AMERICAN WOODMARK CORP MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-K)
The following table shows certain revenue and expense items as a percentage of net sales:
PERCENTAGE OF NET SALES Fiscal Years Ended April 30 2022 2021 2020 Net sales 100.0 % 100.0 % 100.0 % Cost of sales and distribution 87.8 81.5 80.2 Gross profit 12.2 18.5 19.8 Selling and marketing expenses 5.0 5.1 5.0 General and administrative expenses 5.3 6.5 6.9 Restructuring charges, net - 0.3 - Operating income 1.9 6.6 7.9 Pension settlement, net 3.7 - - Interest expense/other (income) expense, net 0.5 2.0 1.9 Income before income taxes (2.3) 4.6 6.0 Income tax expense (0.7) 1.1 1.5 Net income (1.6) 3.5 4.5
The following discussion should be read in conjunction with the consolidated financial statements and related notes contained elsewhere in this report.
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," "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 macro-economic factors that impact our performance such as the
U.S.housing market, general economy, unemployment rates, and consumer sentiment and the impact of such developments on our and our customers' business, operations, and access to financing; •an inability to obtain raw materials in a timely manner or fluctuations in raw material, transportation, and energy costs due to inflation; •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;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; •increased buying power of large customers and the impact on our ability to maintain or raise prices; •a failure to effectively manage manufacturing operations, alignment, and capacity or an inability to maintain the quality of our products; •the impairment of goodwill, other intangible assets, or our long-lived assets; 17 -------------------------------------------------------------------------------- •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; •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 impact of COVID-19 on our business, the global and U.S.economy, and our employees, customers, and suppliers; •the occurrence of significant natural disasters, including earthquakes, fires, floods, hurricanes, or tropical storms; •the unavailability of adequate capital for our business to grow and compete; and •limitations on operating our business as a result of covenant restrictions under our indebtedness, our ability to pay amounts due under our credit facilities and our other indebtedness, and interest rate increases. 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.
American Woodmark Corporationmanufactures 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. At April 30, 2022, the Company operated 17 manufacturing facilities in the United Statesand Mexicoand eight primary service centers and one distribution center located throughout the United States.
A number of general market factors impacted the Company’s business in fiscal 2022, including:
• The unemployment rate has fallen by 41% compared to
•Increase in single family housing starts during the Company's fiscal 2022 of 13%, as compared to the Company's fiscal 2021, according to the
U.S. Department of Commerce;
• Mortgage interest rates increased with a 30-year fixed mortgage rate of 5.1% in
•The median price of existing homes sold in the
U.S.rose by 16.4% during the Company's fiscal 2022, according to data provided by the National Association of Realtors;
• Consumer sentiment, as reported by the
• Cabinet sales, as reported by members of the
The Company's largest remodeling customers and competitors continued to utilize sales promotions in the Company's product category during fiscal 2022. The Company strives to maintain its promotional levels in line with market activity, with a goal of 18 --------------------------------------------------------------------------------
remaining competitive. The Company experienced lower promotion levels in fiscal 2022 than in its prior fiscal year. Sales in the renovation channel increased by 5.2% during the year.
Sales in the new construction channel increased 8.6% during fiscal 2022 due to a rise in new housing starts and an increase in sales in the opening price point cabinets in our Origins by Timberlake brand. The Company increased its net sales by 6.5% during fiscal 2022, which was driven by growth in the home center, builder and independent dealers and distributors channels. Gross margin for fiscal 2022 was 12.2%, a decrease from 18.5% in fiscal 2021. The decrease in gross margin was primarily due to higher material and logistics costs, supply chain disruptions, and increases related to wage and retention programs. This was partially offset by the increase in sales creating leverage of our fixed expenses in our operating platforms. The Company incurred a net loss of
$29.7 millionin fiscal 2022, net income of $61.2 millionin fiscal 2021, and net income of $73.7in fiscal 2020. The net loss in fiscal 2022 is primarily due to onetime pension settlement charges of $68.5 millionrelated to the termination of the Company's pension plan. The Company regularly considers the need for a valuation allowance against its deferred tax assets. The Company has been profitable for the past 9 years. As of April 30, 2022, the Company had total deferred tax assets of $40.8 millionnet of valuation allowance, down from $45.2 millionof deferred tax assets net of valuation allowance at April 30, 2021. Deferred tax assets are reduced by a valuation allowance when, after considering all positive and negative evidence, it is determined that it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. The Company has recorded a valuation allowance related to deferred tax assets for certain state investment tax credit ("ITC") carryforwards. These credits expire in various years beginning in fiscal 2028. The Company believes based on positive evidence of the housing industry improvement along with 9 consecutive years of profitability that the Company will more likely than not realize all other remaining 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 its long-lived assets were impaired as of April 30, 2022.
