EX-13 10 dex13.htm EXHIBIT 13 Prepared by R.R. Donnelley Financial -- Exhibit 13
Table of Contents
LOGO
 

Table of Contents
 
LOGO
 
TABLE OF CONTENTS
 

Table of Contents
 
LOGO
 
M i s s i o n  S t a t e m e n t
 
CREATING VALUE
 
T h r o u g h  P e o p l e
 
WHO WE ARE
 
American Woodmark is an organization of employees and shareholders who have combined their resources to pursue a common goal.
 
WHAT WE DO
 
Our common goal is to create value by providing kitchens and baths “of pride” for the American family.
 
WHY WE DO IT
 
We pursue this goal to earn a profit, which allows us to reward our shareholders and employees and to make a contribution to our society.
 
HOW WE DO IT
 
Four principles guide our actions:
 
CUSTOMER SATISFACTION    Providing the best possible quality, service and value to the greatest number of people. Doing whatever is reasonable, and sometimes unreasonable, to make certain that each customer’s needs are met each and every day.
 
INTEGRITY    Doing what is right. Caring about the dignity and rights of each individual. Acting fairly and responsibly with all parties. Being a good citizen in the communities in which we operate.
 
TEAMWORK    Understanding that we must all work together if we are to be successful. Realizing that each individual must contribute to the team to remain a member of the team.
 
EXCELLENCE    Striving to perform every job or action in a superior way. Being innovative, seeking new and better ways to get things done. Helping all individuals to become the best that they can be in their jobs and careers.
 
ONCE WE’VE DONE IT
 
When we achieve our goal good things happen: sales increase, profits are made, shareholders and employees are rewarded, jobs are created, our communities benefit, we have fun, and our customers are happy and proud—with a new kitchen or bath from American Woodmark.

2002 Annual Shareholders Report  1

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COMPANY PROFILE
 
American Woodmark Corporation manufactures and distributes kitchen cabinets and vanities for the remodeling and new home construction markets. The Company operates thirteen manufacturing facilities located in Arizona, Georgia, Indiana, Kentucky, Minnesota, Oklahoma, Tennessee, Virginia, and West Virginia and eight service centers across the country.
 
American Woodmark Corporation was formed in 1980 and became a public company through a Common Stock offering in July, 1986.
 
The Company offers approximately 150 cabinet lines in a wide variety of designs, materials and finishes. Products are sold across the United States through a network of independent distributors and directly to home centers and major builders. Approximately 65% of sales during fiscal year 2002 were to the remodeling market and 35% to the new home market.
 
The Company believes it is one of the three largest manufacturers of kitchen cabinets in the United States.
 
MARKET INFORMATION
 
American Woodmark Corporation Common Stock, no par value, is quoted on The Nasdaq Stock Market under the “AMWD” symbol. Common Stock per share market prices and cash dividends declared during the last two fiscal years were as follows:
 
    
Market Price
   
Dividends
Declared
    
High
   
Low
   
    
(in dollars)
Fiscal 2002
                     
First quarter
   
$
48.85
   
$
25.68
   
$
.05
Second quarter
   
 
52.00
   
 
26.18
   
 
.05
Third quarter
   
 
64.00
   
 
34.00
   
 
.05
Fourth quarter
   
 
73.25
   
 
55.95
   
 
.05
Fiscal 2001
                     
First quarter
   
$
22.25
   
$
16.81
   
$
.05
Second quarter
   
 
24.88
   
 
17.50
   
 
.05
Third quarter
   
 
21.25
   
 
14.50
   
 
.05
Fourth quarter
   
 
27.59
   
 
18.19
   
 
.05
 
As of April 30, 2002, there were approximately 7,050 shareholders of the Company’s Common Stock. Included are approximately 84% of the Company’s employees, who are shareholders through the American Woodmark Stock Ownership Plan.
 
FINANCIAL HIGHLIGHTS
 
    
Fiscal Years Ended April 30
  
    
2002
     
2001
     
2000
  
    
(in thousands, except share data)
  
Operations
                           
Net sales
   
$
499,046
 
   
$
404,134
 
   
$
367,956
 
Operating income
   
 
53,724
 
   
 
32,365
 
   
 
24,661
 
Income before income taxes and cumulative effect of accounting changes
   
 
53,115
 
   
 
30,774
 
   
 
24,555
 
Net income
   
 
32,155
 
   
 
17,420
 
   
 
14,467
 
Earnings per share
                           
Before cumulative effect of change in accounting principle
                           
Basic
   
$
3.93
 
   
$
2.36
 
   
$
1.82
 
Diluted
   
 
3.81
 
   
 
2.34
 
   
 
1.79
 
After cumulative effect of change in accounting principle
                           
Basic
   
 
3.93
 
   
 
2.16
 
   
 
1.82
 
Diluted
   
 
3.81
 
   
 
2.14
 
   
 
1.79
 
Average shares outstanding
                           
Basic
   
 
8,173
 
   
 
8,057
 
   
 
7,960
 
Diluted
   
 
8,436
 
   
 
8,144
 
   
 
8,095
 
Financial Position
                           
Working capital
   
$
26,114
 
   
$
22,660
 
   
$
22,051
 
Total assets
   
 
234,222
 
   
 
180,368
 
   
 
166,656
 
Long-term debt
   
 
14,398
 
   
 
16,819
 
   
 
22,009
 
Shareholders’ equity
   
 
145,169
 
   
 
109,513
 
   
 
92,612
 
Long-term debt to equity ratio
   
 
10
%
   
 
15
%
   
 
24
%
 

2  American Woodmark Corporation

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LOGO
James J. Gosa, President and Chief Executive Officer
 
TO OUR SHAREHOLDERS
 
We began fiscal 2002 with high hopes, having finished fiscal 2001 with a record fourth quarter and the launching of our 2007 Vision. I am extremely pleased to report that during the year we built on this momentum and were able to combine truly superior results with an aggressive investment in our future.
 
At the beginning of the fiscal year last May, all indications were that the economy was recovering from a difficult time in which many industries suffered from the first downturn in several years. In some ways, our optimism was premature. The well-documented crash of the “dot.com” bubble was followed by unfortunate problems in other industries, most notably the telecommunications and energy industries. By the end of the summer, unprecedented events both at home and abroad challenged many of our long-standing assumptions about the world.
 
Throughout the year, however, American Woodmark performed in spectacular fashion. Our industry remained solid with both new construction and remodeling activity at strong levels. While our strategic partners faced a challenging environment, they too were able to generate growth and realized higher sales. The health of our industry and the success of our customers allowed us to take advantage of the value offered by our expanding line of products and services. We achieved record sales in each of the four fiscal quarters with year over year growth of 16%, 25%, 29%, and 25% in the first through fourth quarters, respectively. For the full fiscal year, net sales increased 23.5% to a record $499.0 million from $404.1 million the previous year.
 
Our success in generating demand placed great pressure on our manufacturing operations as we added capacity as quickly as possible without sacrificing our commitment to quality and customer service. We continued throughout the year with our aggressive capital expansion program, spending almost $40 million to construct two new facilities and to expand several of our existing operations. Over the past four years, we have invested almost $120 million in new capacity. With the completion of our two newest plants in June 2002, our capacity will have doubled in the four years since fiscal 1998. Despite these heavy investments in new property, plant and equipment, gross margins improved almost four points from 22.0% in fiscal 2001 to 25.8% in fiscal 2002.
 
Net income increased 85% to a record $32.2 million from $17.4 million the prior year. We achieved record net income in each of the four fiscal quarters. Earnings per diluted share for the fiscal year were $3.81. During the fourth quarter, earnings per share reached $1.07, topping the $1.00 milestone for the first time in the history of the Company.
 
During the year, we improved our already strong financial position. Cash flow was extremely robust during the year as the Company reduced debt while supporting almost $100 million in incremental sales in addition to our extensive capital spending program. Total debt outstanding at the end of the fiscal year was $17.6 million or less than 11% of total capital. Including cash on-hand of $13.1 million, net debt was $4.5 million versus over $145 million in book

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LOGO
 
equity. The ability to fund our growth from cash flow highlights our financial strength and provides us with many options as we pursue the 2007 Vision.
 
I am pleased to report that the investment community continues to take notice of our performance and to reward our shareholders for the increasing value of the Company. Our share price rose substantially during the year, reaching $70.00 during the fourth fiscal quarter. Over the past three years, the compound annual rate of return to our shareholders has been almost 20%. Over the same period, the return on the Russell 2000 Index was slightly under 5%.
 
As successful as we were in fiscal 2002, our commitment to continuous improvement is driving us towards even greater achievements. Our goal remains to firmly establish our Company as the biggest, the best and the most profitable cabinet company in North America. During the year, we initiated several new programs to expand our product line, improve our merchandising and brand management, enhance our service platform and develop and implement new technologies. Most importantly, we made significant progress in providing our employees with new skills across a variety of disciplines through orientation programs, specific skills training, supervisory training and management development. We believe our continuing investment in employee training provides a competitive advantage over time.
 
As we close the first of six years in our 2007 Vision, we remain more excited than ever about the future prospects for American Woodmark. Our industry remains strong with many competitors challenging us to improve each and every day. We have developed powerful partnerships with the top customers in our strategic channels challenging us to perform at higher levels day in and day out. We are an organization of men and women, working in teams, challenging each other to continue to raise the bar on our own expectations.
 
In 1985, long before they were widely adopted by many companies, we published our Mission Statement. This Statement has guided our actions for seventeen years based on the principles of customer satisfaction, integrity, teamwork and excellence. As we have all watched the high-profile scandals and accounting irregularities that have rocked some corporations over the past year, we reflect with pride on our Mission Statement. We take our obligations to employees, shareholders, vendors, and customers quite seriously and constantly strive to do what is right.
 
I am extremely proud of all the men and women at American Woodmark who contributed to our superior performance during fiscal 2002. I am especially proud because they are a team of individuals that have come together to build a company the right way. We are committed to our Mission Statement, acting with integrity, and Creating Value Through People. We are working to build a great Company.
 
