American Woodmark - 10-Q quarterly report FY

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended January 31, 2006

OR

For the transition period from                 to                 

Commission file number 0-14798

American Woodmark Corporation

(Exact name of registrant as specified in its charter)

(540) 665-9100

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed

since last report)

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, and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large Accelerated Filer  ¨        Accelerated Filer  x        Non-Accelerated Filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

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AMERICAN WOODMARK CORPORATION

FORM 10-Q

INDEX

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PART I. FINANCIAL INFORMATION

AMERICAN WOODMARK CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(Unaudited)

See accompanying condensed notes to consolidated financial statements

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AMERICAN WOODMARK CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except share data)

(Unaudited)

See accompanying condensed notes to consolidated financial statements

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AMERICAN WOODMARK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

See accompanying condensed notes to consolidated financial statements

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AMERICAN WOODMARK CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE A—BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Certain prior amounts have been reclassified to conform to the current period presentation. Operating results for the nine month period ended January 31, 2006 are not necessarily indicative of the results that may be expected for the year ended April 30, 2006. The unaudited financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended April 30, 2005.

NOTE B—NEW ACCOUNTING PRONOUNCEMENTS

In December 2004, the FASB issued Statement No. 123 (R) (Revised 2004), "Share-Based Payment," which is a revision of FASB Statement No. 123, "Accounting for Stock-Based Compensation." Statement 123 (R) supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees."   Under FASB Statement No. 123 (R), all share-based payments to employees, including grants of employee stock options, are to be recognized in the income statement based on their fair values as of the awards’ grant date and the estimated number of awards that are expected to vest. The Company will be required to adopt this statement as of May 1, 2006.  The Company is currently evaluating the impact of adopting Statement No. 123 (R) on its results of operations and its financial position.

NOTE C—COMPREHENSIVE INCOME

The Company’s comprehensive income was $6.1 million and $19.8 million for the three months and nine months ended January 31, 2006, respectively, and $7.2 million and $28.3 million for the three months and nine months ended January 31, 2005, respectively. Comprehensive income differs from net income for the three months and nine months ending January 2006 and 2005 due to a change in the accumulated unrealized loss on the Company’s interest rate swap.

NOTE D—EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):

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NOTE E—STOCK-BASED COMPENSATION

The Company applies Accounting Principles Board Opinion No. 25 in accounting for stock options and discloses the pro forma effects on net income based on the fair value of options granted as permitted by Statement of Financial Accounting Standards No. 123 and No. 148. No stock-based employee compensation cost is reflected in net income, as all options granted had an exercise price equal to the market value of the common stock at the date of grant.

The following table summarizes the pro forma effects on net income assuming compensation cost for such awards had been recorded based upon the estimated fair value on the date of the grant (in thousands, except per share data):

To determine these amounts, the fair value of each stock option has been estimated on the date of the grant using a Black-Scholes option-pricing model. Significant assumptions used in this model include the following:

NOTE F—CUSTOMER RECEIVABLES

The components of customer receivables were:

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NOTE G—INVENTORIES

The components of inventories were:

An actual valuation of inventory under the LIFO method is made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs. Since these items are estimated, interim results are subject to the final year-end LIFO inventory valuation.

NOTE H—PRODUCT WARRANTY

The Company estimates outstanding warranty costs based on the historical relationship between warranty claims and revenues. The warranty accrual is reviewed monthly to verify that it properly reflects the remaining obligation based on the anticipated expenditures over the balance of the obligation period. Adjustments are made when actual warranty claim experience differs from estimates. Warranty claims are generally made within three months of the original shipment date.

The following is a reconciliation of the Company’s warranty liability:

NOTE I—CASH FLOW

Supplemental disclosures of cash flow information:

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NOTE J—PENSION BENEFITS

Net periodic pension cost consisted of the following for the three months and nine months ended January 31, 2006 and 2005.

Employer Contributions

The Company previously disclosed in its consolidated financial statements for the year ended April 30, 2005, that it expected to contribute $7.7 million to its pension plan in fiscal 2006. As of January 31, 2006, $6.0 million of contributions have been made. The Company presently anticipates contributing an additional $1.7 million to fund its pension plan in fiscal 2006 for a total of $7.7 million.

NOTE K—OTHER INFORMATION

The Company is involved in suits and claims in the normal course of business, including product liability and general liability claims, in addition to claims pending before the EEOC. 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 Statement of Financial Accounting Standard No. 5 (SFAS 5), the Company categorizes the various suits and claims into three categories according to their likelihood for resulting in potential loss; those that are probable (i.e., more likely than not), those that are reasonably possible, and those that are deemed to be remote. The Company accounts for these loss contingencies in accordance with SFAS 5. Where losses are deemed to be probable and estimable, accruals are made. Where losses are deemed to be reasonably possible or remote, a range of loss estimates is determined. Where no loss estimate range can be made, the Company and its counsel perform a worst case estimate. In determining these loss range estimates, the Company considers known values of similar claims and consultation with counsel.

