Company Quick10K Filing
Quick10K
American Woodmark
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$90.40 17 $1,520
10-K 2019-04-30 Annual: 2019-04-30
10-Q 2019-01-31 Quarter: 2019-01-31
10-Q 2018-10-31 Quarter: 2018-10-31
10-Q 2018-07-31 Quarter: 2018-07-31
10-K 2018-04-30 Annual: 2018-04-30
10-Q 2018-01-31 Quarter: 2018-01-31
10-Q 2017-10-31 Quarter: 2017-10-31
10-Q 2017-07-31 Quarter: 2017-07-31
10-K 2017-04-30 Annual: 2017-04-30
10-Q 2017-01-31 Quarter: 2017-01-31
10-Q 2016-10-31 Quarter: 2016-10-31
10-Q 2016-07-31 Quarter: 2016-07-31
10-K 2016-04-30 Annual: 2016-04-30
10-Q 2016-01-31 Quarter: 2016-01-31
10-Q 2015-10-31 Quarter: 2015-10-31
10-Q 2015-07-31 Quarter: 2015-07-31
10-K 2015-04-30 Annual: 2015-04-30
10-Q 2015-01-31 Quarter: 2015-01-31
10-Q 2014-10-31 Quarter: 2014-10-31
10-Q 2014-07-31 Quarter: 2014-07-31
10-K 2014-04-30 Annual: 2014-04-30
10-Q 2014-01-31 Quarter: 2014-01-31
8-K 2019-07-11 Regulation FD, Exhibits
8-K 2019-05-28 Earnings, Exhibits
8-K 2019-05-23 Officers, Exhibits
8-K 2019-04-12 Regulation FD, Exhibits
8-K 2019-02-26 Earnings, Exhibits
8-K 2019-01-25 Enter Agreement, Exhibits
8-K 2018-11-29 Earnings, Exhibits
8-K 2018-11-27 Officers, Amend Bylaw, Exhibits
8-K 2018-09-07 Enter Agreement, Other Events, Exhibits
8-K 2018-08-27 Earnings, Exhibits
8-K 2018-08-23 Shareholder Vote
8-K 2018-05-29 Earnings, Exhibits
8-K 2018-03-09 Earnings, Exhibits
8-K 2018-02-12 Enter Agreement, Off-BS Arrangement, Other Events, Exhibits
8-K 2018-01-31 Enter Agreement, Other Events, Exhibits
8-K 2018-01-29 Regulation FD, Exhibits
8-K 2018-01-05 Enter Agreement, M&A, Off-BS Arrangement, Sale of Shares, Regulation FD, Exhibits
LUV Southwest Airlines 28,490
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EVTC Evertec 2,040
MC Moelis 1,690
MYOV Myovant Sciences 1,250
CEIX CONSOL Energy 847
CNOB Connectone Bancorp 804
HAYN Haynes 413
OFS OFS Capital 164
SSFN Stewardship Financial 77
AMWD 2019-04-30
Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
Part IV
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
EX-4.4 ex-44xdescriptionofcapital.htm
EX-21 ex-21x2019430.htm
EX-23.1 ex-231x2019430.htm
EX-31.1 ex-311x2019430.htm
EX-31.2 ex-312x2019430.htm
EX-32.1 ex-321x2019430.htm

American Woodmark Earnings 2019-04-30

AMWD 10K Annual Report

Balance SheetIncome StatementCash Flow

10-K 1 amwd-2019430x10k.htm 10-K Document


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-K
 
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 
 
 
 
For the fiscal year ended
April 30, 2019
 
 
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from
 
 
to
 
 
 
 
 
Commission File Number:
000-14798
 
 
 
 
 
 
 
 
 
 
American Woodmark Corporation
(Exact name of registrant as specified in its charter)
Virginia
 
 
54-1138147
(State or other jurisdiction of incorporation or organization)
 
 
(I.R.S. Employer Identification No.)
561 Shady Elm Road, Winchester, Virginia
 
 
22602
(Address of principal executive offices)
 
 
(Zip Code)
(Registrant's telephone number, including area code)
 
(540) 665-9100
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Trading Symbol
 
Name of each exchange on which registered
Common Stock (no par value)
 
AMWD
 
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:  None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. 
Yes [X]  No [ ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. 
Yes [ ]  No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [X]  No [ ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes [X]  No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company"  in Rule 12b-2 of the Exchange Act.
Large accelerated filer   
[X]
Accelerated filer                 
[ ]
Non-accelerated filer     
[ ]
(Do not check if a smaller reporting company)  
Smaller reporting company
[ ]
Emerging growth company
[ ]
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). 
Yes [ ]  No [X]
The aggregate market value of the registrant's Common Stock, no par value, held by non-affiliates of the registrant as of October 31, 2018, the last business day of the Company’s most recent second quarter was $1,043,079,866.
As of June 21, 2019, 16,869,949 shares of the Registrant's Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE 

Portions of the Registrant’s definitive Proxy Statement for the Annual Meeting of Shareholders to be held on August 22, 2019 (“Proxy Statement”) are incorporated by reference into Part III of this Form 10-K.




American Woodmark Corporation
2019 Annual Report on Form 10-K

TABLE OF CONTENTS
 
PART I
 
 
Item 1.
2
Item 1A.
5
Item 1B.
12
Item 2.
12
Item 3.
13
Item 4.
13
 
13
 
 
 
PART II
 
 
Item 5.
14
Item 6.
16
Item 7.
17
Item 7A.
28
Item 8.
29
Item 9.
60
Item 9A.
60
Item 9B.
61
 
 
 
PART III
 
 
 
 
 
Item 10.
61
Item 11.
62
Item 12.
62
Item 13.
63
Item 14.
63
 
 
 
PART IV
 
 
Item 15.
63
Item 16.
67
 
 
 
SIGNATURES
68

1



PART I
 
Item 1.        BUSINESS
 
Our Company

American Woodmark Corporation (“American Woodmark,” the “Company,” “we,” “our” or “us”) was incorporated in 1980 by the four principal managers of the Boise Cascade Cabinet Division through a leveraged buyout of that division. We operated privately until 1986 when we became a public company through a registered public offering of common stock.

We manufacture and distribute kitchen, bath and home organization products for the remodeling and new home construction markets. Our products are sold on a national basis directly to home centers and builders and through a network of independent dealers and distributors. We presently operate 18 manufacturing facilities and eight primary service centers across the country and Mexico.

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and all amendments to those reports are available free of charge on our website, www.americanwoodmark.com, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission. The contents of our website are not, however, part of, or incorporated by reference into, this report.

Our Business

Our business offers made-to-order cabinetry in over 550 different cabinet lines, ranging in price from relatively inexpensive to medium-priced styles. These cabinets are offered in a broad range of sizes, construction and decorative options to achieve a wide array of design layouts. To satisfy the fashion and style needs of the market place we offer over 100 door designs with a targeted range of painted or stained finishes, or engineered finishes under the Duraform® mark; on fronts made in a variety of wood species, including maple, cherry and oak as well as engineered materials. 

Additionally, we offer value-based assembled cabinet products for stock kitchen and bath, ready-to-assemble cabinetry for home organization, countertops and accessories.  These lines are available in a more targeted finish and door style assortment, and include hundreds of products appropriate for home centers, builders, dealers and remodeling contractors. 

Our products are sold under the brand names of American Woodmark®, Timberlake®, Shenandoah Cabinetry®, Waypoint Living Spaces®, Estate by RSI®, Continental Cabinets®, VillaBath by RSI®, Stor-It-All® and Professional Cabinet Solutions®. Products are also sold under key customer’s private label brands, such as Hampton Bay®, Glacier Bay®, Style Selections®, Allen + Roth®, Home Decorators Collection and Project Source.

Our Products

We offer a wide variety of products that fall into product lines including kitchen cabinetry, bath cabinetry, office cabinetry, home organization and hardware. Our cabinetry products are available in a variety of designs, finishes and finish colors and door styles.

We offer products in the following categories: made-to-order and stock. Stock products represent cash and carry products sold through home centers. Made-to-order products typically utilize higher grade materials with more options as compared to stock and are all special ordered and shipped directly to the home from the factory. Our home organization products are exclusively stock products. Our kitchen cabinetry and bath cabinetry are offered across all product categories (made-to-order and stock) and our office cabinetry is offered as stock. Our stock products are sold through home centers, while our made-to-order products are sold through home centers, builders and independent dealers and distributors.

Our Market

Our products are sold on a national basis across the United States to the remodeling and new home construction markets. We service these markets through three primary channels: home centers, builders, and independent dealers and distributors. We distribute our products to each market channel directly from our assembly plants and through a third party logistics network.

Our Customers

We serve three main categories of customers: home center customers, builders and independent dealers and distributors.


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Home Center Customers

Contractors, builders, remodelers and do-it-yourself homeowners use our products primarily for repair and remodel (“R&R”) projects. Products for R&R projects are predominately purchased through home centers such as Home Depot and Lowe’s. Due to the market presence, store network and customer reach of these large home centers, our strategy has been to develop long-term strategic relationships with both Home Depot and Lowe’s to distribute our products. During the fiscal year ended April 30, 2019 (“fiscal 2019”), Home Depot and Lowe’s accounted for approximately 47.9% of net sales of the Company. The loss of either Home Depot or Lowe’s as a customer would have a material adverse effect on us.

Builders

The builder business represents a large portion of our overall revenue and has historically been a strategic component of our go-to-market strategy. We serve the majority of the top U.S. builders with a high degree of geographic concentration around major metro areas where single family starts are most robust. We also serve multi-family builders, primarily in the Southern California metro area. Our various service center locations serve the function of being close to this business and enable us to deliver exceptional service to our builder partners.

Independent Dealers & Distributors

In 2010, we expanded our business into the dealer channel with the launch of the Waypoint Living Spaces® brand. Today, we sell this brand to over 1,300 regional and local dealers across the country. The dealer channel of the market is the largest by volume, characterized by a high degree of entrepreneurship and one that rewards suppliers that deliver great service. Our ability to provide superior value delivered with exceptional service has helped drive our expansion into this channel and will continue to be a strong growth and market share opportunity for us. Within our distributor channel we also sell our Timberlake® brand through a network of regional distributors who are focused on selling a complete variety of building materials to small and midsized builders and contractors within their local markets. 

