of when stability will return.
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 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 iiiino///
impairment charges related to goodwill for the three- and nine-month periods ended January 31, 2021 and 2020.
Intangible assets consist of customer relationship intangibles and trademarks. The Company amortizes the cost of intangible assets over their estimated useful lives, which range from i3 to i6
years, unless such lives are deemed indefinite. There were iiiino///
impairment charges related to intangible assets for the three- and nine-month periods ended January 31, 2021 and 2020.
Foreign Exchange Forward Contracts: 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
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, net in the condensed consolidated statements of income.
At January 31, 2021, the Company held forward contracts
maturing from February 2021 to April 2021 to purchase i128.8 million Mexican pesos at exchange rates ranging from i22.12 to i23.42
Mexican pesos to one U.S. dollar. An asset of $i0.6 million is recorded in prepaid expenses and other on the condensed consolidated balance sheet.
Note B--iNew
Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. ASU 2020-04 provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective
for all entities as of March 12, 2020 through December 31, 2022 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 has identified loans
10
and other financial instruments that are directly or indirectly influenced by LIBOR and does not expect the adoption of ASU 2020-04 to have a material impact on its consolidated financial statements.
In December 2019, the FASB issued ASU
No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes," which simplifies the accounting for income taxes by removing certain exceptions for recognizing investments, performing intraperiod tax allocations and calculating income taxes in interim periods. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12 is effective for the Company beginning May 1, 2021. Early adoption is permitted. The Company is currently reviewing the provisions of this new pronouncement and the impact, if any, the adoption of this guidance may have on financial position and results of operations.
In
June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," which modifies the methodology for recognizing loss impairments on certain types of financial instruments, including receivables. The new methodology requires an entity to estimate the credit losses expected over the life of an exposure. ASU 2016-13 was effective for the Company beginning May 1, 2020. The adoption did not have a material impact on our 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)
2021
2020
2021
2020
Numerator used in basic and diluted net earnings
per
common share:
Net income
$
i17,195
$
i12,804
$
i55,936
$
i61,848
Denominator:
Denominator
for basic net earnings per common
share - weighted-average shares
i16,995
i16,922
i16,975
i16,902
Effect
of dilutive securities:
Stock options and restricted stock units
i52
i53
i62
i45
Denominator
for diluted net earnings per common
share - weighted-average shares and assumed
conversions
i17,047
i16,975
i17,037
i16,947
Net
earnings per share
Basic
$
i1.01
$
i0.76
$
i3.30
$
i3.66
Diluted
$
i1.01
$
i0.75
$
i3.28
$
i3.65
/
There
were iiiino///
potentially dilutive securities for the three- and nine-month periods ended January 31, 2021 and 2020, which were excluded from the calculation of net earnings per diluted share.
Note D--iStock-Based Compensation
The
Company has various stock-based compensation plans. During the nine-months ended January 31, 2021, 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 employee performance-based RSUs totaled i124,374 units
and the employee and non-employee director service-based RSUs totaled i75,206 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, 2021 and 2020, stock-based compensation expense was allocated as follows:
Three
Months Ended
January 31,
Nine Months Ended
January 31,
(in thousands)
2021
2020
2021
2020
Cost of sales and distribution
$
i426
$
i224
$
i1,134
$
i716
Selling
and marketing expenses
i365
i240
i698
i713
General
and administrative expenses
i525
i583
i1,711
i1,693
Stock-based
compensation expense
$
i1,316
$
i1,047
$
i3,543
$
i3,122
/
During
the nine months ended January 31, 2021, the Company also approved grants of i11,456 cash-settled performance-based restricted stock tracking units ("RSTUs") and i6,229 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. Since the RSTUs will be settled in cash, the grant date fair value of these awards is recorded as a liability until the date of payment. 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 Company recognized expense of $i0.2 million
and $i0.2 million for the three-month periods ended January 31, 2021 and 2020, respectively, and $i0.6
million and $i0.4 million for the nine-month periods ended January 31, 2021 and 2020, respectively. A liability for payment of the RSTUs is included in the condensed consolidated balance sheets in the amount of $i0.8
million and $i0.4 million as of January 31, 2021 and April 30, 2020, respectively.
Note E--iCustomer
Receivables
i
The components of customer receivables were:
January
31,
April 30,
(in thousands)
2021
2020
Gross customer receivables
$
i156,732
$
i112,528
Less:
Allowance
for doubtful accounts
(i371)
(i472)
Allowance
for returns and discounts
(i8,527)
(i5,712)
Net
customer receivables
$
i147,834
$
i106,344
/
12
Note
F--iInventories
i
The components of inventories were:
January
31,
April 30,
(in thousands)
2021
2020
Raw materials
$
i60,321
$
i51,460
Work-in-process
i51,967
i42,381
Finished
goods
i47,343
i32,572
Total
FIFO inventories
i159,631
i126,413
Reserve
to adjust inventories to LIFO value
(i15,039)
(i14,577)
Total
inventories
$
i144,592
$
i111,836
/
Of
the total inventory of $i144.6 million at January 31, 2021, $i88.3 million is carried under the FIFO method of accounting and $i56.3
million is carried under the LIFO method. Of the total inventory of $i111.8 million at April 30, 2020, $i66.0 million is carried under the FIFO method and $i45.8
million is carried under the LIFO method.
