ARMSTRONG WORLD INDUSTRIES INC annual report, FY2020

Armstrong World Industries, Inc. 2020 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2020; filed February 23, 2021. The filing is an annual report, not a standalone quarterly filing, but it includes unaudited fourth-quarter information. AWI produces ceiling and wall systems throughout the Americas through its Mineral Fiber and Architectural Specialties segments.

Financial Performance and Position

Metric	2020	2019
Net sales	$936.9 million	$1,038.1 million
Gross profit	$333.1 million	$395.1 million
Gross margin	35.6%	38.1%
Operating income	$254.8 million	$317.4 million
Operating margin	27.2%	30.6%
Continuing-operations loss	$84.1 million	$242.3 million income
Net loss	$99.1 million	$214.5 million income
Continuing-operations diluted EPS	$(1.76)	$4.88
Net diluted EPS	$(2.07)	$4.32
Operating cash flow	$218.8 million	$182.7 million
Capital expenditures	$55.4 million	$71.3 million

Mineral Fiber sales were $726.0 million, down 12.2%; operating income was $218.7 million, down 24.5%.
Architectural Specialties sales were $210.9 million, down 0.3%; operating income was $22.3 million, down 37.9%.
WAVE joint-venture equity earnings declined to $64.0 million from $96.6 million.
Cash and cash equivalents were $136.9 million at year-end, compared with $45.3 million in 2019.
Total principal debt was $718.7 million, consisting of $225.0 million drawn on the revolving facility and $493.7 million under Term Loan A. Debt was $615.0 million at year-end 2019.
AWI had $275.0 million available under its revolving credit facility and was in compliance with all debt covenants.
Shareholders’ equity increased to $450.9 million from $364.9 million, principally due to pension-related changes in accumulated other comprehensive income.

Material Changes Versus the Prior Comparable Period

COVID-19 reduced construction activity and customer demand, producing an estimated $87 million volume decline and approximately $14 million of unfavorable average unit value.
Sales declined 9.7%, while operating income declined 19.7%. Cost of goods sold increased to 64.4% of sales from 61.9%, reducing gross margin.
SG&A declined to $163.3 million from $174.3 million, primarily because 2019 included significant Rockfon litigation costs, while 2020 included a $10 million charitable endowment and higher acquisition and digital-investment costs.
Interest expense fell to $24.1 million from $38.4 million because of lower interest rates, lower spreads and reduced borrowing costs.
Other non-operating expense increased to $357.4 million from $20.4 million of income, primarily due to a $374.4 million pension settlement loss and a $2.0 million special termination benefit charge.
AWI recorded a $42.6 million income-tax benefit in 2020 compared with $57.1 million of tax expense in 2019, largely reflecting the pension settlement.
In 2020, AWI acquired Turf, Moz Designs and Arktura for aggregate cash consideration of approximately $164.8 million before other acquisition-related considerations. These acquisitions added $18.2 million of 2020 sales and increased goodwill and intangible assets.
AWI recorded a $21.0 million gain on the sale of its idled China plant and a $15.0 million net loss from discontinued operations, including a $17.2 million loss related primarily to final Knauf sale adjustments.

Fourth-Quarter 2020

Fourth-quarter net sales were approximately $239 million, down 3.3% from the fourth quarter of 2019.
Operating income was $44.1 million versus $62.2 million in the prior-year quarter.
Cost of goods sold was 65.3% of sales versus 64.1% in the prior-year quarter; SG&A was $54.5 million, or 22.8% of sales, versus $40.0 million, or 16.2%.
Basic and diluted fourth-quarter EPS were $0.72, compared with $0.74 basic and $0.73 diluted EPS in the prior-year quarter.

Liquidity, Capital Allocation and Outlook

Management stated that cash on hand, operating cash flow and available borrowing capacity should be adequate for near-term operating, capital and debt-service needs based on current expectations.
AWI expects 2021 capital expenditures of approximately $75 million to $80 million and dividends of approximately $40 million.
The quarterly dividend totaled $0.81 per share in 2020. A $0.21 per-share dividend was declared for payment in March 2021.
The share-repurchase program was suspended in the first quarter of 2020 and restarted in October. AWI repurchased approximately 0.5 million shares for $44.4 million during 2020, with $593.8 million remaining under the authorization at year-end.
Debt maturities include $25.0 million annually in 2021 through 2023 and $643.7 million in 2024. The senior credit facility matures in September 2024.
Management provided no specific revenue or earnings guidance. The outlook remains subject to COVID-19, construction activity, customer demand, raw-material costs, acquisitions and market conditions.

Risks, Contingencies and Unusual Items

COVID-19 may continue to affect construction activity, plant operations, customer demand, collections and supply chains. AWI recorded no material COVID-related asset impairments, inventory charges or bad-debt reserves in 2020, but future charges remain possible.
Raw-material, energy, labor and sourced-product costs may increase and may not be fully recoverable through pricing.
Customer concentration is significant: approximately 70% of consolidated sales were to distributors, and two commercial distributors generated $370.3 million of gross sales and each exceeded 10% of consolidated gross sales.
Debt agreements restrict additional debt, acquisitions, asset sales, dividends and share repurchases and require leverage and interest-coverage compliance.
The Turf acquisition includes contingent consideration with a maximum payout of $48.0 million; the fair value recorded at year-end was $14.2 million. Total acquisition-related contingent consideration was $16.9 million.
U.S. pension plans were overfunded by $79.0 million at year-end, while unfunded U.S. postretirement liabilities were $81.4 million. Pension obligations and results remain sensitive to discount rates, asset returns and health-care cost assumptions.
Environmental liabilities recorded were $1.2 million. AWI remains involved in remediation matters at sites in Macon, Georgia and Elizabeth City, North Carolina; ultimate costs could exceed recorded amounts, although management does not expect the total to materially affect liquidity or financial condition.
The Rockfon antitrust litigation was settled and dismissed with prejudice in 2019; AWI does not expect additional costs from that matter.
AWI uses interest-rate swaps with $650.0 million of notional amounts to hedge LIBOR exposure. A hypothetical 25-basis-point increase in LIBOR would increase 2021 interest expense by approximately $0.7 million.

Most Important Facts for Investors to Verify

Whether post-pandemic commercial and residential construction demand returns sufficiently to offset 2020 volume and mix declines.
The sustainability of operating margins after COVID-related mix effects, acquisition costs, digital investments and potential raw-material inflation.
AWI’s ability to refinance or repay the $643.7 million of debt scheduled for 2024 while maintaining covenant compliance.
The performance and integration of Turf, Moz and Arktura, including contingent consideration obligations and goodwill valuation.
The recurring cash-flow impact of dividends, share repurchases, capital expenditures and pension/postretirement obligations.
The potential cash and earnings effects of environmental matters, tax-asset utilization, Knauf purchase-price adjustments and other contingencies.
The filing’s audited financial statements and internal controls received unqualified opinions from KPMG; investors should nonetheless review the pension settlement, discontinued operations and critical audit matters in the notes.