Manufacturing, Distribution and Service

Our manufacturing facilities are strategically located to serve our customers, which enhances our ability to provide high quality, value priced products with low production costs. We manufacture our products across 18 facilities located in Maryland, Indiana, West Virginia, Tennessee, Georgia, Arizona, Kentucky, Virginia, California, Texas, North Carolina and Tijuana, Mexico. The geographic distribution of our facilities throughout the United States, together with our third party logistics network for the American Woodmark business and beneficial freight arrangement with home centers, enable us to provide a “short supply chain” to our U.S. customers. The ordering patterns of Home Depot and Lowe’s, our two biggest customers, require suppliers to have sufficient manufacturing capacity to meet demand and to serve a large number (frequently hundreds to thousands) of stores. They impose strict logistics and performance criteria on us. The scale and strategic locations of our manufacturing facilities help us to meet these demands of the home center customers, as well as provide a logistics platform that we can leverage for builders and dealers. We distribute our products through distribution centers located in some of our manufacturing facilities and other third party locations to maximize efficiency. Our vertically-integrated production and assembly lines, standardized product construction and investments in automation have allowed us to continuously improve productivity and develop an expertise in wood processing and yield-maximizing technologies. We have standardized our raw material inputs and a number of our production processes, which reduces logistical requirements to manufacture and gives us increased economies of scale in sourcing these inputs. Certain of our inputs are also partially processed by our vendors, which reduces cost. In addition, our production of labor-intensive manufacturing and fabrication processes in our three Tijuana, Mexico facilities have enabled us to keep overall labor costs low while maintaining higher quality, greater speed-to-market and transportation cost advantage over Asian manufacturers.

We provide complete turnkey installation services to our direct builder customers via our network of eight primary service centers that are strategically located throughout the United States in Virginia, Texas, North Carolina, Georgia, Florida, Arizona and California.

We regularly evaluate our organizational productivity and supply chains and assess opportunities to reduce costs and enhance quality. We strive to improve quality, speed and flexibility to meet changing and uncertain market conditions, as well as manage cost inflation, including wages and employee medical costs.

Raw Materials and Suppliers

The primary raw materials used in our products include hard maple, soft maple, oak, cherry and beech lumber and plywood. Additional raw materials include paint, particleboard, medium density fiberboard, high density fiberboard, manufactured

3



components and hardware. We purchase these and other raw materials from more than one source and believe them to be readily available. We rely on outside suppliers for some of our key components and do not typically enter into long-term contracts with our suppliers or sourcing partners. We source a portion of our components from third parties in Asia. The distances involved in these arrangements, together with the differences in business practices, shipping and delivery requirements, and laws and regulations add complexity to our supply chain logistics and increase the potential for interruptions in our production scheduling. In addition, prices and availability of these components may be affected by world market conditions and government policies and tariffs.

Competition

We operate in a highly fragmented industry that is composed of several thousand local, regional and national manufacturers. Most of our competitors compete on a local or regional basis, but others, like us, compete on a national basis as well. Our competitors include importers and large consolidated operations as well as relatively small, local cabinet manufacturers. Moreover, companies in other building products industries may compete with us. Competitive factors within the industry include pricing, quality, product availability, service, delivery time and relationships with customers. Our principal means for competition is our breadth and variety of product offerings, expanded service capabilities, geographic reach, competitive price points for our products and affordable quality. We are the second largest manufacturer of kitchen, bath and home organization products in the United States.

Environmental Matters and Regulatory Matters

Our operations are subject to federal, state and local environmental laws and regulations relating to, among other things, the generation, storage, handling, emission, transportation and discharge of regulated materials into the environment. Permits are required for certain of our operations, and these permits are subject to revocation, modification and renewal by issuing authorities. Governmental authorities have the power to enforce compliance with their regulations, and violations may result in the payment of fines or the entry of injunctions, or both. We may also incur liability for investigation and clean-up of soil or groundwater contamination on or emanating from current or formerly owned and operated properties, or at offsite locations at which regulated materials are located where we are identified as a responsible party. Discovery of currently unknown conditions could require responses that could result in significant costs.

Intellectual Property

We maintain trademarks, copyrights and trade secrets. We sell many of our products under a number of registered and unregistered trademarks, which we believe are widely recognized in our industry. We rely on trade secrets and confidentiality agreements to develop and maintain our competitive position. Monitoring the unauthorized use of our intellectual property is difficult, and the steps we have taken may not prevent unauthorized use of our intellectual property. The disclosure or misappropriation of our intellectual property could harm our ability to protect our rights and our competitive position. If we must litigate to protect our rights, we may incur significant expenses and divert significant attention from our business operations. To date, we have not relied on patents in operating our business.

Seasonality

Our business has been subject to seasonal influences, with higher sales typically realized in our first and fourth fiscal quarters. General economic forces and changes in our customer mix have reduced seasonal fluctuations in revenue over the past few years. The costs of the Company’s products are subject to inflationary pressures and commodity price fluctuations. The Company has generally been able over time to recover the effects of inflation and commodity price fluctuations through sales price increases.

Employees

As of April 30, 2019, we employed approximately 9,300 full-time employees, with approximately 210 unionized employees in Anaheim, California. We believe that our employee relations and relationship with the union representing the employees in Anaheim are good.
Our Competitive Strengths

Market Leader with Nationwide Manufacturing and Distribution Network

We believe our company holds the number two market position in the United States cabinet market with an estimated 10% market share. We are one of a select number of market participants with a national manufacturing and distribution footprint, including 18 manufacturing facilities and eight primary service centers across the United States and Mexico. Our operating footprint provides us an ability to service our builder, dealer and home center customers on a national basis, and we offer a broad set of products to serve our customers across a variety of price points. Our facilities are primarily located in or near major metropolitan markets to

4



facilitate efficient product distribution to our customers. We believe the scale and breadth of our operations differentiate us and result in a competitive advantage providing superior customer service, low-cost distribution and on-time delivery.

Comprehensive Product Offering with Diversified End Markets

We believe that the diversity of our product portfolio across categories, channels and end markets benefits our financial performance, both in periods of growth and cyclicality. Our made-to-order offerings provide products for customers looking for a designer product, which can be used for both new home construction and remodeling applications. The addition of the stock offering allows us to further serve our existing end markets through the addition of a lower price point product that is well-suited for areas of growing demand such as new home construction targeting the first-time homebuyer. We also offer turnkey cabinet solutions for our builder customers which we believe is a unique aspect of our service platform. Our turnkey solution provides in-house design and measurement as well as installation service. We believe the ability to leverage our labor and expertise is a value-added service to our builder customers which has helped strengthen our position in the new home construction market.

Deep Relationships with Leading Retailers

We have built strong and stable relationships with a base of long-standing, customers across home centers, builders and independent dealers and distributors. We have an average relationship length of 20 plus years with our top 10 customers, including long-standing relationships with Home Depot and Lowe’s. We believe our customers value our national manufacturing and distribution footprint, which allows us to meet demanding logistics and performance criteria. We believe our focus on providing exceptional customer service and a quality product at a competitive price have enabled us to establish ourselves as a vendor of choice.

Best-in-Class Manufacturing Capabilities

We operate 18 manufacturing facilities across the United States and Mexico. Our vertically-integrated production and assembly lines, standardized product construction and investments in automation, have allowed us to continuously improve productivity and efficiency. We have standardized our raw material inputs and a number of our production processes, which reduces logistical requirements and provides increased economies of scale in sourcing these inputs. Our labor-intensive manufacturing and fabrication processes in Mexico offer a low cost alternative to Asian manufacturers, while providing a higher quality product with lower transportation costs.

Experienced Management Team

We have assembled an executive team from leading organizations with a deep base of management experience within industrial manufacturing companies. Our Chairman and Chief Executive Officer, Cary Dunston, joined our team in 2006 and was named Chief Executive Officer in 2015 and elected Chairman in 2017. Mr. Dunston has a broad range of experience in manufacturing and supply chain management including the implementation of continuous improvement programs and lean manufacturing initiatives. Our team has identified and begun to execute on opportunities for operational improvement that has yielded increased profitability.
 
Item 1A.    RISK FACTORS
 
There are a number of risks and uncertainties that may affect the Company’s business, results of operations and financial condition. These risks and uncertainties could cause future results to differ from past performance or expected results, including results described in statements elsewhere in this report that constitute "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. Additional risks and uncertainties not presently known to the Company or currently believed to be immaterial also may adversely impact the Company’s business. Should any risks or uncertainties develop into actual events, these developments could have material adverse effects on the Company’s business, financial condition, and results of operations. These risks and uncertainties, which the Company considers to be most relevant to specific business activities, include, but are not limited to, the following. Additional risks and uncertainties that may affect the Company’s business, results of operations and financial condition are discussed elsewhere in this report, including in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the headings “Forward-Looking Statements,” “Seasonality,” and “Outlook for Fiscal 2020” and Item 7A, "Quantitative and Qualitative Disclosures about Market Risk."  
 
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 47.9% of total net sales during the fiscal year 2019. 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 significantly affect the prices we receive for our products and services and the other terms

5



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 criteria. 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 generally improved over the past 3 to 5 years, 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 market share losses could occur. 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 may 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 also face competition with respect to some of our products from competitors in countries with lower regulatory, safety, environmental and other costs, such as China. These competitors may also benefit from certain local government subsidies or other incentives that are not available to us.

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,

6



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. 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, multi-family and homebuilder channels. Part of our growth strategy depends on expanding our business in the dealer, multi-family 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, or 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 the Company as a result of this added capacity.

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 and Canada. 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 (including tariffs), 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.


7



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 operations and sourcing of materials (including from Asia and Mexico) 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.

For example, with respect to the Section 301 tariffs from China ("301 tariffs") on goods imported from China, assuming the tariffs are maintained at the 25% levels, we could be exposed to approximately $5-6 million of potential annual direct cost increases in addition to the original 10% tariffs. Our teams are working to mitigate the impact through supplier negotiations, supply chain repositioning, internal productivity measures and pricing action if required. Should the 301 tariffs expand to additional categories we would have an additional exposure of approximately $4.0 million annually.

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.

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 re-engineer 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.

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

8



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. As an example, we are currently dealing with several of the adverse impacts set forth above related to a particleboard supplier as more fully described in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - “Particleboard Supply” herein.

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

9



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.

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 reputation, 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.

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, hurricanes 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.

10



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. Although we believe we made good progress in integrating RSI's operations during fiscal year 2019, 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 our business, results of operations and financial condition could be adversely affected.

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 to the risk of increased interest rates, and corresponding increased interest expense, because borrowings under our credit facilities are at variable rates of interest; reducing funds available for working capital, capital expenditures, acquisitions 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.

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 our 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 that governs our credit facility and the indenture that governs our 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 that governs our credit facility and the indenture that governs our 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

11



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 indebtedness 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 1B.    UNRESOLVED STAFF COMMENTS
 
None.

