Armstrong World Industries, Inc. — Q2 2020 Form 10-Q Summary
Business context and reporting period
AWI manufactures ceiling and wall systems for commercial and residential construction markets throughout the Americas. Reported segments are Mineral Fiber, Architectural Specialties, and Unallocated Corporate. This unaudited Form 10-Q covers the three and six months ended June 30, 2020, compared with the same periods in 2019. Results reflect the September 2019 divestiture of the EMEA and Pacific Rim businesses as discontinued operations.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | First six months 2020 | First six months 2019 |
|---|---|---|---|---|
| Net sales | $203.2 million | $272.0 million | $451.9 million | $514.1 million |
| Gross profit | $67.8 million | $103.4 million | $159.1 million | $194.8 million |
| Gross margin | 33.4% | 38.0% | 35.2% | 37.9% |
| Operating income | $62.4 million | $87.2 million | $138.4 million | $141.9 million |
| Operating margin | 30.7% | 32.1% | 30.6% | 27.6% |
| Earnings from continuing operations | $49.5 million | $63.7 million | $(173.1) million | $100.1 million |
| Net earnings | $50.3 million | $54.5 million | $(175.9) million | $93.6 million |
| Diluted EPS | $1.05 | $1.09 | $(3.67) | $1.88 |
| Cash flow from operations | Not separately provided | Not separately provided | $78.7 million | $47.0 million |
Q2 sales declined 25.3% and operating income declined 28.4%. First-half sales declined 12.1%, while operating income declined 2.5%. The first-half net loss was primarily caused by a $374.4 million non-operating settlement loss from transferring approximately $1.045 billion of pension obligations covering approximately 10,300 retirees and beneficiaries. Excluding the pension settlement, first-half income tax expense was $29.7 million, according to management.
- Mineral Fiber: Q2 sales decreased 26.2% to $157.9 million and operating income decreased 42.6% to $45.6 million. First-half sales decreased 13.4% to $355.6 million and operating income decreased 9.0% to $115.6 million.
- Architectural Specialties: Q2 sales decreased 21.8% to $45.3 million and operating income decreased 54.7% to $4.3 million. First-half sales decreased 6.8% to $96.3 million and operating income decreased 36.9% to $11.8 million.
- WAVE joint venture: Equity earnings declined to $13.5 million in Q2 from $21.2 million and to $33.0 million for the first half from $40.1 million, primarily due to lower volumes.
Cash, debt, liquidity, and capital allocation
- Cash and cash equivalents were $117.1 million at June 30, 2020, up from $45.3 million at December 31, 2019.
- Operating activities provided $78.7 million during the first six months, compared with $47.0 million in the prior-year period. Investing activities provided $10.3 million, while financing activities used $16.7 million.
- Total debt was approximately $656.3 million, comprising $30.0 million of short-term debt, $18.8 million of current long-term debt, and $607.5 million of long-term debt.
- Senior credit facility borrowings included $130.0 million under the revolving facility and $500.0 million under Term Loan A. Revolving capacity available at June 30, 2020 was $370.0 million.
- The accounts receivable securitization facility had $30.0 million outstanding and was scheduled to mature in September 2020.
- Letters of credit had $10.9 million used and $164.1 million available across the disclosed facilities.
- Management stated that the Company was in compliance with its debt covenants and did not currently expect COVID-19-related covenant violations.
- AWI paid $19.5 million of dividends during the first half, or $0.40 per share, and declared an additional $0.20 per share dividend payable in August 2020.
- AWI repurchased 0.4 million shares for $34.4 million during the first half before temporarily suspending the program in March. On July 28, 2020, the board increased total authorization to $1.2 billion and extended the program through December 31, 2023, although the program remained suspended at the filing date.
Material changes versus the prior comparable period
- COVID-19 caused significant demand reductions across commercial and residential markets, with construction delays and temporary business closures particularly affecting major metropolitan areas.
- Volume reductions lowered sales by approximately $68 million in Q2 and $60 million in the first half. Unfavorable product mix and average unit value reduced sales by approximately $1 million and $2 million, respectively.
- Cost of goods sold increased to 66.6% of sales in Q2 from 62.0% and to 64.8% for the first half from 62.1%, although manufacturing productivity and cost-reduction actions partially offset the pressure.
- SG&A declined to $33.0 million in Q2 from $37.4 million and to $67.8 million for the first half from $93.0 million, helped by lower legal and professional fees, reduced incentive compensation, and reimbursements under the Knauf transition services agreement.
- AWI recorded a $14.1 million gain on the sale of its idled mineral fiber plant in China.
- Cash increased partly because of $100.0 million of revolving-credit borrowings and $30.0 million of receivables-facility borrowings obtained in March; $65.0 million of the revolving borrowings was repaid during Q2.
Guidance, outlook, risks, and unusual items
- Management expects lower 2020 net sales than in 2019, with the comparative decline expected to be less severe in Q3 and Q4 than in Q2. No numerical earnings or sales guidance was provided.
- AWI reduced capital expenditures and discretionary spending, including compensation, travel, and marketing, and expects these actions to benefit operating income and cash flow in the second half compared with the prior-year period.
- All manufacturing facilities were operational at June 30, 2020, except a location idled before the pandemic. AWI implemented remote work, personal protective equipment, enhanced cleaning, travel restrictions, and social distancing measures.
- The Company recorded no COVID-19-related asset impairments, inventory charges, or bad-debt reserves through June 30, 2020, but warned that future events could require such charges.
- AWI is negotiating with Knauf regarding the valuation of approximately $11 million of liabilities related to the divestiture and had not accrued a liability for this matter. It had recorded a $6.2 million payable to Knauf for estimated adjustments and a $5.9 million payable to WAVE.
- On July 27, 2020, AWI acquired Turf Design Inc. for $70.0 million in cash, plus potential contingent consideration of up to $48.0 million based on revenue and EBITDA performance through 2022.
- Environmental liabilities recorded were $1.5 million at June 30, 2020. Final costs at the Macon, Georgia and Elizabeth City, North Carolina sites cannot currently be reasonably estimated and may be material to an individual period, although management does not expect them to materially affect liquidity or financial condition.
- Principal risks include COVID-19 and construction activity, customer demand and credit, raw-material and energy costs, competition, WAVE performance, leverage and debt covenants, liquidity, environmental matters, litigation, cybersecurity, labor, international operations, and pension obligations.
Important facts for investors to verify
- Whether construction activity and customer demand recover as projected in the second half of 2020, particularly in major metropolitan markets.
- The maturity or renewal terms of the $30.0 million receivables securitization facility and continued compliance with debt covenants.
- The final working-capital and other purchase-price adjustments related to the Knauf divestiture, including the unresolved $11 million liability valuation.
- The effect of the Turf acquisition and any contingent consideration ultimately payable.
- Whether additional COVID-19-related impairment, inventory, receivable, or restructuring charges become necessary.
- The final and ongoing costs of environmental remediation and the availability of insurance or third-party recoveries.
- The sustainability of dividends and the timing of any restart of the expanded share-repurchase program.