Armstrong World Industries, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Armstrong designs, manufactures and sells flooring products, ceiling systems, and kitchen and bathroom cabinets. Reportable segments are Building Products, Resilient Flooring, Wood Flooring and Cabinets. The filing covers the unaudited three and six months ended June 30, 2011, compared with the corresponding 2010 periods. The company operated 31 manufacturing plants in seven countries and had approximately 9,300 employees at quarter-end.
Key Financial Metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales | $748.6 million, up 3.3% | $1,433.8 million, up 3.6% |
| Gross profit | $184.7 million; 24.7% margin | $345.4 million; 24.1% margin |
| Operating income | $72.7 million; 9.7% margin | $124.8 million; 8.7% margin |
| Net earnings | $37.9 million; 5.1% margin | $51.4 million; 3.6% margin |
| Diluted EPS | $0.64 | $0.87 |
| Operating cash flow | Not separately provided | $32.1 million |
- Six-month cost of goods sold declined to 75.9% of sales from 77.1% in the prior-year period; SG&A declined to 16.9% from 19.9%.
- Cash and cash equivalents were $304.6 million at June 30, 2011, compared with $315.8 million at December 31, 2010. Cash declined by $11.2 million during the first six months.
- Total debt, including current maturities, was $846.3 million at June 30, 2011, versus $874.9 million at year-end 2010. Long-term debt was $838.2 million, excluding current installments.
- Total shareholders’ equity increased to $1,172.2 million from $1,090.8 million, and retained earnings moved from a $35.3 million accumulated deficit to $16.1 million of retained earnings.
- Capital expenditures were $49.7 million in the first six months, compared with $31.8 million in 2010. Net cash used in investing activities was $22.7 million.
- Liquidity included a $250 million revolving credit facility, a $100 million receivables securitization program, foreign lines of credit, and $212.8 million of U.S. cash. Outstanding letters of credit totaled $68.6 million.
Material Changes Versus the Prior Comparable Period
- Second-quarter operating income rose 37.4% and first-half operating income rose 88.2%, driven by improved pricing and mix, lower manufacturing and SG&A costs, and the absence of significant 2010 impairment and executive separation charges.
- Net earnings increased from $26.8 million to $37.9 million in the second quarter and from $7.4 million to $51.4 million for the first six months.
- Pricing actions increased estimated sales by approximately $17 million in the quarter and $34 million year to date; mix improvements added approximately $14 million and $20 million, respectively. Favorable foreign exchange contributed approximately $24 million and $29 million.
- Raw-material and energy inflation reduced operating income by approximately $18 million in the quarter and $32 million year to date.
- Building Products sales increased 7.2% in the quarter and 10.8% year to date, with operating income up 7.7% and 23.9%, respectively.
- Resilient Flooring sales were essentially flat year to date, while operating income improved to $10.0 million from $4.8 million. European restructuring continued to pressure volumes and produced an operating loss of $18.2 million for the first half.
- Wood Flooring operating income improved to $13.4 million in the quarter and $16.9 million year to date, compared with $1.1 million and a $0.5 million loss, respectively, in 2010.
- Cabinets sales declined 5.1% in the quarter and 4.8% year to date, but the segment reached break-even for the first half compared with a $4.3 million loss in 2010.
- Operating cash flow fell to $32.1 million from $56.2 million, primarily because of higher inventories and $14.0 million of restructuring payments.
- Interest expense rose to $26.3 million from $7.9 million for the first six months, primarily because of the 2010 refinancing and higher debt balances and interest rates.
- The effective tax rate declined to 38.1% from 45.7% in the quarter and to 48.0% from 87.6% for the first six months, largely due to valuation allowance changes and the effect of 2010 healthcare legislation.
Guidance, Outlook, Risks and Unusual Items
- Management targeted at least $165 million of manufacturing and SG&A cost removal by 2013, including expected savings of $90 million in 2011 and $40 million in 2012. The filing does not provide a formal earnings or revenue forecast.
- Four new manufacturing projects, including a U.S. mineral wool plant, expanded China Building Products capacity and two China flooring plants, are projected to require $175 million to $200 million of capital spending, primarily in 2011 and 2012.
- Management stated that cash, operating cash flow, credit facilities and receivables financing should meet foreseeable liquidity needs, and reported compliance with all debt covenants.
- Term Loan B was amended in March 2011 to reduce its LIBOR spread and floor and extend maturity to March 2018. The amendment generated a $5.5 million prepayment premium and approximately $1.6 million of third-party fees.
- Restructuring charges were $2.4 million in the quarter and $7.3 million year to date. Total restructuring-related expenses incurred through June 30 were $26.9 million for European flooring, $22.9 million for the Beaver Falls plant closure and $6.7 million for North American SG&A actions. Additional 2011 costs are expected.
- A lockout began July 17, 2011 at the Marietta, Pennsylvania, Building Products plant, affecting approximately 260 workers. Contracts covering approximately 500 additional employees were scheduled to expire during the remainder of 2011.
- Environmental liabilities recorded were $8.8 million. Potential additional remediation costs at the St. Helens, Oregon, and Macon, Georgia, sites cannot currently be estimated with reasonable certainty and may be material.
- Preliminary U.S. antidumping and countervailing duties applied to engineered wood flooring imported from China were 6.78% and 2.25%, respectively. A final antidumping determination was expected in October 2011; an adverse outcome could be material.
- The company remains exposed to housing and commercial construction weakness, raw-material and energy inflation, foreign exchange, variable-rate debt, project cost overruns and construction delays. The filing states that no material changes occurred to previously disclosed risk factors other than plant construction risks.
Most Important Facts for Investors to Verify
- Whether pricing and cost-reduction initiatives can offset continued volume weakness and raw-material inflation.
- Progress, final costs and returns from the $175 million to $200 million manufacturing expansion program.
- Cash conversion, inventory growth and the effect of restructuring payments on operating cash flow.
- Debt covenant compliance, variable-rate interest exposure and refinancing-related interest costs.
- Resolution and potential financial exposure from environmental remediation and China flooring trade-duty proceedings.
- Duration and operational impact of the Marietta plant lockout and other labor negotiations.
- The sustainability of improved tax rates, segment profitability and earnings influenced by restructuring and prior-year unusual items.