Item 2.        PROPERTIES
 
We own our Corporate Office located in Winchester, Virginia. In addition, we lease eight manufacturing facilities and one manufacturing facility/service center in the United States and Mexico and own nine manufacturing facilities located primarily in the eastern and southern United States. We also lease seven primary service centers, 12 satellite service centers and four additional offices located throughout the United States that support the sale and distribution of products to each market channel. We consider our properties suitable for our business and adequate for our needs and believe that, if necessary, we could find additional and/or replacement facilities to lease without suffering a material adverse effect on our business.
 
Primary properties as of April 30, 2019 include:
LOCATION
DESCRIPTION
Allegany County, MD
Manufacturing Facility
Anaheim, CA
Office/ Manufacturing Facility*
Austin, TX
Satellite Service Center*
Berryville, VA
Service Center*
Commerce City, CO
Satellite Service Center*
Coppell, TX
Service Center*
Dallas, TX
Manufacturing Facility*
Dallas, TX
Manufacturing Facility
Fort Myers, FL
Satellite Service Center*
Gas City, IN
Manufacturing Facility
Hamlet, NC
Manufacturing Facility*
Hardy County, WV
Manufacturing Facility*
Houston, TX
Satellite Service Center*
Humboldt, TN
Manufacturing Facility
Huntersville, NC
Service Center*
Jackson, GA
Manufacturing Facility
Jacksonville, FL
Satellite Service Center*
Kingman, AZ
Manufacturing Facility
Kennesaw, GA
Service Center*
Las Vegas, NV
Satellite Service Center*
Lincolnton, NC
Manufacturing Facility*
Mira Loma, CA
Manufacturing Facility/ Service Center*
Mooresville, NC
Office (Sales)*
Montgomeryville, PA
Satellite Service Center*
Monticello, KY
Manufacturing Facility
Morrisville, NC
Satellite Service Center*
Orange, VA
Manufacturing Facility
Orlando, FL
Service Center*
Phoenix, AZ
Service Center*
Rancho Cordova, CA
Service Center*

12



LOCATION
DESCRIPTION
Roswell, GA
Office (Sales)*
San Antonio, TX
Satellite Service Center*
Sarasota, FL
Satellite Service Center*
Tampa, FL
Satellite Service Center*
Tijuana, Mexico
Manufacturing Facility*
Tijuana, Mexico
Manufacturing Facility*
Tijuana, Mexico
Manufacturing Facility*
Toccoa, GA
Manufacturing Facility
Tucson, AZ
Satellite Service Center*
Winchester, VA
Corporate Office
 *Leased facility.
 
Item 3.        LEGAL PROCEEDINGS
 
The Company is involved in suits and claims in the normal course of business, including, without limitation, product liability and general liability claims and claims pending before the Equal Employment Opportunity Commission. On at least a quarterly basis, the Company consults with its legal counsel to ascertain the reasonable likelihood that such claims may result in a loss. As required by ASC Topic 450, “Contingencies” ("ASC 450"), the Company categorizes the various suits and claims into three categories according to their likelihood for resulting in potential loss: those that are probable, those that are reasonably possible and those that are deemed to be remote. The Company accounts for these loss contingencies in accordance with ASC 450. Where losses are deemed to be probable and estimable, accruals are made. Where losses are deemed to be reasonably possible, a range of loss estimate is determined and considered for disclosure.  In determining these loss range estimates, the Company considers known values of similar claims and consults with independent counsel.
 
The Company believes that the aggregate range of estimated loss stemming from the various suits and asserted and unasserted claims which were deemed to be either probable or reasonably possible was not material as of April 30, 2019. 

Item 4.        MINE SAFETY DISCLOSURES
 
None.
 
EXECUTIVE OFFICERS OF THE REGISTRANT
 
Executive officers of the Company are elected by the Board of Directors and generally hold office until the next annual election of officers. There are no family relationships between any executive officer and any other officer or director of the Company or any arrangement or understanding between any executive officer and any other person pursuant to which such officer was elected. The executive officers of the Company are as follows: 
Name
Age
 
Position(s) Held During Past Five Years
S. Cary Dunston
54
 
Company Chairman from August 2017 to present; Company President and Chief Executive Officer from August 2015 to present; Company President and Chief Operating Officer from August 2014 to August 2015; Company Executive Vice President and Chief Operating Officer from August 2013 to August 2014; Company Executive Vice President, Operations from September 2012 to August 2013; Company Senior Vice President, Manufacturing and Supply Chain Services from October 2006 to September 2012.
 
 
 
 
M. Scott Culbreth
48
 
Company Senior Vice President and Chief Financial Officer from February 2014 to present; Chief Financial Officer of Piedmont Hardware Brands from September 2013 to February 2014; Vice President, Finance – Various Segments from 2009 to September 2013 for Newell Rubbermaid.
 
 
 
 
R. Perry Campbell
54
 
Company Senior Vice President of Sales and Marketing from March 2016 to present; Company Senior Vice President and General Manager, New Construction from August 2013 to March 2016; Company Vice President and General Manager, New Construction from May 2011 to August 2013.
 
 
 
 
Name
Age
 
Position(s) Held During Past Five Years
Robert J. Adams, Jr.
53
 
Company Senior Vice President of Value Stream Operations from August 2015 to present; Company Vice President of Value Stream Operations from September 2012 to August 2015; Company Vice President of Manufacturing and Engineering from April 2012 to September 2012; Company Vice President of Engineering from July 2008 to April 2012.


PART II
 
Item 5.        MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Market Information
 
American Woodmark Corporation common stock is listed on The NASDAQ Global Select Market under the “AMWD” symbol.
 
As of June 17, 2019 there were approximately 20,000 total shareholders of the Company's common stock, including 5,000 shareholders of record and 15,000 beneficial owners whose shares are held in "street" name by securities broker-dealers or other nominees. The Company's shareholders also include approximately 50% of the Company's employees who are eligible to participate in the American Woodmark Corporation Retirement Savings Plan. The Company suspended its quarterly dividend during fiscal 2012. The determination as to the payment of future dividends will be made by the Board of Directors (the "Board") from time to time and will depend on the Company's then current financial condition, capital requirements, and results of operations, as well as any other factors then deemed relevant by the Board of Directors, and will be subject to applicable restrictions in the credit agreement governing the Company's credit facility and the indenture governing the Company's senior notes.

Purchases of Equity Securities by the Issuer

The following table details share repurchases by the Company during the fourth quarter of fiscal 2019:

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)
February 1 - 28, 2019
111,845

$
77.31

111,845

$
403

March 1 - 31, 2019
4,673

$
86.26

4,673

$

April 1 - 30, 2019

N/A


$

Quarter ended April 30, 2019
116,518

$
77.67

116,518

$


(1) Under a stock repurchase authorization approved by its Board on November 30, 2016, the Company was authorized to purchase up to $50 million of the Company's common shares. The Board suspended the Company's stock repurchase program in conjunction with the RSI Acquisition. On August 23, 2018, the Board reinstated the program. On November 28, 2018, the Board of the Company authorized an additional stock repurchase program of up to $14 million of the Company's common shares. This authorization is in addition to the stock repurchase program authorized on November 30, 2016. Management funded share repurchases using available cash and cash generated from operations. Repurchased shares became authorized but unissued common shares. At April 30, 2019, no funds remained from the amounts authorized by the Board to repurchase the Company’s common shares. The Company purchased a total of 745,232 common shares, for an aggregate purchase price of $50.0 million, during fiscal 2019 under the authorizations 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.


13



Stock Performance Graph

The performance graph shown below compares the percentage change in the cumulative total shareholder return on our common stock against the cumulative total return of the Russell 2000 Index and Standard & Poor’s Household Durables Index for the period from April 30, 2014 through April 30, 2019. The graph assumes an initial investment of $100 and the reinvestment of dividends. The graph is based on historical data and is not intended to be a forecast or indication of future performance of American Woodmark common stock.
chart-f9f5b653ae0e52dc95c.jpg


2014

2015

2016

2017

2018

2019
American Woodmark Corporation

$100.00

$168.94

$242.72

$306.23

$273.90

$291.46
Russell 2000 Index

100.00

109.71

103.18

129.63

144.58


151.25
S&P Household Durables Index

100.00

117.21

121.32

139.33

129.36


118.86

The graph and related information above are not deemed to be "filed" with the Securities and Exchange ("SEC") for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any future filing made by us with the SEC, except to the extent that we specifically incorporate it by reference into any such filing.



14



Item 6.        SELECTED FINANCIAL DATA
 
FISCAL YEARS ENDED APRIL 30
(Dollars in millions except per share data)
20191,2,3

20181,2

20172

2016

20154










FINANCIAL STATEMENT DATA
 

 

 

 

 
Net sales
$
1,645.3


$
1,250.3


$
1,030.2


$
947.0


$
825.5

Operating income
141.7


107.7


108.2


93.2


54.7

Net income
83.7


63.1


71.2


58.7


35.5

Earnings per share:









Basic
4.84


3.80


4.38


3.61


2.25

Diluted
4.83


3.77


4.34


3.57


2.21

Depreciation and amortization expense
94.4


45.0


18.7


16.5


14.5

Total assets
1,529.9


1,645.3


501.3


466.4


398.8

Long-term debt, less current maturities
689.2


809.9


15.3


22.1


21.4

Total shareholders' equity
620.4


581.7


352.4


280.8


229.8

Average shares outstanding









Basic
17.3


16.6


16.3


16.3


15.8

Diluted
17.3


16.7


16.4


16.4


16.0











PERCENT OF SALES









Gross profit
21.1
%

20.4
%

21.8
%

21.1
%

18.5
%
Selling, general and administrative expenses
12.4


11.8


11.3


11.2


11.9

Income before income taxes
6.7


7.6


10.6


9.7


6.6

Net income
5.1


5.1


6.9


6.2


4.3











RATIO ANALYSIS









Current ratio
2.0


2.1


3.3


3.3


3.2

Inventory turnover5
12.2


13.5


19.6


19.8


19.9

Collection period - days6
35.3


33.6


32.5


31.2


31.6

Percentage of capital (long-term debt plus equity):









Long-term debt, less current maturities
52.6
%

58.2
%

4.2
%

7.4
%

8.5
%
Equity
47.4


41.8


95.8


92.6


91.4

Return on equity7
13.9


13.5


22.5


23.0


16.9

1 
The fiscal 2019 and 2018 year results include twelve and four months, respectively, of RSI activity. See Note B -- Acquisition of RSI Home Products, Inc. for further details.
 
 
2 
The Company incurred corporate business development expenses. During fiscal 2019, these expenses decreased operating income, net income and earnings per share by $2.1 million, $1.6 million and $0.09, respectively. During fiscal 2018, these expenses decreased operating income, net income and earnings per share by $12.9 million, $8.6 million and $0.51, respectively. During fiscal 2017, these expense decreased operating income, net income and earnings per share by $2.7 million, $1.8 million and $0.11, respectively.
 
