NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A--Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three- and nine-month period ended January 31, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending April 30, 2022 ("fiscal 2022"). The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes in the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 2021 ("fiscal 2021") filed with the U.S. Securities and Exchange Commission ("SEC").
COVID-19: COVID-19 continues to spread throughout the United States and other countries across the world, and the duration and severity of the long-term effects continue to be unknown. We were negatively impacted by the COVID-19 pandemic as demand for our products significantly decreased during the fourth quarter of fiscal year ended April 30, 2020 ("fiscal 2020") and first quarter of fiscal 2021, as "stay at home" orders and other work disruptions created disruptions to our business operations. Our supply chain has been negatively impacted throughout the pandemic. COVID-19 continues to impact our overall business, including hiring and retaining employees and through challenges caused by material availability and transportation delays, as well as increased pricing related to the aforementioned items.
Inventories: Effective May 1, 2021, the Company changed its accounting method for inventory valuation for inventories which previously utilized a last-in, first-out ("LIFO") basis to a first-in, first-out ("FIFO") basis. All prior periods presented in the condensed consolidated financial statements have been retrospectively adjusted to apply the effects of the change in accounting method. The change in accounting method increased operating income and reduced net loss and earnings per share for the quarter ended January 31, 2022 by $4.1 million, $3.0 million, and $0.18, respectively, and increased operating income and reduced net loss and earnings per share for the nine months ended January 31, 2022 by $9.3 million, $6.8 million, and $0.41, respectively.
Goodwill and Intangible Assets: Goodwill represents the excess of purchase price over the net amount of identifiable assets acquired and liabilities assumed in a business combination measured at fair value. The Company does not amortize goodwill but evaluates for impairment annually, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
In accordance with accounting standards, when evaluating goodwill, an entity has the option first to assess qualitative factors to determine whether events and circumstances indicate that it is more likely than not that goodwill is impaired. If after such assessment an entity concludes that the asset is not impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the asset using a quantitative impairment test, and if impaired, the associated assets must be written down to fair value. There were no impairment charges related to goodwill for the three- and nine-month periods ended January 31, 2022 and 2021.
Intangible assets consist of customer relationship intangibles. The Company amortizes the cost of intangible assets over their estimated useful lives, six years, unless such lives are deemed indefinite. There were no impairment charges related to intangible assets for the three- and nine-month periods ended January 31, 2022 and 2021.
Derivative Financial Instruments: The Company uses derivatives as part of the normal business operations to manage its exposure to fluctuations in interest rates associated with variable interest rate debt and foreign exchange rates. The Company has established policies and procedures that govern the risk management of these exposures. The primary objective in managing these exposures is to add stability to interest expense, manage the Company's exposure to interest rate movements, and manage the risk from adverse fluctuations in foreign exchange rates.
The Company uses interest rate swap contracts to manage interest rate exposures. The Company records derivatives in the condensed consolidated balance sheets at fair value. Changes in the fair value of derivatives designated as cash flow hedges are recorded in accumulated other comprehensive income (loss), and subsequently reclassified into earnings in the period the hedged forecasted transaction affects earnings. If a derivative is deemed to be ineffective, the change in fair value of the derivative is recognized directly in earnings.
The Company also manages risks through the use of foreign exchange forward contracts. The Company recognizes its outstanding forward contracts in the condensed consolidated balance sheets at their fair values. The Company does not designate the forward contracts as accounting hedges. The changes in the fair value of the forward contracts are recorded in other (income) expense, net in the condensed consolidated statements of income.
Note B--New Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2020-04 "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. ASU 2020-04 provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022 and can be adopted as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020. The Company has identified loans and other financial instruments that are directly or indirectly influenced by LIBOR and does not expect the adoption of ASU 2020-04 to have a material impact on the Company's consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes," which simplifies the accounting for income taxes by removing certain exceptions for recognizing investments, performing intraperiod tax allocations and calculating income taxes in interim periods. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12 was effective for the Company beginning May 1, 2021. The Company has reviewed the provisions of the pronouncement and the adoption of this guidance did not have an impact on the Company's consolidated financial statements.
