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AMWD American Woodmark

Filed: 26 Feb 20, 4:07pm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________

Commission File Number: 000-14798

American Woodmark Corporation
(Exact name of registrant as specified in its charter)

Virginia 54-1138147
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
     
561 Shady Elm Road,Winchester,Virginia 22602
(Address of principal executive offices) (Zip Code)
 

(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)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common StockAMWDNASDAQ

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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  No
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes    No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,”  “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer                  
Non-accelerated filer      Smaller reporting company 
   Emerging growth company 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).  Yes No
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
 
As of February 25, 2020, 16,925,247 shares of the Registrant’s Common Stock were outstanding.





AMERICAN WOODMARK CORPORATION
 
FORM 10-Q
 
INDEX
 
 


2



PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements
AMERICAN WOODMARK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data) 
(Unaudited) 
 January 31,
2020
 April 30,
2019
ASSETS   
Current assets   
Cash and cash equivalents$47,063
 $57,656
Investments - certificates of deposit
 1,500
Customer receivables, net122,353
 125,901
Inventories121,930
 108,528
Income taxes receivable6,238

1,009
Prepaid expenses and other14,627
 11,441
Total current assets312,211
 306,035
Property, plant and equipment, net208,780
 208,263
Operating lease right-of-use assets90,530


Customer relationship intangibles, net178,861

213,111
Trademarks, net3,056

5,555
Goodwill767,612

767,612
Promotional displays, net13,749
 13,058
Deferred income taxes783
 773
Other assets18,252
 15,524
TOTAL ASSETS$1,593,834
 $1,529,931
LIABILITIES AND SHAREHOLDERS' EQUITY   
Current liabilities   
Accounts payable$66,378
 $61,277
Current maturities of long-term debt2,309
 2,286
Short-term lease liability - operating20,837


Accrued compensation and related expenses45,714
 54,906
Accrued marketing expenses12,855
 12,979
Other accrued expenses21,109
 18,142
Total current liabilities169,202
 149,590
Long-term debt, less current maturities600,573
 689,205
Deferred income taxes56,634

64,749
Long-term lease liability - operating73,297


Other long-term liabilities4,843
 6,034
Shareholders' equity   
Preferred stock, $1.00 par value; 2,000,000 shares authorized, none issued
 
Common stock, no par value; 40,000,000 shares authorized; issued and   
outstanding shares: at January 31, 2020: 16,925,247; at April 30, 2019: 16,849,026
358,562
 352,424
Retained earnings379,268
 317,420
Accumulated other comprehensive loss - Defined benefit pension plans(48,545) (49,491)
Total shareholders' equity689,285
 620,353
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY$1,593,834
 $1,529,931
See notes to unaudited condensed consolidated financial statements.   

3



AMERICAN WOODMARK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share data)
(Unaudited)
 
 Three Months Ended Nine Months Ended
 January 31, January 31,
 2020 2019 2020 2019
        
Net sales$395,755
 $384,080
 $1,251,136
 $1,237,920
Cost of sales and distribution323,407
 307,227
 997,219
 978,569
Gross Profit72,348
 76,853
 253,917
 259,351
        
Selling and marketing expenses21,401
 22,215
 62,539
 68,139
General and administrative expenses26,914
 27,462
 86,246
 86,010
Restructuring charges, net
 26
 (207) 2,061
Operating Income24,033
 27,150
 105,339
 103,141
        
Interest expense, net6,924
 8,836
 22,448
 27,204
Other (income) expense, net(165) (5,812) (699) (6,137)
Income Before Income Taxes17,274
 24,126
 83,590
 82,074
        
Income tax expense4,470
 5,717
 21,742
 20,410
        
Net Income$12,804
 $18,409
 $61,848
 $61,664
        
Weighted Average Shares Outstanding       
Basic16,922,231
 17,186,456
 16,902,255
 17,425,385
Diluted16,974,956
 17,216,327
 16,947,449
 17,466,936
        
Net earnings per share       
Basic$0.76
 $1.07
 $3.66
 $3.54
Diluted$0.75
 $1.07
 $3.65
 $3.53
        
See notes to unaudited condensed consolidated financial statements.


4



AMERICAN WOODMARK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(Unaudited)
 
 Three Months Ended Nine Months Ended
 January 31, January 31,
 2020 2019 2020 2019
        
Net income$12,804
 $18,409
 $61,848
 $61,664
        
Other comprehensive income, net of tax:       
Change in pension benefits, net of deferred taxes of $107 and $105, and $322 and $315 for the three and nine months ended January 31, 2020 and 2019, respectively315
 307
 946
 921
        
Total Comprehensive Income$13,119
 $18,716
 $62,794
 $62,585
        
See notes to unaudited condensed consolidated financial statements.


5



AMERICAN WOODMARK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
(Unaudited)

  
 
 
ACCUMULATED  
 
  
 
 
OTHER
TOTAL
 COMMON STOCK
RETAINED
COMPREHENSIVE
SHAREHOLDERS'
(in thousands, except share data)SHARES
AMOUNT
EARNINGS
LOSS
EQUITY
Balance, May 1, 201817,503,922

$361,158

$269,576

$(49,069)
$581,665















Net income



24,767



24,767
Other comprehensive income, 

 
 
 
 
net of tax





307

307
Stock-based compensation

786





786
Exercise of stock-based 
 
 
 
 
compensation awards, net of amounts





 
 


withheld for taxes43,048

(1,241)




(1,241)
Employee benefit plan 
 
 
 
 
contributions41,408

3,623





3,623
Balance, July 31, 201817,588,378

$364,326

$294,343

$(48,762)
$609,907
          
Net income



18,488



18,488
Other comprehensive income, 

 
 
 
 
net of tax





307

307
Stock-based compensation

836





836
Exercise of stock-based 
 
 
 
 
compensation awards, net of amounts





 
 


withheld for taxes5,880








Stock repurchases(189,633)
(3,602)
(9,597)


(13,199)
Balance, October 31, 201817,404,625

$361,560

$303,234

$(48,455)
$616,339
          
Net income



18,409



18,409
Other comprehensive income, 

 
 
 
 
net of tax





307

307
Stock-based compensation

668





668
Stock repurchases(439,081)
(8,341)
(19,410)


(27,751)
Balance, January 31, 201916,965,544

$353,887

$302,233

$(48,148)
$607,972















          
          
          
          
          
          
          
          

6



  
 
 
ACCUMULATED  
 
  
 
 
OTHER
TOTAL
 COMMON STOCK
RETAINED
COMPREHENSIVE
SHAREHOLDERS'
(in thousands, except share data)SHARES
AMOUNT
EARNINGS
LOSS
EQUITY
Balance, May 1, 201916,849,026

$352,424

$317,420

$(49,491)
$620,353












Net income



26,881



26,881
Other comprehensive income, 







 
net of tax





315

315
Stock-based compensation

897





897
Exercise of stock-based







 
compensation awards, net of amounts











withheld for taxes20,923

(1,050)




(1,050)
Employee benefit plan







 
contributions45,721

3,772





3,772
Balance, July 31, 201916,915,670

$356,043

$344,301

$(49,176)
$651,168
          
Net income



22,163



22,163
Other comprehensive income, 







 
net of tax





316

316
Stock-based compensation

1,178





1,178
Exercise of stock-based







 
compensation awards, net of amounts











withheld for taxes5,877

83





83
Balance, October 31, 201916,921,547

$357,304

$366,464

$(48,860)
$674,908
          
Net income



12,804



12,804
Other comprehensive income, 







 
net of tax





315

315
Stock-based compensation

1,047





1,047
Exercise of stock-based







 
compensation awards, net of amounts











withheld for taxes3,700

211





211
Balance, January 31, 202016,925,247

$358,562

$379,268

$(48,545)
$689,285
          
See notes to unaudited condensed consolidated financial statements.  





