AMERICAN WOODMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A--Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“("U.S. GAAP”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-monththree-month period ended JanuaryJuly 31, 20182023 are not necessarily indicative of the results that may be expected for the fiscal year ending April 30, 2018.2024 ("fiscal 2024"). 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, 20172023 ("fiscal 2023") filed with the U.S. Securities and Exchange Commission (“SEC”("SEC"). On December 29, 2017, the Company successfully completed the acquisition of RSI Home Products, Inc. and subsidiaries (“RSI”). As a result of the RSI acquisition, the financial results of the Company for the three- and nine-month periods ended January 31, 2018 include the results of operation of RSI and its subsidiaries since the date of acquisition.
Inventory: Inventories are stated at lower of cost or market. Inventory costs are determined by the last-in, first-out (LIFO) method and for certain subsidiaries by the first-in, first-out (FIFO) method.
The LIFO cost reserve is determined in the aggregate for inventory and is applied as a reduction to inventories determined on the FIFO method. FIFO inventory cost approximates replacement cost.
Use of Estimates: The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during each reporting period. Examples of estimates include the allocation of fair value to assets acquired and liabilities assumed in acquisitions, pension obligations, useful lives of property and equipment and recoverability of goodwill and other intangible assets. Actual results could differ from those estimates.
Goodwill and Other 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 occur or changes in circumstances indicatechange that would more likely than not reduce the fair value of a reporting unit below its carrying value may not be recoverable.amount.
When testingIn accordance with accounting standards, when evaluating goodwill, for impairment, 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 toby the amount that the carrying value exceeds the fair value.value of the reporting unit. There were no impairment charges related to goodwill for the three- and nine-monththree-month periods ended JanuaryJuly 31, 20182023 and 2017.2022.
Intangible assets consist of customer relationship intangibles. The Company amortizes the cost of other intangible assets over their estimated useful lives, which range up to six years, unless such lives are deemed indefinite. The Company reviews its intangible assets for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. There were no impairment charges related to other intangible assets for the three- and nine-monththree-month periods ended JanuaryJuly 31, 20182023 and 2017.2022.
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--New Accounting Pronouncements
In May 2014,There are no relevant recently issued accounting pronouncements that would materially impact the Financial Accounting Standards Board (the FASB) issued Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers: Topic 606.” ASU 2014-09 supersedes the revenue recognition requirements in “Accounting Standard Codification 605 - Revenue Recognition” and most industry-specific guidance. The standard requires that entities recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. ASU 2014-09 permits the use of either the retrospective or cumulative effect transition method. In August 2015, the FASB issued ASU No. 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date." ASU 2015-14 defers the effective date of ASU 2014-09 by one year to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that period. The Company does not expect the adoption of ASU 2014-09 and ASU 2015-14 to have a material
impact on results of operations, cash flows and financial position. The Company is continuing to evaluate the impact of ASU 2014-09 primarily to determine the transition method to utilize at adoption and the additional disclosures required.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)." ASU 2016-02 requires lessees to recognize most leases on-balance sheet, which will increase reported assets and liabilities. Lessor accounting remains substantially similar to current U.S. GAAP. ASU 2016-02 supersedes "Topic 840 - Leases." ASU 2016-02 is effective for public companies for annual and interim periods in fiscal years beginning after December 15, 2018. ASU 2016-02 mandates a modified retrospective transition method for all entities. The Company is currently assessing the impact that ASU 2016-02 will have on itsCompany’s condensed consolidated financial statements.statements and related disclosures.
In March 2017, the FASB issued ASU No. 2017-07, "Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." ASU 2017-07 requires an employer to disaggregate the service cost component from the other components of net benefit (income) cost. The other components of net benefit (income) cost are required to be presented in the income statement separately from the service cost component and outside of operating income. The amendments also allow only the service cost component of net benefit (income) cost to be eligible for capitalization. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017. The amendments in this ASU should be applied (1) retrospectively for the presentation of the service cost component and the other components of net periodic pension (income) cost and net periodic postretirement benefit (income) cost on the income statement, and (2) prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension (income) cost and net periodic postretirement benefit (income) cost in assets. The Company believes this guidance will not have a material impact on its results of operations, cash flows and financial position.
In February 2018, the FASB issued ASU No. 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." ASU 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from
the Tax Cuts and Jobs Act. The amendments in this ASU are effective for annual and interim periods in fiscal years beginning after December 15, 2018. The Company is currently assessing the impact that ASU 2018-02 will have on its consolidated financial statements.
Note C-- Acquisition of RSI Home Products, Inc. (the "RSI Acquisition")
On November 30, 2017, American Woodmark, Alliance Merger Sub, Inc. ("Merger Sub"), RSI Home Products, Inc. ("RSI") and Ronald M. Simon, as the RSI stockholder representative, entered into a merger agreement (the merger agreement"), pursuant to which the parties agreed to merge Merger Sub with and into RSI pursuant to the terms and subject to the conditions set forth in the Merger Agreement, with RSI continuing as the surviving corporation and as a wholly owned subsidiary of American Woodmark. On December 29, 2017 (the "Acquisition Date"), the Company consummated the RSI Acquisition pursuant to the terms of the Merger Agreement. As a result of the merger of Merger Sub with and into RSI, Merger Sub’s separate corporate existence ceased, and RSI continued as the surviving corporation and a wholly owned subsidiary of American Woodmark. RSI is a leading manufacturer of kitchen and bath cabinetry and home organization products. The acquisition is expected to enable the Company to make further progress in implementing its business strategy of increasing operational efficiency to drive enhanced profitability, leveraging differentiated service platforms to grow revenue, and continuing to deepen relationships within its existing customer base.
In connection with the RSI Acquisition, on December 29, 2017, the Company entered into a credit agreement (the "Credit Agreement") with a syndicate of lenders and Wells Fargo Bank, National Association ("Wells Fargo"), as administrative agent, providing for a $100 million, 5-year revolving loan facility with a $25 million sub-facility for the issuance of letters of credit (the “Revolving Facility”), a $250 million, 5-year initial term loan facility (the "Initial Term Loan") and a $250 million delayed draw term loan facility (the "Delayed Draw Term Loan" and, together with the Revolving Facility and the Initial Term Loan, the "Credit Facilities") (See Note M--Loans Payable and Long-Term Debt for further details). American Woodmark used the full proceeds of the Initial Term Loan and approximately $50 million in loans under the Revolving Facility, together with cash on its balance sheet, to fund the cash portion of the RSI Acquisition consideration and its transaction fees and expenses.
At the closing of the RSI Acquisition, American Woodmark assumed approximately $589 million (including accrued interest) of RSI’s indebtedness consisting largely of RSI’s 6½% Senior Secured Second Lien Notes due 2023 (the "RSI Notes"). (See Note M--Loans Payable and Long-Term Debt).
Preliminary Allocation of Purchase Price to Assets Acquired and Liabilities Assumed
As consideration for the RSI Acquisition, American Woodmark paid total accounting consideration of $553.2 million including (i) cash consideration of $363.3 million, net of cash acquired, and (ii) 1,457,568 newly issued shares of American Woodmark common stock valued at $189.8 million based on $130.25 per share, which was the closing stock price on the Acquisition Date. The consideration paid is subject to a working capital adjustment by which the consideration will be adjusted upward or downward depending on whether the amount of working capital delivered at the Acquisition Date exceeds or is less than a target amount. The working capital adjustment has not yet been finalized and the accounting consideration does not reflect any adjustment to the estimated working capital reflected in the consideration paid at the Acquisition Date.
The Company accounted for the acquisition of RSI as a business combination, which requires the Company to record the assets acquired and liabilities assumed at fair value. The amount by which the purchase price exceeds the fair value of net assets acquired is recorded as goodwill. The Company has commenced the appraisals necessary to assess the fair values of the tangible and intangible assets acquired and liabilities assumed and the amount of goodwill to be recognized as of the Acquisition Date. The amounts recorded for certain assets and liabilities are preliminary in nature and are subject to adjustment as additional information is obtained about the facts and circumstances that existed as of the Acquisition Date. The final determination of the fair values of certain assets and liabilities will be completed within the measurement period of up to one year from the Acquisition Date permitted under GAAP. The final values may also result in changes to depreciation and amortization expense related to certain assets such as buildings, equipment and intangible assets. Any potential adjustments made could be material in relation to the preliminary values presented in the table below.
The following table summarizes the allocation of the preliminary purchase price as of the Acquisition Date, which is based on the accounting consideration of $553.2 million, to the estimated fair value of assets acquired and liabilities assumed (in thousands):
|
| | | | |
| Goodwill | | $ | 765,743 |
|
| Customer relationship intangibles | | | 274,000 |
|
| Property, plant and equipment | | | 87,064 |
|
| Inventories | | | 66,293 |
|
| Customer receivables | | | 54,649 |
|
| Income taxes receivable | | | 18,450 |
|
| Trademarks | | | 10,000 |
|
| Prepaid expenses and other | | | 4,571 |
|
| Leasehold interests | | | 151 |
|
| Total identifiable assets and goodwill acquired | | | 1,280,921 |
|
| | | | |
| Debt | | | 602,313 |
|
| Deferred income taxes | | | 67,478 |
|
| Accrued expenses | | | 29,777 |
|
| Accounts payable | | | 25,113 |
|
| Notes payable | | | 2,988 |
|
| Income taxes payable | | | 49 |
|
| Total liabilities assumed | | | 727,718 |
|
| | | | |
| Total accounting consideration | | $ | 553,203 |
|
The fair value of the assets acquired and liabilities assumed were preliminarily determined using income, market and cost valuation methodologies. The fair value of debt acquired was determined using Level 1 inputs as quoted prices in active markets for identical liabilities were available. The fair value measurements were estimated using significant inputs that are not observable in the market and thus represent a Level 3 measurement as defined in Accounting Standards Codification (ASC) 820. The income approach was primarily used to value the customer relationship intangibles and trademarks. The income approach determines value for an asset or liability based on the present value of cash flows projected to be generated over the remaining economic life of the asset or liability being measured. Both the amount and the duration of the cash flows are considered from a market participant perspective. Our estimates of market participant net cash flows considered historical and projected product pricing, operational performance including company specific synergies, product life cycles, material and labor pricing, and other relevant customer, contractual and market factors. The net cash flows are discounted to present value
using a discount rate that reflects the relative risk of achieving the cash flow and the time value of money. The market approach is a valuation technique that uses prices and other relevant information generated by market transactions involving identical or comparable assets, liabilities, or a group of assets or liabilities. The cost approach estimates value by determining the current cost of replacing an asset with another of equivalent economic utility. The cost to replace a given asset reflects the estimated reproduction or replacement cost for the property, less an allowance for loss in value due to depreciation. The cost and market approaches were used to value inventory, while the cost approach was the primary approach used to value property, plant and equipment.
The preliminary purchase price allocation resulted in the recognition of $765.7 million of goodwill, which is not expected to be amortizable for tax purposes. The goodwill recognized is attributable to expected revenue synergies generated by the integration of the Company’s products with RSI's, cost synergies resulting from purchasing and manufacturing activities, and intangible assets that do not qualify for separate recognition, such as the assembled workforce of RSI.
Customer receivables were recorded at the contractual amounts due of $54.7 million, less an allowance for doubtful accounts of $0.1 million, which approximates their fair value.
Determining the fair value of assets acquired and liabilities assumed requires the exercise of significant judgment, including the amount and timing of expected future cash flows, long-term growth rates and discount rates. The cash flows employed in the valuation are based on the Company’s best estimates of future sales, earnings and cash flows after considering factors such as general market conditions, expected future customer orders, contracts with suppliers, labor costs, changes in working capital, long term business plans and recent operating performance. Use of different estimates and judgments could yield different results.
Impact to Financial Results for the Nine Months Ended January 31, 2018
RSI’s financial results have been included in our consolidated financial results for the period from the Acquisition Date to January 31, 2018. As a result, our consolidated financial results for the nine months ended January 31, 2018 do not reflect a full nine months of RSI results. From December 29, 2017 to January 31, 2018, RSI generated net sales of approximately $38.6 million and an operating loss of approximately $4.9 million, inclusive of intangible amortization and adjustments to account for the acquisition, including a $6.3 million charge to cost of sales as a result of the step up of inventory as of the Acquisition Date to fair value.
The Company incurred approximately $10.2 million of transaction costs associated with the RSI Acquisition during the nine months ended January 31, 2018 that the Company expensed as incurred. These costs are included in general and administrative expenseson the Consolidated Statements of Income.
Supplemental Pro Forma Financial Information (unaudited)
The following table presents summarized unaudited pro forma financial information as if RSI had been included in the Company’s financial results for the entire nine months ended January 31, 2018 and 2017:
|
| | | | | | | | |
| | | Nine months ended |
| | | January 31, |
| (in thousands) | | 2018 | | 2017 |
| Net Sales | | $ | 1,207,775 |
| | $ | 1,213,604 |
|
| Net Income (1) | | $ | 45,812 |
| | $ | 71,945 |
|
| Net earnings per share - basic | | $ | 2.60 |
| | $ | 4.06 |
|
| Net earnings per share - diluted | | $ | 2.58 |
| | $ | 4.03 |
|
(1) Includes stock compensation expense of $17.5 million and $2.6 million for the nine months ended January 31, 2018 and 2017, respectively, calculated under the intrinsic value method in measuring stock-based liability awards related to stock-based grants made by RSI prior to the RSI Acquisition.
The unaudited supplemental pro forma financial data above assumes the RSI Acquisition occurred on May 1, 2016 and has been calculated after applying the Company’s accounting policies and adjusting the historical results of RSI with pro forma adjustments, net of a statutory tax rate of 34.4% and 40.4% for the nine months ended January 31, 2018 and 2017, respectively. Significant pro forma adjustments include the recognition of additional amortization expense related to acquired intangible
assets (net of historical amortization expense of RSI), additional interest expense related to the Initial Term Loan used to finance the acquisition, and elimination of the inventory fair value step-up expense and transaction related expenses which are non-recurring in nature. These adjustments assume the application of fair value adjustments to intangibles and that the $300.0 million borrowed under the Credit Agreement occurred on May 1, 2016 and are as follows: amortization expense, net of tax, of $20.0 million and $20.5 million for the nine months ended January 31, 2018 and 2017, respectively; interest expense, net of tax, (including amortization expense related to $6.7 million of debt issuance costs, which are being amortized over a period of 5 years) of $3.0 million and $3.3 million for the nine months ended January 31, 2018 and 2017, respectively. The following amounts have been excluded: inventory fair value step-up expense, net of tax, of $4.1 million for the nine months ended January 31, 2018; and transaction expenses add-back, net of tax, of $6.9 million and $0.5 million for the nine months ended January 31, 2018 and 2017.
The unaudited supplemental pro forma financial information does not reflect the realization of any expected ongoing cost or revenue synergies relating to the integration of the two companies. Further, the pro forma data should not be considered indicative of the results that would have occurred if the RSI Acquisition, related financing, and associated issuance of Senior Notes (defined herein) and repurchase or redemption of the RSI Notes had been actually consummated on May 1, 2016, nor are they indicative of future results (See Note R--Subsequent Events).