Note C--Net Earnings Per Share
The following table sets forth the computation of basic and diluted net earnings per share:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | January 31, | | January 31, |
(in thousands, except per share amounts) | | 2022 | | 2021 | | 2022 | | 2021 |
Numerator used in basic and diluted net earnings | | | | | | | | |
per common share: | | | | | | | | |
Net income (loss) | | $ | (49,257) | | | $ | 18,445 | | | $ | (44,246) | | | $ | 57,626 | |
Denominator: | | | | | | | | |
Denominator for basic net earnings per common | | | | | | | | |
share - weighted-average shares | | 16,570 | | | 16,995 | | | 16,599 | | | 16,975 | |
Effect of dilutive securities: | | | | | | | | |
Stock options and restricted stock units | | — | | | 52 | | | — | | | 62 | |
Denominator for diluted net earnings per common | | | | | | | | |
share - weighted-average shares and assumed | | | | | | | | |
conversions | | 16,570 | | | 17,047 | | | 16,599 | | | 17,037 | |
Net earnings (loss) per share | | | | | | | | |
Basic | | $ | (2.97) | | | $ | 1.09 | | | $ | (2.67) | | | $ | 3.39 | |
Diluted | | $ | (2.97) | | | $ | 1.08 | | | $ | (2.67) | | | $ | 3.38 | |
Potentially dilutive securities of 40,973 and 47,878 for the three- and nine-month periods ended January 31, 2022, respectively, have not been considered in the calculation of net loss per share as the effect would be anti-dilutive. There were no potentially dilutive securities for the three- and nine-month periods ended January 31, 2021, which were excluded from the calculation of net earnings per diluted share.
Note D--Stock-Based Compensation
The Company has various stock-based compensation plans. During the nine-months ended January 31, 2022, the Board of Directors of the Company approved grants of service-based restricted stock units ("RSUs") and performance-based RSUs to key employees and non-employee directors. The performance-based RSUs totaled 57,476 units and the employee and non-employee director service-based RSUs totaled 41,304 units. The performance-based RSUs entitle the recipients to receive one share of the Company's common stock per unit granted if applicable performance conditions are met and the recipient remains continuously employed with the Company until the units vest. The service-based RSUs entitle the recipients to receive one share of the Company's common stock per unit granted if they remain continuously employed with the Company until the units vest. All of the Company's RSUs granted to employees cliff-vest three years from the grant date, while RSUs granted to non-employee directors vest daily over a two-year period from the date of grant.
For the three- and nine-month periods ended January 31, 2022 and 2021, stock-based compensation expense was allocated as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | January 31, | | January 31, |
(in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
Cost of sales and distribution | | $ | 231 | | | $ | 426 | | | $ | 906 | | | $ | 1,134 | |
Selling and marketing expenses | | 269 | | | 365 | | | 931 | | | 698 | |
General and administrative expenses | | 506 | | | 525 | | | 1,562 | | | 1,711 | |
Stock-based compensation expense | | $ | 1,006 | | | $ | 1,316 | | | $ | 3,399 | | | $ | 3,543 | |
During the nine months ended January 31, 2022, the Company also approved grants of 5,794 cash-settled performance-based restricted stock tracking units ("RSTUs") and 3,096 cash-settled service-based RSTUs for more junior level employees. Each performance-based RSTU entitles the recipient to receive a payment in cash equal to the fair market value of one share of the Company's common stock as of the payment date if applicable performance conditions are met and the recipient remains continuously employed with the Company until the units vest. The service-based RSTUs entitle the recipients to receive a payment in cash equal to the fair market value of one share of the Company's common stock as of the payment date if they remain continuously employed with the Company until the units vest. All of the RSTUs cliff-vest three years from the grant date. Since the RSTUs will be settled in cash, the grant date fair value of these awards is recorded as a liability until the date of payment. The fair value of each cash-settled RSTU award is remeasured at the end of each reporting period and the liability is adjusted, and related expense recorded, based on the new fair value. The Company recognized expense of $0.0 million and $0.2 million for the three-month periods ended January 31, 2022 and 2021, respectively, and $0.0 million and $0.6 million for the nine-month periods ended January 31, 2022 and 2021, respectively. A liability for payment of the RSTUs is included in other long-term liabilities on the condensed consolidated balance sheets in the amount of $0.7 million and $1.0 million as of January 31, 2022 and April 30, 2021, respectively.
