Armstrong World Industries, Inc. — Q1 2016 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2016. Before April 1, 2016, Armstrong operated Building Products, Resilient Flooring, and Wood Flooring. On April 1, 2016, it completed the separation and distribution of Armstrong Flooring, Inc. (AFI); AWI thereafter retained the Building Products ceilings business. Historical flooring results will be presented as discontinued operations beginning in the second quarter of 2016.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $571.8 million | $551.4 million | 3.7% increase |
| Gross profit | $131.5 million | $129.5 million | 1.5% increase |
| Gross margin | 23.0% | 23.5% | Down 50 basis points |
| Operating income | $18.3 million | $35.8 million | 48.9% decrease |
| Operating margin | 3.2% | 6.5% | Down 330 basis points |
| Continuing operations | $(11.6) million | $3.8 million | Decline |
| Net earnings | $(9.9) million | $46.6 million | Decline |
| Diluted EPS | $(0.18) | $0.83 | Decline |
| Operating cash flow | $(65.0) million | $(34.1) million | Greater use of cash |
Sales benefited from higher volumes of $34 million, partly offset by unfavorable average unit value of approximately $3 million and unfavorable foreign exchange of $11 million. Raw material, sourced-product, and energy costs benefited operating income by approximately $11 million year over year. WAVE joint-venture earnings increased to $18.1 million from $13.6 million.
Segment performance
- Building Products: Sales were $287.4 million, down 1.6%; operating income was $50.8 million, down 15.1%. Results reflected foreign-exchange pressure, unfavorable average unit value, and higher allocated corporate costs, partly offset by stronger WAVE earnings.
- Resilient Flooring: Sales were $163.9 million, up 4.5%; operating income declined to a $5.4 million loss from income of $5.9 million. Higher sales volumes were offset by increased SG&A and manufacturing costs, including ramp-up costs at the Lancaster, Pennsylvania plant.
- Wood Flooring: Sales increased 17.4% to $120.5 million, and operating income improved to $1.3 million from a $1.2 million loss, supported by higher volumes and lower lumber costs.
Liquidity, debt, and cash flow
Cash and cash equivalents were $149.8 million at March 31, 2016, down from $244.8 million at December 31, 2015. Operating activities used $65.0 million, investing activities used $10.3 million, and financing activities used $20.1 million. Capital expenditures were $28.5 million.
Total debt, including current maturities, was $978.2 million at March 31, 2016, compared with $998.3 million at December 31, 2015. The company had no revolving-credit borrowings and no outstanding borrowings under its accounts-receivable securitization facility, although letters of credit totaled $57.8 million. AWI reported compliance with its debt covenants.
On April 1, 2016, AWI refinanced its $1.275 billion senior credit facility with a $1.05 billion facility consisting of a $200 million revolver, a $600 million Term Loan A, and a $250 million Term Loan B. Maturities were extended to 2021 for the revolver and Term Loan A and to 2023 for Term Loan B. AFI borrowed $100 million under a new facility and paid a $50 million dividend to AWI, which AWI used with cash on hand to reduce debt.
Material changes, outlook, and unusual items
- Separation costs rose to $27.1 million from $4.3 million, primarily for professional services, employee retention, severance, and approximately 30 position eliminations.
- Interest expense increased to $21.9 million from $11.2 million. A $10.7 million loss from settling interest-rate swaps was reclassified from accumulated other comprehensive income into interest expense.
- Income tax expense was $12.1 million despite pretax income of only $0.5 million; the filing attributes the result partly to tax effects of the AFI separation.
- Q1 2015 net earnings included a $42.8 million net gain from the discontinued European DLW business, including a $43.4 million tax benefit. Q1 2016 included a $1.7 million net gain from that matter.
- Management cited improving North American commercial and residential activity, but continuing softness in EMEA and most Pacific Rim markets. Competitive pricing pressure remained significant in flooring.
- Management expects cash on hand, operating cash flow, credit facilities, securitization availability, and the refinanced revolver to meet foreseeable liquidity needs. The filing provides no specific earnings or revenue guidance.
Risks and contingencies
Key risks include execution of the AFI separation, potential tax liabilities if the transaction is not treated as tax-free, reduced diversification after the separation, construction and economic conditions, competition, raw-material and energy costs, indebtedness and covenant requirements, foreign-exchange exposure, pension obligations, environmental remediation, litigation, and the performance of the WAVE joint venture.
Environmental liabilities recorded as probable and reasonably estimable totaled $5.0 million at March 31, 2016. The filing states that additional costs at the St. Helens, Oregon; Macon, Georgia; and Elizabeth City, North Carolina sites could be material but cannot currently be reasonably estimated. AFI assumed responsibility for the legacy antidumping and countervailing-duty flooring matter and agreed to indemnify AWI.
Important facts for investors to verify
- Post-separation results and comparability of AWI’s continuing Building Products business.
- Actual debt reduction, interest expense, leverage, and covenant compliance under the April 2016 refinancing.
- Whether flooring separation costs and other one-time items decline as expected.
- Execution and profitability of the Lancaster plant expansion and the Building Products business.
- Final tax treatment of the separation and any related indemnification obligations.
- Potential environmental remediation costs and other unresolved legal or regulatory contingencies.
- Conversion of seasonal first-quarter operating cash outflows into full-year cash generation.