Note D--NetC--Net Earnings Per Share
The following table sets forth the computation of basic and diluted net earnings per share:
| | | | | | | | | | | | | | | | |
| | | | | Three Months Ended |
| | | | | July 31, |
| (in thousands, except per share amounts) | | | | | | 2023 | | 2022 |
| Numerator used in basic and diluted net earnings | | | | | | | | |
| per common share: | | | | | | | | |
| Net income | | | | | | $ | 37,850 | | | $ | 20,070 | |
| Denominator: | | | | | | | | |
| Denominator for basic net earnings per common | | | | | | | | |
| share - weighted-average shares | | | | | | 16,490 | | | 16,584 | |
| Effect of dilutive securities: | | | | | | | | |
| Stock options and restricted stock units | | | | | | 99 | | | 36 | |
| Denominator for diluted net earnings per common | | | | | | | | |
| share - weighted-average shares and assumed | | | | | | | | |
| conversions | | | | | | 16,589 | | | 16,620 | |
| Net earnings per share | | | | | | | | |
| Basic | | | | | | $ | 2.30 | | | $ | 1.21 | |
| Diluted | | | | | | $ | 2.28 | | | $ | 1.21 | |
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended | | Nine Months Ended |
| | | January 31, | | January 31, |
| (in thousands, except per share amounts) | | 2018 | | 2017 | | 2018 | | 2017 |
| Numerator used in basic and diluted net earnings | | | | | | | | |
| per common share: | | | | | | | | |
| Net income | | $ | 1,996 |
| | $ | 14,553 |
| | $ | 44,032 |
| | $ | 53,851 |
|
| Denominator: | | | | | | | | |
| Denominator for basic net earnings per common | | | | | | | | |
| share - weighted-average shares | | 16,578 |
| | 16,242 |
| | 16,350 |
| | 16,267 |
|
| Effect of dilutive securities: | | | | | | | | |
| Stock options and restricted stock units | | 113 |
| | 140 |
| | 112 |
| | 134 |
|
| Denominator for diluted net earnings per common | | | | | | | | |
| share - weighted-average shares and assumed | | | | | | | | |
| conversions | | 16,691 |
| | 16,381 |
| | 16,462 |
| | 16,401 |
|
| Net earnings per share | | | | | | | | |
| Basic | | $ | 0.12 |
| | $ | 0.90 |
| | $ | 2.69 |
| | $ | 3.31 |
|
| Diluted | | $ | 0.12 |
| | $ | 0.89 |
| | $ | 2.67 |
| | $ | 3.28 |
|
The Company repurchased a total of 58,371 and 38,318 shares of its common stock during the three-month periods ended January 31, 2018 and 2017, respectively, and 309,612 and 178,118 shares of its common stock during the nine-month periods ended January 31, 2018 and 2017, respectively. There were no potentially dilutive securities for the three- and nine-monththree-month periods ended JanuaryJuly 31, 20182023 and 2017,2022, which were excluded from the calculation of net earnings per diluted share.
Note E--Stock-BasedD--Stock-Based Compensation
The Company has various stock-based compensation plans. During the quarterthree months ended JanuaryJuly 31, 2018, the Company did not grant any stock-based compensation awards to employees or non-employee directors. During the nine-months ended January 31, 2018,2023, the Board of Directors of the Company approved grants of service-based RSUsrestricted stock units ("RSUs") and performance-based RSUs to key employees and non-employee directors.employees. The employee performance-based RSUs totaled 33,080124,282 units and the employee and non-employee director service-based RSUs totaled 22,25066,968 units. The performance-based RSUs entitle the recipients to receive one share of the Company’sCompany'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 one share of the Company’sCompany's common stock per unit granted if they remain continuously employed with the Company (or, for
non-employee directors, serving on the Board of Directors) until the units vest. AllPrior to June 2023, all of the Company’sCompany's RSUs granted to employees cliff-vest three years from the grant date. Beginning in June 2023, service-based RSUs granted to employees vest one-third on each of the first, second and third anniversaries of the grant date.
For the three- and nine-monththree-month periods ended JanuaryJuly 31, 20182023 and 2017,2022, stock-based compensation expense was allocated as follows:
| | | | | | | | | | | | | Three Months Ended |
| | | Three Months Ended
January 31, |
| Nine Months Ended
January 31, | | | July 31, |
| (in thousands) | | 2018 |
| 2017 |
| 2018 |
| 2017 | (in thousands) | | 2023 | | 2022 |
| Cost of sales and distribution | | $ | 256 |
| | $ | 160 |
| | $ | 777 |
| | $ | 468 |
| Cost of sales and distribution | | $ | 578 | | | $ | 438 | |
| Selling and marketing (income) expenses | | 183 |
| | 253 |
| | 385 |
| | 755 |
| |
| Selling and marketing expenses | | Selling and marketing expenses | | 608 | | | 498 | |
| General and administrative expenses | | 458 |
| | 414 |
| | 1,344 |
| | 1,254 |
| General and administrative expenses | | 1,061 | | | 699 | |
| Stock-based compensation expense | | $ | 897 |
| | $ | 827 |
| | $ | 2,506 |
| | $ | 2,477 |
| Stock-based compensation expense | | $ | 2,247 | | | $ | 1,635 | |
During the ninethree months ended JanuaryJuly 31, 2018,2023, the Company also approved grants of 4,49612,199 cash-settled performance-based restricted stock tracking units ("RSTUs") and 2,5196,571 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 aone 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 aone share of the Company's common stock as of the payment date if they remain continuously employed with the Company until the units vest. AllPrior to June 2023, all of the Company's RSTUs granted to employees cliff-vest three years from the grant date. SinceBeginning in June 2023, service-based RSTUs granted to employees vest one-third on each of the RSTUs will be settled in cash,first, second and third anniversaries of the grant date fair value of these awards is recorded as a liability until the date of payment.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 Companyexpense recognized expense of approximately $0.6 million and $0.1 million for the three-month periods ended JanuaryJuly 31, 20182023 and 2017, respectively,2022, and approximately $1.0 million and $0.3 million for the nine-month periods ended January 31, 2018 and 2017, respectively. A liability for payment of the RSTUs is included in the Company's balance sheets in the amount of $1.6 million and $1.5 million as of JanuaryJuly 31, 20182023 and April 30, 2017, respectively.2023, related to RSTUs is not significant.
Note F--CustomerE--Customer Receivables
The components of customer receivables were:
| | | |
| January 31, |
| April 30, | | | July 31, | | April 30, |
| (in thousands) |
| 2018 |
| 2017 | (in thousands) | | 2023 | | 2023 |
| Gross customer receivables |
| $ | 127,339 |
|
| $ | 66,373 |
| Gross customer receivables | | $ | 128,833 | | | $ | 130,655 | |
| Less: |
|
|
| | Less: | |
| Allowance for doubtful accounts |
| (280 | ) |
| (148 | ) | Allowance for doubtful accounts | | (618) | | | (449) | |
| Allowance for returns and discounts |
| (5,282 | ) |
| (3,110 | ) | Allowance for returns and discounts | | (10,452) | | | (11,043) | |
|
|
|
|
|
|
| | | | |
| Net customer receivables |
| $ | 121,777 |
|
| $ | 63,115 |
| Net customer receivables | | $ | 117,763 | | | $ | 119,163 | |
Note G--InventoriesF--Inventories
The components of inventories were:
| | | | | | | | | | | | | | |
| | | July 31, | | April 30, |
| (in thousands) | | 2023 | | 2023 |
| Raw materials | | $ | 70,403 | | | $ | 80,953 | |
| Work-in-process | | 45,639 | | | 49,064 | |
| Finished goods | | 51,497 | | | 60,682 | |
| | | | |
| Total inventories | | $ | 167,539 | | | $ | 190,699 | |
|
| | | | | | | | |
| |
| January 31, |
| April 30, |
| (in thousands) |
| 2018 |
| 2017 |
| Raw materials |
| $ | 49,503 |
|
| $ | 18,230 |
|
| Work-in-process |
| 40,330 |
|
| 18,704 |
|
| Finished goods |
| 31,617 |
|
| 19,372 |
|
|
|
|
|
|
|
|
| Total FIFO inventories |
| 121,450 |
|
| 56,306 |
|
|
|
|
|
|
|
|
| Reserve to adjust inventories to LIFO value |
| (13,447 | ) |
| (13,447 | ) |
|
|
|
|
|
|
|
| Total inventories |
| $ | 108,003 |
|
| $ | 42,859 |
|
Interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs. Since these items are estimated, interim results are subject to the final year-end LIFO inventory valuation.
Note H--Property,G--Property, Plant and Equipment
The components of property, plant and equipment were:
| | | | | | | | | | | | | | |
| | | July 31, | | April 30, |
| (in thousands) | | 2023 | | 2023 |
| Land | | $ | 4,475 | | | $ | 4,475 | |
| Buildings and improvements | | 123,186 | | | 121,903 | |
| Buildings and improvements - finance leases | | 11,164 | | | 11,164 | |
| Machinery and equipment | | 334,553 | | | 331,146 | |
| Machinery and equipment - finance leases | | 29,680 | | | 29,869 | |
| Software | | 29,510 | | | 29,322 | |
| Construction in progress | | 53,287 | | | 45,710 | |
| Total property, plant and equipment | | 585,855 | | | 573,589 | |
| Less accumulated amortization and depreciation | | (362,045) | | | (354,174) | |
| | | | |
| Property, plant and equipment, net | | $ | 223,810 | | | $ | 219,415 | |
|
| | | | | | | |
| | January 31 |
| April 30 |
| (in thousands) | 2018 |
| 2017 |
| Land | $ | 4,751 |
|
| $ | 3,581 |
|
| Buildings and improvements | 93,902 |
|
| 81,172 |
|
| Buildings and improvements - capital leases | 11,203 |
|
| 11,202 |
|
| Machinery and equipment | 268,063 |
|
| 187,836 |
|
| Machinery and equipment - capital leases | 29,918 |
|
| 29,378 |
|
| Construction in progress | 28,600 |
|
| 10,838 |
|
| 436,437 |
|
| 324,007 |
|
| Less accumulated amortization and depreciation | (225,809 | ) |
| (216,074 | ) |
|
|
|
|
|
|
| Total | $ | 210,628 |
|
| $ | 107,933 |
|
Amortization and depreciation expense on property, plant and equipment amounted to $12.9$9.6 million and $10.5$9.7 million for the ninethree months ended JanuaryJuly 31, 20182023 and 2017,2022, respectively. Accumulated amortization on capitalfinance leases included in the above table amounted to $30.0$31.9 million and $29.7$31.9 million as of JanuaryJuly 31, 20182023 and April 30, 2017,2023, respectively.
Note I--IntangiblesH--Intangibles
The components of intangible assetscustomer relationship intangibles were:
| | | | | | | | | | | | | | |
| | | July 31, | | April 30, |
| (in thousands) | | 2023 | | 2023 |
| Customer relationship intangibles | | $ | 274,000 | | | $ | 274,000 | |
| Less accumulated amortization | | (254,972) | | | (243,556) | |
| | | | |
| Total | | $ | 19,028 | | | $ | 30,444 | |
|
| | | | | | | | | | | | | | | | |
| (in thousands) | | Weighted Average Amortization Period | | Amortization Method | | Cost | | Accumulated Amortization | | Net Carrying Amount |
| Customer relationships | | 6 years | | Straight-line | | $ | 274,000 |
| | $ | 3,806 |
| | $ | 270,194 |
|
| Trademarks | | 3 years | | Straight-line | | 10,000 |
| | 278 |
| | 9,722 |
|
| Intangible assets, net | | | | | | | | $ | 4,084 |
| | $ | 279,916 |
|
Customer relationship intangibles are amortized over the estimated useful lives on a straight-line basis over six years. Amortization expense for the nine monthsthree-month periods ended JanuaryJuly 31, 20182023 and 2022 was $4.1 million. Based on the carrying amounts of amortizable intangible assets noted above, estimated amortization expense for the next five 12-month periods beginning in January 31, 2018 is $49.0 million, $49.0 million, $48.7 million, $45.7$11.4 million and $45.7$11.4 million, respectively.
Note J--ProductI--Product Warranty
The Company estimates outstanding warranty costs based on the historical relationship between warranty claims and revenues. The warranty accrual is reviewed monthly to verify that it properly reflects the 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 two months of the original shipment date.
The following is a reconciliation of the Company’sCompany's warranty liability, which is included in other accrued expenses on the unaudited condensed consolidated balance sheet:sheets:
| | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | July 31, |
| (in thousands) | | 2023 | | 2022 |
| Beginning balance at May 1 | | $ | 8,014 | | | $ | 6,878 | |
| | | | |
| Accrual | | 5,108 | | | 9,095 | |
| Settlements | | (5,521) | | | (8,109) | |
| | | | |
| Ending balance at July 31 | | $ | 7,601 | | | $ | 7,864 | |
|
| | | | | | | | |
| |
| Nine Months Ended |
| |
| January 31, |
| (in thousands) |
| 2018 |
| 2017 |
| Beginning balance at May 1 |
| $ | 3,262 |
|
| $ | 2,926 |
|
| Acquisition |
| 119 |
|
| — |
|
| Accrual |
| 14,943 |
|
| 13,460 |
|
| Settlements |
| (14,760 | ) |
| (13,376 | ) |
|
|
|
|
|
|
|
| Ending balance at January 31 |
| $ | 3,564 |
|
| $ | 3,010 |
|
Note K--Pension Benefits
Effective April 30, 2012, the Company froze all future benefit accruals under the Company’s hourly and salary defined-benefit pension plans.
Net periodic pension (benefit) cost consisted of the following for the three- and nine-month periods ended January 31, 2018 and 2017:
|
| | | | | | | | | | | | | | | | |
| |
| Three Months Ended |
| Nine Months Ended |
| |
| January 31, |
| January 31, |
| (in thousands) |
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| Interest cost |
| $ | 1,431 |
|
| $ | 1,443 |
|
| $ | 4,295 |
|
| $ | 4,329 |
|
| Expected return on plan assets |
| (2,234 | ) |
| (2,019 | ) |
| (6,702 | ) |
| (6,059 | ) |
| Recognized net actuarial loss |
| 401 |
|
| 442 |
|
| 1,201 |
|
| 1,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net periodic pension benefit |
| $ | (402 | ) |
| $ | (134 | ) |
| $ | (1,206 | ) |
| $ | (402 | ) |
The Company contributed a total of $19.3 million to its pension plans in the first nine months of fiscal 2018, which represents both required and discretionary funding, and does not expect to contribute any additional funds during the remainder of fiscal 2018. On August 24, 2017, the Board of Directors of the Company approved up to $13.6 million of discretionary funding which is included in the total contributions for the year. The Company made contributions of $27.3 million to its pension plans in fiscal 2017.