Note E--Customer Receivables
The components of customer receivables were:
| | | | | | | | | | | | | | |
| | January 31, | | April 30, |
(in thousands) | | 2022 | | 2021 |
Gross customer receivables | | $ | 162,327 | | | $ | 156,187 | |
Less: | | | | |
Allowance for doubtful accounts | | (308) | | | (331) | |
Allowance for returns and discounts | | (10,898) | | | (8,990) | |
| | | | |
Net customer receivables | | $ | 151,121 | | | $ | 146,866 | |
Note F--Inventories
The components of inventories were:
| | | | | | | | | | | | | | |
| | January 31, | | April 30, |
(in thousands) | | 2022 | | 2021 |
Raw materials | | $ | 102,609 | | | $ | 63,384 | |
Work-in-process | | 51,604 | | | 51,176 | |
Finished goods | | 50,021 | | | 43,607 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Total inventories | | $ | 204,234 | | | $ | 158,167 | |
Effective May 1, 2021, the Company changed its accounting principle for inventory valuation for inventories which previously utilized a LIFO basis to a FIFO basis.
Note G--Property, Plant and Equipment
The components of property, plant and equipment were:
| | | | | | | | | | | | | | |
| | January 31, | | April 30, |
(in thousands) | | 2022 | | 2021 |
Land | | $ | 4,431 | | | $ | 4,431 | |
Buildings and improvements | | 118,848 | | | 116,103 | |
Buildings and improvements - finance leases | | 11,636 | | | 11,636 | |
Machinery and equipment | | 325,219 | | | 315,371 | |
Machinery and equipment - finance leases | | 31,094 | | | 31,386 | |
Construction in progress | | 36,865 | | | 22,669 | |
| | 528,093 | | | 501,596 | |
Less accumulated amortization and depreciation | | (319,365) | | | (297,594) | |
| | | | |
Total | | $ | 208,728 | | | $ | 204,002 | |
Amortization and depreciation expense on property, plant and equipment amounted to $9.2 million and $10.3 million for the three months ended January 31, 2022 and 2021, respectively, and $28.3 million and $32.5 million for the nine months ended January 31, 2022 and 2021, respectively. The nine months ended January 31, 2021 includes accelerated depreciation expense of $1.3 million, related to the closure of the plant located in Humboldt, Tennessee. There was no accelerated depreciation for the three months ended January 31, 2021. Accumulated amortization on finance leases included in the above table amounted to $32.7 million and $33.0 million as of January 31, 2022 and April 30, 2021, respectively.
Note H--Intangibles
The customer relationship intangibles were:
| | | | | | | | | | | | | | |
| | January 31, | | April 30, |
(in thousands) | | 2022 | | 2021 |
Customer relationship intangibles | | $ | 274,000 | | | $ | 274,000 | |
Less accumulated amortization | | (186,472) | | | (152,222) | |
| | | | |
Total | | $ | 87,528 | | | $ | 121,778 | |
Customer relationship intangibles are amortized over the estimated useful lives on a straight-line basis over six years. Amortization expense for the three month periods ended January 31, 2022 and 2021 was $11.4 million and $12.0 million
respectively, and $34.2 million and $36.5 million, respectively, for each of the nine month periods ended January 31, 2022 and 2021.
Note I--Product Warranty
The Company estimates outstanding warranty costs based on the historical relationship between warranty claims and revenues. The warranty accrual is reviewed monthly to verify that it properly reflects the remaining obligation based on the anticipated expenditures over the balance of the obligation period. Adjustments are made when actual warranty claim experience differs from estimates. Warranty claims are generally made within two months of the original shipment date.