7



AMERICAN WOODMARK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 Nine Months Ended
 January 31,
 2020
2019
OPERATING ACTIVITIES 
 
Net income$61,848

$61,664
Adjustments to reconcile net income to net cash provided by operating activities:


Depreciation and amortization73,362

70,284
Net loss on disposal of property, plant and equipment350

661
Reduction in the carrying amount of operating lease right-of-use assets19,462


Amortization of debt issuance costs1,963

2,054
Unrealized gain on foreign exchange forward contracts(244)
(291)
Gain on insurance recoveries

(580)
Stock-based compensation expense3,122

2,290
Deferred income taxes(8,623)
(5,757)
Pension contributions in excess of expense(964)
(7,727)
Net gain on debt forgiveness and modification

(5,171)
Contributions of employer stock to employee benefit plan3,772
 3,623
Other non-cash items314

(222)
Changes in operating assets and liabilities:


Customer receivables5,170

19,201
Income taxes receivable(5,229)
27,265
Inventories(14,289)
(11,731)
Prepaid expenses and other assets(6,785)
(5,726)
Accounts payable4,438

(8,323)
Accrued compensation and related expenses(9,193) 724
Operating lease liabilities(16,731)

Marketing and other accrued expenses465

(4,288)
Net cash provided by operating activities112,208

137,950






INVESTING ACTIVITIES 
 
Payments to acquire property, plant and equipment(25,563)
(26,294)
Proceeds from sales of property, plant and equipment321

59
Proceeds from insurance recoveries

580
Acquisition of business, net of cash acquired

(7,182)
Maturities of certificates of deposit1,500

7,000
Investment in promotional displays(6,471)
(5,462)
Net cash used by investing activities(30,213)
(31,299)






FINANCING ACTIVITIES 
 
Payments of long-term debt(91,833)
(100,631)
Proceeds from issuance of common stock295

500
Repurchase of common stock

(40,950)
Withholding of employee taxes related to stock-based compensation(1,050)
(1,739)
Debt issuance cost

(232)
Net cash used by financing activities(92,588)
(143,052)






Net decrease in cash and cash equivalents(10,593)
(36,401)







8



 Nine Months Ended
 January 31,
 2020
2019
Cash and cash equivalents, beginning of period57,656

78,410






Cash and cash equivalents, end of period$47,063

$42,009






Supplemental cash flow information:   
     Non-cash investing and financing activities:
 
          Property, plant and equipment included in accounts payable at period end$1,953
 $462




    Cash paid during the period for:


         Interest$17,322

$23,442
       Income taxes$35,870

$13,109
    
See notes to unaudited condensed consolidated financial statements.



9



AMERICAN WOODMARK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A--Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) 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. GAAP 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. Operating results for the nine-month period ended January 31, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending April 30, 2020.  The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes in the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 2019 filed with the U.S. Securities and Exchange Commission (“SEC”).  

Goodwill and Intangible Assets: Goodwill represents the excess of purchase price over the net amount of identifiable assets acquired and liabilities assumed in a business combination measured at fair value. 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 accounting standards, when evaluating goodwill, 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 0 impairment charges related to goodwill for the three- and nine-month periods ended January 31, 2020 and 2019.

Intangible assets consist of customer relationship intangibles and trademarks. The Company amortizes the cost of intangible assets over their estimated useful lives, which range from 3 to 6 years, unless such lives are deemed indefinite. There were 0 impairment charges related to intangible assets for the three- and nine-month periods ended January 31, 2020 and 2019.

Foreign Exchange Forward Contracts: 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 Company recognizes its outstanding forward contracts in the condensed consolidated balance sheets at their fair values. The Company does not designate the forward contracts as accounting hedges. The changes in the fair value of the forward contracts are recorded in other income, net in the condensed consolidated statements of income.

At January 31, 2020, the Company held forward contracts maturing from February 2020 to April 2020 to purchase 115.7 million Mexican pesos at exchange rates ranging from 19.74 to 19.91 Mexican pesos to one U.S. dollar. An asset of $0.2 million is recorded in prepaid expenses and other on the condensed consolidated balance sheets.

Note B--New Accounting Pronouncements
 
In December 2019, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("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 to the general principles in Topic 740. 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 is effective for the Company beginning May 1, 2021. Early adoption is permitted. The Company is currently reviewing the provisions of this new pronouncement and the impact, if any, the adoption of this guidance may have on financial position and results of operations.

In February 2016, the FASB issued ASU No. 2016-02, which requires lessees to recognize almost all leases on their balance sheet as a right-of-use ("ROU") asset and lease liability. The standard is effective for annual periods beginning after December 15, 2018. The standard provides for the option to elect a package of practical expedients upon adoption. The Company adopted the standard on May 1, 2019 using the modified retrospective transition approach and elected the package of practical expedients that allows it to forgo reassessment of lease classification for leases that have already commenced. The Company also elected the practical expedients to the new standard without restating comparative prior period financial information and to not recognize ROU assets and liabilities for operating leases with shorter than 12-month terms. On May 1, 2019, the Company recognized operating lease assets and operating lease liabilities of $80.4 million. The new standard did not have a material impact on the Company's results of operations or cash flows, or on its debt covenant calculations. ASU 2016-02 also requires entities to disclose

10



certain qualitative and quantitative information regarding the amount, timing, and uncertainty of cash flows arising from leases. Such disclosures are included in Note P--Leases.

Note C--Net Earnings Per Share
 
The following table sets forth the computation of basic and diluted net earnings per share:
  Three Months Ended Nine Months Ended
  January 31, January 31,
(in thousands, except per share amounts) 2020 2019 2020 2019
Numerator used in basic and diluted net earnings        
per common share:        
Net income $12,804
 $18,409
 $61,848
 $61,664
Denominator:        
Denominator for basic net earnings per common        
share - weighted-average shares 16,922
 17,186
 16,902
 17,425
Effect of dilutive securities:        
Stock options and restricted stock units 53
 30
 45
 42
Denominator for diluted net earnings per common        
share - weighted-average shares and assumed        
conversions 16,975
 17,216
 16,947
 17,467
Net earnings per share        
Basic $0.76
 $1.07
 $3.66
 $3.54
Diluted $0.75
 $1.07
 $3.65
 $3.53


The Company repurchased a total of 439,081 and 628,714 shares of its common stock during the three- and nine-month periods ended January 31, 2019, respectively. There were 0 shares repurchased during the three- and nine-month periods ended January 31, 2020. There were 0 potentially dilutive securities for the three- and nine-month periods ended January 31, 2020, which were excluded from the calculation of net earnings per diluted share. An immaterial amount of potentially dilutive securities for the three- and nine-month periods ended January 31, 2019 were excluded from the calculation of net earnings per diluted share.

Note D--Stock-Based Compensation
 
The Company has various stock-based compensation plans. During the nine-months ended January 31, 2020, the Board of Directors of the Company approved grants of service-based restricted stock units ("RSUs") and performance-based RSUs to key employees and non-employee directors. The employee performance-based RSUs totaled 61,379 units and the employee and non-employee director service-based RSUs totaled 42,691 units. The performance-based RSUs entitle the recipients to receive 1 share of the Company’s common stock per unit granted if applicable performance conditions are met and the recipient remains continuously employed with the Company (or, for non-employee directors, serving on the Board of Directors) until the units vest.  The service-based RSUs entitle the recipients to receive 1 share of the Company’s common stock per unit granted if they remain continuously employed with the Company until the units vest.  All of the Company’s RSUs granted to employees cliff-vest three years from the grant date, while RSUs granted to non-employee directors vest daily over a two-year period from the date of the grant.

For the three- and nine-month periods ended January 31, 2020 and 2019, stock-based compensation expense was allocated as follows: 

11



  Three Months Ended 
 January 31,

Nine Months Ended 
 January 31,
(in thousands) 2020
2019
2020
2019
Cost of sales and distribution $224
 $158
 $716
 $502
Selling and marketing expenses 240
 64
 713
 449
General and administrative expenses 583
 446
 1,693
 1,339
Stock-based compensation expense $1,047
 $668
 $3,122
 $2,290

 
During the nine months ended January 31, 2020, the Company also approved grants of 6,483 cash-settled performance-based restricted stock tracking units ("RSTUs") and 3,482 cash-settled service-based RSTUs for more junior level employees.  Each performance-based RSTU entitles the recipient to receive a payment in cash equal to the fair market value of a share of the Company's common stock as of the payment date if applicable performance conditions are met and the recipient remains continuously employed with the Company until the units vest.  The service-based RSTUs entitle the recipients to receive a payment in cash equal to the fair market value of a share of the Company's common stock as of the payment date if they remain continuously employed with the Company until the units vest.  All of the RSTUs cliff-vest three years from the grant date.  Since the RSTUs will be settled in cash, the grant date fair value of these awards is recorded as a liability until the date of payment.  The fair value of each cash-settled RSTU award is remeasured at the end of each reporting period and the liability is adjusted, and related expense recorded, based on the new fair value.  The Company recognized expense of $0.2 million and $0.1 million for the three-month periods ended January 31, 2020 and 2019, respectively, and $0.4 million and $0.2 million for the nine-month periods ended January 31, 2020 and 2019, respectively. A liability for payment of the RSTUs is included in the condensed consolidated balance sheets in the amount of $0.7 million and $0.7 million as of January 31, 2020 and April 30, 2019, respectively.