FISCAL YEARS ENDED APRIL 30 2022 vs. 2021 2021 vs. 2020 PERCENT PERCENT (Dollars in thousands) 2022 2021 2020 CHANGE CHANGE Net sales
$ 1,857,186 $ 1,744,014 $ 1,650,3336.5 % 5.7 % Gross profit 226,444 322,118 326,562 (29.7) % (1.4) % Selling and marketing expenses 92,555 89,011 83,092 4.0 % 7.1 % General and administrative expenses 97,547 112,521 113,353 (13.3) % (0.7) % Interest expense, net 10,189 23,128 29,027 (55.9) % (20.3) % Net Sales
Net sales for fiscal 2022 increased 6.5% to
Net sales for fiscal 2021 increased 5.7% to
Gross profit as a percentage of sales decreased to 12.2% in fiscal 2022 as compared with 18.5% in fiscal 2021. The decrease in gross profit margin was primarily due to higher material and logistics costs, and increases related to wage and retention programs. This was partially offset by the increase in sales creating leverage of our fixed expenses in our operating platforms. 19 -------------------------------------------------------------------------------- Gross profit as a percentage of sales decreased to 18.5% in fiscal 2021 as compared with 19.8% in fiscal 2020. The decrease in gross profit margin was primarily due to higher material and logistics costs, investments made to establish our distribution center in
Texas, and increases related to wage and retention programs. This was partially offset by the increase in sales creating leverage of our fixed expenses in our operating platforms.
Sales and marketing expenses
Selling and marketing costs increased by
$3.5 millionor 4.0% during fiscal 2022 versus the prior year. Selling and marketing expenses in fiscal 2022 were 5.0% of net sales, compared with 5.1% of net sales in fiscal 2021 Selling and marketing expenses in fiscal 2021 and fiscal 2020 were both 5.1% of net sales. Selling and marketing costs increased by $5.9 millionor 7% during fiscal 2021 versus the prior year.
General and administrative expenses
General and administrative expenses decreased by
$15.0 millionor 13.3% during fiscal 2022 versus the prior fiscal year. General and administrative costs decreased to 5.3% of net sales in fiscal 2022 compared with 6.5% of net sales in fiscal 2021. The decrease in general and administrative expenses was primarily due to controlled spending and reduced incentive costs. General and administrative expenses decreased by $0.8 millionor 0.7% during fiscal 2021 versus the prior fiscal year. General and administrative costs decreased to 6.5% of net sales in fiscal 2021 compared with 6.9% of net sales in fiscal 2020. Effective Income Tax Rates The Company generated pre-tax loss of $43.0 millionduring fiscal 2022. The Company's effective tax rate increased from 24.1% in fiscal 2021 to 30.8% in fiscal 2022 primarily due to the pre-tax loss and benefit from higher federal income tax credits. The Company's effective tax rate decreased from 25.5% in fiscal 2020 to 24.1% in fiscal 2021. The lower effective tax rate was primarily due to the benefit from federal income tax credits.
Non-GAAP Financial Measures
We have presented our financial results in accordance with
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 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.
EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin
We use EBITDA, 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 EBITDA, Adjusted EBITDA, and Adjusted EBITDA margin allow us to readily view operating trends, perform analytical comparisons, and identify strategies to improve operating performance. Additionally, Adjusted EBITDA is a key measurement used in our Term Loans to determine interest rates and financial covenant compliance. We define EBITDA as net income (loss) adjusted to exclude (1) income tax expense (benefit), (2) interest expense, net, (3) depreciation and amortization expense, and (4) amortization of customer relationship intangibles and trademarks. We define Adjusted EBITDA as EBITDA adjusted to exclude (1) expenses related to the RSI Acquisition and the subsequent restructuring charges that the Company incurred related to the acquisition, (2) non-recurring restructuring charges, (3) net gain/loss on debt forgiveness and modification, (4) stock-based compensation expense, (5) gain/loss on asset disposals, (6) change in fair value of foreign exchange forward contracts, and (7) pension settlement charges. 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. 20 --------------------------------------------------------------------------------
We define Adjusted EBITDA margin as Adjusted EBITDA as a percentage of net sales.
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 the subsequent restructuring charges that the Company incurred related to the acquisition, (2) non-recurring restructuring charges, (3) the amortization of customer relationship intangibles and trademarks, (4) net gain/loss on debt forgiveness and modification, (5) pension settlement charges, and (6) the tax benefit of RSI Acquisition expenses and subsequent restructuring charges, the net gain/loss 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. Free cash flow To better understand trends in our business, we believe that it is helpful to subtract amounts for capital expenditures consisting of cash payments for property, plant and equipment and cash payments for investments in displays from cash flows from continuing operations which is how we define free cash flow. Management believes this measure gives investors an additional perspective on cash flow from operating activities in excess of amounts required for reinvestment. It also provides a measure of our ability to repay our debt obligations.
A reconciliation of these non-GAAP financial measures to the most directly comparable measures calculated and presented in accordance with GAAP is set out in the following tables:
Reconciliation of EBITDA, Adjusted EBITDA and Adjusted EBITDA margin
FISCAL YEARS ENDED APRIL 30, (Dollars in thousands) 2022 2021 2020 Net income (loss) (GAAP)
$ (29,722) $ 61,193 $ 73,653Add back: Income tax expense (benefit) (13,257) 19,500 25,275 Interest expense, net 10,189 23,128 29,027 Depreciation and amortization expense 50,939 51,100 49,513 Amortization of customer relationship intangibles and trademarks 45,667 47,889 49,000 EBITDA (Non-GAAP) $ 63,816 $ 202,810 $ 226,468Add back: Acquisition and restructuring related expenses (1) 80 174 221 Non-recurring restructuring charges, net (2) 183 5,848 - Pension settlement, net 68,473 - - Change in fair value of foreign exchange forward contracts (3) - (1,102) 1,102 Net loss on debt forgiveness and modification (4) - 13,792 - Stock-based compensation expense 4,708 4,598 3,989 Loss on asset disposal 697 384 2,629 Adjusted EBITDA (Non-GAAP) $ 137,957 $ 226,504 $ 234,409Net Sales $ 1,857,186 $ 1,744,014 $ 1,650,333Net income margin (GAAP) (1.6) % 3.5 % 4.5 % Adjusted EBITDA margin (Non-GAAP) 7.4 % 13.0 % 14.2 % (1) Acquisition and restructuring related expenses are comprised of expenses related to the RSI Acquisition and the subsequent restructuring charges that the Company incurred related to the acquisition. (2) Non-recurring restructuring charges are comprised of expenses incurred related to the permanent layoffs due to COVID-19 and the closure of the manufacturing plant in Humboldt, Tennessee. Fiscal year 2021 includes accelerated depreciation expense of $1.3 millionand gain on asset disposal of $2.2 millionrelated to Humboldt. (3) 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, net in the operating results. (4) The Company recognized net loss on debt modification totaling $13.8 millionfor fiscal year 2021 related to the restructuring of its debt. A reconciliation of EBITDA, Adjusted EBITDA and Adjusted EBITDA margin as projected for fiscal 2023 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. 22 --------------------------------------------------------------------------------
Adjusted EPS per diluted share
FISCAL YEARS ENDED APRIL 30, (Dollars in thousands, except share and per share data) 2022 2021 2020 Net income (loss) (GAAP)
$ (29,722) $ 61,193 $ 73,653Add back: Acquisition and restructuring related expenses 80 174 221 Non-recurring restructuring charges, net 183 5,848 - Pension settlement, net 68,473 - - Amortization of customer relationship intangibles and trademarks 45,667 47,889 49,000 Net loss on debt forgiveness and modification - 13,792 - Tax benefit of add backs (29,859) (17,467) (12,305) Adjusted net income (Non-GAAP) $ 54,822
Weighted average diluted shares (GAAP) 16,592,358 17,036,730 16,952,480 Add back: potentially anti-dilutive shares (1) 48,379 - - Weighted average diluted shares (Non-GAAP) 16,640,737 17,036,730 16,952,480 EPS per diluted share (GAAP)
$ (1.79) $ 3.59 $ 4.34Adjusted EPS per diluted share (Non-GAAP) $ 3.29
(1) Potentially dilutive securities for the twelve-month period ended
April 30, 2022have not been considered in the GAAP calculation of net loss per shares as effect would be anti-dilutive. Free cash flow FISCAL YEARS ENDED APRIL 30, (Dollars in thousands) 2022 2021 2020
Cash flow from operating activities
Less: Capital expenditures (1) 51,582 46,318 40,739 Free cash flow
$ (27,137) $ 105,445 $ 136,803
(1) Capital expenditures include cash payments for property, plant and equipment and cash payments for display investments.
