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AMWD > SEC Filings for AMWD > Form 10-K on 30-Jun-2014All Recent SEC Filings

Show all filings for AMERICAN WOODMARK CORP

Form 10-K for AMERICAN WOODMARK CORP


30-Jun-2014

Annual Report


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
                                              2014         2013     2012
Net sales                                    100.0  %     100.0  % 100.0  %
Cost of sales and distribution                82.9         83.7     87.1
Gross profit                                  17.1         16.3     12.9
Selling and marketing expenses                 8.2          9.1     11.3
General and administrative expenses            4.3          4.4      4.9
Restructuring charges                          0.0          0.2      3.2
Insurance recovery                             0.0         (0.1)     0.0
Operating income (loss)                        4.6          2.7     (6.5)
Interest expense/other (income) expense        0.1          0.1     (0.1)
Income (loss) before income taxes              4.5          2.7     (6.4)
Income tax expense (benefit)                   1.8          1.1     (2.4)
Net income (loss)                              2.7          1.5     (4.0)

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," or other similar words. Forward-looking statements contained in this annual 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:

general economic or business conditions and instability in the financial and credit markets, including their potential impact on our (i) sales and operating costs and access to financing; and (ii) customers and suppliers and their ability to obtain financing or generate the cash necessary to conduct their respective businesses;

the cyclical nature of the Company's industry, which is particularly sensitive to changes in consumer confidence, the amount of consumers' income available for discretionary purchases, and the availability and terms of consumer credit;

economic weakness in a specific channel of distribution;

the loss of sales from specific customers due to their loss of market share, bankruptcy or switching to a competitor;

risks associated with domestic manufacturing operations, including fluctuations in capacity utilization and the prices and availability of key raw materials as well as fuel, transportation, warehousing and labor costs and environmental compliance and remediation costs;

the need to respond to price or product initiatives launched by a competitor;

the Company's ability to successfully implement initiatives related to increasing market share, new products, maintaining and increasing its sales force and new product displays; and

sales growth at a rate that outpaces the Company's ability to install new capacity or a sales decline that requires reduction or realignment of the Company's manufacturing capacity.


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 cabinets and vanities for the remodeling and new home construction markets. Its products are sold on a national basis directly to home centers, major builders and home manufacturers and through a network of independent dealers and distributors. At April 30, 2014, the Company operated 9 manufacturing facilities and 9 service centers across the country.

During the Company's fiscal year that ended on April 30, 2014 (fiscal 2014), the Company continued to experience improving housing market conditions during the first half of fiscal 2014 and generally flat market conditions during the second half of fiscal 2014 as the recovery from the housing market downturn that began in 2007 stalled.

A number of positive factors evidenced the improving housing market, including:

The unemployment rate improved by 16% compared to April 2013, but was still elevated versus historical norms at 6.3% as of April 2014 according to data provided by the U.S. Department of Labor;

A 7% improvement in Gross Private Residential Fixed Investment reported by the U.S. Department of Commerce during the most recent four quarters through the first quarter of calendar 2014, as compared with the same period one year ago;

Increases in total housing starts and single family housing starts during the Company's fiscal 2014 of 11% and 7%, respectively, as compared to the Company's fiscal 2013, according to the U.S. Department of Commerce;

The median price of existing homes sold in the U.S. rose by 5% during the Company's fiscal 2014, according to data provided by the National Association of Realtors;

Consumer sentiment, as reported by the University of Michigan, averaged 5% higher during the Company's fiscal 2014 than in its prior fiscal year; and

Cabinet sales, as reported by members of the Kitchen Cabinet Manufacturers Association (KCMA), increased by 19% during fiscal 2014, suggesting an increase in both new construction and remodeling sales of cabinets.

Despite these positive factors, the Company is still faced with a stagnant remodeling market and the Company's largest remodeling customers and competitors continued to utilize sales promotions in the Company's product category during fiscal 2014 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 2014 that were slightly lower than those experienced in its prior fiscal year. The Company's remodeling sales were relatively flat during fiscal 2014 in a remodeling market that appears to have improved slightly.

The Company increased its net sales by 15% during fiscal 2014. The Company realized strong sales gains in its new construction channel during fiscal 2014, where sales increased by more than 30%, significantly outpacing the improvement in single-family housing starts. Management believes this result indicates the Company realized market share gains in the new construction sales channel during fiscal 2014.

During the third quarter of fiscal 2012, the Company announced several initiatives designed to reduce its cost base (the 2012 Restructuring), including the permanent closure of two manufacturing plants, the decision to sell a previously closed manufacturing facility, and the realignment of its retirement program, including the freezing of its pension plans. All of these initiatives were completed either prior to or just after the beginning of the Company's


fiscal 2013, and restructuring charges related to these actions have been reflected in the Company's results for fiscal years 2014 and 2013.