I look forward to reporting our progress towards our Vision during fiscal 2003. Thank you for your continuing support of American Woodmark.
 
LOGO
James J. Gosa
President and Chief Executive Officer

4  American Woodmark Corporation

Table of Contents
 
FIVE-YEAR SELECTED FINANCIAL INFORMATION
 
    
Fiscal Years Ended April 30
  
    
2002
     
2001
     
2000
     
1999
     
1998
  
    
(in millions, except share data)
  
Financial Statement Data
                                             
Net sales(1)
   
$
499.0
 
   
$
404.1
 
   
$
368.0
 
   
$
312.7
 
   
$
231.4
 
Income before income taxes and cumulative effect of accounting changes(2)
   
 
53.1
 
   
 
30.8
 
   
 
24.6
 
   
 
28.5
 
   
 
21.3
 
Net income
   
 
32.2
 
   
 
17.4
 
   
 
14.5
 
   
 
17.5
 
   
 
13.0
 
Earnings per share
                                             
Before cumulative effect of change in accounting principle
                                             
Basic
   
 
3.93
 
   
 
2.36
 
   
 
1.82
 
   
 
2.23
 
   
 
1.68
 
Diluted
   
 
3.81
 
   
 
2.34
 
   
 
1.79
 
   
 
2.18
 
   
 
1.65
 
After cumulative effect of change in accounting principle
                                             
Basic
   
 
3.93
 
   
 
2.16
 
   
 
1.82
 
   
 
2.23
 
   
 
1.68
 
Diluted
   
 
3.81
 
   
 
2.14
 
   
 
1.79
 
   
 
2.18
 
   
 
1.65
 
Depreciation and amortization expense
   
 
23.8
 
   
 
19.6
 
   
 
14.7
 
   
 
9.7
 
   
 
7.8
 
Total assets
   
 
234.2
 
   
 
180.4
 
   
 
166.7
 
   
 
140.6
 
   
 
106.5
 
Long-term debt
   
 
14.4
 
   
 
16.8
 
   
 
22.0
 
   
 
11.4
 
   
 
8.7
 
Shareholders’ equity
   
 
145.2
 
   
 
109.5
 
   
 
92.6
 
   
 
78.3
 
   
 
59.1
 
Cash dividends declared per share
   
 
.20
 
   
 
.20
 
   
 
.19
 
   
 
.15
 
   
 
.11
 
Average shares outstanding
                                             
Basic
   
 
8.2
 
   
 
8.1
 
   
 
8.0
 
   
 
7.9
 
   
 
7.8
 
Diluted
   
 
8.4
 
   
 
8.1
 
   
 
8.1
 
   
 
8.0
 
   
 
7.9
 
Percent of Sales
                                             
Gross profit
   
 
25.8
%
   
 
22.0
%
   
 
21.4
%
   
 
24.7
%
   
 
26.7
%
Sales, general and administrative expenses
   
 
15.0
 
   
 
14.0
 
   
 
14.3
 
   
 
15.8
 
   
 
17.5
 
Income before income taxes and cumulative effect of accounting change
   
 
10.6
 
   
 
7.6
 
   
 
6.7
 
   
 
9.1
 
   
 
9.2
 
Net income
   
 
6.4
 
   
 
4.3
 
   
 
3.9
 
   
 
5.6
 
   
 
5.6
 
Ratio Analysis
                                             
Current ratio
   
 
1.4
 
   
 
1.5
 
   
 
1.5
 
   
 
1.7
 
   
 
1.9
 
Inventory turnover(3)
   
 
11.4
 
   
 
11.7
 
   
 
14.0
 
   
 
15.6
 
   
 
15.1
 
Percentage of capital (long-term debt plus equity):
                                             
Long-term debt
   
 
9.0
%
   
 
13.3
%
   
 
19.2
%
   
 
12.7
%
   
 
12.8
%
Equity
   
 
91.0
 
   
 
86.7
 
   
 
80.8
 
   
 
87.3
 
   
 
87.2
 
Return on equity (average%)
   
 
25.3
 
   
 
17.7
 
   
 
16.9
 
   
 
25.5
 
   
 
24.7
 
Collection period—days(4)
   
 
31.8
 
   
 
34.6
 
   
 
37.9
 
   
 
39.4
 
   
 
37.2
 
(1)
 
Prior year amounts have been reclassified to conform to the current-year presentation under EITF 01-9, “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products.” This Issue is a codification of all the issues in both EITF Issue 00-14, “Accounting for Certain Sales Incentives,” and EITF Issue 00-25, “Vendor Income Statement Characterization of Consideration to a Purchaser of the Vendor’s Products or Services.”
(2)
 
Effective May 1, 2000, the Company changed its accounting for revenue recognition in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (“SAB 101”). The cumulative effect of the change on retained earnings as of the beginning of fiscal year 2001 resulted in a charge to fiscal year 2001 income of $1.6 million.
(3)
 
Based on average of beginning and ending inventory.
(4)
 
Based on ratio of monthly average customer receivables to average sales per day.

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FINANCIAL REVIEW
 
2002
 
MANAGEMENT’S DISCUSSION AND ANALYSIS
 
Results of Operations
 
The following table sets forth certain income and expense items as a percentage of net sales.
 
    
Percentage of Net Sales
Years Ended April 30
  
    
2002
     
2001
     
2000
  
Net sales
   
100.0
%
   
100.0
%
   
100.0
%
Cost of sales and distribution
   
74.2
 
   
78.0
 
   
78.6
 
Gross profit
   
25.8
 
   
22.0
 
   
21.4
 
Selling and marketing expenses
   
10.1
 
   
10.2
 
   
10.1
 
General and administrative expenses
   
4.9
 
   
3.8
 
   
4.2
 
Restructuring costs
   
—  
 
   
—  
 
   
0.4
 
Operating income
   
10.8
 
   
8.0
 
   
6.7
 
Interest expense
   
0.1
 
   
0.4
 
   
0.1
 
Income before income taxes
   
10.6
 
   
7.6
 
   
6.7
 
Provision for income taxes
   
4.2
 
   
2.9
 
   
2.7
 
Net income
   
6.4
 
   
4.3
 
   
3.9
 

6  American Woodmark Corporation

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Fiscal Year 2002 Compared to Fiscal Year 2001
 
Net sales for fiscal 2002 increased 23.5% to $499.0 million from $404.1 million in fiscal 2001. Improved sales were primarily the result of new product introductions and growth in shipments to both the remodel and new home construction markets. In fiscal 2002, the average selling price per unit increased 1.4% as the Company realized improved product mix.
 
Unit volume increased 21.7% over prior year as the Company gained market share. Unit growth in the Home Center channel was driven by an expanded product offering, new programs, and the continued expansion of exclusive branding. Unit shipments to direct builders increased due primarily to strong new construction rates in key markets served by the Company. Unit shipments through distributors declined year over year due to economic weakness in areas serviced by key customers.
 
Gross Profit in fiscal 2002 increased to 25.8% from 22.0% in fiscal 2001. The increase in gross profit was a result of positive leverage gained through improved product mix, additional volume, lower freight costs, lower material costs and higher fixed overhead utilization.
 
Material cost per unit decreased 3.5% from the prior year as declining raw material costs more than offset a shift towards more material-intensive products.
 
Labor costs per unit in fiscal 2002 increased 0.4% over the prior fiscal year. Increases in the number of employees and rate increases were offset by higher productivity. Health care costs increased due to a larger number of eligible employees and from pricing pressures in the health care industry.
 
Overhead costs decreased 2.7% on a per unit basis as higher volumes absorbed increases in depreciation, supplies, utilities and waste removal.
 
Freight costs decreased 9.7% on a per unit basis. This decrease was the result of higher capacity utilization related to volume, decreases in diesel fuel cost year over year and improved performance within the Company’s third-party carrier network.
 
Selling and marketing expenses decreased as a percent of sales in fiscal 2002 to 10.1%, as compared to 10.2% in fiscal 2001. The decrease was the result of positive leverage gained in overhead and advertising expenses which were partially offset by additional expense related to promotional activity.
 
General and Administrative Expenses for fiscal year 2002 as a percent of sales were 4.9%, up from 3.8% in fiscal 2001. The increase was primarily due to higher costs associated with the Company’s performance-driven incentive bonus plans.
 
Net Interest Expense decreased $933,000 in fiscal 2002 as compared to fiscal 2001. The decrease was due to an increase in capitalized interest, lower average borrowings, and lower average interest rates.
 
Other Expense decreased $49,000 for fiscal 2002 as compared to fiscal 2001. The decrease was due to higher cash balances resulting in increased income from the Company’s short-term investments.
 
The Company’s combined federal and state tax rate in fiscal 2002 was 39.5%, an increase from 38.3% in fiscal 2001. The difference was due to increased state income taxes as a result of the mix of sales, payroll, and capital investments among various states in which the Company does business.
 
Liquidity and Capital Resources
 
The Company’s operating activities generated $53.5 million in net cash during fiscal 2002 as compared to $21.5 million in the prior year. Cash generated from operations was up $32.0 million year over year. The Company realized this positive position due to increases in net income, the provision for depreciation and amortization, accounts payable and accrued compensation and related expenses. These items more than offset a reduction in deferred income taxes, other non-cash items and increases in accounts receivable and other assets.
 
The increase in the provision for depreciation and amortization was a result of the Company’s capital spending program. Customer receivables increased year over year due to higher sales, which were partially offset by improved collection performance. Accounts payable increases were due to the normal timing in processing invoices. The Company has made no changes to payment practices. Accrued liabilities increased due to amounts

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due under the Company’s performance-based employee incentive compensation programs. The reduction in deferred income taxes was principally due to timing differences related to accounts receivable and employee benefits. Other assets increased due to promotional display additions related to the Company’s growth within the home center channel.
 