The Company believes that the aggregrate range of loss stemming from the various suits and asserted and unasserted claims which were deemed to be either probable or reasonably possible were not material.

NOTE L—LONG-TERM DEBT

On July 29, 2005, the Company amended its $10 million term loan facility to extend the maturity date of the note from May 31, 2006 to May 31, 2010.

NOTE M—SUBSEQUENT EVENTS

On March 1, 2006, the Board of Directors authorized the repurchase of an additional $10 million in common stock. The additional authorization increases the total repurchase program, initiated in 2001, to $50 million.

On March 1, 2006, the Board of Directors approved a $0.03 per share cash dividend on its common stock.The cash dividend will be paid on March 31, 2006, to shareholders of record on March 17, 2006.

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Management’s Discussion and Analysis of Financial Condition

and Results of Operations

The following discussion should be read in conjunction with our consolidated financial statements and the related notes to the consolidated financial statements, both of which are included in 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 year ended April 30, 2005.

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 are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In most cases, the reader can identify these forward-looking statements by words such as “anticipate,” “estimate,” “forecast,” “expect,” “believe,” “should,” “could,” “plan,” “may” or other similar words. Forward-looking statements, contained in this Management’s Discussion and Analysis are based on current expectations and our actual results may differ materially from those projected in any forward-looking statements. In addition, we participate 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. These include (1) overall industry demand at reduced levels, (2) economic weakness in a specific channel of distribution, (3) the loss of sales from specific customers due to their loss of market share, bankruptcy or switching to a competitor, (4) a sudden and significant rise in basic raw material costs, (5) a dramatic increase to the cost of diesel fuel and/or transportation related services, (6) the need to respond to price or product initiatives launched by a competitor, and (7) sales growth at a rate that outpaces the Company’s ability to install new capacity. 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 materially adverse impact on operating results.

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 distributors. At January 31, 2006, the Company operated fifteen manufacturing facilities and nine service centers across the country.

The Company’s gross profit and net income declined for the first nine months of fiscal 2006 as compared with the comparable period of fiscal 2005. The Company was adversely impacted by two operational events that occurred in the latter part of fiscal 2005, namely (1) the impact upon the Company’s material planning system from the start-up of two new manufacturing facilities, and (2) the transition of the majority of the Company’s transportation delivery network to new or other existing carriers. The adverse impact of these two events increased the Company’s production and transportation costs and resulted in a temporary loss of market share in geographical regions that were impacted by these events. The Company believes that these operational events were completely resolved during the third quarter of fiscal 2006.

During the third quarter of fiscal 2006, the Company experienced growth in net sales driven by expansion in both the new construction and remodeling markets.  New construction markets serviced by the Company exhibited growth due to the continued favorable housing environment. Demand for the Company’s products in the remodeling market also exhibited growth as home improvement activity remained positive. Gross profit for the third quarter of fiscal 2006 was 17.5%, up from 15.7% in the second quarter of fiscal 2006, but down from 18.8% in the third quarter of fiscal 2005. The year-over-year decline in gross profit was driven by higher manufacturing overhead and transportation costs. However, gross profit was better sequentially than that of the second fiscal quarter and slightly better than the Company’s previous expectations. This improvement was driven by the resolution of the operational events, which helped to improve productivity, and reduced discretionary spending, coupled with lower fuel costs and pricing actions taken to recover inflationary freight costs.

Net income for the third quarter of fiscal 2006 was $6.1 million, compared to $7.1 million during the third quarter of fiscal 2005.

Results of Operations

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Sales.  Net sales were $191.1 million for the third quarter of fiscal 2006, an increase of 4.3% over the third quarter of fiscal 2005. For the first nine months of fiscal 2006, net sales were $621.2 million, an increase of 9.0% over the same period in fiscal 2005. Overall unit volume for the quarter ended January 31, 2006 decreased 1.3% as the Company began to execute its plans to exit certain high volume low margin business. Unit volume for the nine-month period ended January 31, 2006, increased 2.9% due to the combination of general market growth and new products. The average revenue per unit increased 5.7% for the third quarter of fiscal 2006 and 5.9% for the nine-month period ended January 31, 2006, as a result of shifts in product mix and improved pricing.