Note L--FairJ--Fair 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 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, valued at cost, which approximatesaccounts receivable and payable, and short-term debt on the condensed consolidated balance sheets approximate their fair value due to the short-termshort maturities of these instruments. Moneyitems. The interest rate swap and foreign exchange forward contracts were marked to market funds, mutual funds and certificates of deposits are carried attherefore represent fair value in the financial statements. For these investments, the fair value was estimated based on quoted prices categorized as a Level 1 valuation. The Company's mutual fund investment assets represent contributions made and invested on behalf of the Company's executive officers in a supplementary employee retirement plan.
value. The fair values of the Company's RSI Notes werethese contracts are determined using Level 2based on inputs based the conditional call and tender offer described furtherthat are readily available in Note R, which approximates the carrying value recordedpublic markets or can be derived from information available in connection with the RSI Acquisition. The carrying values of the Credit Facilities approximated fair value because the interest rates vary with market interest rates.
publicly quoted markets. The following table summarizes the fair valuesvalue of assets that are recorded in the Company’s unaudited condensedCompany's consolidated financial statements as of JanuaryJuly 31, 20182023 and April 30, 20172023 at fair value on a recurring basis (in thousands): | | | | | | Fair Value Measurements |
| | | | | As of July 31, 2023 |
| | | | | Level 1 | | Level 2 | | Level 3 |
| ASSETS: | | ASSETS: | | | | | | |
| | Mutual funds | | Mutual funds | | $ | 199 | | | $ | — | | | $ | — | |
| Interest rate swap contracts | | Interest rate swap contracts | | — | | | 15,128 | | | — | |
| Foreign exchange forward contracts | | Foreign exchange forward contracts | | — | | | 1,015 | | | — | |
| Total assets at fair value | | Total assets at fair value | | $ | 199 | | | $ | 16,143 | | | $ | — | |
| | | | |
| Fair Value Measurements | | | | | | |
| |
| As of January 31, 2018 | | | As of April 30, 2023 |
| |
| Level 1 |
| Level 2 |
| Level 3 | | | Level 1 | | Level 2 | | Level 3 |
| ASSETS: |
| |
| |
| | ASSETS: | | | | | | |
| Certificates of deposit |
| $ | 10,500 |
|
| $ | — |
|
| $ | — |
| |
| Mutual funds |
| 1,092 |
|
| — |
|
| — |
| Mutual funds | | $ | 191 | | | $ | — | | | $ | — | |
| Interest rate swap contracts | | Interest rate swap contracts | | — | | | 13,885 | | | — | |
| Total assets at fair value |
| $ | 11,592 |
|
| $ | — |
|
| $ | — |
| Total assets at fair value | | $ | 191 | | | $ | 13,885 | | | $ | — | |
|
|
|
|
|
|
|
|
|
| |
| |
| As of April 30, 2017 | |
| |
| Level 1 |
| Level 2 |
| Level 3 | |
| ASSETS: |
| |
| |
| | |
| Money market funds |
| $ | 50,146 |
|
| $ | — |
|
| $ | — |
| |
| Mutual funds |
| 1,038 |
|
| — |
|
| — |
| |
| Certificates of deposit |
| 72,250 |
|
| — |
|
| — |
| |
| Total assets at fair value |
| $ | 123,434 |
|
| $ | — |
|
| $ | — |
| |
There were no transfers between Level 1, Level 2, or Level 3 for assets measured at fair value on a recurring basis.
Note M--LoansK--Loans Payable and Long-Term Debt
The Credit Facilities
On December 29, 2017,April 22, 2021, the Company amended and restated its prior credit agreement and on January 17, 2023 the 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 (the "A&R Credit Agreement, whichAgreement") provides for a $500 million revolving loan facility with a $50 million sub-facility for the Revolving Facility, the Initial Termissuance of letters of credit (the "Revolving Facility") and a $250 million term loan facility (the "Term Loan and the Delayed Draw Term Loan.Facility"). Also on December 29, 2017,April 22, 2021, the Company borrowed the entire $250 million available under the Initial Term Loan Facility and approximately $50$264 million under the Revolving Facility to fund, in part, the cash portionrepayment in full of the RSI Acquisition considerationamounts then outstanding under its prior credit agreement and the Company’s transaction fees and expenses related to the RSI Acquisition. In connection with its entry into the Credit Agreement, the Company terminated its prior $35redemption of $350 million revolving credit facility with Wells Fargo. Asin aggregate principal amount of January 31, 2018, $250 million and $30 million remained outstanding on the Initial Term Loan and the Revolving Facility, respectively, and no amounts were outstanding under the Delayed Draw Term Loan. The Initial Term Loan is scheduled to mature as follows: $12.5 million by January 31, 2019; $18.8 million by January 31, 2020; $25.0 million by January 31, 2021; $25.0 million by January 31, 2022; and $168.7 million by December 29, 2022. The Credit Facilities mature on December 29, 2022.4.875% Senior Notes due 2026 (the Senior Notes). The Company is required to repay any aggregate outstanding amounts under the Initial Term Loan and the Delayed Draw Term LoanFacility in certain specified quarterly installments, beginningwhich have been prepaid through April 30, 2025. The Revolving Facility and Term Loan Facility mature on April 22, 2026.
As of July 31, 2023 and April 30, 2018.2023, $206.3 million and $206.3 million, respectively, was outstanding on the Term Loan Facility. As of July 31, 2023 and April 30, 2023, $163.8 million and $163.8 million, respectively, was outstanding under the Revolving Facility.
Outstanding letters of credit under the Revolving Facility were $13.0 million as of July 31, 2023, leaving approximately $323.2 million in available capacity under the Revolving Facility as of July 31, 2023. The outstanding balances noted above approximate fair value as the facilities have a floating interest rate.
Amounts outstanding under the Credit FacilitiesTerm Loan Facility and the Revolving Facility bear interest based on a fluctuating rate measured by reference to either, at the Company’sCompany's option, a base rate plus an applicable margin or LIBORSOFR plus 10 basis points plus an applicable margin, with the applicable margin being determined by reference to the Company’sCompany's then-current “Total Funded Debt to EBITDA"Secured Net Leverage Ratio.”" The Company will also incurincurs 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’sCompany's then-current “Total Funded Debt to EBITDA"Secured Net Leverage Ratio.”" In addition, a letter of credit fee will accrueaccrues on the face amount of any outstanding letters of credit at a per annum rate equal to the applicable margin on LIBORSOFR loans, payable quarterly in arrears. As of July 31, 2023, the
applicable margin with respect to base rate loans and SOFR loans was 0.0% and 1.0%, respectively, and the commitment fee was 0.1%.
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 restrictingthat 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 Company’s 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 JanuaryJuly 31, 2018,2023, the Company’sCompany was in compliance with all covenants included in the A&R Credit Agreement.
The Company's obligations under the A&R Credit Agreement wereare guaranteed by the Company’sCompany's domestic subsidiaries, (other than RSI and its subsidiaries) and the obligations of the Company and its domestic subsidiaries (other than RSIunder the A&R Credit Agreement and its subsidiaries) weretheir guarantees, respectively, are secured by a pledge of substantially all of their respective personal property.
Note L--Derivative Financial Instruments
Interest Rate Swap Contracts
The RSI Notes
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 December 29, 2017, as a resultMay 28, 2021, the Company entered into four interest rate swaps with an aggregate notional amount of $200 million to hedge part of the closingvariable 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 RSI Acquisition,variable rate debt to fixed rate debt. The Company receives floating interest payments monthly based on one-month SOFR and pays a fixed rate of 0.53% to the Company assumed, through its acquisition of all of the equity interests of RSI, the RSI Notes. As of December 29, 2017, the RSI Notes had acounterparty.
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 $602.3 million. As of January 31, 2018, the entire $575 million aggregate principal amount of the RSI Notes remained outstanding.
As of January 31, 2018, the RSI Notes (i) accrued interest atvariable amounts from a rate equal to 6.5% per annum, payable in cash in arrears on March 15 and September 15 of each year, (ii) were scheduled to mature on March 15, 2023, (iii) were guaranteed by each of RSI’s domestic subsidiaries, and (iv) were secured by a second lien on substantially all of the assets of RSI and its domestic subsidiaries. As of January 31, 2018, the indenture governing the RSI Notes contained certain customary covenants, including covenants that limited or restricted RSI’s ability to incur debt, pay dividends, repurchase or make other distributions in respect of its capital stock, make other restricted payments, create liens, dispose of assets or engage in transactions with affiliates, subject, in each case to the exceptions and conditions described in the indenture. As of January 31, 2018, RSI was in compliance with the covenants under the indenture governing the RSI Notes. See Note R--Subsequent Events for information concerning the refinancing of the RSI Notes.
Other RSI Debt
On December 29, 2017, the Company also assumed, through its acquisition of all of the equity interests of RSI, $2.8 million of subordinated promissory notes payable to certain current and former RSI employees. The promissory notes each have a term of 5 years, bear interest at rates ranging from 1.01% to 2.12% per annum, may be prepaid by RSI at any time without penalty and are due in annual installments of principal and interest on their respective anniversary dates. The notes were issuedcounterparty in exchange for the cancellation of vested stock options of RSI either uponCompany making fixed-rate payments over the terminationlife of the applicable employeecontract agreements without exchange of the underlying notional amount. Realized gains or immediately priorlosses 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-month periods ended July 31, 2023 and 2022, unrealized gains (losses), net of deferred taxes, of $2.7 million and $(1.1) million, respectively, were recorded in other comprehensive income, and $1.8 million and $0.2 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 expiration of such options.swap counterparties. As of JanuaryJuly 31, 2018,2023, the aggregate outstanding balanceCompany anticipates reclassifying approximately $9.3 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.
The fair value of the derivative instruments are included in other assets on the notes was $2.8condensed consolidated balance sheets.
Foreign Exchange Forward Contracts
At July 31, 2023, the Company held forward contracts maturing from August 2023 to April 2024 to purchase 334.0 million Mexican pesos at an exchange rate of 18.91 Mexican pesos to one U.S. dollar. Additionally, the Company entered into a contingent forward contract with payments due through June 30, 2022.maturities from May 2024 to April 2025 to purchase 660.0 million Mexican pesos at an exchange rate of 18.91 Mexican pesos to one U.S. dollar. This contingent forward contract gives the bank the option to cancel these forward contracts in April 2024. An asset of $1.0 million is recorded in prepaid expense and other on the condensed consolidated balance sheet.
Note O--IncomeM--Income Taxes
The effective income tax raterates for the three- and nine-month periodsthree-month period ended JanuaryJuly 31, 20182023 was 47.0% and 33.9%, respectively,21.9% compared with 33.2% and 34.5%, respectively,25.0% in the comparable periodsperiod in the prior fiscal year. The increase ineffective rates were higher than the 21.0% U.S. statutory rate for all periods presented primarily due to state income taxes. The effective tax rate for the third quarter ofperiod ended July 31, 2023 was lower than the comparable period in the prior fiscal 2018 as compared to the third quarter of fiscal 2017 wasyear primarily due to transaction costs incurred due to the RSI Acquisitiona favorable increase in federal tax credits for prior periods and an expected reduction in the amount of domestic production deduction expected for the year due to such acquisition in the quarter, partially offset by the overall benefit from the reduction in the tax rate enacted in connection with the Tax Cuts and Jobs Act of 2017 (H.R. 1) (the “Tax Act”). The Company recorded a net tax benefit of $1.2 million in the third quarter of fiscal 2018 in connection with the Tax Act enacted in December 2017. The decrease in the effective tax rate for the first nine months of fiscal 2018 as compared to the first nine months of fiscal 2017 was primarily due to the net benefit of $1.2 million from tax rate reduction enacted in connection with the Tax Act and an increase of $0.5 million in tax benefits from stock-basedstock compensation transactions. As is discussed in Note C--Acquisition of RSI Home Products, Inc., a deferred tax liability of approximately $67.8 million was recorded as a result of the RSI Acquisition.
Tax Cuts and Jobs Act of 2017
On December 22, 2017, the Tax Act was signed into law. The Tax Act significantly revises the future ongoing U.S. corporate income tax by, among other things, lowering the U.S. corporate federal income tax rate from 35% to 21% effective January 1, 2018. As a result, a proportional federal rate of 30.4% is applicabledeductions booked in the current fiscal year.quarter.
Note N--Revenue Recognition
The key impactsCompany disaggregates revenue from contracts with customers into major sales distribution channels as these categories depict the nature, amount, timing, and uncertainty of the Tax Actrevenues and cash flows that are affected by economic factors. The following table disaggregates our consolidated revenue by major sales distribution channels for the three months ended JanuaryJuly 31, 2018 were the re-measurement of deferred tax balances to the new corporate tax rate2023 and the reduction of corporate federal tax rate applicable in the calculation of current tax expense from 35% to 30.4% in the current fiscal year. The Company is required to re-measure, through income tax expense, its deferred tax assets and liabilities using the enacted rate at which the items are expected to be recovered or settled.2022:
| | | | | | | | | | | | | | | | |
| | | | Three Months Ended |
| | | | July 31, |
| (in thousands) | | | | | | 2023 | | 2022 |
| Home center retailers | | | | | | $ | 210,460 | | | $ | 241,318 | |
| Builders | | | | | | 203,375 | | | 217,236 | |
| Independent dealers and distributors | | | | | | 84,420 | | | 84,339 | |
| Net Sales | | | | | | $ | 498,255 | | | $ | 542,893 | |
Due to the complexities associated with understanding and applying various aspects of the new law and quantifying or estimating amounts upon which calculations required to account for new law are based, the U.S. Securities and Exchange Commission (“SEC”) recognized that it may be difficult for many companies to complete the determination of all accounting effects of the new law within the available timeframe for issuing their financial statements for the period of enactment. As a result, the SEC provided guidance under SAB 118, permitting corporations to record and report specific items impacted by the new law on the basis of reasonable estimates if final amounts have not been determined and designate them as provisional amounts, or to continue to account for specific items under the previous law if it is not possible to develop reasonable estimates within the timeframe for issuance of the financial statements. In subsequent reporting periods, as the accounting for those items is finalized, companies are expected to record the appropriate adjustments to the initial accounting, removing the provisional designation on an item in the period that the accounting for that item is completed. A measurement period of no more than one year from the date of enactment of the new law is provided under the SEC guidance to complete all such adjustments.
While the Company has not yet completed the assessment of the effects of the Tax Act, we are able to determine reasonable estimates for the impacts of the key items specified above, thus we reported provisional amounts for these items. The Company is still analyzing the impact of the provisions of the law on our deferred tax balances and refining our calculations which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount determined and recorded for the re-measurement of our deferred tax balances resulted in a net reduction in deferred assets of $1.6 million. While we have made a reasonable estimate of the impact of the federal corporate tax rate reduction, that estimate could change as we complete our analysis of all impacts of the Tax Act.
We were unable to determine a reasonable estimate of the impact, if any, of the effect on our existing deferred tax assets related to executive compensation. We have continued to apply our existing accounting under ASC 740 for this matter.
Note P--ConcentrationO--Concentration 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 onwith 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 debtexpected 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 of each customer’scustomer'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 JanuaryAs of July 31, 2018,2023, the Company's two largest customers, Customers A and B, represented 31.3%31.5% and 22.0%23.4% of the Company's gross customer receivables, respectively. At April 30, 2017,As of July 31, 2022, Customers A and B represented 8.2%33.6% and 20.7%17.2% of the Company’sCompany's gross customer receivables, respectively.
The following table summarizes the percentage of net sales attributable to the Company's two largest customers for the ninethree months ended JanuaryJuly 31, 20182023 and 2017:2022:
| | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | July 31, |
| | | | | | 2023 | | 2022 |
| Customer A | | | | | 28.2% | | 30.3% |
| Customer B | | | | | 14.0% | | 14.2% |
|
| | | |
| | PERCENT OF GROSS SALES |
| Nine Months Ended |
| January 31, |
| | 2018 |
| 2017 |
| Customer A | 21.8 |
| 20.2 |
| Customer B | 14.4 |
| 15.9 |
Note Q--OtherP--Other 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” (ASC 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.