The following is a reconciliation of the Company's warranty liability, which is included in other accrued expenses on the unaudited condensed consolidated balance sheets:
| | | | | | | | | | | | | | |
| | Nine Months Ended |
| | January 31, |
(in thousands) | | 2022 | | 2021 |
Beginning balance at May 1 | | $ | 5,249 | | | $ | 3,753 | |
| | | | |
Accrual | | 18,729 | | | 13,885 | |
Settlements | | (17,821) | | | (13,150) | |
| | | | |
Ending balance at January 31 | | $ | 6,157 | | | $ | 4,488 | |
Note J--Pension Benefits
Prior to April 30, 2020, the Company had two defined benefit pension plans covering many of the Company's employees hired prior to April 30, 2012. Effective April 30, 2012, the Company froze all future benefit accruals under the Company's defined-benefit pension plans. Effective April 30, 2020, these plans were merged into one plan, the American Woodmark Corporation Employee Pension Plan (the "Plan"). Effective December 31, 2020 (the "Plan Termination Date"), the Plan was terminated in a standard termination and benefits were distributed on December 2, 2021.
Net periodic pension benefit cost consisted of the following for the three- and nine-month periods ended January 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | January 31, | | January 31, |
(in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
Interest cost | | $ | 450 | | | $ | 1,165 | | | $ | 3,148 | | | $ | 3,496 | |
Expected return on plan assets | | (515) | | | (2,107) | | | (3,601) | | | (6,322) | |
Recognized net actuarial loss | | 167 | | | 441 | | | 1,164 | | | 1,321 | |
| | | | | | | | |
Net periodic pension benefit | | $ | 102 | | | $ | (501) | | | $ | 711 | | | $ | (1,505) | |
The Company did not contribute to the Plan in fiscal 2021 or the first nine months of fiscal 2022 and no additional contributions to the Plan are expected to be required in the future as a result of the settlement. The Company recognized a pension settlement charge of $69.5 million during the third quarter of fiscal 2022.
Note K--Fair Value Measurements
The Company utilizes the hierarchy of fair value measurements to classify certain of its assets and liabilities based upon the following definitions:
Level 1- Investments with quoted prices in active markets for identical assets or liabilities. The Company's cash equivalents are invested in money market funds, mutual funds, and certificates of deposit. The Company's mutual fund investment assets represent contributions made and invested on behalf of the Company's named executive officers in a supplementary employee retirement plan.
Level 2- Investments with observable inputs other than Level 1 prices, such as: quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3- Investments with unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The Company has no Level 3 assets or liabilities measured on a recurring basis.
The Company's financial instruments include cash and equivalents, marketable securities, and other investments; accounts receivable and accounts payable; interest rate swap and foreign exchange forward contracts; and short- and long-term debt. The carrying values of cash and equivalents, accounts receivable and payable, and short-term debt on the condensed consolidated balance sheets approximate their fair value due to the short maturities of these items. The interest rate swap and foreign exchange forward contracts were marked to market and therefore represent fair value. The fair values of these contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. The following table summarizes the fair value of assets and liabilities that are recorded in the Company's consolidated financial statements as of January 31, 2022 and April 30, 2021 at fair value on a recurring basis (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements |
| | As of January 31, 2022 |
| | Level 1 | | Level 2 | | Level 3 |
ASSETS: | | | | | | |
| | | | | | |
Mutual funds | | $ | 469 | | | $ | — | | | $ | — | |
Interest rate swap contracts | | — | | | 5,548 | | | — | |
Foreign exchange forward contracts | | — | | | 7 | | | — | |
Total assets at fair value | | $ | 469 | | | $ | 5,555 | | | $ | — | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | As of April 30, 2021 |
| | Level 1 | | Level 2 | | Level 3 |
ASSETS: | | | | | | |
Mutual funds | | $ | 642 | | | $ | — | | | $ | — | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
There were no transfers between Level 1, Level 2, or Level 3 for assets measured at fair value on a recurring basis.