The Company recorded restructuring charges of $1.4 million (pre-tax) and $0.9 million (after-tax) during fiscal 2013 and $(0.2) million (pre-tax) and $(0.1) million (after-tax) during fiscal 2014 in connection with these initiatives. Because the bulk of these restructuring efforts have been completed, the Company expects that its future out-of-pocket costs will be nominal. The Company sold a previously closed plant during fiscal 2013 and another previously closed plant during fiscal 2014 and continues to include in "Other Assets" an aggregate $1.0 million book value for the remaining plant held for sale that was included in the 2012 Restructuring.

Gross margin for fiscal 2014 was 17.1%, improved from 16.3% in fiscal 2013. The increase in the Company's gross margin rate was driven by the beneficial impact of increased sales volume, favorable sales mix and efficiencies in freight, labor and overhead, which more than offset the impact of rising materials costs.

The Company regularly considers the need for a valuation allowance against its deferred tax assets. The Company had a history of profitable operations for 16 consecutive years, from 1994 to 2009, followed by losses that coincided with the industry downturn from 2010 to 2012. As of April 30, 2014, the Company had total deferred tax assets of $29.9 million, down from $39.2 million at April 30, 2013. Growth in the Company's deferred tax assets in recent fiscal years prior to fiscal 2013 resulted primarily from growth in its defined benefit pension liabilities and the impact of its recent losses prior to fiscal 2013. The Company earned sufficient net income during fiscal 2013 to fully utilize its Federal net operating loss carryforward. To fully realize its remaining net deferred tax assets, the Company will need to, among other things, substantially reduce its unfunded pension obligation of $41.5 million at April 30, 2014. The Company took definitive actions when it froze its pension plans as part of the 2012 Restructuring to enhance the probability that this objective is achieved in the future.

The Company resumed the funding of its pension plans during fiscal year 2012, and expects to continue funding these plans for the foreseeable future, which will reduce both its unfunded pension plan obligation and its deferred tax asset. These actions, coupled with the recent improvement in the U.S. housing market and the Company's continued ability to grow its sales at a faster rate than its competitors, have enabled the Company to generate net income and reduce its deferred tax assets and unfunded pension obligation during fiscal 2013 and 2014. The Company believes that the positive evidence of the housing industry improvement, coupled with the benefits from the Company's successful restructuring and continued market share gains have already driven a return to profitability that is expected to continue, and that the combined impact of these positive factors outweighs the negative factor of the Company's previous losses. Accordingly, Management has concluded it is more likely than not that the Company will realize its 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 the long-lived assets pertaining to its 9 manufacturing plants or any of its other long-lived assets were impaired as of April 30, 2014.

Results of Operations

                                                     FISCAL YEARS ENDED APRIL 30
                                                                         2014 vs. 2013   2013 vs. 2012
(in thousands)                            2014       2013       2012    PERCENT CHANGE  PERCENT CHANGE

                                                $          $          $
Net sales                                726,515    630,437    515,814      15  %           22  %
Gross profit                             124,177    102,656     66,475      21              54
Selling and marketing expenses            59,536     57,402     58,271       4              (1)
General and administrative expenses       30,881     27,575     25,329      12               9
Interest expense                             728        643        527      13              22

Net Sales

Net sales were $726.5 million in fiscal 2014, an increase of $96.1 million, or 15%, compared with fiscal 2013. Overall unit volume for fiscal 2014 was 10% higher than in fiscal 2013, which was driven primarily by the


Company's increased new construction volume. Average revenue per unit increased 5% in fiscal 2014, driven by improvements in the Company's sales mix and pricing.

Net sales for fiscal 2013 increased 22% to $630.4 million from $515.8 million in fiscal 2012. Overall unit volume for fiscal 2013 was 17% higher than in fiscal 2012, which management believes was driven primarily by the Company's increased market share. Average revenue per unit increased 4% during fiscal 2013, driven primarily by improvements in product mix.

Gross Profit

Gross profit as a percentage of sales increased to 17.1% in fiscal 2014 as compared with 16.3% in fiscal 2013. The improvement in gross profit margin was due primarily to the beneficial impact of higher sales volume and improved labor efficiency. This favorability was partially offset by an increase in material costs. Specific changes and additional information included:

Labor costs improved by 2.4% as a percentage of net sales compared with the prior fiscal year, as increased sales volume resulted in more efficient labor costs than in the prior fiscal year;

Freight costs improved by 0.4% as a percentage of net sales compared with the prior fiscal year, due to mix and higher volume across our delivery network;

Materials costs increased as a percentage of net sales by 1.0% during fiscal 2014 as compared with fiscal 2013, driven primarily by inflationary pressures in hardwood lumber, plywood, particleboard and liner board; and

Overhead and installation costs increased by 1.0% as a percentage of net sales as compared with fiscal 2013 due to increased spending for infrastructure to support higher levels of anticipated sales and installation activity. This increase was partially offset by the increased sales volume as increased utilization resulted in leverage on our semi-fixed and fixed costs.

