Armstrong World Industries, Inc. — Q3 2021 Form 10-Q
Business context and reporting period
AWI manufactures and sells ceiling and wall systems throughout the Americas, primarily through its Mineral Fiber and Architectural Specialties segments. The filing covers the unaudited three and nine months ended September 30, 2021, compared with the corresponding 2020 periods.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net sales | $292.2 million | $246.3 million | $824.1 million | $698.2 million |
| Gross profit | $110.7 million | $91.2 million | $303.1 million | $250.3 million |
| Operating income | $72.1 million | $72.3 million | $204.5 million | $210.7 million |
| Net earnings | $50.8 million | $54.0 million | $141.3 million | $(121.9) million |
| Diluted EPS | $1.06 | $1.13 | $2.94 | $(2.54) |
| Operating margin | 24.7% | 29.4% | 24.8% | 30.2% |
- Q3 gross margin was approximately 37.9%, versus 37.0% in the prior year; nine-month gross margin was approximately 36.8%, versus 35.8%.
- Mineral Fiber sales increased 14.5% in Q3 and 12.6% for the nine-month period; segment operating income increased 17.9% and 15.8%, respectively.
- Architectural Specialties sales increased 31.7% in Q3 and 37.0% for nine months, but operating income declined 45.1% and 64.1%, respectively, reflecting acquisition-related costs, higher spending, capacity investments and project delays.
- WAVE equity earnings increased to $23.4 million in Q3 and $68.1 million for nine months, from $15.2 million and $48.2 million, respectively.
- Cash provided by operating activities was $137.9 million for nine months, compared with $148.4 million in 2020. Capital expenditures were $47.9 million.
- Cash used in financing activities was $175.1 million, including $18.7 million of debt repayment, $30.4 million of dividends and $50.0 million of share repurchases.
- Cash and cash equivalents were $94.3 million at September 30, 2021, compared with $136.9 million at December 31, 2020.
- Total debt was $627.4 million, consisting primarily of $155.0 million outstanding under the revolving facility and $475.0 million under Term Loan A. The company reported $345.0 million of unused revolver capacity and $166.6 million of available letter-of-credit capacity.
Material changes versus the prior comparable period
- Sales growth reflected recovering construction demand, favorable pricing and mix, higher volumes, and contributions from the Turf, Moz and Arktura acquisitions. Management estimated favorable average unit value contributed $26 million to Q3 sales and $48 million to nine-month sales.
- Operating income was broadly unchanged in Q3 and declined for nine months despite higher sales. Inflation in raw materials, energy and freight, increased incentive and deferred compensation, acquisition-related expenses, normalized discretionary spending and digital investment pressured results.
- SG&A increased to $62.3 million in Q3 and $176.5 million for nine months, versus $41.0 million and $108.8 million, respectively, in 2020.
- The nine-month 2020 comparison included a $374.4 million pension settlement loss and a $21.0 million gain from the sale of an idled China plant. These unusual items explain much of the improvement in reported 2021 net earnings.
- AWI repurchased approximately 0.5 million shares for $50.0 million during the first nine months and had $543.8 million remaining under its repurchase authorization at September 30, 2021. The quarterly dividend was increased from $0.21 to $0.231 per share for the dividend declared on October 20, 2021.
Guidance, outlook, risks and unusual items
The filing does not provide specific quantitative full-year earnings or revenue guidance. Management reported continued improvement in demand but noted that activity remained below pre-pandemic levels and that year-over-year volume growth had moderated.
- COVID-19 remains a source of uncertainty, particularly through supply-chain disruption, labor constraints, construction delays, customer demand and raw-material and transportation inflation. No COVID-related asset impairments, inventory charges or material bad-debt reserves were recorded in the reported periods.
- AWI recorded a $4.5 million Employee Retention Credit receivable and related benefit in Q3 2021.
- Architectural Specialties results are exposed to project scheduling and custom-project delays. Its acquisition-related contingent consideration liability was $7.1 million at September 30, 2021, after $9.8 million of fair-value income during the first nine months.
- The company was in compliance with its senior credit facility covenants. The facility requires a minimum interest-coverage ratio of 3.0 to 1.0 and a maximum net leverage ratio of 3.75 to 1.0.
- Environmental investigations and remediation at the Macon, Georgia and Elizabeth City, North Carolina sites could result in future costs that may be material to individual periods, although management does not expect them to materially affect liquidity or financial condition because payments may occur over many years.
- Management identified no material changes to previously disclosed risk factors, no defaults on senior securities and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether pricing and mix continue to offset raw-material, energy, freight and labor inflation.
- Whether Architectural Specialties margins recover as acquisition costs moderate and project delays resolve.
- The pace of commercial and residential construction recovery and any renewed COVID-19 effects.
- Compliance with debt covenants, variable-rate exposure and the timing of scheduled debt repayments.
- Cash deployment among dividends, share repurchases, capital expenditures and acquisitions.
- The ultimate cost and insurance recovery prospects for environmental matters and other contingent liabilities.