EX-13 9 dex13.htm ANNUAL REPORT Annual Report

 

Contents
    
     
     
2  
   
                               MARKET INFORMATION
2  
   
                            FINANCIAL HIGHLIGHTS
2  
   
                   LETTER FROM THE PRESIDENT
3  
   
5  
   
6  
   
             CONSOLIDATED FINANCIAL STATEMENTS
14  
   
17  
   
                         MANAGEMENT ’S REPORT
27  
   
                REPORT OF INDEPENDENT AUDITORS
28  
   
29  
   
                      CORPORATE INFORMATION
29  

2001 ANNUAL SHAREHOLDERS REPORT

Creating Value
Through People

Mission Statement

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.

1

2001 ANNUAL SHAREHOLDERS REPORT

Company Profile

American Woodmark Corporation manufactures and distributes kitchen cabinets and vanities for the remodeling and new home construction markets. The Company operates eleven manufacturing facilities located in Arizona, Georgia, Indiana, Kentucky, Minnesota, Tennessee, Virginia, and West Virginia and nine 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. Our products are sold across the United States through a network of independent distributors and directly to home centers, major builders and home manufacturers. Approximately 75% of our sales during fiscal year 2001 were to the remodeling market and 25% to the new home market.

     The Company is one of the five 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
  
(in dollars) High     Low   Declared  
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  
Fiscal 2000                  
First quarter $ 39.50   $ 31.94   $ .04  
Second quarter   33.50     18.75     .05  
Third quarter   25.00     16.07     .05  
Fourth quarter   24.50     14.13     .05  

As of April 30, 2001, there were approximately 5,150 shareholders of the Company’s Common Stock. Included are approximately 67% of the Company’s employees who are shareholders through the American Woodmark Stock Ownership Plan.

Financial Highlights

   
Fiscal Years Ended April 30
  
(in thousands, except share data)   2001  
2000
     1999  
                   
Operations                  
Net sales $ 416,668   $ 377,374   $ 320,279  
Operating income   32,365     24,661     27,911  
Income before income taxes and cumulative effect of accounting changes   30,774     24,555     28,547  
Net income   17,420     14,467     17,509  
Earnings per share                  
   Before cumulative effect of change in accounting principles                  
      Basic $ 2.36   $ 1.82   $ 2.23  
      Diluted   2.34     1.79     2.18  
   After cumulative effect of change in accounting principles                  
      Basic   2.16     1.82     2.23  
      Diluted   2.14     1.79     2.18  
Average shares outstanding                  
      Basic   8,057     7,960     7,856  
      Diluted   8,144     8,095     8,047  
                   
Financial Position                  
Working capital $ 22,660   $ 22,051   $ 29,486  
Total assets   180,368     166,656     140,609  
Long-term debt   16,819     22,009     11,435  
Shareholders’ equity   109,513     92,612     78,337  
Long-term debt to equity ratio   15 %   24 %   15 %

2   American Woodmark Corporation

James J. Gosa, President
and Chief Executive Officer

T o   o u r
Shareholders

Fiscal 2001 was an outstanding year for American Woodmark.

Like many companies in the United States, we faced the first threat to economic growth in many years. Since the summer of 2000, the financial pages of virtually every newspaper have been riddled with bad news on both overall economic performance and individual company earnings. The “dot.com” bubble has clearly burst, sending shock waves through the financial markets. Nervous consumers have changed spending habits, resulting in little or no same store sales growth in many of the leading retailers in the country. The Federal Reserve has aggressively moved to keep the economy going with a record series of interest rate cuts. Our elected leaders on Capitol Hill have passed the largest tax cut in history to get more money back into the hands of consumers.

     In this environment, many durable goods industries have fared even worse than the overall economy as these items are generally discretionary expenditures. The furniture industry, for example, has been especially hard hit with several leading manufacturers reporting sales declines of 10% and more. In our particular industry, demand stalled for the first time since 1995. Remodeling activity accounts for approximately 75% of all kitchen cabinet sales and the leading retailers, The Home Depot and Lowe's, reported flat or negative same store sales for several months during our fiscal year.

     Despite these obstacles, demand for American Woodmark products and services continued to grow. Net sales for the year increased 10% to a record $416.7 million from $377.4 million the previous year. Adjusting for the exit from certain business in the prior year, net sales for the core business increased 15% from fiscal 2000. We continue to generate growth and gain market share based on our customer relationships, our innovative new products and our superior service programs.

     Prior to the cumulative effect of a required change in accounting principles, net income for the fiscal year was a record $19.0 million or $2.34 per diluted share. On a per share basis, this represents an improvement of 31% over fiscal 2000 and 7% over the previous record set in fiscal 1999.

     I am also pleased to report that even with our growth, we continue to strengthen the balance sheet of the Company. Over the past three years, we have invested almost $80 million in new facilities and additional capacity. This effort has largely been funded by our operating cash flow. At the end of fiscal 2001, total debt remained below $20 million and our debt to total capital was approximately 15%. The financial health of the Company and the availability of capital to fund our growth will continue to be a critical element in our future success.

     As we end fiscal 2001, it is a time of reflection for all of us at American Woodmark. In 1989 we launched the 1995 Vision, the first six-year plan for the Company. This Vision was revolutionary in the way we thought about our business and it created the foundation for the Company we know today.

     In 1995 we launched the 2001 Vision, our second six-year plan. The goal of this second Vision was to take advantage of the new business model and create a growth Company. Our efforts over the past six years in this regard have been an unqualified success. Since fiscal 1995, the Company has set new

2001 Annual Shareholders Report    3

TO OUR SHAREHOLDERS continued

sales records in five of the six years and more than doubled annual revenue. We have established new net income records in four of the six years. The market value of the Company has increased over 350%, creating over $150 million in value for our shareholders.

     As we look forward, we are excited about the future and about the launching of our third six-year plan. During the years under our 2007 Vision we are bound to see many more changes in the marketplace and in our Company. Ultimately, our goal over the next six years is to firmly establish American Woodmark as the number one player in the industry. We want to be the biggest, the best and the most profitable major cabinet Company in North America. We want to be a great Company.

     As we begin this new Vision, we face many challenges. The economic outlook is uncertain. Our customers are demanding more variety, higher quality and even better service. The industry has many capable suppliers. Our organization will have to develop all the necessary skills to achieve our ultimate Vision.

