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Risk Factors - AMWD
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Item 1A. "Risk Factors".
As of the date of this filing, we are not aware of any current cybersecurity threats or cybersecurity incidents that have materially affected or are reasonably likely to materially affect our business, results of operations or financial condition. For further discussion of the risks related to cybersecurity, see Item 1A. "Risk Factors".
Competition
We operate in a highly fragmented industry that is composed of several thousand local, regional, and national manufacturers. Most of our competitors compete on a local or regional basis, but others, like us, compete on a national basis as well. Our competitors include importers and large consolidated operations as well as relatively small, local cabinet manufacturers. Moreover, companies in other building products industries may compete with us. Competitive factors within the industry include pricing, quality, product availability, service, delivery time, and relationships with customers. Our principal means for competition is our breadth and variety of product offerings, expanded service capabilities, geographic reach, competitive price points for our products, and affordable quality. We believe we are a top three manufacturer of kitchen, bath, and home organization products in the United States based on publicly available information.
Environmental Matters and Regulatory Matters
Our operations are subject to federal, state and local environmental laws and regulations relating to, among other things, the generation, storage, handling, emission, transportation, and discharge of regulated materials into the environment. Permits are required for certain of our operations, and these permits are subject to revocation, modification, and renewal by issuing authorities. Governmental authorities have the power to enforce compliance with their regulations, and violations may result in the payment of fines or the entry of injunctions, or both. We may also incur liabilities for investigation and clean-up of soil or groundwater contamination on or emanating from current or formerly owned and operated properties, or at offsite locations at which regulated materials are located where we are identified as a responsible party. Discovery of currently unknown conditions could require responses that could result in significant costs.
Intellectual Property
We maintain trademarks, copyrights, and trade secrets. We sell many of our products under a number of registered and unregistered trademarks, which we believe are widely recognized in our industry. We rely on trade secrets and confidentiality agreements to develop and maintain our competitive position. Monitoring the unauthorized use of our intellectual property is difficult, and the steps we have taken may not prevent unauthorized use of our intellectual property. The disclosure or misappropriation of our intellectual property could harm our ability to protect our rights and our competitive position. If we must litigate to protect our rights, we may incur significant expenses and divert significant attention from our business operations. To date, we have not relied on material patents in operating our business.
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Seasonality
Our business has been subject to seasonal influences, with higher sales typically realized in our first and fourth fiscal quarters. General economic forces and changes in our customer mix have reduced seasonal fluctuations in revenue over the past few years and this trend is expected to continue.
Human Capital Resources
Employees
As of April 30, 2025, we employed over 7,800 full-time employees, with approximately 228 unionized employees in Anaheim, California. We believe that our employee relations and relationship with the union representing the employees in Anaheim are in good standing.
Culture and Core Values
At American Woodmark, our mission to create value through people remains unchanged. The way we conduct our business and interact with our customers, vendors, and the communities in which we operate is driven by our core principles of customer satisfaction, integrity, teamwork, and excellence. These principles also guide our interactions with employees and serve as a basis for setting goals for and evaluating our employees. By living out these principles, we believe we will be best positioned to attract, develop, and promote a broad range of talent and to conduct our business in a responsible, ethical, and professional manner. To that end, we have, among other things, established policies under which we strive to:
•Engage with our key stakeholders, including employees, to ensure their needs and concerns are heard and addressed, and if appropriate, incorporated into our strategy;
•Maintain a safe and enriching working environment where all employees are treated with respect and are able to achieve their full potential;
•Encourage employees to volunteer in our communities through internally or externally organized events;
•Fund the American Woodmark Foundation and the AWCares Fund, which serve as vehicles for our employees to serve the community and receive financial assistance for unforeseen personal disaster or tragedy; and
•Provide scholarship opportunities to family members of our employees.
Training
Our training is designed and developed at the corporate and local level in order to further our goals of enterprise alignment and local integration. We prefer a leader-led approach to training whenever possible to foster engagement, relationship building, connection, and shared learning experiences. Depending on the course, our training and development opportunities are offered through a variety of platforms and frequencies, such as in person vs. online and on-demand, semi-annual, annual, or biannual basis.
Safety
We have established comprehensive safety programs throughout our operations to provide our employees with the tools they need to comply with the safety standards established under federal, state, and local laws and regulations or independently by us. Our safety leadership teams monitor our safety programs and related benchmarking with the goal of improving safety across the Company. Our rate of incidents recordable under the standards of the Occupational Safety and Health Administration (“OSHA”) per one hundred employees per year, also known as the OSHA recordable rate, was 1.48 during fiscal 2025, which is 53% better than the industry average of 3.1 according to the U.S. Department of Labor.
Employee Experience
American Woodmark is an equal opportunity employer committed to fostering an inclusive workplace where individuals are treated with dignity and respect and have the opportunity to succeed. We believe a culture built on trust, collaboration, and shared values enhances engagement, encourages innovation, and supports long-term business success.
Our employee experience strategy integrates inclusive leadership, continuous development, and structured feedback into how we operate, lead, and support our workforce. It is designed to promote belonging, connection, and growth throughout the employee lifecycle.
In recent years, we have strengthened our efforts to build a self-sustaining, intentional culture that aligns with our mission of Creating Value Through People. These efforts include:
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•Facilitating local engagement through our Right Environment Councils, employee-led teams which help reinforce our culture and core values across all locations;
•Delivering interactive, leader-led training that emphasizes inclusive leadership, servant leadership, effective interpersonal communication, and high-performing team behaviors;
•Capturing employee feedback through multiple channels—including exit surveys, engagement surveys, and other touchpoints—to guide improvement plans at the functional and enterprise level; and
•Expanding access to development and leadership readiness programs that support internal mobility and career progression through transparent, role-aligned pathways.