Gross Profit.  Gross profit margin for the third quarter of fiscal 2006 was 17.5% compared to 18.8% for the same period of fiscal 2005. For the first nine months of fiscal 2006, gross margin was 16.7% compared to 20.3% for the same period of fiscal 2005. Manufacturing overhead costs increased 1.1% of sales for the third quarter of fiscal 2006 and increased 1.4% of sales for the nine-month period ended January 31, 2006, primarily due to higher depreciation and other start-up costs associated with new capacity. Transportation costs increased 0.5% of sales for the third quarter of fiscal 2006 and 1.1% of sales for the nine-month period ended January 31, 2006, due to higher fuel costs, general market inflation of rate structures, and additional costs from switching selected carriers to improve customer service and to avoid significant rate increases. During the third quarter of fiscal 2006, the Company implemented pricing actions, completed carrier transitions, and realized a reduction in fuel costs as compared with the second quarter of fiscal 2006, leading to sequentially improved transportation costs in relation to sales. Labor costs decreased 0.2% of sales for the third quarter of fiscal 2006 due to improved productivity. For the nine-month period ended January 31, 2006, labor costs increased 0.6% of sales due primarily to the impact of the aforementioned operating events.

Selling and Marketing Expenses.  Selling and marketing expenses for the third quarter of fiscal 2006 were $17.9 million or 9.4% of sales compared to $16.6 million or 9.1% of sales for the same period in fiscal 2005. For the first nine months of fiscal 2006, selling and marketing expenses were $53.8 million or 8.7% of sales compared to $49.2 million or 8.6% of sales for the first nine months of fiscal 2005. The increase as a percent of sales in the third quarter of fiscal 2006 was primarily due to higher promotional advertising and display costs. During the first nine months of fiscal 2006, selling and marketing expenses as a percent of sales were comparable to the prior year.

General and Administrative Expenses.  General and administrative expenses for the third quarter of fiscal 2006 were $5.8 million or 3.1% of sales compared to $6.2 million or 3.4% of sales for the same period in fiscal 2005. For the first nine months of fiscal 2006, general and administrative expenses were $18.5 million or 3.0% of sales compared to $20.7 million or 3.6% of sales for the same period of fiscal 2005. Decreases between periods were primarily the result of decreased professional fees, including start-up costs incurred in fiscal 2005 associated with Section 404 compliance of the Sarbanes-Oxley Act of 2002, and lower costs associated with the Company’s pay-for-performance employee incentive plans.

Interest Expense.  Interest expense for the third quarter and first nine months of fiscal 2006 was $247 thousand and $760 thousand respectively, compared to $75 thousand and $209 thousand for the third quarter and first nine months of fiscal 2005. The increase between periods is attributable to fewer long-term capital projects in fiscal 2006, resulting in less capitalized interest.

Effective Income Tax Rates.  The Company’s effective income tax rate for the third quarter and first nine months of fiscal 2006 was 38.0% and 38.3% respectively, compared to 39.0% in the same periods of fiscal 2005. The decrease in the effective tax rate is a result of the “American Jobs Creation Act of 2004” which allows for a deduction based on qualified domestic production activities.

Outlook.  The Company expects a continued positive environment for remodeling orders and less robust, but still healthy, new construction order rates during its fourth fiscal quarter. The Company expects growth of its core products in the mid-single percentage range, which will be offset by the impact of its continued transition out of low margin products. Overall, the Company expects that total sales revenue will be flat within a range of a 2% decline to a 2% increase.

The Company expects that gross margin will continue to increase sequentially and improve over the same period in the prior year. The Company expects improvement to be driven by seasonally higher sales volumes and improved mix, improved leverage of the Company’s overhead, continued realization of previous pricing actions to offset higher material and fuel costs, and the realization of operational improvements. It is expected that material and fuel costs will be relatively stable, however, should these costs rise significantly it would adversely affect the Company’s near-term operating performance.

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CASH FLOWS

The statements of cash flows reflect the changes in cash and cash equivalents for the nine months ended January 31, 2006 and 2005, by classifying transactions into three major categories: operating, investing, and financing activities.

Operating Activities

The Company’s main source of liquidity is cash generated from operating activities consisting of net earnings adjusted for non-cash operating items, primarily depreciation and amortization, and changes in operating assets and liabilities such as receivables, inventories, and payables.

