The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes, both of which are included in Part I, Item 1 of this report. The Company's critical accounting policies are included in the Company's Annual Report on Form 10-K for the fiscal year endedApril 30, 2019 . Forward-Looking Statements This report contains statements concerning the Company's expectations, plans, objectives, future financial performance, and other statements that are not historical facts. These statements may be "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. In most cases, the reader can identify forward-looking statements by words such as "anticipate," "estimate," "forecast," "expect," "believe," "should," "could," "would," "plan," "may," "intend," "estimate," "prospect," "goal," "will," "predict," "potential" or other similar words. Forward-looking statements contained in this report, including elsewhere in "Management's Discussion and Analysis of Financial Condition and Results of Operations," are based on current expectations and our actual results may differ materially from those projected in any forward-looking statements. In addition, the Company participates in an industry that is subject to rapidly changing conditions and there are 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
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; 19
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• 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;
• 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;
• the risk that the anticipated economic benefits, costs savings and other
synergies in connection with our acquisition of RSI are not fully realized
or take longer to realize than expected; and
• limitations on operating our business as a result of covenant restrictions
under our indebtedness, and our ability to pay amounts due under the Credit
Facilities, the Senior Notes and our other indebtedness.
Additional information concerning factors that could cause actual results to differ materially from those in forward-looking statements is contained in this report, including elsewhere in "Management's Discussion and Analysis of Financial Condition and Results of Operations," and also in the Company's most recent Annual Report on Form 10-K for the fiscal year endedApril 30, 2019 , filed with theSEC , including under Item 1A, "Risk Factors," Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Item 7A, "Quantitative and Qualitative Disclosures about Market Risk." While the Company believes that these risks are manageable and will not adversely impact the long-term performance of the Company, these risks could, under certain circumstances, have a material adverse impact on its operating results and financial condition. Any forward-looking statement that the Company makes speaks only as of the date of this report. The Company undertakes no obligation to publicly update or revise any forward-looking statements or cautionary factors as a result of new information, future events or otherwise, except as required by law.
Overview
American Woodmark Corporation manufactures and distributes kitchen, bath and home organization products for the remodeling and new home construction markets. Its products are sold on a national basis directly to home centers and builders and through a network of independent dealers and distributors. OnOctober 31, 2019 , the Company operated eighteen manufacturing facilities inthe United States andMexico and eight primary service centers located throughoutthe United States .
The three-month period ended
The Company's remodeling-based business was impacted by the following trends during the second quarter of the Company's fiscal 2020:
• The median price per existing home sold rose during the third calendar
quarter of 2019 compared to the same period one year ago by 5.0% according
to data provided by the
home sales increased 2.3% during the third calendar quarter of 2019 compared to the same period in the prior year;
• The unemployment rate improved to 3.6% as of
as ofOctober 2018 according to data provided by theU.S. Department of Labor ;
• Mortgage interest rates decreased with a thirty-year fixed mortgage rate
of approximately 3.69% in
basis points compared to the same period in the prior year, according to
Freddie Mac; and
• Consumer sentiment as tracked by Thomson Reuters/
decreased from 98.6 in
The Company believes there is no single indicator that directly correlates with cabinet remodeling market activity. For this reason, the Company considers other factors in addition to those discussed above as indicators of overall market activity including credit availability, housing affordability and sales reported by theKitchen Cabinet Manufacturers Association ("KCMA"), a trade 20 -------------------------------------------------------------------------------- organization that issues the aggregate sales that have been reported by its members including the largest cabinet manufacturers inthe United States . Based on the totality of factors listed above, the Company believes that the cabinet remodeling market decreased in the low-single digits during the second quarter of fiscal 2020. The Company's remodeling sales, which consist of our independent dealer and distributor channel sales and home center retail sales, decreased 4.7% during the second quarter and 4.1% during the first half of fiscal 2020 compared to the same prior-year periods. Our independent dealer and