ARMSTRONG WORLD INDUSTRIES INC annual report, FY2021

Armstrong World Industries, Inc. 2021 Form 10-K Summary

Business context and reporting period

Armstrong World Industries, Inc. (NYSE: AWI) designs and manufactures ceiling and wall systems for commercial and residential construction and renovation markets primarily in the Americas. Its reportable segments are Mineral Fiber, Architectural Specialties and Unallocated Corporate. The filing covers the fiscal year ended December 31, 2021, with comparisons primarily to 2020. The company also owns a 50% interest in Worthington Armstrong Venture (WAVE), a ceiling suspension-system joint venture.

Demand improved from the COVID-19-affected 2020 period, but management reported continuing construction delays, supply-chain disruption, labor constraints and inflation. The 2020 acquisitions of Turf, Moz and Arktura contributed meaningfully to 2021 revenue, primarily in Architectural Specialties.

Key financial metrics

Metric	2021	2020	Change
Net sales	$1,106.6 million	$936.9 million	18.1% increase
Gross profit	$405.6 million	$333.1 million	21.8% increase
Gross margin	36.6%	35.6%	Improved
Operating income	$260.0 million	$254.8 million	2.0% increase
Operating margin	23.5%	27.2%	Declined
Earnings from continuing operations	$185.3 million	$(84.1) million	Improved
Net earnings	$183.2 million	$(99.1) million	Improved
Diluted EPS	$3.82	$(2.07)	Improved
Operating cash flow	$187.2 million	$218.8 million	14.4% decrease
Capital expenditures	$79.8 million	$55.4 million	Increase

Net earnings and EPS benefited from the absence of the $374.4 million pension settlement loss recorded in 2020. The 2020 results also included a $21.0 million gain on the sale of an idled China plant and a $357.4 million net other non-operating expense, compared with $5.6 million of other non-operating income in 2021.

Mineral Fiber: sales of $818.5 million, up 12.7%; operating income of $261.2 million, up 19.4%. Favorable average unit value contributed $71 million to consolidated sales, while higher volume contributed $22 million to segment sales.
Architectural Specialties: sales of $288.1 million, up 36.6%; operating income of $4.2 million, down from $22.3 million. Acquisitions contributed $64 million of segment revenue, but acquisition costs, amortization, input-cost inflation and project delays compressed profitability.
WAVE: equity earnings increased to $87.7 million from $64.0 million, driven by favorable pricing and volume, partly offset by higher steel costs and SG&A.
Customer concentration: approximately 70% of consolidated sales were to distributors. Two distributors generated aggregate gross sales of $495.8 million, individually exceeding 10% of consolidated gross sales.

Balance sheet, debt and liquidity

Cash and cash equivalents were $98.1 million at December 31, 2021, including $87.1 million in the United States.
Principal debt outstanding was $633.7 million, consisting of $165.0 million drawn on the revolving facility and $468.7 million under Term Loan A. Debt, net of financing costs, was $631.4 million.
The $1.0 billion senior credit facility includes a $500 million revolving facility and a $500 million Term Loan A, both maturing in September 2024. $335.0 million remained available under the revolving credit facility.
The company was in compliance with its debt covenants at year-end. Required ratios include minimum interest coverage of 3.0 to 1.0 and maximum adjusted leverage of 3.75 to 1.0.
Letters of credit totaled $8.4 million used against $175.0 million of available facilities.
U.S. pension plans were overfunded by $71.6 million; unfunded U.S. postretirement obligations were $78.0 million.
During 2021, AWI repurchased 0.8 million shares for $80.0 million and paid $41.4 million of dividends. The remaining share-repurchase authorization was $513.8 million as of December 31, 2021.

Material changes versus the prior comparable period

Revenue increased 18.1% as demand recovered from pandemic-related weakness, acquisitions added $82 million of revenue, volume added $35 million, and favorable pricing and mix added approximately $71 million.
Gross margin improved because of pricing, mix and manufacturing productivity, partly offset by raw-material and energy inflation.
Operating margin declined because SG&A increased to $237.4 million from $163.2 million. The increase reflected acquisition-related expenses and amortization, higher incentive compensation, renewed discretionary spending and digital investments.
Operating cash flow declined by $31.6 million, primarily because of higher income-tax payments and lower cash earnings, partly offset by favorable working-capital changes.
Investing cash outflows improved substantially to $13.9 million from $141.1 million because acquisition spending declined and the prior-year remittance of Knauf proceeds to WAVE did not recur.
Financing cash outflows increased to $212.1 million, primarily because of higher share repurchases and lower net borrowing activity.
Architectural Specialties revenue grew rapidly, but operating income fell sharply due to acquisition costs, amortization, higher manufacturing costs and delays in custom projects.

Fourth-quarter 2021 performance

Fourth-quarter net sales were $282.5 million, up 18.3% from the fourth quarter of 2020.
Operating income was $55.5 million versus $44.1 million in the prior-year quarter.
Basic and diluted EPS were $0.88 versus $0.72 in the fourth quarter of 2020.
Fourth-quarter cost of goods sold declined to 63.7% of sales from 65.3%, while SG&A was $60.9 million, or 21.6% of sales.

Guidance, outlook, commentary and unusual items

Management expected 2022 capital expenditures of approximately $90 million to $100 million and dividends of approximately $45 million.
Management stated that cash on hand, operating cash flow and available borrowing capacity should fund near-term operations, capital expenditures and scheduled debt payments based on current expectations.
Price increases were implemented during 2021, with additional increases announced in the fourth quarter to become effective in the first quarter of 2022. Further pricing actions may depend on inflation and market conditions.
COVID-19 continued to affect construction activity, supply chains, labor availability and input costs. The company did not record COVID-related asset impairments, inventory charges or material bad-debt reserves in 2021 or 2020.
AWI paid $11.8 million to Knauf in the first quarter of 2021 for final post-closing purchase-price adjustments related to the 2019 divestiture of EMEA and Pacific Rim businesses. A $2.1 million after-tax loss from discontinued operations was recorded in 2021.
Acquisition-related contingent consideration was $12.8 million at year-end, including $8.6 million expected to be paid in the first quarter of 2022.
Environmental liabilities recorded at year-end were $0.7 million, but the company stated that ultimate costs at two Superfund-related sites could exceed accrued amounts and may be material to a future quarter or year.
Key ongoing risks include construction-cycle weakness, customer concentration, raw-material and energy inflation, supply-chain disruption, labor shortages, WAVE performance, acquisition integration, leverage and covenant compliance, pension and postretirement assumptions, environmental matters, cybersecurity and COVID-19 developments.

Most important facts for an investor to verify

Whether pricing actions and productivity gains can offset continuing raw-material, energy, freight and labor inflation.
Whether Architectural Specialties can convert substantial acquired and project-driven revenue growth into sustainable operating margins.
The timing and terms of refinancing or repayment for approximately $583.7 million of scheduled debt maturities in 2024.
Compliance with the senior credit facility’s leverage and interest-coverage covenants as rates and operating conditions change.
The sustainability of cash generation after capital expenditures, dividends, share repurchases, contingent consideration payments and environmental expenditures.
Exposure to two large distributors, which together represented $495.8 million of 2021 gross sales.
Potential future environmental remediation costs and insurance recoveries beyond the $0.7 million accrued liability.
Management’s assumptions for pension discount rates, investment returns and postretirement healthcare costs, which materially affect earnings and cash requirements.