Capital spending increased $22.4 million as the Company pursued an aggressive expansion policy in light of continued growth. During fiscal 2002, the Company began investment in new facilities in Tahlequah, Oklahoma, and Hazard, Kentucky, to increase assembly and dimension capacity, respectively. Additionally, capital investments were made at existing facilities to increase component and finishing capacity in Monticello, Kentucky; Kingman, Arizona; and Gas City, Indiana. Finally, the Company made strategic capital investments at its Toccoa, Georgia, flatstock facility to improve efficiencies. The Company expects that continued sales growth will require continued investments in plant, property and equipment. Capital expenditures in fiscal 2003 are expected to be between $25 and $30 million.
 
The Company decreased long-term debt by $1.8 million due to scheduled repayments.
 
The timing of the Company’s Contractual Obligations and Other Commercial Commitments are summarized in the following table. For more information, see Notes E and I in the Notes to Consolidated Financial Statements.
 
    
Total Amounts
   
Fiscal Years Ending April 30
       
2003
   
2004-2007
   
2008 and Thereafter
    
(in thousands)
Term Credit Facility
   
$
10,000
   
$
—  
   
$
10,000
   
$
  
Term Loans
   
 
1,732
   
 
111
   
 
956
   
 
665
Industrial Revenue
                            
        Bonds
   
 
2,500
   
 
2,500
   
 
—  
   
 
—  
Operating Lease
   
 
6,648
   
 
2,488
   
 
4,126
   
 
34
Capital Lease Obligations
   
 
3,384
   
 
607
   
 
2,777
   
 
—  
    
  
  
  
Total
   
$
24,264
   
$
5,706
   
$
17,859
   
$
699
    
  
  
  
 
The Company received cash flow of $4.7 million from Common Stock issued under the Company’s stock option plans.
 
The Company repurchased $3.5 million in Common Stock during fiscal 2002, compared to $0.5 million in fiscal 2001. This follows the announcement in January 2001 by the Board of Directors of the authorization to use up to $10.0 million for such repurchases.
 
Cash dividends of $1.6 million were paid on Common Stock during fiscal 2002.
 
Cash flow from operations combined with accumulated cash on hand and available borrowing capacity is expected to be sufficient to meet forecasted capital requirements, payments of accrued compensation, service existing debt obligations and fund capital expenditures for fiscal 2003.
 
Fiscal Year 2001 Compared to Fiscal Year 2000
 
Net sales for fiscal 2001 increased 9.8% to $404.1 million from $368.0 million in fiscal 2000. Improved sales were primarily the result of new product introductions and continued growth in all primary channels of distribution. In fiscal 2001, the average price per unit increased 9.9% over fiscal 2000. This increase was the result of a combination of improved product and channel mix, and price increases implemented during the third quarter of fiscal 2000.
 
Overall unit volume was even with prior year as the impact of exiting the OEM business during fiscal 2000 was offset by growth in the Company’s strategic channels of distribution. Within the home center channel, growth was driven by an increased product offering, new programs, and the expansion of exclusive branding. Unit shipments to direct builders improved due to the combination of increased activity in the Company’s traditional markets and the start-up of new markets. Unit shipments to distributors improved due to the combination of increased volume with existing customers and agreements with new customers.

8  American Woodmark Corporation

Table of Contents
 
Gross profit in fiscal 2001 increased to 22.0% from 21.4% in fiscal 2000. The increase in gross profit was the result of leverage as higher costs per unit for material, labor, overhead and freight were more than offset by improvements in the channel and product mix and the price increase implemented during the third quarter of fiscal 2000.
 
Material cost per unit increased 5.3% from prior year due to a shift towards more material-intensive products.
 
Labor costs per unit in fiscal 2001 increased 8.8% over the prior fiscal year. Cost increases were the result of excess labor costs, especially during the second fiscal quarter, as actual volume was less than anticipated. The over crewing in certain facilities, based on the actual versus expected volume, effectively decreased productivity. In addition, overall labor costs increased on a per unit basis as the newer plants produced a greater percentage of the overall volume. The newer facilities are not yet as efficient as the established facilities. Health care costs increased in fiscal 2001 due to an increase in the number of eligible employees.
 
Overhead costs increased 11.2% on a per unit basis primarily due to increased depreciation expense on capacity added during fiscal 2000.
 
Freight cost per unit increased 21.3% over prior year due to higher standard delivery rates from third-party carriers and increased cost for diesel fuel, which is passed on to the Company by its carriers in the form of a surcharge.
 
Selling and marketing expenses as a percent of net sales for fiscal 2001 were 10.2%, up from 10.1% in fiscal 2000. The primary components of the increase were costs associated with promotional expenses related to product merchandising programs and increases in staffing to support growth.
 
General and administrative expenses for fiscal 2001 as a percent of sales were 3.8%, down from 4.2% in fiscal 2000. The decrease was primarily attributable to lower management information systems costs as the Company converted to a lower cost computing platform.
 
Net interest expense for fiscal 2001 increased $969,000 from the prior year to $1,439,000. The increase was due to higher average borrowings throughout the year.
 
Other income decreased $516,000 from income of $364,000 in fiscal 2000 to expense of $152,000 in fiscal 2001. The decrease was due to certain educational credits received in the prior year from economic development agencies and to miscellaneous expenses.
 
The Company’s combined federal and state effective tax rate in fiscal 2001 was 38.3%, a decrease from 41.1% in fiscal 2000. The decrease was due primarily to the write-off of non-deductible goodwill in the prior year.
 
Forward Looking Statements
 
All forward looking statements made by the Company involve material risks and uncertainties and are subject to change based on factors that may be beyond the Company’s control. Accordingly, the Company’s future performance and financial results may differ materially from those expressed or implied in any such forward looking statements. Such factors include, but are not limited to, those described in the Risk Factors section of Management’s Discussion and Analysis. The Company does not undertake to publicly update or revise its forward looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.
 
Outlook for Fiscal 2003
 
The Company believes there remains significant uncertainty in the economy with respect to the strength and duration of the present recovery. The Company follows several indices, including housing starts, existing home sales, interest rates and consumer confidence, that it believes are leading indicators of overall demand for kitchen and bath cabinetry. These indicators currently suggest to the Company that demand in the industry will grow during the period covered by the Company’s fiscal year ending April 30, 2003.
 
The Company expects to increase sales in fiscal 2003 versus fiscal 2002 based on three factors. First, as one of the largest manufacturers in the industry with a broad distribution base, the Company expects to participate in the overall growth of the industry. Second, the Company expects to gain share in the general market due to strategic partnerships with home centers, builders and distributors that are gaining share versus other distribution outlets. Finally, the Company expects to gain share with customers

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due to the value of the products and services in the Company’s broad offerings.
 
Assuming the Company is successful in generating increased sales, the Company expects to generate higher net income in fiscal 2003 versus fiscal 2002. The Company expects to benefit from additional margin on incremental sales, improved product mix, leverage on fixed and semi-fixed costs with additional unit volume, and improved productivity in existing facilities. Expected benefits will be partially offset by start-up expenses at the new facilities in Kentucky and Oklahoma, costs associated with a major expansion at the Arizona facility, and higher health care expenses due to overall cost pressures in the medical industry. The Company currently expects the benefits of higher sales to offset general cost increases.
 
The Company would be negatively impacted by reduced market demand as the result of lower overall remodeling or new construction activity. While the Company would expect to perform better than the industry on average during a downturn in demand, the combined effects of lower sales and underutilized capacity could result in decreased profitability in fiscal 2003 versus 2002.
 
During fiscal 2002, the Company benefited from reduced material costs. The Company believes that lower material costs were the result of depressed demand in other industries, primarily home furnishings and furniture, that compete for the same raw materials. The Company expects the raw material markets to remain relatively stable during fiscal 2003. While the Company believes that it is extremely efficient as compared to the industry in the use of materials, a sudden and significant rise in raw material costs would negatively impact profitability during fiscal 2003. The Company does not believe that increases in raw material costs would negatively impact performance over time due to the availability of substitute materials and the historical ability for the industry to recover market-driven increases in raw materials through pricing.
 
Over the past three years, the Company has significantly expanded overall manufacturing capacity through an aggressive capital spending program. In order to support the growth in demand for products and services, the Company has invested approximately $98 million in property, plant and equipment over the last three fiscal years. Long-term projected growth will continue to require the Company to invest in additional capacity. The Company expects new spending on property, plant and equipment during fiscal 2003 to be slightly less than the average investment during the last three fiscal years. Projects for the fiscal year include the completion of the new lumber processing facility in Hazard, Kentucky, the completion of the new assembly facility in Tahlequah, Oklahoma, the completion of the expansion of the Kingman, Arizona assembly plant and new production equipment in the Monticello, Kentucky lumber processing facility and the Gas City, Indiana assembly plant. The Company believes that it has sufficient financial resources to support the capital spending program without a significant impact on the current financial position. Management is prepared to adjust the capital spending program to maintain the financial strength of the Company.
 
The aforementioned forward-looking statements should be read in combination with information presented in the Risk Factors section of Management’s Discussion and Analysis.
 
Risk Factors
 
The Company’s business has historically been subjected to seasonal influences, with higher sales typically realized in the second and fourth fiscal quarters.
 
The costs of the Company’s products are subject to inflationary pressures and commodity price fluctuations. Inflationary pressure and commodity price increases have been relatively modest over the past five years. The Company has generally been able, over time, to recover the effects of inflation and commodity price fluctuations through sales price increases.
 
On April 30, 2002, the Company had no material exposure to changes in interest rates for its debt agreements. All significant borrowings of the Company carry a fixed interest rate between 5% and 6%.
 
We participate in an industry that is subject to rapidly changing conditions. Forward-looking statements, contained in this Management’s Discussion and Analysis, are

10  American Woodmark Corporation

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based on current expectations, but there are numerous factors that could cause the Company to experience a decline in sales and/or earnings. These include (1) overall industry demand at reduced levels, (2) economic weakness in a specific channel of distribution, especially the home center industry, (3) the loss of sales from specific customers due to their loss of market share, bankruptcy or switching to a competitor, (4) a sudden and significant rise in basic raw material costs, (5) a dramatic increase to the cost of diesel fuel, and/or transportation-related services, (6) the need to respond to price or product initiatives launched by a competitor, and (7) sales growth at a rate that outpaces the Company’s ability to install new capacity. While the Company believes that these risks are manageable and will not adversely impact the long-term performance of the Company, these risks could, under certain circumstances, have a materially adverse impact on operating results.
 