Outlook for FY2023
We expect mid-teens to high-teens growth rate in net sales for fiscal 2023 versus fiscal 2022. The growth rate is highly dependent upon overall industry, economic growth trends, material constraints, labor impacts, interest rates and consumer behaviors. Our previously announced price increases will continue to take effect at various stages throughout fiscal 2023, with pricing being realized first in our new construction channel, followed by dealer distributor and then home centers. Our outlook for adjusted EBITDA margin percent for fiscal 2023 will range from high single digit to low double-digit EBITDA. Inflationary pressures for raw materials, fuel and logistics will continue at least through the first half of fiscal 2023, and we expect margins will expand sequentially throughout the second quarter of fiscal 2023 through the fourth quarter of fiscal 2023 as our price realization grows and efficiencies with manufacturing operations improve. We will continue our investment back into the business by increasing our capital investment rate to a range of 3.0 to 3.5% of net sales. These investments will range from the continuation of our ERP journey to get on the cloud, digital investments in our customer experience and reinvesting in our manufacturing facilities to help reduce labor dependencies, improve quality and increase capacity. We are choosing to make these additional investments into our core business which will help improve sales and enhance our margins in the future. 23 -------------------------------------------------------------------------------- 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."
Cash and capital resources
The Company's cash and cash equivalents totaled
$22.3 millionat April 30, 2022, representing a $68.7 milliondecrease from its April 30, 2021levels. At April 30, 2022, total long-term debt (including current maturities) was $508.9 million, a decrease of $12.8 millionfrom the balance at April 30, 2021. The Company's ratio of long-term debt to total capital was 39.6% at April 30, 2022, compared with 40.4% at April 30, 2021. The Company's main source of liquidity is its cash and cash equivalents on hand and cash generated from its operating activities, which we expect to continue into fiscal 2023. Approximately $237.0 millionwas available under this facility as of April 30, 2022. See Note F - Loans Payable and Long-Term Debt for further discussion on our indebtedness. On April 22, 2021, the Company amended and restated the Prior Credit Agreement. The amended and restated credit agreement (the "A&R Credit Agreement") provides for a $500 millionrevolving loan facility with a $50 millionsub-facility for the issuance of letters of credit (the "Revolving Facility") and a $250 millionterm loan facility (the "Term Loan Facility"). Also on April 22, 2021, the Company borrowed the entire $250 millionunder the Term Loan Facility and approximately $264 millionunder the Revolving Facility to fund, in part, the repayment in full of the amounts then outstanding under the Prior Credit Agreement and the redemption of the Senior Notes. The Company is required to repay the Term Loan Facility in specified quarterly installments. The Revolving Facility and Term Loan Facility mature on April 22, 2026. The A&R Credit Agreement includes certain financial covenants that require the Company to maintain (i) a "Consolidated Interest Coverage Ratio" of no less than 2.00 to 1.00 and (ii) a "Total Net Leverage Ratio" of no greater than 4.00 to 1.00, subject, in each case, to certain limited exceptions. The A&R Credit Agreement includes certain additional covenants, including negative covenants that restrict the ability of the Company and certain of its subsidiaries to incur additional indebtedness, create additional liens on its assets, make certain investments, dispose of its assets or engage in a merger or other similar transaction or engage in transactions with affiliates, subject, in each case, to the various exceptions and conditions described in the A&R Credit Agreement. The negative covenants further restrict the ability of the Company and certain of its subsidiaries to make certain restricted payments, including, in the case of the Company, the payment of dividends and the repurchase of common stock, in certain limited circumstances. See Note F - Loans Payable and Long-Term Debt for a discussion of interest rates under the new A&R Credit Agreement and our compliance with the covenants in the credit agreement.