Note E--Customer Receivables
 
The components of customer receivables were: 
 
January 31,
April 30,
(in thousands)
2020
2019
Gross customer receivables
$128,815

$132,145
Less:


 
Allowance for doubtful accounts
(460)
(249)
Allowance for returns and discounts
(6,002)
(5,995)







Net customer receivables
$122,353

$125,901
  

Note F--Inventories
 
The components of inventories were: 
 
January 31,
April 30,
(in thousands)
2020
2019
Raw materials
$55,875

$46,054
Work-in-process
45,230

43,794
Finished goods
37,018

34,873







Total FIFO inventories
138,123

124,721







Reserve to adjust inventories to LIFO value
(16,193)
(16,193)







Total inventories
$121,930

$108,528

 

12



Of the total inventory of $121.9 million at January 31, 2020, $72.9 million is carried under the FIFO method of accounting and $49.0 million is carried under the LIFO method. Of the total inventory of $108.5 million at April 30, 2019, $58.6 million is carried under the FIFO method and $49.9 million is carried under the LIFO method.
 
Note G--Property, Plant and Equipment

The components of property, plant and equipment were:
  January 31,
April 30,
(in thousands) 2020
2019
Land $4,431

$4,751
Buildings and improvements 115,004

114,421
Buildings and improvements - finance leases 11,676

11,202
Machinery and equipment 308,141

294,993
Machinery and equipment - finance leases 30,772

30,574
Construction in progress 18,000

7,002

 488,024

462,943
Less accumulated amortization and depreciation (279,244)
(254,680)

 




Total $208,780

$208,263


Amortization and depreciation expense on property, plant and equipment amounted to $9.3 million and $9.0 million for the three months ended January 31, 2020 and 2019, respectively, and $27.6 million and $26.8 million for the nine months ended January 31, 2020 and 2019, respectively. Accumulated amortization on finance leases included in the above table amounted to $31.9 million and $30.8 million as of January 31, 2020 and April 30, 2019, respectively.

Note H--Intangibles

The components of customer relationship intangibles were:
  January 31,
April 30,
(in thousands) 2020
2019
Customer relationship intangibles $274,000

$274,000
Less accumulated amortization (95,139)
(60,889)

 




Total $178,861

$213,111

The components of trademarks were:
  January 31,
April 30,
(in thousands) 2020
2019
Trademarks $10,000

$10,000
Less accumulated amortization (6,944)
(4,445)

 




Total $3,056

$5,555


Customer relationship intangibles and trademarks are amortized over the estimated useful lives on a straight-line basis over six and three years, respectively. Amortization expense for each of the three month periods ended January 31, 2020 and 2019 was $12.2 million, and $36.7 million for each of the nine month periods ended January 31, 2020 and 2019, respectively.

Note I--Product Warranty
 

13



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 two months of the original shipment date.
 
The following is a reconciliation of the Company’s warranty liability, which is included in other accrued expenses on the balance sheet: 
 
Nine Months Ended
 
January 31,
(in thousands)
2020
2019
Beginning balance at May 1
$4,616

$4,045
Accrual
17,132

18,406
Settlements
(17,611)
(18,315)







Ending balance at January 31
$4,137

$4,136


Note J--Pension Benefits
 
Effective April 30, 2012, the Company froze all future benefit accruals under the Company’s hourly and salary defined-benefit pension plans.
 
Net periodic pension benefit cost consisted of the following for the three- and nine-month periods ended January 31, 2020 and 2019: 
 
Three Months Ended
Nine Months Ended
 
January 31,
January 31,
(in thousands)
2020
2019
2020
2019
Interest cost
$1,493

$1,567

$4,480

$4,702
Expected return on plan assets
(2,082)
(2,127)
(6,245)
(6,382)
Recognized net actuarial loss
423

412

1,269

1,236













Net periodic pension benefit
$(166)
$(148)
$(496)
$(444)

 
The Company contributed $0.5 million to its pension plans in the first nine months of fiscal 2020, which represents discretionary funding, and does not expect to contribute any additional funds during the remainder of fiscal 2020. The Company made contributions of $7.3 million to its pension plans in fiscal 2019. 

Note K--Fair Value Measurements
 
The Company utilizes the hierarchy of fair value measurements to classify certain of its assets and liabilities based upon the following definitions:
Level 1- Investments with quoted prices in active markets for identical assets or liabilities. The Company’s cash equivalents are invested in money market funds, mutual funds and certificates of deposit.  The Company’s mutual fund investment assets represent contributions made and invested on behalf of the Company’s named executive officers in a supplementary employee retirement plan.

Level 2- Investments with observable inputs other than Level 1 prices, such as: quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3- Investments with unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The Company has no Level 3 assets or liabilities measured on a recurring basis.


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The Company's financial instruments include cash and equivalents, marketable securities and other investments; accounts receivable and accounts payable; and short- and long-term debt. The carrying values of cash and equivalents, certificates of deposit, accounts receivable and payable and short-term debt on the condensed consolidated balance sheets approximate their fair value due to the short maturities of these items. The forward contracts were marked to market and therefore represent fair value. The fair values of these contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. The following table summarizes the fair value of assets and liabilities that are recorded in the Company’s consolidated financial statements as of January 31, 2020 and April 30, 2019 at fair value on a recurring basis (in thousands):
 
Fair Value Measurements
 
As of January 31, 2020
 
Level 1
Level 2
Level 3
ASSETS:
 
 
 
Mutual funds
$808

$

$
Foreign exchange forward contracts


244


Total assets at fair value
$808

$244

$










 
As of April 30, 2019
 
Level 1
Level 2
Level 3
ASSETS:
 
 
 
Certificates of deposit
$1,500

$

$
Mutual funds
1,604




Total assets at fair value
$3,104

$

$


There were no transfers between Level 1, Level 2 or Level 3 for assets measured at fair value on a recurring basis.

Note L--Loans Payable and Long-Term Debt

On December 29, 2017, the Company entered into a credit agreement (as subsequently amended, the "Credit Agreement") with a syndicate of lenders and Wells Fargo Bank, National Association, as administrative agent, providing for a $100 million, 5-year revolving loan facility with a $25 million sub-facility for the issuance of letters of credit (the “Revolving Facility”), a $250 million, 5-year initial term loan facility (the "Initial Term Loan") and a $250 million delayed draw term loan facility (the "Delayed Draw Term Loan" and, together with the Revolving Facility and the Initial Term Loan, the "Credit Facilities"). The Company borrowed the entire $250 million available under each of the Initial Term Loan and the Delayed Draw Term Loan on December 29, 2017 and February 12, 2018, respectively, in connection with its acquisition of RSI Home Products, Inc. (“RSI”) and subsequent refinancing of RSI’s debt. The Company is required to make specified quarterly installments on both the Initial Term Loan and the Delayed Draw Loan. As of January 31, 2020, $125 million was outstanding on each of the Initial Term Loan and the Delayed Draw Loan for a total of $250 million. As of April 30, 2019, $170 million was outstanding on each of the Initial Term Loan and the Delayed Draw Loan for a total of $340 million. The outstanding balance approximates fair value as the Initial Term Loan and Delayed Draw Term Loan have a floating interest rate. There were 0 amounts outstanding on the Revolving Facility as of January 31, 2020 or April 30, 2019. The Credit Facilities mature on December 29, 2022.

