Armstrong World Industries, Inc. — FY2011 Form 10-K Summary
Business Context and Reporting Period
Annual report for the fiscal year ended December 31, 2011, filed February 27, 2012. Armstrong produces ceiling systems, resilient and wood flooring, and U.S. kitchen and bathroom cabinets through Building Products, Resilient Flooring, Wood Flooring, Cabinets, and Unallocated Corporate segments. The company operated 32 manufacturing plants in eight countries and employed approximately 9,100 people.
Key Financial Metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net sales | $2,859.5 million | $2,766.4 million | +3.4% |
| Gross profit | $671.6 million | $611.8 million | +9.8% |
| Operating income | $239.2 million | $81.1 million | +194.9% |
| Earnings | $112.4 million | $11.0 million | Significant improvement |
| Diluted EPS | $1.90 | $0.19 | Significant improvement |
| Operating margin | 8.4% | 2.9% | +5.5 percentage points |
| Cash flow from operations | $212.2 million | $190.4 million | +$21.8 million |
| Capital expenditures | $150.6 million | $92.7 million | +$57.9 million |
| Cash and equivalents | $480.6 million | $315.8 million | +$164.8 million |
| Total debt, including current portion | $843.0 million | $874.9 million | -$31.9 million |
| Total equity | $1,130.2 million | $1,090.8 million | +$39.4 million |
Gross margin was approximately 23.5%, compared with 22.1% in 2010. Cost of goods sold declined to 76.5% of sales from 77.9%, while SG&A declined to 16.7% of sales from 19.2%. Interest expense increased to $48.5 million from $21.2 million following the 2010 refinancing. Income tax expense was $80.7 million, producing a 41.8% effective tax rate versus 83.5% in 2010.
At December 31, 2011, Armstrong had $480.6 million of cash, including $381.8 million in the U.S. The company had $822.9 million of long-term debt, a $250 million revolving credit facility with $230.6 million of availability, and a $100 million receivables securitization facility with reported maximum capacity of $57.2 million, of which $6.6 million was available. The company was in compliance with its debt covenants.
Fourth-Quarter Performance
| Metric | Q4 2011 | Q4 2010 |
|---|---|---|
| Net sales | $652.1 million | $642.9 million |
| Gross profit | $129.3 million | $123.6 million |
| Net earnings | $8.5 million | $(21.0) million |
| Operating income | $21.6 million | $(30.2) million |
| Diluted EPS | $0.14 | $(0.36) |
Fourth-quarter sales increased approximately 1% excluding foreign exchange, driven by price realization and mix, partly offset by lower volume. Results benefited from the absence of 2010 impairment, restructuring, and divestiture charges.
Material Changes Versus the Prior Comparable Period
- Building Products sales rose 9.0% to $1,237.5 million and operating income rose 32.2% to $226.1 million.
- Resilient Flooring sales declined 1.1% to $1,002.3 million, while operating income increased 20.6% to $15.8 million. European operations remained loss-making, with a $29.2 million operating loss.
- Wood Flooring sales increased 0.9% to $483.3 million, and the segment moved from a $45.8 million operating loss to $43.4 million of operating income, primarily because 2010 included substantial restructuring, asset write-downs, and a $22.4 million trademark impairment.
- Cabinets sales declined 1.6% to $136.4 million, while the operating loss narrowed to $0.7 million from $6.4 million.
- Pricing actions increased estimated 2011 sales by approximately $60 million and mix improvements by approximately $24 million. Raw-material and energy inflation reduced operating income by approximately $58 million.
- Cost-reduction initiatives delivered approximately $115 million of savings in 2011. Armstrong reported approximately $36 million of related expenses and targeted at least $185 million of cumulative manufacturing and SG&A cost removal by the end of 2012.
- Cash increased primarily from $212.2 million of operating cash flow and $102.4 million of WAVE joint-venture distributions, including a $50.1 million special distribution, partly offset by $150.6 million of capital expenditures.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected an additional approximately $35 million of cost savings in 2012 and approximately $4 million of first-quarter 2012 costs related to the Marietta, Pennsylvania labor settlement.
- Management stated that cash on hand, operating cash flow, credit facilities, and receivables financing should be adequate for foreseeable liquidity needs, including planned capital spending and debt service.
- Capital spending for a U.S. mineral wool plant, expanded Building Products capacity in China, and two Chinese flooring plants was projected at approximately $200 million; approximately $72 million had been incurred through year-end 2011. In February 2012, the company approved a Russian mineral fiber ceiling plant with expected spending of approximately $100 million through 2015.
- The company idled or closed facilities in North Carolina, Sweden, and Pennsylvania and acquired specialty ceiling manufacturer Intalite in Canada for $4.2 million.
- Key risks include construction-market weakness, raw-material and energy cost volatility, competition and excess capacity, international and currency exposure, labor negotiations, leverage and covenant compliance, pension and postretirement obligations, outsourcing of IT and finance functions, environmental liabilities, product claims, and impairment risk.
- Environmental liabilities recorded were $7.3 million. The St. Helens, Oregon, and Macon, Georgia, sites could require additional remediation costs that may be material, but the filing states that total potential costs cannot currently be reasonably estimated.
- Unrecognized tax benefits were $127.2 million at year-end, and the company maintained $194.9 million of valuation allowances against deferred tax assets.
- There were no regular dividends declared in 2011. The $13.74-per-share special dividend paid in December 2010 totaled approximately $798.6 million in cash.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective.
Important Facts for Investors to Verify
- Whether pricing and cost-reduction benefits can offset raw-material inflation and construction-market weakness.
- The sustainability of cash generation after elevated capital expenditures and reliance on WAVE distributions.
- Debt maturities, variable-rate exposure, interest-rate swaps, and compliance with tightening leverage covenants.
- The recovery prospects of European Resilient Flooring and the performance of the Cabinets segment.
- Actual spending and returns from the U.S., China, and Russia manufacturing projects.
- Potential environmental remediation, tax, pension, labor, product-liability, and customs-related exposures not fully quantified in the filing.
- The effect of outsourcing IT, finance, and accounting functions on controls and operating continuity.