     We are, however, optimistic in the face of these challenges. American Woodmark is a financially sound Company with outstanding employees and strategic partnerships with the leading retailers, home builders and distributors in the country. We are confident that we will meet these challenges and that we will continue to grow and prosper.

     The growing family at American Woodmark has reached 4,000 strong. As individuals, these men and women are dedicated and resourceful. As a team, they are second to none. I am extremely proud of the way each and every member of our team responded to the challenges we faced over the past year. After a record first quarter, the economic slowdown took a toll on our second quarter performance. Instead of reducing expectations based on factors out of our control, our employees rededicated themselves to the values expressed in our Mission Statement. Through their creativity and hard work, we overcame these obstacles and posted both record revenue and income for the year. I congratulate these individuals and their teams for a job well done.

     I look forward to reporting our progress in fiscal 2002 on our journey to a new Vision for 2007. Thank you for your continuing support of American Woodmark.

James J. Gosa
President and Chief Executive Officer

 

4    American Woodmark Corporation

Five-Year Selected Financial Information

   
Fiscal Years Ended April 30
    2001     2000     1999     1998     1997  
 
Financial Statement Data                              
(in millions, except share data)                              
Net sales (1) $ 416.7   $ 377.4   $ 320.3   $ 237.2   $ 216.5  
Income before income taxes and cumulative                              
   effect of accounting changes (2)   30.8     24.6     28.5     21.3     17.1  
Net income   17.4     14.5     17.5     13.0     10.5  
Earnings per share                              
      Before cumulative effect of change in                              
         accounting principles                              
            Basic   2.36     1.82     2.23     1.68     1.37  
            Diluted   2.34     1.79     2.18     1.65     1.35  
      After cumulative effect of change in                              
         accounting principles                              
            Basic   2.16     1.82     2.23     1.68     1.37  
            Diluted   2.14     1.79     2.18     1.65     1.35  
Depreciation and amortization expense   19.6     14.7     9.7     7.8     7.8  
Total assets   180.4     166.7     140.6     106.5     87.2  
Long-term debt   16.8     22.0     11.4     8.7     10.6  
Shareholders’ equity   109.5     92.6     78.3     59.1     46.3  
Cash dividends declared per share   .20     .19     .15     .11     .06  
Average shares outstanding                              
            Basic   8.1     8.0     7.9     7.8     7.7  
            Diluted   8.1     8.1     8.0     7.9     7.8  
 
Percent of Sales                              
Gross profit   25.3 %   24.3 %   27.1 %   29.0 %   26.9 %
Sales, general and administrative expenses   17.5     17.3     18.4     20.0     18.7  
Income before income taxes and cumulative                              
   effect of accounting changes   7.4     6.5     8.9     9.0     7.9  
Net income   4.2     3.8     5.5     5.5     4.9  
                               
Ratio Analysis                              
Current ratio   1.5     1.5     1.7     1.9     1.9  
Inventory turnover (3)   11.7     14.0     15.6     15.1     15.3  
Percentage of capital (long-term debt plus equity):                              
      Long-term debt   13.3 %   19.2 %   12.7 %   12.8 %   18.7 %
      Equity   86.7     80.8     87.3     87.2     81.3  
Return on equity (average %)   17.7     16.9     25.5     24.7     25.7  
Collection period — days (4)   34.6     37.9     39.4     37.2     36.1  
   
(1) Prior-year amounts have been reclassified to conform to the current year presentation under EITF 00-22, “Accounting for Points and Certain Other Time-Based or Volume-Based Sales Incentive Offers and Offers for Free Products or Services to be Delivered in the Future.”
(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.

2001 Annual Shareholders Report    5

Financial Review
2 0 0 1

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    
  2001 2000 1999
Net sales 100.0 % 100.0 % 100.0 %
Cost of sales and distribution 74.7   75.7   72.9  
Gross profit 25.3   24.3   27.1  
Selling and marketing expenses 13.8   13.2   13.2  
General and administrative expenses 3.7   4.1   5.2  
Restructuring costs —   0.4   —  
Operating income 7.8   6.5   8.7  
Interest expense 0.3   0.1   0.1  
Income before income taxes 7.4   6.5   8.9  
Provision for income taxes 2.8   2.7   3.4  
Net income 4.2   3.8   5.5  

6   American Woodmark Corporation

Fiscal Year 2001 Compared to Fiscal Year 2000

Net sales for fiscal 2001 increased 10.4% to $416.7 million from $377.4 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 10.5% 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, by new programs and by 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.

     Gross profit in fiscal 2001 increased to 25.3% from 24.3% 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% from prior year due to a shift toward more material intensive products.

     Labor costs per unit in fiscal 2001 increased 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% on a per unit basis primarily due to increased depreciation expense on capacity added during fiscal 2000.

     Freight cost per unit increased 21% 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 13.8%, up from 13.2% in fiscal 2000. The primary components of the increase were costs associated with promotional expenses relating to product merchandising programs and increases in staffing to support growth.

     General and administrative expenses for fiscal 2001 as a percent of sales were 3.7%, down from 4.1% 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%, a decrease from 41% in fiscal 2000. The decrease was due primarily to the write-off of non-deductible goodwill in the prior year.

2001 Annual Shareholders Report    7

FINANCIAL REVIEW continued

Liquidity and Capital Resources

The Company’s operating activities generated $21.5 million in net cash during fiscal 2001 as compared to $21.3 million in the prior year. Cash generated from operations was essentially the same as the prior year, as an increase in net income, an increase in depreciation and amortization, a decrease in customer receivables and an increase in accrued liabilities offset the impact of the restructuring charge in the prior year, an increase in inventories, an increase in other assets and a decrease in accounts payable.

     The increase in the provision for depreciation and amortization was a result of the Company’s capital spending program. Customer receivables decreased from fiscal year 2000 to fiscal 2001 due to an improvement in collection performance and the impact of SAB 101. The increase in accrued liabilities was related to timing differences between the recognition of expenses and actual payment for certain items, most notably for amounts due under the Company’s performance-based employee incentive compensation programs. The increase in work-in-process inventories was due to additional facilities and product lines. The increase in finished goods inventories was due to the impact of SAB 101. The increase in other assets was due to promotional display additions associated with the Company’s continued growth, primarily in the home center channel. The accounts payable decrease was due to normal timing in the processing of vendor invoices. The Company has made no changes to payment practices.