 
3 
The Company announced a reduction in workforce in fiscal 2019. During fiscal 2019, the expenses related to the reduction in force decreased operating income, net income and earnings per share by $2.0 million, $1.5 million and $0.09, respectively.
 
 
4 
The Company announced plans to realign its manufacturing network during fiscal 2012. During fiscal 2015, the credits related to these initiatives increased operating income, net income and earnings per share by $0.2 million, $0.1 million and $0.01, respectively.
 
 
5 
Based on average beginning and ending inventory.
 
 
6 
Based on the ratio of average monthly customer receivables to average sales per day.
 
 
7 
Based on net income divided by average beginning and ending shareholders equity.


15



Item 7.        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Results of Operations
 
The following table sets forth certain income and expense items as a percentage of net sales:
 
PERCENTAGE OF NET SALES
 
Fiscal Years Ended April 30
 
2019

2018

2017
Net sales
100.0
%

100.0
%

100.0
 %
Cost of sales and distribution
78.9


79.6


78.2

Gross profit
21.1


20.4


21.8

Selling and marketing expenses
5.5


6.2


6.9

General and administrative expenses
6.9


5.6


4.4

Restructuring
0.1





Operating income
8.6


8.6


10.5

Interest expense/other (income) expense
1.9


1.0


(0.1
)
Income before income taxes
6.7


7.6


10.6

Income tax expense
1.6


2.5


3.7

Net income
5.1


5.1


6.9


The following discussion should be read in conjunction with the Selected Financial Data and the Consolidated Financial Statements and the related notes contained elsewhere in this report.
 
Forward-Looking Statements
 
This annual report contains statements concerning the Company’s expectations, plans, objectives, future financial performance, and other statements that are not historical facts.  These statements may be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  In most cases, the reader can identify forward-looking statements by words such as “anticipate,” “estimate,” “forecast,” “expect,” “believe,” “should,” “could,” “would,” “plan,” “may,” “intend,” “estimate,” “prospect,” “goal,” “will,” “predict,” “potential” or other similar words.  Forward-looking statements contained in this report, including elsewhere in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are based on current expectations and our actual results may differ materially from those projected in any forward-looking statements.  In addition, the Company participates in an industry that is subject to rapidly changing conditions and there are 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 U.S. housing market or general economy and the impact of such developments on our and our customers’ business, operations and access to financing;
competition from other manufacturers and the impact of such competition on pricing and promotional levels;
an inability to develop new products or respond to changing consumer preferences and purchasing practices;
a failure to effectively manage manufacturing operations, alignment and capacity or an inability to maintain the quality of our products;
the impairment of goodwill, other intangible assets or our long-lived assets;
an inability to obtain raw materials in a timely manner or fluctuations in raw material and energy costs;
information systems interruptions or intrusions or the unauthorized release of confidential information concerning customers, employees or other third parties;
the cost of compliance with, or liabilities related to, environmental or other governmental regulations or changes in governmental or industry regulatory standards, especially with respect to health and safety and the environment;
a failure to attract and retain certain members of management or other key employees or other negative labor developments, including increases in the cost of labor;
risks associated with the implementation of our growth strategy;

16



risks related to sourcing and selling products internationally and doing business globally, including the imposition of tariffs or duties on those products;
unexpected costs resulting from a failure to maintain acceptable quality standards;
changes in tax laws or the interpretations of existing tax laws;
the occurrence of significant natural disasters, including earthquakes, fires, floods, and hurricanes or tropical storms;
the unavailability of adequate capital for our business to grow and compete;
increased buying power of large customers and the impact on our ability to maintain or raise prices;
our ability to successfully integrate RSI into our business and operations and the risk that the anticipated economic benefits, costs savings and other synergies in connection with 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 our credit facilities, our senior notes and our other indebtedness.

Additional information concerning the factors that could cause actual results to differ materially from those in forward-looking statements is contained in this annual report, including elsewhere in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and under Item 1A. “Risk Factors,” and Item 7A. “Quantitative and Qualitative Disclosures about Market Risk.”  While the Company believes that these risks are manageable and will not adversely impact the long-term performance of the Company, these risks could, under certain circumstances, have a material adverse impact on its operating results and financial condition.
 
Any forward-looking statement that the Company makes speaks only as of the date of this annual report.  The Company undertakes no obligation to publicly update or revise any forward-looking statements or cautionary factors, as a result of new information, future events or otherwise, except as required by law.
 
Overview
 
American Woodmark Corporation manufactures and distributes kitchen, bath and home organization products for the remodeling and new home construction markets.  Its products are sold on a national basis directly to home centers and builders and through a network of independent dealers and distributors.  At April 30, 2019, the Company operated 18 manufacturing facilities in the United States and Mexico and eight primary service centers located throughout the United States.
On December 29, 2017, we completed the acquisition of RSI, a leading manufacturer of kitchen, bath and home organization products. For the fiscal year ended April 30, 2019, the consolidated results include 12 months of RSI activity and in the prior fiscal year ended April 30, 2018, only four months of RSI activity is included.
A number of general market factors impacted the Company's business in fiscal 2019, including:
 
The unemployment rate improved by 8% compared to April 2018, falling to 3.6% as of April 2019 according to data provided by the U.S. Department of Labor;    
Decreases in single family housing starts during the Company’s fiscal 2019 of 1%, as compared to the Company’s fiscal 2018, according to the U.S. Department of Commerce;
Mortgage interest rates decreased with a 30-year fixed mortgage rate of 4.14% in April 2019, a decrease of approximately 33 basis points compared to April 2018;
The median price of existing homes sold in the U.S. rose by 3.6% during the Company’s fiscal 2019, according to data provided by the National Association of Realtors;
Consumer sentiment, as reported by the University of Michigan, averaged the same during the Company’s fiscal 2019 as in its prior fiscal year; and
Cabinet sales, as reported by members of the Kitchen Cabinet Manufacturers Association (KCMA), increased by 2.4% during fiscal 2019 versus the prior fiscal year.
 
The Company’s largest remodeling customers and competitors continued to utilize sales promotions in the Company’s product category during fiscal 2019 to boost sales.  The Company strives to maintain its promotional levels in line with market activity, with a goal of remaining competitive. The Company experienced promotional levels during fiscal 2019 that were higher than those experienced in its prior fiscal year. Sales in the remodel channel increased 46% during the fiscal year due to growth in the made- to-order framed business and eight incremental months of results from the Company’s acquisition of RSI.


17



Sales in the new construction channel increased 13% during the fiscal year due to share penetration with our builder partners, the health of the markets where we concentrated our business during fiscal 2019 and eight incremental months of results from the Company's acquisition of RSI.

The Company increased its net sales by 32% during fiscal 2019, which management believes was driven primarily by a rise in overall market activity and eight incremental months of results from the Company's acquisition of RSI.
 
Gross margin for fiscal 2019 was 21.1%, an increase from 20.4% in fiscal 2018.  The increase in gross profit margin was due primarily to higher sales volumes, price, mix and overhead cost leverage due to higher volumes. These favorable impacts were partially offset by higher transportation costs, tariffs and raw material inflation.
 
The Company regularly considers the need for a valuation allowance against its deferred tax assets.  The Company has been profitable for the last 7 years.  As of April 30, 2019, the Company had total deferred tax assets of $14.3 million net of valuation allowance, down from $17.8 million of deferred tax assets net of valuation allowance at April 30, 2018. 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 7 consecutive years of profitability that the Company will more likely than not realize all other remaining deferred tax assets.
 
The Company also regularly assesses its long-lived assets to determine if any impairment has occurred.  The Company has concluded that none of its long-lived assets were impaired as of April 30, 2019. 

Results of Operations
 
FISCAL YEARS ENDED APRIL 30










(Dollars in thousands)
2019

2018

2017

2019 vs. 2018 PERCENT
CHANGE

2018 vs. 2017 PERCENT
CHANGE















Net sales
$
1,645,319


$
1,250,274


$
1,030,248


32
%

21
 %
Gross profit
346,473


255,403


224,636


36


14

Selling and marketing expenses
89,875


77,843


70,979


15


10

General and administrative expenses
112,917


69,855


45,419


62


54

Interest expense (income), net
35,652


13,054


(521
)

173


(2,606
)

Net Sales
 
Net sales for the 2019 fiscal year increased 32% to $1,645.3 million from the prior fiscal year. The current fiscal year results include eight incremental months of results from the RSI Acquisition. Excluding the impact of the RSI Acquisition, the Company experienced growth in all channels during fiscal year 2019 versus the comparable prior year period.

Net sales for the 2018 fiscal year increased 21% to $1,250.3 million from the prior fiscal year. Excluding the impact of the RSI Acquisition, net sales for the 2018 fiscal year increased 4% to $1,072.6 million from the prior fiscal year. Excluding the impact of the RSI Acquisition, the Company experienced growth in both the builders and independent dealer and distributor channels during the fiscal year.
 
Gross Profit

Gross profit as a percentage of sales increased to 21.1% in fiscal 2019 as compared with 20.4% in fiscal 2018. The increase in gross profit margin was due primarily to higher sales volumes, price, mix and overhead cost leverage due to higher volumes. These favorable impacts were partially offset by higher transportation costs, newly enacted tariffs and raw material inflation.

Gross profit as a percentage of sales decreased to 20.4% in fiscal 2018 as compared with 21.8% in fiscal 2017. The decrease in gross profit margin was due primarily to higher transportation costs, raw material inflation, higher healthcare costs and $6.3 million, or 50 bps, of inventory step-up amortization related to the RSI Acquisition.   

18



Selling and Marketing Expenses
 
Selling and marketing expenses in fiscal 2019 were 5.5% of net sales, compared with 6.2% of net sales in fiscal 2018.  Selling and marketing costs increased by only 15% despite a 32% increase in net sales.  The improvement in the percentage of selling and marketing costs in relation to net sales was due to favorable leverage from increased sales and on-going expense control.
 
Selling and marketing expenses in fiscal 2018 were 6.2% of net sales, compared with 6.9% of net sales in fiscal 2017.  Selling and marketing costs increased by only 10% despite a 21% increase in net sales.  The improvement in the percentage of selling and marketing costs in relation to net sales was due to favorable leverage from increased sales, on-going expense control and lower display costs and commissions.

General and Administrative Expenses
 
General and administrative expenses increased by $43.1 million or 62% during fiscal 2019 versus the prior fiscal year. The increase was related to intangible amortization and higher compensation incentive costs. General and administrative costs increased to 6.9% of net sales in fiscal 2019 compared with 5.6% of net sales in fiscal 2018.
 