During fiscal 2013, the Company's gross profit increased as a percentage of net sales to 16.3% from 12.9% in fiscal 2012. The improvement in gross profit margin was due primarily to the beneficial impact of higher sales volume and labor and overhead cost savings associated with the Company's two plant closures in April and May of 2012. This favorability was partially offset by an increase in material costs. Specific changes and additional information included:

Labor and overhead costs improved by 3.6% as a percentage of net sales during fiscal 2013 compared with the prior fiscal year, as the combination of the increased sales volume and the plant closures caused both a decrease in overhead costs and improved absorption of fixed overhead costs, while labor costs became increasingly more efficient throughout fiscal 2013 as productivity gains were realized following the plant closures;

Materials and freight costs increased as a percentage of net sales by 1.6% during fiscal 2013 as compared with fiscal 2012, driven primarily by inflationary pressures in finishing materials, lumber, cartons, plywood, particleboard and paint, as well as from increased levels of outsourcing following the plant closures; and

Sales promotion costs improved by 1.4% of net sales during fiscal 2013 compared with the prior year, as a result of both an increased proportion of new construction sales to the Company's total sales and reduced promotional activity.

Selling and Marketing Expenses

Selling and marketing expenses in fiscal 2014 were 8.2% of net sales, compared with 9.1% of net sales in fiscal 2013. Selling and marketing costs increased by 4% despite a 15% increase in net sales. The improvement in sales and marketing costs in relation to net sales was due to reduced spending on product launch costs, which were offset in part by increased sales compensation and staffing costs related to the Company's increased sales levels.

Selling and marketing expenses were 9.1% of net sales in fiscal 2013 compared with 11.3% in fiscal 2012. The improvement in sales and marketing costs in relation to net sales was due to reduced spending on product launch costs and cost reductions related to the Company's retirement plan changes, which were offset in part by increased sales compensation and staffing costs related to the Company's increased sales levels.


General and Administrative Expenses

General and administrative expenses increased by $3.3 million or 12% during fiscal 2014. The increase in cost was related to increased pay-for-performance compensation and one-time personnel related costs. However, general and administrative costs declined to 4.3% of net sales in fiscal 2014 compared with 4.4% of net sales in fiscal 2013.

General and administrative expenses in fiscal 2013 increased by $2.2 million, or 9%, compared with fiscal 2012 and represented 4.4% of net sales, compared with 4.9% of net sales for fiscal 2012. The increase in cost was related to increased pay-for-performance compensation.

Effective Income Tax Rates

The Company generated pre-tax income of $33.7 million during fiscal 2014. The Company's effective tax rate decreased from 41.7% in fiscal 2013 to 39.2% in fiscal 2014. The lower effective tax rate was the result of the Company operating at a higher net income than the prior year period and more favorable permanent tax differences.

Outlook for Fiscal 2015

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 prices will continue to improve, driven by employment growth and a resumption of growth in new household formation. However, the Company expects that while the cabinet remodeling market will show modest improvement during fiscal 2015 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 a mid-single digit rate during the Company's fiscal 2015. The Company expects that its home center market share will be relatively stable in fiscal 2015 and it will continue to gain market share in its growing dealer business. This combination is expected to result in remodeling sales growth that reflects the market.

The Company believes, based on available information, that new construction starts will grow double digit during its fiscal 2015 with stronger growth projected in the second half of the year. The Company's new construction sales growth outperformed the new construction market during fiscal 2014, and expects that it will again outperform the new construction market during fiscal 2015 but by a lesser rate than fiscal 2014, as its comparable prior year sales levels become more challenging.

Inclusive of the potential for modest sales mix and pricing improvements, the Company expects that it will grow its total sales at a mid-teen rate in fiscal 2015. The Company experienced material inflation throughout fiscal 2014 as well as negative impacts in the third and fourth quarter from our decision to retain crewing and infrastructure to support our new construction business. Although material inflation will continue in fiscal 2015, the Company expects that its gross margin rate and net income for fiscal 2015 will improve compared with its fiscal 2014 performance.

The Company had gross outlays for capital expenditures and customer display units of $11.4 million during fiscal 2014, and plans to increase its base spending level during fiscal 2015. However, the Company is undertaking a multi-year review of its manufacturing capacity and capital expenditure plans which could cause its capital expenditures to exceed this base level.

