American Woodmark (AMWD) - 2020 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements The financial statements detail the company's financial position, operations, and cash flows, noting increased assets, reduced long-term debt, and the adoption of ASC 842 Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Jan 31, 2020 | Apr 30, 2019 | | :--- | :--- | :--- | | Total Assets | $1,593,834 | $1,529,931 | | Cash and cash equivalents | $47,063 | $57,656 | | Inventories | $121,930 | $108,528 | | Goodwill | $767,612 | $767,612 | | Total Liabilities | $904,549 | $909,578 | | Long-term debt, less current maturities | $600,573 | $689,205 | | Total Shareholders' Equity | $689,285 | $620,353 | - The company adopted the new lease standard, resulting in the recognition of $90.5 million in Operating lease right-of-use assets and corresponding short-term ($20.8 million) and long-term ($73.3 million) lease liabilities as of January 31, 2020[7] Condensed Consolidated Statements of Income Three Months Ended January 31 (in thousands) | Metric | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Net sales | $395,755 | $384,080 | 3.0% | | Gross Profit | $72,348 | $76,853 | (5.9)% | | Operating Income | $24,033 | $27,150 | (11.5)% | | Net Income | $12,804 | $18,409 | (30.4)% | | Diluted EPS | $0.75 | $1.07 | (29.9)% | Nine Months Ended January 31 (in thousands) | Metric | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Net sales | $1,251,136 | $1,237,920 | 1.1% | | Gross Profit | $253,917 | $259,351 | (2.1)% | | Operating Income | $105,339 | $103,141 | 2.1% | | Net Income | $61,848 | $61,664 | 0.3% | | Diluted EPS | $3.65 | $3.53 | 3.4% | Condensed Consolidated Statements of Cash Flows Cash Flow Summary - Nine Months Ended January 31 (in thousands) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $112,208 | $137,950 | | Net cash used by investing activities | ($30,213) | ($31,299) | | Net cash used by financing activities | ($92,588) | ($143,052) | | Net decrease in cash and cash equivalents | ($10,593) | ($36,401) | - The decrease in cash from financing activities was primarily due to no stock repurchases in the first nine months of fiscal 2020, compared to $41.0 million in repurchases in the same period of fiscal 2019[14] Notes to Condensed Consolidated Financial Statements - The company adopted the new lease accounting standard (ASU 2016-02) on May 1, 2019, recognizing operating lease assets and liabilities of $80.4 million upon adoption[24] Revenue by Sales Channel - Nine Months Ended Jan 31 (in thousands) | Channel | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Home center retailers | $579,443 | $587,592 | (1.4)% | | Builders | $512,513 | $482,023 | 6.3% | | Independent dealers and distributors | $159,180 | $168,305 | (5.4)% | | Total Net Sales | $1,251,136 | $1,237,920 | 1.1% | - The company has significant customer concentration risk, with its two largest customers (A and B) representing 30.3% and 24.5% of gross customer receivables, respectively, at January 31, 2020[58] - As of January 31, 2020, the company had $250 million outstanding on its term loans and $350 million in 4.875% Senior Notes due 2026. The company was in compliance with all debt covenants[46][50][51] Management's Discussion and Analysis of Financial Condition and Results of Operations Q3 FY2020 net sales grew 3.0% but gross margin declined due to operational issues and tariffs, with full-year sales growth expected to be low single-digit Overview and Results of Operations Q3 FY2020 Performance vs. Q3 FY2019 (in thousands) | Metric | Q3 FY2020 | Q3 FY2019 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $395,800 | $384,100 | 3.0% | | Gross Profit | $72,300 | $76,900 | (5.9)% | | Gross Margin | 18.3% | 20.0% | (170 bps) | | Net Income | $12,800 | $18,400 | (30.4)% | - Sales growth was driven by a 5.3% increase in the new construction channel, while remodeling sales (home center and dealer channels combined) grew 1.6%[80][81] - The decline in Q3 gross margin was attributed to operating inefficiencies, increased tariffs, costs from a particleboard supply disruption, and $1.6 million in duplicate rent and move costs for a California facility[84] Non-GAAP Financial Measures Adjusted EBITDA Reconciliation (in thousands) | Metric | Q3 FY2020 | Q3 FY2019 | | :--- | :--- | :--- | | Net Income (GAAP) | $12,804 | $18,409 | | Adjusted EBITDA (Non-GAAP) | $50,125 | $52,196 | | Adjusted EBITDA Margin | 12.7% | 13.6% | Adjusted Net Income Reconciliation (in