Armstrong World Industries, Inc. — 2013 Form 10-K Summary
Business context and reporting period
Armstrong World Industries, Inc. is a global manufacturer of flooring products and ceiling systems serving residential, commercial, and institutional construction and renovation markets. Reportable segments are Building Products, Resilient Flooring, Wood Flooring, and Unallocated Corporate. The filing covers the fiscal year ended December 31, 2013, with unaudited fourth-quarter information.
At year-end, the company operated 35 manufacturing plants in eight countries and had approximately 8,700 employees. Approximately 30% of revenue came from operations outside the United States and Canada. No customer represented 10% or more of consolidated sales.
Key financial metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $2,719.9 million | $2,618.9 million | 3.9% increase |
| Gross profit | $622.7 million | $633.2 million | 1.7% decrease |
| Gross margin | 22.9% | 24.2% | 130 basis-point decline |
| Operating income | $238.6 million | $271.2 million | 12.0% decrease |
| Operating margin | 8.8% | 10.4% | 160 basis-point decline |
| Earnings from continuing operations | $100.5 million | $144.4 million | 30.4% decrease |
| Diluted EPS from continuing operations | $1.71 | $2.41 | Decrease |
| Net earnings | $94.1 million | $131.3 million | 28.3% decrease |
| Operating cash flow | $213.7 million | $220.0 million | Decrease |
| Capital expenditures | $213.7 million | $198.8 million | Increase |
Interest expense was $68.8 million, compared with $53.7 million in 2012, primarily because of the write-off of $18.9 million of unamortized financing costs related to the refinancing. Equity earnings from the WAVE joint venture increased to $59.4 million from $55.9 million.
At December 31, 2013, cash and cash equivalents were $135.2 million, total debt including current maturities was $1,066.5 million, and shareholders’ equity was $673.2 million. Long-term debt declined modestly from $1,071.0 million at year-end 2012 to $1,066.5 million, including the current portion, at year-end 2013.
The company generated $213.7 million of operating cash flow, used $145.8 million in investing activities, and used $263.7 million in financing activities. Financing cash use included the $261.4 million repurchase of 5,057,382 shares in connection with a secondary offering. No dividends were declared in 2013.
Fourth-quarter results
| Metric | Q4 2013 | Q4 2012 |
|---|---|---|
| Net sales | $661.3 million | $612.8 million |
| Gross profit | $134.0 million | $135.7 million |
| Gross margin | 20.3% | 22.1% |
| Operating income | $30.4 million | $42.3 million |
| Earnings from continuing operations | $10.8 million | $9.2 million |
| Diluted EPS from continuing operations | $0.20 | $0.15 |
Fourth-quarter sales increased 7.9%, but operating income declined because of raw-material inflation, Russian plant start-up costs, approximately $8 million of European and Australian Resilient Flooring cost-reduction charges, and higher corporate and professional-services spending.
Material changes versus the prior comparable period
- Building Products sales increased 3.7% to $1,264.6 million and operating income increased 14.2% to $263.1 million, helped by favorable price and mix, volume gains, lower facility-closure costs, and higher WAVE earnings.
- Resilient Flooring sales declined 1.9% to $921.3 million and operating income declined 22.5% to $44.1 million, reflecting lower commercial and residential volumes and approximately $16 million of European and Australian cost-reduction charges.
- Wood Flooring sales increased 15.9% to $534.0 million, but operating income fell 83.9% to $6.0 million. Higher lumber, labor, manufacturing, and other input costs more than offset volume, price, and mix benefits.
- Raw materials, sourced products, and energy reduced 2013 operating income by approximately $45 million compared with 2012. Cost of goods sold rose to 77.1% of sales from 75.8%.
- Pricing actions increased sales by approximately $40 million and mix improvements by approximately $13 million versus 2012. However, SG&A increased to $443.7 million, or 16.3% of sales, from $418.3 million, or 16.0%.
- The company opened three manufacturing facilities in China and continued construction of facilities in Russia and the United States. Total projected spending on specified plant projects was approximately $375 million, of which approximately $272 million had been incurred by year-end.
- The company refinanced its senior credit facility in March 2013, reducing the interest-rate spread and extending maturities. Term Loan A was extended to 2018 and Term Loan B to 2020.
- Other comprehensive income was $99.8 million, compared with a $56.4 million loss in 2012, principally because of pension and postretirement actuarial gains.
Guidance, outlook, commentary, risks, and unusual items
Management did not provide a clear numerical 2014 revenue or earnings forecast in the filing. Management expected continued residential improvement, particularly in builder activity, but identified softness in commercial markets, especially education and healthcare, and mixed conditions in Europe and Australia.
Price increases were announced for resilient flooring, wood flooring, ceilings, and grid products in the Americas, and for ceilings in EMEA and the Pacific Rim, effective in the first quarter of 2014. Management stated that additional pricing actions could be implemented if raw-material costs remained elevated or increased.
- Liquidity: management believed cash on hand, operating cash flow, credit facilities, and receivables-securitization capacity would be adequate for foreseeable needs. The company was in compliance with debt covenants at December 31, 2013 and stated that no mandatory excess-cash-flow payment would be required in 2014.
- Available liquidity included $235.2 million under the revolving credit facility, approximately $12.9 million of capacity under the securitization facility subject to collateral conditions, and $15.6 million of unused foreign credit lines.
- Debt risk: the senior facility requires minimum interest coverage of 3.0 to 1.0 and maximum net leverage of 4.0 to 1.0 after December 31, 2013, tightening to 3.75 to 1.0 after March 31, 2015. A covenant breach could accelerate borrowings.
- Tax assets: the company reported $320.9 million of net deferred tax assets and $228.4 million of valuation allowances. It held $94.4 million of U.S. foreign-tax-credit carryforwards, with $4.5 million expiring by the end of 2014 if unused. Future ownership changes could restrict utilization.
- Contingencies: environmental liabilities recorded were $8.3 million. Potential additional costs at the St. Helens, Oregon and Macon, Georgia sites could be material, although the filing does not provide a clear estimate.
- The company recorded a $7.2 million liability related to a disputed multi-employer pension withdrawal claim associated with the cabinets divestiture. The Fund claimed $15.2 million; arbitration was expected in 2014.
- Antidumping and countervailing-duty reviews involving Chinese multilayered wood flooring were ongoing. Management did not expect the preliminary rates to have a material impact, but final rates had not been determined.
- Interest-rate sensitivity: a 25-basis-point increase in LIBOR was estimated to increase 2014 interest expense by approximately $0.6 million. The company had $1.0 billion of interest-rate swaps outstanding.
- Key operating risks include construction-cycle weakness, raw-material and energy inflation, competition and excess industry capacity, labor matters, plant-project cost overruns, international and currency exposure, WAVE joint-venture performance, environmental claims, litigation, and reliance on deferred tax assets.
Important facts for investors to verify
- Whether announced 2014 price increases offset lumber, PVC, energy, labor, and other input-cost inflation.
- Whether Wood Flooring margins recover after the substantial 2013 cost increase and whether Resilient Flooring volumes stabilize.
- Actual 2014 capital spending and completion costs for the Russia, Lancaster, and other plant projects.
- Compliance with leverage and interest-coverage covenants, including the impact of variable-rate debt and refinancing terms.
- Realizability and expiration timing of foreign-tax-credit, state NOL, and other deferred tax assets.
- Developments in the St. Helens and Macon environmental matters and the multi-employer pension withdrawal dispute.
- Final antidumping and countervailing-duty rates on Chinese wood flooring imports.
- Future capital allocation, including dividends and additional share repurchases, given debt restrictions and liquidity requirements.