     Capital spending decreased $23.3 million from the prior year as the Company’s expansion plans did not require the same level of aggressive capital spending as experienced during fiscal 2000. During fiscal 2001, the Company invested capital resources in new facilities, the expansion of existing facilities and capacity to support additional products. During fiscal 2001, the Company opened its second flatstock processing facility in Humboldt, Tennessee. In addition, the Company expanded the Monticello, Kentucky, facility to increase component production capacity. The Company expects that in order to support continued sales growth, it will be necessary to make continued investments in plant, property and equipment. Capital expenditures in fiscal 2002 are expected to be between $25 million and $30 million.

     The Company decreased overall debt by $4.9 million as cash flow from operations exceeded payments to acquire property, plant, and equipment from April 30, 2000 to April 30, 2001.

     On January 18, 2001, the Company announced that the Board of Directors had authorized the use of up to $10.0 million for the repurchase of the Company’s Common Stock. The Company repurchased $493,000 in Common Stock during fiscal 2001.

     Cash dividends of $1.6 million were paid on Common Stock during fiscal 2001.

     Cash flow from operations combined with accumulated cash on hand and available borrowing capacity is expected to be sufficient to meet forecasted working capital requirements, service existing debt obligations and fund capital expenditures for fiscal 2002.

Outlook for Fiscal 2002

The Company anticipates continued uncertainty regarding the strength and prospects for growth in the domestic economy through at least the first half of fiscal 2002. This uncertainty could result in lower, or even negative, growth rates in the relevant markets for the Company. While the Company expects to continue to increase sales and gain market share in a slow-growth market environment, the Company is not immune to the effects of overall market demand. Significant disruptions in demand for the Company’s products, which may result from lower overall remodeling and new construction activity, could result in less than anticipated growth for the Company.

     Based on currently available data, the Company does expect to realize higher sales during fiscal 2002 versus fiscal 2001.

8   American Woodmark Corporation

Assuming the company is successful in generating higher net sales, the Company should maintain or improve profitability performance over the same period of the prior year. Additional volume and improved efficiencies should be sufficient to offset the anticipated rise in other costs.

     Over the past three years the Company has significantly expanded overall capacity. Long-term projected growth, however, will require additional capital projects designed to increase both component and assembly manufacturing capacities. Planned for fiscal year 2002 are expansions of the Monticello, Kentucky, wood processing facility and the Kingman, Arizona, assembly facility. The Company also anticipates proceeding with site selection for two new facilities to support increased demand for both component and finished goods production. Additional capital spending will include projects planned to improve productivity, support cost-saving initiatives and replace aging equipment. Management establishes debt-to-equity targets in order to maintain the financial health of the Company and is prepared to trim investment plans to maintain financial strength.

     The aforementioned forward-looking statements should be read in combination with information presented in the Risk Factors section of Management’s Discussion and Analysis.

Fiscal Year 2000 Compared To Fiscal Year 1999

Net sales for fiscal 2000 increased 17.8% to $377.4 million from $320.3 million in fiscal 1999. Improved sales were the result of new product introductions and continued growth in all primary channels of distribution. In fiscal 2000, the average price per unit increased 6.2% over fiscal 1999. This increase was the result of a combination of improved product and channel mix and price increases implemented during the third quarters of fiscal 1999 and 2000.

     Overall unit volume increased approximately 11% from the prior year as the Company gained market share. Within the home center channel, growth was driven by an increased product offering and by the introduction of exclusive branding. Unit shipments to direct builders improved primarily through increased activity in the Sunbelt and Northeastern regions of the United States. Unit shipments to distributors were flat as compared to the prior fiscal year.

     Gross profit in fiscal 2000 decreased to 24.3% from 27.1% in fiscal 1999. The decrease in gross profit was due to higher costs for labor, overhead, distribution and certain volume-based customer incentives. The Company experienced higher labor costs primarily due to the impact of new and inexperienced production employees hired to support the Company’s growth. Higher overhead costs were the result of start-up and increased depreciation expenses resulting from the Company’s capital investments in new facilities and other capacity expansions. Higher distribution costs were the result of increased standard freight rates from third-party carriers, increased fuel surcharges and changes to the network of third-party carriers used by the Company. Higher volume-based customer incentives were the result of changes in customer mix.

     Material cost per unit increased 2.6% from prior year due to a shift toward more material-intensive products and increased net scrap. The increase in net scrap was attributed to the relative inexperience of new production employees hired in fiscal 2000. The unfavorable impact of out-sourced components experienced in fiscal 1999 was substantially reduced through facility and process expansions that were completed in fiscal 2000.

     Labor costs per unit in fiscal 2000 increased approximately 12% over the prior fiscal year as productivity decreased. The decrease in labor productivity was attributed to ineffiencies experienced at the Company’s assembly facilities during the second and third fiscal quarters and the relative inefficiency of the new facilities due to the significant number of new, relatively inexperienced employees hired to increase capacity. Health care costs increased in fiscal

2001 Annual Shareholders Report    9

FINANCIAL REVIEW continued

2000 due to both an increase in the number of eligible employees and higher per capita claims.

     Freight cost per unit increased approximately 22% 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 were 13.2% in both fiscal 2000 and fiscal 1999.

     General and administrative expenses for fiscal 2000 as a percent of sales were 4.1%, down from 5.2% in fiscal 1999. Year-over-year increases in payroll and bad debt expenses were more than offset by a reduction in expense for employee incentives. Bad debt expense increased as a result of ongoing evaluation of the collectibility of accounts receivable. The reduction in employee incentives was due to Company performance versus predetermined targets.

     During fiscal 2000, the Company recorded a pre-tax restructuring charge of $1.5 million related to its custom cabinet line. Components of this charge included $884,000 for impairment of goodwill, $300,000 for impairment of promotional displays and $316,000 for impairment of certain other assets. The Company acquired Knapp Woodworking in 1998 in order to develop a line of custom cabinets for the home center channel. Test marketing of the line in the spring of 2000 did not meet performance parameters for revenue, margin and return on investment. Based on evaluation of the test, the Company approved a plan to discontinue the custom cabinet line and convert the existing facility to a component manufacturing plant. The converted facility will support the production of other lines offered by the Company. An evaluation of the recoverability of all assets related to the line of custom cabinets was performed and the Company concluded that a complete impairment of goodwill and a partial impairment of certain other assets had occurred.

