Armstrong World Industries, Inc. — Q1 2021 Form 10-Q Summary
Business context and reporting period
Armstrong World Industries, Inc. designs, manufactures and sells ceiling and wall systems for commercial and residential construction markets throughout the Americas. The report covers the unaudited quarter ended March 31, 2021, compared with the quarter ended March 31, 2020. Reportable segments are Mineral Fiber, Architectural Specialties and Unallocated Corporate.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $251.9 million | $248.7 million | 1.3% |
| Gross profit | $87.5 million | $91.3 million | Down $3.8 million |
| Gross margin | 34.7% | 36.7% | Down 200 bps |
| Operating income | $54.1 million | $76.0 million | Down 28.8% |
| Operating margin | 21.5% | 30.6% | Down 910 bps |
| Earnings from continuing operations | $37.5 million | $(222.6) million | Improved |
| Net earnings | $35.4 million | $(226.2) million | Improved |
| Diluted EPS | $0.74 | $(4.71) | Improved |
| Cash flow from operations | $19.6 million | $25.7 million | Down $6.1 million |
| Capital expenditures | $13.2 million | $12.0 million | Up $1.2 million |
Mineral Fiber sales were $188.7 million, down 4.6%, and segment operating income was $60.6 million, down 13.4%. Architectural Specialties sales were $63.2 million, up 23.9%, but the segment recorded a $4.9 million operating loss versus $7.5 million of income, primarily because of acquisition-related amortization and expenses.
Cash and cash equivalents were $121.6 million at March 31, 2021, compared with $136.9 million at December 31, 2020. Total debt, including current maturities, was $709.4 million, consisting primarily of $225.0 million drawn on the revolving facility and $487.4 million under Term Loan A. The company reported $275.0 million of unused revolving capacity and was in compliance with its debt covenants. Net cash used in financing activities was $26.2 million, including $10.1 million of dividends, $10.0 million of share repurchases and $6.3 million of long-term debt repayments.
Material changes versus the prior comparable period
- Revenue increased modestly despite an estimated $17 million reduction in volumes related to lower COVID-19-driven demand. Favorable average unit value contributed approximately $5 million, while the 2020 acquisitions contributed approximately $17 million to Architectural Specialties revenue.
- Cost of goods sold increased to 65.3% of sales from 63.3%, reflecting acquisition-related costs, unfavorable mix and higher raw-material and energy costs. Higher input costs reduced operating income by approximately $1 million.
- SG&A increased to $54.4 million from $34.8 million, driven primarily by approximately $12 million of acquisition-related costs, including intangible amortization, and approximately $7 million of higher incentive and deferred compensation expense.
- Operating income declined by $21.9 million despite higher sales. WAVE joint-venture earnings increased to $21.0 million from $19.5 million.
- Results benefited substantially from the absence of the $374.4 million pension settlement loss recognized in Q1 2020. Other non-operating income was $1.3 million in Q1 2021 versus $369.4 million of expense in Q1 2020.
- The company paid $11.8 million to Knauf for final post-closing purchase-price adjustments related to the 2019 discontinued-business sale.
- The company repurchased approximately 0.1 million shares for $10.0 million and paid a quarterly dividend of $0.21 per share. The remaining share-repurchase authorization was approximately $583.8 million at March 31, 2021.
Guidance, outlook, commentary, risks and unusual items
Management did not provide quantified full-year revenue or earnings guidance in the filing. Management stated that customer demand improved in Q1 2021 but remained below pre-pandemic levels. All manufacturing facilities were operational at quarter-end except the previously idled St. Helens, Oregon facility, which was held for sale. A sale agreement for that property was entered into during Q1 2021, with closing expected in 2021.
COVID-19 remains a significant uncertainty affecting construction activity, customer demand, operations, supply chains, collections and financial markets. No COVID-19-related asset impairments, inventory charges or material bad-debt reserves were recorded in Q1 2021, but future charges remain possible. The company announced price increases for selected Mineral Fiber, grid and Architectural Specialties products effective in Q2 2021 and may take additional pricing actions.
Acquisition-related items included $0.7 million of deferred-revenue effects, $0.2 million of contingent-consideration remeasurement, $2.8 million of deferred cash arrangements and $0.3 million of inventory step-up charges. The acquired Turf, Moz and Arktura businesses generated $16.5 million of Q1 sales and a $5.7 million pretax loss.
Environmental liabilities of $0.9 million were recorded at March 31, 2021. The company is involved in ongoing remediation and insurance-recovery matters at sites in Macon, Georgia and Elizabeth City, North Carolina; ultimate costs may be material to a quarter or year, although management does not expect them to materially affect liquidity or financial condition because payments may occur over many years. The filing states that no current other claims are expected to have a material adverse effect.
Most important facts for investors to verify
- Whether commercial and residential construction demand returns to pre-pandemic levels and whether COVID-19 causes renewed disruptions.
- Whether Architectural Specialties acquisitions achieve expected revenue and EBITDA growth while absorbing amortization, integration and contingent-consideration costs.
- The effect of raw-material, energy, steel and labor inflation on gross margin and the effectiveness of announced pricing actions.
- Compliance with the senior credit facility covenants and the company’s ability to manage approximately $709.4 million of debt.
- Cash generation after dividends, share repurchases, capital expenditures, debt repayment and the $11.8 million Knauf payment.
- Potential environmental remediation costs, litigation outcomes and insurance recoveries, which remain subject to uncertainty.
- The sustainability of the $0.21 quarterly dividend and future share repurchases given seasonal cash flow and market conditions.