Note G--iProperty, Plant and Equipment
ii
The
components of property, plant and equipment were:
January 31,
April 30,
(in thousands)
2021
2020
Land
$
i4,431
$
i4,431
Buildings
and improvements
i115,515
i120,819
Buildings
and improvements - finance leases
i11,636
i11,636
Machinery
and equipment
i309,152
i312,806
Machinery
and equipment - finance leases
i31,440
i30,911
Construction
in progress
i19,608
i8,164
i491,782
i488,767
Less
accumulated amortization and depreciation
(i290,897)
(i284,943)
Total
$
i200,885
$
i203,824
//
Amortization
and depreciation expense on property, plant and equipment amounted to $i10.3 million and $i9.3 million for the three months ended January 31,
2021 and 2020, respectively, and $i32.5 million and $i27.6 million for the nine months
ended January 31, 2021 and 2020, respectively. The nine months ended January 31, 2021 includes accelerated depreciation expense of $i1.3 million related to the closure of the plant located in Humboldt, Tennessee. There was no accelerated depreciation for the three months ended January 31, 2021. Accumulated amortization on finance leases included in the above
table amounted to $i33.2 million and $i32.3
million as of January 31, 2021 and April 30, 2020, respectively.
13
Note H--iIntangibles
i
The
components of customer relationship intangibles were:
January 31,
April 30,
(in thousands)
2021
2020
Customer relationship intangibles
$
i274,000
$
i274,000
Less
accumulated amortization
(i140,806)
(i106,556)
Total
$
i133,194
$
i167,444
The
components of trademarks were:
January 31,
April 30,
(in thousands)
2021
2020
Trademarks
$
i10,000
$
i10,000
Less
accumulated amortization
(i10,000)
(i7,778)
Total
$
i—
$
i2,222
/
Customer
relationship intangibles and trademarks are amortized over the estimated useful lives on a straight-line basis over six and ithree years, respectively. Amortization expense for the three month periods ended January 31, 2021 and 2020 was $i12.0 million
and $i12.3 million, respectively, and $i36.5 million and $i36.8 million,
respectively, for each of the nine month periods ended January 31, 2021 and 2020.
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.
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:
On November 16, 2020the Company filed an application with the Internal Revenue Service to terminate the American Woodmark Corporation Employee Pension Plan (the “Plan”) with a proposed effective date of December 31, 2020 (the “Plan Termination Date”), in a standard termination and the Company expects to incur approximately $i1.6 million
to terminate the Plan. In connection with the Plan termination and in addition to the Plan termination costs, the Company may be required to
14
make an additional funding contribution to the Plan in order to ensure the Plan is fully funded on a termination basis as of the Benefit Distribution Date, with the amount of such contribution still to be determined. The Benefit Distribution Date will be determined once the Company receives approval from certain regulatory agencies. The additional funding contribution is expected to be funded from cash on hand and the amount will vary depending on the lump sum
distribution take rate and the interest rate on the Benefit Distribution Date.
i
Net periodic pension benefit cost consisted of the following for the three- and nine-month periods ended January 31, 2021 and 2020:
Three
Months Ended
Nine Months Ended
January 31,
January 31,
(in thousands)
2021
2020
2021
2020
Interest cost
$
i1,165
$
i1,493
$
i3,496
$
i4,480
Expected
return on plan assets
(i2,107)
(i2,082)
(i6,322)
(i6,245)
Recognized
net actuarial loss
i441
i423
i1,321
i1,269
Net
periodic pension benefit
$
(i501)
$
(i166)
$
(i1,505)
$
(i496)
/
The
Company did inot contribute to its pension plan in the first nine months of fiscal 2021 and does not expect to contribute any funds during the remainder of fiscal 2021. The Company made contributions of $i0.5
million to its pension plans in fiscal 2020.
Note K--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 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; 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 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 and liabilities that are recorded in the Company’s consolidated financial statements as of January 31, 2021 and April 30, 2020 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 L--iLoans Payable and Long-Term Debt
On December 29, 2017, the Company entered into a credit
agreement (as subsequently amended, the "Credit Agreement") with a syndicate of lenders and Wells Fargo Bank, National Association, as administrative agent, providing for a $i100 million, i5-year revolving
loan facility with a $i25 million sub-facility for the issuance of letters of credit (the “Revolving Facility”), a $i250 million, i5-year
initial term loan facility (the "Initial Term Loan") and a $i250 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"). The Company borrowed the entire $i250
million available under each of the Initial Term Loan and the Delayed Draw Term Loan on December 29, 2017 and February 12, 2018, respectively, in connection with its acquisition of RSI Home Products, Inc. (“RSI”) and subsequent refinancing of RSI’s debt. The Company is required to make specified quarterly installments on both the Initial Term Loan and the Delayed Draw Loan. As of January 31, 2021, $i82 million
was outstanding on each of the Initial Term Loan and the Delayed Draw Loan for a total of $i164 million. As of April 30, 2020, $i122
million was outstanding on each of the Initial Term Loan and the Delayed Draw Loan for a total of $i244 million. The outstanding balance approximates fair value as the Initial Term Loan and Delayed Draw Term Loan have a floating interest rate. There were ino
amounts outstanding on the Revolving Facility as of January 31, 2021 or April 30, 2020. The Credit Facilities mature on December 29, 2022.