     Net interest expense for fiscal 2000 increased $107,000 from the prior year to $470,000. Additional interest expense on increased debt was partially offset by capitalized interest. Capitalized interest increased from $332,000 to $589,000 as the Company continued its capital spending plan to increase capacity. Total debt increased $10.5 million during fiscal 2000 primarily through borrowings against the Company’s five-year revolving credit facility.

     Other income decreased $635,000 from $999,000 in fiscal 1999 to $364,000 in fiscal 2000. The decrease was due to the reduction in interest earned from short-term cash investments.

     The Company’s combined federal and state effective tax rate in fiscal 2000 was 41%, an increase from 39% in fiscal 1999. The increase was due to the write-off of non-deductible goodwill and a reduction in tax-exempt interest earned.

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.

Recent Accounting Pronouncements

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.

10   American Woodmark Corporation

Under the new accounting rule, the Company now recognizes revenue when both title and risk of loss transfers 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. The cumulative effect of the change on prior years’ retained earnings resulted in an after-tax charge to fiscal 2001 income of $1.6 million. As a result of the adoption of SAB 101, approximately $7.3 million in revenue that had been realized in fiscal 2000 was recognized in the first quarter of fiscal 2001. Had SAB 101 been effective for all prior fiscal years presented, the pro forma net income and earnings per share would not have been materially different from the previously reported results.

     In January 2001, the Financial Accounting Standards Board’s Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-22, “Accounting for Points and Certain Other Time-Based or Volume-Based Sales Incentive Offers and Offers for Free Products or Services to be Delivered in the Future.” The Company was required to adopt EITF 00-22 in fiscal 2001. EITF 00-22 requires that certain volume-based rebates to customers be classified as a reduction of revenue. Certain amounts previously classified by the Company as selling and marketing expenses have been reclassified to net sales for all periods presented.

     In April 2001, the Financial Accounting Standards Board’s EITF reached a consensus on Issue No. 00-25, “Vendor Income Statement Characterization of Consideration to a Purchaser of the Vendor’s Products or Services.” The Company is required to adopt EITF 00-25 no later than the fourth fiscal quarter of fiscal 2002. EITF 00-25 requires that certain activities such as the payment of “slotting fees,” cooperative advertising arrangements and “buy downs” be classified as a reduction in revenue. The adoption of EITF 00-25 will have no impact on the net income or earnings per share of the Company. The impact on the consolidated financial statements at adoption will result in a material adjustment to both net sales and selling and marketing expense as the Company currently classifies some of the defined activities as expense.

     The Company will be 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 adoption will not have a material impact on the Company’s financial position or results from operations.

Dividends Declared

On May 16, 2001, the Board of Directors approved a $.05 per share cash dividend on its Common Stock. The cash dividend was paid on June 12, 2001, to shareholders of record on May 31, 2001.

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 pressures and commodity price increases have been relatively modest over the past five years, except for lumber prices, which rose significantly during fiscal 1997. The Company has generally been able over time to recover the effects of inflation and commodity price fluctuations through sales price increases.

     The Company is also exposed to changes in interest rates primarily from its long-term debt arrangements and, secondarily, its investments in securities. The Company uses interest rate swap agreements to manage exposure to interest rate changes on certain long-term borrowings. The Company has variable-rate debt instruments

2001 Annual Shareholders Report    11

FINANCIAL REVIEW continued

representing approximately 56% of its total long-term debt at April 30, 2001. If interest rates average 100 basis points more in fiscal 2002 than during fiscal 2001, the Company’s interest expense would be increased by approximately $104,000. These amounts are determined by considering the impact of the hypothetical interest rates on the Company’s variable-rate, long-term debt at April 30, 2001, after giving consideration to variable-rate debt for which the rate has been fixed via an interest rate swap.

     While the Company is not currently aware of any other events that would result in a material decline in earnings from fiscal 2001, we participate in an industry that is subject to rapidly changing conditions. The preceding forward-looking statements are 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 in the cost of diesel fuel, and/or transportation related services, (6) the need to respond to price or product initiatives launched by a competitor, (7) a significant investment which provides a substantial opportunity to increase long-term performance and (8) 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 short-term operating results.

12   American Woodmark Corporation

Quarterly results of Operations (Unaudited)

  Previously       (a)   Previously     (a)   Previously   (a)        
  Reported     Restated     Reported   Restated     Reported   Restated        
FY 2001 07/31/00   07/31/00   10/31/00   10/31/00   01/31/01   01/31/01   04/30/01  
 
(in thousands, except share amounts)                                              
Net Sales $ 106,491   $ 104,297   $ 107,209   $ 103,857   $ 101,179   $ 98,940   $ 109,575  
Gross Profit   29,192     26,431     27,409     24,295     26,308   23,798     30,926  
Income before income taxes   8,516       8,627       5,864     5,683     5,504     5,715     10,750  
Net income before cumulative                                              
   effect of change in accounting                                              
   principles   5,106       5,181       3,522     3,401     3,299     3,431     6,990  
Cumulative effect of change                                              
   in accounting principles   —     (1,583 )     —     —     —     —     —  
Net income $ 5,106     $ 3,598     $ 3,522   $ 3,401   $ 3,299   $ 3,431   $ 6,990  
Earnings per share:                                              
Net income before cumulative                                              
   effect of change in accounting                                              
   principles                                              
      Basic $ 0.64   $   0.65   $   0.44   $ 0.42   $ 0.41   $ 0.42   $ 0.86  
      Diluted   0.63       0.64       0.43     0.42     0.41     0.42     0.85  
Cumulative effect of change                                              
   in accounting principle   —       (0.20 )     —     —     —     —     —  
Net income                                              
      Basic $ 0.64   $   0.45   $   0.44   $ 0.42   $ 0.41   $ 0.42   $ 0.86  
      Diluted   0.63       0.44       0.43     0.42     0.41     0.42     0.85  
FY 2000(b)                                              
 
Net Sales $ 91,883       —   $ 96,821     —   $ 89,402     —   $ 99,268  
Gross Profit   23,779       —     23,071     —     19,909     —     24,756  
Income before income taxes   7,584       —       6,727     —     4,591     —     5,653 (c)
Net income   4,614       —       4,100     —     2,562     —     3,191  
Earnings per share:                                              
Net income                                              
      Basic $ 0.58       —   $   0.52     —   $ 0.32     —   $ 0.40  
      Diluted   0.57       —       0.51     —     0.32     —     0.39  
   
(a) Amounts have been restated for the adoption of SAB 101, “Revenue Recognition in Financial Statements” in the fourth quarter which was applied retroactively to May 1, 2000. Certain amounts have also been reclassified for the adoption of EITF 00-22, “Accounting for Points and Certain Other Time-Based or Volume-Based Sales Incentive Offers and Offers for Free Products or Services to be Delivered in the Future.”
(b) Amounts have been reclassified to conform to the current year presentation.
(c) Income before income taxes for the fourth quarter of fiscal 2000 includes $1,530,000 in restructuring charges.

