Armstrong World Industries, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited U.S. GAAP interim results. AWI produces flooring and ceiling systems and operated 32 manufacturing plants in nine countries. The company reported Building Products, Resilient Flooring, and Wood Flooring segments.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $551.4 million | $590.0 million | Down 6.5% |
| Gross profit | $129.5 million | $142.1 million | Down 8.9% |
| Gross margin | 23.5% | 24.1% | Down 0.6 percentage points |
| Operating income | $35.8 million | $53.8 million | Down 33.5% |
| Operating margin | 6.5% | 9.1% | Down 2.6 percentage points |
| Earnings from continuing operations | $3.8 million | $18.1 million | Down 79.0% |
| Net earnings | $46.6 million | $16.9 million | Includes discontinued-operation benefit |
| Diluted EPS | $0.83 | $0.30 | Continuing operations: $0.07 vs. $0.33 |
| Operating cash flow | $(34.1) million | $(32.9) million | Higher use of cash |
| Capital expenditures | $26.2 million | $40.9 million | Lower spending |
Cash and cash equivalents were $132.0 million at March 31, 2015, down from $185.3 million at December 31, 2014. Total debt, including current installments, was approximately $1.04 billion. The company had no outstanding borrowings under its $250 million revolving credit facility or accounts receivable securitization facility, although letters of credit totaled $67.3 million.
AWI remained in compliance with its debt covenants. The $1.3 billion senior credit facility requires minimum interest coverage of 3.0 to 1.0 and a maximum consolidated net leverage ratio of 3.75 to 1.0 after March 31, 2015. Management stated that available cash, operating cash flow, credit facilities, and securitization capacity should meet foreseeable liquidity needs.
Material changes versus the prior comparable period
- Sales declined primarily because of $39 million of lower volume and $20 million of unfavorable foreign-exchange effects, partly offset by approximately $20 million of favorable price and mix.
- Building Products sales fell 5.3% to $292.0 million, but operating income increased 3.5% to $59.8 million because favorable pricing, mix, and lower input costs exceeded volume and SG&A headwinds.
- Resilient Flooring sales fell 4.2% to $156.8 million and operating income fell 43.3% to $5.9 million, reflecting unfavorable price and mix, lower volume, and higher SG&A.
- Wood Flooring sales fell 13.1% to $102.6 million, and the segment moved to a $1.2 million operating loss from $5.1 million of operating income. Volume declines reflected market-share shifts and customer inventory adjustments.
- Unallocated corporate expense increased to $28.7 million from $19.5 million, primarily because of higher U.S. pension costs and separation costs.
- The effective tax rate rose to 84.1% from 51.6%, driven principally by $3.2 million of state net operating loss write-offs following a change in ownership and the effect of unbenefited foreign losses.
Discontinued operations and unusual items
- AWI recorded $42.8 million of net earnings from discontinued operations related to DLW, its former European flooring business. The amount principally reflects a non-cash $43.4 million income tax benefit associated with DLW’s German insolvency proceedings.
- DLW had a $12.9 million net liability at deconsolidation, recorded as a contingent liability pending completion of the insolvency proceedings. Any shortfall is to be recognized through discontinued operations.
- AWI incurred $4.3 million of separation costs related to the planned flooring and ceilings spinoff.
- Equity earnings from the WAVE joint venture declined to $13.6 million from $14.8 million; WAVE sales declined to $86.6 million from $92.3 million.
- Total other comprehensive loss was $3.9 million, compared with $6.1 million of income in the prior-year quarter, primarily reflecting foreign-currency translation losses.
Outlook, management commentary, and risks
The Board approved a plan to separate the flooring business from the ceilings business into two independent publicly traded companies, with completion expected in the first quarter of 2016. The filing does not provide a specific earnings, revenue, or EBITDA forecast.
Management observed softness in U.S. commercial office and Canadian retail markets, continued healthcare weakness, mixed EMEA conditions, Russian-ruble volatility, and weak Chinese markets. Residential activity was flat to slightly positive, while education demand improved. Competitive pricing pressure continued in Wood and Resilient Flooring.
Key risks include construction and macroeconomic conditions, competition, raw-material and energy costs, foreign-exchange movements, customer concentration, debt covenants and leverage, execution of the planned separation, the DLW insolvency, WAVE performance, environmental liabilities, litigation, labor matters, tax-asset availability, and international operations.
Environmental liabilities considered probable and reasonably estimable totaled $4.3 million. Additional costs at the St. Helens, Oregon; Macon, Georgia; and Elizabeth City, North Carolina sites may be material but could not be reasonably estimated. A pending antidumping review could create approximately $5 million to $7 million of additional liability if preliminary rates are sustained and upheld.
Important facts for investors to verify
- Whether the planned flooring and ceilings separation was completed on schedule and within expected costs.
- The sustainability of cash generation given first-quarter operating cash use of $34.1 million, seasonal working-capital needs, and approximately $1.04 billion of debt.
- Current leverage and interest-coverage ratios relative to post-March 31, 2015 covenant thresholds.
- The final financial impact of the DLW insolvency, including potential contingent-liability adjustments and the non-cash tax benefit.
- Progress and final cost exposure for the Russia plant and Lancaster, Pennsylvania, luxury-vinyl-tile expansion; total project spending was projected at approximately $150 million, with $138 million incurred through March 31, 2015.
- Final antidumping and countervailing-duty determinations and any resulting payment or refund obligations.
- Potential additional environmental remediation costs that the filing states may be material but cannot currently be estimated.