We are committed to cultivating a workplace where every individual can thrive. By embedding employee experience into the fabric of our culture, we strengthen organizational alignment, reinforce our core principles, and position American Woodmark for sustainable growth.
Our Competitive Strengths
Market Leader with North American Manufacturing and Distribution Network
We believe our company holds the number two or three market position in the United States cabinet market with approximately 11% market share based on publicly available information. We are one of a select number of market participants with a national manufacturing and distribution footprint, which includes 17 manufacturing facilities in the United States and Mexico, and eight primary service centers and one distribution center located throughout the United States. Our operating footprint provides us an ability to service our builder, independent dealers and distributors, and home centers customers nationwide, offering them a broad set of products across a variety of price points. Our facilities are strategically located in or near major metropolitan markets to facilitate efficient product distribution to our customers. We believe the scale and breadth of our operations differentiate us and result in a competitive advantage providing superior customer service, low-cost distribution, and on-time delivery.
Comprehensive Product Offering with Diversified End-Markets
We believe that the diversity of our product portfolio across categories, channels, and end-markets enables our financial performance, both in periods of growth and cyclicality. Our made-to-order offerings provide products for customers looking for a designer product, which can be used for both new home construction and remodeling applications. Our stock offering allows us to further serve our existing end-markets through the addition of a lower price point product that is well-suited for areas of growing demand such as new home construction targeting the first-time homebuyer. We also offer turnkey cabinet solutions for our builder customers which we believe is a unique aspect of our service platform. Our turnkey solution provides in-house design and measurement as well as installation service. We believe the ability to leverage our labor and expertise is a value-added service to our builder customers which has helped strengthen our position in the new home construction market.
Deep Relationships with Leading Retailers
We have built strong and stable relationships with a base of long-standing customers across home centers, builders, and independent dealers and distributors. We have an average relationship length of 20 plus years with our top 10 customers, including long-standing relationships with Home Depot and Lowe's. We believe our customers value our North American manufacturing and distribution footprint, which allows us to meet demanding logistics and performance criteria. We believe our focus on providing exceptional customer service and a quality product at a competitive price have enabled us to establish ourselves as a vendor of choice.
Best-in-Class Manufacturing Capabilities
We operate 17 manufacturing facilities across the United States and Mexico. Our vertically-integrated production and assembly lines, standardized product construction, and investments in automation, have allowed us to continuously improve productivity and efficiency. We have standardized our raw material inputs and a number of our production processes, which reduces logistical requirements and provides increased economies of scale in sourcing these inputs. Our labor-intensive manufacturing and fabrication processes in Mexico offer a low cost alternative to Asian manufacturers, while providing a quality product with lower transportation costs.
Experienced Management Team
We have assembled an executive team from leading organizations with a deep base of management experience within industrial manufacturing companies. Our President and Chief Executive Officer, M. Scott Culbreth, joined our team in 2014 as the Chief
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Financial Officer and was named Chief Executive Officer in 2020. Mr. Culbreth's career in the manufacturing industry has been highlighted with multiple leadership roles in finance. Our other senior executives all have over twenty plus years of experience working for multi-national companies, with individual backgrounds in manufacturing, finance, sales and human resources.
Item 1A. RISK FACTORS
There are a number of risks and uncertainties that may affect the Company's business, results of operations, and financial condition. These risks and uncertainties could cause future results to differ from past performance or expected results, including results described in statements elsewhere in this report that constitute "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. Additional risks and uncertainties not presently known to the Company or currently believed to be immaterial also may adversely impact the Company's business. Should any risks or uncertainties develop into actual events, these developments could have material adverse effects on the Company's business, financial condition, and results of operations. These risks and uncertainties, which the Company considers to be most relevant to specific business activities, include, but are not limited to, the factors identified below. Additional risks and uncertainties that may affect the Company's business, results of operations, and financial condition are discussed elsewhere in this report, including in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the headings "Forward-Looking Statements," "Seasonality," and "Outlook for Fiscal 2026" and Item 7A. "Quantitative and Qualitative Disclosures about Market Risk."
Risks related to our business and industry
We manufacture our products internationally and are exposed to risks associated with doing business globally. We manufacture our products in the United States and Mexico and sell our products in the United States and Canada. Accordingly, we are subject to risks associated with potential disruption caused by changes in political, monetary, economic, and social environments, including civil and political unrest, terrorism, possible expropriation, local labor conditions, changes in laws, regulations, and policies of foreign governments and trade disputes with the United States, and compliance with U.S. laws affecting activities of U.S. companies abroad. We have been and could be further adversely affected by international trade regulations, including the imposition of sanctions, duties, new or increased tariffs and anti-dumping penalties. Risks inherent to international operations include: tax laws, economic sanctions, and enforcement of contract and intellectual property rights.
We are also subject to the Foreign Corrupt Practices Act and other anti-bribery laws. While we have implemented safeguards and policies to discourage these practices by our employees and agents, our existing safeguards and policies to assure compliance and any future improvements may prove to be less than effective and our employees or agents may engage in conduct for which we might be held responsible. If employees violate our policies, we may be subject to regulatory sanctions. Violations of these laws or regulations could result in sanctions including fines, debarment from export privileges, and penalties and could have a material adverse effect on our business, financial condition, or results of operations.
We may continue to hedge certain foreign currency transactions in the future; however, a change in the value of the currencies may impact our financial statements when translated into U.S. dollars. In addition, fluctuations in currency can adversely impact the cost position in local currency of our products, making it more difficult for us to compete. Our success will depend, in part, on our ability to effectively manage our business through the impact of these potential changes.