2001 Annual Shareholders Report    13

FINANCIAL REVIEW continued

Consolidated Balance Sheet

     
April 30
      
(in thousands, except share amounts)   2001     2000  
 
             
Assets            
Current Assets            
 
   Cash and cash equivalents $ 1,714   $ 4,183  
   Customer receivables   29,410     35,813  
   Inventories   30,267     22,739  
   Prepaid expenses and other   1,728     1,826  
   Deferred income taxes   4,760     3,074  
 
      Total Current Assets   67,879     67,635  
             
Property, Plant and Equipment   93,641     86,954  
Promotional Displays   15,761     10,099  
Other Assets   3,087     1,968  
 
  $ 180,368   $ 166,656  
 
             
Liabilities and Shareholders’ Equity            
Current Liabilities            
   Accounts payable $ 17,038   $ 20,195  
   Accrued compensation and related expenses   16,269     15,154  
   Current maturities of long-term debt   2,118     1,876  
   Accrued marketing expenses   3,505     3,148  
   Other accrued expenses   6,289     5,211  
 
      Total Current Liabilities   45,219     45,584  
             
Long-Term Debt, less current maturities   16,819     22,009  
Deferred Income Taxes   7,246     4,897  
Long-Term Pension Liabilities   1,571     1,554  
Commitments and Contingencies   —     —  
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:            
      8,079,093-2001; 8,010,427-2000   24,412     22,896  
   Retained earnings   85,101     69,716  
 
      Total Shareholders’ Equity   109,513     92,612  
 
  $ 180,368   $ 166,656  
 

See notes to consolidated financial statements.

14   American Woodmark Corporation

Consolidated Statement of Income and Retained Earnings

     
Years Ended April 30
    
(in thousands, except share amounts)   2001  
2000
     1999  
 
                   
Net sales $ 416,668   $ 377,374   $ 320,279  
Cost of sales and distribution   311,217     285,859     233,414  
 
                   
      Gross Profit   105,451     91,515     86,865  
Selling and marketing expenses   57,653     49,789     42,387  
General and administrative expenses   15,433     15,535     16,567  
Restructuring costs   —     1,530     —  
 
                   
      Operating Income   32,365     24,661     27,911  
Interest expense   1,439     470     363  
Other (income) expense   152     (364 )   (999 )
 
                   
      Income Before Income Taxes and Cumulative                  
         Effect of Accounting Change   30,774     24,555     28,547  
Provision for income taxes   11,771     10,088     11,038  
 
                   
      Income Before Cumulative Effect of Accounting Change   19,003     14,467     17,509  
Cumulative effect of accounting change, net of tax   (1,583 )   —     —  
 
                   
      Net Income   17,420     14,467     17,509  
      Retained Earnings, Beginning of Year   69,716     56,762     40,433  
Stock repurchases   (423 )   —     —  
Cash dividends   (1,612 )   (1,513 )   (1,180 )
 
      Retained Earnings, End of Year $ 85,101   $ 69,716   $ 56,762  
 
                   
Share Information                  
Earnings per share                  
   Before cumulative effect of change in accounting principles                  
      Basic $ 2.36   $ 1.82   $ 2.23  
      Diluted   2.34     1.79     2.18  
   After cumulative effect of change in accounting principles                  
      Basic $ 2.16   $ 1.82   $ 2.23  
      Diluted   2.14     1.79     2.18  
Cash dividends per share   .20     .19     .15  
 

See notes to consolidated financial statements.

2001 Annual Shareholders Report    15

 

FINANCIAL REVIEW continued

Consolidated Statement of Cash Flows

   
Years Ended April 30
  
(in thousands)   2001  
2000
     1999  
 
Operating Activities                  
Net Income $ 17,420   $ 14,467   $ 17,509  
Adjustments to reconcile net income to net                  
   cash provided by operating activities:                  
      Cumulative effect of change in accounting principles   1,583     —     —  
      Provision for depreciation and amortization   19,635   14,712     9,690  
      Net (gain) loss on disposal of property, plant, and equipment   22     28     (17 )
      Deferred income taxes   2,187     121     79  
      Restructuring costs   —     1,530     —  
      Other non-cash items   2,316     2,564     1,436  
      Changes in operating assets and liabilities:                  
         Customer receivables   (1,959 )   1,907   (10,807 )
         Inventories   (4,183 )   (5,566 )   (5,532 )
         Other assets (14,660 )   (9,091 )   (8,645 )
         Accounts payable   (2,462 )   1,276     5,648  
         Accrued compensation and related expenses   1,115     (1,412 )   3,542  
         Other   477     716     (429 )
 
         Net Cash Provided by Operating Activities   21,491   21,252     12,474  
                   
Investing Activities                  
Payments to acquire property, plant, and equipment (17,445 ) (40,787 ) (21,691 )
Proceeds from sales of property, plant, and equipment   26     16     39  
 
         Net Cash Used by Investing Activities (17,419 ) (40,771 ) (21,652 )
                   
Financing Activities                  
Payment of loans   —     —     (1,119 )
Payments of long-term debt (123,698 ) (61,974 )   (3,790 )
Proceeds from long-term borrowings 118,750   72,700     5,000  
Common Stock issued through stock option plans   512     324     507  
Repurchase of common stock   (493 )   —     —  
Dividends paid   (1,612 )   (1,513 )   (1,180 )
 
         Net Cash Provided (Used) by Financing Activities   (6,541 )   9,537     (582 )
 
Decrease in Cash and Cash Equivalents   (2,469 )   (9,982 )   (9,760 )
Cash and Cash Equivalents, Beginning of Year   4,183   14,165     23,925  
 
Cash and Cash Equivalents, End of Year   $1,714   $ 4,183   $ 14,165  
 

See notes to consolidated financial statements.

16   American Woodmark Corporation

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, major builders and home manufacturers.