TheExcept 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 JanuaryJuly 31, 2018.2023.
Antidumping and Countervailing Duties Investigation Note R--Subsequent Events
OnIn February 12, 2018,2020, a conglomeration of domestic manufacturers filed a scope and circumvention petition seeking the Companyimposition 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 $350 million in aggregate principal amounta Preliminary Scope Determination and Affirmative Preliminary Determination of 4.875% Senior Notes due 2026 (the “Senior Notes”Circumvention of the Antidumping and Countervailing Duty Orders (“Preliminary Determination”). The Senior Notes will mature on March 15, 2026. InterestIn July 2023, the DOC issued a Final Determination of Circumvention of the Antidumping and Countervailing Duty Orders (“Final Determination”).
Included in the Final 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 appealed their inclusion on the Senior Notes is payable semi-annuallyineligible for certification list in arrears on March 15 and September 15 of each year, beginning on September 15, 2018. The Senior Notes are, and will be, fully and unconditionally guaranteed by eachthe Preliminary Determination. Because two of the Company’s current and future wholly-owned domestic subsidiaries that guaranteeprimary Vietnamese plywood vendors remained on the Company’s obligations underineligible for certification list in the Credit Agreement.Final Determination, the Company recorded a loss on unliquidated customs entries as of Final Determination in July 2023. The indenture governingloss recorded in the Senior Notes restrictsfirst quarter of fiscal 2024 was $4.9 million, or $3.7 million net of tax. Through the abilityfirst fiscal quarter of 2024, the Company has remitted deposits of $3.8 million pursuant to the Preliminary Determination. 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 the Final Determination that it is subject to these duties 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 abilitybelieves that any deposits made will ultimately be refunded upon settlement 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.
Also on February 12, 2018, the Company borrowed the entire $250 million available under the Delayed Draw Term Loan. In connectionappeals. Our last order was placed with these borrowings, RSI and its domestic subsidiaries became guarantors of the Company’s obligations under the Credit Agreement and pledged substantially all of their respective personal property as security for their obligations under such guarantee.vendors in June 2022.
The Company utilized the proceeds from the issuance of the Senior Notes and borrowings under the Delayed Draw Term Loan, together with cash on hand, to (A) fund (i) the redemption of $115 million in aggregate principal amount of the RSI Notes on February 26, 2018 pursuant to a conditional call announced on January 25, 2018, (ii) the purchase of approximately $449.1 million in aggregate principal amount of the RSI Notes on February 12, 2018 pursuant to a tender offer that commenced on January 29, 2018 and (iii) the redemption of approximately $10.9 million in aggregate principal amount of the RSI Notes on February 28, 2018 pursuant to a make-whole call, and (B) repay $30 million of the amount borrowed under the Revolving Facility in connection with the closing of the RSI Acquisition. As a result of these redemptions and the tender offer, none of the RSI Notes remain outstanding.
Item 2. Management’sManagement'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’sCompany's critical accounting policies are included in the Company’sCompany's Annual Report on Form 10-K for the fiscal year ended April 30, 2017.2023.
Forward-Looking Statements
This report contains statements concerning the Company’sCompany's expectations, plans, objectives, future financial performance, and other statements that are not historical facts. These statements may be “forward-looking statements”"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”"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"Management's Discussion and Analysis of Financial Condition and Results of Operations,”" are based on current expectations and our actual results may differ materially from those projected in any forward-looking statements. In addition, the Company participates in an industry that is subject to rapidly changing conditions and there are numerous factors that could cause the Company to experience a decline in sales and/or earnings or deterioration in financial condition. Factors that could cause actual results to differ materially from those in forward-looking statements made in this report include but are not limited to:
•the 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, ormortgage interest rates, general economy, unemployment rates, and consumer sentiment and the impact of such developments on our and our customers’customers' business, operations, and access to financing;
•an inability to obtain raw materials in a timely manner or fluctuations in raw material, transportation, and energy costs due to inflation or otherwise;
•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; 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;
•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;
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 employees or other negative labor developments, including increases in the cost of labor;
•risks associated with the implementation of our growth, strategy;digital transformation, and platform design strategies;
•risks related to sourcing and selling products internationally and doing business globally;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 or another pandemic 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, and hurricanes, or tropical storms;
•the unavailability of adequate capital for our business to grow and compete; and
increased buying power of large customers and the impact on our ability to maintain or raise prices;
the effect of the RSI Acquisition on our ability to retain customers, maintain relationships with suppliers and hire and retain key personnel;
our ability to successfully integrate RSI into our business and operations and the risk that the anticipated economic benefits, costs savings and other synergies in connection with the RSI Acquisition are not fully realized or take longer to realize than expected; and
•limitations on operating our business as a result of covenant restrictions under our indebtedness, and our ability to pay amounts due under the Credit Facilities, the Senior Notesour credit facilities and our other indebtedness.indebtedness, and interest rate increases.
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"Management's Discussion and Analysis of Financial Condition and Results of Operations" and in Item 1A, "Risk Factors,", and also in the Company's most recent Annual Report on Form 10-K for the fiscal year ended April 30, 2017,2023, filed with the SEC, including under Item 1A, "Risk Factors," Item 7, “Management’s"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 builders and distributorsbuilders and through a network of independent dealers. At Januarydealers and distributors. As of July 31, 2018,2023, the Company operated eighteen17 manufacturing facilities in the United States and Mexico, and seveneight primary service centers, and one distribution center located throughout the United States.
On December 29, 2017, the Company completed the acquisition of RSI, a leading manufacturer of kitchen and bath cabinetry and home organization products, for consideration consisting of 1,457,568 newly issued shares of American Woodmark common stock, $363.3 million in net cash (subject to certain customary postclosing working capital, indebtedness and seller expense true ups), and the assumption of approximately $589 million of RSI debt, including accrued interest. We refer to this acquisition as the “RSI Acquisition.”
The three-month period ended JanuaryJuly 31, 20182023 was the Company’s thirdCompany's first quarter of its fiscal year that ends on April 30, 2018 (“2024 ("fiscal 2018”2024"). During the third quarter of fiscal 2018, the Company continued to experience improving market conditions from the housing market downturn that began in 2007.
Financial Overview
The Company’s remodeling-based businessCompany was impacted by the following macro-economic trends during the thirdfirst quarter of the Company’s fiscal 2018: 2024:
Residential investment as a percentage of gross domestic product as tracked by the U.S. Department of Commerce for the fourth calendar quarter of 2017 was flat at 3.5% compared with the same period in the prior year;
•The median price per existing home sold rosedeclined during the fourthsecond calendar quarter of 20172023 compared to the same period one year ago by 5.6%2.1% according to data provided by the National Association of Realtors, and existing home sales increased 0.42%decreased 20.8% during the fourthsecond calendar quarter of 20172023 compared to the same period in the prior year;
•The unemployment rate improved to 4.1%remained flat at 3.5% as of January 2018July 2023 compared to 4.8%3.5% as of January 2017July 2022, and increased slightly from 3.4% in April 2023, according to data provided by the U.S. Department of Labor;
•Mortgage interest rates remained lowincreased with a thirty-year fixed mortgage rate of approximately 4.03%6.8% in January 2018, a decreaseJuly 2023, an increase of approximately 12151 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 decreasedincreased from 98.551.5 in January 2017July 2022 to 95.771.6 in January 2018.July 2023; and
•The inflation rate as of July 2023 was 3.2%, compared to 8.5% in July 2022 and 4.9% in April 2023 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 andaffordability.
The Company's total net 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 in the low single digitsdecreased 8.2% during the thirdfirst quarter of fiscal 2018. 2024 compared to the same prior year period.
The Company earned net income of $37.9 million for the first quarter of fiscal 2024, compared with a net income of $20.1 million in the same period of the prior year.
Results of Operations
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Three Months Ended |
| | | | | July 31, |
| (in thousands) | | | | | | | | 2023 | | 2022 | | Percent Change |
| | | | | | | | | | | | |
| Net sales | | | | | | | | $ | 498,255 | | | $ | 542,893 | | | (8.2) | % |
| Gross profit | | | | | | | | $ | 109,609 | | | $ | 86,747 | | | 26.4 | % |
| Selling and marketing expenses | | | | | | | | $ | 24,360 | | | $ | 25,766 | | | (5.5) | % |
| General and administrative expenses | | | | | | | | $ | 35,594 | | | $ | 30,180 | | | 17.9 | % |
Net Sales. Net sales were $498.3 million for the first quarter of fiscal 2024, a decrease of $44.6 million or 8.2% compared to the same period of fiscal 2023. The Company’sCompany's remodeling sales, which consist of our independent dealer and distributor channel sales and home center retail sales, increased 33% during the third quarter and 10%decreased 9.5% during the first nine monthsquarter of fiscal 20182024 compared to the same prior-year periods.prior year period. Our independent dealer and distributor channel grew by 3% during the third quarter and 11%remained flat during the first nine monthsquarter of fiscal 2018, respectively, when2024 compared to the comparable prior-year periods as management believes that the Company has improved market share in this channel.prior year period. Our home center retailer channel grewdecreased by 42% during the third quarter and 9%12.8% during the first nine monthsquarter of fiscal 2018, respectively, when2024 compared to the comparable prior-year periods. Much of this growth is attributedprior year period. Demand trends have slowed for our made-to-order and stock kitchen business due to lower in-store traffic rates and consumers are choosing smaller sized projects.
Builder sales decreased 6.4% in the one month of results from the Company’s acquisition of RSI which accounted for 31% of our remodeling sales during the thirdfirst quarter of fiscal 2018. Otherwise, excluding2024, compared to the impactsame period of RSI sales, management believes the Company has maintained share within the home center retail channel.
Regarding new construction markets, thefiscal 2023. 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 rose approximately 8%decreased 21.6% during the thirdfirst quarter of the Company’s fiscal 20182024 over the comparable prior year period. Completions overperiod, according to the third fiscal quarter only averaged an increaseU.S. Department of 3%.
Sales in the new construction channel increased 7% in the third quarter, 4% of which was attributable to one month of results from the Company's acquisition of RSI, and more than 9%Commerce. In comparison, housing completions decreased 0.9% during the first nine monthsquarter of fiscal 2018 when2024 over the comparable prior year period, according to the U.S. Department of Commerce.
GrossProfit. Gross profit margin for the first quarter of fiscal 2024 was 22.0% compared with 16.0% for the same periodsperiod of fiscal 2017. The Company believes it under indexed2023, representing a 600 basis point improvement. Gross profit margin in the market duefirst quarter of the current fiscal year was positively impacted by operational improvements in our manufacturing facilities and stability in the supply chain, partially offset by a $4.9 million pre-tax charge related to an increase in first time home buyers.the plywood case.
The Company’s total net sales rose 17% during the third quarterSelling and 9%Marketing Expenses. Selling and marketing expenses decreased by $1.4 million or 5.5% during the first nine months of fiscal 2018 compared to the same prior-year periods, which management believes was driven primarily by a rise in overall market activity plus one month of sales from the Company’s acquisition of RSI.
The Company earned net income of $2.0 million for the third quarter of fiscal 2018,2024 compared with $14.6 million in the third quarter of its prior fiscal year, and earned net income of $44.0 million for the first nine months of fiscal 2018, compared with $53.9 million into the same period of the prior year.
As of January 31, 2018, the Company had total net deferred tax liabilities of $63.6 million, compared to net deferred tax assets of $18.0 million at April 30, 2017. The reduction in total net deferred tax assets from April 30, 2017 to January 31, 2018 is mainly due to the preliminary deferred tax liability of $67.8 million from RSI Acquisition, pension contributions, and stock based compensation transactions over the period. The Company regularly considers the need for a valuation allowance against its deferred tax assets. Deferred tax assets are reduced by a valuation allowance when, after considering all positive and negative evidence, it is determined that it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. The Company has recorded a valuation allowance related to deferred tax assets for certain state investment tax credit (“ITC”) carryforwards. These credits expire in various years beginning in fiscal 2020. The Company believes based on positive evidence of the housing industry improvement along with five consecutive years of profitability that the Company will more likely than not realize all other remaining deferred tax assets.
Results of Operations
|
| | | | | | | | | | | | | | | | | | | | | | |
| |
| Three Months Ended |
| Nine Months Ended |
| |
| January 31, |
| January 31, |
| (in thousands) |
| 2018 |
| 2017 |
| Percent Change |
| 2018 |
| 2017 |
| Percent Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net sales |
| $ | 292,791 |
|
| $ | 249,285 |
|
| 17 | % |
| $ | 844,387 |
|
| $ | 771,511 |
|
| 9 | % |
| Gross profit |
| 50,379 |
|
| 51,596 |
|
| (2 | ) |
| 166,208 |
|
| 167,065 |
|
| (1 | ) |
| Selling and marketing expenses |
| 19,167 |
|
| 18,519 |
|
| 3 |
|
| 55,397 |
|
| 52,128 |
|
| 6 |
|
| General and administrative expenses |
| 23,492 |
|
| 11,476 |
|
| 105 |
|
| 41,442 |
|
| 33,083 |
|
| 25 |
|
Net Sales. Net sales were $292.8 million for the third quarter of fiscal 2018, an increase of 17% compared with the third quarter of fiscal 2017. For the first nine months of fiscal 2018, net sales were $844.4 million, reflecting a 9% increase compared with the same period of fiscal 2017. The increase in net sales during the third quarter and first nine months of fiscal 2018 was driven by one month of sales from the Company’s acquisition of RSI of $38.6 million and organic growth of 2% in the third quarter and 4% in the first nine months of fiscal 2018.
GrossProfit. Gross profit margin for the third quarter of fiscal 2018 was 17.2%, compared with 20.7% for the same period of fiscal 2017. Gross profit margin was 19.7% for the first nine months of fiscal 2018, compared with 21.7% in the first nine months of fiscal 2017. Gross profit in the third quarter was unfavorably impacted by higher transportation costs, raw material inflation, and operating inefficiency and $6.3 million, or 216 bps, of inventory step-up amortization. Gross profit for the first nine months of the current fiscal year was unfavorably impacted by higher transportation costs, raw material inflation, and healthcare costs and $6.3 million, or 75 bps, of inventory step-up amortization.
Selling andMarketing Expenses.Selling and marketing expenses were 6.5% of net sales in the third quarter of fiscal 2018, compared with 7.4% of net sales for the same period in fiscal 2017. For the first nine months of fiscal 2018, selling and marketing expenses were 6.6% of net sales, compared with 6.8% of net sales for the same period of fiscal 2017. Selling and marketing expenses as a percentage of net sales decreased during the third quarter and first nine months of fiscal 2018 as a result of lower personnel costs and product launch costs.
General andAdministrative Expenses. General and administrative expenses were 8.0% of net sales in the third quarter of fiscal 2018, compared with 4.6% of net sales in the third quarter of fiscal 2017, and 4.9% of net sales in the first nine monthsquarter of fiscal 20182024, compared with 4.3%4.7% for the same period of fiscal 2023. The decrease in selling and marketing expenses was due to lower outside services spend.
General andAdministrative Expenses. General and administrative expenses increased by $5.4 million or 17.9%. General and administrative expenses were 7.1% of net sales in the same periodfirst quarter of fiscal 2024, compared with 5.6% of net sales in the first quarter of fiscal 2017.2023. The increase in general and administrative expenses as a percentage of net sales during the thirdfirst quarter and first nine months of fiscal 20182024 was driven primarily by RSI Acquisition related costs of $10.2 million and amortization of intangibles of $4.1 million, partially offset by lowerhigher employee incentive costs.