Amounts outstanding under the Credit Facilities bear interest based on a fluctuating rate measured by reference to either, at the Company’s option, a base rate plus an applicable margin or LIBOR plus an applicable margin, with the applicable margin being determined by reference to the Company’s then-current “Total Funded Debt to EBITDA Ratio.”The
Company also incurs a quarterly commitment fee on the average daily unused portion of the Revolving Facility during the applicable quarter at a rate per annum also determined by reference to the Company’s then-current “Total Funded Debt to EBITDA Ratio.” In addition, a letter of credit fee will accrue on the face amount of any outstanding letters of credit at a per annum rate equal to the applicable margin on LIBOR loans, payable quarterly in arrears. As of January 31, 2021, the applicable margin with respect to base rate loans and LIBOR loans was i0.50%
and i1.50%, respectively, and the commitment fee was i0.175%. As of December 31, 2021, the
Company will transition to the Secured Overnight Financial Rate ("SOFR") as required by the Credit Facilities. The Company expects the transition to SOFR to be materially similar to LIBOR.
The Credit Agreement includes certain financial covenants. On September 16, 2020 the “Total Funded Debt to EBITDA Ratio” was amended to a “Total Net Funded Debt to EBITDA Ratio” to include Unrestricted Cash in the aggregate amount not to exceed $100 million. The maximum “Total Net Funded Debt to EBITDA Ratio” can be no more than i3.25
to 1.00 (with an increase to i3.75 to 1.00 for a certain period upon the consummation of a “Qualified Acquisition”). The Company is also required to maintain a “Fixed Charge Coverage Ratio” of no less than i1.25
to 1.00.
The 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, dispose of its assets or engage in a merger or another similar transaction or engage in transactions with affiliates, subject, in each case, to the
16
various exceptions and conditions described in the Credit Agreement. The negative covenants also restrict the
Company’s ability to make certain investments and to make certain restricted payments, including the payment of dividends and repurchase of common stock, in certain limited circumstances. The Company is, however, permitted to make unlimited investments so long as the "Total Net Funded Debt to EBITDA Ratio" is less than or equal to i3.00 to 1.00
after giving effect to any such investment and no default or event of default has occurred and is continuing or would result from any such investment. The Company is also permitted to make (i) unlimited restricted payments so long as the “Total Net Funded Debt to EBITDA Ratio” would be less than or equal to i2.75 to 1.00 after giving effect to any
such payment and no default or event of default has occurred and is continuing or would result from any such payment and (ii) up to an aggregate of $i50 million in restricted payments not otherwise permitted under the Credit Agreement so long as no default or event of default has occurred and is continuing or would result from any such payment.
As of January 31,
2021, the Company's Total Net Funded Debt to EBITDA Ratio was i1.91 to 1.00 and the Fixed Charge Coverage Ratio was i6.50
to 1.00. As of January 31, 2021, the Company was in compliance with the covenants included in the Credit Agreement.
The Company’s obligations under the Credit Agreement are guaranteed by the Company’s subsidiaries and the obligations of the Company and its subsidiaries are secured by a pledge of substantially all of their
respective personal property.
On February 12, 2018, the Company issued $i350 million in aggregate principal amount of i4.875% Senior
Notes due 2026 (the “Senior Notes”). The Senior Notes mature on March 15, 2026 and interest on the Senior Notes is payable semi-annually in arrears on March 15 and September 15 of each year. The Senior Notes are fully and unconditionally guaranteed by each of the Company’s current and future wholly-owned domestic subsidiaries that guarantee the Company’s obligations under the Credit Agreement. The indenture governing the Senior Notes restricts the ability of the Company and the
Company’s “restricted subsidiaries” to, as applicable, (i) incur additional indebtedness or issue certain preferred shares, (ii) create liens, (iii) pay dividends, redeem or repurchase stock or make other distributions or restricted payments, (iv) make certain investments, (v) create restrictions on the ability of the “restricted subsidiaries” to pay dividends to the Company or make other intercompany transfers, (vi) transfer or sell assets, (vii) merge or consolidate with a third party and (viii) enter into certain transactions with affiliates of the Company, subject, in each case, to certain qualifications
and exceptions as described in the indenture. As of January 31, 2021, the Company and its restricted subsidiaries were in compliance with all covenants under the indenture governing the Senior Notes.
At January 31, 2021, the book value of the Senior Notes was $i350
million and the fair value was $i360.5 million, based on Level 1 inputs.
Note M--iIncome
Taxes
The effective income tax rate for the three- and nine-month periods ended January 31, 2021 was i25.6% and i25.9%,
respectively, compared with i25.9% and i26.0% in the comparable periods in the prior fiscal year. The effective rate was higher than the iiii21.0///%
U.S. statutory rate for all periods presented primarily due to state income taxes.
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, 2021 and 2020:
Three
Months Ended
Nine Months Ended
January 31,
January 31,
(in thousands)
2021
2020
2021
2020
Home center retailers
$
i216,819
$
i191,544
$
i613,932
$
i579,443
Builders
i161,113
i155,169
i496,503
i512,513
Independent
dealers and distributors
i54,022
i49,042
i160,189
i159,180
Net
Sales
$
i431,954
$
i395,755
$
i1,270,624
$
i1,251,136
17
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 bad debt 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.
