Business Context and Reporting Period
Armstrong World Industries, Inc. (AWI) filed an unaudited Form 10-Q for the three and nine months ended September 30, 2020. AWI produces ceiling and wall systems throughout the Americas through its Mineral Fiber and Architectural Specialties segments. Results were materially affected by COVID-19-related reductions in construction activity and customer demand.
Financial Performance and Position
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net sales | $246.3 million | $277.1 million | $698.2 million | $791.2 million |
| Gross profit | $91.2 million | $111.7 million | $250.3 million | $306.5 million |
| Operating income | $72.3 million | $113.3 million | $210.7 million | $255.2 million |
| Earnings from continuing operations | $54.2 million | $90.7 million | $(118.9) million | $190.8 million |
| Net earnings | $54.0 million | $73.2 million | $(121.9) million | $166.8 million |
| Diluted EPS | $1.13 | $1.48 | $(2.54) | $3.36 |
| Cash flow from operations | Not provided for quarter | Not provided for quarter | $148.4 million | $121.4 million |
- Q3 gross margin was approximately 37.0%, versus 40.3% in the prior-year quarter. Operating margin was approximately 29.4%, versus 40.9%.
- For the first nine months, gross margin was approximately 35.8%, versus 38.7%, and operating margin was approximately 30.2%, versus 32.3%.
- Q3 SG&A was $41.0 million, or 16.6% of sales, compared with $41.3 million, or 14.9%, in Q3 2019. Nine-month SG&A declined to $108.8 million from $134.3 million.
- September 30, 2020 cash and cash equivalents were $138.8 million, compared with $45.3 million at December 31, 2019.
- Total debt, including current installments, was $681.5 million at September 30, 2020, compared with $610.8 million at year-end 2019. Debt consisted primarily of $500.0 million outstanding under Term Loan A and $185.0 million under the revolving facility.
- AWI had $315.0 million of available revolving credit capacity and $164.1 million of available letter-of-credit capacity at September 30, 2020. The company stated it was in compliance with its debt covenants.
- Investing activities used $52.2 million in the first nine months, including $33.0 million of capital expenditures and $74.2 million for acquisitions. Financing activities used $2.5 million, including $29.1 million of dividends and $34.4 million of share repurchases.
Material Changes Versus the Prior Comparable Period
- Q3 sales decreased 11.1%, primarily because of $28 million of lower volume and $3 million of unfavorable average unit value. Nine-month sales decreased 11.8%, reflecting $88 million of lower volume and $5 million of unfavorable average unit value.
- Mineral Fiber sales declined 14.3% in Q3 and 13.7% for the nine-month period; segment operating income declined 43.9% and 24.6%, respectively. Lower demand, lower volume, unfavorable product mix and reduced WAVE joint-venture earnings were principal drivers.
- Architectural Specialties sales increased 0.9% in Q3 but declined 4.0% for the nine-month period. Acquisitions partly offset weaker underlying demand, while operating income declined 21.6% in Q3 and 31.0% for the nine-month period.
- WAVE equity earnings decreased to $15.2 million in Q3 from $42.9 million and to $48.2 million for the nine months from $83.0 million. The prior-year period included AWI’s $25.5 million share of WAVE’s gain on sale of discontinued businesses.
- Nine-month results include a $374.4 million pension settlement loss and a $2.0 million early-retirement charge. These items drove $361.8 million of other non-operating expense and contributed to the nine-month net loss.
- AWI acquired Turf Design for $70.0 million in July 2020 and Moz Designs for $4.2 million in August 2020. The acquisitions added $15.9 million of recorded contingent consideration and increased goodwill to $108.2 million from $53.0 million.
- Q3 2020 includes a $6.9 million gain, and the nine-month period includes a $21.0 million gain, from the sale of an idled mineral fiber plant in China.
- The company repaid $30.0 million under its accounts receivable securitization facility when it matured in September 2020. The share repurchase program, suspended during the first quarter, was restarted on October 21, 2020; $603.8 million remained authorized.
Guidance, Outlook, Risks and Unusual Items
- Management expected fourth-quarter 2020 sales to be lower than fourth-quarter 2019, although the year-over-year decline was expected to be less severe than in the second and third quarters.
- Management expected reduced capital expenditures and discretionary spending, including compensation, travel and marketing, to support fourth-quarter operating income and cash flow.
- All manufacturing facilities were operational at September 30, 2020, except the St. Helens, Oregon facility, which had been idled before the pandemic.
- AWI had not recorded COVID-19-related asset impairments, inventory charges or bad-debt reserves through September 30, 2020, but disclosed that future events could require material charges.
- COVID-19 risks include renewed restrictions, weaker construction activity, customer and supplier disruption, manufacturing limitations and customer credit deterioration.
- Final post-closing adjustments related to the Knauf disposal could increase liabilities by up to $11.0 million; no liability was accrued because payment was not considered probable.
- Environmental remediation liabilities recorded on the balance sheet totaled $1.5 million at September 30, 2020. Potential future costs at the Macon, Georgia and Elizabeth City, North Carolina sites may be material to individual periods, although management did not expect them to materially impair liquidity or financial condition.
- The company declared a quarterly dividend of $0.21 per share on October 21, 2020. The filing does not provide formal full-year revenue, earnings or EBITDA guidance.
Investor Verification Items
- Verify the sustainability of demand, pricing and product mix as COVID-19 effects and construction activity evolve.
- Assess covenant headroom and the effect of $681.5 million of debt, variable-rate exposure and interest-rate swap liabilities.
- Separate recurring operating performance from the $374.4 million pension settlement loss, WAVE’s prior-year disposal gain, the China plant gain and other unusual items.
- Review the performance and contingent consideration exposure of the Turf and Moz acquisitions, including earn-outs tied to revenue and EBITDA targets.
- Monitor the potential $11.0 million Knauf adjustment and unresolved environmental investigation and remediation obligations.
- Confirm the company’s cash generation, capital spending discipline, dividend policy and resumed share repurchases against available liquidity.