Effective Income Tax Rates. The effective income tax rates for the three-month period ended July 31, 2023 was 21.9% compared with 25.0% in the comparable period in the prior fiscal year. The effective rate was higher than the 21.0% U.S. statutory rate for the three-month period ended July 31, 2023 primarily due to state income taxes. The effective rate for the period ended July 31, 2023 was lower than the comparable period in the prior fiscal year primarily due to a favorable increase in federal tax credits for prior periods and stock compensation deductions booked in the current quarter.
Non-GAAP Financial Measures. Management considers a measurement that is notMeasures. 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 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 useful measurementsubstitute 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 operational profitabilitypreparation of the Company. Management deems adjustedour 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 EBITDA as a useful measure of performance of its core operations and helpful in evaluating comparative results period over period. Some investment professionals also utilize such a measurement as an indicator of the value of profits and cash that are generated strictly from operating activities, putting aside working capital and certain other balance sheet changes. For this measurement, management increases net income for significant non-operating(loss) adjusted to exclude (1) income tax expense (benefit), (2) interest expense, net, (3) depreciation and non-cashamortization expense, items to arrive at an amount known as “Earnings Before Interest, Taxes, Depreciation(4) amortization of customer relationship intangibles and Amortization” (EBITDA). Further, management defines adjustedtrademarks. We define Adjusted EBITDA as EBITDA adjusted to exclude such items as:(1) expenses related to the acquisition of RSI Home Products, Inc. ("RSI acquisition") and the subsequent restructuring charges stock based compensation, corporate business development expense and that the Company incurred related to the acquisition, (2) non-recurring restructuring charges, (3) net gain/loss on disposaldebt forgiveness and modification, (4) stock-based compensation expense, (5) gain/loss on asset disposals, (6) change in fair value of property, plantforeign exchange forward contracts, and equipment. The reader(7) pension settlement charges. We believe Adjusted EBITDA, when presented in conjunction with comparable GAAP measures, is cautioneduseful for investors because management uses Adjusted EBITDA in evaluating the performance of our business.
We define Adjusted EBITDA margin as Adjusted EBITDA as a percentage of net sales.
Adjusted EPS per diluted share
We use Adjusted EPS per diluted share in evaluating the performance of our business and profitability. Management believes that this measure provides useful information to investors by offering additional ways of viewing the Company's results by providing an indication of performance and profitability excluding the impact of unusual and/or non-cash items. We define Adjusted EPS per diluted share as diluted earnings per share excluding the per share impact of (1) expenses related to the RSI acquisition and the subsequent restructuring charges that the values for EBITDA and adjusted EBITDA should not be compared to other entities unknowingly. EBITDA and adjusted EBITDA should not be considered alternatives to net income or cash flows from operating activities as an indicator of operating performance or as a measure of liquidity. The reader should referCompany incurred related to the determinationRSI acquisition, (2) non-recurring restructuring charges, (3) the amortization of customer relationship intangibles and trademarks, (4) net incomegain/loss on debt forgiveness and cash flowsmodification, (5) pension settlement charges, and (6) the tax benefit of RSI acquisition expenses and subsequent restructuring charges, the net gain on debt forgiveness and modification and the amortization of customer relationship intangibles and trademarks. The amortization of intangible assets is driven by the RSI acquisition and will recur in future periods. Management has determined that excluding amortization of intangible assets from operating activities in accordance with U.S. generally accepted accounting principles disclosedour 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 |
| | | | July 31, |
| (in thousands) | | | | | | 2023 | | 2022 |
| | | | | | | | |
| Net income (GAAP) | | | | | | $ | 37,850 | | | $ | 20,070 | |
| Add back: | | | | | | | | |
| Income tax expense (benefit) | | | | | | 10,615 | | | 6,691 | |
| Interest expense, net | | | | | | 2,437 | | | 4,053 | |
| Depreciation and amortization expense | | | | | | 11,745 | | | 12,430 | |
| Amortization of customer relationship intangibles | | | | | | 11,417 | | | 11,417 | |
| EBITDA (Non-GAAP) | | | | | | 74,064 | | | 54,661 | |
| Add back: | | | | | | | | |
| Acquisition and restructuring related expenses (1) | | | | | | 20 | | | 20 | |
| Non-recurring restructuring charges (2) | | | | | | (172) | | | — | |
| Pension settlement, net | | | | | | — | | | (239) | |
| | | | | | | | |
| Change in fair value of foreign exchange forward contracts (3) | | | | | | (1,015) | | | 238 | |
| | | | | | | | |
| Stock-based compensation expense | | | | | | 2,247 | | | 1,635 | |
| Loss on asset disposal | | | | | | 7 | | | 177 | |
| Adjusted EBITDA (Non-GAAP) | | | | | | 75,151 | | | 56,492 | |
| | | | | | | | |
| Net Sales | | | | | | $ | 498,255 | | | $ | 542,893 | |
| Net income margin (GAAP) | | | | | | 7.6 | % | | 3.7 | % |
| Adjusted EBITDA margin (Non-GAAP) | | | | | | 15.1 | % | | 10.4 | % |
(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 nationwide reduction-in-force implemented in the Condensed Consolidated Statementsthird and fourth quarters of Income, Condensed Consolidated Statementsfiscal 2023.
(3) In the normal course of Comprehensive Income and Condensed Consolidated Statementsbusiness the Company is subject to risk from adverse fluctuations in foreign exchange rates. The Company manages these risks through the use of Cash Flows.
EBITDA and adjusted EBITDA as used by management are calculated as follows:
|
| | | | | | | | | | | | | | | | |
| Reconciliation of Adjusted Non-GAAP Financial Measures to the GAAP Equivalents |
| | | | | | | | | |
| | | Three Months Ended | | Nine Months Ended |
| | | January 31, | | January 31, |
| (in thousands) | | 2018 | | 2017 | | 2018 | | 2017 |
| | | | | | | | | |
| Net income (GAAP) | | $ | 1,996 |
| | $ | 14,553 |
| | $ | 44,032 |
| | $ | 53,851 |
|
| Add back: | | | | | | | | |
| Income tax expense | | 1,768 |
| | 7,220 |
| | 22,567 |
| | 28,312 |
|
| Interest (income) expense, net | | 4,035 |
| | (167 | ) | | 2,887 |
| | (225 | ) |
| Depreciation and amortization expense | | 6,602 |
| | 4,846 |
| | 17,579 |
| | 13,719 |
|
| Amortization of customer lists and trademarks | | 4,083 |
| | — |
| | 4,083 |
| | — |
|
| EBITDA (Non-GAAP) | | $ | 18,484 |
| | $ | 26,452 |
| | $ | 91,148 |
| | $ | 95,657 |
|
| Add back: | | | | | | | | |
| Acquisition related expenses | | 10,163 |
| | 728 |
| | 10,163 |
| | 728 |
|
| Inventory step-up amortization (1) | | 6,334 |
| | — |
| | 6,334 |
| | — |
|
| Stock compensation expense | | 897 |
| | 828 |
| | 2,506 |
| | 2,477 |
|
| Loss on asset disposal | | 147 |
| | 111 |
| | 280 |
| | 286 |
|
| Adjusted EBITDA (Non-GAAP) | | $ | 36,025 |
| | $ | 28,119 |
| | $ | 110,431 |
| | $ | 99,148 |
|
| | | | | | | | | |
| Net Sales | | $ | 292,791 |
| | $ | 249,285 |
| | $ | 844,387 |
| | $ | 771,511 |
|
| Adjusted EBITDA margin (Non-GAAP) | | 12.3 | % | | 11.3 | % | | 13.1 | % | | 12.9 | % |
(1)foreign exchange forward contracts. The inventory step-amortization is the increasechanges in the fair value of inventory acquired through the RSI Acquisition that was fully expensedforward contracts are recorded in other (income) expense, net in the quarter ended January 31, 2018.operating results.
A reconciliation of EBITDA, Adjusted EBITDA and Adjusted EBITDA margin as projected for fiscal 2024 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).
Adjusted EBITDA. Adjusted EBITDA for the first quarter of fiscal 2024 was $36.0$75.2 million with an Adjusted EBITDA marginor 15.1% of 12.3%,net sales compared to $28.1$56.5 million and 11.3%or 10.4% of net sales for the same quarter of the prior fiscal year. The increase in Adjusted EBITDA was $110.4 million, with an Adjusted EBITDA margin of 13.1%, for the first ninequarter of fiscal 2024 is primarily due to increased net income due to pricing better matching inflationary impacts, mix and improved efficiencies in the manufacturing platforms, as our operations team continues to drive excellence in our plants. This was partially offset by a $4.9 million pre-tax charge related to the plywood case.
| | | | | | | | | | | | | | | | |
| Reconciliation of Net Income to Adjusted Net Income |
| | | | Three Months Ended |
| | | | July 31, |
| (in thousands, except share data) | | | | | | 2023 | | 2022 |
| | | | | | | | |
| Net income (GAAP) | | | | | | $ | 37,850 | | | $ | 20,070 | |
| Add back: | | | | | | | | |
| Acquisition and restructuring related expenses | | | | | | 20 | | | 20 | |
| | | | | | | | |
| Non-recurring restructuring charges | | | | | | (172) | | | — | |
| Pension settlement, net | | | | | | — | | | (239) | |
| Amortization of customer relationship intangibles | | | | | | 11,417 | | | 11,417 | |
| | | | | | | | |
| Tax benefit of add backs | | | | | | (2,940) | | | (2,900) | |
| Adjusted net income (Non-GAAP) | | | | | | $ | 46,175 | | | $ | 28,368 | |
| | | | | | | | |
| Weighted average diluted shares (GAAP) | | | | | | 16,589,481 | | | 16,619,916 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| EPS per diluted share (GAAP) | | | | | | $ | 2.28 | | | $ | 1.21 | |
| Adjusted EPS per diluted share (Non-GAAP) | | | | | | $ | 2.78 | | | $ | 1.71 | |
Outlook. Shifting our focus to the remainder of fiscal year 2024, we hold our expectations on a low-double digit decline in net sales versus fiscal year 2023. We are increasing our Adjusted EBITDA expectation by $20 million to a range of $225 million to $245 million for fiscal 2024 (which includes the now completed first quarter). The change in net sales and Adjusted EBITDA is highly dependent upon overall industry, economic growth trends, material constraints, labor impacts, interest rates and consumer behaviors. Adjusted EBITDA will also be impacted by one-time start-up costs for our plant expansions in Monterrey, Mexico and Hamlet, North Carolina, which are expected to occur in the second half of fiscal 2024.
We will continue our investment back into the business by focusing on the plant expansions in Monterrey, Mexico and Hamlet, North Carolina, continuing our digital transformation path with investments in Oracle and Salesforce, and investing in automation. We are choosing to make these additional investments into our core business in an effort to improve sales and enhance our margins in the future.
During the first quarter of fiscal 2024, we repurchased $22.1 million of the Company's common shares. We will continue to be opportunistic in our share repurchasing. Lastly, we have our debt position at a leverage ratio we wanted to achieve and will be deprioritizing paying down debt in fiscal 2024.
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, 2023, 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 $89.7 million at July 31, 2023, representing a $47.9 million increase from its April 30, 2023 levels primarily due to $86.7 million cash provided by operations in the first three months of fiscal 20182024 compared to $99.1with cash used by operations of $37.3 million and 12.9% in the same period of the prior fiscal year. The increase during the third quarteryear, $13.8 million in payments to acquire property, plant, and first nine monthsequipment, and $22.1 million of fiscal 2018 is primarily due to additional sales growth and the inclusion of one month of results for RSI.
Effective Income Tax Rates.The Company’s effective income tax rate for the three- and nine-month periods ended January 31, 2018 was 47.0% and 33.9%, respectively, compared with 33.2% and 34.5%, respectively, in the comparable
periods in the prior fiscal year.stock repurchases. The increase in the effective tax rate for the third quarter of fiscal 2018 as compared to the third quarter of fiscal 2017Company's cash from operating activities was driven primarily due to transaction costs incurred andby an increase in limitation of domestic production deduction due to the acquisition in the quarter,net income and cash inflows from customer receivables, net, inventories, accrued marketing expenses and prepaid expenses and other assets, partially offset by the benefitcash outflows from the reduction in the tax rate enacted in connection with the Tax Act. The Company recorded a net tax benefit of $1.2 million in the third quarter of fiscal 2018 in connection with the Tax Act enacted in December, 2017. The decrease in the effective tax rate for the first nine months of fiscal 2018 as compared to the first nine months of fiscal 2017 was primarily due to the net benefit of $1.2 million from tax rate reduction enacted in connection with the Tax Actaccrued compensation and an increase of $0.5 million tax benefit from stock-based compensation transactions. See Note O--Income Taxes for more information on the Tax Act.
Outlook. The Company believes that the average price of existing home sales will continue to increase driven by growth in both employmentrelated expenses, income taxes, accounts payable and new household formations. In this environment, the Company expects the cabinet remodeling market will show modest improvement during the remainder of fiscal 2018 but overall activity will continue to be below historical averages. Within the cabinet remodeling market, the Company expects independent dealers to outperform other channels of distribution primarily due to their more affluent customer base. The Company remains focused on improving market share in the home center channel for the remainder of fiscal 2018, however this is heavily dependent upon competitive promotional activity. The Company also expects to continue to increase market share in the dealer channel. This combination is expected to result in remodeling sales growth that is above the market rate primarily due to incremental growth from the RSI Acquisition.
The Company expects that single-family housing starts and in turn, new construction cabinet sales, will grow approximately 8-10% during the remainder of its fiscal year 2018, and that the Company’s new construction sales growth will be below, or at this level, for the remainder of its current fiscal year, as the market continues to shift to first time home buyers.
LIQUIDITY AND CAPITAL RESOURCES
The Acquisition significantly affected the Company’s financial condition, liquidity and cash flow. See Note C--Acquisition of RSI Home Products, Inc. for a table detailing the preliminary purchase price. The Company’s cash and cash equivalents totaled $139.6 million at Januaryaccrued expenses. At July 31, 2018, representing a $37.4 million decrease from its April 30, 2017 levels. At January 31, 2018,2023, total long-term debt (including current maturities) was $896.4 million, an increase of $879.6 million from its balance at April 30, 2017.$371.5 million. The Company’sCompany's ratio of long-term debt to total capital was 61.0%29.2% at JanuaryJuly 31, 2018,2023, compared with 4.2%29.7% at April 30, 2017.2023.
The Company’sCompany'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 upamounts under the Revolving Facility.
On April 22, 2021, the Company amended and restated its prior credit agreement and on January 17, 2023 the Company entered into an amendment of such agreement to $100transition 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 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. Approximately $65.1 million was available under this facility as of January 31, 2018, and approximately $95.1 million was available as of February 12, 2018 after giving effectFacility to fund, in part, the use of proceeds from the issuancerepayment in full of the amounts then outstanding under its prior credit agreement and the complete redemption of its 4.875% Senior Notes and borrowings under the Delayed Draw Term Loan (See Note R--Subsequent Events).