At January 31, 2021, the Company's two largest customers, Customers A and B, represented i32.9%
and i21.1% of the Company's gross customer receivables, respectively. At January 31, 2020, Customers A and B represented i30.3%
and i24.5% 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, 2021 and 2020:
iOperating
Leases - ROU assets related to operating leases are presented as “Operating lease right-of-use assets” on the unaudited condensed consolidated balance sheets. Lease liabilities related to operating leases with lease terms greater than twelve months are presented in “Short-term lease liability - operating” and “Long-term lease liability - operating” on the unaudited condensed consolidated balance sheets.
Operating lease ROU assets and lease liabilities are recognized at the commencement date based on the present value of the future lease payments over the lease term. The discount rate used to determine the present value of the lease payments is the rate implicit in the lease unless that rate cannot be readily determined, in which case, the Company utilizes
its incremental borrowing rate in determining the present value of the future lease payments. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Operating lease ROU assets may also include any cumulative prepaid or accrued rent when the lease payments are uneven throughout the lease term. The ROU assets and lease liabilities may also include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The ROU asset includes any lease payments made and lease incentives received prior to the commencement date. The
Company has lease arrangements with lease and non-lease components which are accounted for separately. Non-lease components of the lease payments are expensed as incurred and are not included in determining the present value.
Finance Leases - ROU assets related to finance leases are presented in "Property, plant and equipment, net” on the unaudited condensed consolidated balance sheet. Lease liabilities related to finance leases are presented in “Current maturities of long-term debt” and “Long-term debt, less current maturities” on the unaudited condensed consolidated balance sheets.
Finance lease ROU assets and lease liabilities are recognized at the commencement date based on the present value of the future lease payments over the lease term. The discount
rate used to determine the present value of the lease payments is the rate implicit in the lease unless that rate cannot be readily determined, in which case, the Company utilizes its incremental borrowing rate in determining the present value of the future lease payments. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.
18
i
The
components of lease costs were as follows:
Nine Months Ended
January 31,
(in thousands)
2021
2020
Finance
lease cost:
Reduction in the carrying value of right-of-use assets
$
i403
$
i1,922
Interest
on lease liabilities
i50
i157
Operating
lease cost
i20,252
i19,462
Additional
information related to leases was as follows:
Nine Months Ended
January 31,
(in thousands)
2021
2020
Cash
paid for amounts included in the measurement of lease liabilities:
Operating cash flows for finance leases
$
i50
$
i157
Operating
cash flows for operating leases
i18,161
i16,731
Financing
cash flows for financing leases
i384
i1,883
Right-of-use
assets obtained in exchange for new finance lease liabilities
i1,531
i1,399
Right-of-use
assets obtained in exchange for new operating lease liabilities
i6,886
i29,622
Weighted
average remaining lease term (years)
Weighted average remaining lease term - finance leases
i3.06
i3.44
Weighted
average remaining lease term - operating leases
i6.89
i6.38
Weighted
average discount rate
Weighted average discount rate - finance leases
i3.00
%
i3.20
%
Weighted
average discount rate - operating leases
i3.29
%
i4.26
%
/
ii
The
following is a reconciliation of future undiscounted cash flows to the operating and finance lease liabilities, and the related ROU assets, presented on the unaudited condensed consolidated balance sheet as of January 31, 2021:
In the fourth quarter of fiscal 2020 and first quarter of fiscal 2021, the Company implemented nationwide reductions in force, which were substantially completed in the fourth quarter of fiscal 2020 and first quarter of fiscal 2021, respectively. During the third quarter and first nine months of fiscal 2021, the
Company recognized pre-tax restructuring charges, net of $(i0.1) million and $i1.5 million, respectively, related to these reductions in force, which were primarily severance and separation costs.
During
June 2020, the Company's Board of Directors approved the closure and eventual disposal of its manufacturing plant located in Humboldt, Tennessee. Operations ceased at the Humboldt plant in July 2020. During the third quarter of fiscal 2021, the Company sold the Humboldt plant and recognized a gain of $i2.3 million on the sale. During the third quarter and first nine months of fiscal 2021, the
Company recognized pre-tax restructuring charges, net of $(i0.7) million and $i3.9 million, respectively, related to the closure of the plant. Included in the $i3.9 million
of restructuring charges for the first nine months of fiscal 2021 were $i0.9 million of severance and separation costs and $i3.0 million for equipment, inventory and facilities-related expenses.
i
A
reserve for restructuring charges is included in accrued compensation and related expenses in the condensed consolidated balance sheets as of January 31, 2021 which relates to employee termination costs accrued but not yet paid as follows:
January 31,
(in thousands)
2021
Restructuring reserve balance at May 1
$
i189
Expense
i1,746
Payments
and adjustments
(i1,767)
Restructuring reserve balance at January 31
$
i168
/
Note
R--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 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.
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, 2021.
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, 2020.