In addition, we source raw materials and components from Asia where we have recently experienced higher manufacturing costs and longer lead times due to currency fluctuations, higher wage rates, labor shortages, and higher raw material costs, and we have also experienced higher shipping costs, shipping delays, and higher tariff costs. There is currently uncertainty about the future relationship between the U.S. and various other countries with respect to trade practices. The U.S. government has imposed significant tariffs or other restrictions on certain foreign imports and has raised the possibility of imposing additional tariff increases or expanding the tariffs to capture other countries and types of foreign imports, which have increased and could further increase the cost of certain raw materials and components imported into the U.S. Our international operations and sourcing of materials (including from Asia and Mexico) could be harmed by a variety of factors including, but not limited to:
•increases in transportation costs or transportation delays;
•work stoppages and labor strikes;
•introduction of non-native invasive organisms into new environments;
•recessionary trends in international markets;
•legal and regulatory changes and the burdens and costs of our compliance with a variety of laws, including export controls, import and customs trade restrictions, tariffs and other regulations;
•fluctuations in exchange rates, particularly the value of the U.S. dollar relative to other currencies; and
•political unrest, terrorism, and economic instability.
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If any of these or other factors were to render the conduct of our business in a particular country undesirable or impractical, our business, financial condition, or results of operations could be materially adversely affected.
Fluctuating raw material and energy costs could have a material adverse effect on our business and results of operations. Fluctuating raw material and energy costs could have a material adverse effect on our business and results of operations. We purchase various raw materials, including, among others, wood, wood-based, and resin products, which are subject to price fluctuations that could materially increase our manufacturing costs. Further, increases in energy costs increase our production costs and also the cost to transport our products, each of which could have a material adverse effect on our business and results of operations. In addition, some of our suppliers have consolidated and other suppliers may do so in the future. Combined with increased demand, such consolidation could increase the price of our supplies and raw materials.
We also may be unwilling or unable to pass these cost increases on to our customers.We also may be unwilling or unable to pass on to customers commensurate cost increases. Competitive considerations and customer resistance to price increases may delay or make us unable to adjust selling prices. To the extent we are unable to either re-engineer or otherwise offset increased costs, or are unwilling or unable to build price increases into our sales prices, our margins will be negatively affected. Even if we are able to increase our selling prices, sustained price increases for our products may lead to sales declines and loss of market share, particularly if our competitors do not increase their prices, and there is usually a six to nine month lag before we are able to see the results of our pricing actions. Conversely, when raw materials or energy prices decline, we may receive customer pressure to reduce our sales prices.
These prices are market-based and fluctuate based on factors beyond our control. We do not have long-term fixed supply agreements and do not hedge against price fluctuations. We, therefore, cannot predict our raw materials or energy costs for the coming year.
The inability to obtain raw materials from suppliers in a timely manner would adversely affect our ability to manufacture and market our products. Our ability to offer a wide variety of products depends on our ability to obtain an adequate supply of components from manufacturers and other suppliers, particularly wood-based and resin products. Transportation and container delays may adversely impact our supply chain. Additionally, failure by our suppliers to provide us with quality products on commercially reasonable terms, potential cybersecurity attacks on our suppliers, and failure to comply with legal requirements for business practices, could have a material adverse effect on our business, financial condition, or results of operations. Additionally, failure by our suppliers to provide us with quality products on 10commercially reasonable terms, and to comply with legal requirements for business practices, could have a material adverse effect on our business, financial condition, or results of operations. Furthermore, we rely heavily or, in certain cases, exclusively, on outside suppliers for some of our key components. While we do not rely exclusively on any one supplier for any particular raw materials, the loss of a major supplier could increase our costs to obtain raw materials until we obtain an adequate alternative source. Import tariffs or other adverse trade actions have led to increases in prices of raw materials and components which are critical to our business, and additional tariffs or other adverse trade actions could result in further price increases. The ultimate impact of such adverse trade actions remains uncertain as it is subject to a number of factors including the effective date and duration of tariffs, changes in amount, scope and nature of tariffs in the future, any countermeasures that countries subject to the tariffs may take and our ability to mitigate the impact of tariffs.
We typically do not enter into long-term contracts with our suppliers or sourcing partners. Instead, most raw materials and sourced goods are obtained on a "purchase order" basis. Although these components are generally obtainable in sufficient quantities from other sources, resourcing them from another supplier could take time. Financial, operating, or other difficulties encountered by our suppliers or sourcing partners, or changes in our relationships with them could result in manufacturing or sourcing interruptions, delays, and inefficiencies, and prevent us from manufacturing enough products to meet customer demands.
Because of the concentration of our sales to our two largest customers, the loss of either customer or a significant reduction in orders from either customer could adversely affect our financial results. Home Depot and Lowe's collectively accounted for approximately 40.8% of total net sales during the fiscal year 2025. We do not typically enter into long-term sales contracts with Home Depot or Lowe's and our sales usually occur on a "purchase order" basis. Our customers can make significant changes in their purchase volumes and can seek to significantly affect the prices we receive for our products and services and the other terms and conditions on which we do business. They have in the past discontinued, and may in the future choose to discontinue, purchasing some or all of our products with little or no notice. In the past, purchase volumes from our customers, including Home Depot and Lowe's, have fluctuated substantially, and we expect such fluctuations to occur from time to time in the future. Any reduction in, or termination of, our sales to either Home Depot or Lowe's could have a material adverse effect on our business, financial condition, or results of operations.
In addition, the potential for orders from these large retail customers to increase significantly from time to time requires us to have sufficient manufacturing capacity. These large retailers also impose strict logistics and performance criteria and fines. Failure to comply with these obligations may result in these customers reducing or stopping their purchase of our products.
