Armstrong World Industries, Inc. — Q1 2020 Form 10-Q Summary
Business context and reporting period
Armstrong World Industries, Inc. (AWI) filed an unaudited Form 10-Q for the three months ended March 31, 2020. AWI manufactures ceiling and wall systems for commercial and residential construction markets throughout the Americas. Reportable segments were Mineral Fiber, Architectural Specialties and Unallocated Corporate.
The quarter included the effects of the November 2019 MRK acquisition and reflected the September 2019 divestiture of the EMEA and Pacific Rim businesses as discontinued operations. COVID-19 began affecting the operating outlook during the quarter, although all operating manufacturing facilities were operational at March 31, 2020, except previously idled locations.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $248.7 million | $242.1 million | 2.7% increase |
| Gross profit | $91.3 million | $91.4 million | Essentially flat |
| Gross margin | 36.7% | 37.7% | Down approximately 100 bps |
| Operating income | $76.0 million | $54.7 million | 38.9% increase |
| Operating margin | 30.6% | 22.6% | Up approximately 800 bps |
| Loss from continuing operations | $222.6 million loss | $36.4 million income | Driven by pension settlement loss |
| Net loss | $226.2 million | $39.1 million net income | Material deterioration |
| Diluted EPS | $4.71 loss | $0.78 income | Continuing and discontinued operations combined |
| Cash flow from operations | $25.7 million | $14.7 million | Increase of $11.0 million |
SG&A declined to $34.8 million from $55.6 million, principally because Q1 2019 included approximately $20 million of Rockfon litigation-related legal and professional fees and lower incentive and deferred compensation costs. Equity earnings from WAVE increased modestly to $19.5 million from $18.9 million.
- Mineral Fiber sales were $197.7 million, up 0.5%; operating income was $70.0 million, up 47.1%.
- Architectural Specialties sales were $51.0 million, up 12.3%; operating income fell 18.1% to $7.5 million.
- Capital expenditures were $12.0 million, compared with $14.8 million in Q1 2019.
- Cash and cash equivalents were $146.9 million at March 31, 2020, compared with $45.3 million at December 31, 2019.
Debt, liquidity and capital allocation
At March 31, 2020, total debt consisted principally of $195.0 million outstanding under the revolving credit facility, a fully drawn $500.0 million Term Loan A, and $30.0 million under the accounts receivable securitization facility. Current and long-term debt totaled approximately $721.0 million, excluding other obligations classified separately.
- AWI reported $305.0 million of available borrowing capacity under its revolving credit facility.
- Letters of credit had $164.1 million of total available capacity, with $10.9 million used.
- Management stated that cash, operating cash flow and available borrowing capacity should address near-term liquidity needs.
- AWI was in compliance with its debt covenants and did not expect COVID-19 to cause covenant violations as of the filing date.
- Operating activities provided $25.7 million of cash; investing activities provided $9.9 million, including an $18.1 million return of investment from WAVE; financing activities provided $66.8 million, primarily from borrowings.
- AWI repurchased approximately 0.4 million shares for $34.4 million during the quarter and temporarily suspended the repurchase program in March 2020.
- The Board declared a $0.20 per share dividend payable in May 2020.
Material changes versus the prior comparable period
- Sales increased modestly, reflecting approximately $8 million of higher volume partially offset by approximately $1 million of unfavorable average unit value and product mix.
- Operating income improved substantially because of the absence of the prior-year Rockfon litigation costs, lower compensation expense, lower manufacturing costs and favorable raw-material and energy costs.
- Architectural Specialties benefited from the MRK and ACGI acquisitions and higher volume, but profitability declined because of additional selling and design investments, project timing and increased amortization.
- Interest expense declined to $6.7 million from $10.4 million due to lower rates, refinancing and lower average borrowings.
- Reported earnings were overwhelmed by a $374.4 million pretax pension settlement loss related to transferring approximately $1.045 billion of obligations for roughly 10,300 retirees and beneficiaries to insurers.
- The pension transaction also generated a $288.3 million increase in other comprehensive income, while total comprehensive income was $48.2 million.
- Discontinued operations generated a $3.6 million net loss in Q1 2020, compared with $2.7 million of net earnings in Q1 2019, reflecting preliminary working-capital and other adjustments related to the Knauf divestiture.
Guidance, outlook, risks and unusual items
Management did not provide quantitative earnings or sales guidance. It expects COVID-19 to cause a material decrease in customer demand, sales and earnings across markets during the remainder of 2020, with the most significant impact expected in the second and third quarters. On April 24, 2020, AWI temporarily suspended operations at its recently acquired Libertyville, Illinois facility.
- COVID-19 risks include reduced construction activity, facility or customer closures, supply-chain disruption, weaker demand and customer collection risk.
- No COVID-19-related asset impairments, inventory charges or bad-debt reserves were recorded in Q1 2020, but management warned that future charges could materially affect results, liquidity or financial condition.
- The Knauf divestiture remains subject to final working-capital and other adjustments. AWI recorded a $6.2 million payable to Knauf and a $25.9 million payable to WAVE and expected finalization in Q2 2020.
- Environmental liabilities were $1.5 million at March 31, 2020. Potential future costs at the Macon, Georgia and Elizabeth City, North Carolina sites could be material to individual periods, although management did not expect them to materially impair liquidity or financial condition.
- AWI identified construction activity, raw-material and energy costs, competition, customer concentration, WAVE, indebtedness, debt covenants, liquidity, pensions, environmental matters, litigation, cybersecurity and international operations as additional risks.
Most important facts for investors to verify
- Assess the magnitude and duration of COVID-19 effects on construction demand, facility utilization, customer credit quality and second- and third-quarter results.
- Monitor debt levels, revolver availability, the September 2020 maturity of the amended $30.0 million receivables facility and compliance with financial covenants.
- Separate recurring operating performance from the $374.4 million pension settlement loss and the unusually favorable comparison from Q1 2019 Rockfon litigation costs.
- Confirm final purchase-price and working-capital adjustments related to the Knauf divestiture.
- Evaluate Architectural Specialties margins following the MRK and ACGI acquisitions and the planned investments in selling and design capacity.
- Review environmental remediation developments and potential uninsured costs at the Macon and Elizabeth City sites.
- Verify whether the dividend and share-repurchase suspension remain consistent with liquidity requirements as COVID-19 impacts cash generation.