General and administrative expenses increased by $24.4 million or 54% during fiscal 2018. The increase was related to intangible amortization and RSI Acquisition related expenses, offset by lower compensation incentive costs. General and administrative costs increased to 5.6% of net sales in fiscal 2018 compared with 4.4% of net sales in fiscal 2017.

Effective Income Tax Rates
 
The Company generated pre-tax income of $110.9 million during fiscal 2019.  The Company’s effective tax rate decreased from 33.4% in fiscal 2018 to 24.5% in fiscal 2019.  The lower effective tax rate was primarily due to 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’s effective tax rate decreased from 34.6% in fiscal 2017 to 33.4% in fiscal 2018. The lower effective tax rate in fiscal 2018 was primarily due to the overall benefit from the reduction in the tax rate enacted in connection with the Tax Act, partially offset by non-deductible acquisition costs. 

Non-GAAP Financial Measures

We have reported our financial results in accordance with generally accepted accounting principles ("GAAP"). In addition, we have presented in this report 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 substitute for, the Company’s reported results prepared in accordance with GAAP. Our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP.

EBITDA, Adjusted EBITDA and Adjusted EBITDA margin

We use EBITDA, Adjusted EBITDA and Adjusted EBITDA margin in evaluating the performance of our business, and we use each in the preparation of our annual operating budgets and as indicators of business performance and profitability. We believe Adjusted EBITDA and Adjusted EBITDA margin allow us to readily view operating trends, perform analytical comparisons and identify strategies to improve operating performance. Additionally, Adjusted EBITDA is a key measurement used in our Term Loans to determine interest rates and financial covenant compliance.

We define EBITDA as net income adjusted to exclude (1) income tax expense, (2) interest (income) expense, net, (3) depreciation and amortization expense, and (4) amortization of customer relationship intangibles and trademarks. We define Adjusted EBITDA as EBITDA adjusted to exclude (1) expenses related to the RSI Acquisition and subsequent restructuring charges, (2) inventory step-up amortization due to the increase in the fair value of inventory acquired through the RSI Acquisition, (3) net gain on debt forgiveness and modification, (4) stock-based compensation expense, (5) gain/loss on asset disposals and (6) change in fair value of foreign exchange forward contracts. We believe Adjusted EBITDA, when presented in conjunction with comparable GAAP measures, is useful for investors because management uses Adjusted EBITDA in evaluating the performance of our business.

19



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 subsequent restructuring charges, (2) inventory step-up amortization due to the increase in the fair value of inventory acquired through the RSI Acquisition, (3) the amortization of customer relationship intangibles and trademarks, (4) net gain on debt forgiveness and modification, and (5) the tax benefit of RSI Acquisition expenses and subsequent restructuring charges, the inventory step-up amortization, the net gain on debt forgiveness and modification and the amortization of customer relationship intangibles and trademarks. The amortization of intangible assets is driven by the RSI Acquisition and will recur in future periods. Management has determined that excluding amortization of intangible assets from our definition of Adjusted EPS per diluted share will better help it evaluate the performance of our business and profitability and we have also received similar feedback from some of our investors regarding the same.
 
Free cash flow

To better understand trends in our business, we believe that it is helpful to subtract amounts for capital expenditures consisting of cash payments for property, plant and equipment and cash payments for investments in displays from cash flows from continuing operations which is how we define free cash flow. Management believes this measure gives investors an additional perspective on cash flow from operating activities in excess of amounts required for reinvestment. It also provides a measure of our ability to repay our debt obligations.

A reconciliation of these non-GAAP financial measures and the most directly comparable measures calculated and presented in accordance with GAAP are set forth in the following tables:
Reconciliation of EBITDA, Adjusted EBITDA and Adjusted EBITDA margin


 
 
 
 
 
 
 
 
FISCAL YEARS ENDED APRIL 30,
(Dollars in thousands)
 
2019
 
2018
 
2017
 
 
 
 
 
 
 
Net income (GAAP)
 
$
83,688

 
$
63,141

 
$
71,199

Add back:
 
 
 
 
 
 
      Income tax expense
 
27,200

 
31,619

 
37,726

      Interest expense (income), net
 
35,652

 
13,054

 
(521
)
      Depreciation and amortization expense
 
45,446

 
28,671

 
18,682

      Amortization of customer relationship intangibles and trademarks
 
49,000

 
16,333

 

EBITDA (Non-GAAP)
 
$
240,986

 
$
152,818

 
$
127,086

Add back:
 
 
 
 
 
 
      Acquisition related expenses (1)
 
4,118

 
12,902

 
2,686

      Inventory step-up amortization (2)
 

 
6,334

 

      Net gain on debt forgiveness and modification (3)
 
(5,266
)
 

 

      Stock-based compensation expense
 
3,040

 
3,097

 
3,469

      Loss on asset disposal
 
1,973

 
615

 
444

Adjusted EBITDA (Non-GAAP)
 
$
244,851

 
$
175,766

 
$
133,685

 
 
 
 
 
 
 
Net Sales
 
$
1,645,319

 
$
1,250,274

 
$
1,030,248

Adjusted EBITDA margin (Non-GAAP)
 
14.9
%
 
14.1
%
 
13.0
%

(1) Acquisition related expenses are comprised of expenses related to the RSI Acquisition and the subsequent restructuring charges that the Company incurred.

20



(2) The inventory step-amortization is the increase in the fair value of inventory acquired through the RSI Acquisition that was fully expensed when the inventory was sold in the quarter ended January 31, 2018.
(3) The Company had loans and interest forgiven relating to four separate economic development loans totaling $5.5 million for fiscal year 2019 and the Company incurred $0.3 million in loan modification expense with an amendment to the credit agreement during fiscal year 2019.

A reconciliation of EBITDA, Adjusted EBITDA and Adjusted EBITDA margin as projected for fiscal 2020 is not provided because we do not forecast net income as we cannot, without unreasonable effort, estimate or predict with certainty various components of net income.
Adjusted EPS per diluted share


 
 
 
 
 
 
 
 
FISCAL YEARS ENDED APRIL 30,
(Dollars in thousands, except share and per share data)
 
2019
 
2018
 
2017
 
 
 
 
 
 
 
Net income (GAAP)
 
$
83,688

 
$
63,141

 
$
71,199

Add back:
 
 
 
 
 
 
      Acquisition related expenses
 
4,118

 
12,902

 
2,686

      Amortization of intangibles
 
49,000

 
16,333

 

      Inventory step-up amortization
 

 
6,334

 

      Net gain on debt forgiveness and modification
 
(5,266
)
 

 

      Tax benefit of add backs
 
(11,824
)
 
(10,970
)
 
(969
)
Adjusted net income (Non-GAAP)
 
$
119,716

 
$
87,740

 
$
72,916

 
 
 
 
 
 
 
Weighted average diluted shares
 
17,330,419

 
16,744,705

 
16,398,240

Adjusted EPS per diluted share (Non-GAAP)
 
$
6.91

 
$
5.24

 
$
4.45

EPS per diluted share (GAAP)
 
$
4.83

 
$
3.77

 
$
4.34


Free cash flow


 
 
 
 
 
 
 
 
FISCAL YEARS ENDED APRIL 30,
(Dollars in thousands)
 
2019
 
2018
 
2017
 
 
 
 
 
 
 
Cash provided by operating activities
 
$
190,845

 
$
86,775

 
$
77,080

Less: capital expenditures (1)
 
39,385

 
49,893

 
25,531

Free cash flow
 
$
151,460

 
$
36,882

 
$
51,549


Outlook for Fiscal 2020
 
The Company tracks several metrics, including but not limited to housing starts, existing home sales, mortgage interest rates, new jobs growth, GDP growth and consumer confidence, which it believes are leading indicators of overall demand for kitchen and bath cabinetry. The Company believes that housing starts will continue to improve, driven by low unemployment rates and growth in new household formation. However, the Company expects that while the cabinet remodeling market will show modest improvement during fiscal 2020, it will continue to be below historical averages.

The Company expects that industry-wide cabinet remodeling sales will continue to be challenged until economic trends remain consistently favorable.  Growth is expected at roughly low to mid-single digit rate during the Company’s fiscal 2020. The Company’s home center market share is expected to remain at normalized levels for fiscal 2020, however this is heavily dependent upon competitive promotional activity. The Company expects to continue to gain market share in its growing independent dealer and distributor channel.


21



Based on available information, it is expected that new residential construction starts will grow approximately 3 to 5% during fiscal 2020. The Company’s new residential construction direct business is expected to increase at a faster rate than the market rate for single family housing starts due to continued share gains.

In total, the Company expects that it will grow sales at a mid-single digit rate in fiscal 2020.  Margins will be challenged with increases in labor costs, raw materials, tariffs and transportation rates.  With respect to the 301 Tariffs on goods imported from China, assuming the tariffs are maintained at the 25% levels, we could be exposed to approximately $5-6 million of potential annual direct cost increases in addition to the original 10% tariffs. Our teams are working to mitigate the impact through supplier negotiations, supply chain repositioning, internal productivity measures and pricing action if required. Should the 301 tariffs expand to additional categories we would have an additional exposure of approximately $4.0 million annually. The Company will also be negatively impacted by the move of one of our California facilities and incremental merchandising expenses. The Company expects adjusted EBITDA margins to decrease slightly for fiscal 2020.

Particleboard Supply

Due to a catastrophic fire at a key Southeast supplier plant in May 2019 and the supplier’s subsequent decision to shutter operations over the next 90-days at two additional plants, the Company is currently experiencing a temporary disruption in supply of particleboard, a key input component to the build of our cabinetry. The Company is working diligently to qualify alternate and additional suppliers, and our product engineering team is working on acceptable product substitutions where performance of other materials will meet or exceed that of particleboard.

We expect stable supply lines for particleboard will once again be established around the end of the second quarter of fiscal 2020. In the interim, we may experience extended lead times on particleboard cabinet orders in our Northeast, Mid-Atlantic, Southeast and Gulf Regions. Management’s current expectation on increased lead times is one to two weeks.

Management currently expects that these events will have a negative impact on at least our first and second quarters of fiscal 2020 as we expect the increased lead times to impact sales and our use of substituted materials instead of particleboard will increase our costs. Our results could be negatively impacted by product substitution costs and incremental transportation costs of $1-$3 million per quarter until fully resolved.

The Company maintains property insurance, including business interruption/dependent property coverage with a limit of $5 million and extra expense with a limit of $10 million that we believe will provide substantial coverage for certain of the losses arising from these events.  The Company is working with its insurance carrier on this matter and the magnitude and timing of the ultimate settlement is currently unknown. We expect the level of insurance proceeds will cover a substantial portion of the losses we incur due to these events, but there can be no assurance that we will ultimately be able to collect such amounts and such collection may occur in a different reporting period from the reporting period where we experience losses due to these events.