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We could also experience delays or defaults in payment from Home Depot or Lowe's, which could adversely affect our business, financial condition or results of operations. The loss of a substantial portion of our order volumes or revenue from either Home Depot or Lowe's for any reason would have a material adverse effect on our business, financial condition, or results of operations.
Our business primarily relies on U.S. home improvement, repair and remodel and new home construction activity levels, all of which are impacted by risks associated with fluctuations in the housing market. Downward changes in the general economy, the housing market, or other business conditions could adversely affect our results of operations, cash flows, and financial condition. Our business primarily relies on home improvement, repair and remodel and new home construction activity levels in the United States. The housing market is sensitive to changes in economic conditions and other factors, such as the level of employment, access to labor, consumer confidence, consumer income, availability of financing and interest rate levels, and available inventory. Net sales volume decreases combined with adverse changes in any of these conditions generally, or in any of the markets where we operate, could decrease demand and could adversely impact our businesses by:
•causing consumers to delay or decrease homeownership or relocation;
•making consumers more price conscious resulting in a shift in demand to smaller, less expensive homes;
•making consumers more reluctant to make investments in their existing homes, including kitchen and bath repair and remodel projects;
•making consumers more price conscious resulting in a shift in demand to less expensive, more value-based product offerings when making investments in their homes; or
•making it more difficult to secure loans for major renovations.
Prolonged economic downturns may adversely impact our sales, earnings, and liquidity. Our industry historically has been cyclical in nature and has fluctuated with economic cycles. During economic downturns, our industry could experience longer periods of recession and greater declines than the general economy. We believe that our industry is significantly influenced by economic conditions generally and particularly by housing activity, consumer confidence, the level of personal discretionary spending, demographics, and credit availability. These factors may affect not only the ultimate consumer of our products, but also may impact home centers, builders, and our other primary customers. As a result, a worsening of economic conditions could adversely affect our sales and earnings as well as our cash flow and liquidity.
The U.S. cabinetry industry is highly competitive, and market share losses could occur. We operate within a highly competitive U.S. cabinetry industry, which is characterized by competition from a number of other manufacturers. Competition is further intensified during economic downturns. We compete with numerous large national and regional home products companies for, among other things, customers, orders from Home Depot and Lowe's, raw materials, skilled management, and labor resources. Purchase volumes from our main home center customers have fluctuated substantially from time to time in the past, and we expect such fluctuations to occur from time to time in the future.
Some of our competitors may have greater financial, marketing, and other resources than we do and, therefore, may be able to adapt to changes in customer preferences more quickly, devote more resources to the marketing and sale of their products, generate greater national brand recognition, or adopt more aggressive pricing policies than we can. In addition, some of our competitors may resort to price competition to sustain or gain market share and manufacturing capacity utilization, and we may have to adjust the prices on some of our products to stay competitive, which could reduce our revenues.
We also face competition with respect to some of our products from competitors in countries with lower regulatory, safety, environmental, and other costs, such as China, Vietnam, Thailand, and Malaysia. These competitors may also benefit from certain local government subsidies or other incentives that are not available to us.
We may not ultimately succeed in competing with other manufacturers and distributors in our market, which may have a material adverse effect on our business, financial condition, or results of operations.
Our failure to develop new products or respond to changing consumer preferences and purchasing practices could have a material adverse effect on our business, financial condition, or results of operations. The U.S. cabinetry industry is subject to changing consumer trends, demands, and preferences. The uncertainties associated with developing and introducing new products, such as gauging changing consumer preferences and successfully developing, manufacturing, marketing, and selling new products, could lead to, among other things, rejection of a new product line, reduced demand and price reductions for our products. If our products do not keep up with consumer trends, demands, and preferences, we could lose market share, which could have a material adverse effect on our business, financial condition, or results of operations. If our products do not keep up with consumer trends, demands, and preference, we could lose market share, which could have a material adverse effect on our business, financial condition, or results of operations.
Changes to consumer shopping habits and potential trends toward "online" purchases could also impact our ability to compete. Further, the volatile and challenging economic environment of recent years has caused shifts in consumer trends, demands,
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preferences and purchasing practices, and changes in the business models and strategies of our customers. Shifts in consumer preferences, which may or may not be long-term, have altered the quantity, type, and prices of products demanded by the end-consumer and our customers. If we do not timely and effectively identify and respond to these changing consumer preferences and purchasing practices, our relationships with our customers could be harmed, the demand for our products could be reduced, and our market share could be negatively affected.
Manufacturing expansion or reduction of capacity, manufacturing realignments, and other cost savings programs could result in a decrease in our near-term earnings.Manufacturing expansion to add capacity, manufacturing realignments, and other cost savings programs could result in a decrease in our near-term earnings. We continually review our manufacturing operations. These reviews could result in the expansion or reduction of capacity, manufacturing realignments, and various cost savings programs. These reviews could result in the expansion of capacity, manufacturing realignments, and various cost savings programs. Effects of manufacturing expansion or reduction, realignments, or cost savings programs could result in a decrease in our short-term earnings until the capacity is right-sized, cost reductions are achieved, and/or production volumes stabilize, such as our expansion of stock kitchen and bath capacity in North Carolina and Mexico, which was completed during the prior fiscal year and the closing of our manufacturing facility in Orange, Virginia during this fiscal year. Such manufacturing expansions or reductions, realignments, and programs involve substantial planning, often require capital investments, and may result in charges for fixed asset impairments or obsolescence and substantial severance costs. Such manufacturing expansions, realignments, and programs involve substantial planning, often require capital investments, and may result in charges for fixed asset impairments or obsolescence and substantial severance costs. We also cannot provide assurance that we will achieve all of the intended cost savings. Our ability to achieve cost savings and other benefits within expected time frames is subject to many estimates and assumptions. These estimates and assumptions are subject to significant economic, competitive, and other uncertainties, some of which are beyond our control. If these estimates and assumptions are incorrect, if we experience delays, or if other unforeseen events occur, our business, financial condition, and results of operations could be materially and adversely affected. In addition, downturns in the economy could potentially have a larger impact on the Company as a result of any added capacity.