Amounts outstanding under the Credit Facilities bear interest based on a fluctuating rate measured by reference to either, at the Company’s option, a base rate plus an applicable margin or LIBOR plus an applicable margin, with the applicable margin being determined by reference to the Company’s then-current “Total Funded Debt to EBITDA Ratio.” The Company also incurs a quarterly commitment fee on the average daily unused portion of the Revolving Facility during the applicable quarter at a rate per annum also determined by reference to the Company’s then-current “Total Funded Debt to EBITDA Ratio.” In addition, a letter of credit fee will accrue on the face amount of any outstanding letters of credit at a per annum rate equal to the applicable margin on LIBOR loans, payable quarterly in arrears. As of January 31, 2020, the applicable margin with respect to base rate loans and LIBOR loans was 0.50% and 1.50%, respectively, and the commitment fee was 0.18%.

The Credit Agreement includes certain financial covenants, including a maximum “Total Funded Debt to EBITDA Ratio” of no more than 3.25 to 1.00 (with an increase to 3.75 to 1.00 for a certain period upon the consummation of a “Qualified Acquisition”). The Company is also required to maintain a “Fixed Charge Coverage Ratio” of no less than 1.25 to 1.00. 


15



The 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, dispose of its assets or engage in a merger or another similar transaction or engage in transactions with affiliates, subject, in each case, to the various exceptions and conditions described in the Credit Agreement. The negative covenants also restrict the Company’s ability to make certain investments and to make certain restricted payments, including the payment of dividends and repurchase of common stock, in certain limited circumstances. The Company is, however, permitted to make unlimited investments so long as the “Total Funded Debt to EBITDA Ratio” is less than or equal to 3.00 to 1.00 after giving effect to any such investment and no default or event of default has occurred and is continuing or would result from any such investment. The Company is also permitted to make (i) unlimited restricted payments so long as the “Total Funded Debt to EBITDA Ratio” would be less than or equal to 2.75 to 1.00 after giving effect to any such payment and no default or event of default has occurred and is continuing or would result from any such payment and (ii) up to an aggregate of $50 million in restricted payments not otherwise permitted under the Credit Agreement so long as no default or event of default has occurred and is continuing or would result from any such payment.
 
As of January 31, 2020, the Company was in compliance with the covenants included in the Credit Agreement.

The Company’s obligations under the Credit Agreement are guaranteed by the Company’s subsidiaries and the obligations of the Company and its subsidiaries are secured by a pledge of substantially all of their respective personal property.

On February 12, 2018, the Company issued $350 million in aggregate principal amount of 4.875% Senior Notes due 2026 (the “Senior Notes”). The Senior Notes mature on March 15, 2026 and interest on the Senior Notes is payable semi-annually in arrears on March 15 and September 15 of each year. The Senior Notes are fully and unconditionally guaranteed by each of the Company’s current and future wholly-owned domestic subsidiaries that guarantee the Company’s obligations under the Credit Agreement. The indenture governing the Senior Notes restricts the ability of the Company and the Company’s “restricted subsidiaries” to, as applicable, (i) incur additional indebtedness or issue certain preferred shares, (ii) create liens, (iii) pay dividends, redeem or repurchase stock or make other distributions or restricted payments, (iv) make certain investments, (v) create restrictions on the ability of the “restricted subsidiaries” to pay dividends to the Company or make other intercompany transfers, (vi) transfer or sell assets, (vii) merge or consolidate with a third party and (viii) enter into certain transactions with affiliates of the Company, subject, in each case, to certain qualifications and exceptions as described in the indenture. As of January 31, 2020, the Company and its restricted subsidiaries were in compliance with all covenants under the indenture governing the Senior Notes.

At January 31, 2020, the book value of the Senior Notes was $350 million and the fair value was $361.4 million, based on Level 1 inputs.

Note M--Income Taxes

The effective income tax rate for the three- and nine-month periods ended January 31, 2020 was 25.9% and 26.0%, respectively, compared with 23.7% and 24.9% in the comparable periods in the prior fiscal year. The increase in the effective tax rate for the third quarter as compared to the comparable period in the prior fiscal year was primarily due to benefits from credits finalized with the filing of the fiscal 2018 tax return in the prior year. The overall increase in the effective tax rate for the first nine months of fiscal 2020, as compared to the comparable period in the prior year, was primarily due to a decrease in the benefit from stock-based compensation transactions and benefits from credits finalized with the filing of the fiscal 2018 tax return during fiscal 2019.

Note N--Revenue Recognition

The Company disaggregates revenue from contracts with customers into major sales distribution channels as these categories depict the nature, amount, timing and uncertainty of revenues and cash flows that are affected by economic factors. The following table disaggregates our consolidated revenue by major sales distribution channels for the three- and nine-months ended January 31, 2020 and 2019:


Three Months Ended
Nine months ended


January 31,
January 31,
(in thousands)
2020
2019
2020
2019
Home center retailers
$191,544

$186,001

$579,443

$587,592
Builders
155,169

147,343

512,513

482,023
Independent dealers and distributors
49,042

50,736

159,180

168,305
Net Sales
$395,755

$384,080

$1,251,136

$1,237,920



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Note O--Concentration of Risks

Financial instruments that potentially subject the Company to concentrations of risk consist primarily of cash and cash equivalents and accounts receivable. The Company maintains its cash and cash equivalents with major financial institutions and such balances may, at times, exceed Federal Deposit Insurance Corporation insurance limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risk on cash.

Credit is extended to customers based on an evaluation of each customer's financial condition and generally collateral is not required. The Company's customers operate in the new home construction and home remodeling markets. 
 
The Company maintains an allowance for bad debt based upon management's evaluation and judgment of potential net loss. The allowance is estimated based upon historical experience, the effects of current developments and economic conditions and of each customer’s current and anticipated financial condition. Estimates and assumptions are periodically reviewed and updated. Any resulting adjustments to the allowance are reflected in current operating results.

At January 31, 2020, the Company's two largest customers, Customers A and B, represented 30.3% and 24.5% of the Company's gross customer receivables, respectively. At January 31, 2019, Customers A and B represented 26.4% and 24.4% of the Company’s gross customer receivables, respectively.

The following table summarizes the percentage of net sales attributable to the Company's two largest customers for the three- and nine-months ended January 31, 2020 and 2019:

Three Months Ended
Nine months ended

January 31,
January 31,
 2020
2019
2020
2019
Customer A30.1%
29.3%
29.2%
29.0%
Customer B18.3%
19.2%
17.2%
18.4%


Note P--Leases

On May 1, 2019, the Company adopted ASC 842, Leases. Changes to the Company’s accounting policy as a result of adoption are discussed below.

Operating Leases - ROU assets related to operating leases are presented as “Operating lease right-of-use assets” on the unaudited condensed consolidated balance sheet. Lease liabilities related to operating leases that are subject to the ASC 842 measurement requirements such as operating leases with lease terms greater than twelve months are presented in “Short-term lease liability - operating” and “Long-term lease liability - operating” on the unaudited condensed consolidated balance sheet.

Operating lease ROU assets and lease liabilities are recognized at the commencement date based on the present value of the future lease payments over the lease term. The discount rate used to determine the present value of the lease payments is the rate implicit in the lease unless that rate cannot be readily determined, in which case, the Company utilizes its incremental borrowing rate in determining the present value of the future lease payments. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Operating lease ROU assets may also include any cumulative prepaid or accrued rent when the lease payments are uneven throughout the lease term. The ROU assets and lease liabilities may also include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The ROU asset includes any lease payments made and lease incentives received prior to the commencement date. The Company has lease arrangements with lease and non-lease components which are accounted for separately. Non-lease components of the lease payments are expensed as incurred and are not included in determining the present value.

Finance Leases - ROU assets related to finance leases are presented in "Property, plant and equipment, net” on the unaudited condensed consolidated balance sheet. Lease liabilities related to finance leases are presented in “Current maturities of long-term debt” and “Long-term debt, less current maturities” on the unaudited condensed consolidated balance sheet.

Finance lease ROU assets and lease liabilities are recognized at the commencement date based on the present value of the future lease payments over the lease term. The discount rate used to determine the present value of the lease payments is the rate implicit in the lease unless that rate cannot be readily determined, in which case, the Company utilizes its incremental borrowing rate in determining the present value of the future lease payments. The incremental borrowing rate is the rate of interest that the Company

17



would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.