distributor channel decreased by 7.9% during the second quarter and 6.3% during the first half of fiscal 2020 when compared to the comparable prior-year periods. Our home center channel decreased by 3.8% during the second quarter and 3.4% during the first half of fiscal 2020 when compared to the comparable prior-year periods. New construction sales increased 8.9% in the second quarter and 6.8% in the first half of fiscal 2020, when compared to the same periods of fiscal 2019. The Company believes that fluctuations in single-family housing starts are the best indicator of new construction cabinet activity. Assuming a sixty to ninety day lag between housing starts and the installation of cabinetry, single-family housing starts increased 1.6% during the second quarter of the Company's fiscal 2020 over the comparable prior year period. The Company believes it over indexed the market due to mix and share gains with existing customers. The Company's total net sales increased 0.7% during the second quarter and 0.2% during the first half of fiscal 2020 compared to the same prior-year periods, which was driven primarily by growth in the builder channel. The Company earned net income of$22.2 million for the second quarter of fiscal 2020, compared with$18.5 million in the second quarter of its prior fiscal year, and earned net income of$49.0 million for the first half of fiscal 2020, compared with$43.3 million in the same period of the prior year. Results of Operations Three Months Ended Six Months Ended October 31, October 31, (in thousands) 2019 2018 Percent Change 2019 2018 Percent Change Net sales$ 428,016 $ 424,878 0.7 %$ 855,381 $ 853,840 0.2 % Gross profit 87,050 86,762 0.3 181,569 182,498 (0.5 ) Selling and marketing expenses 20,451 22,986 (11.0 ) 41,138 45,924 (10.4 ) General and administrative expenses 29,900 28,718 4.1 59,332 58,548 1.3Net Sales . Net sales were$428.0 million for the second quarter of fiscal 2020, an increase of 0.7% compared with the second quarter of fiscal 2019. For the first six months of fiscal 2020, net sales were$855.4 million , reflecting a 0.2% increase compared to the same period of fiscal 2019. The Company experienced growth in the builder channel and stock home center business, which was offset by declines in the made-to-order home center and independent dealers and distributors channels during the second quarter and first half of fiscal year 2020. Gross Profit. Gross profit margin for the second quarter of fiscal 2020 was 20.3%, compared with 20.4% for the same period of fiscal 2019. Gross profit margin was 21.2% for the first half of fiscal 2020, compared with 21.4% in the first half of fiscal 2019. Gross margin in the second quarter and first half of the current fiscal year was favorably impacted by higher sales volumes and improved operating efficiencies. These favorable impacts were partially offset by increased tariffs, costs related to our particleboard supply disruption (see discussion below) and duplicate rent costs related to ourCalifornia facility move of$0.4 million and$0.8 million for the three- and six-month periods endedOctober 31, 2019 , respectively. Selling and Marketing Expenses. Selling and marketing expenses were 4.8% of net sales in the second quarter and first half of fiscal 2020, compared with 5.4% of net sales for the same periods in fiscal 2019. Selling and marketing expenses as a percentage of net sales decreased during the second quarter and first half of fiscal 2020 as a result of ongoing expense controls and lower personnel costs. General and Administrative Expenses. General and administrative expenses were 7.0% of net sales in the second quarter of fiscal 2020, compared with 6.8% of net sales in the second quarter of fiscal 2019 and 6.9% of net sales in both the first half of fiscal 2020 and 2019. The increase in general and administrative expenses as a percentage of net sales during the second quarter was driven by higher incentive compensation costs. 21 -------------------------------------------------------------------------------- Effective Income Tax Rates. The Company's effective income tax rate for the three- and six-month periods endedOctober 31, 2019 and 2018 was 26.1% and 26.0%, respectively, compared with 27.2% and 25.4% in the comparable periods in the prior fiscal year. The decrease in the effective tax rate for the second quarter as compared to the comparable period in the prior fiscal year was primarily due to less unfavorable permanent tax items. The overall increase in the effective tax rate for the first half of fiscal 2020 as compared to the comparable period in the prior year was primarily due to a decrease in the benefit from stock-based compensation transactions.
Non-GAAP Financial Measures. We have reported our financial results in accordance with generally accepted accounting principles (GAAP). In addition, we have discussed our financial results using the non-GAAP measures described below.
A reconciliation of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP is set forth below.
Management believes that these non-GAAP financial measures provide an additional means of analyzing the current period's results against the corresponding prior period's results. However, these non-GAAP financial measures should be viewed in addition to, and not as a substitute for, the Company's reported results prepared in accordance with GAAP. Our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP.