The Company borrowed $250 million under the Initial Term Loan on December 29, 2017 in connection with the closing of the RSI Acquisition and borrowed an additional $250 million under the Delayed Draw Term Loan on February 12, 2018 in connection with the refinancing of the RSI Notes. Amounts outstanding under the Credit Facilities bear interest based on a fluctuating rate measured by reference to either, at the Company’s option, a base rate plus an applicable margin ranging between 0.25% and 1.25% or LIBOR plus an applicable margin ranging between 1.25% and 2.25%, with the applicable margin being determined by reference to the Company’s then-current “Total Funded Debt to EBITDA Ratio.” The Company will also incur 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.” The initial applicable margin with respect to base rate loans was 1.00% and the initial applicable margin with respect to LIBOR loans was 2.00%. The initial commitment fee was 0.25%. As of February 20, 2018, the applicable margin with respect to base rate loans and LIBOR loans was 1.25% and 2.25%, respectively, and the commitment fee was 0.30%.
due 2026. The Company is required to repay the aggregate outstanding amountsTerm Loan Facility in specified quarterly installments. The Revolving Facility and Term Loan Facility mature on April 22, 2026. Approximately $323.2 million was available under the Initial Term Loan and the Delayed Draw Term Loan inRevolving Facility as of July 31, 2023.
The A&R Credit Agreement includes certain specified quarterly installments beginning on April 30, 2018. The Credit Facilities mature on December 29, 2022.
On February 12, 2018,financial covenants that require the Company issued $350 millionto 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 aggregate principal amount of the Senior Notes and utilized the proceeds of such issuance, together with the borrowings under the Delayed Draw Term Loan as discussed above and cash on hand,each case, to fund the refinancing of the RSI Notes.certain limited exceptions.
The A&R Credit Agreement and the indenture governing the Senior Notesincludes certain additional covenants, including negative covenants that restrict the ability of the Company and certain of the Company’sits subsidiaries to among other things, incur additional indebtedness, create additional liens on its assets, make certain vestments,
investments, dispose of its assets or engage in a merger or consolidation,other similar transaction or 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 A&R Credit AgreementAgreement. 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 indenture governing the Senior Notes.
repurchase of common stock, in certain limited circumstances. See Note M--K — Loans Payable and Long-Term Debt for a discussion of interest rates under the A&R Credit Agreement and Note R--Subsequent Events for additional information concerningour compliance with the covenants in the A&R Credit Facilities, the Senior Notes and the refinancingAgreement. We expect to remain in compliance with each of the RSI Notes.covenants under the A&R Credit Agreement during fiscal 2024.
Cash provided by operating activities inAs of July 31, 2023 and April 30, 2023, the first nine months of fiscal 2018 was $48.9 million, compared with $51.7 million in the comparable period of fiscal 2017. The decrease in the Company’s cash from operating activities was driven primarily by a decrease in net income and increased income taxes receivable and accrued compensation and other expenses, which was partially offset by higher depreciation and amortization.Company had no off-balance sheet arrangements.
The Company’sCompany's investing activities primarily consist of purchases and maturities of certificates of deposit, investment in property, plant and equipment and promotional displays. Net cash used for investing activities was $28.4$14.2 million in the first ninethree months of fiscal 2018,2024, compared with $51.7$4.6 million in the comparable period of fiscal 2017. The decrease in cash used was due to the acquisition of RSI and increased investment in property, plant and equipment, which was partially offset by a net $96.0 million increase in cash flow from certificates of deposit.2023.
During the first ninethree months of fiscal 2018,2024, net cash used by financing activities was $57.9$24.6 million, compared with $11.2$21.4 million in the comparable period of the prior fiscal year. The increase in cash used during the first three months of fiscal 2024 was primarily driven by the Company’s payments of long-term debt of $21.4$22.1 million the repurchase of 309,612 shares of common stock at a cost of $29.0 million, a $15.6 million increase from the prior year, debt issuance costs of $6.7 million andrepurchases, offset by a decrease in proceeds fromnet debt repayments of $0.6 million during the exercisefirst three months of stock optionsfiscal 2024 compared to $20.6 million of $1.1 million.net debt repayments in the same period of the prior fiscal year.
UnderOn May 25, 2021, the Company's Board of Directors (the "Board") authorized a stock repurchase authorization approved by its Boardprogram of Directors on November 30, 2015, the Company was authorized to purchase up to $20$100 million of the Company's common shares. On November 30, 2016, the Board of Directors authorized an additional stock repurchase program of up to $50 million of the Company's common shares. This authorization is in addition to the stock repurchase program authorized on November 19, 2015. 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 the indenture governing the Senior Notes, and other factors management deems relevant. At January 31, 2018, $36.0 million remainedThe 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 by the Company’s Board of Directors to repurchase the Company’sbut unissued common shares. The Company purchased a totalrepurchased $22.1 million of 309,612its common shares for an aggregate purchase price of $29.0 million, during the first nine months of fiscal 2018, under the authorizations. See Part II. Item 2, "Unregistered Sales of Equity Securities and Use of Proceeds" for further information on share repurchases. The Company announced on December 1, 2017 that it suspended its stock repurchase program in conjunction with the RSI Acquisition.
On November 30, 2016 the Board of Directors of the Company approved the construction of a new corporate headquarters in Winchester, Virginia. The new space will consolidate employees that currently occupy four buildings in Winchester, Virginia and Frederick County, Virginia, during the 4th quarter of fiscal 2018. It is expected that the new building will be self-funded for approximately $302024. As of July 31, 2023, $52.9 million of which $18.3 million has been spent through January 31, 2018. Duringfunds remained available from the first nine months of fiscal 2018, approximately $15.3 million in costs were incurred relatedamounts authorized by the Board to repurchase the new company headquarters.Company's common stock.
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 2018.2024.
Seasonal and Inflationary Factors
The Company’sOur business has historically been subject to seasonal influences, with higher sales typically realized in the secondour 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’sCompany'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. The Company’sThere have been no significant changes to the Company's critical accounting policies areas disclosed in the Company’sCompany's Annual Report on Form 10-K for the fiscal year ended April 30, 2017. Beginning third quarter fiscal 2018 goodwill and other intangible assets has been designated as one of the Company's critical accounting policies as a result of the acquisition of RSI.2023.
Goodwill and Other Intangible Assets: Goodwill represents the excess of purchase price over the fair value of net assets acquired. The Company does not amortize goodwill but evaluates for impairment annually, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
In accordance with the accounting standards, an entity has the option first to assess qualitative factors to determine whether events and circumstances indicate that it is more likely than not that goodwill is impaired. If after such assessment an entity concludes that the asset is not impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the asset using a quantitative impairment test, and if impaired, the associated assets must be written down to fair value. There were no impairment charges related to goodwill for the three- and nine-month periods ended January 31, 2018 and 2017.
The Company amortizes the cost of other intangible assets over their estimated useful lives, which range up to six years, unless such lives are deemed indefinite. There were no impairment charges related to other intangible assets for the three- and nine-month periods ended January 31, 2018 and 2017.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate RiskThe 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.
Our Revolving Facility and Initial Term Loan, includeThe 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 JanuaryJuly 31, 20182023 would increase our annual interest expense by approximately $2.8$1.7 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 interest rate derivatives or similar financial instruments to manage its commodity price or interest rate risks. See “Seasonal and Inflationary Factors” in Management’s Discussion and Analysis of Financial Condition and Results of Operations above for additional information regarding the effects inflation and commodity price fluctuations have on the costs of the Company’s products.
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 JanuaryJuly 31, 2018.2023. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective. We acquired RSI on December 29, 2017 and have not yet included RSI in our assessment of the effectiveness of our internal control over financial reporting. Accordingly, pursuant to the Securities and Exchange Commission's general guidance that an assessment of a recently acquired business may be omitted from the scope of an assessment in the year of acquisition, the scope of our assessment of the effectiveness of our disclosure controls and procedures does not include internal control over financial reporting related to RSI.
Except as described in the preceding paragraph, thereThere has been no change in the Company's internal control over financial reporting that occurred during the quarter ended JanuaryJuly 31, 20182023 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’sCompany's business. The Company is not party to any material litigation that does not constitute ordinary, routine litigation incidental to its business. See Note P — Other Information for further discussion of the antidumping and countervailing duties investigation.
Item 1A. Risk Factors
Due to the acquisition of RSI there have been changes to the riskRisk factors described in Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on June 29, 2017 as follows:
Because of the concentration of our sales to our two largest customers, the loss of either customer or a significant reduction in orders from either customer could adversely affect our financial results. Home Depot and Lowe’s collectively accounted for approximately 36% of total Company sales during the first nine months of fiscal 2018 and with the RSI Acquisition, we expect this concentration to significantly increase. We do not typically enter into long-term sales contracts with Home Depot or Lowe’s and our sales usually occur on a “purchase order” basis. Our customers can make significant changes in their purchase volumes and can seek to significantlythat may affect the prices we receive for our products and services and the other terms and conditions on which we do business. They have discontinued, and may in the future choose to discontinue, purchasing some or all of our products with little or no notice. In the past, purchase volumes from our customers, including Home Depot and Lowe’s, have fluctuated substantially, and we expect such fluctuations to occur from time to time in the future. Any reduction in, or termination of, our sales to either Home Depot or Lowe’s could have a material adverse effect on our business, financial condition or results of operations.
In addition, the potential for orders from these large retail customers to increase significantly from time to time requires us to have sufficient manufacturing capacity. These large retailers also impose strict logistics and performance obligations. Failure to comply with these obligations may result in these customers reducing or stopping their purchase of our products.
We could also experience delays or defaults in payment from Home Depot or Lowe’s, which could adversely affect our business, financial condition or results of operations. The loss of a substantial portion of our order volumes or revenue from either Home Depot or Lowe’s for any reason would have a material adverse effect on our business, financial condition, or results of operations.
Our business primarily relies on U.S. home improvement, repair and remodel and new home construction activity levels, all of which are impacted by risks associated with fluctuations in the housing market. Downward changes in the general economy, the housing market or other business conditions could adversely affect our results of operations, cash flows and financial condition. Our business primarily relies on home improvement, repair and remodel, and new home construction
activity levels in the United States. The housing market is sensitive to changes in economic conditions and other factors, such as the level of employment, access to labor, consumer confidence, consumer income, availability of financing and interest rate levels. Adverse changes in any of these conditions generally, or in any of the markets where we operate, could decrease demand and could adversely impact our businesses by: causing consumers to delay or decrease homeownership; making consumers more price conscious resulting in a shift in demand to smaller, less expensive homes; making consumers more reluctant to make investments in their existing homes, including large kitchen and bath repair and remodel projects; or making it more difficult to secure loans for major renovations. Although the U.S. new home construction market is improving, demand for new homes is still recovering after the 2007-2009 U.S. economic recession and continues to remain below historical levels.
Prolonged economic downturns may adversely impact our sales, earnings and liquidity. Our industry historically has been cyclical in nature and has fluctuated with economic cycles. During economic downturns, our industry could experience longer periods of recession and greater declines than the general economy. We believe that our industry is significantly influenced by economic conditions generally and particularly by housing activity, consumer confidence, the level of personal discretionary spending, demographics and credit availability. These factors may affect not only the ultimate consumer of our products,
but also may impact home centers, builders and our other primary customers. As a result, a worsening of economic conditions could adversely affect our sales and earnings as well as our cash flow and liquidity.
The U.S. cabinetry industry is highly competitive, and we may not be able to compete successfully. We operate within the highly competitive U.S. cabinetry industry, which is characterized by competition from a number of other manufacturers. Competition is further intensified during economic downturns. We compete with numerous large national and regional home products companies for, among other things, customers, orders from Home Depot and Lowe’s, raw materials and skilled management and labor resources. Purchase volumes from our main home center customers have fluctuated substantially from time to time in the past, and we expect such fluctuations to occur from time to time in the future.
Some of our competitors have greater financial, marketing and other resources than we do and, therefore, may be able to adapt to changes in customer preferences more quickly, devote more resources to the marketing and sale of their products, generate greater national brand recognition or adopt more aggressive pricing policies than we can.
In addition, some of our competitors may resort to price competition to sustain or gain market share and manufacturing capacity utilization, and we may have to adjust the prices on some of our products to stay competitive, which could reduce our revenues. We may not ultimately succeed in competing with other manufacturers and distributors in our market, which may have a material adverse effect on our business, financial condition or results of operations.
Our failure to develop new products or respond to changing consumer preferences and purchasing practices could have a material adverse effect on our business, financial condition or results of operations. The U.S. cabinetry industry is subject to changing consumer trends, demands and preferences. The uncertainties associated with developing and introducing new products, such as gauging changing consumer preferences and successfully developing, manufacturing, marketing and selling new products, could lead to, among other things, rejection of a new product line, reduced demand and price reductions for our products. If our products do not keep up with consumer trends, demands and preference, we could lose market share, which
could have a material adverse effect on our business, financial condition or results of operations.
Changes to consumer shopping habits and potential trends toward “online” purchases could also impact our ability to compete as we currently sell our products mainly through our distribution channel. Further, the volatile and challenging economic environment of recent years has caused shifts in consumer trends, demands, preferences and purchasing practices and changes in the business models and strategies of our customers. Shifts in consumer preferences, which may or may not be long-term, have altered the quantity, type and prices of products demanded by the end-consumer and our customers. If we do not timely and effectively identify and respond to these changing consumer preferences and purchasing practices, our relationships with our customers could be harmed, the demand for our products could be reduced and our market share could be negatively
affected.
We may fail to fully realize the anticipated benefits of our growth strategy within the dealer and homebuilder channels. Part of our growth strategy depends on expanding our business in the dealer and homebuilder channels. We may fail to compete successfully against other companies that are already established providers within the dealer and homebuilder channels. Demand for our products within the homebuilder and dealer channels may not grow, or might even decline. In addition, we may not accurately gauge consumer preferences and successfully develop, manufacture and market our products at a national level. Further, the implementation of our growth strategy may place additional demands on our administrative, operational and financial resources and may divert management’s attention away from our existing business and increase the demands on our financial systems and controls. If our management is unable to effectively manage growth, our business, financial condition or results of operations could be adversely affected. If our growth strategy is not successful then our revenue and earnings
may not grow as anticipated or may decline, we may not be profitable, our reputation and brand may be damaged. In addition, we may change our financial strategy or other components of our overall business strategy if we believe our current strategy is not effective, if our business or markets change, or for other reasons, which may cause fluctuations in our financial results.
Manufacturing expansion to add capacity, manufacturing realignments, and other cost savings programs could result in a decrease in our near-term earnings. We continually review our manufacturing operations. These reviews could result in the expansion of capacity, manufacturing realignments and various cost savings programs. Effects of manufacturing expansion, realignments or cost savings programs could result in a decrease in our short-term earnings until the additional capacity is in place, cost reductions are achieved and/or production volumes stabilize. Such manufacturing expansions, realignments and programs involve substantial planning, often require capital investments, and may result in charges for fixed asset impairments or obsolescence and substantial severance costs. We also cannot assure you that we will achieve all of the intended cost savings. Our ability to achieve cost savings and other benefits within expected time frames is subject to many estimates and assumptions. These estimates and assumptions are subject to significant economic, competitive, and other uncertainties, some of which are beyond our control. If these estimates and assumptions are incorrect, if we experience delays, or if other unforeseen events occur, our business, financial condition, and results of operations could be materially and adversely affected. In addition, downturns in the economy could potentially have a larger impact on American Woodmark as a result of this added capacity.