Certain of our customers have been expanding and may continue to expand through consolidation and internal growth, which may increase their buying power, which could materially and adversely affect our sales, results of operations, and financial position. Certain of our customers have been expanding and may continue to expand through consolidation and internal growth, which may increase their buying power, which could materially and adversely affect our sales, results of operations, and financial position. Certain of our customers are large companies with significant buying power. In addition, potential further consolidation in the distribution channels could enhance the ability of certain of our customers to seek more favorable terms, including pricing, for the products that they purchase from us. Accordingly, our ability to maintain or raise prices in the future may be limited, including during periods of raw material and other cost increases. If we are forced to reduce prices or to maintain prices during periods of increased costs, or if we lose customers because of pricing or other methods of competition, our sales, operating results, and financial position may be materially and adversely affected.
We may fail to fully realize the anticipated benefits of our growth strategy within the home center, independent dealer and distributor and builder channels. Part of our growth strategy depends on expanding our business in the home center, independent dealer and distributor and builder channels. We may fail to compete successfully against other companies that are already established providers within the home center, independent dealer and distributor and builder channels. Demand for our products within the home center, builder, and independent dealer and distributor channels may not grow, or might even decline. Further, the implementation of our growth strategy may place additional demands on our administrative, operational, and financial resources and may divert management's attention away from our existing business and increase the demands on our financial systems and controls. If our management is unable to effectively manage growth, our business, financial condition, or results of operations could be adversely affected. If our growth strategy is not successful then our revenue and earnings may not grow as anticipated or may decline, we may not be profitable, or our reputation and brand may be damaged. In addition, we may change our financial strategy or other components of our overall business strategy if we believe our current strategy is not effective, if our business or markets change, or for other reasons, which may cause fluctuations in our financial results.
Other general risks applicable to us and our business
The implementation of our Enterprise Resource Planning system could disrupt our business. We are in the process of implementing a common Enterprise Resource Planning ("ERP") platform over several fiscal years. The first wave (including the procurement, general ledger, accounts payable, projects, and fixed asset modules) went live in the second half of fiscal 2022. During fiscal 2024, our new Monterrey, Mexico facility went live. The first wave (including the procurement, general ledger, accounts payable, projects, and fixed asset modules) went live in the second half of fiscal 2022. During fiscal 2024, our new Monterrey, Mexico facility went live. Our Anaheim facility went live in May 2025. We have begun planning for the next implementation in our Lincolnton and Hamlet, North Carolina facilities later in fiscal 2026. Although we currently expect the ERP implementation to increase efficiencies by leveraging a common, cloud-based system throughout the Company and standardizing processes and reporting, it may not result in improvements outweighing its costs and may disrupt our operations. We have begun planning for the next implementation in our Anaheim and Riverside, California facilities in fiscal 2025. Although we currently expect the ERP implementation to increase efficiencies by leveraging a common, cloud-based system throughout the Company and standardizing processes and reporting, our ERP system implementation may not result in improvements that outweigh its costs and may disrupt our operations. Our inability to mitigate existing and future disruptions could adversely affect our sales, earnings, financial condition and liquidity. The ERP system implementation subjects us to substantial costs and inherent risks associated with migrating from our legacy systems. These costs and risks could include, but are not limited to:
•significant capital and operating expenditures;
•disruptions to our domestic and international supply chains;
•inability to fill customer orders accurately and on a timely basis, or at all;
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•inability to process payments to suppliers, vendors and associates accurately and in a timely manner;
•disruption to our system of internal controls;
•inability to fulfill our SEC or other governmental reporting requirements in a timely or accurate manner;
•inability to fulfill federal, state, or local tax filing requirements in a timely or accurate manner; and
•increased demands on management and staff time to the detriment of other corporate initiatives.
Our operations may be adversely affected by information systems interruptions or intrusions. We rely on a number of information technology systems to process, transmit, store, and manage information to support our business activities. Increased global cybersecurity vulnerabilities, threats, and more sophisticated and targeted attacks pose a risk to our information technology systems. We have established security policies, processes, and layers of defense designed to help identify and protect against intentional and unintentional misappropriation or corruption of our systems and information and disruption of our operations. Despite these efforts, systems may be damaged, disrupted, or shut down due to attacks by unauthorized access, malicious software, undetected intrusion, hardware failures, or other events, and in these circumstances our disaster recovery planning may be ineffective or inadequate. These breaches or intrusions could lead to business interruption, exposure of proprietary or confidential information, data corruption, damage to our reputation, exposure to litigation, and increased operational costs. Such events could have a material adverse impact on our business, financial condition and results of operation. In addition, we could be adversely affected if any of our significant customers or suppliers experience any similar events that disrupt their business operations or damage their reputation.