The components of lease costs were as follows:
 
Nine months ended
 
January 31,
(in thousands)
2020
Finance lease cost:


Reduction in the carrying value of right-of-use assets
$1,922
Interest on lease liabilities
157
Operating lease cost
19,462


Additional information related to leases was as follows:
 
Nine months ended
 
January 31,
(in thousands)
2020
Cash paid for amounts included in the measurement of lease liabilities:


Operating cash flows for finance leases
$157
Operating cash flows for operating leases
16,731
Financing cash flows for financing leases
1,883
Right-of-use assets obtained in exchange for new finance lease liabilities
1,399
Right-of-use assets obtained in exchange for new operating lease liabilities
29,622



Weighted average remaining lease term (years)

Weighted average remaining lease term - finance leases
3.44
Weighted average remaining lease term - operating leases
6.38



Weighted average discount rate

Weighted average discount rate - finance leases
3.20%
Weighted average discount rate - operating leases
4.26%


The following is a reconciliation of future undiscounted cash flows to the operating and finance lease liabilities, and the related ROU assets, presented on the unaudited condensed consolidated balance sheet as of January 31, 2020:
(in thousands)
Operating leases
Financing leases
Year ending April 30,





2020
$6,305

$687
2021
23,959

2,316
2022
17,911

1,381
2023
12,762

921
2024
10,735

858
Thereafter
36,142

338
Total lease payments
107,814

6,501
Less imputed interest
(13,680)
(382)
Total lease liability
$94,134

$6,119
Current maturities
(20,837)
(2,355)
Lease liability - long-term
$73,297

$3,764
Lease assets
$90,530

$10,582


18




As we have not restated prior-year information for our adoption of ASC Topic 842, the following presents our future minimum lease payments for operating leases and capital leases under ASC Topic 840 on April 30, 2019:
Fiscal YearOperating (in thousands)
Capital (in thousands)
2020$17,943

2,456
202117,649

1,953
202212,435

1,013
202310,636

705
20249,854

701
2025 (and thereafter)38,871

166
 $107,388

$6,994
Less amounts representing interest (2% - 6.5%) 
(349)
Total obligations under capital leases 
$6,645


Note Q--Other Information
 
The Company is involved in suits and claims in the normal course of business, including without limitation product liability and general liability claims, and claims pending before the Equal Employment Opportunity Commission.  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 FASB Accounting Standards Codification Topic 450, “Contingencies,” the Company categorizes the various suits and claims into three categories according to their likelihood for resulting in potential loss: those that are probable, those that are reasonably possible, and those that are deemed to be remote.  Where losses are deemed to be probable and estimable, accruals are made. Where losses are deemed to be reasonably possible, a range of loss estimates is determined and considered for disclosure.  In determining these loss range estimates, the Company considers known values of similar claims and consults with outside counsel.
 
The Company believes that the aggregate range of loss stemming from the various suits and asserted and unasserted claims that were deemed to be either probable or reasonably possible was not material as of January 31, 2020.
          
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes, both of which are included in Part I, Item 1 of this report.  The Company’s critical accounting policies are included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2019.

 Forward-Looking Statements
 
This report contains statements concerning the Company’s expectations, plans, objectives, future financial performance, and other statements that are not historical facts.  These statements may be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  In most cases, the reader can identify forward-looking statements by words such as “anticipate,” “estimate,” “forecast,” “expect,” “believe,” “should,” “could,” “would,” “plan,” “may,” “intend,” “estimate,” “prospect,” “goal,” “will,” “predict,” “potential” or other similar words.  Forward-looking statements contained in this report, including elsewhere in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are based on current expectations and our actual results may differ materially from those projected in any forward-looking statements.  In addition, the Company participates in an industry that is subject to rapidly changing conditions and there are numerous factors that could cause the Company to experience a decline in sales and/or earnings or deterioration in financial condition.  Factors that could cause actual results to differ materially from those in forward-looking statements made in this report include but are not limited to:

the loss of or a reduction in business from one or more of our key customers;
negative developments in the U.S. housing market or general economy and the impact of such developments on our and our customers’ business, operations and access to financing;
competition from other manufacturers and the impact of such competition on pricing and promotional levels;
an inability to develop new products or respond to changing consumer preferences and purchasing practices;

19



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;
an inability to obtain raw materials in a timely manner or fluctuations in raw material and energy costs;
information systems interruptions or intrusions or the unauthorized release of confidential information concerning customers, employees or other third parties;
the cost of compliance with, or liabilities related to, environmental or other governmental regulations or changes in governmental or industry regulatory standards, especially with respect to health and safety and the environment;
a failure to attract and retain certain members of management or other key employees or other negative labor developments, including increases in the cost of labor;
risks associated with the implementation of our growth strategy;
risks related to sourcing and selling products internationally and doing business globally, including the imposition of or increases in tariffs or duties on those products;
unexpected costs resulting from a failure to maintain acceptable quality standards;
changes in tax laws or the interpretations of existing tax laws;
the occurrence of significant natural disasters, including earthquakes, fires, floods, and hurricanes or tropical storms;
the unavailability of adequate capital for our business to grow and compete;
increased buying power of large customers and the impact on our ability to maintain or raise prices;
the risk that the anticipated economic benefits, costs savings and other synergies in connection with our acquisition of RSI are not fully realized or take longer to realize than expected; and
limitations on operating our business as a result of covenant restrictions under our indebtedness, and our ability to pay amounts due under the Credit Facilities, the Senior Notes and our other indebtedness.

Additional information concerning factors that could cause actual results to differ materially from those in forward-looking statements is contained in this report, including elsewhere in "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and in Item 1A, "Risk Factors," and also in the Company's most recent Annual Report on Form 10-K for the fiscal year ended April 30, 2019, filed with the SEC, including under Item 1A, "Risk Factors," Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Item 7A, "Quantitative and Qualitative Disclosures about Market Risk."  While the Company believes that these risks are manageable and will not adversely impact the long-term performance of the Company, these risks could, under certain circumstances, have a material adverse impact on its operating results and financial condition.
 
Any forward-looking statement that the Company makes speaks only as of the date of this report.  The Company undertakes no obligation to publicly update or revise any forward-looking statements or cautionary factors as a result of new information, future events or otherwise, except as required by law.

Overview
 
American Woodmark Corporation manufactures and distributes kitchen, bath and home organization products for the remodeling and new home construction markets.  Its products are sold on a national basis directly to home centers and builders and through a network of independent dealers and distributors.  On January 31, 2020, the Company operated eighteen manufacturing facilities in the United States and Mexico and eight primary service centers located throughout the United States.

The three-month period ended January 31, 2020 was the Company’s third quarter of its fiscal year that ends on April 30, 2020 (“fiscal 2020”).  
 
The Company’s remodeling-based business was impacted by the following trends during the third quarter of the Company’s fiscal 2020:    
 
The median price per existing home sold rose during the fourth calendar quarter of 2019 compared to the same period one year ago by 6.5% according to data provided by the National Association of Realtors, and existing home sales increased 5.8% during the fourth calendar quarter of 2019 compared to the same period in the prior year;
The unemployment rate improved to 3.6% as of January 2020 compared to 4.0% as of January 2019 according to data provided by the U.S. Department of Labor;
Mortgage interest rates decreased with a thirty-year fixed mortgage rate of approximately 3.62% in January 2020, a decrease of approximately 84 basis points compared to the same period in the prior year, according to Freddie Mac; and
Consumer sentiment as tracked by Thomson Reuters/University of Michigan increased from 91.2 in January 2019 to 99.8 in January 2020.


20



The Company believes there is no single indicator that directly correlates with cabinet remodeling market activity. For this reason, the Company considers other factors in addition to those discussed above as indicators of overall market activity including credit availability, housing affordability and sales reported by the Kitchen Cabinet Manufacturers Association (“KCMA”), a trade organization that issues the aggregate sales that have been reported by its members including the largest cabinet manufacturers in the United States.  Based on the totality of factors listed above, the Company believes that the cabinet remodeling market decreased in the low-single digits during the third quarter of fiscal 2020. 
 
The Company’s remodeling sales, which consist of our independent dealer and distributor channel sales and home center retail sales, increased 1.6% during the third quarter and decreased 2.3% during the first nine months of fiscal 2020 compared to the same prior-year periods. Our independent dealer and distributor channel decreased by 3.3% during the third quarter and 5.4% during the first nine months of fiscal 2020 when compared to the comparable prior-year periods.  Our home center channel increased by 3.0% during the third quarter and decreased 1.4% during the first nine months of fiscal 2020 when compared to the comparable prior-year periods. 