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 Company's cash and cash equivalents totaled $135.7 million at April 30, 2014, which represented an increase of $38.7 million from April 30, 2013. Total debt was $21.6 million at April 30, 2014, $3.1 million lower than the prior fiscal year and long-term debt, excluding current maturities, to capital was 9.7% at April 30, 2014, down from 13.9% at April 30, 2013.


The Company's main source of liquidity is its cash and cash equivalents on hand and cash generated from its operating activities. The Company also has a $35 million secured revolving credit facility with Wells Fargo Bank, N.A., which expires on December 31, 2015. This facility had an available borrowing base of $25 million at April 30, 2014.

OPERATING ACTIVITIES

Cash provided by operating activities in fiscal 2014 was $40.5 million, compared with $24.5 million in fiscal 2013. The $16.0 million improvement was primarily attributable to the Company's $10.7 million improvement in net income and a $3.5 million decrease in cash used for the Company's working capital investment in inventory and customer receivables.

Cash provided by operating activities in fiscal 2013 was $24.5 million, compared with $16.1 million in fiscal 2012. The $8.4 million improvement was primarily attributable to the Company's $22.9 million improvement in net income and reduction in asset impairments related to the 2012 Restructuring. This improvement was offset in part by a $13.6 million net working capital investment in the Company's operating assets and liabilities to fund growth and increased contributions to its pension plans of $2.0 million.

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 2014 was $9.6 million, compared with $6.1 million in fiscal 2013 and $9.9 million in fiscal 2012. Investments in property, plant and equipment for fiscal 2014 were $7.9 million, compared with $8.9 million in fiscal 2013 and $6.7 million in fiscal 2012. Investments in promotional displays were $3.5 million in fiscal 2014, compared with $4.8 million in fiscal 2013 and $3.3 million in fiscal 2012. The levels of investment in property, plant and equipment and promotional displays decreased during fiscal 2014 primarily due to a decrease in the enhancements made to machinery and equipment during the fiscal year and a decrease in the number of display units deployed with customers in fiscal 2014.

During fiscal 2014, the Company's increased net cash used for investing activities was driven by a $5.7 million decrease in proceeds from the sale of assets from closed plants and insurance proceeds compared to the prior year, offset by the aggregate $2.2 million decrease in outflows for capital expenditures and promotional displays.

The Company generated positive free cash flow (defined as cash provided by operating activities less cash used for investing activities) of $30.9 million during fiscal 2014, compared with $18.4 million in fiscal 2013 and $6.1 million in fiscal 2012. The increase in fiscal 2014 was driven by the net improvements in cash provided by operating activities, which more than offset the increased net outflows used for investing activities. The increase in fiscal 2013 was driven by the net improvements in both cash provided by operating activities and decreased net outflows used for investing activities.

FINANCING ACTIVITIES

The Company realized a net inflow of $7.8 million from financing activities in fiscal 2014, compared with $11.9 million in fiscal 2013, and $5.1 million in fiscal 2012. Reductions in the amount of restricted cash previously required under the Company's credit facility drove inflows of approximately $7 million in both fiscal 2013 and 2012. Additional proceeds of $15.3 million and $5.9 million, respectively, were generated during fiscal 2014 and 2013 from the exercise of stock options. During fiscal 2014 $4.5 million was used to repay long-term debt, compared with approximately $1 million in both fiscal 2013 and 2012, while fiscal 2012 was further impacted by dividend payments to shareholders of $1.3 million. The Company elected to suspend its quarterly dividend during fiscal 2012.

The Company ended fiscal 2014 with a record level of nearly $136 million in cash and cash equivalents. Under a stock repurchase authorization approved by its Board of Directors on November 21, 2013, the Company is authorized to purchase up to $10 million of the Company's common shares. Repurchases may be made from time to time through December 31, 2014 at prices and on terms the Company deems appropriate. At April 30, 2014, approximately $6.9 million remained authorized by the Company's Board of Directors to repurchase shares of the Company's common stock. The Company purchased a total of 100,000 shares of its common stock, for $3.1 million, during fiscal 2014. The Company continues to evaluate its cash on hand and prospects for future cash generation, and compare these against its plans for future capital expenditures. Although the evaluation of its future capital expenditures is ongoing, the Company expects that it will make repurchases of its common stock from time


to time during fiscal 2015 subject to the Company's financial condition, capital requirements, results of operations and any other factors then deemed relevant.

The Company can borrow up to $35 million under the Wells Fargo credit facility, subject to a maximum borrowing base equal to 75% of eligible accounts receivable, 50% of eligible pre bill reserves and up to $20 million for equipment value (each as defined in the agreement) less any outstanding loan balance. At April 30, 2014, $10 million of loans and $5.3 million of letters of credit were outstanding under the Wells Fargo facility, and the Company had . . .

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