Adjusted EPS per diluted share
We use Adjusted EPS per diluted share in evaluating the performance of our business and profitability. Management believes that this measure provides useful information to investors by offering additional ways of viewing the Company's results by providing an indication of performance and profitability excluding the impact of unusual and/or non-cash items. We define Adjusted EPS per diluted share as diluted earnings per share excluding the per share impact of (1) expenses related to the RSI acquisition and subsequent restructuring charges, (2) the amortization of customer relationship intangibles and trademarks, (3) net gain on debt forgiveness and modification and (4) the tax benefit of RSI acquisition expenses and subsequent restructuring charges, the net gain on debt forgiveness and modification and the amortization of customer relationship intangibles and trademarks. The amortization of intangible assets is driven by the RSI acquisition and will recur in future periods. Management has determined that excluding amortization of intangible assets from our definition of Adjusted EPS per diluted share will better help it evaluate the performance of our business and profitability and we have also received similar feedback from some of our investors regarding the same.
Adjusted EBITDA and Adjusted EBITDA margin
We use Adjusted EBITDA and Adjusted EBITDA margin in evaluating the performance of our business, and we use each in the preparation of our annual operating budgets and as indicators of business performance and profitability. We believe Adjusted EBITDA and Adjusted EBITDA margin allow us to readily view operating trends, perform analytical comparisons and identify strategies to improve operating performance. We define Adjusted EBITDA as net income adjusted to exclude (1) income tax expense, (2) interest (income) expense, net, (3) depreciation and amortization expense, (4) amortization of customer relationship intangibles and trademarks, (5) expenses related to the RSI acquisition and subsequent restructuring charges, (6) stock-based compensation expense, (7) gain/loss on asset disposals, (8) unrealized gain/loss on foreign exchange forward contracts and (9) net gain on debt forgiveness and modification. We believe Adjusted EBITDA, when presented in conjunction with comparable GAAP measures, is useful for investors because management uses Adjusted EBITDA in evaluating the performance of our business.
We define Adjusted EBITDA margin as Adjusted EBITDA as a percentage of net sales.
22 -------------------------------------------------------------------------------- Reconciliation of Adjusted Non-GAAP Financial Measures to the GAAP Equivalents Three Months Ended Six Months Ended October 31, October 31, (in thousands) 2019 2018 2019 2018 Net income (GAAP)$ 22,163 $ 18,488 $ 49,044 $ 43,255 Add back: Income tax expense 7,815 6,921 17,272 14,693 Interest expense, net 7,436 8,943 15,524 18,368
Depreciation and amortization expense 12,164 11,458
24,027 22,226
Amortization of customer relationship intangibles and trademarks 12,250 12,250 24,500 24,500 EBITDA (Non-GAAP)$ 61,828 $ 58,060 $ 130,367 $ 123,042 Add back: Acquisition related expenses (1) (130 ) 649
(89 ) 3,410
Change in foreign exchange forward contracts (2) (152 ) 993 (96 ) 199 Stock-based compensation expense 1,178 836 2,075 1,622 Loss on asset disposal 151 230 217 584 Adjusted EBITDA (Non-GAAP)$ 62,875 $ 60,768 $ 132,474 $ 128,857 Net Sales$ 428,016 $ 424,878 $ 855,381 $ 853,840 Adjusted EBITDA margin (Non-GAAP) 14.7 % 14.3 %
15.5 % 15.1 %