Cash provided by operating activities in fiscal 2022 was
$24.4 million, compared with $151.8 millionin fiscal 2021. The decrease in the Company's cash from operating activities was driven primarily by a decrease in net income and decreased cash flows from inventories, accrued marketing expenses, other accrued expenses, and accounts payable, which were partially offset by an increase in cash flows from customer receivables. Cash provided by operating activities in fiscal 2021 was $151.8 million, compared with $177.5 millionin fiscal 2020. The decrease in the Company's cash from operating activities was driven primarily by a decrease in net income and decreased cash flows from customer receivables and inventories, which were partially offset by an increase in cash flows from accounts payable and accrued marketing expenses. The Company made no contributions to its pension plan in fiscal 2022, 2021, and made contributions of $0.5 millionto its pension plans during fiscal 2020.The Company recognized a pension settlement charge of $68.3 millionin fiscal 2022.
The Company's investing activities primarily consist of capital expenditures and investments in promotional displays. Net cash used by investing activities in fiscal 2022 was
$51.6 million, compared with $42.4 millionin fiscal 2021 and $38.9 millionin fiscal 2020. Investments in property, plant and equipment for fiscal 2022 were $44.1 million, compared with $35.7 millionin 24 --------------------------------------------------------------------------------
financial year 2021 and
The Company realized a net outflow of
$41.6 millionfrom financing activities in fiscal 2022 compared with a net outflow of $115.3 millionin fiscal 2021, and a net outflow of $99.2 millionin fiscal 2020. During fiscal 2022, $15.5 million, net, was used to repay long-term debt, compared with approximately $82.5 millionin fiscal 2021 and $98.5 millionin fiscal 2020. On August 22, 2019, the Board authorized a stock repurchase program of up to $50 millionof the Company's common shares. On May 25, 2021, the Board authorized a stock repurchase program of up to $100 millionof the Company's outstanding common shares. In conjunction with this authorization the Board cancelled the remaining portion of the $50 millionexisting authorization, of which the Company had repurchased $20 millionin the fourth quarter of fiscal 2021. The Company repurchased $25.0 millionduring fiscal 2022 and $20.0 millionduring fiscal 2021. The Company did not repurchase any of its shares during the fiscal year ended April 30, 2020.
Cash flow from operations combined with accumulated cash and cash equivalents is expected to be more than sufficient to meet projected working capital requirements, service existing debt and fund capital expenditures for fiscal 2023.
Future minimum annual commitments for contractual obligations under term loans, the Revolving Facility, capital and operating lease obligations, and other long-term debt amount to
$27.6 millionin fiscal 2023, $77.6 millionin fiscal 2024-25, $505.3 millionin fiscal 2026-27, and $30.5 millionin fiscal 2028 and thereafter. SEASONALITY Our business has been subject to seasonal influences, with higher sales typically realized in our first and fourth fiscal quarters, however sales were down in the fourth quarter of fiscal 2020 and the first quarter of fiscal 2021 due to the COVID-19 pandemic. 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.
For a further discussion of risks that could affect the Company and its business, see “Forward-Looking Statements” above, as well as Section 1A. “Risk Factors” and point 7A. “Quantitative and qualitative information on market risk.”
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management has chosen accounting policies that are necessary to give reasonable assurance that the Company's operational results and financial position are accurately and fairly reported. The significant accounting policies of the Company are disclosed in Note A to the Consolidated Financial Statements included in this annual report. The following discussion addresses the accounting policies that management believes have the greatest potential impact on the presentation of the financial condition and operating results of the Company for the periods being reported and that require the most judgment.
Management regularly reviews these critical accounting policies and estimates with the Audit Committee of the Board of Directors.