We may record future goodwill impairment charges or other asset impairment charges which could negatively impact our future results of operations and financial condition. We have recorded significant goodwill as a result of the RSI Acquisition, and goodwill and other acquired intangible assets represent a substantial portion of our assets. We also have long-lived assets consisting of property and equipment and other identifiable intangible assets which we review both on an annual basis as well as when events or circumstances indicate that the carrying amount of an asset may not be recoverable. If a determination is made that a significant impairment in value of goodwill, other intangible assets or long-lived assets has occurred, such determination could require us to impair a substantial portion of our assets. Asset impairments could have a material adverse effect on our financial condition and results of operations.
Fluctuating raw material and energy costs could have a material adverse effect on our business and results
of operations. We purchase various raw materials, including, among others, wood, wood-based and resin products, which
are subject to price fluctuations that could materially increase our manufacturing costs. Further, increases in energy costs increase our production costs and also the cost to transport our products, each of which could have a material adverse effect on our business and results of operations. In addition, some of our suppliers have consolidated and other suppliers may do so in the future. Combined with increased demand, such consolidation could increase the price of our supplies and raw materials.
We also may be unwilling or unable to pass on to customers commensurate cost increases. Competitive considerations and customer resistance to price increases may delay or make us unable to adjust selling prices. To the extent we are unable to either reengineer or otherwise offset increased costs or are unwilling or unable to build price increases into our sales prices, our margins will be negatively affected. Even if we are able to increase our selling prices, sustained price increases for our products may lead to sales declines and loss of market share, particularly if our competitors do not increase their prices. Conversely, when raw materials or energy prices decline, we may receive customer pressure to reduce our sales prices.
These prices are market-based and fluctuate based on factors beyond our control. We do not have long-term fixed supply agreements and do not hedge against price fluctuations. We, therefore, cannot predict our raw materials costs for the coming year.
The inability to obtain raw materials from suppliers in a timely manner would adversely affect our ability to manufacture and market our products. Our ability to offer a wide variety of products depends on our ability to obtain an adequate supply of
components from manufacturers and other suppliers, particularly wood-based and resin products. Failure by our suppliers to provide us with quality products on commercially reasonable terms, and to comply with legal requirements for business practices, could have a material adverse effect on our business, financial condition or results of operations. Furthermore, we rely heavily or, in certain cases, exclusively, on outside suppliers for some of our key components. While we do not rely exclusively on any one supplier for any particular raw materials, the loss of a major supplier could increase our costs to obtain raw materials until we obtain an adequate alternative source of materials.
We typically do not enter into long-term contracts with our suppliers or sourcing partners. Instead, most raw materials and sourced goods are obtained on a “purchase order” basis. Although these components are generally obtainable in sufficient quantities from other sources, resourcing them from another supplier could take time. Financial, operating, or other difficulties encountered by our suppliers or sourcing partners or changes in our relationships with them could result in manufacturing or sourcing interruptions, delays and inefficiencies, and prevent us from manufacturing enough products to meet customer demands.
Our operations may be adversely affected by information systems interruptions or intrusions. We rely on a number of information technology systems to process, transmit, store and manage information to support our business activities. Increased global cybersecurity vulnerabilities, threats and more sophisticated and targeted attacks pose a risk to our information technology systems. We have established security policies, processes and layers of defense designed to help identify and protect against intentional and unintentional misappropriation or corruption of our systems and information and disruption of our operations. Despite these efforts, systems may be damaged, disrupted, or shut down due to attacks by unauthorized access, malicious software, undetected intrusion, hardware failures, or other events, and in these circumstances our disaster recovery planning may be ineffective or inadequate. These breaches or intrusions could lead to business interruption, exposure of proprietary or confidential information, data corruption, damage to our reputation, exposure to litigation and increased operational costs. Such events could have a material adverse impact on our business, financial condition and results of operation. In addition, we could be adversely affected if any of our significant customers or suppliers experience any similar events that disrupt their business operations or damage their reputation.
Increased compliance costs or liabilities associated with environmental regulations could have a material adverse effect on our business, financial condition or results of operations. Our facilities are subject to numerous environmental laws, regulations and permits, including those governing emissions to air, discharges to water, storage, treatment and disposal of waste, remediation of contaminated sites and protection of worker health and safety. We may not be in complete compliance with these laws, regulations or permits at all times. Our efforts to comply with environmental requirements do not remove
the risk that we may incur material liabilities, fines or penalties for, among other things, releases of regulated materials occurring on or emanating from current or formerly owned or operated properties or any associated offsite disposal location, or for contamination discovered at any of our properties from activities conducted by previous occupants. Liability for environmental contamination or a release of hazardous materials may be joint and several, so that we may be held responsible for more than our share of the contamination or other damages, or even for the entire share.
Changes in environmental laws and regulations or the discovery of previously unknown contamination or other liabilities relating to our properties and operations could result in significant environmental liabilities that could impact our business,
financial condition or results of operation. In addition, we may incur capital and other costs to comply with increasingly stringent environmental laws and enforcement policies. These laws, including, for example, the regulations relating to formaldehyde emissions promulgated by the California Air Resources Board, require us to rely on compliance by our suppliers of raw materials. Should a supplier fail to comply with such regulations, notify us of non-compliance, or provide us with a product that does not comply, we could be subject to disruption in our business and incur substantial liabilities.
Unauthorized disclosure of confidential information provided to us by customers, employees or third parties could harm our business. We rely on the internet and other electronic methods to transmit confidential information and store confidential information on our networks. If there were a disclosure of confidential information provided by, or concerning, our employees, customers or other third parties, including through inadvertent disclosure, unapproved dissemination, or unauthorized access, our reputation could be harmed and we could be subject to civil or criminal liability and regulatory actions.
Changes in government and industry regulatory standards could have a material adverse effect on our business, financial condition or results of operations. Government regulations pertaining to health and safety and environmental concerns continue to emerge, domestically as well as internationally. These regulations include the Occupational Safety and Health
Administration and other worker safety regulations for the protection of employees, as well as regulations for the protection of consumers. It is necessary for us to comply with current requirements (including requirements that do not become effective until a future date), and even more stringent requirements could be imposed on our products or processes. Compliance with these regulations may require us to alter our manufacturing and installation processes and our sourcing. Such actions could increase our capital expenditures and adversely impact our business, financial condition or results of operations, and our inability to effectively and timely meet such regulations could adversely impact our competitive position.
The loss of certain members of our management may have an adverse effect on our operating results. Our success will depend, in part, on the efforts of our senior management and other key employees. These individuals possess sales, marketing, engineering, manufacturing, financial and administrative skills and know-how that are critical to the operation of our business. If we lose or suffer an extended interruption in the services of one or more of our senior officers or other key employees, our financial condition and results of operations may be negatively affected. Moreover, the pool of qualified individuals may be highly competitive and we may not be able to attract and retain qualified personnel to replace or succeed members of our senior
management or other key employees, should the need arise. The loss of the services of any key personnel, or our inability to hire new personnel with the requisite skills, could impair our ability to develop new products or enhance existing products, sell products to our customers or manage our business effectively.
We could continue to pursue growth opportunities through either acquisitions, mergers or internally developed projects, which may be unsuccessful or may adversely affect future financial condition and operating results. We could continue to pursue opportunities for growth through either acquisitions, mergers or internally developed projects as part of our growth strategy. We cannot assure you that we will be successful in integrating an acquired business or that an internally developed project will perform at the levels we anticipate. We may pay for future acquisitions using cash, stock, the assumption of debt, or a combination of these. Future acquisitions could result in dilution to existing shareholders and to earnings per share. In addition, we may fail to identify significant liabilities or risks associated with a given acquisition that could adversely affect our future financial condition and operating results or result in us paying more for the acquired business or assets than they are worth.
Our ability to operate and our growth potential could be materially and adversely affected if we cannot employ, train and retain qualified personnel at a competitive cost. Many of the products that we manufacture and assemble require manual processes in plant environments. We believe that our success depends upon our ability to attract, employ, train and retain qualified personnel with the ability to design, manufacture and assemble these products. In addition, our ability to expand our operations depends in part on our ability to increase our skilled labor force as the housing market continues to recover in the
United States. A significant increase in the wages paid by competing employers could result in a reduction of our qualified labor force, increases in the wage rates that we must pay, or both. In addition, we believe that our success depends in part on our ability to quickly and effectively train additional workforce to handle the increased volume and production while minimizing labor inefficiencies and maintaining product quality in a housing market recovery. If either of these events were to occur, our cost structure could increase, our margins could decrease, and any growth potential could be impaired.
We manufacture our products internationally and are exposed to risks associated with doing business globally. We manufacture our products in the United States and Mexico and sell our products in the United States. Accordingly, we are subject to risks associated with potential disruption caused by changes in political, monetary, economic and social environments, including civil and political unrest, terrorism, possible expropriation, local labor conditions, changes in laws, regulations and policies of foreign governments and trade disputes with the United States, and compliance with U.S. laws
affecting activities of U.S. companies abroad, including tax laws, economic sanctions and enforcement of contract and intellectual property rights.
We are also subject to the Foreign Corrupt Practices Act and other anti-bribery laws. While we have implemented safeguards and policies to discourage these practices by our employees and agents, our existing safeguards and policies to assure compliance and any future improvements may prove to be less than effective and our employees or agents may engage in conduct for which we might be held responsible. If employees violate our policies, we may be subject to regulatory sanctions. Violations of these laws or regulations could result in sanctions including fines, debarment from export privileges and penalties and could have a material adverse effect on our business, financial condition or results of operations.
We may hedge certain foreign currency transactions in the future; however, a change in the value of the currencies may impact our financial statements when translated into U.S. dollars. In addition, fluctuations in currency can adversely impact the cost position in local currency of our products, making it more difficult for us to compete. Our success will depend, in part, on our ability to effectively manage our business through the impact of these potential changes.
In addition, we source raw materials and components from Asia where we have recently experienced higher manufacturing costs and longer lead times due to currency fluctuations, higher wage rates, labor shortages and higher raw material costs. Our international sourcing of materials could be harmed by a variety of factors including:
introduction of non-native invasive organisms into new environments;
recessionary trends in international markets;
legal and regulatory changes and the burdens and costs of our compliance with a variety of laws, including export controls, import and customs trade restrictions and tariffs;
increases in transportation costs or transportation delays;
work stoppages and labor strikes;
fluctuations in exchange rates, particularly the value of the U.S. dollar relative to other currencies; and
political unrest, terrorism and economic instability.
If any of these or other factors were to render the conduct of our business in a particular country undesirable or impractical, our business, financial condition or results of operations could be materially adversely affected.
Our failure to maintain acceptable quality standards could result in significant unexpected costs. Any failure to maintain acceptable quality standards could require us to recall or redesign such products, or pay substantial damages, any of which would result in significant unexpected costs. We may also have difficulty controlling the quality of products or components sourced from other manufacturers, so we are exposed to risks relating to the quality of such products and to limitations on our recourse against such suppliers. Further, any claim or product recall could result in adverse publicity against us, which could decrease our credibility, harm our reputations, adversely affect our sales, or increase our costs. Defects in our products could also result in decreased orders or sales to our customers, which could have a material adverse effect on our business, financial
condition or results of operations.
New U.S. tax legislation could adversely affect us and our debt holders. On December 22, 2017, President Trump signed the Tax Act into law. The Tax Act is generally effective for taxable years beginning after December 31, 2017. The Tax Act includes significant amendments to the Internal Revenue Code of 1986 (as amended, the “Code”), including amendments that lower the U.S. corporate federal income tax rate from 35% to 21%, including the taxation of offshore earnings and the deductibility of interest. Some of the amendments could adversely affect our business and financial condition.
While the Company has not yet completed the assessment of the effects of the Tax Act, we are able to determine reasonable estimates for the impacts of the key items specified above, thus we reported provisional amounts for these items. The Company is still analyzing the impact of the provisions of the law on our deferred tax balances and refining our calculations which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount determined and recorded for the re-measurement of our deferred tax balances resulted in a net reduction in deferred assets of $1.6 million. While we have made a reasonable estimate of the impact of the federal corporate tax rate reduction, that estimate could change as we complete our analysis of all impacts of the Tax Act.
Future tax law changes or the interpretation of existing tax laws may materially impact our effective income tax rate and the resolution of unrecognized tax benefits. Our businesses are subject to taxation in the United States as well as internationally. Tax legislation may be enacted that could have a material adverse impact on our worldwide income tax provision. Tax authorities in many jurisdictions routinely audit us. Because there are significant uncertainties in the outcome of such audits, the ultimate outcome from any audit could be materially different from amounts reflected in our income tax
provisions and accruals. Future settlements of income tax audits may have a material adverse effect on earnings between the period of initial recognition of tax estimates in our financial statements and the point of ultimate tax audit settlement.
Natural disasters could have a material adverse effect on our business, financial condition or results of operations. Many of our facilities are located in regions that are vulnerable to natural disasters and other risks, such as earthquakes, fires, floods, tropical storms and snow and ice, which at times have disrupted the local economy and posed physical risks to our property. In addition, the continued threat of terrorism and heightened security and military action in response to this threat, or any future acts of terrorism, may cause further disruptions to the economies of the United States and other countries. Our redundant, multiple site capacity may not be sufficient in the event of a natural disaster, terrorist act or other catastrophic event. Such disruptions could, among other things, disrupt our manufacturing or distribution facilities and result in delays or cancellations of customer orders for our products, which in turn could have a material adverse effect on our business, financial condition and results of operations. Further, if a natural disaster occurs in a region from which we derive a significant portion of our revenue, end-user customers in that region may delay or forego purchases of our products, which may materially and adversely impact our operating results for a particular period.
Our ability to grow and compete in the future will be adversely affected if adequate capital is not available to us or not available on terms favorable to us. The ability of our business to grow and compete depends on the availability of adequate capital, which in turn depends in large part on our cash flow from operations and the availability of equity and debt financing. We cannot assure you that our cash flow from operations will be sufficient or that we will be able to obtain equity or debt financing on acceptable terms, if at all, to implement our growth strategy. As a result, we cannot assure you that adequate capital will be available to finance our current growth plans, take advantage of business opportunities or respond to competitive pressures, any of which could harm our business.
Certain of our customers have been expanding and may continue to expand through consolidation and internal growth, which may increase their buying power, which could materially and adversely affect our sales, results of operations and financial position. Certain of our customers are large companies with significant buying power. In addition, potential further
consolidation in the distribution channels could enhance the ability of certain of our customers to seek more favorable terms, including pricing, for the products that they purchase from us. Accordingly, our ability to maintain or raise prices in the future may be limited, including during periods of raw material and other cost increases. If we are forced to reduce prices or to maintain prices during periods of increased costs, or if we lose customers because of pricing or other methods of competition, our sales, operating results and financial position may be materially and adversely affected.
We may experience difficulties in integrating American Woodmark and RSI’s operations and realizing the expected benefits of the RSI Acquisition. The success of the RSI Acquisition will depend in part on our ability to realize the anticipated business opportunities and growth prospects from combining with RSI in an efficient and effective manner. We may never realize these business opportunities and growth prospects. Further, our management might have its attention diverted while trying to integrate operations and corporate and administrative infrastructures.