Additional risks and uncertainties that could affect the Company’s results of operations and financial condition are discussed elsewhere in this annual report, including under “Forward-Looking Statements,” and elsewhere in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as under Item 1A. “Risk Factors” and Item 7A. “Quantitative and Qualitative Disclosures about Market Risk.”

Liquidity and Capital Resources

The RSI Acquisition significantly affected the Company’s financial condition, liquidity and cash flow. See Note B -- Acquisition of RSI Home Products, Inc. (the “RSI Acquisition”) for a table detailing the purchase price. The Company’s cash and cash equivalents and investments in certificates of deposit totaled $59.2 million at April 30, 2019, representing a $28.7 million decrease from its April 30, 2018 levels.  At April 30, 2019, total long-term debt (including current maturities) was $691.5 million, a decrease of $122.5 million from its balance at April 30, 2018.  The Company’s ratio of long-term debt to total capital was 52.6% at April 30, 2019, compared with 58.2% at April 30, 2018.  The Company’s main source of liquidity is its cash and cash equivalents on hand and cash generated from its operating activities.

The Company can also borrow up to $100 million under the Revolving Facility. Approximately $93.3 million was available under this facility as of April 30, 2019.  

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 or LIBOR plus an applicable

22



margin, with the applicable margin being determined by reference to the Company’s then-current “Total Funded Debt to EBITDA Ratio.” The Company also incurs a quarterly commitment fee on the average daily unused portion of the Revolving Facility during the applicable quarter at a rate per annum also determined by reference to the Company’s then-current “Total Funded Debt to EBITDA Ratio.” As of April 30, 2019, the applicable margin with respect to base rate loans and LIBOR loans was 0.75% and 1.75%, respectively, and the commitment fee was 0.20%.

The Company began repaying the aggregate outstanding amounts under its initial term loan facility and the delayed draw term loan facility in certain specified quarterly installments on April 30, 2018. The Credit Facilities mature on December 29, 2022.

On February 12, 2018, the Company issued $350 million in aggregate principal amount of the Senior Notes and utilized the proceeds of such issuance, together with the borrowings under the Delayed Draw Term Loan as discussed above and cash on hand, to fund the refinancing of the RSI Notes, which were acquired as part of the RSI Acquisition - See Note B -- Acquisition of RSI Home Products, Inc. (the “RSI Acquisition”).

The credit agreement governing the Company's credit facilities and the indenture governing the Senior Notes restrict the ability of the Company and certain of the Company’s subsidiaries to, among other things, incur additional indebtedness, create additional liens, make certain investments, dispose of assets or engage in a merger or consolidation, engage in certain transactions with affiliates, and make certain restricted payments, including the payment of dividends or the repurchase or redemption of stock, subject, in each case, to the various exceptions and conditions described in the credit agreement and the indenture. See Note G --Notes Payable and Long-Term Debt for a discussion of our compliance with the covenants in the credit agreement and the indenture.
 
OPERATING ACTIVITIES
 
Cash provided by operating activities in fiscal 2019 was $190.8 million, compared with $86.8 million in fiscal 2018.  The increase in the Company’s cash from operating activities was driven primarily by an increase in net income excluding non-cash items (primarily depreciation and amortization), lower pension contributions in excess of expense, and a decrease in customer receivables which was partially offset by an increase in inventories and other accrued expenses.

Cash provided by operating activities in fiscal 2018 was $86.8 million, compared with $77.1 million in fiscal 2017.  The increase in the Company’s cash from operating activities was driven primarily by an increase in net income excluding non-cash items (primarily depreciation and amortization and changes in deferred taxes), which was partially offset by an increase in customer and income tax receivables.

On November 28, 2018, the Board approved up to $5.0 million of discretionary funding to reduce its defined benefit pension liabilities. The Company made aggregate contributions of $7.3 million to its pension plans during fiscal 2019, including the $5.0 million of discretionary funding.

On August 24, 2017, the Board approved up to $13.6 million of discretionary funding to reduce its defined benefit pension liabilities. The Company made aggregate contributions of $19.3 million to its pension plans during fiscal 2018, including the $13.6 million of discretionary funding.

On August 25, 2016, the Board approved up to $20 million of discretionary funding to reduce its defined benefit pension liabilities. The Company made aggregate contributions of $27.3 million to its pension plans during fiscal 2017, including the $20.0 million of discretionary funding during fiscal 2017.
 
INVESTING ACTIVITIES
 
The Company’s investing activities primarily consist of capital expenditures and investments in promotional displays. Net cash used by investing activities in fiscal 2019 was $37.9 million, compared with $44.3 million in fiscal 2018 and $53.7 million in fiscal 2017. Investments in property, plant and equipment for fiscal 2019 were $32.1 million, compared with $47.6 million in fiscal 2018 and $21.8 million in fiscal 2017. Investments in promotional displays were $7.3 million in fiscal 2019, compared with $2.3 million in fiscal 2018 and $3.7 million in fiscal 2017.
 
On November 30, 2016 the Board approved the construction of a new corporate headquarters in Winchester, Virginia. The new space has consolidated employees that previously occupied four buildings in Winchester, Virginia and Frederick County, Virginia, during the fourth quarter of fiscal 2018. During fiscal 2019, 2018 and 2017, approximately $6.7 million, $21.1 million and $3.0 million, respectively, was spent related to the new corporate headquarters.


23



During fiscal 2019, the Company’s decrease in net cash used for investing activities was primarily driven by lower payments to acquire property, plant and equipment.

FINANCING ACTIVITIES
 
The Company realized a net outflow of $173.7 million from financing activities in fiscal 2019 compared with a net outflow of $141.0 million in fiscal 2018, and a net outflow of $20.8 million in fiscal 2017.  During fiscal 2019, $122.2 million was used to repay long-term debt, compared with approximately $96.6 million in fiscal 2018 and $11.7 million in fiscal 2017.  
 
Under a stock repurchase authorization approved by its Board on November 30, 2016, the Company was authorized to purchase up to $50 million of the Company's common shares. The Board suspended the Company's stock repurchase program in conjunction with the RSI Acquisition. On August 23, 2018, the Board reinstated the program. On November 28, 2018, the Board authorized an additional stock repurchase program of up to $14 million of the Company's common shares. This authorization is in addition to the stock repurchase program authorized on November 30, 2016. Management funded share repurchases using available cash and cash generated from operations. Repurchased shares became authorized but unissued common shares. At April 30, 2019, no funds remained from the amounts authorized by the Board to repurchase the Company’s common shares. The Company purchased a total of 745,232 common shares, for an aggregate purchase price of $50.0 million, during fiscal 2019 under the authorizations 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. The Company also repurchased $29.0 million during fiscal 2018 and $13.4 million during fiscal 2017.

Cash flow from operations combined with accumulated cash and cash equivalents on hand are expected to be more than sufficient to support forecasted working capital requirements, service existing debt obligations and fund capital expenditures for fiscal 2020.

The timing of the Company’s contractual obligations (excluding interest) as of April 30, 2019 is summarized in the table below:
 
FISCAL YEARS ENDED APRIL 30










(in thousands)
Total Amounts

2020

2021-2022

2023-2024

2025 and Thereafter















Term Loans
$
340,000


$


$
27,500


$
312,500


$

The Senior Notes
350,000








350,000

Capital lease obligations
6,645


2,285


2,825


1,369


166

Other long-term debt
6,660






76


6,584

Operating lease obligations
107,388


17,943


30,084


20,490


38,871
















Total
$
810,693


$
20,228


$
60,409


$
334,435


$
395,621


SEASONALITY
 
Our business has been subject to seasonal influences, with higher sales typically realized in our first and fourth fiscal quarters. General economic forces and changes in our customer mix have reduced seasonal fluctuations in revenue over the past few years. The costs of the Company’s products are subject to inflationary pressures and commodity price fluctuations. The Company has generally been able over time to recover the effects of inflation and commodity price fluctuations through sales price increases.

For additional discussion of risks that could affect the Company and its business, see “Forward-Looking Statements” above, as well as Item 1A. “Risk Factors” and Item 7A. “Quantitative and Qualitative Disclosures About Market Risk.”    
 
OFF-BALANCE SHEET ARRANGEMENTS
 
As of April 30, 2019 and 2018, the Company had no off-balance sheet arrangements.
 
CRITICAL ACCOUNTING POLICIES
 
Management has chosen accounting policies that are necessary to give reasonable assurance that the Company’s operational results and financial position are accurately and fairly reported. The significant accounting policies of the Company are disclosed in Note A to the Consolidated Financial Statements included in this annual report. The following discussion addresses the accounting

24



policies that management believes have the greatest potential impact on the presentation of the financial condition and operating results of the Company for the periods being reported and that require the most judgment.
 
Management regularly reviews these critical accounting policies and estimates with the Audit Committee of the Board.

Revenue Recognition.  The Company utilizes signed sales agreements that provide for transfer of title to the customer at the time of shipment or upon delivery based on the contractual terms. The Company must estimate the amount of sales that have been transferred to third-party carriers but not delivered to customers as the carriers are not able to report real-time what has been delivered and thus there is a delay in reporting to the Company. The estimate is calculated using a lag factor determined by analyzing the actual difference between shipment date and delivery date of orders over the past 12 months. Revenue is only recognized on those shipments which the Company believes have been delivered to the customer. 
 
The Company recognizes revenue based on the invoice price less allowances for sales returns, cash discounts and other deductions as required under U.S. GAAP. Collection is reasonably assured as determined through an analysis of accounts receivable data, including historical product returns and the evaluation of each customer’s ability to pay. Allowances for sales returns are based on the historical relationship between shipments and returns. The Company believes that its historical experience is an accurate reflection of future returns.

Self Insurance.  The Company is self-insured for certain costs related to employee medical coverage, workers’ compensation liability, general liability, auto liability and property insurance. The Company maintains stop-loss coverage with third-party insurers to limit total exposure. The Company establishes a liability at each balance sheet date based on estimates for a variety of factors that influence the Company’s ultimate cost. In the event that actual experience is substantially different from the estimates, the financial results for the period could be adversely affected. The Company believes that the methodologies used to estimate insurance liabilities are an accurate reflection of the liabilities as of the date of the balance sheets.
 
Pensions.  The Company has two non-contributory defined benefit pension plans covering many of the Company’s employees hired prior to April 30, 2012. Effective April 30, 2012, the Company froze all future benefit accruals under the Company’s hourly and salaried defined benefit pension plans.
 