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 addition, the Company participates in an industry that is subject to rapidly changing conditions and there are
20
numerous
factors that could cause the Company to experience a decline in sales and/or earnings or deterioration in financial condition. Factors that could cause actual results to differ materially from those in forward-looking statements made in this report include but are not limited to:
•the impact of COVID-19 on our business, the global and U.S. economy and our customers and suppliers;
•the loss of or a reduction in business from one or more of our key customers;
•negative developments in the macro-economic factors that impact our performance such as the U.S. housing market, general economy, unemployment rates and consumer sentiment and the impact of
such developments on our and our customers’ business, operations and access to financing;
•competition from other manufacturers and the impact of such competition on pricing and promotional levels;
•an inability to develop new products or respond to changing consumer preferences and purchasing practices;
•a failure to effectively manage manufacturing operations, alignment and capacity or an inability to maintain the quality of our products;
•the impairment of goodwill, other intangible assets or our long-lived assets;
•an inability to obtain raw materials in a timely manner or fluctuations in raw material and energy costs;
•information
systems interruptions or intrusions or the unauthorized release of confidential information concerning customers, employees or other third parties;
•the cost of compliance with, or liabilities related to, environmental or other governmental regulations or changes in governmental or industry regulatory standards, especially with respect to health and safety and the environment;
•a failure to attract and retain certain members of management or other key hourly and salary employees or other negative labor developments, including increases in the cost of labor;
•risks associated with the implementation of our growth strategy;
•risks related to sourcing and selling products internationally and doing business
globally, including the imposition of or increases in tariffs or duties on those products;
•unexpected costs resulting from a failure to maintain acceptable quality standards;
•changes in tax laws or the interpretations of existing tax laws;
•the occurrence of significant natural disasters, including earthquakes, fires, floods, and hurricanes or tropical storms;
•the unavailability of adequate capital for our business to grow and compete;
•increased buying power of large customers and the impact on our ability to maintain or raise prices;
•our ability to successfully
integrate RSI into our business and operations and the risk that the anticipated economic benefits, costs savings and other synergies in connection with our acquisition of RSI are not fully realized or take longer to realize than expected; and
•limitations on operating our business as a result of covenant restrictions under our indebtedness, and our ability to pay amounts due under the Credit Facilities, the Senior Notes 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, 2020, 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 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,
2021, the Company operated seventeen manufacturing facilities in the United States and Mexico and eight primary service centers and one distribution center located throughout the United States.
The
pandemic caused by COVID-19 was first reported in Wuhan, China in December 2019 and has since spread throughout the world. Financial markets were volatile in 2020 and into 2021, primarily due to uncertainty with respect to the severity and duration of the pandemic.
As the spread of the virus began to be identified within the United States in March 2020, we acted by imposing travel restrictions, transitioning large meetings from in-person to virtual formats, assessing our information technology infrastructure to ensure readiness for a remote workforce, staying connected to customers, suppliers and business partners, planning for return to the workplace and making operational adjustments as needed to ensure continued safety of our workforce.
The pandemic has resulted in federal, state and local governments
around the world implementing stringent measures to help control the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions or bans, business curtailments, school closures, and other protective measures, some of which have been recently reinstated.
All of our U.S. manufacturing facilities currently qualify as essential operations (or the equivalent) under applicable federal and state orders. Operations in our component plants in Mexico were temporarily suspended for a period of time in April 2020, however, all of our manufacturing facilities and service centers are currently open and operating. We are enforcing social distancing and enhanced health, safety and sanitization measures in accordance with guidelines from the Center for Disease Control. We have also implemented necessary procedures and support to enable a
significant portion of our office personnel to work remotely.
The COVID-19 pandemic impacted our business operations and financial results beginning in the fourth quarter of fiscal 2020 and continues to impact us in fiscal 2021. Although the financial impact on our overall fiscal 2020 results was limited due to the timing of the outbreak, we saw more material impacts on our results for the first quarter of fiscal 2021. Although the financial impacts from the pandemic lessened during the second and third quarter of fiscal 2021, we continue to face numerous uncertainties in estimating the direct and indirect effects of COVID-19 on our present and future business operations, financial condition, results of operations, and liquidity. Due to several rapidly changing variables related to the COVID-19 pandemic including recent rises in case counts, we cannot reasonably estimate future economic
trends and the timing of when stability will return. Refer to Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended April 30, 2020 for a disclosure of risk factors related to COVID-19.
Financial Overview
The Company’s remodeling-based business was impacted by the following trends during the third quarter of fiscal 2021:
•The median price per existing home sold rose during the fourth calendar quarter of 2020 compared to the same period one year ago by 16.0% according to data provided by the National Association of Realtors, and
existing home sales increased 11.6% during the fourth calendar quarter of 2020 compared to the same period in the prior year;
•The unemployment rate increased to 6.3% as of January 2021 compared to 3.6% as of January 2020 according to data provided by the U.S. Department of Labor; however, the unemployment rate decreased from 14.7% in April 2020;
•Mortgage interest rates decreased with a thirty-year fixed mortgage rate of approximately 2.73% in January 2021, a decrease of approximately 89 basis points compared to the same period in the prior year, according to Freddie Mac; and
•Consumer sentiment as tracked by Thomson Reuters/University of Michigan decreased from 99.8 in January 2020 to 79.0 in January 2021.
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, housing affordability and sales reported by the Kitchen Cabinet Manufacturers Association (“KCMA”), a trade organization that issues the aggregate sales that have been reported by its members including the largest cabinet manufacturers in the United States. Based on the totality of factors listed above, the Company believes that the cabinet remodeling market increased mid to upper-single digits during the third quarter of fiscal 2021.