New construction sales increased 5.3% in the third quarter and 6.3% in the first nine months of fiscal 2020, when compared to the same periods of fiscal 2019. The Company believes that fluctuations in single-family housing starts are the best indicator of new construction cabinet activity.  Assuming a sixty to ninety day lag between housing starts and the installation of cabinetry, single-family housing starts increased 8.1% during the third quarter of the Company’s fiscal 2020 over the comparable prior year period.  The Company believes it over indexed the market on a unit basis within made-to-order framed builder direct, which was offset by price, mix and declines in our frameless business.

The Company’s total net sales increased 3.0% during the third quarter and 1.1% during the first nine months of fiscal 2020 compared to the same prior-year periods, which was driven primarily by growth in the builder channel.
  
The Company earned net income of $12.8 million for the third quarter of fiscal 2020, compared with $18.4 million in the third quarter of its prior fiscal year, and earned net income of $61.8 million for the first nine months of fiscal 2020, compared with $61.7 million in the same period of the prior year.

Results of Operations
 
Three Months Ended
Nine Months Ended
 
January 31,
January 31,
(in thousands)
2020
2019
Percent Change
2020
2019
Percent Change



















Net sales
$395,755

$384,080

3.0 %
$1,251,136

$1,237,920

1.1 %
Gross profit
72,348

76,853

(5.9)
253,917

259,351

(2.1)
Selling and marketing expenses
21,401

22,215

(3.7)
62,539

68,139

(8.2)
General and administrative expenses
26,914

27,462

(2.0)
86,246

86,010

0.3
 
Net Sales. Net sales were $395.8 million for the third quarter of fiscal 2020, an increase of 3.0% compared with the third quarter of fiscal 2019.  For the first nine months of fiscal 2020, net sales were $1,251.1 million, reflecting a 1.1% increase compared to the same period of fiscal 2019. The Company experienced growth in the builder channel and stock home center business, which was offset by declines in the made-to-order home center and independent dealers and distributors channels during the third quarter and first nine months of fiscal year 2020.

Gross Profit. Gross profit margin for the third quarter of fiscal 2020 was 18.3%, compared with 20.0% for the same period of fiscal 2019.  Gross profit margin was 20.3% for the first nine months of fiscal 2020, compared with 21.0% in the first nine months of fiscal 2019.  Gross margin in the third quarter of the current fiscal year was favorably impacted by higher sales volumes. These favorable impacts were more than offset by operating inefficiencies, increased tariffs, costs related to our particleboard supply disruption (see discussion below) and duplicate rent and move costs related to our California facility move of $1.6 million for the three-month period ended January 31, 2020. Gross margin in the first nine months of the current fiscal year was favorably impacted by higher sales volumes and improved operating efficiencies. These favorable impacts were offset by increased tariffs, costs related to our particleboard supply disruption (see discussion below) and duplicate rent and move costs related to our California facility move of $2.4 million for the nine-month period ended January 31, 2020.


21



Selling and Marketing Expenses.  Selling and marketing expenses were 5.4% of net sales in the third quarter of fiscal 2020, compared with 5.8% of net sales for same period in fiscal 2019. For the first nine months of fiscal 2020, selling and marketing expenses were 5.0% of net sales, compared with 5.5% of net sales for the same period of fiscal 2019.  Selling and marketing expenses as a percentage of net sales decreased during the third quarter and first nine months of fiscal 2020 as a result of lower spending and leverage from higher sales.

General and Administrative Expenses.  General and administrative expenses were 6.8% of net sales in the third quarter of fiscal 2020, compared with 7.2% of net sales in the third quarter of fiscal 2019 and 6.9% of net sales in the first nine of fiscal 2020 compared with 6.9% of net sales in the same period of fiscal 2019. The decrease in general and administrative expenses as a percentage of net sales during the third quarter was driven by lower spending and leverage from higher sales.

Effective Income Tax Rates.  The Company’s effective income tax rate for the three- and nine-month periods ended January 31, 2020 and 2019 was 25.9% and 26.0%, respectively, compared with 23.7% and 24.9% in the comparable periods in the prior fiscal year. The increase in the effective tax rate for the third quarter as compared to the comparable period in the prior fiscal year was primarily due to benefits from credits finalized with the filing of the fiscal 2018 tax return in the prior year. The overall increase in the effective tax rate for the first nine months of fiscal 2020, as compared to the comparable period in the prior year, was primarily due to a decrease in the benefit from stock-based compensation transactions and benefits from credits finalized with the filing of the fiscal 2018 tax return during fiscal 2019.

Non-GAAP Financial Measures. We have reported our financial results in accordance with generally accepted accounting principles (GAAP). In addition, we have discussed our financial results using the non-GAAP measures described below.

A reconciliation of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP is set forth below.

Management believes that these non-GAAP financial measures provide an additional means of analyzing the current period’s results against the corresponding prior period’s results. However, these non-GAAP financial measures should be viewed in addition to, and not as a substitute for, the Company’s reported results prepared in accordance with GAAP. Our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP.

Adjusted EPS per diluted share

We use Adjusted EPS per diluted share in evaluating the performance of our business and profitability. Management believes that this measure provides useful information to investors by offering additional ways of viewing the Company’s results by providing an indication of performance and profitability excluding the impact of unusual and/or non-cash items. We define Adjusted EPS per diluted share as diluted earnings per share excluding the per share impact of (1) expenses related to the RSI acquisition and subsequent restructuring charges, (2) the amortization of customer relationship intangibles and trademarks, (3) net gain on debt forgiveness and modification and (4) the tax benefit of RSI acquisition expenses and subsequent restructuring charges, the net gain on debt forgiveness and modification and the amortization of customer relationship intangibles and trademarks. The amortization of intangible assets is driven by the RSI acquisition and will recur in future periods. Management has determined that excluding amortization of intangible assets from our definition of Adjusted EPS per diluted share will better help it evaluate the performance of our business and profitability and we have also received similar feedback from some of our investors regarding the same.

Adjusted EBITDA and Adjusted EBITDA margin

We use Adjusted EBITDA and Adjusted EBITDA margin in evaluating the performance of our business, and we use each in the preparation of our annual operating budgets and as indicators of business performance and profitability. We believe Adjusted EBITDA and Adjusted EBITDA margin allow us to readily view operating trends, perform analytical comparisons and identify strategies to improve operating performance.

We define Adjusted EBITDA as net income adjusted to exclude (1) income tax expense, (2) interest (income) expense, net, (3) depreciation and amortization expense, (4) amortization of customer relationship intangibles and trademarks, (5) expenses related to the RSI acquisition and subsequent restructuring charges, (6) stock-based compensation expense, (7) gain/loss on asset disposals, (8) unrealized gain/loss on foreign exchange forward contracts and (9) net gain on debt forgiveness and modification. We believe Adjusted EBITDA, when presented in conjunction with comparable GAAP measures, is useful for investors because management uses Adjusted EBITDA in evaluating the performance of our business.


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We define Adjusted EBITDA margin as Adjusted EBITDA as a percentage of net sales.
Reconciliation of Adjusted Non-GAAP Financial Measures to the GAAP Equivalents
  Three Months Ended Nine months ended
  January 31, January 31,
(in thousands) 2020 2019 2020 2019
         
Net income (GAAP) $12,804
 $18,409
 $61,848
 $61,664
Add back:        
      Income tax expense 4,470
 5,717
 21,742
 20,410
      Interest expense, net 6,924
 8,836
 22,448
 27,204
      Depreciation and amortization expense 12,585
 11,308
 36,612
 33,534
Amortization of customer relationship intangibles and        
trademarks 12,250
 12,250
 36,750
 36,750
EBITDA (Non-GAAP) $49,033
 $56,520
 $179,400
 $179,562
Add back:        
      Acquisition related expenses (1) 60
 593
 (29) 4,002
 Change in foreign exchange forward contracts (2) (148) (490) (244) (291)
      Net gain on debt forgiveness and modification (3) 
 (5,171) 
 (5,171)
      Stock-based compensation expense 1,047
 668
 3,122
 2,290
      Loss on asset disposal 133
 76
 350
 661
Adjusted EBITDA (Non-GAAP) $50,125
 $52,196
 $182,599
 $181,053
         
Net Sales $395,755
 $384,080
 $1,251,136
 $1,237,920
Adjusted EBITDA margin (Non-GAAP) 12.7% 13.6% 14.6% 14.6%
(1) Acquisition related expenses are comprised of expenses related to the RSI acquisition and the subsequent restructuring charges that the Company incurred.
(2) In the normal course of business the Company is subject to risk from adverse fluctuations in foreign exchange rates. The Company manages these risks through the use of foreign exchange forward contracts. The changes in the fair value of the forward contracts are recorded in other (income) expense in the operating results.
(3) The Company had loans and interest forgiven relating to four separate economic development loans totaling $5.5 million and the Company incurred $0.3 million in loan modification expense related to an amendment to the credit agreement during the third quarter of fiscal 2019.