Increased compliance costs or liabilities associated with environmental regulations could have a material adverse effect on our business, financial condition, or results of operations. Our facilities are subject to numerous environmental laws, regulations and permits, including those governing emissions to air, discharges to water, storage, treatment and disposal of waste, remediation of contaminated sites, and protection of worker health and safety. We may not be in complete compliance with these laws, regulations, or permits at all times. Our efforts to comply with environmental requirements do not remove the risk that we may incur material liabilities, fines or penalties for, among other things, releases of regulated materials occurring on or emanating from current or formerly owned or operated properties or any associated offsite disposal location, or for contamination discovered at any of our properties from activities conducted by previous occupants. Liability for environmental contamination or a release of hazardous materials may be joint and several, so that we may be held responsible for more than our share of the contamination or other damages, or even for the entire share.
Changes in environmental laws and regulations or the discovery of previously unknown contamination or other liabilities relating to our properties and operations could result in significant environmental liabilities that could impact our business, financial condition, or results of operation. In addition, we may incur capital and other costs to comply with increasingly stringent environmental laws and enforcement policies. These laws, including, for example, the regulations relating to formaldehyde emissions promulgated by the California Air Resources Board, require us to rely on compliance by our suppliers of raw materials. Should a supplier fail to comply with such regulations, notify us of non-compliance, or provide us with a product that does not comply, we could be subject to disruption in our business and incur substantial liabilities.
Unauthorized disclosure of confidential information provided to us by customers, employees or third parties could harm our business. We rely on the internet and other electronic methods to transmit confidential information and store confidential information on our networks. If there were a disclosure of confidential information provided by, or concerning, our employees, customers or other third parties, including through inadvertent disclosure, unapproved dissemination, or unauthorized access, our reputation could be harmed and we could be subject to civil or criminal liability and regulatory actions.
Changes in government and industry regulatory standards could have a material adverse effect on our business, financial condition, or results of operations. Government regulations pertaining to health and safety and environmental concerns continue to emerge, domestically as well as internationally. These regulations include the Occupational Safety and Health Administration and other worker safety regulations for the protection of employees, as well as regulations for the protection of consumers. It is necessary for us to comply with current requirements (including requirements that do not become effective until a future date), and even more stringent requirements could be imposed on our products or processes. Compliance with these regulations may require us to alter our manufacturing and installation processes and our sourcing. Such actions could increase our capital expenditures and adversely impact our business, financial condition or results of operations, and our inability to effectively and timely meet such regulations could adversely impact our competitive position.
We could pursue growth opportunities through either acquisitions, mergers or internally developed projects, which may be unsuccessful or may adversely affect our future financial condition and operating results. We could pursue opportunities for growth through either acquisitions, mergers, or internally developed projects as part of our growth strategy. We cannot provide assurance that we will be successful in integrating an acquired business or that an internally developed project will perform at the levels we anticipate. We may pay for future acquisitions using cash, stock, the assumption of debt, or a combination of
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these. Future acquisitions could result in dilution to existing shareholders and to earnings per share. In addition, we may fail to identify significant liabilities or risks associated with a given acquisition that could adversely affect our future financial condition, and operating results or result in us paying more for the acquired business or assets than they are worth.
Our ability to operate and our growth potential could be materially and adversely affected if we cannot employ, train, and retain qualified personnel at a competitive cost. Many of the products that we manufacture and assemble require manual processes in plant environments. We believe that our success depends upon our ability to attract, employ, train, and retain qualified personnel with the ability to design, manufacture, and assemble these products. In addition, our ability to expand our operations depends in part on our ability to increase our skilled labor force when the housing market recovers in the United States. In addition, our ability to expand our operations depends in part on our ability to increase our skilled labor force as the housing market continues to recover in the United States. In addition, we believe that our success depends in part on our ability to quickly and effectively train additional workforce to handle increased volume and production while minimizing labor inefficiencies and maintaining product quality during a housing market recovery. In addition, we believe that our success depends in part on our ability to quickly and effectively train additional workforce to handle the increased volume and production while minimizing labor inefficiencies and maintaining product quality in a housing market recovery. If either of these events were to occur, our cost structure could increase, our margins could decrease, and any growth potential could be impaired.
Our failure to maintain acceptable quality standards could result in significant unexpected costs. Any failure to maintain acceptable quality standards could require us to recall or redesign such products, or pay substantial damages, any of which would result in significant unexpected costs. We may also have difficulty controlling the quality of products or components sourced from other manufacturers, so we are exposed to risks relating to the quality of such products and to limitations on our recourse against such suppliers. Further, any claim or product recall could result in adverse publicity against us, which could decrease our credibility, harm our reputation, adversely affect our sales, or increase our costs. Defects in our products could also result in decreased orders or sales to our customers, which could have a material adverse effect on our business, financial condition or results of operations.
Natural disasters, terrorist acts or other catastrophic events could have a material adverse effect on our business, financial condition, or results of operations. Many of our facilities are located in regions that are vulnerable to natural disasters and other risks, such as earthquakes, fires, floods, tropical storms, hurricanes, and snow and ice, which at times have disrupted the local economy and posed physical risks to our property. In addition, the continued threat of terrorism and heightened security and military action in response to this threat, or any future acts of terrorism, may cause further disruptions to the economies of the United States and other countries. Our redundant, multiple site capacity may not be sufficient in the event of a natural disaster, terrorist act or other catastrophic event. Such disruptions could, among other things, disrupt our manufacturing or distribution facilities and result in delays or cancellations of customer orders for our products, which in turn could have a material adverse effect on our business, financial condition and results of operations. Further, if a natural disaster occurs in a region from which we derive a significant portion of our revenue, end-user customers in that region may delay or forego purchases of our products, which may materially and adversely impact our operating results for a particular period.