(1) Acquisition related expenses are comprised of expenses related to the RSI acquisition and the subsequent restructuring charges that the Company incurred. (2) In the normal course of business the Company is subject to risk from adverse fluctuations in foreign exchange rates. The Company manages these risks through the use of foreign exchange forward contracts. The changes in the fair value of the forward contracts are recorded in other (income) expense in the operating results. A reconciliation of 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 EBITDA. Adjusted EBITDA for the second quarter of fiscal 2020 was$62.9 million or 14.7% of net sales compared to$60.8 million or 14.3% of net sales for the same quarter of the prior fiscal year. Adjusted EBITDA for the first six months of the fiscal year was$132.5 million or 15.5% of net sales compared to$128.9 million or 15.1% of net sales for the same period of the prior fiscal year. The increase is primarily due to sales growth, improved operating efficiencies and lower selling and marketing expenses. 23 --------------------------------------------------------------------------------
Reconciliation of Net Income to Adjusted Net Income Three Months Ended Six Months Ended October 31, October 31, (in thousands, except share data) 2019 2018 2019 2018 Net income (GAAP)$ 22,163 $ 18,488 $ 49,044 $ 43,255 Add back: Acquisition related expenses (130 ) 649 (89 ) 3,410 Amortization of customer relationship intangibles and trademarks 12,250 12,250 24,500 24,500 Tax benefit of add backs (3,103 ) (3,291 ) (6,200 ) (7,089 ) Adjusted net income (Non-GAAP)$ 31,180 $ 28,096
Weighted average diluted shares 16,955,835 17,588,449 16,932,236 17,589,767 Adjusted EPS per diluted share (Non-GAAP)$ 1.84 $ 1.60 $ 3.97 $ 3.64 Outlook. 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 remain positive, driven by low unemployment rates, low mortgage 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 a low 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 gain market share in its growing independent dealer and distributor channel, however we believe the overall market will continue to soften with relatively flat growth. Based on available information, it is expected that new residential construction starts will grow approximately low single digits 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 market share gains. In total, the Company expects that it will grow sales at a low single digit rate in fiscal 2020. This growth rate is very dependent upon overall industry and economic growth. Margins will be challenged with increases in labor costs, raw materials, tariffs and transportation rates. The Company will be negatively impacted by the move of one of ourCalifornia facilities and incremental merchandising expenses and particle board supply disruption costs. The Company expects adjusted EBITDA margins for fiscal 2020 to remain flat with prior year results. Particleboard Supply Due to a catastrophic fire at a key Southeast supplier plant inMay 2019 and the supplier's subsequent decision to shutter operations at two additional plants, the Company is currently experiencing higher costs in the supply of particleboard, a key input component to the build of our cabinetry. The Company has worked diligently to qualify additional suppliers, and our product engineering team has successfully transitioned to acceptable substitutions with a performance level that meets or exceeds that of particleboard. We expect stable supply lines for particleboard will once again be established during the third quarter of fiscal 2020. The Company has recognized costs in excess of insurance reimbursements related to our particleboard supply disruption of$0.9 million and$2.4 million for the three- and six-month periods endedOctober 31, 2019 . Management currently expects that these events will have a negative impact on at least our third quarter of fiscal 2020 as the continued use of substituted materials will increase our costs. Our results could continue to be negatively impacted by product substitution costs and incremental transportation costs of$1.0 to$2.0 million per quarter until fully resolved. The Company maintains property insurance, including business interruption/dependent property coverage with a limit of$5 million . The company has realized a$2.9 million reimbursement to date on the$5 million limit. The Company is working with 24 -------------------------------------------------------------------------------- its insurance carrier to determine the applicability of the coverage for the event. We expect the level of insurance proceeds will cover approximately 60% 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.