Critical Accounting Policies
 
On December 12, 2001, the Securities and Exchange Commission (SEC) issued a financial reporting release, “Cautionary Advice Regarding Disclosure about Critical Accounting Policies” (“FR-60”). The SEC alerted public companies to the need for improved disclosures about critical accounting policies. FR-60 defines “critical accounting policies” as those most important to the financial statement presentation and that require the most difficult, subjective, complex judgments. The SEC announced an expectation that public companies would provide disclosures responsive to FR-60, including disclosures in Management’s Discussion and Analysis, in annual reports for fiscal years ending on or after December 31, 2001.
 
The significant accounting policies of the Company are disclosed in Note A to the Consolidated Financial Statements. The following discussion addresses the accounting policies that are the most important to the portrayal of the financial condition of the Company for the period being reported and that require judgment.
 
Revenue Recognition.    Effective May 1, 2000, the Company changed its revenue accounting for revenue recognition in accordance with Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (“SAB 101”). Prior to the adoption of SAB 101, the Company recognized revenue on the date shipments were transferred to third-party carriers for delivery to the customer. After the change, the Company recognizes revenue upon delivery to the customer. The Company’s network of third-party carriers does not currently have the technology to provide detailed information regarding the delivery date for all orders. As a result, the Company must estimate the amount of sales that have been transferred to third-party carriers but not delivered to customers. Due to the nature of the Company’s business, the impact from this estimate is limited to fiscal quarters as any shipments deemed to be in transit at the end of a reporting period are delivered to the customer within the first two weeks of the next period. Management believes that likely changes in the estimate are immaterial to the overall results of the fiscal year.
 
The Company recognizes revenue based on the invoice price less allowances for sales returns, cash discounts, and other deductions as required under current generally accepted accounting standards. Allowances for sales returns are based on the historical relationship between shipments and returns. The Company believes that historical experience is an accurate reflection of future returns.
 
Self-Insurance.    The Company is self-insured for certain costs related to employee medical coverage and workers’ compensation liability. The Company maintains stop loss coverage with third-party insurers to limit total exposure. The Company establishes a liability at the balance sheet date based on estimates for a variety of factors that influence the Company’s ultimate cost. In the event that actual experience is substantially different from the estimates, the financial results for the period could be impacted. The Company believes that the methodologies used to estimate all factors related to employee medical coverage and workers’ compensation are an accurate reflection of the liability as of the date of the balance sheet.

2002 Annual Shareholders Report  11

Table of Contents
 
Promotional Displays.    The Company invests in product displays in order to promote the sale of its products and services. The investment is carried at cost less applicable amortization. Amortization is provided by the straight-line method on an individual display basis over the estimated period of economic benefit, approximately 30 months. The estimated period of economic benefit is based on historical experience. The Company believes that the estimated period of economic benefit provides an accurate reflection of the value of displays as of the date of the balance sheet.
 
On May 10, 2002, the SEC published a proposed rule, “Disclosure in Management’s Discussion and Analysis about the Application of Critical Accounting Policies.” The proposed rule, if adopted, would require public companies to provide extensive disclosure in Management’s Discussion and Analysis about their most sensitive and subjective accounting estimates. Companies would also be required to provide disclosure about the initial adoption of accounting policies with a material impact. Under the proposed rule, a “critical accounting estimate” must be disclosed if (1) the accounting estimate required the registrant to make assumptions about matters that are highly uncertain at the time the accounting estimate was made; and (2) different estimates that reasonably could have been used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period-to-period, would have a material impact on the financial statements. The Company is unable to predict if and when the proposed rule will be adopted and what, if any, impact the proposed rule will have on the Company’s disclosure requirements.
 
Recent Accounting Pronouncements
 
In November 2001, the Financial Accounting Standards Board’s Emerging Issues Task Force (EITF) reached a consensus on Issue No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products.” The Company was required to adopt EITF 01-9 in fiscal 2002. EITF 01-9 requires that certain payments to its customers be classified as a reduction of revenue or an increase to cost of goods sold. Certain amounts previously classified by the Company as selling and marketing expenses have been reclassified to net sales and cost of goods sold for all periods presented.
 
The Company was required to adopt SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” as amended by SFAS No. 138, “Accounting for Derivative Instruments and Certain Hedging Activities” in the first quarter of fiscal 2002. The new standards establish accounting and reporting requirements for derivative instruments and hedging activities. The statement requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. By adoption of SFAS No. 133 and as a result of the use of interest rate swaps, the Company has recognized a $281,000 loss in accumulated other comprehensive income, net of tax, during the fiscal year. The adoption of SFAS No. 133 did not have a material impact on the Company’s financial position or results of operations. The market risk associated with the Company’s interest rate swap is immaterial.
 
Legal Matters
 
The Company is involved in various suits and claims in the normal course of business, which include claims against the Company pending before the Equal Employment Opportunity Commission. Although management believes that such suits and EEOC claims are without merit and intends to vigorously contest them, the ultimate outcome of these matters cannot be determined at this time. In the opinion of management, after consultation with counsel, the ultimate liabilities and losses, if any, that may result from suits and claims involving the Company will not have any material adverse effect on the Company’s operating results or financial position.
 
Dividends Declared
 
On May 30, 2002, the Board of Directors approved a $.05 per share cash dividend on its Common Stock. The cash dividend was paid on July 1, 2002, to shareholders of record on June 17, 2002.

12  American Woodmark Corporation

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QUARTERLY RESULTS OF OPERATIONS (Unaudited)
 
    
Previously
Reported
07/31/01
   
(a)
Restated
07/31/01
   
Previously
Reported
10/31/01
   
(a)
Restated
10/31/01
   
Previously
Reported
01/31/02
   
(a)
Restated
01/31/02
   
04/30/02
    
(in thousands, except share amounts)
FY 2002
                                                 
Net Sales
   
$
121,262
   
$
117,161
   
$
129,777
   
$
125,760
   
$
128,254
   
$
123,705
   
$
132,419
Gross Profit
   
 
35,265
   
 
30,294
   
 
36,827
   
 
31,407
   
 
37,714
   
 
31,857
   
 
35,119
Income before income taxes
   
 
12,173
   
 
12,173
   
 
13,162
   
 
13,162
   
 
12,676
   
 
12,676
   
 
15,102
Net income before cumulative effect
                                                 
    of change in accounting principle
   
 
7,385
   
 
7,385
   
 
7,963
   
 
7,963
   
 
7,669
   
 
7,669
   
 
9,137
Cumulative effect of change in
                                                 
    accounting principle
                                                 
Net income
   
$
7,385
   
$
7,385
   
$
7,963
   
$
7,963
   
$
7,669
   
$
7,669
   
$
9,137
Earnings per share:
                                                 
Net income before cumulative effect
                                                 
    of change in accounting principle
                                                 
        Basic
   
$
0.91
   
$
0.91
   
$
0.98
   
$
0.98
   
$
0.94
   
$
0.94
   
$
1.11
        Diluted
   
 
0.89
   
 
0.88
   
 
0.95
   
 
0.95
   
 
0.91
   
 
0.91
   
 
1.07
Cumulative effect of change in
                                                 
    accounting principle
   
 
—  
   
 
—  
   
 
—  
   
 
—  
   
 
—  
   
 
—  
   
 
—  
        Basic
   
$
0.91
   
$
0.91
   
$
0.98
   
$
0.98
   
$
0.94
   
$
0.94
   
$
1.11
        Diluted
   
 
0.89
   
 
0.88
   
 
0.95
   
 
0.95
   
 
0.91
   
 
0.91
   
 
1.07
 
   
Previously
Reported 07/31/00
     
(a)
Restated 07/31/00
     
Previously
Reported 10/31/00
   
(a)
Restated 10/31/00
   
Previously
Reported 01/31/01
   
(a)
Restated 01/31/01
   
Previously
Reported 04/30/01
   
(a)
Restated 4/30/01
   
(in thousands, except share amounts)
     
FY 2001
                                                           
Net Sales
  
$
104,297
 
   
$
101,230
 
   
$
103,857
   
$
100,603
   
$
98,940
   
$
96,066
   
$
109,575
   
$
106,236
Gross Profit
  
 
26,431
 
   
 
22,453
 
   
 
24,295
   
 
19,948
   
 
23,798
   
 
19,902
   
 
30,926
   
 
26,529
Income before income taxes
  
 
8,627
 
   
 
8,627
 
   
 
5,683
   
 
5,683
   
 
5,715
   
 
5,715
   
 
10,750
   
 
10,750
Net income before
                                                           
    cumulative effect of
                                                           
    change in accounting
                                                           
    principle
  
 
5,181
 
   
 
5,181
 
   
 
3,401
   
 
3,401
   
 
3,431
   
 
3,431
   
 
6,990
   
 
6,990
Cumulative effect of
                                                           
    change in accounting
                                                           
    principle
  
 
(1,583
)
   
 
(1,583
)
   
 
—  
   
 
—  
   
 
—  
   
 
—  
   
 
—  
   
 
—  
Net income
  
$
3,598
 
   
$
3,598
 
   
$
3,401
   
$
3,401
   
$
3,431
   
$
3,431
   
$
6,990
   
$
6,990
Earnings per share:
                                                           
Net income before
                                                           
    cumulative effect of
                                                           
    change in accounting
                                                           
    principle
                                                           
        Basic
  
$
0.65
 
   
$
0.65
 
   
$
0.42
   
$
0.42
   
$
0.42
   
$
0.42
   
$
0.86
   
$
0.86
        Diluted
  
 
0.64
 
   
 
0.64
 
   
 
0.42
   
 
0.42
   
 
0.42
   
 
0.42
   
 
0.85
   
 
0.85
Cumulative effect of
                                                           
    change in accounting
                                                           
    principle
  
 
(0.20
)
   
 
(0.20
)
   
 
—  
   
 
—  
   
 
—  
   
 
—  
   
 
—  
   
 
—  
        Basic
  
$
0.45
 
   
$
0.45
 
   
$
0.42
   
$
0.42
   
$
0.42
   
$
0.42
   
$
0.86
   
$
0.86
        Diluted
  
 
0.44
 
   
 
0.44
 
   
 
0.42
   
 
0.42
   
 
0.42
   
 
0.42
   
 
0.85
   
 
0.85
(a)
 
Amounts have been restated for the adoption of EITF 01-9, “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products.” This Issue is a codification of all the issues in both EITF Issue 00-14, “Accounting for Certain Sales Incentives,” and EITF Issue 00-25, “Vendor Income Statement Characterization of Consideration to a Purchaser of the Vendor’s Products or Services.”