Revenue Recognition. The Company utilizes signed sales agreements that provide for transfer of title to the customer at the time of shipment or upon delivery based on the contractual terms. The Company must estimate the amount of sales that have been transferred to third-party carriers but not delivered to customers as the carriers are not able to report real-time what has been delivered and thus there is a delay in reporting to the Company. The estimate is calculated using a lag factor determined by analyzing the actual difference between shipment date and delivery date of orders over the past 12 months. Revenue is recognized on those shipments which the Company believes have been delivered to the customer. The Company recognizes revenue based on the invoice price less allowances for sales returns, cash discounts, and other deductions as required under GAAP. Collection is reasonably assured as determined through an analysis of accounts receivable data, including historical product returns and the evaluation of each customer's ability to pay. Allowances for sales returns are based on the historical relationship between shipments and returns. The Company believes that its historical experience is an accurate reflection of future returns. 25 -------------------------------------------------------------------------------- Pensions. Prior to
April 30, 2020, the Company had two non-contributory defined benefit pension plans covering many of the Company's employees hired prior to April 30, 2012. Effective April 30, 2012, the Company froze all future benefit accruals under the Company's hourly and salaried defined benefit pension plans. Effective April 30, 2020, these plans were merged into one plan. Effective December 31, 2020the Plan was terminated in a standard termination and benefits were distributed on December 2, 2021. Goodwill. Goodwillrepresents the excess of purchase price over the fair value of net assets acquired. The Company does not amortize goodwill but evaluates for impairment annually, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In accordance with the accounting standards, an entity has the option first to assess qualitative factors to determine whether events and circumstances indicate that it is more likely than not that goodwill is impaired. If after such assessment an entity concludes that the asset is not impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the asset using a quantitative impairment test, and if impaired, the associated assets must be written down to fair value. There were no impairment charges related to goodwill for the fiscal years 2022, 2021, and 2020.. The on-going COVID-19 pandemic, Russia'smilitary actions in Ukraine, related global supply chain constraints, and higher raw material costs have created volatility, uncertainty and economic disruption for the Company, our customers and vendors, and the markets in which we do business. We have experienced production delays, disruptions in component availability, increased pricing both for labor and parts, lower levels of factory utilization and higher logistics, transportation, energy, and operational costs. Such business conditions are expected to continue into fiscal 2023. In addition, as of April 30, 2022, our stock price has declined to $46.85. It is possible that, during the fiscal 2023 or beyond, business conditions could deteriorate from the current state, our current or prospective customers could materially postpone, reduce or even forgo purchases of our products and services to a greater extent than we currently anticipate, or our common stock price could fluctuate. Such fluctuation could be caused by uncertainty about the severity and length of the COVID-19 pandemic, and its impact on global activity. A significant decline in our customers' spending that is greater than we anticipate or a shift in funding priorities may also have a negative effect on future orders, sales, income and cash flows and we might be required to perform a quantitative assessment during fiscal 2023 or beyond. If assumed net sales and cash flow projections are not achieved in future periods or our common stock price declines from its fiscal 2022 year end price, our goodwill could be at risk of failing the quantitative assessment and goodwill and intangibles could be impaired. Intangible Assets. Intangible assets consist of customer relationship intangibles. The Company amortizes the cost of intangible assets over their estimated useful lives, six years, unless such lives are deemed indefinite. The Company reviews its intangible assets for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. There were no impairment charges related to other intangible assets for the fiscal years 2022, 2021, and 2020.
RECENT ACCOUNTING PRONOUNCEMENTS
December 2019, the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes," which simplifies the accounting for income taxes by removing certain exceptions for recognizing deferred taxes for investments, performing intraperiod tax allocations and calculating income taxes in interim periods. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12 became effective for the Company beginning May 1, 2021. The Company has reviewed the provisions of this new pronouncement and the adoption of this guidance did not have an impact on the Company's consolidated financial statements. In March 2020, the FASB issued ASU No. 2020-04 "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020through December 31, 2022and can be adopted as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020. The Company has identified loans and other financial instruments that are directly or indirectly influenced by LIBOR and does not expect the adoption of ASU 2020-04 to have a material impact on its consolidated financial statements. 26
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