Business Context and Reporting Period
Armstrong World Industries, Inc. (AWI) filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2015. AWI produces flooring products and ceiling systems through Building Products, Resilient Flooring, and Wood Flooring segments. The company operated 32 plants in nine countries and had approximately 7,600 employees.
On February 19, 2015, AWI approved a plan to separate its flooring business from its ceilings business through a spinoff into two publicly traded companies, expected to be completed in the first quarter of 2016. European flooring subsidiary DLW remained in discontinued operations following its German insolvency filing in December 2014.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2015 | Three Months Ended June 30, 2014 | Six Months Ended June 30, 2015 | Six Months Ended June 30, 2014 |
|---|---|---|---|---|
| Net sales | $632.7 million | $659.1 million | $1,184.1 million | $1,249.1 million |
| Gross profit | $157.9 million | $147.0 million | $287.4 million | $289.1 million |
| Operating income | $63.1 million | $63.6 million | $98.9 million | $117.4 million |
| Earnings from continuing operations | $29.9 million | $26.6 million | $33.7 million | $44.7 million |
| Net earnings | $29.6 million | $18.9 million | $76.2 million | $35.8 million |
| Diluted EPS | $0.53 | $0.34 | $1.36 | $0.64 |
- Second-quarter gross margin was approximately 25.0%, versus 22.3% in the prior-year quarter. Six-month gross margin was approximately 24.3%, versus 23.1%.
- Second-quarter operating margin was approximately 10.0%, versus 9.7%. Six-month operating margin declined to approximately 8.4% from 9.4%.
- Second-quarter sales decreased 4.0%; six-month sales decreased 5.2%. Excluding foreign exchange, sales declined $2 million in the quarter and $22 million for the six months, primarily reflecting lower volumes partly offset by favorable price and mix.
- Operating cash flow was $58.9 million for the first six months, compared with $22.4 million in 2014. Capital expenditures were $56.2 million, compared with $102.9 million.
- Cash and cash equivalents totaled $201.6 million at June 30, 2015, compared with $185.3 million at December 31, 2014.
- Total debt was $1,024.6 million, including $45.9 million of current installments. Long-term debt, excluding current installments, was $978.7 million.
- AWI had no outstanding balance on its $250 million revolving credit facility or its accounts receivable securitization facility. Letters of credit totaled $68.2 million.
- The $1.3 billion senior credit facility consisted of a $250 million revolver, a $550 million Term Loan A, and a $475 million Term Loan B. AWI was in compliance with all debt covenants at June 30, 2015.
Material Changes Versus the Prior Comparable Period
- Building Products sales declined 5.4% in the quarter and 5.3% for the six months, largely because of unfavorable foreign exchange and lower volumes. Six-month operating income increased 1.1% to $124.0 million.
- Resilient Flooring sales increased 1.9% in the quarter but declined 0.9% for the six months. Quarterly operating income rose 12.1%, while six-month operating income fell 6.4%, reflecting higher promotional spending and unfavorable price and mix.
- Wood Flooring sales declined 9.1% in the quarter and 11.0% for the six months. Quarterly operating income improved to $2.5 million from a $2.6 million loss, but six-month operating income declined 48.0% to $1.3 million.
- Foreign exchange reduced consolidated sales by approximately $24 million in the quarter and $43 million for the six months, with the largest impact in EMEA.
- Lower raw-material, sourced-product, and energy costs benefited operating income by approximately $14 million in the quarter and $17 million for the six months.
- SG&A increased to $106.1 million in the quarter and $209.1 million for the six months, primarily due to promotional spending in Resilient Flooring. Separation costs were $5.1 million in the quarter and $9.4 million for the six months.
- WAVE joint-venture earnings declined to $16.4 million in the quarter and $30.0 million for the six months, from $17.6 million and $32.4 million, respectively.
- The six-month effective tax rate increased to 57.3% from 49.5%, primarily due to state net operating loss write-offs following an ownership change and the impact of unbenefited foreign losses.
- Net earnings benefited from a $43.4 million non-cash tax benefit related to the DLW insolvency and were therefore not directly comparable with the prior period.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management expected the flooring and ceilings separation to be completed in the first quarter of 2016. Separation costs and execution risk may continue before completion.
- AWI announced price increases in Building Products businesses in the Americas, EMEA, and Pacific Rim effective in the third quarter of 2015. In EMEA, it also implemented price reductions in response to the appreciating Russian ruble.
- Management stated that cash on hand, operating cash flow, credit lines, securitization availability, and the undrawn revolver were expected to meet foreseeable liquidity needs, including remaining project spending and scheduled debt payments.
- Approximately $150 million was projected for a Russian mineral-fiber plant and Lancaster, Pennsylvania luxury-vinyl-tile expansion; approximately $143 million had been incurred through June 30, 2015.
- AWI recorded approximately $4 million of expense in the second quarter for potential antidumping duties on prior Chinese multilayered wood-flooring imports. The filing estimated additional liability of approximately $4 million if the applicable rates are ultimately upheld.
- DLW insolvency proceedings continued after the sale of its operations to a third party. AWI recognized a contingent liability of $12.3 million at June 30, 2015 related to DLW’s net liability at deconsolidation.
- Environmental liabilities recorded were $5.5 million. Potential additional costs at the St. Helens, Oregon and Macon, Georgia sites may be material but could not be reasonably estimated.
- Key disclosed risks include construction and economic conditions, competition, raw-material and energy costs, debt covenants and leverage, liquidity, the separation transaction, international operations and foreign exchange, the WAVE joint venture, environmental matters, litigation, labor, tax assets, and the DLW insolvency.
- The filing states that no material changes occurred in previously disclosed risk factors and that disclosure controls and procedures were effective.
Most Important Facts to Verify
- Progress, final structure, costs, tax consequences, and financing implications of the planned flooring and ceilings spinoff.
- Actual foreign-exchange, volume, price, mix, and promotional-spending trends, particularly in EMEA and Wood Flooring.
- Compliance with senior credit facility covenants, debt maturities, interest-rate exposure, and availability under the revolver and receivables facility.
- Final antidumping and countervailing-duty rates and any additional liability related to Chinese wood-flooring imports.
- Resolution and ultimate cost of DLW insolvency proceedings, including the $12.3 million contingent liability.
- Potential material environmental remediation costs beyond the $5.5 million recorded liability.
- The sustainability of reported six-month net earnings and EPS, given the $43.4 million non-cash DLW tax benefit and other unusual items.