American Woodmark (AMWD) - 2022 Q4 - Annual Report

Part I Item 1. Business American Woodmark is a leading U.S. cabinet manufacturer serving remodeling and new home construction markets, with key customers Home Depot and Lowe's accounting for 48% of fiscal 2022 net sales - The company is one of the largest cabinet manufacturers in the U.S., with over 10,000 employees and more than a dozen brands[9] FY2022 Net Sales by Customer Channel | Customer Channel | Percentage of Net Sales | | :--- | :--- | | Home Centers (Home Depot & Lowe's) | ~48.0% | | Builders | ~39.3% | | Independent Dealers & Distributors | ~12.7% | - The company operates a nationwide network of 17 manufacturing facilities in the U.S. and Mexico, along with eight primary service centers, enabling a "short supply chain" to its U.S. customers[17][33] - Primary raw materials include hard maple, cherry, and beech lumber, with a portion of components sourced from Asia, introducing supply chain complexity and potential interruptions[19][20] - As of April 30, 2022, the company employed over 10,000 full-time employees, with an OSHA recordable incident rate of 1.40 during fiscal 2022[25][30] Item 1A. Risk Factors The company faces significant risks from customer concentration, cyclical housing market dependence, fluctuating costs, supply chain disruptions, ERP implementation, and debt levels - A high concentration of sales to Home Depot and Lowe's, approximately 48.0% of total net sales in fiscal 2022, presents a significant risk[40] - The business is highly dependent on U.S. home improvement, remodeling, and new construction activity, sensitive to economic conditions, interest rates, and consumer confidence[42] - Fluctuating raw material and energy costs, which increased manufacturing costs in fiscal 2022, could materially impact results, with a typical six to nine-month lag before price increases can offset these costs[43][44] - The COVID-19 pandemic has adversely affected the business through supply chain disruptions, rising material and logistics costs, and labor absenteeism, with its ultimate future impact remaining uncertain[46][47][48] - The implementation of a new Enterprise Resource Planning (ERP) system, which went live in the second half of fiscal 2022, subjects the company to risks of business disruption, including impacts on order fulfillment and supply chains[71] - The company's debt level and the restrictive covenants in its credit agreement could limit its ability to fund operations, capitalize on business opportunities, and compete effectively[65][67] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - No unresolved staff comments were reported[83] Item 2. Properties The company owns its corporate office and operates 17 manufacturing facilities, service centers, and a distribution center across the U.S. and Mexico, through a mix of owned and leased properties - The company owns its corporate office and eight manufacturing facilities, while leasing eight other manufacturing facilities, one manufacturing/service center, and one distribution center in the U.S. and Mexico[83] Item 3. Legal Proceedings The company is involved in various legal proceedings, with the aggregate estimated loss from probable or reasonably possible claims deemed immaterial as of April 30, 2022 - The company believes the aggregate estimated loss from various probable or reasonably possible suits and claims was not material as of April 30, 2022[85] Item 4. Mine Safety Disclosures The company reports no mine safety disclosures - No mine safety disclosures were reported[87] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities American Woodmark's common stock trades on NASDAQ under "AMWD", with no current cash dividends, and has underperformed benchmark indices from 2017 to 2022 - The company's common stock is listed on The NASDAQ Global Select Market under the symbol "AMWD"[90] - The company does not currently pay cash dividends and has no intention to do so in the near future, with future decisions dependent on financial condition and other factors[91] Stock Performance Comparison (2017-2022) | Index | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | American Woodmark Corporation | $100.00 | $89.40 | $97.90 | $55.90 | $108.20 | $51.00 | | Russell 2000 Index | $100.00 | $111.50 | $116.70 | $97.60 | $170.60 | $141.90 | | S&P Household Durables Index | $100.00 | $92.80 | $85.30 | $80.10 | $157.50 | $120.10 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal 2022 saw net sales grow to $1.86 billion, but gross margin declined to 12.2% and the company reported a $29.7 million net loss, largely due to a $68.5 million pension charge, with cash from operations significantly decreasing Results of Operations Fiscal 2022 net sales grew 6.5% to $1,857.2 million, but gross margin sharply declined to 12.2% due to inflation, resulting in a $29.7 million net loss, impacted by a $68.5 million pension charge Financial Performance Summary (in thousands) | Metric | FY 2022 | FY 2021 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $1,857,186 | $1,744,014 | 6.5% | | Gross Profit | $226,444 | $322,118 | (29.7)% | | Gross Margin | 12.2% | 18.5% | (6.3 p.p.) | | Net Income (Loss) | ($29,722) | $61,193 | N/A | - The decrease in gross margin was primarily driven by higher material and logistics costs, supply chain disruptions, and increases from wage and retention programs[104][110] - General and administrative expenses decreased by 13.3% in fiscal 2022, mainly due to controlled spending and reduced incentive costs[113] Non-GAAP Financial