The integration process could take longer than anticipated and could result in the loss of key employees, the disruption of our and RSI’s ongoing businesses, tax costs or inefficiencies, or inconsistencies in standards, controls, information technology systems, procedures and policies, any of which could adversely affect our ability to maintain relationships with customers, employees or other third parties, or our ability to achieve the anticipated benefits of the transaction, and could harm our financial performance. If we are unable to successfully or timely integrate the operations of RSI’s business with our business, we may incur unanticipated liabilities and be unable to realize the revenue growth, synergies and other anticipated benefits resulting from the transaction, and ourCompany's business, results of operations and financial condition could be adversely affected.
American Woodmark and RSI’s important business relationships may be disrupted due to the RSI Acquisition, which could adversely affect American Woodmark’s and RSI’s business, respectively. Someare described in Part I, Item 1A, "Risk Factors" of the parties with which American WoodmarkCompany's Annual Report on Form 10-K for the fiscal year ended April 30, 2023 and RSI do business may be uncertain about their business relationships with the combined company as a result of the RSI Acquisition. For example, customers, partners, resellers, suppliers, vendors and others may consider entering into alternative business relationships with other parties. Some of RSI’s customers, partners, resellers, suppliers, vendors and others may decide to exercise their rights to terminate contracts that were triggered upon completion of the RSI Acquisition. These disruptions couldthere have an adverse effect on RSI’s and/or American Woodmark’s businesses, financial condition or results of operations, or the prospects of the combined company.
Our level and terms of indebtedness could adversely affect our business and liquidity position. Our consolidated indebtedness level could have important consequences to us, including, among other things, increasing our vulnerability to general economic and industry conditions; requiring a portion of our cash flow used in operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our liquidity and our ability to use our cash flow to
fund our operations, capital expenditures and future business opportunities; exposing us tobeen no material changes from the risk factors disclosed. Additional risks are discussed elsewhere in this report, including in "Management's Discussion and Analysis of increased interest rates,Financial Condition and corresponding increased interest expense, because borrowingsResults of Operations" under the Credit Facilities are at variable rates of interest; reducing funds available for working capital, capital expenditures, acquisitionsheadings "Forward-Looking Statements" and other general corporate purposes, due to the costs and expenses associated with such debt; limiting our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions, and general corporate or other purposes; and limiting our ability to adjust to changing marketplace conditions and placing us at a competitive disadvantage compared to our competitors who may have less debt."Outlook."
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital, or restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations, which could cause us to default on our debt obligations and impair our liquidity. In the event of a default under any of our indebtedness, the holders of the defaulted debt could elect to declare all the funds borrowed to be due and payable, together with accrued and unpaid interest, which in turn could result in cross-defaults under our other indebtedness. The lenders under the Credit Facilities could also elect to terminate their commitments thereunder and cease making further loans, and such lenders could institute foreclosure proceedings against their collateral, all of which could adversely affect our financial condition in a material way.
The Credit Agreement and the indenture that governs the Senior Notes impose significant operating and financial restrictions on us and our subsidiaries, which may prevent us from capitalizing on business opportunities or otherwise negatively impact our business.The Credit Agreement and the indenture that governs the Senior Notes impose significant operating and financial restrictions on us. These restrictions limit our ability and the ability of our subsidiaries to, among other things, incur additional indebtedness (including guarantee obligations); incur liens; engage in mergers, consolidations and certain other fundamental changes; dispose of assets; make advances, investments and loans; engage in sale and leaseback transactions; engage in certain transactions with affiliates; enter into contractual arrangements that encumber or restrict the ability to (A) (i) pay dividends or make distributions, (ii) pay indebtedness, (iii) make loans or advances or (iv) sell, lease or transfer property, in each case to us and our subsidiaries, or (B) incur liens; pay dividends, distributions and other payments in respect of capital stock or subordinated debt; repurchase or retire capital stock, warrants or options or subordinated debt; and amend the terms of documents governing, or make payments prior to the scheduled maturity of, certain other indebtedness.
As a result of these restrictions, each of which is subject to certain exceptions and qualifications, we will be limited as to how we conduct our business and we may be unable to raise additional debt or equity financing to compete effectively or to take advantage of new business opportunities. The terms of any future indebtedness we may incur could include more restrictive covenants. We cannot assure you that we will be able to maintain compliance with these existing covenants in the future and, if we fail to do so, that we will be able to obtain waivers from the lenders and/or amend the covenants.
Our failure to comply with the restrictive covenants described above as well as other terms of our indebtedness and/or the terms of any future in debtedness from time to time could result in an event of default, which, if not cured or waived, could result in our being required to repay these borrowings before their due date. If we are forced to refinance these borrowings on less favorable terms or cannot refinance these borrowings, our results of operations and financial condition could be adversely affected.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table details share repurchases made by the Company during the thirdfirst quarter of fiscal 2018:2024:
| | | | | | | | | | | | | | |
| Share Repurchases |
| Total Number of Shares Purchased | Average Price Paid | Total Number of Shares Purchased as Part of Publicly Announced | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Programs (000) |
| (1) | Per Share | Programs | (1) |
| May 1 - 31, 2023 | — | | N/A | — | | $ | 75,000 | |
| June 1 - 30, 2023 | 328,295 | | $ | 67.383 | | 328,295 | | $ | 52,872 | |
| July 1 - 31, 2023 | — | | N/A | — | | $ | 52,872 | |
| Quarter ended July 31, 2023 | 328,295 | | $ | 67.383 | | 328,295 | | $ | 52,872 | |
|
| | | | | | | | | | |
| Share Repurchases |
| Total Number of Shares Purchased | Average Price Paid | Total Number of Shares Purchased as Part of Publicly Announced | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Programs (000) |
| (1) | Per Share | Programs | (1) |
| November 1 - 30, 2017 | 58,371 |
| $ | 94.20 |
| 58,371 |
| $ | 35,968 |
|
| December 1 - 31, 2017 | — |
| $ | — |
| — |
| $ | 35,968 |
|
| January 1 - 31, 2018 | — |
| $ | — |
| — |
| $ | 35,968 |
|
| Quarter ended January 31, 2018 | 58,371 |
| $ | 94.2 |
| 58,371 |
| $ | 35,968 |
|
(1) Under a stock repurchase authorization approved by its Board of Directors on November 30, 2015,May 25, 2021, the Company was authorized to purchase up to $20$100 million of the Company's common shares. On November 30, 2016, the Board of Directors authorized an additional stock repurchase program of up to $50 million of the Company's common shares. This authorization is in addition to the stock repurchase program authorized on November 19, 2015. 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 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 anyfunded these share repurchases using available cash and cash generated from operations. Repurchased shares will becomebecame authorized but unissued common shares. InAt July 31, 2023, $52.9 million of funds remained from the third quarteramounts authorized by the Board to repurchase the Company's common shares. The Company purchased a total of fiscal 2018, the Company repurchased 58,371328,295 common shares, for an aggregate purchase price of $5.5$22.1 million, during the first quarter of fiscal 2024 under the authorization pursuant to a repurchase plan intended to comply with the requirements of Rule 10b5-1 and Rule 10b-18 under the Securities Exchange Act of 1934, as amended.
Item 5. Other Information
Rule 10b5-1 Trading Plans
During the fiscal quarter ended July 31, 2023, none of the Company’s directors or executive officers adopted, terminated or modified a "Rule 10b5-1 trading agreement" or a “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.
Compensatory Arrangements of Certain Officers
On August 24, 2023, the Company held its 2023 Annual Meeting of Shareholders, at which the Company’s shareholders approved the American Woodmark Corporation 2023 Stock Incentive Plan (the “2023 Stock Incentive Plan”). For a description of the terms and conditions of the 2023 Stock Incentive Plan, see “Item 3: Approval of American Woodmark Corporation 2023 Stock Incentive Plan” in the Company’s definitive proxy statement filed with the Securities and Exchange Commission on June 27, 2023 (the “Proxy Statement”), which description is incorporated herein by reference. Such description is qualified in its entirety by reference to the 2023 Stock Incentive Plan, a copy of which is filed as Exhibit 10.1 hereto and is incorporated herein by reference.
Submission of Matters to a Vote of Security Holders
At January 31, 2018, $36.0 million remained authorized bythe Annual Meeting of Shareholders of American Woodmark Corporation held on August 24, 2023, the holders of 15,222,152 of the 16,376,579 shares of the Company's common stock outstanding voted on one or more matters either in person at the meeting or by duly executed and delivered proxies. The shareholders approved the items outlined in the Company's Proxy Statement that was sent to shareholders and filed with the SEC in accordance with Regulation 14A under the Securities Exchange Act of 1934, as amended.
The following items were approved at the Company's Annual Meeting:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Votes | | Votes | | Broker | | | | |
| "FOR" | | "WITHHELD" | | "NON-VOTES" | | | | |
| | | | | | | | | |
| 1. Election of the Board of Directors: | | | | | | | | | |
| Latasha M. Akoma | 14,681,787 | | | 77,773 | | | 462,592 | | | | | |
| Andrew B. Cogan | 14,396,854 | | | 362,706 | | | 462,592 | | | | | |
| M. Scott Culbreth | 14,410,510 | | | 349,050 | | | 462,592 | | | | | |
| James G. Davis, Jr. | 13,368,523 | | | 1,391,037 | | | 462,592 | | | | | |
| Daniel T. Hendrix | 14,235,342 | | | 524,218 | | | 462,592 | | | | | |
| David A. Rodriguez | 14,372,911 | | | 386,649 | | | 462,592 | | | | | |
| Vance W. Tang | 14,063,132 | | | 696,428 | | | 462,592 | | | | | |
| Emily C. Videtto | 14,378,090 | | | 381,470 | | | 462,592 | | | | | |
| | | | | | | | | |
| Votes | | Votes | | Votes | | Broker | | |
| "FOR" | | "AGAINST" | | "ABSTAINED" | | "NON-VOTES" | | |
| | | | | | | | | |
| 2. Ratification of Selection of Independent Registered Public Accounting Firm | 15,197,431 | | | 21,532 | | | 3,189 | | | — | | | |
| | | | | | | | | |
| 3. Vote to Approve the American Woodmark Corporation 2023 Stock Incentive Plan | 14,130,894 | | | 571,931 | | | 56,735 | | | 462,592 | | | |
| | | | | | | | | |
| 4. Advisory Vote to Approve Executive Compensation | 14,384,144 | | | 338,777 | | | 36,639 | | | 462,592 | | | |
| | | | | | | | | |
| Votes for | | Votes for | | Votes for | | Votes | | Broker |
| "1 YEAR" | | "2 YEARS" | | "3 YEARS" | | "ABSTAINED" | | "NON-VOTES" |
| | | | | | | | | |
| 5. Advisory Vote of Frequency of Future Advisory Votes to Approve Executive Compensation | 13,286,237 | | | 74,694 | | | 1,347,552 | | | 51,077 | | | 462,592 | |
Consistent with the shareholder vote and the recommendation of the Company’s Board of Directors, to repurchase the Company's common shares. The Company announcedwill hold a shareholder advisory vote on December 1, 2017 that it was suspending its stock repurchase program in conjunction with the RSI Acquisition.compensation of the Company’s named executive officers annually until the next vote on the frequency of such advisory vote.
Item 6. Exhibits
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| Exhibit Number | Description |
| |
Exhibit Number | Description |
| |
| Agreement and Plan of Merger, dated as of November 30, 2017, among RSI Home Products, Inc., American Woodmark Corporation, Alliance Merger Sub, Inc. and Ronald M. Simon, solely in his capacity as the Stockholder Representative (incorporated by reference to Exhibit 2.1 to the Registrant’s Form 8-K as filed on December 1, 2017; Commission File No. 000-14798).
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3.1 (a) | Articles of Incorporation as amended effective August 12, 1987 (incorporated by reference to Exhibit 3.1 to the Registrant’sRegistrant's Form 10-Q for the quarter ended JanuaryJuly 31, 2003;2004; Commission File No. 000-14798). |
| |
| Articles of Amendment to the Articles of Incorporation effective September 10, 2004Bylaws – as amended (incorporated by reference to Exhibit 3.1 to the Registrant’sRegistrant's Form 8-K as filed on August 31, 2004;May 25, 2023; Commission File No. 000-14798). |
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| Bylaws – as amended and restated August 24, 2017American Woodmark 2023 Stock Incentive Plan (incorporated by reference to Exhibit 3.2Appendix A to the Registrant’s Form 10-Q fordefinitive proxy statement filed by the quarter ended July 31, 2017; Commission File No. 000-14798)Registrant on June 27, 2023). |
| |
4.1 | The Articles of Incorporation and Bylaws of the Registrant as currently in effect (incorporated by reference to Exhibits 3.1 and 3.2). |
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| Indenture, dated as of March 16, 2015, by and among RSI Home Products, Inc., the guarantors from time to time party thereto and Wells Fargo Bank, National Association, as Trustee and Collateral Agent (Filed Herewith). |
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| Supplemental Indenture, dated as of December 15, 2017, among RSI Home Products, Inc., the guarantors party thereto and Wells Fargo Bank, National Association, as Trustee and Collateral Agent (Filed Herewith). |
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| Second Supplemental Indenture, dated as of February 9, 2018, among RSI Home Products, Inc., the guarantors party thereto and Wells Fargo Bank, National Association, as Trustee and Collateral Agent (Filed Herewith). |
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| Indenture, dated as of February 12, 2018, among American Woodmark Corporation, the guarantors from time to time party thereto and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to the Registrant’s Form 8-K as filed on February 14, 2018; Commission File No. 000-14798). |
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| Credit Agreement, dated as of December 29, 2017, by and among American Woodmark Corporation, as Borrower, the Lenders referred to therein as Lenders and Wells Fargo Bank, National Association, as Administrative Agent, Swingline Lender and Issuer Lender (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K as filed on January 5, 2018; Commission File No. 000-14798). |
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| Collateral Agreement, dated as of December 29, 2017, by American Woodmark Corporation and certain of its subsidiaries, as Grantors, in favor of Wells Fargo Bank, National Association, as Administrative Agent (incorporated by reference to Exhibit 10.2 to the Registrant’s Form 8-K as filed on January 5, 2018; Commission File No. 000-14798). |
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| Joinder Agreement, dated as of February 12, 2018, by American Woodmark Corporation and each of its subsidiary named therein in favor of Wells Fargo Bank, National Association, as Administrative Agent, for the benefit of the Secured Parties (Filed Herewith). |
| |
| Shareholders Agreement, dated as of November 30, 2017, by and among American Woodmark Corporation and the shareholders party thereto (Filed Herewith). |
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| Commitment Letter, dated as of November 30, 2017, among American Woodmark Corporation, Wells Fargo Bank, National Association, and Wells Fargo Securities, LLC (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K as filed on December 1, 2017; Commission File No. 000-14798). |
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| Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a) of the Exchange Act (Filed Herewith). |
| |
| Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a) of the Exchange Act (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 (Furnished(Filed Herewith). |
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| 101 | Interactive Data File for the Registrant’sRegistrant's Quarterly Report on Form 10-Q for the quarter ended JanuaryJuly 31, 20182023 formatted in Inline XBRL (eXtensible(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). |
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| 104 | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101). |
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.
AMERICAN WOODMARK CORPORATION
(Registrant)
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| /s/ M. Scott CulbrethPaul Joachimczyk |
| M. Scott CulbrethPaul Joachimczyk |
| Senior Vice President and Chief Financial Officer |
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| Date: March 12, 2018August 29, 2023 |
| Signing on behalf of the registrant and |
| as principal financial and accounting officer |
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