Armstrong World Industries, Inc. — Q1 2012 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2012, compared with the same period in 2011. Armstrong produces flooring, ceiling systems, and kitchen and bathroom cabinets through 32 manufacturing plants in eight countries. Reportable segments are Building Products, Resilient Flooring, Wood Flooring, and Cabinets.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net sales | $668.0 million | $685.2 million |
| Gross profit | $144.8 million | $160.7 million |
| Gross margin | 21.7% | 23.5% |
| Operating income | $41.6 million | $52.1 million |
| Operating margin | 6.2% | 7.6% |
| Net earnings | $18.2 million | $13.5 million |
| Diluted EPS | $0.31 | $0.23 |
| Net cash used in operating activities | $33.1 million | $36.1 million |
| Capital expenditures | $34.4 million | $19.3 million |
| Cash and cash equivalents at March 31 | $683.3 million | $244.4 million |
| Total debt, including current portion | $1,092.1 million | $843.0 million at December 31, 2011 |
Net earnings benefited from lower income tax expense of $13.0 million versus $24.1 million, with the effective tax rate declining to 41.7% from 64.1%. Interest expense also decreased to $11.2 million from $14.8 million. The filing does not provide a separately stated adjusted EBITDA figure.
Material changes versus the prior comparable period
- Sales declined 2.5%, primarily because volume decreases outweighed favorable pricing and mix. Americas sales fell 0.9%, Europe fell 9.4%, and Pacific Rim sales increased 2.1%.
- Gross and operating margins contracted primarily because of lower sales and nearly $15 million of accelerated depreciation and impairment charges related to the planned closure of the Mobile, Alabama Building Products plant.
- Building Products operating income fell to $43.3 million from $61.5 million, partly due to Mobile plant charges and approximately $4 million of costs related to ending a labor lockout at the Marietta plant.
- Resilient Flooring improved to $10.7 million of operating income from a $1.3 million loss, helped by lower manufacturing and SG&A expenses and the absence of approximately $8.2 million of prior-year European severance and restructuring charges.
- Wood Flooring operating income declined to $2.5 million from $3.5 million because of lower volume, price, and mix. Shipments were constrained by production capacity.
- WAVE joint-venture earnings declined to $13.6 million from $16.4 million; WAVE sales declined to $90.8 million from $98.5 million.
- Operating cash use improved modestly, but investing cash use increased due to higher capital spending. Financing activities provided $249.6 million, principally from $251.9 million of additional long-term debt.
Liquidity, debt, outlook, and risks
- On March 22, 2012, Armstrong amended its senior credit facility to $1.3 billion, consisting of a $250 million revolver, a $250 million Term Loan A, and an $800 million Term Loan B. The additional $250 million Term Loan B funded in part the special dividend.
- Debt increased materially, while a $508.3 million special dividend was declared at $8.55 per share. Approximately $503.0 million was paid on April 10, 2012; the remaining $5.3 million relates to unvested employee shares.
- Armstrong reported compliance with all debt covenants and stated that covenant default was currently considered unlikely. The amended leverage covenant is 4.5-to-1 through December 31, 2013, 4.0-to-1 through March 31, 2015, and 3.75-to-1 thereafter.
- Management expects cash on hand, operating cash flow, credit lines, receivables securitization capacity, and revolver availability to meet foreseeable liquidity needs. Cash totaled $683.3 million, including $587.5 million in the U.S. and $95.8 million abroad.
- Management targets at least $185 million of manufacturing and SG&A cost removal by the end of 2012, including approximately $35 million expected during 2012. Approximately $16 million of related expenses were recorded in Q1 2012.
- Capital spending for previously approved projects was projected at approximately $210 million, with $93 million incurred through March 31, 2012. A new Russia mineral fiber ceiling plant was approved with expected spending of approximately $100 million through 2015.
- Key operating risks include weak European demand, volume and construction-market variability, raw-material and energy costs, production capacity constraints, foreign exchange, interest rates, and leverage.
- Environmental liabilities of $7.3 million were recorded, but potential additional costs at the St. Helens, Oregon and Macon, Georgia sites may be material and cannot currently be reasonably estimated.
- Armstrong disclosed that its asbestos-related personal injury claims are channeled to the Asbestos Personal Injury Trust following its 2006 emergence from Chapter 11. The filing states that other ordinary-course legal matters are not currently expected to be material.
Important facts for investors to verify
- Whether volume trends, particularly in Europe, stabilize and whether announced pricing offsets raw-material, energy, and freight inflation.
- The timing and total cost of the Mobile plant closure, other restructuring actions, and the achievement of the remaining 2012 cost-savings target.
- Post-dividend liquidity and leverage after the $250 million Term Loan B borrowing and the $508.3 million special dividend.
- Progress and remaining capital requirements for the mineral wool, China, and Russia projects.
- Potential environmental remediation exposure at St. Helens and the Macon Site beyond the $7.3 million recorded liability.
- Whether Wood Flooring capacity additions resolve the shipment backlog and support anticipated sales growth.