2002 Annual Shareholders Report  13

Table of Contents
CONSOLIDATED BALANCE SHEET
 
    
April 30
    
2002
     
2001
    
(in thousands, except share amounts)
ASSETS
                
Current Assets
                
Cash and cash equivalents
   
$
13,083
 
   
$
1,714
Customer receivables
   
 
32,246
 
   
 
29,410
Inventories
   
 
34,872
 
   
 
30,267
Prepaid expenses and other
   
 
2,741
 
   
 
1,728
Deferred income taxes
   
 
7,569
 
   
 
4,760
    
  
Total Current Assets
   
 
90,511
 
   
 
67,879
Property, Plant and Equipment
   
 
122,405
 
   
 
93,641
Promotional Displays
   
 
16,160
 
   
 
15,761
Other Assets
   
 
5,146
 
   
 
3,087
    
  
    
$
234,222
 
   
$
180,368
    
  
LIABILITIES AND SHAREHOLDERS’ EQUITY
                
Current Liabilities
                
Accounts payable
   
$
23,059
 
   
$
17,038
Accrued compensation and related expenses
   
 
25,888
 
   
 
16,269
Current maturities of long-term debt
   
 
3,218
 
   
 
2,118
Accrued marketing expenses
   
 
5,627
 
   
 
3,505
Other accrued expenses
   
 
6,605
 
   
 
6,289
    
  
Total Current Liabilities
   
 
64,397
 
   
 
45,219
Long-Term Debt, less current maturities
   
 
14,398
 
   
 
16,819
Deferred Income Taxes
   
 
9,556
 
   
 
7,246
Long-Term Pension Liabilities
   
 
238
 
   
 
1,571
Other Long-Term Liabilities
   
 
464
 
   
 
—  
Shareholders’ Equity
                
Preferred stock, $1.00 par value; 2,000,000 shares authorized, none issued
                
Common stock, no par value; 20,000,000 shares authorized; issued and outstanding shares: 8,271,496-2002; 8,079,093-2001;
   
 
33,072
 
   
 
24,412
Retained earnings
   
 
112,378
 
   
 
85,101
Other Comprehensive Income
   
 
(281
)
   
 
—  
    
  
Total Shareholders’ Equity
   
 
145,169
 
   
 
109,513
    
  
    
$
234,222
 
   
$
180,368
    
  
 
See notes to consolidated financial statements.

14  American Woodmark Corporation

Table of Contents
 
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
 
    
Years Ended April 30
  
    
2002
     
2001
     
2000
  
    
(in thousands, except share amounts)
  
Net sales
   
$
499,046
 
   
$
404,134
 
   
$
367,956
 
Cost of sales and distribution
   
 
370,369
 
   
 
315,302
 
   
 
289,035
 
    
  
  
    Gross Profit
   
 
128,677
 
   
 
88,832
 
   
 
78,921
 
Selling and marketing expenses
   
 
50,442
 
   
 
41,034
 
   
 
37,195
 
General and administrative expenses
   
 
24,511
 
   
 
15,433
 
   
 
15,535
 
Restructuring costs
   
 
—  
 
   
 
—  
 
   
 
1,530
 
    
  
  
    Operating Income
   
 
53,724
 
   
 
32,365
 
   
 
24,661
 
Interest expense
   
 
506
 
   
 
1,439
 
   
 
470
 
Other (income) expense
   
 
103
 
   
 
152
 
   
 
(364
)
    
  
  
    Income Before Income Taxes and Cumulative Effect of Accounting Change
   
 
53,115
 
   
 
30,774
 
   
 
24,555
 
Provision for income taxes
   
 
20,960
 
   
 
11,771
 
   
 
10,088
 
    
  
  
    Income Before Cumulative Effect of Accounting Change
   
 
32,155
 
   
 
19,003
 
   
 
14,467
 
Cumulative effect of accounting change, net of tax
   
 
—  
 
   
 
(1,583
)
   
 
—  
 
    
  
  
    Net Income
   
 
32,155
 
   
 
17,420
 
   
 
14,467
 
    Retained Earnings, Beginning of Year
   
 
85,101
 
   
 
69,716
 
   
 
56,762
 
Stock repurchases
   
 
(3,240
)
   
 
(423
)
   
 
—  
 
Cash dividends
   
 
(1,638
)
   
 
(1,612
)
   
 
(1,513
)
    
  
  
    Retained Earnings, End of Year
   
$
112,378
 
   
$
85,101
 
   
$
69,716
 
    
  
  
Share Information
                           
Earnings per share
                           
Before cumulative effect of change in accounting principle
                           
Basic
   
$
3.93
 
   
$
2.36
 
   
$
1.82
 
Diluted
   
 
3.81
 
   
 
2.34
 
   
 
1.79
 
After cumulative effect of change in accounting principle
                           
Basic
   
$
3.93
 
   
$
2.16
 
   
$
1.82
 
Diluted
   
 
3.81
 
   
 
2.14
 
   
 
1.79
 
Cash dividends per share
   
 
.20
 
   
 
.20
 
   
 
.19
 
    
  
  
 
See notes to consolidated financial statements.

2002 Annual Shareholders Report  15

Table of Contents
 
CONSOLIDATED STATEMENT OF CASH FLOWS
 
    
Years Ended April 30
  
    
2002
     
2001
     
2000
  
    
(in thousands)
  
Operating Activities
                           
Net Income
   
$
32,155
 
   
$
17,420
 
   
$
14,467
 
Adjustments to reconcile net income to net cash provided by operating activities:
                           
Cumulative effect of change in accounting principle
   
 
—  
 
   
 
1,583
 
   
 
—  
 
Provision for depreciation and amortization
   
 
23,792
 
   
 
19,635
 
   
 
14,712
 
Net loss on disposal of property, plant and equipment
   
 
141
 
   
 
22
 
   
 
28
 
Deferred income taxes
   
 
(337
)
   
 
2,187
 
   
 
121
 
Restructuring costs
   
 
—  
 
   
 
—  
 
   
 
1,530
 
Other non-cash items
   
 
1,668
 
   
 
2,316
 
   
 
2,564
 
Changes in operating assets and liabilities:
                           
Customer receivables
   
 
(2,880
)
   
 
(1,959
)
   
 
1,907
 
Inventories
   
 
(5,067
)
   
 
(4,183
)
   
 
(5,566
)
Other assets
   
 
(13,296
)
   
 
(14,660
)
   
 
(9,091
)
Accounts payable
   
 
6,021
 
   
 
(2,462
)
   
 
1,276
 
Accrued compensation and related expenses
   
 
9,619
 
   
 
1,115
 
   
 
(1,412
)
Other
   
 
1,634
 
   
 
477
 
   
 
716
 
    
  
  
Net Cash Provided by Operating Activities
   
 
53,450
 
   
 
21,491
 
   
 
21,252
 
Investing Activities
                           
Payments to acquire property, plant and equipment
   
 
(39,829
)
   
 
(17,445
)
   
 
(40,787
)
Proceeds from sales of property, plant and equipment
   
 
27
 
   
 
26
 
   
 
16
 
    
  
  
Net Cash Used by Investing Activities
   
 
(39,802
)
   
 
(17,419
)
   
 
(40,771
)
Financing Activities
                           
Payments of long-term debt
   
 
(20,778
)
   
 
(123,698
)
   
 
(61,974
)
Proceeds from long-term borrowings
   
 
19,007
 
   
 
118,750
 
   
 
72,700
 
Common Stock issued through stock option plans
   
 
4,674
 
   
 
512
 
   
 
324
 
Repurchase of common stock
   
 
(3,544
)
   
 
(493
)
   
 
—  
 
Dividends paid
   
 
(1,638
)
   
 
(1,612
)
   
 
(1,513
)
    
  
  
Net Cash Provided (Used) by Financing Activities
   
 
(2,279
)
   
 
(6,541
)
   
 
9,537
 
    
  
  
Increase (Decrease) in Cash and Cash Equivalents
   
 
11,369
 
   
 
(2,469
)
   
 
(9,982
)
Cash and Cash Equivalents, Beginning of Year
   
 
1,714
 
   
 
4,183
 
   
 
14,165
 
    
  
  
Cash and Cash Equivalents, End of Year
   
$
13,083
 
   
$
1,714
 
   
$
4,183
 
    
  
  
 
See notes to consolidated financial statements.

16  American Woodmark Corporation

Table of Contents
AMERICAN WOODMARK
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note A—Significant Accounting Policies
 
The Company manufactures and distributes kitchen cabinets and vanities for the remodeling and new home construction markets. The Company’s products are sold across the United States through a network of independent distributors and directly to home centers and major builders.
 
The following is a description of the more significant accounting policies of the Company.
 
Principles of Consolidation:    The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation.
 
Revenue Recognition:    Effective May 1, 2000, the Company changed its accounting for revenue recognition in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (“SAB 101”). Previously, the Company recognized revenue on the date shipments were transferred to independent third-party carriers for delivery to the customer. Under the new accounting rule, the Company now recognizes revenue when product is delivered to the customer. Revenue is based on invoice price less allowances for sales returns, cash discounts, and other deductions as required by current generally accepted accounting standards
 
Advertising Costs:    Advertising costs are expensed in the fiscal year incurred.
 