thousands, except per share data) | Metric | Q3 FY2020 | Q3 FY2019 | | :--- | :--- | :--- | | Net Income (GAAP) | $12,804 | $18,409 | | Adjusted Net Income (Non-GAAP) | $21,987 | $24,109 | | Adjusted EPS per diluted share (Non-GAAP) | $1.30 | $1.40 | Outlook - The company expects to grow sales at a low single-digit rate for the full fiscal year 2020[100] - Adjusted EBITDA margins for fiscal 2020 are expected to decrease slightly compared to the prior year, primarily due to ongoing tariff costs and particleboard pricing/transportation costs[100] - The new residential construction business is expected to grow faster than the market rate due to continued market share gains[99] Particleboard Supply Disruption - A catastrophic fire at a key supplier's plant in May 2019 is causing higher costs for particleboard[101] - The company incurred net costs of $3.0 million for the nine months ended Jan 31, 2020, related to the disruption. It expects an ongoing negative impact of $1.5 to $1.9 million per quarter until resolved[102] - The company received a $5 million insurance reimbursement during the nine-month period, which is the limit of its business interruption coverage[103] Liquidity and Capital Resources - Total long-term debt decreased by $88.6 million to $602.9 million at January 31, 2020, from April 30, 2019[104] - Cash provided by operating activities for the first nine months of fiscal 2020 was $112.2 million, a decrease from $138.0 million in the prior-year period[111] - The Board of Directors authorized a new stock repurchase program of up to $50 million on August 22, 2019. No shares were repurchased during the quarter ended January 31, 2020[114][115] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from inflation, commodity prices, variable interest rates, and foreign currency, with a 100 basis point interest rate increase impacting annual expense by $2.5 million - The company is subject to interest rate risk on its variable-rate debt. A hypothetical 100 basis point increase in the variable interest rate would increase annual interest expense by approximately $2.5 million[119] - The company uses foreign exchange forward contracts to manage currency risk from transactions denominated in foreign currencies, primarily the Mexican peso[120][22] Controls and Procedures Management concluded disclosure controls were ineffective as of January 31, 2020, due to a material weakness in IT controls at the acquired RSI business, with a remediation plan in progress - The CEO and CFO concluded that disclosure controls and procedures were not effective as of January 31, 2020[122] - The ineffectiveness is due to a material weakness in internal control over financial reporting involving general information technology controls (GITCs) related to the acquired RSI business[122] - The company is implementing a remediation plan and expects it to be completed prior to the end of fiscal 2020[123] PART II. OTHER INFORMATION Legal Proceedings The company is involved in various routine lawsuits and claims incidental to its business, none of which are considered material - The Company is involved in various suits and claims in the normal course of business, which are considered ordinary, routine litigation incidental to its business and are not deemed material[125] Risk Factors No material changes to 10-K risk factors, except for a revised global operations risk detailing international manufacturing and sourcing disruptions, including tariffs and the coronavirus response - No material changes from the risk factors disclosed in the Annual Report on Form 10-K, except for one revised factor[126] - The revised risk factor details risks associated with manufacturing internationally (Mexico) and sourcing raw materials globally (Asia), including tariffs, trade disputes, and compliance with foreign laws[126][129] - A new point was added to the list of international sourcing risks: 'countries taking steps that disrupt supply chains and worker and customer activity, including closing borders and implementing quarantines, for public health reasons or otherwise, such as the on-going response to coronavirus'[129] Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and the Interactive Data File (Inline XBRL) - Lists exhibits filed with the report, including Certifications of the CEO and CFO pursuant to Exchange Act rules and the Sarbanes-Oxley Act of 2002[131] - Includes the Interactive Data File (Inline XBRL) for the financial statements and notes[131] Signatures