The
Company’s total net sales increased 9.1% during the third quarter and 1.6% during the first nine months of fiscal 2021 compared to the same prior-year period.
The Company’s remodeling sales, which consist of our independent dealer and distributor channel sales and home center retail sales, increased 12.6% during the third quarter and 4.8% during the first nine months of fiscal 2021 compared to the same prior-
22
year period. Our independent dealer and distributor channel increased by 10.2% during the third quarter and 0.6% during the first nine months of fiscal 2021 compared to the comparable prior-year
period. Our home center channel increased by 13.2% during the third quarter and 6.0% during the first nine months of fiscal 2021 compared to the comparable prior-year period.
New construction sales increased 3.8% in the third quarter and decreased 3.11% in the first nine months of fiscal 2021, compared to the same period of fiscal 2020. 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 increased 26.2% during the third quarter of fiscal 2021 over the comparable prior year period. The Company believes we are seeing
a temporary shift to extend the lag to a 90 to 120 day lag and that we are tracking to market demand on a unit basis within made-to-order framed builder direct, which was offset by price, mix and declines in our frameless business.
In the fourth quarter of fiscal 2020 and first quarter of fiscal 2021, the Company implemented nationwide reductions in force, which were substantially completed in the fourth quarter of fiscal 2020 and first quarter of fiscal 2021, respectively. During June 2020, the Company's Board of Directors approved the closure and eventual disposal of its manufacturing plant located in Humboldt, Tennessee. The Company expects
to recognize substantially all of the costs related to the closure of the Humboldt facility during fiscal 2021. The Company recorded restructuring charges, net related to these two actions for the three- and nine-months ended January 31, 2021 of $(0.8) million and $5.4 million, respectively. During the third quarter of fiscal 2021, the Company sold the Humboldt plant and recognized a gain of $2.3 million on the sale.
The Company earned net income of $17.2 million for the third quarter of fiscal 2021, compared with $12.8 million in the third quarter of its prior fiscal year, and earned
net income of $55.9 million for the first nine months of fiscal 2021, compared with $61.8 million in the same period of the prior year.
Results of Operations
Three
Months Ended
Nine Months Ended
January 31,
January 31,
(in thousands)
2021
2020
Percent Change
2021
2020
Percent Change
Net
sales
$
431,954
$
395,755
9.1
%
$
1,270,624
$
1,251,136
1.6
%
Gross profit
75,820
72,348
4.8
245,469
253,917
(3.3)
Selling
and marketing expenses
21,862
21,401
2.2
63,368
62,539
1.3
General and administrative expenses
26,202
26,914
(2.6)
86,414
86,246
0.2
Net
Sales. Net sales were $432.0 million for the third quarter of fiscal 2021, an increase of 9.1% compared with the third quarter of fiscal 2020. For the first nine months of fiscal 2021, net sales were $1,270.6 million, reflecting a 1.6% increase compared to the same period of fiscal 2020. The Company experienced growth across all channels during the third quarter of fiscal 2021, with low double digit growth in the repair and remodel sales channel and mid single digit growth in the new construction markets. The first nine months of fiscal 2021 experienced single digit growth in our repair and remodel sales channel offset by declines in our new construction sales channel.
GrossProfit. Gross profit margin for the
third quarter of fiscal 2021 was 17.6% compared with 18.3% for the same period of fiscal 2020. Gross profit margin for the first nine months of fiscal 2021 was 19.3%, compared with 20.3% for the same period of fiscal 2020. Gross profit margin in the third quarter of the current fiscal year was negatively impacted by higher material and logistics costs, investments made to establish our distribution center in Texas, and increases related to wage programs. This was offset by the increase in sales creating leverage of our fixed expenses in our operating platforms. Gross profit margin in the first nine months of fiscal 2021 was impacted by higher material and logistics costs, and increases related to wage and retention programs.
Selling andMarketing Expenses.Selling
and marketing expenses were 5.1% of net sales in the third quarter of fiscal 2021, compared with 5.4% of net sales for the same period in fiscal 2020. For the first nine months of fiscal 2021 and 2020, selling and marketing expenses were 5.0% of net sales for each of the respective periods. Selling and marketing expenses as a percentage of net sales decreased during the third quarter as a result of leverage created from higher sales, offset by higher spending in the third quarter of fiscal 2021.
23
General andAdministrative Expenses. General and administrative expenses were 6.1% of net sales in the third quarter of fiscal 2021, compared
with 6.8% of net sales in the third quarter of fiscal 2020. General and administrative expenses were 6.8% of net sales in the first nine months of fiscal 2021, compared with 6.9% of net sales in the same period of fiscal 2020. The decrease in general and administrative expenses as a percentage of net sales during the third quarter was driven by the leverage from higher sales, lower spending and impacts of our actions taken in the first quarter of fiscal 2021 related to a nationwide reduction in force.
Effective Income Tax Rates.The Company’s effective income tax rate for the three- and nine-month periods ended January 31, 2021 was 25.6% and 25.9%, respectively, compared with 25.9%
and 26.0% in the comparable periods in the prior fiscal year. The effective rate was higher than the 21.0% U.S. statutory tax rate for all periods presented primarily due to state income taxes.