Note L--Loans Payable and Long-Term Debt
On December 29, 2017, the Company entered into a credit agreement (the "Prior Credit Agreement") with a syndicate of lenders and Wells Fargo Bank, National Association, as administrative agent. The Prior Credit Agreement provided for a $100 million revolving loan facility with a $25 million sub-facility for the issuance of letters of credit, a $250 million initial term loan facility, and a $250 million delayed draw term loan facility. The Company borrowed the entire $250 million available under the initial term loan facility, the entire $250 million under the delayed draw term loan facility, and approximately $50 million under the revolving loan facility in connection with its acquisition of RSI Home Products, Inc. ("RSI") in December 2017 and subsequent refinancing of RSI's debt. The facilities under the Prior Credit Agreement were scheduled to mature on December 29, 2022.
On April 22, 2021, the Company amended and restated the Prior Credit Agreement. The amended and restated credit agreement (the "A&R Credit Agreement") provides for a $500 million revolving loan facility with a $50 million sub-facility for the issuance of letters of credit (the "Revolving Facility") and a $250 million term loan facility (the "Term Loan Facility"). Also on April 22, 2021, the Company borrowed the entire $250 million under the Term Loan Facility and approximately $264 million under the Revolving Facility to fund, in part, the repayment in full of the amounts then outstanding under the Prior Credit Agreement and the redemption of the Senior Notes (as defined below). The Company is required to repay the Term Loan Facility in specified quarterly installments. The Revolving Facility and Term Loan Facility mature on April 22, 2026. On January 20, 2022, the Company borrowed on a swingline loan under the Revolving Facility in the aggregate principal amount of $5.0 million bearing an interest rate at the base rate of 4.0%. The aggregate principal amount of all loans and letters of credit
obligations outstanding cannot exceed the maximum permitted to be outstanding pursuant to the terms of the A&R Credit Agreement.
As of January 31, 2022 and April 30, 2021, $237.5 million and $250.0 million, respectively, was outstanding on the Term Loan Facility. As of January 31, 2022 and April 30, 2021, $258.0 million and $264.0 million, respectively, was outstanding under the Revolving Facility. Outstanding letters of credit under the Revolving Facility were $10.0 million as of January 31, 2022, leaving approximately $227.0 million in available capacity under the Revolving Facility as of January 31, 2022. Outstanding letters of credit under the Revolving Facility were $8.3 million as of April 30, 2021, leaving approximately $227.7 million in available capacity under the Revolving Facility as of April 30, 2021. The outstanding balances noted above approximate fair value as the facilities have a floating interest rate.
Amounts outstanding under the Term Loan Facility and the Revolving Facility bear interest based on a fluctuating rate measured by reference to either, at the Company's option, a base rate plus an applicable margin or LIBOR plus an applicable margin, with the applicable margin being determined by reference to the Company's then-current "Secured Net Leverage Ratio." The Company also incurs a quarterly commitment fee on the average daily unused portion of the Revolving Facility during the applicable quarter at a rate per annum also determined by reference to the Company's then-current "Secured Net Leverage Ratio." In addition, a letter of credit fee accrues on the face amount of any outstanding letters of credit at a per annum rate equal to the applicable margin on LIBOR loans, payable quarterly in arrears. As of January 31, 2022, the applicable margin with respect to base rate loans and LIBOR loans was 0.75% and 1.75%, respectively, and the commitment fee was 0.18%. The A&R Credit Agreement includes provisions providing for the transition from LIBOR to a replacement benchmark upon the occurrence of certain events. The Company does not currently expect any such transition to materially impact its financing costs.
The A&R Credit Agreement includes certain financial covenants that require the Company to maintain (i) a "Consolidated Interest Coverage Ratio" of no less than 2.00 to 1.00 and (ii) a "Total Net Leverage Ratio" of no greater than 4.00 to 1.00, subject, in each case, to certain limited exceptions.
The A&R Credit Agreement includes certain additional covenants, including negative covenants that restrict the ability of the Company and certain of its subsidiaries to incur additional indebtedness, create additional liens on its assets, make certain investments, dispose of its assets, or engage in a merger or other similar transaction, or engage in transactions with affiliates, subject, in each case, to the various exceptions and conditions described in the A&R Credit Agreement. The negative covenants further restrict the ability of the Company and certain of its subsidiaries to make certain restricted payments, including, in the case of the Company, the payment of dividends and the repurchase of common stock, in certain limited circumstances.