     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 both title and risk of loss transfers 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. The cumulative effect of the change on prior years’ retained earnings resulted in a charge to fiscal 2001 income of $2.6 million pre-tax and $1.6 million after tax. As a result of the adoption of SAB 101, approximately $7.3 million in revenue that had been realized in fiscal 2000 was recognized in the first quarter of fiscal 2001. Had SAB 101 been effective for all prior fiscal years presented, the pro forma net income and earnings per share would not have been materially different from the previously reported results.

     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.

2001 Annual Shareholders Report    17

FINANCIAL REVIEW continued

     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 January 2001, the Financial Accounting Standards Board’s Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-22, “Accounting for Points and Certain Other Time-Based or Volume-Based Sales Incentive Offers and Offers for Free Products or Services to be Delivered in the Future.” The Company was required to adopt EITF 00-22 in fiscal 2001. EITF 00-22 requires that certain volume-based rebates to customers be classified as a reduction of revenue. Certain amounts previously classified by the Company as selling and marketing expenses have been reclassified to net sales for all periods presented.

     In April 2001, the Financial Accounting Standards Board’s Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-25, “Vendor Income Statement Characterization of Consideration to a Purchaser of the Vendor’s Products or Services.” The Company is required to adopt EITF 00-25 no later than the fourth fiscal quarter of fiscal 2002. EITF 00-25 requires that certain activities such as the payment of “slotting fees,” cooperative advertising arrangements and “buy downs” be classified as a reduction in revenue. The adoption of EITF 00-25 will have no impact on the net income or earnings per share of theCompany. The impact on the consolidated financial statements at adoption will result in a material adjustment to both net sales and selling and marketing expense as the Company currently classifies some of the defined activities as expense.

     The Company will be 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 adoption will not have a material impact on the Company’s financial position or results from operations.

     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
  
(in thousands)   2001     2000  
 
             
Gross customer receivables $ 34,066   $ 39,298  
Less:            
   Allowance for bad debt   (1,350 )   (769 )
   Allowance for returns            
      and discounts   (3,306 )   (2,716 )
 
Net customer receivables $ 29,410   $ 35,813  
 

18   American Woodmark Corporation

Note C — Inventories
The components of inventories were:

   
April 30
  
(in thousands)   2001       2000  
 
Raw materials
$
 12,041    
$
 12,136  
Work-in-process   20,600       17,246  
Finished goods   5,079       1,006  
 
Total FIFO inventories   37,720       30,388  
Reserve to adjust inventories to LIFO value   (7,453 )     (7,649 )
 
Total inventories
$
 30,267    
$
 22,739  
 

Note D — Property, Plant and Equipment
The components of property, plant and equipment were:

   
April 30
  
(in thousands)   2001       2000  
 
Land
$
 1,506    
$
 1,506  
Buildings and improvements   39,082       33,718  
Buildings and improvements – capital leases   9,195       8,043  
Machinery and equipment 106,098       88,926  
Machinery and equipment – capital leases   436       25  
Construction in progress   1,101       9,759  
 
  157,418     141,977  
Less allowance for depreciation (63,777 )   (55,023 )
 
Total
$
 93,641    
$
 86,954  
 

Depreciation expense amounted to $10,727, $7,490, and $5,184 in fiscal 2001, 2000, and 1999, respectively.

Note E — Loans Payable and Long-Term Debt
Maturities of long-term debt are as follows:

               
Fiscal Years Ending April 30
              
                                2007 and        
                                There-   Total  
(in thousands)   2002   2003     2004     2005   2006     after   Outstanding  
 
Revolving Credit Facility $ —   $ —   $ —   $ 8,650   $ —   $ —   $ 8,650  
Term Loans   597     611     617     123     130     803     2,881  
Industrial revenue bonds   925     2,500     —     —     —     —     3,425  
Capital lease obligations   596     608     640     675     712     750     3,981  
 
Total $ 2,118   $ 3,719   $ 1,257   $ 9,448   $ 842   $ 1,553   $ 18,937  
 
Less current maturities                                     $ 2,118  
 
Total long-term debt                                     $ 16,819  
 

2001 Annual Shareholders Report    19

FINANCIAL REVIEW continued

     The Company’s primary loan agreement provides for a five-year $45 million revolving credit facility, which expires on February 7, 2005. Borrowings under the revolving credit facility bear interest at the LIBOR rate (4.46% at April 30, 2001) plus a spread (0.68% at April 30, 2001) based on Total Funded Debt to earnings, before deduction of interest and taxes, plus depreciation and amortization (EBITDA).

     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, 2001, these amounts were immaterial. The Company does not invest, trade, or otherwise speculate in any derivatives or similar type financial instruments.

     On April 30, 2001, term loans of $2.9 million were outstanding. The term loans bore an average interest rate of 5.7% on April 30, 2001.

     On April 30, 2001, the Company had $3.4 million outstanding in industrial revenue bonds, maturing at various dates through 2003. Due to an interest rate swap agreement, a fixed rate of approximately 5.0% applies to $3.0 million through December 1, 2002. The variable rate that would have applied without the rate swap was 4.4% on April 30, 2001. On the remaining $675,000 of outstanding bonds, the variable interest rate was 4.4% on April 30, 2001.

     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, 2001. These obligations mature through 2008.

     On May 31, 2001, the Company reduced the amount available under the revolving credit facility to $35 million and entered into a $10 million term loan. The term loan matures on May 31, 2006, and carries a fixed interest rate of 6.0% via an interest rate swap.

     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, 2001.

     Interest paid was $1,439,000, $1,290,000 and $923,000, during fiscal 2001, 2000, and 1999, respectively. Net amounts to be received or paid under interest rate swap agreements are accrued as an adjustment to interest expense.

     Interest capitalized was $342,000, $589,000, and $332,000 during fiscal 2001, 2000, and 1999, respectively.

Note F — Shareholders’ Equity

Common Stock

Transactions affecting Common Stock were as follows:

 
Shares
   Amount  
 
Outstanding
   (in thousands)  
 
           
Balance at April 30, 1998 7,800,886  
$
 18,704  
Stock options exercised 37,346     507  
Stock issued to AWSOP 29,969     897  
Stock issued for Knapp          
Acquisition 47,934     1,467  
 
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  
 

20   American Woodmark Corporation

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 one year 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 $566,000, $439,000, and $526,000, in fiscal 2001, 2000, and 1999, respectively.