Non-GAAP Financial Measures. We have reported our financial results in accordance with 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.
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 subsequent restructuring charges, (2) non-recurring restructuring charges, (3) the amortization of customer relationship intangibles and trademarks, (4) net gain on debt forgiveness and modification 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 regarding the same.
Adjusted EBITDA and Adjusted EBITDA margin
We use Adjusted EBITDA and Adjusted EBITDA margin in evaluating the performance of our business, and we use each in the preparation of our annual operating budgets and as indicators of business performance and profitability. We believe Adjusted EBITDA and Adjusted EBITDA margin allow us to readily view operating trends, perform analytical comparisons and identify strategies to improve operating performance.
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 and trademarks, (5) expenses related to the RSI acquisition and subsequent restructuring charges, (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) net gain on debt forgiveness and modification. We believe Adjusted EBITDA, when presented in conjunction with comparable GAAP measures, is useful for investors because management uses Adjusted EBITDA in evaluating the performance of our business.
We define Adjusted EBITDA margin as Adjusted EBITDA as a percentage of net sales.
24
Reconciliation
of EBITDA, Adjusted EBITDA and Adjusted EBITDA margin
Three Months Ended
Nine Months Ended
January 31,
January 31,
(in thousands)
2021
2020
2021
2020
Net
income (GAAP)
$
17,195
$
12,804
$
55,936
$
61,848
Add back:
Income tax expense
5,921
4,470
19,518
21,742
Interest
expense, net
5,746
6,924
17,757
22,448
Depreciation and amortization expense
12,732
12,585
38,710
36,612
Amortization
of customer relationship intangibles and
trademarks
11,972
12,250
36,472
36,750
EBITDA (Non-GAAP)
$
53,566
$
49,033
168,393
179,400
Add
back:
Acquisition and restructuring related expenses (1)
33
60
154
(29)
Non-recurring restructuring charges (2)
(847)
—
5,404
—
Change
in fair value of foreign exchange forward contracts (3)
101
(148)
(1,720)
(244)
Stock-based compensation expense
1,316
1,047
3,543
3,122
Loss
on asset disposal
(97)
133
235
350
Adjusted EBITDA (Non-GAAP)
$
54,072
$
50,125
176,009
182,599
Net
Sales
$
431,954
$
395,755
$
1,270,624
$
1,251,136
Adjusted EBITDA margin (Non-GAAP)
12.5
%
12.7
%
13.9
%
14.6
%
(1) Acquisition
and restructuring related expenses are comprised of expenses related to the acquisition of RSI Home Products, Inc., 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 due to COVID-19 and the closure of the manufacturing plant in Humboldt, Tennessee. The nine-months ended January 31, 2021 includes accelerated depreciation expense of $1.3 million related to Humboldt. The three- and nine-months ended January 31, 2021 includes gain on asset disposal of $2.5 million and $2.2 million, respectively, related to Humboldt.
(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, net in the operating results.
A reconciliation of Adjusted EBITDA and Adjusted EBITDA margin as projected for fiscal 2021 is not provided because we do not forecast net income as we cannot, without unreasonable effort, estimate or predict with certainty various components of net income.
Adjusted
EBITDA. Adjusted EBITDA for the third quarter of fiscal 2021 was $54.1 million or 12.5% of net sales compared to $50.1 million or 12.7% of net sales for the same quarter of the prior fiscal year. Adjusted EBITDA for the first nine months of fiscal 2021 was $176.0 million or 13.9% of net sales compared to $182.6 million or 14.6% of net sales for the same period of the prior fiscal year. The increase in Adjusted EBITDA for the third quarter of fiscal 2021 is primarily due to increased sales, leveraging of fixed costs across the Company, lower spending and positive impacts of the actions taken in the first fiscal quarter of 2021.The decrease in Adjusted EBITDA for the first nine months of fiscal 2021 is primarily due to a decrease in net income due to higher material and logistics costs, and increases related to
wage and retention programs.
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Reconciliation of Net Income to Adjusted Net Income
Three
Months Ended
Nine Months Ended
January 31,
January 31,
(in thousands, except share data)
2021
2020
2021
2020
Net
income (GAAP)
$
17,195
$
12,804
$
55,936
$
61,848
Add back:
Acquisition and restructuring
related expenses
33
$
60
154
(29)
Non-recurring restructuring charges
(847)
$
—
5,404
—
Amortization
of customer relationship intangibles and trademarks
11,972
$
12,250
36,472
36,750
Tax benefit of add backs
(2,815)
$
(3,127)
(10,718)
(9,327)
Adjusted
net income (Non-GAAP)
$
25,538
$
21,987
$
87,248
$
89,242
Weighted average diluted shares
17,047,211
16,974,956
17,036,586
16,947,449
Adjusted
EPS per diluted share (Non-GAAP)
$
1.50
$
1.30
$
5.12
$
5.27
Outlook. The Company’s net sales were up 9.1% during the third quarter of fiscal 2021.Shifting our focus onto the fourth quarter of
fiscal 2021, we expect double digit net sales growth versus the prior year, which was negatively impacted by COVID-19 shutdowns. The growth rate is very dependent upon overall industry, economic growth trends and consumer behaviors, including the impact of the ever changing COVID-19 environment. The Company is planning on announcing pricing increases in the fourth fiscal quarter, but given the lag from announcement to effective date, we will not see a benefit in this fiscal year. Gross margin will continue to be pressured but we expect an increase over our third quarter results based on the increased sales volumes that will create leverage within our operating platforms offset by increasing material and logistics costs. We will continue to invest back into our business through wage programs and the launch of new products and by building the foundation for our journey on our financial
and procurement system consolidation as part of the first phase of our ERP implementation. We expect adjusted EBITDA margins for the fourth quarter of fiscal 2021 to be similar to our fiscal third quarter. The Company had very strong operating cash flows for the year, which led to $80 million pay down of our term loan facilities as of the end of the third quarter. As of January 31, 2021, the Company had $91.8 million of cash on hand and access to $93.0 million of additional availability under its revolver. With current corporate debt rates at historic lows, the Company will be evaluating the current debt structure during our fourth fiscal quarter to possibly take
advantage of any benefits the Company may receive from those low rates. We will continue to monitor the situation closely and may implement further measures to provide additional financial flexibility as we work to protect our cash position and liquidity.
