American Woodmark Corporation (NASDAQ: AMWD) Makes A Well-Timed Acquisition

Shares in American Woodmark Corporation (NASDAQ: AMWD) bounced smartly on Friday after the company’s announcement that it had agreed to acquire RSI Home Products Inc., a privately held competitor that makes kitchen, bath, and home organisation cabinet, countertop and accessory products.

The acquisition makes not only excellent business sense for American Woodmark, but is also timed to take advantage of a surge in US new home sales which hit a 10 year high in October. According to the Commerce Department, new home sales in October were up 6.2% to 685,000 units, the highest level since October 2007, and rubbishing analysts’ expectations of a decline of 6.0% to 625,000 units. The figures are a bright spot for the housing market which has been under the weather for most of this year, facing the fallout from hurricanes Harvey and Irma, as well as land and labour shortages.

American Woodmark Corporation (NASDAQ: AMWD) Reports A Subdued Second Quarter

Hurricanes were part of the reason American Woodmark missed market expectations during its recently declared second-quarter results. Revenue grew 4% to $274.8 million and earnings per share increased 13% to $1.21. However, analysts were expecting EPS of $1.26 on sales of $283 million.

“The quarter proved to be challenging from a revenue perspective, with a 4% year-over-year growth,” the company said on its earnings call. “With Florida and Texas being very large operations for us within new construction, we did see an impact from the 2 hurricanes.”

During the quarter, the company also faced pressures on margins due to logistics costs as well as material inflation, as well as the reduced level of operations throughout the quarter due to the hurricanes.

The company also had to extend higher-than-expected levels of promotional discounting in its home centre business, which saw a decline of 7% for the quarter.

Investors should be thankful, however, that the company took these hiccups in its stride and chose also to focus on the big picture – an opportunity to expand its presence in the more cost sensitive sections of the market through the acquisition of rival RSI Home Products Inc.

Understandably, investors shrugged off the second-quarter numbers and bid up the stock in appreciation of the RSI deal.

American Woodmark Corporation (NASDAQ: AMWD)’s RSI Home Acquisition Checks All The Boxes

American Woodmark, which does not pay dividends, was hitherto using extra cash in a stock buyback program worth $50 million.

The company is suspending its share repurchase program in conjunction with the transaction to acquire RSI Home, which was founded in 1989, and is one of the top players in the industry.

In a deal valued at $ 1.075 billion, AMWD will pay $ 486 million in cash and stock, as well as assume $ 589 million of RSI debt. Upon closure of the transaction, RSI shareholders will own about 8% of AMWD.

American Woodmark expects to realise a number of advantages after it dovetails the RSI Home business within its own.

Key among those is the opportunity to expand its presence into the “in-stock” and “lower-to middle-stock” segments where AMWD currently is not adequately represented. RSI has a low-cost manufacturing platform which is ideally suited to this objective.

“It fits very well, allows us to combine our 2 platforms, to take our service platform and that low-cost platform that RSI offers, and really go out now and aggressively pursue that lower cost price point base as well as in new construction and the repair and remodel,” S. Cary Dunston, Chairman, CEO & President, in response to a question on the earnings call. He also clarified that there was minimal overlap in product lines of the two companies, calling the transaction therefore very “rare in the M&A world.”

Further, RSI has a solid 16% pro forma EBITDA margin, and which is likely to be highly accretive to AMWD’s earnings per share by at least 10%-20%. In addition, the transaction will release annual run rate synergies of $ 30 million-$ 40 million over the next 3 to 4 years.

RSI’s 2017 revenue is about $ 560 million and it is expected that on a consolidated basis AMWD will garner 2017 revenue of $ 1.6 billion, adding exceptional scale.

According to the company on its earnings call, RSI has nine manufacturing and distribution facilities and its operations and sales locations will fully complement those of AMWD. “The broad footprint offers operating flexibility and the ability to continue to enhance our customers’ experience in all channels,” the company said. AMWD will also benefit from RSIs strong brand portfolio.

All said, the transaction is likely to create substantial value for AMWD shareholders in years to come.


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