A reconciliation of Adjusted EBITDA and Adjusted EBITDA margin as projected for fiscal 2020 is not provided because we do not forecast net income as we cannot, without unreasonable effort, estimate or predict with certainty various components of net income.

Adjusted EBITDA. Adjusted EBITDA for the third quarter of fiscal 2020 was $50.1 million or 12.7% of net sales compared to $52.2 million or 13.6% of net sales for the same quarter of the prior fiscal year. Adjusted EBITDA for the first nine months of the fiscal year was $182.6 million or 14.6% of net sales compared to $181.1 million or 14.6% of net sales for the same period of the prior fiscal year. The decrease in Adjusted EBITDA for the third quarter of fiscal 2020 is primarily due to tariffs, operating inefficiencies, costs related to our particleboard supply disruption and duplicate rent and move costs related to our California facility move which were partially offset by sales growth.

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Reconciliation of Net Income to Adjusted Net Income
  Three Months Ended Nine months ended
  January 31, January 31,
(in thousands, except share data) 2020 2019 2020 2019
         
Net income (GAAP) $12,804
 $18,409
 $61,848
 $61,664
Add back:        
Acquisition related expenses 60
 593
 (29) 4,002
Amortization of customer relationship intangibles and        
trademarks 12,250
 12,250
 36,750
 36,750
      Net gain on debt forgiveness and modification 
 (5,171) 
 (5,171)
Tax benefit of add backs (3,127) (1,972) (9,327) (9,061)
Adjusted net income (Non-GAAP) $21,987
 $24,109
 $89,242
 $88,184
         
Weighted average diluted shares 16,974,956
 17,216,327
 16,947,449
 17,466,936
Adjusted EPS per diluted share (Non-GAAP) $1.30
 $1.40
 $5.27
 $5.05

Outlook.  The Company tracks several metrics, including but not limited to housing starts, existing home sales, mortgage interest rates, new jobs growth, GDP growth and consumer confidence, which it believes are leading indicators of overall demand for kitchen and bath cabinetry. The Company believes that housing starts will remain positive, driven by low unemployment rates, low mortgage rates and growth in new household formation. However, the Company expects that while the cabinet remodeling market will show modest improvement during the remainder of fiscal 2020, it will continue to be below historical averages.

The Company expects that industry-wide cabinet remodeling sales will continue to be challenged.  Growth is expected at a low single digit rate during the Company’s fiscal 2020. The Company’s home center market share is expected to remain at normalized levels for fiscal 2020, however this is heavily dependent upon competitive promotional activity. The Company expects to maintain or slightly grow its market share with independent dealers and regain market share within its distributor channel, however we believe the overall market will continue to soften with relatively flat growth.

Based on available information, it is expected that new residential construction starts will grow approximately low single digits during fiscal 2020. The Company’s new residential construction direct business is expected to increase at a faster rate than the market rate for single family housing starts due to continued market share gains.

In total, the Company expects that it will grow sales at a low single digit rate for fiscal 2020.  This growth rate is very dependent upon overall industry and economic growth. The Company’s margins were negatively impacted in the nine-month period ended January 31, 2020 by $2.4 million for the move of one of our California facilities and $3.0 million due to net particle board supply disruption costs. Due to ongoing tariff costs and particle board pricing/transportation costs the Company expects adjusted EBITDA margins for fiscal 2020 to decrease slightly compared with prior year results.

Particleboard Supply

Due to a catastrophic fire at a key Southeast supplier plant in May 2019 and the supplier’s subsequent decision to shutter operations at two additional plants, the Company is currently experiencing higher costs in the supply of particleboard, a key input component to the build of our cabinetry.  The Company has qualified suitable capacity from additional suppliers.

The Company has recognized costs in excess of insurance reimbursements related to our particleboard supply disruption of $0.5 million and $3.0 million for the three- and nine-month periods ended January 31, 2020. Management currently expects that these events will continue to have a negative impact on at least our fourth quarter of fiscal 2020.  Our results could continue to be negatively impacted by higher pricing and incremental transportation costs of $1.5 to $1.9 million per quarter until fully resolved.

The Company maintains property insurance, including business interruption/dependent property coverage with a limit of $5 million.  The company realized a $5 million reimbursement during the nine-month period ended January 31, 2020, on the $5 million limit, which is included in gross profit on the Company's condensed consolidated statement of income.  


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Liquidity and Capital Resources
 
The Company’s cash and cash equivalents and investments in certificates of deposit totaled $47.1 million at January 31, 2020, representing a $12.1 million decrease from its April 30, 2019 levels.  At January 31, 2020, total long-term debt (including current maturities) was $602.9 million, a decrease of $88.6 million from its balance at April 30, 2019.  The Company’s ratio of long-term debt to total capital was 46.6% at January 31, 2020, compared with 52.6% at April 30, 2019.
 
The Company’s main source of liquidity is its cash and cash equivalents on hand and cash generated from its operating activities. The Company can also borrow up to $100 million under the Revolving Facility. Approximately $94.5 million was available under this facility as of January 31, 2020.

As of January 31, 2020, $125.0 million was outstanding on each of the Initial Term Loan and the Delayed Draw Term Loan for a total of $250.0 million. Amounts outstanding under the Credit Facilities bear interest based on a fluctuating rate measured by reference to either, at the Company’s option, a base rate plus an applicable margin ranging between 0.00% and 1.00% or LIBOR plus an applicable margin ranging between 1.00% and 2.00%, with the applicable margin being determined by reference to the Company’s then-current “Total Funded Debt to EBITDA Ratio.” The Company also incurs a quarterly commitment fee on the average daily unused portion of the Revolving Facility during the applicable quarter at a rate per annum also determined by reference to the Company’s then-current “Total Funded Debt to EBITDA Ratio.” As of January 31, 2020, the applicable margin with respect to base rate loans and LIBOR loans was 0.50% and 1.50%, respectively, and the commitment fee was 0.18%.

The Company is required to repay the aggregate outstanding amounts under the Initial Term Loan and the Delayed Draw Term Loan in certain specified quarterly installments that began on April 30, 2018. The Credit Facilities mature on December 29, 2022.

As of January 31, 2020, the Company’s previously issued $350 million in aggregate principal amount of Senior Notes remained outstanding. Interest on the Senior Notes accrues at an annual rate of 4.875% and is payable semi-annually in arrears on March 15 and September 15 of each year. The Senior Notes mature on March 15, 2026.

The Credit Agreement and the indenture governing the Senior Notes restrict the ability of the Company and certain of the Company’s subsidiaries to, among other things, incur additional indebtedness, create additional liens, make certain investments, dispose of assets or engage in a merger or consolidation, engage in certain transactions with affiliates, and make certain restricted payments, including the payment of dividends or the repurchase or redemption of stock, subject, in each case, to the various exceptions and conditions described in the Credit Agreement and the indenture governing the Senior Notes.

See Note L--Loans Payable and Long-Term Debt for additional information about the Credit Facilities and Senior Notes and a discussion of our compliance with the covenants in the Credit Agreement and the indenture.

Cash provided by operating activities in the first nine months of fiscal 2020 was $112.2 million, compared with $138.0 million in the comparable period of fiscal 2019.  The decrease in the Company’s cash from operating activities was driven primarily by a decrease in cash inflows from income taxes and accrued compensation and related expenses.
 