As of January 31, 2022, the Company was in compliance with all covenants included in the A&R Credit Agreement.
The Company's obligations under the A&R Credit Agreement are guaranteed by the Company's domestic subsidiaries, and the obligations of the Company and its domestic subsidiaries under the A&R Credit Agreement and their guarantees, respectively, are secured by a pledge of substantially all of their respective personal property.
On February 12, 2018, the Company issued $350 million in aggregate principal amount of 4.875% Senior Notes due 2026 (the "Senior Notes") and utilized the proceeds, together with the proceeds from the delayed draw term loan under the Prior Credit Agreement, to refinance certain senior notes assumed from the acquisition of RSI. The Senior Notes were guaranteed by the Company's domestic subsidiaries and were scheduled to mature March 15, 2026. On April 26, 2021, the Company redeemed in full the Senior Notes at a redemption price equal to 102.438% of the principal amount of the Senior Notes, plus accrued and unpaid interest to the redemption date.
Note M--Derivative Financial Instruments
Interest Rate Swap Contracts
The Company enters into interest rate swap contracts to manage variability in the amount of known or expected cash payments related to portions of its variable rate debt. On May 28, 2021, the Company entered into four interest rate swaps with an aggregate notional amount of $200 million to hedge part of the variable rate interest payments under the Term Loan Facility. The interest rate swaps became effective on May 28, 2021 and will terminate on May 30, 2025. The interest rate swaps economically convert a portion of the variable rate debt to fixed rate debt. The Company receives floating interest payments monthly based on one-month LIBOR and pays a fixed rate of 0.5980% to the counterparty.
The interest rate swaps are designated as cash flow hedges. Changes in fair value are recorded to other comprehensive income. The risk management objective in using interest rate swaps is to add stability to interest expense and to manage the Company's exposure to interest rate movements. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the contract agreements without exchange of the underlying notional amount. Realized gains or losses from interest rate swaps are recorded in earnings, as a component of interest expense, net to offset variability in interest expense associated with the underlying debt's cash flows.
For the three- and nine-month periods ended January 31, 2022, unrealized gains, net of deferred taxes, of $2.3 million and $4.1 million, respectively, were recorded in other comprehensive income, and $0.3 million and $0.7 million, respectively, of realized losses were reclassified out of accumulated other comprehensive loss to interest expense due to payments made to the swap counterparties. As of January 31, 2022, the Company anticipates reclassifying approximately $0.4 million of net hedging gains from accumulated other comprehensive income into earnings during the next 12 months to offset the variability of the hedged items during this period. Since the Company did not have outstanding interest rate swaps in the prior year period, there were no gains or losses recorded for the nine months ended January 31, 2021.
Foreign Exchange Forward Contracts
At January 31, 2022, the Company held forward contracts maturing from February 2022 to April 2022 to purchase 164.1 million Mexican pesos at exchange rates ranging from 20.76 to 20.91 Mexican pesos to one U.S. dollar. An immaterial asset is recorded in prepaid expense and other on the condensed consolidated balance sheet.
Note N--Income Taxes
The effective income tax rate for the three- and nine-month periods ended January 31, 2022 was 26.0% and 26.3%, respectively, compared with 25.6% and 25.9% in the comparable periods in the prior fiscal year. The effective rates were higher than the 21.0% U.S. statutory rate for all periods presented primarily due to state income taxes and lower pretax income for the quarter.