We may incur future goodwill impairment charges or other long-lived asset impairment charges which could negatively impact our future results of operations and financial condition. We recorded significant goodwill as a result of the acquisition of RSI Home Products, Inc. (the "RSI Acquisition" or "RSI") in fiscal 2018. Goodwill represents a substantial portion of our assets. We also have long-lived assets consisting of property and equipment, capitalized internal use software, and certain prepaid customer incentives, as well as other identifiable intangible assets which we review both on an annual basis as well as when events or circumstances indicate that the carrying amount of an asset may not be recoverable. We also have long-lived assets consisting of property and equipment and other identifiable intangible assets which we review both on an annual basis as well as when events or circumstances indicate that the carrying amount of an asset may not be recoverable. If a determination is made that a significant impairment in value of goodwill or long-lived assets has occurred, such determination could require us to impair a substantial portion of our assets. Asset impairments could have a material adverse effect on our financial condition and results of operations.
Risks related to indebtedness
Our level and terms of indebtedness could adversely affect our business and liquidity position. Our consolidated indebtedness level could have important consequences to us, including, among other things, increasing our vulnerability to general economic and industry conditions; requiring a portion of our cash flow used in operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our liquidity and our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities; exposing us to the risk of increased interest rates, and corresponding increased interest expense, because borrowings under our credit facilities are at variable rates of interest; reducing funds available for working capital, capital expenditures, acquisitions, and other general corporate purposes, due to the costs, and expenses associated with such debt; limiting our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions, and general corporate, or other purposes; and limiting our ability to adjust to changing marketplace conditions and placing us at a competitive disadvantage compared to our competitors who may have less debt.
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If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital, or restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations, which could cause us to default on our debt obligations and impair our liquidity. In the event of a default under any of our indebtedness, the holders of the defaulted debt could elect to declare all the funds borrowed to be due and payable, together with accrued and unpaid interest. The lenders under our credit facilities could also elect to terminate their commitments thereunder and cease making further loans, and such lenders could institute foreclosure proceedings against their collateral, all of which could adversely affect our financial condition in a material way.
The credit agreement that governs our credit facility imposes operating and financial restrictions on us and our subsidiaries, which may prevent us from capitalizing on business opportunities or otherwise negatively impact our business. The credit agreement that governs our credit facility imposes operating and financial restrictions on us. These restrictions limit our ability and the ability of our subsidiaries to, among other things, incur additional indebtedness, create additional liens on its assets, make certain investments, dispose of 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 credit agreement. These restrictions limit our ability and the ability of our subsidiaries to, among other things, to incur additional indebtedness, create additional liens on its assets, make certain investments, dispose of 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 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 a result of these restrictions, each of which is subject to certain exceptions and qualifications, we may be limited as to how we conduct our business and we may be unable to raise additional debt or equity financing to compete effectively or to take advantage of new business opportunities. The terms of any future indebtedness we may incur could include more restrictive covenants. We cannot assure you that we will be able to maintain compliance with these existing covenants in the future and, if we fail to do so, that we will be able to obtain waivers from the lenders and/or amend the covenants.
Our failure to comply with the restrictive covenants described above as well as other terms of our indebtedness and/or the terms of any future indebtedness from time to time could result in an event of default, which, if not cured or waived, could result in us being required to repay these borrowings before their due date. If we are forced to refinance these borrowings on less favorable terms or cannot refinance these borrowings, our results of operations and financial condition could be adversely affected.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 1C. Cybersecurity
Risk Management and Strategy
Our operations rely on both on-premises and cloud-hosted IT solutions for critical business processes such as compliance, reporting, marketing, e-commerce, operations, product development, manufacturing, distribution, data management, and stakeholder communication. Recognizing the paramount importance of cybersecurity in today's digital landscape, we are committed to safeguarding our information assets, protecting consumer data, and maintaining the integrity and availability of our systems. To this end, we have implemented a comprehensive cybersecurity risk management framework designed to identify, assess, mitigate, and prevent potential cybersecurity risks, aligning with industry best practices and all applicable regulatory requirements. We evaluate our cybersecurity risk management framework against the National Institute of Standards and Technology's Cybersecurity Framework ("NIST-CSF"), which outlines the core components and responsibilities necessary to sustain a robust and well-balanced cybersecurity program.
The foundation of our framework rests on these key principles: (i) risk assessment and threat intelligence gathering; (ii) implementing robust security controls; (iii) maintaining effective incident response capabilities; (iv) promoting employee awareness and providing cybersecurity training; (v) managing third-party risks; and (vi) providing governance aligning with business objectives and ensuring senior leadership accountability for cyber security risk management.The foundation of our framework rests on these key principles: (i) risk assessment and threat intelligence gathering; (ii) implementing robust security controls; (iii) maintaining effective incident response capabilities; (iv) promoting employee awareness and providing cybersecurity training; and (v) managing third-party risks. We continue to integrate our cybersecurity framework into our overarching enterprise risk management processes, enabling us to capitalize on our extensive enterprise-wide experience in risk management and swiftly adapt to the ever-evolving cybersecurity threat landscape.
Risk Assessment and Threat Intelligence: Under the oversight of the Vice President of Information Security who operates as our Chief Information Security Officer ("CISO") , we conduct periodic risk assessments to pinpoint potential cybersecurity vulnerabilities and threats. These assessments entail evaluating the security posture of critical systems, networks, and applications, as well as analyzing the potential impact of cybersecurity threats on our business operations, financial condition, and reputation. Additionally, we perform continuous threat monitoring and deployed monitoring systems, encompassing
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technologies such as intrusion detection systems, security information and event management tools, and threat intelligence programs.
To ensure the effectiveness of our existing cybersecurity controls and processes, and identify areas for improvement based on the latest industry best practices, we regularly engage third-party consulting services to conduct independent audits and assessments. Additionally, we leverage external expertise to evaluate our cybersecurity and risk management strategy, review policies and procedures to address emerging risks, and maintain ongoing compliance with evolving legal and regulatory requirements.
