Armstrong World Industries, Inc. — 2014 Q3 Form 10-Q Summary
Business context and reporting period
Armstrong World Industries, Inc. is a global manufacturer of ceiling systems and resilient and wood flooring products. Reported segments are Building Products, Resilient Flooring, and Wood Flooring. The filing covers the unaudited three and nine months ended September 30, 2014, compared with the same periods of 2013. The financial statements received a limited review by KPMG LLP.
Key financial metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Net sales | $728.3 million | $729.7 million | $2,072.7 million | $2,058.6 million |
| Gross profit | $164.2 million | $179.9 million | $474.9 million | $488.7 million |
| Gross margin | 22.5% | 24.7% | 22.9% | 23.7% |
| Operating income | $69.0 million | $93.6 million | $179.3 million | $208.2 million |
| Operating margin | 9.5% | 12.8% | 8.7% | 10.1% |
| Earnings from continuing operations | $31.8 million | $55.9 million | $69.7 million | $89.7 million |
| Net earnings | $31.6 million | $50.4 million | $67.4 million | $83.3 million |
| Diluted EPS | $0.57 | $0.85 | $1.21 | $1.39 |
Management attributed the earnings decline primarily to weaker volumes, higher raw-material and energy costs, higher SG&A spending, plant-closure charges, and a $11.9 million impairment charge in European Resilient Flooring. Pricing and mix increased sales by approximately $27 million in the quarter and $77 million year to date, but did not offset lower volumes of approximately $31 million and $61 million, respectively.
- Building Products sales increased 4.8% in Q3 and 4.1% year to date; operating income was essentially flat at $86.6 million in Q3 and declined slightly to $209.3 million year to date.
- Resilient Flooring sales declined 2.7% in Q3 and 2.6% year to date. Operating income fell to a $1.7 million loss in Q3 from $22.5 million of income and declined 51.1% year to date to $22.8 million.
- Wood Flooring sales declined 7.4% in Q3 and 1.6% year to date; operating income declined to $2.0 million in Q3 and $4.5 million year to date.
- Equity earnings from the 50%-owned WAVE joint venture increased to $18.8 million in Q3 and $51.2 million year to date.
Cash flow, liquidity, debt, and balance sheet
- Cash provided by operating activities was $111.1 million for the first nine months, down from $161.7 million in 2013.
- Capital expenditures were $151.1 million, producing negative operating cash flow less capital expenditures of approximately $40.0 million before other investing items.
- Cash used in investing activities was $96.9 million; the company received $50.8 million from the WAVE joint venture.
- Cash and cash equivalents were $148.4 million at September 30, 2014, compared with $135.2 million at December 31, 2013.
- Total debt, including current installments, was $1,050.1 million, compared with $1,066.5 million at year-end 2013. No amounts were outstanding under the $250 million revolving credit facility or the $75 million accounts receivable securitization facility.
- Available liquidity included cash, the undrawn revolving facility, the securitization facility, and foreign credit lines. Outstanding letters of credit totaled approximately $65 million.
- The company reported compliance with all senior credit facility covenants. Term Loan A matures in March 2018 and Term Loan B in March 2020.
Material changes, outlook, risks, and unusual items
- Operations ceased at the Thomastown, Australia resilient flooring plant and the Kunshan, China engineered wood flooring plant. Q3 closure-related charges were approximately $7 million; nine-month charges were approximately $12 million.
- European Resilient Flooring remained underperforming. Management is evaluating strategic alternatives, and a further effect on asset and liability carrying values was possible before year-end 2014. The business had $152.0 million of assets and $171.3 million of liabilities at September 30, including a $126.5 million unfunded pension liability.
- The company recorded a $0.3 million discontinued-operations charge in Q3 to finalize a $10.3 million settlement of a multi-employer pension withdrawal liability related to the divested cabinets business; the settlement was paid in the quarter.
- The effective tax rate increased to 45.3% in Q3 and 50.2% year to date, principally because foreign losses were not fully benefited and the European impairment increased the impact of foreign losses. A future ownership change could limit tax attributes and was estimated to cause a one-time after-tax charge of approximately $4 million to $8 million if it had occurred in Q3.
- Management cited softness in commercial construction, residential builder and renovation activity, aggressive competition, adverse product mix, excess industry capacity, raw-material and energy costs, foreign exchange, and global economic conditions.
- No formal earnings or revenue guidance is provided in the filing. Management expects announced price increases in Building Products and selected resilient products to take effect in late 2014 or early 2015.
- Environmental liabilities recorded were $7.2 million. Potential additional remediation costs at the St. Helens, Oregon and Macon, Georgia sites, among others, could be material but cannot presently be reasonably estimated.
- Forward-looking results remain subject to construction activity, liquidity and debt covenants, pension obligations, litigation, environmental matters, the WAVE joint venture, strategic transactions, tax-attribute limitations, labor, raw-material costs, and international operations.
Important facts for investors to verify
- Whether European Resilient Flooring requires additional impairments, restructuring, or a strategic transaction.
- The sustainability of operating cash flow relative to the company’s elevated capital-expenditure program and scheduled debt payments.
- Compliance with leverage and interest-coverage covenants as operating income remains below 2013 levels.
- The effect of weaker volumes, raw-material inflation, pricing actions, and competitive pressure on future margins.
- Potential tax-attribute limitations and the estimated $4 million to $8 million after-tax exposure from a future Section 382 ownership change.
- Potentially material environmental remediation costs and the status of antidumping and countervailing-duty proceedings.