The Company’s investing activities primarily consist of purchases and maturities of certificates of deposit, investment in property, plant and equipment and promotional displays.  Net cash used for investing activities was $30.2 million in the first nine months of fiscal 2020, compared with $31.3 million in the comparable period of fiscal 2019. The decrease in cash used was due to a decrease in cash received from maturities of certificates of deposit, offset by the prior year payment of the working capital adjustment related to the acquisition of RSI.

During the first nine months of fiscal 2020, net cash used by financing activities was $92.6 million, compared with $143.1 million in the comparable period of the prior fiscal year.  The decrease in cash used was primarily driven by the Company’s payments of long-term debt of $91.8 million, a decrease of $8.8 million, and no stock repurchases in the current year, a decrease of $41.0 million.

On August 22, 2019, the Company’s Board of Directors (the “Board”) authorized a stock repurchase program of up to $50 million of the Company’s common shares. Repurchases may be made from time to time in the open market, or through privately negotiated transactions or otherwise, in compliance with applicable laws, rules and regulations, at prices and on terms the Company deems appropriate and subject to the Company's cash requirements for other purposes, compliance with the covenants under the Credit Agreement and the indenture governing the Senior Notes, and other factors management deems relevant. The authorization does not obligate the Company to acquire a specific number of shares during any period, and the authorization may be modified, suspended or discontinued at any time at the discretion of the Board. Management expects to fund any share repurchases using

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available cash and cash generated from operations. Repurchased shares will become authorized but unissued common shares. The Company did not repurchase any of its shares during the fiscal quarter ended January 31, 2020.

Cash flow from operations combined with accumulated cash and cash equivalents on hand are expected to be more than sufficient to support forecasted working capital requirements, service existing debt obligations and fund capital expenditures for the remainder of fiscal 2020.  

Seasonal and Inflationary Factors
 
Our business has been subject to seasonal influences, with higher sales typically realized in our first and fourth fiscal quarters. General economic forces and changes in our customer mix have reduced seasonal fluctuations in revenue over the past few years. The costs of the Company’s products are subject to inflationary pressures and commodity price fluctuations.  The Company has generally been able over time to recover the effects of inflation and commodity price fluctuations through sales price increases.
 
Critical Accounting Policies
 
The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.  There have been no significant changes to the Company’s critical accounting policies as disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2019.

Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
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. 

The Revolving Facility, Initial Term Loan and Delayed Draw Term Loan include a variable interest rate component. As a result, we are subject to interest rate risk with respect to such floating-rate debt. A 100 basis point increase in the variable interest rate component of our borrowings as of January 31, 2020 would increase our annual interest expense by approximately $2.5 million. 

The Company enters into foreign exchange forward contracts principally to offset currency fluctuations in transactions denominated in certain foreign currencies, thereby limiting our exposure to risk that would otherwise result from changes in exchange rates. The periods of the foreign exchange forward contracts correspond to the periods of the transactions denominated in foreign currencies.

The Company does not currently use commodity or interest rate derivatives or similar financial instruments to manage its commodity price or interest rate risks.

Item 4. Controls and Procedures
 
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, 2020.  Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are not effective as of January 31, 2020 due to the material weakness in internal control over financial reporting involving ineffective general information technology controls ("GITCs") related to RSI that was disclosed in Part II, Item 9A of our Annual Report on Form 10-K for the fiscal year ended April 30, 2019 (our "2019 Annual Report").  

During the quarter ended January 31, 2020, we continued to implement our remediation plan described in Part II, Item 9A of our 2019 Annual Report, which includes establishing additional training for certain RSI personnel to ensure a clear understanding of risk assessment and monitoring activities related to automated processes and IT systems and GITCs, documenting and executing robust policies and procedures over the GITC environment with a focus on user and privileged access controls and their impact on program change and computer operation controls, defining and documenting clear roles and responsibilities for certain departments to perform complete and timely user access reviews, and implementing consistent documentation requirements and retention to evidence the operation of GITC access controls. We are committed to maintaining a strong internal control environment and implementing measures designed to help ensure that control deficiencies contributing to the material weakness are remediated as soon as possible. The weakness will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of this material weakness will be completed prior to the end of fiscal 2020.

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Except as described above, there has been no change in the Company's internal control over financial reporting that occurred during the quarter ended January 31, 2020 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 

PART II.  OTHER INFORMATION

Item 1. Legal Proceedings
 
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 Company’s business.  The Company is not party to any material litigation that does not constitute ordinary, routine litigation incidental to its business.

Item 1A. Risk Factors
 
Risk factors that may affect the Company’s business, results of operations and financial condition are described in Part I, Item 1A, “Risk Factors” of the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2019 and there have been no material changes from the risk factors disclosed, except as set forth below.  Additional risks are discussed elsewhere in this report, including in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the headings “Forward-Looking Statements” and “Outlook.”

The Company has reviewed and revised the following risk factor:

We manufacture our products internationally and are exposed to risks associated with doing business globally. We manufacture our products in the United States and Mexico and sell our products in the United States and Canada. Accordingly, we are subject to risks associated with potential disruption caused by changes in political, monetary, economic and social environments, including civil and political unrest, terrorism, possible expropriation, local labor conditions, changes in laws, regulations and policies of foreign governments and trade disputes with the United States (including tariffs), and compliance with U.S. laws affecting activities of U.S. companies abroad, including tax laws, economic sanctions and enforcement of contract and intellectual property rights.

We are also subject to the Foreign Corrupt Practices Act and other anti-bribery laws. While we have implemented safeguards and policies to discourage these practices by our employees and agents, our existing safeguards and policies to assure compliance and any future improvements may prove to be less than effective and our employees or agents may engage in conduct for which we might be held responsible. If employees violate our policies, we may be subject to regulatory sanctions. Violations of these laws or regulations could result in sanctions including fines, debarment from export privileges and penalties and could have a material adverse effect on our business, financial condition or results of operations.

We may hedge certain foreign currency transactions in the future; however, a change in the value of the currencies may impact our financial statements when translated into U.S. dollars. In addition, fluctuations in currency can adversely impact the cost position in local currency of our products, making it more difficult for us to compete. Our success will depend, in part, on our ability to effectively manage our business through the impact of these potential changes.

In addition, we source raw materials and components from Asia where we have recently experienced higher manufacturing costs and longer lead times due to currency fluctuations, higher wage rates, labor shortages and higher raw material costs. Our international operations and sourcing of materials (including from Asia and Mexico) could be harmed by a variety of factors including:

introduction of non-native invasive organisms into new environments;
recessionary trends in international markets;
legal and regulatory changes and the burdens and costs of our compliance with a variety of laws, including export controls, import and customs trade restrictions and tariffs;
increases in transportation costs or transportation delays;
work stoppages and labor strikes;
countries taking steps that disrupt supply chains and worker and customer activity, including closing borders and implementing quarantines, for public health reasons or otherwise, such as the on-going response to coronavirus;
fluctuations in exchange rates, particularly the U.S. dollar relative to other currencies; and
political unrest, terrorism and economic instability.

If any of these or other factors were to render the conduct of our business in a particular country undesirable or impractical, our business, financial condition or results of operations could be materially adversely affected.

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Item 6. Exhibits
 
Exhibit NumberDescription
  
Articles of Incorporation as amended effective August 12, 1987 (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 10-Q for the quarter ended January 31, 2003; Commission File No. 000-14798).
  
Articles of Amendment to the Articles of Incorporation effective September 10, 2004 (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 8-K as filed on August 31, 2004; Commission File No. 000-14798).
  
Bylaws – as amended and restated November 27, 2018 (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 8-K as filed on November 28, 2018; Commission File No. 000-14798).
  
Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a) of the Exchange Act (Filed Herewith).
  
Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a) of the Exchange Act (Filed Herewith).


Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Furnished Herewith).
  
101Interactive Data File for the Registrant’s Quarterly Report on Form 10-Q for the quarter ended January 31, 2020 formatted in Inline XBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Income, (iii) Condensed Consolidated Statements of Comprehensive Income, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements (Filed Herewith).
  
104Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101).



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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.
 
AMERICAN WOODMARK CORPORATION
(Registrant)
 
 /s/ M. Scott Culbreth
 M. Scott Culbreth
 Senior Vice President and Chief Financial Officer 
  
 Date: February 26, 2020
 Signing on behalf of the registrant and
 as principal financial and accounting officer
  

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