Liquidity and Capital Resources
The Company's cash and cash equivalents and investments in certificates of deposit totaled$51.4 million atOctober 31, 2019 , representing a$7.7 million decrease from itsApril 30, 2019 levels. AtOctober 31, 2019 , total long-term debt (including current maturities) was$ 620.3 million , a decrease of$71.2 million from its balance atApril 30, 2019 . The Company's ratio of long-term debt to total capital was 47.8% atOctober 31, 2019 , compared with 52.6% atApril 30, 2019 . 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$94.5 million was available under this facility as ofOctober 31, 2019 . As ofOctober 31, 2019 ,$134 million was outstanding on each of the Initial Term Loan and the Delayed Draw Term Loan for a total of$268.0 million . Amounts outstanding under the Credit Facilities bear interest based on a fluctuating rate measured by reference to either, at the Company's option, a base rate plus an applicable margin ranging between 0.00% and 1.00% or LIBOR plus an applicable margin ranging between 1.00% and 2.00%, with the applicable margin being determined by reference to the Company's then-current "Total Funded Debt to EBITDA Ratio." The Company also incurs a quarterly commitment fee on the average daily unused portion of the Revolving Facility during the applicable quarter at a rate per annum also determined by reference to the Company's then-current "Total Funded Debt to EBITDA Ratio." As ofOctober 31, 2019 , the applicable margin with respect to base rate loans and LIBOR loans was 0.50% and 1.50%, respectively, and the commitment fee was 0.18%. The Company is required to repay the aggregate outstanding amounts under the Initial Term Loan and the Delayed Draw Term Loan in certain specified quarterly installments that began onApril 30, 2018 . The Credit Facilities mature onDecember 29, 2022 . As ofOctober 31, 2019 , the Company's previously issued$350 million in aggregate principal amount of Senior Notes remained outstanding. Interest on the Senior Notes accrues at an annual rate of 4.875% and is payable semi-annually in arrears onMarch 15 andSeptember 15 of each year. The Senior Notes mature onMarch 15, 2026 . The Credit Agreement and the indenture governing the Senior Notes restrict the ability of the Company and certain of the Company's subsidiaries to, among other things, incur additional indebtedness, create additional liens, make certain investments, dispose of assets or engage in a merger or consolidation, engage in certain transactions with affiliates, and make certain restricted payments, including the payment of dividends or the repurchase or redemption of stock, subject, in each case, to the various exceptions and conditions described in the Credit Agreement and the indenture governing the Senior Notes. See Note L--Loans Payable and Long-Term Debt for additional information about the Credit Facilities and Senior Notes and a discussion of our compliance with the covenants in the Credit Agreement and the indenture. Cash provided by operating activities in the first six months of fiscal 2020 was$86.2 million , compared with$107.7 million in the comparable period of fiscal 2019. The decrease in the Company's cash from operating activities was driven primarily by a decrease in cash inflows from income taxes and accrued compensation and related expenses. The Company's investing activities primarily consist of purchases and maturities of certificates of deposit, investment in property, plant and equipment and promotional displays. Net cash used for investing activities was$18.3 million in the first six months of fiscal 2020, compared with$19.7 million in the comparable period of fiscal 2019. The decrease in cash used was due to a decrease in cash received from maturities of certificates of deposit, offset by the prior year payment of the working capital adjustment related to the acquisition of RSI. During the first six months of fiscal 2020, net cash used by financing activities was$74.2 million , compared with$108.5 million in the comparable period of the prior fiscal year. The decrease in cash used was primarily driven by the Company's payments of long-term debt of$73.2 million , a decrease of$20.9 million , and no stock repurchases in the current year, a decrease of$13.2 million . OnAugust 22, 2019 , the Company's Board of Directors (the "Board") authorized a stock repurchase program of up to$50 million of the Company's common shares. Repurchases may be made from time to time in the open market, or through privately negotiated transactions or otherwise, in compliance with applicable laws, rules and regulations, at prices and on terms the Company deems 25 -------------------------------------------------------------------------------- appropriate and subject to the Company's cash requirements for other purposes, compliance with the covenants under the Credit Agreement and the indenture governing the Senior Notes, and other factors management deems relevant. The authorization does not obligate the Company to acquire a specific number of shares during any period, and the authorization may be modified, suspended or discontinued at any time at the discretion of the Board. Management expects to fund any share repurchases using available cash and cash generated from operations. Repurchased shares will become authorized but unissued common shares. The Company did not repurchase any of its shares during the fiscal quarter endedOctober 31, 2019 .
Cash flow from operations combined with accumulated cash and cash equivalents on hand are expected to be more than sufficient to support forecasted working capital requirements, service existing debt obligations and fund capital expenditures for the remainder of fiscal 2020.
Seasonal and Inflationary Factors
Our business has been subject to seasonal influences, with higher sales typically realized in our first and fourth fiscal quarters. General economic forces and changes in our customer mix have reduced seasonal fluctuations in revenue over the past few years. The costs of the Company's products are subject to inflationary pressures and commodity price fluctuations. The Company has generally been able over time to recover the effects of inflation and commodity price fluctuations through sales price increases.
Critical Accounting Policies
The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no significant changes to the Company's critical accounting policies as disclosed in the Company's Annual Report on Form 10-K for the fiscal year endedApril 30, 2019 .
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