The Company continues to track 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 starts will continue to show positive growth, driven by low mortgage rates, growth
in new household formation and expansion into rural areas, although the current high unemployment rates and the unknown impacts from COVID-19 are cause for concern.
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, 2020, 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.”
The Company’s main source of liquidity is its cash and cash equivalents on hand and cash generated from its operating activities. The Company can also borrow up to $100 million under the Revolving Facility. Approximately $93.0 million was available under this facility as of January 31, 2021.
As of January 31,
2021, $82.0 million was outstanding on each of the Initial Term Loan and the Delayed Draw Term Loan for a total of $164.0 million. Amounts outstanding under the Credit Facilities bear interest based on a fluctuating rate measured by reference to either, at the Company’s option, a base rate plus an applicable margin ranging between 0.00% and 1.00% or LIBOR plus an applicable margin ranging between 1.00% and 2.00%, with the applicable margin being determined by reference to the Company’s then-current “Total Funded Debt to EBITDA Ratio.”The Company also incurs a quarterly commitment fee on the average daily unused portion of the Revolving Facility during the applicable quarter at a rate per annum also determined
by reference to the Company’s then-current “Total Funded Debt to EBITDA Ratio.” As of January 31, 2021, the applicable margin with respect to base rate loans and LIBOR loans was 0.50% and 1.50%, respectively, and the commitment fee was 0.175%.
The Company is required to repay the aggregate outstanding amounts under the Initial Term Loan and the Delayed Draw Term Loan in certain specified quarterly installments that began on April 30, 2018. The Credit Facilities mature on December 29, 2022.
As
of January 31, 2021, the Company’s previously issued $350 million in aggregate principal amount of Senior Notes remained outstanding. Interest on the Senior Notes accrues at an annual rate of 4.875% and is payable semi-annually in arrears on March 15 and September 15 of each year. The Senior Notes mature on March 15, 2026.
The Credit Agreement and the indenture governing the Senior Notes restrict the ability of the Company and certain of the Company’s
subsidiaries to, among other things, incur additional indebtedness, create additional liens, make certain investments, dispose of assets or engage in a merger or consolidation, engage in certain transactions with affiliates, and make certain restricted payments, including the payment of dividends or the repurchase or redemption of stock, subject, in each case, to the various exceptions and conditions described in the Credit Agreement and the indenture governing the Senior Notes.
See Note L--Loans Payable and Long-Term Debt for additional information about the Credit Facilities and Senior Notes and a discussion of our compliance with the covenants in the Credit
Agreement and the indenture.
Cash provided by operating activities in the first nine months of fiscal 2021 was $107.5 million, compared with $112.2 million in the comparable period of fiscal 2020. The decrease in the Company’s cash from operating activities was driven primarily by cash outflows from customer receivables and inventories, offset by cash inflows from accounts payable and accrued compensation and related expenses.
The Company’s investing activities primarily consist of investment in property, plant and equipment and promotional displays. Net
cash used for investing activities was $29.4 million in the first nine months of fiscal 2021, compared with $30.2 million in the comparable period of fiscal 2020.
During the first nine months of fiscal 2021, net cash used by financing activities was $83.4 million, compared with $92.6 million in the comparable period of the prior fiscal year. The decrease in cash used was primarily driven by the Company’s payments of long-term debt of $81.9 million in the first nine months of fiscal 2021 compared with $91.8 million in the prior year.
On August 22, 2019, the Company’s Board of Directors
(the “Board”) authorized a stock repurchase program of up to $50 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 Credit Agreement and the indenture governing the Senior Notes, 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 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 shares during the fiscal quarter ended January 31, 2021.
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 2021.
27
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, 2020.
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.
The Revolving Facility, Initial Term Loan and Delayed Draw Term Loan include 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,
2021 would increase our annual interest expense by approximately $1.6 million.
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 interest rate derivatives or similar financial instruments to manage its commodity price or interest rate 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, 2021. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the
Company's disclosure controls and procedures are effective.
There has been no change in the Company's internal control over financial reporting that occurred during the quarter ended January 31, 2021 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.
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, 2020 and there have
28
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.”
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 (Furnished Herewith).
101
Interactive Data File for the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended January 31, 2021 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).
29
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.