Cash and Cash Equivalents:    Cash in excess of operating requirements is invested in short-term instruments which are carried at fair value (approximate cost). The Company considers all highly liquid short-term investments with maturity of three months or less when purchased to be cash equivalents.
 
Inventories:    Inventories are stated at lower of cost or market. Inventory costs were determined principally by the last-in, first-out (LIFO) method.
 
The LIFO cost reserve is determined in the aggregate for inventory and is applied as a reduction to inventories determined on the first-in, first-out method (FIFO). FIFO inventory cost approximates replacement cost.
 
Promotional Displays:    The Company’s investment in promotional displays is carried at cost less applicable amortization. Amortization is provided by the straight-line method on an individual display basis over the estimated period of benefit (approximately 30 months).
 
Property, Plant and Equipment:    Property, plant and equipment is stated on the basis of cost less an allowance for depreciation. Depreciation is provided by the straight-line method over the estimated useful lives of the related assets, which range from fifteen to thirty years for buildings and improvements and three to ten years for furniture and equipment. Assets under capital lease are amortized over the shorter of their estimated useful lives or term of the related lease.
 
Fair Value of Financial Instruments:    The carrying amounts of the Company’s cash and cash equivalents, customer receivables, accounts payable, and long-term debt approximate fair value. The fair value of interest rate swaps is immaterial.
 
Stock-Based Compensation:    As permitted by Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” the Company has elected to continue using the intrinsic value method of accounting for stock options and has provided the additional required disclosures. (See Note F to the Consolidated Financial Statements.)
 
New Accounting Rules:    In November 2001, the Financial Accounting Standards Board’s Emerging Issues Task Force (EITF) reached a consensus on Issue No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products.” The Company was required to adopt EITF 01-9 in fiscal 2002. EITF 01-9 requires that certain payments or incentives

2002 Annual Shareholders Report  17

Table of Contents

AMERICAN WOODMARK
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
given to its customers be classified as a reduction of revenue and others an increase to cost of goods sold. Certain amounts previously classified by the Company as selling and marketing expenses have been reclassified to net sales and others to cost of goods sold for all periods presented.
 
The Company was required to adopt SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” as amended by SFAS No. 138, “Accounting for Derivative Instruments and Certain Hedging Activities” in the first quarter of fiscal 2002. The new standards establish accounting and reporting requirements for derivative instruments and hedging activities. The statement requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. By adoption of SFAS No. 133 and as a result of the use of interest rate swaps, the Company has recognized a $281,000 loss in accumulated other comprehensive income, net of tax, during the fiscal year.
 
Use of Estimates:    The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
Reclassifications:    Certain prior years’ amounts have been reclassified to conform to the current year’s presentation.
 
Note B—Customer Receivables
 
The components of customer receivables were:
 
    
April 30
  
    
2002
     
2001
  
    
(in thousands)
  
Gross customer receivables
   
$
36,872
 
   
$
34,066
 
Less:
                  
Allowance for bad debt
   
 
(799
)
   
 
(1,350
)
Allowance for returns and discounts
   
 
(3,827
)
   
 
(3,306
)
    
  
Net customer receivables
   
$
32,246
 
   
$
29,410
 
    
  
 
Note C—Inventories
 
The components of inventories were:
 
    
April 30
  
    
2002
     
2001
  
    
(in thousands)
  
Raw materials
   
$
11,971
 
   
$
12,041
 
Work-in-process
   
 
23,021
 
   
 
20,600
 
Finished goods
   
 
6,663
 
   
 
5,079
 
    
  
Total FIFO inventories
   
 
41,655
 
   
 
37,720
 
Reserve to adjust inventories to LIFO value
   
 
(6,783
)
   
 
(7,453
)
    
  
Total inventories
   
$
34,872
 
   
$
30,267
 
    
  

18  American Woodmark Corporation

Table of Contents

AMERICAN WOODMARK
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
Note D—Property, Plant and Equipment
 
The components of property, plant and equipment were:
 
    
April 30
  
    
2002
     
2001
  
    
(in thousands)
  
Land
   
$
1,506
 
   
$
1,506
 
Buildings and improvements
   
 
39,782
 
   
 
39,082
 
Buildings and improvements—capital leases
   
 
9,153
 
   
 
9,195
 
Machinery and equipment
   
 
112,397
 
   
 
106,098
 
Machinery and equipment—capital leases
   
 
334
 
   
 
436
 
Construction in progress
   
 
31,732
 
   
 
1,101
 
    
  
    
 
194,904
 
   
 
157,418
 
Less allowance for depreciation
   
 
(72,499
)
   
 
(63,777
)
    
  
Total
   
$
122,405
 
   
$
93,641
 
    
  
 
Depreciation expense amounted to $11,347, $10,727, and $7,490 in fiscal 2002, 2001, and 2000, respectively.
 
Note E—Loans Payable and Long-Term Debt
 
Maturities of long-term debt are as follows:
 
    
Fiscal Years Ending April 30
     
    
2003
   
2004
   
2005
   
2006
   
2007
   
2008 and There-after
   
Total Outstanding
    
(in thousands)
Revolving Credit Facility
   
$
—  
   
$
—  
   
$
—  
   
$
—  
   
  $
—  
   
$
—  
   
$
—  
Term Credit Facility
   
 
—  
   
 
—  
   
 
—  
   
 
—  
   
 
10,000
   
 
—  
   
 
10,000
Term Loans
   
 
111
   
 
116
   
 
573
   
 
130
   
 
137
   
 
665
   
 
1,732
Industrial Revenue Bonds
   
 
2,500
   
 
—  
   
 
—  
   
 
—  
   
 
—  
   
 
—  
   
 
2,500
Capital Lease Obligations
   
 
607
   
 
640
   
 
675
   
 
712
   
 
750
   
 
—  
   
 
3,384
    
  
  
  
  
  
  
Total
   
$
3,218
   
$
756
   
$
1,248
   
$
842
   
$
10,887
   
$
665
   
$
17,616
    
  
  
  
  
  
  
Less Current Maturities
                                             
$
3,218
                                              
Total Long-Term Debt
                                             
$
14,398
                                              
 
The Company’s primary loan agreement provides for a five-year $35 million revolving credit facility and a $10 million five-year term credit facility which expire on May 31, 2006. Borrowings under the credit facilities bear interest at the LIBOR rate (1.9% at April 30, 2002) plus a spread (0.50% at April 30, 2002) based on Total Funded Debt to earnings, before deduction of interest and taxes, plus depreciation and amortization (EBITDA). The interest rate on the five-year term loan has been fixed at 6.0% via an interest rate swap.
 
The Company employs straightforward interest rate swap agreements to assist in maintaining a balance between fixed and variable interest rates on outstanding debt. Any deferred gain or loss associated with the swap agreements is accounted for over the life of the swaps at the fixed rate stipulated in the executed agreements. On April 30, 2002, these amounts were immaterial. The Company does not invest, trade, or otherwise speculate in any derivatives or similar type financial instruments.

2002 Annual Shareholders Report   19

Table of Contents

AMERICAN WOODMARK
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
On April 30, 2002, term loans of $1.7 million were outstanding. The interest bearing term loans bore an average interest rate of 5.7% on April 30, 2002.
 
On April 30, 2002, the Company had $2.5 million outstanding in industrial revenue bonds, maturing at December 1, 2002. Due to an interest rate swap agreement, a fixed rate of approximately 5.0% applies through December 1, 2002. The variable rate that would have applied without the rate swap was 1.7% on April 30, 2002.
 
Substantially all of the industrial revenue bonds are redeemable at the option of the bondholder. The Company has irrevocable arrangements to refinance these bonds on a long-term basis in the event they are redeemed.
 
The average interest rate on the Company’s capital lease obligations was 5.4% on April 30, 2002. These obligations mature through 2007.
 
The Company’s loan agreements limit the amount and type of indebtedness the Company can incur and require the Company to maintain specified financial ratios measured on a quarterly basis. A portion of the assets of the Company are pledged as collateral under the industrial revenue bond agreements and capital lease arrangements. The Company was in compliance with all covenants contained in its loan agreements at April 30, 2002.
 
Interest paid was $1,128,000, $1,793,000, and $959,000, during fiscal 2002, 2001, and 2000, respectively. Net amounts to be received or paid under interest rate swap agreements are accrued as an adjustment to interest expense.
 
Interest capitalized was $659,000, $342,000, and $589,000, during fiscal 2002, 2001, and 2000, respectively.
 
Note F—Shareholders’ Equity
 
Common Stock
 
Transactions affecting Common Stock were as follows:
 
    
Shares
Outstanding
     
Amount
  
    
(in thousands)
  
Balance at April 30, 1999
   
7,916,135
 
   
$
21,575
 
Stock options exercised
   
48,385
 
   
 
324
 
Stock issued to AWSOP
   
45,907
 
   
 
997
 
    
  
Balance at April 30, 2000
   
8,010,427
 
   
 
22,896
 
Stock options exercised
   
33,197
 
   
 
512
 
Stock issued to AWSOP
   
58,469
 
   
 
1,074
 
Stock repurchases
   
(23,000
)
   
 
(70
)
    
  
Balance at April 30, 2001
   
8,079,093
 
   
 
24,412
 
Stock options exercised
   
245,195
 
   
 
7,802
 
Stock issued to AWSOP
   
30,208
 
   
 
1,162
 
Stock repurchases
   
(83,000
)
   
 
(304
)
    
  
Balance at April 30, 2002
   
8,271,496
 
   
$
33,072
 
    
  
 
Employee Stock Ownership Plan
 
In fiscal 1990, the Company instituted the American Woodmark Stock Ownership Plan (AWSOP). Under this plan, all employees over the age of 18 who have been employed by the Company for a minimum of six months are eligible to receive Company stock through a profit sharing contribution and a 401(k) matching contribution based upon the employee’s contribution to the plan.
 