Note O--Revenue Recognition
The Company disaggregates revenue from contracts with customers into major sales distribution channels as these categories depict the nature, amount, timing, and uncertainty of revenues and cash flows that are affected by economic factors. The following table disaggregates our consolidated revenue by major sales distribution channels for the three and nine months ended January 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | January 31, | | January 31, |
(in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
Home center retailers | | $ | 225,046 | | | $ | 216,819 | | | $ | 649,712 | | | $ | 613,932 | |
Builders | | 177,716 | | | 161,113 | | | 539,154 | | | 496,503 | |
Independent dealers and distributors | | 56,974 | | | 54,022 | | | 166,614 | | | 160,189 | |
Net Sales | | $ | 459,736 | | | $ | 431,954 | | | $ | 1,355,480 | | | $ | 1,270,624 | |
Note P--Concentration of Risks
Financial instruments that potentially subject the Company to concentrations of risk consist primarily of cash and cash equivalents and accounts receivable. The Company maintains its cash and cash equivalents with major financial institutions and such balances may, at times, exceed Federal Deposit Insurance Corporation insurance limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risk with respect to cash.
Credit is extended to customers based on an evaluation of each customer's financial condition and generally collateral is not required. The Company's customers operate in the new home construction and home remodeling markets.
The Company maintains an allowance for bad debt based upon management's evaluation and judgment of potential net loss. The allowance is estimated based upon historical experience, the effects of current developments and economic conditions, and each customer's current and anticipated financial condition. Estimates and assumptions are periodically reviewed and updated. Any resulting adjustments to the allowance are reflected in current operating results.
As of January 31, 2022, the Company's two largest customers, Customers A and B, represented 31.3% and 18.8% of the Company's gross customer receivables, respectively. As of January 31, 2021, Customers A and B represented 32.9% and 21.1% of the Company's gross customer receivables, respectively.
The following table summarizes the percentage of net sales attributable to the Company's two largest customers for the three and nine months ended January 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| January 31, | | January 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
Customer A | 32.1% | | 31.8% | | 31.9% | | 30.1% |
Customer B | 16.9% | | 18.4% | | 16.0% | | 18.2% |
Note Q--Leases
Operating Leases - Right-of-Use ("ROU") assets related to operating leases are presented as operating lease right-of-use assets on the unaudited condensed consolidated balance sheets. Lease liabilities related to operating leases with remaining lease terms less than twelve months are presented in short-term lease liability - operating and operating leases with remaining lease terms greater than twelve months are presented in long-term lease liability - operating on the unaudited condensed consolidated balance sheets.
Operating lease ROU assets and lease liabilities are recognized at the commencement date based on the present value of the future lease payments over the lease term. The discount rate used to determine the present value of the lease payments is the rate implicit in the lease unless that rate cannot be readily determined, in which case, the Company utilizes its incremental borrowing rate in determining the present value of the future lease payments. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Operating lease ROU assets may also include any cumulative prepaid or accrued rent when the lease payments are uneven throughout the lease term. The ROU assets and lease liabilities may also include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The ROU asset includes any lease payments made and lease incentives received prior to the commencement date. The Company has lease arrangements with lease and non-lease components which are accounted for separately. Non-lease components of the lease payments are expensed as incurred and are not included in determining the present value.
Finance Leases - ROU assets related to finance leases are presented in property, plant and equipment, net on the unaudited condensed consolidated balance sheet. Lease liabilities related to finance leases are presented in current maturities of long-term debt and long-term debt, less current maturities on the unaudited condensed consolidated balance sheets.
Finance lease ROU assets and lease liabilities are recognized at the commencement date based on the present value of the future lease payments over the lease term. The discount rate used to determine the present value of the lease payments is the rate implicit in the lease unless that rate cannot be readily determined, in which case, the Company utilizes its incremental borrowing rate in determining the present value of the future lease payments. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.