     The Company matches 401(k) contributions in the amount of 50% of an employee’s contribution to the plan up to 3% of base salary for an effective maximum Company contribution of 1.5% of base salary. The expense for 401(k) matching contributions for this plan was $753,000, $684,000, and $623,000 in fiscal 2001, 2000, and 1999, respectively.

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 three 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 three 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, 2001, 2000 and 1999, 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:

2001 Annual Shareholders Report    21

FINANCIAL REVIEW continued

(in thousands, except share amounts)   2001     2000     1999  
 
Net Income before cumulative effect of change                  
   in accounting principles $ 17,961   $ 13,199   $ 16,573  
Cumulative effect of change in accounting principle   (1,583 )   —     —  
Net Income   16,378     13,199     16,573  
Net Income per common share:                  
      Net income before cumulative effect of change                  
         in accounting principles                  
      Basic   2.22     1.66     2.11  
      Diluted   2.21     1.64     2.04  
Cumulative effect of change in accounting principle                  
      Basic   (0.20 )   —     —  
      Diluted   (0.20 )   —     —  

     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:

    2001   2000   1999  
 
Expected Volatility   0.475     0.475     0.479  
Risk-free interest rates   5.50 %   5.75 %   5.50 %
Expected life in years   6.0     6.0     5.5  
Weighted-average fair value per share $ 9.76   $ 18.58   $ 14.07  

     The following table summarizes stock option activity and related information under the stock option plans for the fiscal years ended April 30:

  2001   2000   1999  
 
Outstanding at beginning of year 647,800   575,251   480,351  
Granted 274,000   143,500   137,100  
Exercised (35,933 ) (48,350 ) (39,050 )
Expired or cancelled (48,600 ) (22,601 ) (3,150 )
 
Outstanding at April 30 837,267   647,800   575,251  
 
Exercisable at April 30 456,423   347,868   216,202  
Available for future issuance at April 30 863,496   1,081,828   202,429  
 
Weighted average exercise prices (in dollars):                  
Outstanding at beginning of year $ 21.55   $ 21.27   $ 11.71  
Granted   19.93     37.42     29.57  
Exercised   12.35     5.51     8.29  
Expired or cancelled   28.45     20.90     10.13  
Outstanding at April 30   21.01     21.55     21.27  
Exercisable at April 30 $ 16.52   $ 14.13   $ 10.06  

22   American Woodmark Corporation

     The following table summarizes information about stock options outstanding at April 30, 2001 [remaining lives (in years) and exercise prices are weighted-averages]:

   
Options Outstanding
  
Options Exercisable
  
   
 
  Option Price     Remaining     Exercise        
Exercise
  
  per Share Options Life     Price   Options    
Price
  
 
 
$ 5.25-$6.50 100,300  
5.2
   $
6.06
   100,300   $ 6.06  
$ 9.25-$14.44 46,350  
5.8
    
12.18
   46,350     12.18  
$ 15.56-$18.94 338,217  
7.4
    
17.48
   194,417     16.68  
$ 21.72-$37.81 352,400  
8.0
    
29.81
   115,356     27.07  

Earnings Per Share

The following table summarizes the computations of basic and diluted earnings per share:

 
Fiscal Years Ended April 30
  
(in thousands, except share amounts) 2001   2000     1999  
 
Numerator used in basic and diluted earnings per common share:                  
      Net income $ 17,420   $ 14,467   $ 17,509  
 
Denominator:                  
      Denominator for basic earnings per common share –                  
         weighted-average shares   8,057     7,960     7,856  
      Effect of dilutive securities:                  
            Stock options   87     135     191  
 
Denominator for diluted earnings per common share –                  
   weighted-average shares and assumed conversions   8,144     8,095     8,047  
 
Earnings per common share                  
   Before cumulative effect of change in accounting principles                  
      Basic $ 2.36   $ 1.82   $ 2.23  
      Diluted $ 2.34   $ 1.79   $ 2.18  
   After cumulative effect of change in accounting principles                  
      Basic $ 2.16   $ 1.82   $ 2.23  
      Diluted $ 2.14   $ 1.79   $ 2.18  

2001 Annual Shareholders Report    23

FINANCIAL REVIEW 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  
(in thousands)  
2001
  
2000
  
 
Change in Benefit            
Obligation            
Benefit obligation at            
   beginning of year
$
 24,981  
$
 24,734  
Service cost
1,402  
1,439  
Interest cost
1,916  
1,776  
Amendments
55  
92  
Actuarial gains
(200 )
(2,517 )
Benefits paid
(626 )
(543 )
 
Benefit obligation at end
   
   
   of year
$
 27,528  
$
 24,981  
 
Change in Plan Assets
   
   
Fair value of plan assets at
   
   
   beginning of year
$
 23,582  
$
 21,626  
Actual return on plan assets
(1,428 )
928  
Company contributions
3,333  
1,571  
Benefits paid
(626 )
(543 )
 
Fair value of plan assets at
   
   
   end of year
$
 24,861  
$
 23,582  
 
Funded status of the plans
$
 (2,667 )
$
 (1,399 )
Unamortized prior service cost
610  
664  
 
Unrecognized net
   
   
   actuarial loss (gain)
2,637  
(509 )
Unrecognized net transition
   
   
   obligation
8  
82  
 
Prepaid (accrued) benefit cost
$
 588  
$
 (1,162 )
Amounts Recognized in the
   
   
Consolidated Balance Sheet
   
   
Prepaid benefit cost
$
 2,550  
$
 1,389  
 
Accrued benefit liability
(1,962 )
(2,551 )
 
Net amount recognized
$
 588  
$
 (1,162 )
 
Weighted-Average
   
   
Assumptions as of April 30
   
   
Discount rate
7.65 %
7.75 %
Expected return on plan assets
8.0 %
8.0 %
Rate of compensation increase
4.0 %
4.0 %

     For fiscal 2000 and fiscal 2001, both of the Company’s pension plans contained total assets in excess of the accumulated benefit obligation for the plan.