Security Controls: Our approach to cybersecurity employs a multi-layered strategy, implementing a range of technical administrative and physical controls to safeguard critical systems and data. These controls encompass (i) firewalls, intrusion detection, and prevention systems to monitor and block unauthorized access attempts, detect and prevent malicious activities, and protect network infrastructure; (ii) encryption, including secure protocols and multi-factor authentication, to secure information in transit and at rest; and (iii) a secure network architecture that segregates critical systems from the public internet, limiting exposure to potential threats. We also conduct regular security patching to mitigate emerging cyber threats proactively.
Incident Response: We have implemented an incident response plan and playbook, encompassing procedures designed to respond to and recover from internal cybersecurity incidents. In collaboration with third-party security consultants, we conduct ongoing reviews and tabletop exercises of these procedures, which provide detailed descriptions of the roles and responsibilities of key stakeholders, as well as the protocols for communication and coordination during an incident. The procedures also outline guidelines for escalating incident information to our Cybersecurity Steering Committee, senior management, our Audit Committee (which, as discussed below, has been delegated the responsibility for our Board cybersecurity risk oversight function), our full Board, and for providing timely public disclosure when necessary. The procedures also outline guidelines for escalating incident information to our Cybersecurity Steering Committee, senior management, our Audit Committee (which, as discussed below, has been delegated the responsibility for our Board of Directors (the "Board") cybersecurity risk oversight function), our full Board, and for providing timely public disclosure when necessary.
Employee Awareness and Training: Our employees play a pivotal role in maintaining a strong cybersecurity posture. Our Information Security Policy Framework outlines the requirements for employee conduct concerning company information and company-managed devices, encompassing relevant privacy, data security, and data retention policies. We believe our Information Security Policy Framework aligns with industry best practices and applicable legal and regulatory requirements. Complementing our Information Security Policy Framework, we conduct regular cybersecurity training campaigns that emphasize the importance of cybersecurity awareness. These campaigns address relevant cybersecurity topics, such as common cybersecurity threats, phishing awareness, and best practices for safeguarding sensitive information. Employees are held accountable for completing all assigned cybersecurity programs and meeting certain performance thresholds in phishing awareness and testing exercises.
Third-Party Risk Management: We recognize the potential cybersecurity risks inherent in our relationships with third parties. To address this, we are implementing a comprehensive third-party risk management program designed to identify and oversee such risks . This program will rely on key elements, including risk assessment, due diligence, contractual provisions, and ongoing monitoring, to identify and mitigate impacts from high-risk third parties and specific risks. This program relies on key elements, including risk assessment, due diligence, contractual provisions, and ongoing monitoring, to identify and mitigate impacts from high-risk third parties and specific risks. We will utilize security risk assessment questionnaire tools to identify high-risk third parties, enabling us to proactively and effectively assess and mitigate potential security vulnerabilities. We utilize security risk assessment questionnaire tools to identify high-risk third parties, enabling us to proactively and effectively assess and mitigate potential security vulnerabilities.
Governance: Our Board dedicates time and attention to our cybersecurity and information technology risks. The Board executes its cybersecurity risk oversight function collectively and by delegating responsibility to our Audit Committee. Our CISO presents to the Board at least annually and to our Audit Committee at least quarterly, covering a broad range of topics, such as recent and potential cybersecurity threats and incidents across our industry, best practices and policies, emerging trends, vulnerability assessments, and management's ongoing efforts to prevent, detect, and address internal and external cybersecurity threats specific to our organization. These briefings also include periodic third-party cybersecurity program assessments, benchmarks, and updates from our cybersecurity incident management exercises. Cybersecurity risks are documented and shared with our Audit Committee and the Board quarterly.
While our Board and Audit Committee oversee cybersecurity risk, senior management is responsible for actively managing cybersecurity risk, including overseeing and executing the risk management strategies discussed above.While our Board and Audit Committee oversees cybersecurity risk, senior management is responsible for actively managing cybersecurity risk, including overseeing and executing the risk management strategies discussed above. Senior management reports to the Board annually on our enterprise risk management processes, ensuring transparency and accountability. Senior management reports to the Board semi-annually on our enterprise risk management processes, ensuring transparency and accountability.
Additionally, our Cybersecurity Steering Committee is co-chaired by our CISO and Cybersecurity, Governance Risk and Compliance manager along with other key leaders, including the Chief Human Resources Officer, Vice President of Finance, Corporate Controller, Senior Corporate Risk Manager, Director of Enterprise Infrastructure and Vice President of Internal Audit, all overseeing the management of key cybersecurity risks and strategy for the organization.Additionally, our Cybersecurity Steering Committee is co-chaired by our CIO and Cybersecurity, Governance Risk and Compliance manager along with other key leaders, including the Chief Human Resources Officer, Vice President of Finance, Corporate Controller, Senior Corporate Risk Manager, Director of Enterprise Infrastructure and Senior Director of Internal Audit, all overseeing the management of key cybersecurity risks and strategy for the organization. Our CISO has over 25 years of cybersecurity and corporate risk management experience. The Cybersecurity Steering Committee meets and receives quarterly updates, which provide ongoing visibility into cybersecurity risks and mitigation efforts. The Cybersecurity Steering Committee meets and receives bi-monthly updates, which provide ongoing visibility into cybersecurity risks and mitigation efforts.
Through this robust governance structure, involving Board oversight, senior management leadership, and a cross-functional committee, we maintain a proactive and comprehensive approach to managing cybersecurity risks across the organization.
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