Measures Fiscal 2022 Adjusted EBITDA decreased to $138.0 million with a 7.4% margin, Adjusted EPS fell to $3.29, and free cash flow was negative $(27.1) million, reflecting lower gross profit and a pension settlement charge Reconciliation of Net Income (Loss) to Adjusted EBITDA (in thousands) | Metric | FY 2022 | FY 2021 | FY 2020 | | :--- | :--- | :--- | :--- | | Net Income (Loss) (GAAP) | $(29,722) | $61,193 | $73,653 | | Pension Settlement, net | $68,473 | — | — | | Net loss on debt forgiveness | — | $13,792 | — | | Adjusted EBITDA (Non-GAAP) | $137,957 | $226,504 | $234,409 | | Adjusted EBITDA Margin | 7.4% | 13.0% | 14.2% | Adjusted EPS per Diluted Share | Metric | FY 2022 | FY 2021 | FY 2020 | | :--- | :--- | :--- | :--- | | Diluted EPS (GAAP) | $(1.79) | $3.59 | $4.34 | | Adjusted EPS (Non-GAAP) | $3.29 | $6.54 | $6.52 | Free Cash Flow (in thousands) | Metric | FY 2022 | FY 2021 | FY 2020 | | :--- | :--- | :--- | :--- | | Cash provided by operating activities | $24,445 | $151,763 | $177,542 | | Less: Capital expenditures | $51,582 | $46,318 | $40,739 | | Free Cash Flow | $(27,137) | $105,445 | $136,803 | Outlook for Fiscal 2023 For fiscal 2023, the company projects mid-to-high teens net sales growth and high single-digit to low double-digit adjusted EBITDA margin, driven by price increases and increased capital investments for system upgrades - Expects mid-teens to high-teens net sales growth rate for fiscal 2023 versus fiscal 2022[128] - Projects an adjusted EBITDA margin for fiscal 2023 to range from high single-digits to low double-digits, with margin expansion expected through the year as pricing actions are realized[128] - Capital investment will increase to a range of 3.0% to 3.5% of net sales to support ERP implementation, digital investments, and manufacturing facility upgrades[129] Liquidity and Capital Resources As of April 30, 2022, cash and equivalents decreased to $22.3 million, total long-term debt was $508.9 million, and cash from operations significantly declined to $24.4 million Liquidity Position (as of April 30) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $22.3 million | $91.0 million | | Total long-term debt | $508.9 million | $521.7 million | | Long-term debt to total capital | 39.6% | 40.4% | - Cash provided by operating activities decreased to $24.4 million in fiscal 2022 from $151.8 million in fiscal 2021, primarily due to lower net income and unfavorable changes in working capital[136] - The company repurchased $25.0 million of its common stock during fiscal 2022 under a $100 million authorization[141] Critical Accounting Policies and Estimates Critical accounting policies include revenue recognition and annual goodwill impairment testing, with goodwill at risk due to economic volatility; the company also terminated its defined benefit pension plan in fiscal 2022 - Revenue recognition involves estimating when product control transfers to the customer, requiring a lag factor based on historical shipping and delivery data[145] - The company's defined benefit pension plan was terminated effective December 31, 2020, with benefits distributed on December 2, 2021[147] - Goodwill is tested for impairment annually, and management notes that economic volatility, supply chain issues, and stock price decline could put goodwill at risk of impairment in fiscal 2023 or beyond[149][151] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from inflation, commodity prices, and interest rate changes, mitigating interest rate risk with swaps hedging $200 million of variable-rate debt - The company is subject to interest rate risk on its variable-rate debt; a hypothetical 100 basis point increase would raise annual interest expense by approximately $3.1 million[155] - In May 2021, the company entered into interest rate swaps to hedge approximately $200 million of its variable interest rate debt[155] Item 8. Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for fiscal year 2022, including a change to FIFO inventory valuation, and an auditor's report with an unqualified opinion on financials but an adverse opinion on internal controls due to material weaknesses Consolidated Financial Statements Consolidated financial statements show total assets decreased to $1.63 billion in FY2022, with a net loss of $29.7 million and cash flow from operations significantly declining to $24.4 million Consolidated Balance Sheet Data (in thousands) | Account | April 30, 2022 | April 30, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $22,325 | $91,071 | | Total Current Assets | $428,657 | $409,965 | | Total Assets | $1,632,496 | $1,654,399 | | Total Current Liabilities | $216,228 | $220,447 | | Long-term debt, less current maturities | $506,732 | $513,450 | | Total Shareholders' Equity | $772,883 | $756,238 | Consolidated Statement of Operations Data (in thousands) | Account | FY 2022 | FY 2021 | FY 2020 | | :--- | :--- | :--- | :--- | | Net Sales | $1,857,186 | $1,744,014 | $1,650,333 | | Gross Profit | $226,444 | $322,118 | $326,562 | | Operating Income | $36,159 | $114,738 | $130,135 | | Net Income (Loss) | $(29,722) | $61,193 | $73,653 | | Diluted EPS | $(1.79) | $3.59 | $4.34 | Consolidated Statement of Cash Flows Data (in thousands) | Account | FY 2022 | FY 2021 | FY 2020 | | :--- | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $24,445 | $151,763 | $177,542 | | Net Cash Used by Investing Activities | $(51,572) | $(42,429) | $(38,916) | | Net Cash Used by Financing Activities | $(41,619) | $(115,322) | $(99,223) | | Net (Decrease) Increase in Cash | $(68,746) | $(5,988) | $39,403 | Notes to Consolidated Financial Statements Notes detail accounting policies, including a change to FIFO inventory valuation, debt structure with $500 million revolving and $250 million term loans, pension plan termination with a $68.3 million charge, and customer concentration - Effective May 1, 2021, the company changed its inventory valuation method from LIFO to FIFO, retrospectively adjusting all prior periods for a more uniform and reflective inventory value[180][181] - As of April 30, 2022, the company had $237.5 million outstanding on its Term Loan Facility and $263.0 million outstanding on its Revolving Facility, with approximately $225.3 million in available capacity[227] - The company's pension plan was terminated effective December 31, 2020, with benefits distributed on December 2, 2021, resulting in a settlement charge of $68.5 million in fiscal 2022[254][256] Net Sales by Channel (in thousands) | Channel | FY 2022 | FY 2021 | FY 2020 | | :--- | :--- | :--- | :--- | | Home center retailers | $890,554 | $848,898 | $768,043 | | Builders | $731,048 | $673,307 | $668,765 | | Independent dealers & distributors | $235,584 | $221,809 | $213,525 | | Total Net Sales | $1,857,186 | $1,744,014 | $1,650,333 | Report of Independent Registered Public Accounting Firm KPMG LLP issued an unqualified opinion on the financial statements but an adverse opinion on internal control over financial reporting due to material weaknesses in IT change management and ERP system implementation controls - The auditor issued an unqualified opinion on the consolidated financial statements[302] - The auditor issued an ADVERSE opinion on the effectiveness of the Company's internal control over financial reporting as of April 30, 2022[303][312] - A material weakness was identified in general information technology controls (GITCs) related to IT change management for the Made to Order (MTO) business, where changes were not consistently tested and approved[315] - A second material weakness was identified in GITCs related to the new ERP system, stemming from ineffective risk assessment and monitoring during its implementation[316] Item 9A. Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of April 30, 2022, due to two material weaknesses in IT change management and ERP system implementation controls, for which remediation plans are outlined - Management concluded that disclosure controls and procedures were not effective as of April 30, 2022, due to two material weaknesses in internal control over financial reporting[323] - Material Weakness 1: Ineffective IT change management controls within the Made to Order (MTO) business environment, including improper segregation of duties and lack of timely testing and approval of changes[327] - Material Weakness 2: Ineffective controls related to the new ERP system implementation, including inadequate user access controls and monitoring, stemming from ineffective risk assessment[328] - Remediation plans include deploying monitoring tools, removing developer access to production environments, enhancing review procedures, and conducting an organizational assessment for the ERP system[331][332] Part III Item 10. Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the company's definitive Proxy Statement - Information required by this item is incorporated by reference from the Registrant's definitive Proxy Statement[334][335] Item 11. Executive Compensation Information regarding executive and director compensation is incorporated by reference from the company's definitive Proxy Statement - Information required by this item is incorporated by reference from the Registrant's definitive Proxy Statement[336] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated by reference, with 301,844 securities issuable from restricted stock units and 508,968 available for future issuance under equity plans as of April 30, 2022 Equity Compensation Plan Information as of April 30, 2022 | Plan Category | Securities to be Issued Upon Exercise (a) | Securities Remaining for Future Issuance (c) | | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 301,844 | 508,968 | | Equity compensation plans not approved by security holders | — | — | | Total | 301,844 | 508,968 | Item 13. Certain Relationships and Related Transactions, and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the company's definitive Proxy Statement - Information required by this item is incorporated by reference from the Registrant's definitive Proxy Statement[340] Item 14. Principal Accounting Fees and Services Information regarding fees paid to and services provided by the principal accounting firm is incorporated by reference from the company's definitive Proxy Statement - Information required by this item is incorporated by reference from the Registrant's definitive Proxy Statement[341] Part IV Item 15. Exhibits and Financial Statement Schedules This section lists financial statements, schedules, and exhibits filed with the Form 10-K, including consolidated financial statements incorporated by reference from Item 8, and various governance and executive agreements - The consolidated financial statements of the company are incorporated by reference to Item 8 of the report[342] - Financial Statement Schedule II – Valuation and Qualifying Accounts for the three-year period ended April 30, 2022, is filed with this report[342] - Exhibits filed include governance documents, credit agreements, executive employment agreements, and certifications required by the Sarbanes-Oxley Act[343][345][346]