Armstrong World Industries, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2018; unaudited results compared with the three months ended March 31, 2017. AWI produces ceiling systems primarily for commercial, institutional and residential construction markets in the Americas. Continuing operations comprise Mineral Fiber, Architectural Specialties and Unallocated Corporate; EMEA and Pacific Rim operations are classified as discontinued operations pending sale.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $227.3 million | $219.8 million | 3.4% increase |
| Gross profit | $70.8 million | $78.3 million | 9.6% decrease |
| Gross margin | 31.1% | 35.6% | Down 4.5 percentage points |
| Operating income | $49.6 million | $57.3 million | 13.4% decrease |
| Operating margin | 21.8% | 26.1% | Down 4.0 percentage points |
| Earnings from continuing operations | $41.2 million | $35.5 million | 16.1% increase |
| Net earnings | $27.8 million | $30.4 million | 8.6% decrease |
| Diluted EPS from continuing operations | $0.76 | $0.65 | Increase |
| Diluted net EPS | $0.51 | $0.56 | Decrease |
| Operating cash flow | $26.0 million | $10.6 million | Increase |
Cost of goods sold increased to 68.9% of sales from 64.4%, primarily because of $7.7 million of accelerated depreciation related to the planned closure of the St. Helens, Oregon plant. SG&A declined to $37.5 million, or 16.5% of sales, from $39.3 million, or 17.9%.
- Segment sales: Mineral Fiber sales were $190.7 million versus $189.8 million; Architectural Specialties sales increased to $36.6 million from $30.0 million.
- Segment operating income: Mineral Fiber declined to $43.7 million from $55.5 million; Architectural Specialties increased to $8.3 million from $4.8 million.
- Tax rate: The effective tax rate fell to 16.6% from 38.0%, primarily due to the Tax Cuts and Jobs Act and excess tax benefits from stock-based compensation.
- Balance sheet: March 31 cash and cash equivalents were $116.9 million, versus $159.6 million at December 31, 2017. Total debt was $842.6 million, including current maturities, versus $850.2 million at year-end.
- Liquidity: The company had $570 million outstanding under Term Loan A, $245 million under Term Loan B and no revolving-credit borrowings. Available letter-of-credit capacity was $162.6 million. AWI reported compliance with all debt covenants.
- Capital allocation: AWI repurchased 1.2 million shares for $70.0 million during the quarter, with $211.4 million remaining under the repurchase authorization at March 31.
Material Changes Versus Prior Comparable Period
- Sales increased from favorable average unit value of approximately $10 million, partially offset by approximately $3 million of lower consolidated volume. Mineral Fiber volume was affected by one fewer shipping day and unfavorable weather.
- Mineral Fiber operating income was pressured by the St. Helens accelerated depreciation, lower WAVE joint-venture earnings and higher raw-material, sourced-product and energy costs. Management estimated those input costs reduced operating income by $3 million year over year.
- Architectural Specialties benefited from market penetration, new commercial construction and a full quarter of Tectum sales.
- Operating cash flow improved partly because AWI collected $28.7 million of environmental insurance settlements.
- Net earnings included a $13.4 million net loss from discontinued operations, including a $17.7 million after-tax-neutral impairment charge associated with the planned EMEA and Pacific Rim sale. In Q1 2017, discontinued operations produced a $5.1 million net loss.
- AWI early adopted ASU 2018-02 and reclassified $54.3 million from accumulated other comprehensive loss to retained earnings.
Outlook, Risks and Unusual Items
AWI announced price increases for Mineral Fiber products effective in the first quarter, additional Architectural Specialties increases and two further grid-product increases effective in the second quarter. The filing does not provide quantified full-year revenue, earnings or EBITDA guidance. Management expects seasonally stronger sales in the second and third quarters, but notes exposure to construction activity, weather, economic conditions, competition, customer concentration, raw-material and energy costs, and project timing.
- Pending divestiture: AWI agreed to sell EMEA and Pacific Rim businesses to Knauf for $330 million in cash, subject to adjustments. Regulatory clearances remained pending in the EU, Bosnia and Herzegovina and Macedonia and were expected during the third quarter of 2018. Completion, timing and proceeds remain uncertain.
- Plant closure: The St. Helens facility closure was expected in the second quarter of 2018 and generated $7.7 million of first-quarter accelerated depreciation.
- Environmental matters: Environmental liabilities were $13.2 million at March 31. The proposed St. Helens settlement would require an $8.6 million payment and remedial action, subject to court approval. Potential future costs at the Macon and Elizabeth City sites may be material but cannot be reasonably estimated beyond recorded amounts.
- Litigation: Roxul USA’s antitrust litigation remained ongoing; the court dismissed two claims during the quarter. AWI stated that it does not expect current claims, individually or in aggregate, to materially affect financial condition, liquidity or results.
- Interest-rate exposure: Term Loans A and B are variable-rate debt, partially hedged with interest-rate swaps. Higher floating rates increased first-quarter interest expense slightly.
- Liquidity outlook: Management believes cash, operating cash flow and available credit facilities will meet foreseeable needs, although seasonal cash flow is generally weaker in the first and fourth quarters.
Facts Investors Should Verify
- Regulatory approvals, final terms and closing date of the Knauf transaction, including any working-capital or regulatory-remedy adjustments.
- Actual proceeds and accounting effects from the EMEA and Pacific Rim divestiture, including further impairment or foreign-currency adjustments.
- Costs, timing and operational effects of the St. Helens closure and whether planned savings offset lost capacity and accelerated depreciation.
- Ability to manage $842.6 million of debt, variable interest rates and applicable leverage and interest-coverage covenants.
- Whether price increases offset raw-material, energy, freight and sourced-product inflation without weakening demand.
- Potential cash requirements from environmental remediation, the Roxul litigation and other legal or contingent matters.
- Finalization of provisional Tax Act accounting, which management expected to complete in the second half of 2018.