Armstrong World Industries, Inc. 2017 Form 10-K Summary
Business context and reporting period
Armstrong World Industries designs, manufactures and sells commercial and residential ceiling, wall and suspension-system solutions, primarily in the Americas. This annual report covers the fiscal year ended December 31, 2017; fourth-quarter information is included where relevant. Continuing operations comprise Mineral Fiber, Architectural Specialties and Unallocated Corporate. EMEA and Pacific Rim businesses were classified as discontinued operations in connection with the planned sale to Knauf.
- Acquired Tectum on January 13, 2017; its operations were included in Architectural Specialties.
- Entered into an agreement to sell EMEA and Pacific Rim businesses to Knauf for $330.0 million in cash, subject to adjustments and regulatory approvals; closing was expected in mid-2018.
- Approximately 75% of consolidated sales were to distributors. Three commercial distributors represented $426.1 million of 2017 sales.
Financial performance and key metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net sales from continuing operations | $893.6 million | $837.3 million | 6.7% increase |
| Gross profit | $323.8 million | $305.8 million | 5.9% increase |
| Gross margin | 36.2% | 36.5% | Down 0.3 points |
| Operating income | $255.1 million | $188.9 million | 35.0% increase |
| Operating margin | 28.5% | 22.6% | Up 5.9 points |
| Earnings from continuing operations | $220.6 million | $99.3 million | 121.9% increase |
| Diluted EPS from continuing operations | $4.08 | $1.78 | Increase |
| Net earnings | $154.8 million | $104.7 million | 47.9% increase |
| Diluted net EPS | $2.86 | $1.87 | Increase |
| Operating cash flow | $170.4 million | $49.3 million | Increase |
| Capital expenditures | $89.7 million | $104.2 million | Decrease |
- Mineral Fiber sales were $756.4 million, up 2.7%, and operating income was $231.9 million, up 3.6%. Favorable average unit value contributed approximately $29 million, while volume declined by approximately $10 million.
- Architectural Specialties sales were $137.2 million, up 36.2%, and operating income was $27.7 million, up 44.3%, driven by Tectum and stronger new-construction activity.
- WAVE equity earnings were $67.0 million, down from $73.1 million, primarily because of higher steel and other input costs and increased processing charges.
- Cash flow from investing activities used $54.2 million, including $31.2 million for the Tectum acquisition. Financing activities used $102.7 million, including $80.4 million for share repurchases.
- At year-end, cash and cash equivalents were $159.6 million, total assets were $1.87 billion, total debt including current maturities was $850.2 million, and shareholders’ equity was $419.3 million.
- The continuing-operations tax rate was 0.7%, compared with 34.1% in 2016. The 2017 result included an $82.5 million net benefit from the Tax Cuts and Jobs Act.
Material changes versus the prior comparable period
- Sales growth reflected approximately $29 million of favorable pricing and mix effects and $27 million of higher volume. Higher raw-material, sourced-product and energy costs reduced operating income by approximately $3 million.
- SG&A declined to $135.7 million from $155.5 million, aided by lower pension expense, higher WAVE reimbursements and environmental insurance settlements. The 2016 period included $34.5 million of AFI separation costs; no comparable separation costs were recorded in 2017.
- Operating income benefited from lower pension expense and the absence of AFI separation costs, partially offset by plant-closure charges, higher manufacturing costs and lower WAVE earnings.
- Net earnings included a $65.8 million loss from discontinued operations, principally a $74.0 million impairment related to the anticipated Knauf sale. In 2016, discontinued operations generated $5.4 million.
- The company repurchased 1.8 million shares for $80.4 million during 2017. No cash dividends were declared in 2017 or 2016.
Debt, liquidity and other financial considerations
- The senior credit facility totals $1.05 billion, comprising a $200.0 million revolving facility, a $600.0 million Term Loan A and a $250.0 million Term Loan B. Year-end borrowings were $577.5 million under Term Loan A and $245.6 million under Term Loan B; the revolving facility was undrawn.
- Term Loan A and the revolving facility mature in 2021; Term Loan B matures in 2023. A $35.0 million variable-rate tax-exempt bond matures in 2041.
- The company had no borrowings under its $40.0 million accounts-receivable securitization facility. It reported $151.3 million of available letter-of-credit capacity, although the securitization arrangement showed $6.6 million of letters of credit above its stated limit.
- Management stated that cash on hand, operating cash flow and available credit were expected to fund foreseeable operating, capital-expenditure and debt-service needs. The company was in compliance with all debt covenants at December 31, 2017.
- U.S. pension plans were overfunded by $29.6 million, while unfunded U.S. postretirement liabilities were $86.6 million. Estimated 2018 pension and postretirement contributions were approximately $4.0 million and $7.4 million, respectively.
Guidance, outlook, commentary, risks and unusual items
- Management’s strategy is to accelerate profitable sales and earnings growth by expanding markets in the Americas and selling a broader array of products and solutions. The filing does not provide quantified 2018 revenue, earnings or EBITDA guidance.
- Management expected commercial and residential construction activity, renovation demand, pricing, product mix and new-construction project timing to remain important revenue drivers. Sales are generally stronger in the second and third quarters.
- The St. Helens, Oregon mineral-fiber plant was scheduled to close in the first half of 2018. The company recorded approximately $10 million of accelerated depreciation and $3.3 million of severance and related costs associated with plant closures and workforce reductions.
- The Knauf transaction remained subject to regulatory approvals and customary closing conditions. The company intended to return a majority of the net proceeds to shareholders, subject to board approval, but did not specify the amount or timing.
- Environmental liabilities increased to $13.5 million from $4.7 million. The company recorded $10.1 million of environmental reserves in 2017 and reached $30.5 million of insurance settlements; the settlements were expected to be released from escrow in the first quarter of 2018.
- Key risks include construction-market cyclicality, raw-material and energy costs, customer concentration, competition, WAVE performance, leverage and debt covenants, pension and postretirement obligations, environmental remediation, litigation, labor negotiations, cybersecurity and execution of the Knauf divestiture.
- Roxul USA, doing business as Rockfon, filed an antitrust lawsuit seeking unspecified damages and remedial measures. Management considered the allegations without merit and did not expect current litigation to have a material adverse effect, but the ultimate outcome was uncertain.
- The Tax Cuts and Jobs Act reduced the U.S. federal corporate tax rate to 21%. The company’s 2017 tax accounting remained provisional, including a $10.3 million transition-tax liability and changes to deferred-tax valuations.
Most important facts an investor should verify
- Whether the Knauf sale closed on the expected timetable, the final cash proceeds and adjustments, and the allocation of proceeds to shareholders.
- The sustainability of 2017 earnings excluding the $82.5 million tax benefit, environmental insurance recoveries, pension-related effects, plant-closure charges and discontinued-operation items.
- Progress in replacing or consolidating St. Helens production and the resulting capital, severance, impairment and operating costs.
- Operating trends in Mineral Fiber, including volume recovery, pricing realization, mix and input-cost pass-through.
- Architectural Specialties growth and the integration and contribution of Tectum.
- WAVE’s earnings, distributions and exposure to steel and other input costs following the planned divestiture.
- Debt maturities, floating-rate exposure, covenant headroom and the refinancing or repayment plan for the 2021 maturities.
- Potential additional environmental remediation costs, insurance recoveries and the status of the Rockfon antitrust litigation.
- Finalization of provisional Tax Act accounting and the realizability of deferred tax assets, foreign tax credits and state NOLs.