The estimated expense, benefits and pension obligations of these plans are determined using various assumptions. The most significant assumptions are the long-term expected rate of return on plan assets and the discount rate used to determine the present value of the pension obligations. The long-term expected rate of return on plan assets reflects the current mix of the plan assets invested in equities and bonds.

The following is a summary of the potential impact of a hypothetical 1% change in actuarial assumptions for the discount rate, expected return on plan assets and consumer price index: 
(in millions)
IMPACT OF 1% INCREASE

IMPACT OF 1% DECREASE
(decrease) increase
 

 




Effect on annual pension expense
$
(1.6
)

$
1.5





Effect on projected pension benefit obligation
$
(21.1
)

$
26.4


Pension expense for fiscal 2019 and the assumptions used in that calculation are presented in Note J of the Consolidated Financial Statements.  At April 30, 2019, the weighted average discount rate was 4.02% compared with 4.18% at April 30, 2018. The expected return on plan assets was 5.5% for the year ended April 30, 2019 and 6.5% for the year ended April 30, 2018. The rate of compensation increase is not applicable for periods beyond April 30, 2012 because the Company froze its pension plans as of that date.
 
The projected performance of the Company’s pension plans is largely dependent on the assumptions used to measure the obligations of the plans and to estimate future performance of the plans’ invested assets. Over the past two measurement periods, the most material deviations between results based on assumptions and the actual plan performance have resulted from changes to the discount rate used to measure the plans’ benefit obligations and the actual return on plan assets.  Accounting guidelines require the discount rate to be set to a current market rate at each annual measurement date.
 
The Company strives to balance expected long-term returns and short-term volatility of pension plan assets. Favorable and unfavorable differences between the assumed and actual returns on plan assets are generally amortized over a period no longer

25



than the average life expectancy of the plans’ active participants. The actual rates of return on plan assets realized, net of investment manager fees, were 7.0%, 3.5% and 10.3% for fiscal 2019, 2018 and 2017, respectively.
 
The fair value of plan assets at April 30, 2019 was $169.5 million compared with $156.5 million at April 30, 2018. The Company’s plan assets exceeded the projected benefit obligation by $0.7 million in fiscal 2019 and the projected benefit obligation exceeded plan assets by $7.0 million in fiscal 2018. The $7.7 million decrease in the Company’s unfunded position during fiscal 2019 was primarily driven by the Company’s $7.3 million contributions.  The Company expects its pension benefit to increase from $0.6 million in fiscal 2019 to $0.7 million in fiscal 2020, due primarily to a decrease in the expected interest cost, partially offset by a decrease in the expected long-term rate of return from 5.5% to 5.0%.  The Company expects to contribute $0.5 million to its pension plans in fiscal 2020, which represents discretionary funding.  The Company made contributions of $7.3 million to its pension plans in fiscal 2019. 
 
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 fiscal years ended 2019 and 2018.

The Company amortizes the cost of other intangible assets over their estimated useful lives, which range from three to six years, unless such lives are deemed indefinite. There were no impairment charges related to other intangible assets for the fiscal years ended 2019 and 2018.

RECENT ACCOUNTING PRONOUNCEMENTS
 
In May 2014, 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 adopted ASU 2014-09 as of May 1, 2018 and for periods thereafter using the modified retrospective approach, which was applied to all contracts not completed as of May 1, 2018. The cumulative effect of adopting the new revenue standard was not material. The comparative financial information has not been restated and continues to be reported under the accounting standards in effect for those periods. The adoption of this standard did not have a material impact on the twelve month periods ended April 30, 2019 and the Company does not expect it to have a material impact on revenue or net income on an ongoing basis. See Note A -- Summary of Significant Account Policies for further information.

In February 2016, the FASB issued ASU 2016-02, which requires lessees to recognize almost all leases on their balance sheet as a “right-of-use” asset and lease liability but recognize related expenses in a manner similar to current accounting. The guidance also eliminates current real estate-specific provisions for all entities. In January 2018, the FASB issued ASU 2018-01, which clarifies the application of the new leases guidance to land easements. In July 2018, the FASB issued ASU 2018-10 and ASU 2018-11, which clarify certain guidance included in ASU 2016-02 and introduces a new optional transition method. The standard is effective for annual periods beginning after December 15, 2018. The standard provides for the option to elect a package of practical expedients upon adoption. The Company intends to adopt the standard on May 1, 2019 and plans to elect the package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs and is evaluating the other practical expedients available under the guidance. The Company expects expanded financial statement note disclosure in addition to recognizing a right-of-use asset and lease liability for its operating leases on the balance sheet. In preparation for the adoption of the standard, the Company has procured a third-party software to track and manage the leases. Based on leases outstanding at April 30, 2019, the Company estimates the operating lease right-of-use asset and lease liability would have been in the range of $95 million to $115 million. The Company continues to evaluate the impacts of the pending adoption. As such, the Company’s preliminary assessments are subject to change.


26



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 adopted ASU 2017-07 as of May 1, 2018 and for periods thereafter using the retrospective approach. The adoption of this standard resulted in immaterial reclassifications from operating income in prior periods. The Company does not expect the adoption of this standard to have a material effect on our financial statements on an ongoing basis.

 Item 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
The costs of the Company’s products are subject to inflationary pressures and commodity price fluctuations.  The Company has generally been able, over time, to recover the effects of inflation and commodity price fluctuations through sales price increases.
 
Our revolving credit facility, initial term loan facility and delayed draw term loan facility, include a variable interest rate component. As a result, we are subject to interest rate risk with respect to such floating-rate debt. A 100 basis point increase in the variable interest rate component of our borrowings as of April 30, 2019 would increase our annual interest expense by approximately $3.4 million.
 
The Company does not currently use commodity or interest rate derivatives or similar financial instruments to manage its commodity price or interest rate risks.


27



Item 8.        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  
CONSOLIDATED BALANCE SHEETS
 
APRIL 30
(in thousands, except share and per share data)
2019

2018




ASSETS
 

 
Current Assets
 

 
Cash and cash equivalents
$
57,656


$
78,410

Investments - certificates of deposit
1,500


8,000

Customer receivables, net
125,901


136,355

Inventories
108,528


104,801

Income taxes receivable
1,009


25,996

Prepaid expenses and other
11,441


10,805

Total Current Assets
306,035


364,367







Property, plant and equipment, net
208,263


218,102

Investments - certificates of deposit


1,500

Customer relationships intangibles, net
213,111


258,778

Trademarks, net
5,555


8,889

Goodwill, net
767,612


767,451

Promotional displays, net
13,058


12,189

Deferred income taxes
773


732

Other assets
15,524


13,337

TOTAL ASSETS
$
1,529,931


$
1,645,345





LIABILITIES AND SHAREHOLDERS' EQUITY
 

 




Current Liabilities
 

 
Accounts payable
$
61,277


$
71,096

Current maturities of long-term debt
2,286


4,143

Accrued compensation and related expenses
54,906


48,682

Accrued marketing expenses
12,979


19,289

Other accrued expenses
18,142


27,245

Total Current Liabilities
149,590


170,455







Long-term debt, less current maturities
689,205


809,897

Deferred income taxes
64,749


71,563

Defined benefit pension liabilities


6,960

Other long-term liabilities
6,034


4,805







Shareholders' Equity
 

 
Preferred stock, $1.00 par value; 2,000,000 shares authorized, none issued



Common stock, no par value; 40,000,000 shares authorized; issued and outstanding shares:  at April 30, 2019: 16,849,026, at April 30, 2018: 17,503,922
352,424


361,158

Retained earnings
317,420


269,576

Accumulated other comprehensive loss - Defined benefit pension plans
(49,491
)

(49,069
)
Total Shareholders' Equity
620,353


581,665

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
1,529,931


$
1,645,345

See notes to consolidated financial statements.

28



CONSOLIDATED STATEMENTS OF INCOME
 
 
FISCAL YEARS ENDED APRIL 30
(in thousands, except per share data)
2019

2018

2017









Net sales
$
1,645,319


$
1,250,274


$
1,030,248

Cost of sales and distribution
1,298,846


994,871


805,612

Gross Profit
346,473


255,403


224,636










Selling and marketing expenses
89,875


77,843


70,979

General and administrative expenses
112,917


69,855


45,419

Restructuring charges, net
1,987





Operating Income
141,694


107,705


108,238










Interest expense (income), net
35,652


13,054


(521
)
Other (income) expense
(4,846
)

(109
)

(166
)
Income Before Income Taxes
110,888


94,760


108,925










Income tax expense
27,200


31,619


37,726










Net Income
$
83,688


$
63,141


$
71,199







SHARE INFORMATION
 

 

 
Earnings per share
 

 

 
Basic
$
4.84


$
3.80


$
4.38

Diluted
$
4.83


$
3.77


$
4.34


See notes to consolidated financial statements.
 
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
FISCAL YEARS ENDED APRIL 30
(in thousands)
2019

2018

2017









Net income
$
83,688


$
63,141


$
71,199










Other comprehensive income (loss) net of tax:





Change in pension benefits, net of deferred taxes





of $(190), $(50), and $(4,391) respectively
(422
)

88


6,868










Total Comprehensive Income
$
83,266


$
63,229


$
78,067


See notes to consolidated financial statements.


29



CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 
 

 

 

ACCUMULATED  

 
 
 

 

 

OTHER

TOTAL
 
COMMON STOCK

RETAINED

COMPREHENSIVE

SHAREHOLDERS'
(in thousands, except share data)
SHARES

AMOUNT

EARNINGS

LOSS

EQUITY
Balance, May 1, 2016
16,244,041


$
163,290


$
164,756


$
(47,285
)

$
280,761

 
 
 
 
 
 
 
 
 
 
Net income




71,199




71,199

Other comprehensive income, net of tax






6,868


6,868

Stock-based compensation


3,469






3,469

Exercise of stock-based compensation awards, net of amounts withheld for taxes
122,772


633






633

Stock repurchases
(178,118
)

(1,483
)

(11,924
)



(13,407
)
Employee benefit plan contributions
44,080


2,926






2,926

Balance, April 30, 2017
16,232,775


$
168,835


$
224,031


$
(40,417
)

$
352,449

 
 
 
 
 
 
 
 
 
 
Net income




63,141




63,141

Adoption of ASU 2018-02




8,740


(8,740
)


Other comprehensive income, net of tax






88


88

Stock-based compensation


3,097






3,097

Exercise of stock-based compensation awards, net of amounts withheld for taxes
86,927


(1,513
)





(1,513
)
Stock issuance related to acquisition
1,457,568


189,849






189,849

Stock repurchases
(309,612
)

(2,664
)

(26,336
)



(29,000
)
Employee benefit plan contributions
36,264


3,554






3,554

Balance, April 30, 2018
17,503,922


$
361,158


$
269,576


$
(49,069
)

$
581,665

 
 
 
 
 
 
 
 
 
 
Net income




83,688




83,688

Other comprehensive loss, net of tax






(422
)

(422
)
Stock-based compensation


3,040






3,040

Exercise of stock-based compensation awards, net of amounts withheld for taxes
48,928


(1,241
)





(1,241
)
Stock repurchases
(745,232
)

(14,156
)

(35,844
)



(50,000
)
Employee benefit plan contributions
41,408


3,623






3,623

Balance, April 30, 2019
16,849,026


$
352,424


$
317,420


$
(49,491
)

$
620,353


See notes to consolidated financial statements.