Cash provided by operating activities in the first nine months of fiscal 2006 was $41.8 million compared to $56.6 million in fiscal 2005. The decrease in cash provided from operations compared to last year was attributable to a decrease in net income of $8.4 million combined with decreases in accounts payable and other accrued expenses, which were partially offset by increases in depreciation and amortization and customer receivables. The decrease in accounts payable was due to a combination of reduced plant construction activity and timing. Other accrued expenses decreased due to timing. Depreciation and amortization increased as a result of investment in property, plant, and equipment during fiscal 2005 combined with additional promotional display amortization. The decrease in customer receivables was due to sales activity and timing of cash receipts

Investing Activities

The Company’s primary investing activities are capital expenditures and investments in promotional displays. Net cash used by investing activities in the first nine months of fiscal 2006 was $21.7 million compared to $65.3 million in fiscal 2005. Net property, plant, and equipment additions for the first nine months of fiscal 2006 were $11.4 million compared to $54.4 million in the first nine months of fiscal 2005. Net property, plant, and equipment additions for the first nine months of fiscal 2005 were primarily for the completion of construction of a new component facility in Hardy County, West Virginia, and new assembly facility in Allegany County, Maryland. The expenditures during the past nine months were primarily for an expansion of the assembly facility in Jackson, Georgia, equipment deposits to enhance capacity, and other equipment and tooling related to cost savings projects. The Company’s investment in promotional displays for the first nine months of fiscal 2006 was $10.3 million compared to $11.1 million in the first nine months of fiscal 2005. The Company currently expects to invest approximately $5 to $7 million in capital spending and $3 to $5 million in promotional displays during the remainder of fiscal 2006.

Financing Activities

During the first nine months of fiscal 2006, net cash used by financing activities was $11.7 million compared to cash generated of $6.9 million in fiscal 2005. In fiscal 2005, net borrowings included a $10 million, low interest loan from the West Virginia Economic Development Authority. During fiscal 2005, the Company received $4.3 million in grant proceeds relating to the completion of the new component facility in Hardy County, West Virginia. This was offset by repurchases of the Company’s stock of $7.5 million in the first nine months of fiscal 2005. In the first nine months of fiscal 2006, the Company repurchased $12.6 million of stock, which was slightly offset by exercises of stock options of $2.9 million.

Cash dividends paid to shareholders were $1.5 million and $1.4 million for the first nine months of fiscal 2006 and 2005, respectively.

Under the Company’s stock repurchase plans approved by the Board of Directors in August 2004 and May 2005, the Company repurchased $12.6 million of common stock during the first nine months of fiscal 2006. Each authorization was for the repurchase of up to $10 million of common stock from time to time, when in the opinion of management, the market price presents an attractive return on investment for the shareholders. At January 31, 2006, approximately $0.1 million remained authorized by the Company’s Board of Directors to repurchase shares of the Company’s common stock under these authorizations. On March 1, 2006, the Board of Directors authorized the repurchase of an additional $10 million in common stock. The additional authorization increases the total repurchase program, initiated in 2001, to $50 million. See Part II, Item 2 for a table summarizing stock repurchases in the quarter ended Janaury 31, 2006, and the approximate dollar value of shares that may be repurchased under the program.

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FINANCIAL CONDITION AND LIQUIDITY

Cash flow from operations combined with accumulated cash on hand and available borrowing capacity is expected to be sufficient to meet forecasted working capital requirements, service existing debt obligations, and fund capital expenditures for the remainder of fiscal 2006 and fiscal 2007.   As of January 31, 2006, the Company had $35 million available under existing credit facilities.

At January 31, 2006, the interest rate swap agreeement had a fair value loss of $47,000. The Company estimates future payments of $27,000 on the remaining term of the swap agreement, which expires May 31, 2006. All borrowings of the Company, after consideration of the interest rate swap, carry a fixed interest rate between 2% and 6%.

The timing of the Company’s contractual obligations is summarized in the table below.

Dividends Declared

On March 1, 2006, the Board of Directors approved a $.03 per share cash dividend on its common stock. The cash dividend will be paid on March 31, 2006, to shareholders of record on March 17, 2006.

Seasonal and Inflationary Factors

The Company’s business has historically been subject to seasonal influences, with higher sales typically realized in the second and fourth fiscal quarters.

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.

As of January 31, 2006, the Company had no instruments which were sensitive to changes in the market. All borrowings of the Company, after consideration of the interest rate swap, carry a fixed interest rate between 2% and 6%. See additional disclosures in the Company’s Annual Report on Form 10-K for the year ended April 30, 2005.

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Senior management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of January 31, 2006. Based on this evaluation process, the Chief Executive Officer and Chief Financial Officer have concluded that the design and operating effectiveness of the Company’s disclosure controls and procedures are effective and that there have been no changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

The Company is involved in various suits and claims in the normal course of business all of which constitute ordinary, routine litigation incidental to the business. The Company does not have any litigation that does not constitute ordinary, routine litigation to its business.

The following table summarizes repurchases of common stock in the quarter ended January 31, 2006:

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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