        Profit sharing contributions are 3% of after tax earnings, calculated on a quarterly basis and distributed equally to all employees eligible to participate in the plan. The Company recognized expenses for profit sharing contributions of $900,000, $566,000, and $439,000, in fiscal 2002, 2001, and 2000, respectively.
 
        The Company matches 401(k) contributions in the amount of 50% of an employee’s contribution to the plan up to 4% of base salary for an effective maximum Company contribution of 2% of base salary. The expense for 401(k) matching contributions for this plan was $758,000, $753,000, and $684,000, in fiscal 2002, 2001, and 2000, respectively.

20  American Woodmark Corporation

Table of Contents

AMERICAN WOODMARK
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
Stock Options
 
In August 1999, shareholders approved a stock option plan for key employees of the Company. Under the plan, up to 1,000,000 shares of Common Stock may be granted as options, with the term of options granted not exceeding ten years. Options granted are subject to vesting conditions and other requirements prescribed by a participant’s stock option agreement. Options vest over 3 years on a straight-line basis.
 
In August 1996, shareholders approved a stock option plan for key employees of the Company. Under the plan, up to 750,000 shares of Common Stock may be granted as options, with the term of options granted not exceeding ten years. Options granted are subject to vesting conditions and other requirements prescribed by a participant’s stock option agreement. Options vest over 3 years on a straight-line basis.
 
In August 2000, shareholders approved a stock option plan for non-employee directors. Under the 2000 plan, up to 30,000 shares of Common Stock may be granted as options, with each non-employee director receiving an option to purchase 1,000 shares on the anniversary date of the plan. Outstanding options under the plan are exercisable in annual cumulative increments of 33.33% of options granted beginning one year after the date of grant and must be exercised within twelve months after cumulative increments exercisable equal 100% of options granted, at which time options expire.
 
The Company has adopted the disclosure only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.” Since the exercise price for all options granted is the fair market value of the Company’s stock, no compensation cost has been recognized for the stock option plans.
 
For the years ended April 30, 2002, 2001, and 2000, pro forma net income and earnings per share information required by SFAS No. 123 has been determined as if the Company had accounted for its stock options using the fair value method.
 
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting periods. The Company’s pro forma information follows:
 
    
2002
   
2001
     
2000
    
(in thousands, except share amounts)
Net Income before cumulative effect of change in accounting principle
   
$
30,791
   
$
17,961
 
   
$
13,199
Cumulative effect of change in accounting principle
   
 
—  
   
 
(1,583
)
   
 
—  
Net Income
   
 
30,791
   
 
16,378
 
   
 
13,199
Net Income per common share:
                       
Net income before cumulative effect of change in accounting principle
                       
Basic
   
 
3.77
   
 
2.22
 
   
 
1.66
Diluted
   
 
3.65
   
 
2.21
 
   
 
1.64
Cumulative effect of change in accounting principle
                       
Basic
   
 
—  
   
 
(0.20
)
   
 
—  
Diluted
   
 
—  
   
 
(0.20
)
   
 
—  

2002 Annual Shareholders Report  21

Table of Contents

AMERICAN WOODMARK
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
To determine these amounts, the fair value of each stock option has been estimated on the date of the grant using a Black-Scholes option-pricing model. Significant assumptions used in this model include a dividend yield of 0.8% and the following:
 
    
2002
     
2001
     
2000
  
Expected Volatility
   
 
0.509
 
   
 
0.475
 
   
 
0.475
 
Risk-free interest rates
   
 
5.20
%
   
 
5.50
%
   
 
5.75
%
Expected life in years
   
 
6.0
 
   
 
6.0
 
   
 
6.0
 
Weighted-average fair value per share
   
$
15.39
 
   
$
9.76
 
   
$
18.58
 
 
The following table summarizes stock option activity and related information under the stock option plans for the fiscal years ended April 30:
 
    
2002
     
2001
     
2000
  
Outstanding at beginning of year
   
 
837,267
 
   
 
647,800
 
   
 
575,251
 
Granted
   
 
162,390
 
   
 
274,000
 
   
 
143,500
 
Exercised
   
 
(250,285
)
   
 
(35,933
)
   
 
(48,350
)
Expired or cancelled
   
 
(12,167
)
   
 
(48,600
)
   
 
(22,601
)
    
  
  
Outstanding at April 30
   
 
737,205
 
   
 
837,267
 
   
 
647,800
 
    
  
  
Exercisable at April 30
   
 
369,154
 
   
 
456,423
 
   
 
347,868
 
Available for future issuance at April 30
   
 
717,696
 
   
 
863,496
 
   
 
1,081,828
 
    
  
  
Weighted average exercise prices (in dollars):
                           
Outstanding at beginning of year
   
$
21.01
 
   
$
21.55
 
   
$
21.27
 
Granted
   
 
30.84
 
   
 
19.93
 
   
 
37.42
 
Exercised
   
 
18.68
 
   
 
12.35
 
   
 
5.51
 
Expired or cancelled
   
 
23.60
 
   
 
28.45
 
   
 
20.90
 
Outstanding at April 30
   
 
23.92
 
   
 
21.01
 
   
 
21.55
 
Exercisable at April 30
   
$
22.80
 
   
$
16.52
 
   
$
14.13
 

22  American Woodmark Corporation

Table of Contents

AMERICAN WOODMARK
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
The following table summarizes information about stock options outstanding at April 30, 2002 [remaining lives (in years) and exercise prices are weighted-averages]:
 
   
Options Outstanding
  
Options Exercisable
 Option Price
    per Share 
  
Options
   
Remaining
Life
  
Exercise
Price
  
Options
  
Exercise
Price
$  5.25-    6.50
  
44,250
   
4.2
  
$  5.51
  
44,250
  
$  5.51
$  9.25-  13.13
  
37,500
   
4.9
  
12.87
  
37,500
  
12.87
$15.56-$18.94
  
219,000
   
6.7
  
17.60
  
128,378
  
16.92
$21.72-$58.84
  
436,455
   
8.0
  
29.91
  
159,026
  
34.70
 
Earnings Per Share
 
The following table summarizes the computations of basic and diluted earnings per share:
 
    
Fiscal Years ended April 30
    
2002
   
2001
   
2000
    
(in thousands, except share amounts)
Numerator used in basic and diluted earnings per common share:
                     
Net income
   
$
32,155
   
$
17,420
   
$
14,467
    
  
  
Denominator:
                     
Denominator for basic earnings per common share- weighted-average shares
   
 
8,173
   
 
8,057
   
 
7,960
Effect of dilutive securities:
                     
Stock options
   
 
263
   
 
87
   
 
135
    
  
  
Denominator for diluted earnings per common share-weighted-average shares and assumed conversions
   
 
8,436
   
 
8,144
   
 
8,095
    
  
  
Earnings per common share
                     
Before cumulative effect of change in accounting principle
                     
Basic
   
$
3.93
   
$
2.36
   
$
1.82
Diluted
   
$
3.81
   
$
2.34
   
$
1.79
After cumulative effect of change in accounting principle
                     
Basic
   
$
3.93
   
$
2.16
   
$
1.82
Diluted
   
$
3.81
   
$
2.14
   
$
1.79

2002 Annual Shareholders Report  23

Table of Contents

AMERICAN WOODMARK
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
Note G—Pension Benefits
 
The following information is disclosed in accordance with the requirements of SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” which the Company adopted in 1999. The Company has two defined benefit plans covering virtually all of the Company’s employees.
 
    
Pension Benefits
  
    
2002
     
2001
  
    
(in thousands)
  
Change in Benefit Obligation
                  
Benefit obligation at beginning of year
   
$
27,528
 
   
$
24,981
 
Service cost
   
 
1,602
 
   
 
1,402
 
Interest cost
   
 
2,084
 
   
 
1,916
 
Amendments
   
 
31
 
   
 
55
 
Actuarial (gains) losses
   
 
3,851
 
   
 
(200
)
Benefits paid
   
 
(666
)
   
 
(626
)
    
  
Benefit obligation at end of year
   
$
34,430
 
   
$
27,528
 
    
  
Change in Plan Assets
                  
Fair value of plan assets at beginning of year
   
$
24,861
 
   
$
23,582
 
Actual return on plan assets
   
 
(584
)
   
 
(1,428
)
Company contributions
   
 
3,456
 
   
 
3,333
 
Benefits paid
   
 
(666
)
   
 
(626
)
    
  
Fair value of plan assets at end of year
   
$
27,067
 
   
$
24,861
 
    
  
Funded status of the plans
   
$
(7,363
)
   
$
(2,667
)
Unamortized prior service cost
   
 
544
 
   
 
610
 
Unrecognized net actuarial loss
   
 
8,975
 
   
 
2,637
 
    
  
Unrecognized net transition obligation
   
 
—  
 
   
 
8
 
    
  
Prepaid benefit cost
   
$
2,156
 
   
$
588
 
    
  
Amounts Recognized in the Consolidated Balance Sheet
                  
Prepaid benefit cost
   
$
4,158
 
   
$
2,550
 
Accrued benefit liability
   
 
(2,002
)
   
 
(1,962
)
    
  
Net amount recognized
   
$
2,156
 
   
$
588
 
    
  
Weighted-Average Assumptions as of April 30
                  
Discount rate
   
 
7.30
%
   
 
7.65
%
Expected return on plan assets
   
 
8.0
%
   
 
8.0
%
Rate of compensation increase
   
 
4.0
%
   
 
4.0
%
 
As of April 30, 2002, one of the Company’s defined benefit plans had a projected benefit obligation of $23.1 million and an accumulated benefit obligation of $17.4 million which exceeded the plan assets of $15.5 million.
 