The components of lease costs were as follows:
| | | | | | | | | | | | | | |
| | Nine Months Ended |
| | January 31, |
(in thousands) | | 2022 | | 2021 |
Finance lease cost: | | | | |
Reduction in the carrying value of right-of-use assets | | $ | 996 | | | $ | 403 | |
Interest on lease liabilities | | $ | 79 | | | $ | 50 | |
Operating lease cost | | $ | 20,823 | | | $ | 20,252 | |
Additional information related to leases was as follows:
| | | | | | | | | | | | | | |
| | Nine Months Ended |
| | January 31, |
(in thousands) | | 2022 | | 2021 |
Cash paid for amounts included in the measurement of lease liabilities: | | | | |
Operating cash flows for finance leases | | $ | 79 | | | $ | 50 | |
Operating cash flows for operating leases | | $ | 18,345 | | | $ | 18,161 | |
Financing cash flows for financing leases | | $ | 975 | | | $ | 384 | |
Right-of-use assets obtained in exchange for new finance lease liabilities | | $ | 1,614 | | | $ | 1,531 | |
Right-of-use assets obtained in exchange for new operating lease liabilities | | $ | 6,608 | | | $ | 6,886 | |
| | | | |
Weighted average remaining lease term (years) | | | | |
Weighted average remaining lease term - finance leases | | 2.49 | | 3.06 |
Weighted average remaining lease term - operating leases | | 5.96 | | 6.89 |
| | | | |
Weighted average discount rate | | | | |
Weighted average discount rate - finance leases | | 2.83 | % | | 3.00 | % |
Weighted average discount rate - operating leases | | 3.14 | % | | 3.29 | % |
The following is a reconciliation of future undiscounted cash flows to the operating and finance lease liabilities, and the related ROU assets, presented on the unaudited condensed consolidated balance sheet as of January 31, 2022:
| | | | | | | | | | | | | | |
(in thousands) | | Operating leases | | Financing leases |
Year ending April 30, | | | | |
2022 | | $ | 6,738 | | | $ | 632 | |
2023 | | 24,898 | | | 2,284 | |
2024 | | 22,957 | | | 1,904 | |
2025 | | 19,299 | | | 559 | |
2026 | | 18,848 | | | 120 | |
Thereafter | | 41,168 | | | 7 | |
Total lease payments | | 133,908 | | | 5,506 | |
Less imputed interest | | (12,052) | | | (188) | |
Total lease liability | | 121,856 | | | 5,318 | |
Current maturities | | (22,303) | | | (2,250) | |
Lease liability - long-term | | $ | 99,553 | | | $ | 3,068 | |
Lease assets | | $ | 112,874 | | | $ | 9,982 | |
Note R--Restructuring
In the fourth quarter of fiscal 2020 and first quarter of fiscal 2021, the Company implemented nationwide reductions in force, which were substantially completed in the fourth quarter of fiscal 2020 and first quarter of fiscal 2021, respectively. The Company recognized pre-tax restructuring charges, net of $(0.1) million and $(0.1) million for the three months ended January 31, 2022 and 2021, respectively, and $(0.1) million and $1.5 million for the nine months ended January 31, 2022 and 2021, respectively, related to these reductions in force, which were primarily severance and separation costs.
During June 2020, the Company's Board of Directors approved the closure and eventual disposal of its manufacturing plant located in Humboldt, Tennessee. Operations ceased at the Humboldt plant in July 2020. During the third quarter of fiscal 2021, the Company sold the Humboldt plant and recognized a gain of $2.3 million on the sale. The Company recognized pre-tax restructuring charges, net of $0.0 million and $(0.7) million for the three months ended January 31, 2022 and 2021,
respectively, and $0.3 million and $3.9 million for the nine months ended January 31, 2022 and 2021, respectively, related to the closure of the plant.
Note S--Other Information
The Company is involved in suits and claims in the normal course of business, including without limitation product liability and general liability claims, and claims pending before the Equal Employment Opportunity Commission. On at least a quarterly basis, the Company consults with its legal counsel to ascertain the reasonable likelihood that such claims may result in a loss. As required by FASB Accounting Standards Codification Topic 450, "Contingencies," the Company categorizes the various suits and claims into three categories according to their likelihood for resulting in potential loss: those that are probable, those that are reasonably possible, and those that are deemed to be remote. Where losses are deemed to be probable and estimable, accruals are made. Where losses are deemed to be reasonably possible, a range of loss estimates is determined and considered for disclosure. In determining these loss range estimates, the Company considers known values of similar claims and consults with outside counsel.
The Company believes that the aggregate range of loss stemming from the various suits and asserted and unasserted claims that were deemed to be either probable or reasonably possible was not material as of January 31, 2022.