30



CONSOLIDATED STATEMENTS OF CASH FLOWS
 
FISCAL YEARS ENDED APRIL 30
(in thousands)
2019

2018

2017






OPERATING ACTIVITIES
 

 

 
Net income
$
83,688


$
63,141


$
71,199

Adjustments to reconcile net income to net cash and





cash equivalents provided by operating activities:





Depreciation and amortization
94,446


45,004


18,682

Net loss on disposal of property, plant and equipment
1,973


615


444

Amortization of debt issuance costs
2,724





Loss on extinguishment of debt


257



Gain on insurance recoveries
(580
)




Stock-based compensation expense
3,040


3,097


3,469

Deferred income taxes
(7,805
)

21,404


9,899

Pension contributions in excess of expense
(7,875
)

(20,928
)

(27,840
)
Net gain on debt forgiveness and modification
(5,266
)




Contributions of employer stock to employee benefit plan
3,623


3,554


2,926

Other non-cash items
916


14


318

Changes in operating assets and liabilities (net of acquired assets and liabilities):





Customer receivables
9,719


(18,786
)

(7,780
)
Inventories
(4,852
)

2,802


(4,925
)
Income taxes receivable
26,357


(7,295
)


Prepaid expenses and other assets
(5,172
)

(7,492
)

(207
)
Accounts payable
(4,775
)

(858
)

6,301

Accrued compensation and related expenses
6,225


(2,525
)

773

Marketing and other accrued expenses
(5,541
)

4,771


3,821

Net Cash Provided by Operating Activities
190,845


86,775


77,080







INVESTING ACTIVITIES
 

 

 
Payments to acquire property, plant and equipment
(32,128
)

(47,590
)

(21,811
)
Proceeds from sales of property, plant and equipment
64


27


37

Proceeds from insurance recoveries
580





Acquisition of business, net of cash acquired
(7,182
)

(57,200
)


Purchases of certificates of deposit


(25,000
)

(85,000
)
Maturities of certificates of deposit
8,000


87,750


56,750

Investment in promotional displays
(7,257
)

(2,303
)

(3,720
)
Net Cash Used by Investing Activities
(37,923
)

(44,316
)

(53,744
)






FINANCING ACTIVITIES
 

 

 
Payments of long-term debt
(122,205
)

(96,572
)

(11,731
)
Proceeds from long-term debt


734


3,477

Proceeds from issuance of common stock and other
500


1,289


2,366

Repurchase of common stock
(50,000
)

(29,000
)

(13,407
)
Withholding of employee taxes related to stock-based compensation
(1,739
)

(2,803
)

(1,734
)

31



 
FISCAL YEARS ENDED APRIL 30
(in thousands)
2019

2018

2017






Debt issuance cost
(232
)

(14,675
)


Notes receivable, net




208

Net Cash Used by Financing Activities
(173,676
)

(141,027
)

(20,821
)









Net (Decrease) Increase in Cash and Cash Equivalents
(20,754
)

(98,568
)

2,515










Cash and Cash Equivalents, Beginning of Year
78,410


176,978


174,463










Cash and Cash Equivalents, End of Year
$
57,656


$
78,410


$
176,978

Supplemental cash flow information:
 

 
 
 
     Non-cash investing and financing activities:



 

          Long-term debt related to funding acquisition
$


$
300,000

 
$

          Long-term debt issued to satisfy outstanding debt
$


$
600,000

 
$

          Long-term debt satisfied from issuance of debt
$


$
(602,750
)
 
$

          Stock issuance in connection with acquisition
$


$
189,849

 
$

          Property, plant and equipment
$
1,331


$
5,530

 
$

          Net other assets and liabilities related to acquisition
$


$
7,169

 
$





 

    Cash paid during the period for:



 

         Interest
$
35,908


$
5,919

 
$
596

       Income taxes
$
22,035


$
18,219

 
$
27,302


See notes to consolidated financial statements.

32



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note A -- Summary of Significant Accounting Policies
 
American Woodmark Corporation (“American Woodmark,” the “Company,” “we,” “our” or “us”) manufactures and distributes kitchen, bath and home organization products for the remodeling and new home construction markets.  Its products are sold on a national basis directly to home centers, and builders and through a network of independent dealers and distributors. The Company operates within a single reportable segment primarily within the U.S.; long-lived assets and sales outside the U.S. are not significant.
 
The following is a description of the Company’s significant accounting policies:
 
Principles of Consolidation and Basis of Presentation:  The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
 
Revenue Recognition:  Our principal performance obligations are the sale of kitchen, bath and home organization products. The Company recognizes revenue as control of our products is transferred to our customers, which is at the time of shipment or upon delivery based on the contractual terms with our customers. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods to our customers. Payment terms on our product sales normally range from 30 to 90 days. Taxes assessed by a governmental authority that we collect are excluded from revenue. The expected costs associated with our contractual warranties will continue to be recognized as expense when the products are sold. See Note M--Commitments and Contingencies for further discussion.

When revenue is recognized, we record estimates to reduce revenue for customer programs and incentives in order to determine that amount of consideration the Company will ultimately be entitled to receive. Customer programs and incentives are considered variable consideration, and include price discounts, volume-based incentives, promotions and cooperative advertising. The Company includes variable consideration in revenue only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the variable consideration is resolved. This determination is made based upon known customer program and incentive offerings at the time of sale, and expected sales volume forecasts as it relates to our volume-based incentives. This determination is updated each reporting period. In addition, for certain customer program incentives, we receive an identifiable benefit (goods or services) in exchange for the consideration given and record the associated expenditure in selling, general and administrative expenses.

We account for shipping and handling costs that occur before the customer has obtained control of a product as a fulfillment activity rather than as a promised service. These costs are classified within costs of sales and distribution.
 
Cost of Sales and Distribution:  Cost of sales and distribution includes all costs associated with the manufacture and distribution of the Company’s products including the costs of shipping and handling.
 
Advertising Costs:  Advertising costs are expensed as incurred. Advertising expenses for fiscal years 2019, 2018 and 2017 were $38.9 million, $40.1 million and $41.0 million, respectively.
 
Cash and Cash Equivalents:  Cash in excess of operating requirements is invested in money market accounts which are carried at cost (which approximates fair value). The Company considers all highly liquid short-term investments with an original maturity of three months or less when purchased to be cash equivalents.
 
Investments in Certificates of Deposit: Certificates of deposit are carried at cost (which approximates fair value). Certificates of deposit with original maturities greater than three months and remaining maturities less than one year are classified as current assets. Certificates of deposit with remaining maturities greater than one year are classified as long-term assets.

Inventories:   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.
 
Property, Plant and Equipment:  Property, plant and equipment is stated on the basis of cost less accumulated depreciation. Depreciation is provided by the straight-line method over the estimated useful lives of the related assets, which range from 15 to 30 years for buildings and improvements and 3 to 12 years for machinery and equipment. Assets under capital leases are amortized over the shorter of their estimated useful lives or the term of the related lease.

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Impairment of Long-Lived Assets:  The Company reviews its long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. During fiscal years 2019, 2018 and 2017, the Company concluded no impairment existed.

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, the entity is not required to take further action. However, if an entity concludes otherwise, 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. During fiscal years 2019, 2018 and 2017, the Company concluded no impairment existed.

Intangible assets consist of customer relationship intangibles and trademarks. The Company amortizes the cost of other intangible assets over their estimated useful lives, which range from three to six years, unless such lives are deemed indefinite. During fiscal years 2019, 2018 and 2017, the Company concluded no impairment existed.

Promotional Displays:  The Company invests in promotional displays in retail stores to demonstrate product features, product and quality specifications and to serve as a training tool for retail kitchen designers. The Company invests in these long-lived productive assets to provide the aforementioned benefits. The Company's investment in promotional displays is carried at cost less applicable amortization. Amortization is provided by the straight-line method on an individual display basis over periods of 24 to 60 months (the estimated period of benefit). Promotional display amortization expense for fiscal years 2019, 2018 and 2017 was $6.4 million, $4.5 million and $3.4 million, respectively, and is included in selling and marketing expenses.
 
Income Taxes:  The Company accounts for deferred income taxes utilizing the asset and liability method, whereby deferred tax assets and liabilities are recognized based on the tax effects of temporary differences between the financial statement amounts and the tax basis of assets and liabilities, using enacted tax rates in effect for the year in which these items are expected to reverse. At each reporting date, the Company evaluates the need for a valuation allowance to adjust deferred tax assets and liabilities to an amount that more likely than not will be realized.

Pensions:  The Company has two non-contributory defined benefit pension plans covering many of the Company’s employees hired before April 30, 2012.  Both defined benefit pension plans were frozen effective April 30, 2012.  The Company recognizes the overfunded or underfunded status of its defined benefit pension plans, measured as the difference between the fair value of plan assets and the benefit obligation, in its consolidated balance sheets. The Company also recognizes the actuarial gains and losses and the prior service costs, credits and transition costs as a component of other comprehensive income (loss), net of tax. 
 
Stock-Based Compensation:  The Company recognizes stock-based compensation expense based on the grant date fair value over the requisite service period.  The Company records the expense for stock-based compensation awards subject to performance-based criteria vesting over the remaining service period when the Company determines that achievement of the performance criteria is probable. The Company evaluates when the achievement of performance-based criteria is probable based on the expected satisfaction of the performance criteria at each reporting date.
 
Self Insurance: The Company is self-insured for certain costs related to employee medical coverage, workers’ compensation liability, general liability, auto liability and property insurance. The Company maintains stop-loss coverage with third-party insurers to limit total exposure. The Company establishes a liability at each balance sheet date based on estimates for a variety of factors that influence the Company’s ultimate cost. In the event that actual experience is substantially different from the estimates, the financial results for the period could be adversely affected. The Company believes that the methodologies used to estimate insurance liabilities are an accurate reflection of the liabilities as of the date of the balance sheet.

Recent Accounting Pronouncements In May 2014, the Financial Accounting