        Pension Benefits        
(in thousands) 2001   2000   1999  
 
Components of
   
   
   
   Net Periodic
   
   
   
   Benefit Cost
   
   
   
Service cost
$
 1,402  
$
 1,439  
$
 1,137  
Interest cost
1,916  
1,776  
1,544  
Expected return on
   
   
   
   plan assets
(1,918
 )
(1,742
 )
(1,598
 )
Amortization of the
   
   
   
   unrecognized
   
   
   
   transition
   
   
   
   obligation
75  
82  
82  
Amortization of
   
   
   
   prior service cost
109  
106  
90  
 
Benefit cost
$
 1,584  
$
 1,661  
$
 1,255  
 

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  
 
(in thousands)   2001     2000     1999  
 
                   
Current                  
   Federal
$
 8,406  
$
 8,651  
$
 9,451  
   State
1,178  
1,316  
1,508  
 
      Total current
9,584  
9,967  
10,959  
 
Deferred (benefit)
   
   
   
   Federal
1,927  
124  
87  
   State
260  
(3 )
(8 )
 
      Total deferred
2,187  
121  
79  
 
 
   
   
   
Total provision
$
 11,771  
$
 10,088  
$
 11,038  
 

24    2001 Annual Shareholders Report

     The Company’s effective income tax rate varied from the federal statutory rate as follows:

 
Fiscal Years Ended April 30
 
2001
 2000
1999
 
             
Federal statutory rate 35 % 35 % 35 %
Permanent differences —   2   —  
State income taxes, net            
   of federal tax effect 3   4   4  
Effective income tax rate 38 % 41 % 39 %

     Income taxes paid were $9,235,000, $9,939,000, and $10,944,000 for fiscal years 2001, 2000, and 1999, respectively.

     The significant components of deferred tax assets and liabilities were as follows:

 
April 30
(in thousands) 2001
2000
             
Deferred tax assets            
   Accounts receivable
$
 2,590  
$
 1,199  
   Employee benefits
651  
763  
   Product liability
1,020  
1,020  
   Other
281  
459  
   Total
4,542  
3,441  
Deferred tax liabilities
   
   
   Depreciation
6,219  
4,386  
   Inventory
393  
463  
   Other
416  
415  
   Total
7,028  
5,264  
Net deferred tax liability
$
 2,486  
$
 1,823  

Note I — Restructuring

The Company acquired Knapp Woodworking, Inc., in 1998 in order to develop a line of custom cabinets for the home center industry. During the year ended April 30, 2000, the Company made the decision to abandon the effort to develop this line and to convert the manufacturing facility acquired in the transaction to a component plant supporting the production of the Company’s other products. As a result, the Company recorded a restructuring charge of $1.5 million including $884,000 for goodwill impairment, $300,000 for impairment of promotional displays and $316,000 for impairment of certain other assets. As of April 30, 2001, activity relating to the restructuring was completed.

Note J — 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 three office buildings, a manufacturing building, nine service centers and certain equipment. Total rental expenses amounted to approximately $4,840,000, $5,016,000, and $4,699,000, in fiscal 2001, 2000, and 1999, respectively. Minimum rental commitments as of April 30, 2001, under noncancelable leases are as follows:

Fiscal Year   Operating Capital
(in thousands)  
         
2002  
$
 2,475  
$
 801  
2003  
1,495  
780  
2004  
827  
780  
2005  
614  
780  
2006  
568  
780  
2007 (and thereafter)  
   
780  
   
$
 5,979  
$
 4,701  
Less amounts representing interest  
(720 )
Total obligation under capital lease  
$
 3,981  

2001 Annual Shareholders Report    25

FINANCIAL REVIEW 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 five remaining years with one five-year renewal period available at the Company’s option. Under this agreement, rental expense was $398,000, $391,000, and $386,000, in fiscal 2001, 2000, and 1999, respectively. Rent during the remaining term of approximately $398,000 annually (included in the above table) is subject to adjustment based upon changes in the Consumer Price Index.

Note K — 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, 2001, the Company’s two largest customers, Customers A and B, represented 34.5% and 12.7% 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
  
  2001  
2000
   1999  
 
             
Customer A 42.1  
39.6
   34.1  
Customer B 17.8  
16.0
   13.5  

     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

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 individuals 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.

 

James J. Gosa
President and Chief Executive Officer

 

Kent B. Guichard
Senior Vice President, Finance and
Chief Financial Officer

2001 Annual Shareholders Report 27

FINANCIAL REVIEW continued

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, 2001 and 2000, 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, 2001. 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, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended April 30, 2001, in conformity with accounting principles generally accepted in the United States.

     As discussed in Note A to the Consolidated Financial Statements, in fiscal 2001 the Company changed its method of accounting for revenue from sales to customers.

 

Baltimore, Maryland
June 8, 2001

28   American Woodmark Corporation

 

Directors and Executive Officers

James J. Gosa
Director; President and
Chief Executive Officer

David L. Blount
Senior Vice President, Manufacturing

Kent B. Guichard
Director; Senior Vice President, Finance and
Chief Financial Officer; Corporate Secretary

Ian J. Sole
Senior Vice President, Sales and Marketing

William F. Brandt, Jr.
Chairman of the Board

Daniel T. Carroll
Director;
Chairman
The Carroll Group
A Management Consulting Firm

Martha M. Dally
Director;
Executive Vice President-Personal Products
Sara Lee Corporation

Fred S. Grunewald
Director;
Operating Partner
Kier Group Holding, LLC

C. Anthony Wainwright
Director;
Vice Chairman
McKinney & Silver

Kent J. Hussey
Director;
President and Chief Operating Officer
Rayovac Corporation

Albert L. Prillaman
Director;
Chairman, Chief Executive Officer and President
Stanley Furniture Company, Inc.

Corporate Information

Annual Meeting
The Annual Meeting of Shareholders of
American Woodmark Corporation will be held on
August 30, 2001, at 9:00 a.m. at the Hampton Inn
at 1204 Berryville Avenue in Winchester, Virginia.

Annual Report on Form 10-K
A copy of the Company’s Annual Report on Form
10-K for the fiscal year ended April 30, 2001, may be
obtained free of charge by writing:
    Kent Guichard
    Senior Vice President, Finance and
    Chief Financial Officer
    American Woodmark Corporation
    PO Box 1980
    Winchester, VA 22604-8090

Corporate Headquarters
American Woodmark Corporation
3102 Shawnee Drive
Winchester, VA 22601-4208
(540) 665-9100

Mailing Address
PO Box 1980
Winchester, VA 22604-8090

Transfer Agent
American Stock Transfer & Trust Company
(800) 937-5449

American Woodmark®
is a trademark of American Woodmark Corporation.

Thomasville®
is a trademark of Thomasville Furniture Industries, Inc.

©2001 American Woodmark Corporation

Printed in U.S.A.

29