    
Pension Benefits
  
    
2002
     
2001
     
2000
  
    
(in thousands)
  
Components of Net Periodic Benefit Cost
                           
Service cost
   
$
1,602
 
   
$
1,402
 
   
$
1,439
 
Interest cost
   
 
2,084
 
   
 
1,916
 
   
 
1,776
 
Expected return on plan assets
   
 
(1,965
)
   
 
(1,918
)
   
 
(1,742
)
Amortization of the unrecognized transition obligation
   
 
8
 
   
 
75
 
   
 
82
 
Amortization of prior service cost
   
 
97
 
   
 
109
 
   
 
106
 
Recognized net actuarial loss
   
 
63
 
   
 
—  
 
   
 
—  
 
    
  
  
Benefit cost
   
$
1,889
 
   
$
1,584
 
   
$
1,661
 
    
  
  
 
Note H—Income Taxes
 
The provision for income taxes on income before the cumulative effect of accounting change was comprised of the following:
 
    
Fiscal Years Ended April 30
  
    
2002
     
2001
   
2000
  
    
(in thousands)
  
Current
                         
Federal
   
$
18,213
 
   
$
8,406
   
$
8,651
 
State
   
 
3,084
 
   
 
1,178
   
 
1,316
 
    
  
  
Total current
   
 
21,297
 
   
 
9,584
   
 
9,967
 
    
  
  
Deferred (benefit)
                         
Federal
   
 
(289
)
   
 
1,927
   
 
124
 
State
   
 
(48
)
   
 
260
   
 
(3
)
    
  
  
Total deferred
   
 
(337
)
   
 
2,187
   
 
121
 
    
  
  
Total provision
   
$
20,960
 
   
$
11,771
   
$
10,088
 
    
  
  

24  American Woodmark Corporation

Table of Contents

AMERICAN WOODMARK
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
The Company’s effective income tax rate varied from the federal statutory rate as follows:
 
    
Fiscal Years Ended April 30
  
    
2002
     
2001
     
2000
  
Federal statutory rate
   
35.0
%
   
35.0
%
   
35.0
%
Permanent differences
   
—  
 
   
—  
 
   
1.7
 
State income taxes, net of federal tax effect
   
4.5
 
   
3.3
 
   
4.4
 
    
  
  
Effective income tax rate
   
39.5
%
   
38.3
%
   
41.1
%
    
  
  
 
Income taxes paid were $18,293,000, $9,235,000, and $9,939,000 for fiscal years 2002, 2001, and 2000, respectively.
 
The significant components of deferred tax assets and liabilities were as follows:
 
    
April 30
    
2002
   
2001
    
(in thousands)
Deferred tax assets
              
Accounts receivable
   
$
3,882
   
$
2,590
Employee benefits
   
 
1,398
   
 
651
Product liability
   
 
1,168
   
 
1,020
Other
   
 
319
   
 
281
    
  
Total
   
 
6,767
   
 
4,542
Deferred tax liabilities
              
Depreciation
   
 
7,501
   
 
6,219
Inventory
   
 
869
   
 
393
Other
   
 
384
   
 
416
    
  
Total
   
 
8,754
   
 
7,028
Net deferred tax liability
   
$
1,987
   
$
2,486
    
  
 
Note I—Commitments and Contingencies
 
Legal Matters
 
The Company is involved in various suits and claims in the normal course of business which include claims against the Company pending before the Equal Employment Opportunity Commission. Although management believes that such suits and EEOC claims are without merit and intends to vigorously contest them, the ultimate outcome of these matters cannot be determined at this time. In the opinion of management, after consultation with counsel, the ultimate liabilities and losses, if any, that may result from suits and claims involving the Company will not have a material adverse effect on the Company’s results of operations or financial position.
 
Lease Agreements
 
The Company leases five office buildings, a manufacturing building, eight service centers and certain equipment. Total rental expenses amounted to approximately $5,397,000, $4,840,000, and $5,016,000, in fiscal 2002, 2001, and 2000, respectively. Minimum rental commitments as of April 30, 2002, under noncancelable leases are as follows:
 
Fiscal Year
   
Operating
   
Capital
  
    
(in thousands)
  
2003
   
 
2,488
   
 
780
 
2004
   
 
1,709
   
 
780
 
2005
   
 
1,181
   
 
780
 
2006
   
 
974
   
 
780
 
2007
   
 
262
   
 
780
 
2008 (and thereafter)
   
 
34
         
    
  
    
$
6,648
   
$
3,900
 
    
  
Less amounts representing interest
          
 
(516
)
           
Total obligation under capital lease
          
$
3,384
 
           

2002 Annual Shareholders Report   25

Table of Contents

AMERICAN WOODMARK
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
Related Parties
 
During fiscal 1985, prior to becoming a publicly held corporation, the Company entered into an agreement with a partnership formed by certain executive officers of the Company to lease an office building constructed and owned by the partnership. The lease term has four remaining years with one five-year renewal period available at the Company’s option. Under this agreement, rental expense was $406,000, $398,000, and $391,000, in fiscal 2002, 2001, and 2000, respectively. Rent during the remaining term of approximately $408,000 annually (included in the above table) is subject to adjustment based upon changes in the Consumer Price Index.
 
Note J—Other Information
 
Credit is extended to customers based on an evaluation of the customer’s financial condition and generally collateral is not required. The Company’s customers operate in the new home construction and home remodeling markets. At April 30, 2002, the Company’s two largest customers, Customers A and B, represented 32.5% and 20.3% of the Company’s customer receivables, respectively.
 
The following table summarizes the percentage of sales to the Company’s two largest customers for the last three fiscal years:
 
    
Percent of Annual Sales
    
2002
   
2001
   
2000
Customer A
   
42.3
   
42.1
   
39.6
Customer B
   
21.0
   
17.8
   
16.0
 
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 customers’ 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.

26  American Woodmark Corporation    

Table of Contents
MANAGEMENT’S REPORT
 
The accompanying consolidated financial statements, which include the notes thereto, are the responsibility of and have been prepared by the management of American Woodmark. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and necessarily include some amounts that are based on management’s best estimates and judgments. Financial information throughout this annual report is consistent with the consolidated financial statements.
 
The Company maintains a system of internal accounting controls designed to provide reasonable assurance that transactions are properly recorded, that policies and procedures are adhered to and that assets are adequately safeguarded. The system of internal controls is supported by written policies and guidelines, an organizational structure designed to ensure appropriate segregation of responsibilities and selection and training of qualified personnel.
 
To ensure that the system of internal controls operates effectively, management and the internal audit staff review and monitor internal controls on an ongoing basis. In addition, as part of the audit of the consolidated financial statements, the Company’s independent auditors evaluate selected internal accounting controls to establish a basis for reliance thereon in determining the nature, timing and extent of audit tests to be performed. The Company believes its system of internal controls is adequate to accomplish the intended objectives, and continues its efforts to further improve those controls.
 
The Audit Committee of the Board of Directors, which is composed entirely of non-management Directors, oversees the Company’s financial reporting and internal control functions. The Audit Committee meets periodically and separately with Company management, the internal audit staff, and the independent auditors to ensure these parties are fulfilling their obligations and to discuss auditing, internal control and financial reporting matters. The Audit Committee reports its findings to the Board of Directors. The independent auditors and the internal audit staff have unrestricted access to the Audit Committee.
 
LOGO
James J. Gosa
President and Chief Executive Officer
 
LOGO
Kent B. Guichard
Senior Vice President, Finance and Chief Financial Officer

2002 Annual Shareholders Report  27

Table of Contents
 
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
 
Shareholders and Board of Directors
American Woodmark Corporation
 
We have audited the accompanying consolidated balance sheets of American Woodmark Corporation as of April 30, 2002 and 2001, and the related consolidated statements of income and retained earnings, and cash flows for each of the three years in the period ended April 30, 2002. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Woodmark Corporation at April 30, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended April 30, 2002, in conformity with accounting principles generally accepted in the United States.
 
LOGO
Washington, DC
June 7, 2002

28  American Woodmark Corporation

Table of Contents
 
Directors and
Executive Officers
  
Corporate Information
David L. Blount
Senior Vice President, Manufacturing

  
Annual Meeting
 
The Annual Meeting of Shareholders of American Woodmark Corporation will be held on August 29, 2002, at 9:00 a.m. at the Hampton Inn at 1204 Berryville in Winchester, Virginia.
William F. Brandt, Jr.
Chairman of the Board

  
Annual Report on Form 10-K
 
A copy of the Company’s Annual Report on Form 10-K the fiscal year ended April 30, 2002 may be obtained of charge by writing:
Daniel T. Carroll
Director;
Chairman
The Carroll Group
A Management Consulting Firm
  
Kent Guichard
Senior Vice President, Finance and
Chief Financial Officer
American Woodmark Corporation
PO Box 1980
Winchester, VA 22604-8090
Martha M. Dally
Director;
Senior Vice President, Business Development
Sara Lee Apparel, Europe

  
Corporate Headquarters
 
American Woodmark Corporation
3102 Shawnee Drive
Winchester, VA 22601-4208
(540) 665-9100
James G. Davis
Director;
President & CEO
James G. Davis Construction Corporation
  
 
Mailing Address
 
PO Box 1980
Winchester, VA 22604-8090
James J. Gosa
Director; President and
Chief Executive Officer
  
Transfer Agent
 
American Stock Transfer & Trust Company
(800) 937-5449
Fred S. Grunewald
Director;
Operating Partner
Kier Group Holding, LLC
    
Kent B. Guichard
Director; Senior Vice President, Finance and
Chief Financial Officer; Corporate Secretary
    
Kent J. Hussey
Director;
President and Chief Operating Officer
Rayovac Corporation
    
Albert L. Prillaman
Director;
Chairman, Chief Executive Officer
Stanley Furniture Company, Inc.
    
Ian J. Sole
Senior Vice President, Sales and Marketing
  
American Woodmark®
is a trademark of American Woodmark Corporation.
C. Anthony Wainwright
Director;
Vice Chairman
Arnold Worldwide
  
© 2002 American Woodmark Corporation®
Printed in U.S.A.

2002 Annual Shareholders Report  29

Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LOGO
 
American Woodmark Corporation
3102 Shawnee Drive
Winchester, Virginia 22601-4208
(540) 665-9100
(540) 665-9176 Fax