Armstrong World Industries, Inc. — Form 10-Q Summary
Business context and reporting period
AWI produces ceiling systems, primarily mineral fiber, fiberglass wool, metal and wood products, for commercial, institutional and residential buildings, principally in the Americas. The unaudited report covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. Reportable segments are Mineral Fiber, Architectural Specialties and Unallocated Corporate.
On September 30, 2019, AWI completed the sale of its EMEA and Pacific Rim businesses to Knauf for previously funded consideration of $330.0 million, subject to post-closing adjustments. These businesses are presented as discontinued operations for all periods.
Financial performance and key metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net sales | $277.1 million | $260.5 million | $791.2 million | $736.4 million |
| Gross profit | $111.7 million | $97.9 million | $306.5 million | $251.4 million |
| Operating income | $113.3 million | $81.3 million | $255.2 million | $196.9 million |
| Earnings from continuing operations | $90.7 million | $64.2 million | $190.8 million | $153.0 million |
| Net earnings | $73.2 million | $76.2 million | $166.8 million | $151.3 million |
| Diluted EPS from continuing operations | $1.83 | $1.23 | $3.84 | $2.89 |
| Diluted net EPS | $1.48 | $1.46 | $3.36 | $2.86 |
- Q3 sales increased 6.4%; nine-month sales increased 7.4%. Management attributed the increases to higher volumes and favorable average unit value, including pricing and product mix.
- Gross margin was approximately 40.3% in Q3 and 38.7% for the first nine months, compared with approximately 37.6% and 34.1%, respectively, in the prior-year periods.
- Operating margin was approximately 40.9% in Q3 and 32.3% for the first nine months, compared with approximately 31.2% and 26.7%, respectively.
- Improved profitability benefited from the absence of accelerated depreciation and closure-related costs following the 2018 St. Helens plant closure, favorable pricing and mix, and higher WAVE equity earnings. Q3 operating income also included AWI’s $25.5 million share of WAVE’s gain on the sale of its discontinued businesses.
- Mineral Fiber sales increased 2.7% in Q3 and 3.1% for the nine months; operating income increased 44.2% and 31.7%, respectively. Architectural Specialties sales increased 22.6% and 28.2%; operating income increased 2.7% and 7.4%.
- Net earnings included discontinued-operation losses of $17.5 million in Q3 and $24.0 million for the nine months, primarily reflecting disposal losses on the EMEA and Pacific Rim sale. The 2018 periods included discontinued-operation net earnings of $12.0 million and a $1.7 million loss, respectively.
Cash flow, balance sheet, debt and liquidity
- Operating cash flow was $121.4 million for the first nine months of 2019, compared with $159.0 million in 2018.
- Investing activities used $70.9 million, including $44.0 million of capital expenditures, $43.4 million for the ACGI acquisition and $47.9 million paid to Knauf. The prior-year period benefited from $330.0 million of Knauf proceeds.
- Financing activities used $289.0 million, including $790.4 million of debt repayments, $500.0 million of new long-term debt proceeds, $81.2 million of share repurchases and $25.9 million of dividends.
- Cash and cash equivalents were $98.0 million at September 30, 2019, compared with $325.7 million at December 31, 2018. Management stated that cash generation, cash on hand and available credit are expected to cover foreseeable liquidity needs.
- Total long-term debt was $650.5 million at September 30, 2019, down from $819.8 million at year-end 2018. The September 2019 refinancing created a $1.0 billion senior facility consisting of a $500.0 million revolving facility and a $500.0 million Term Loan A, with maturity extended to September 2024.
- Borrowings at September 30, 2019 included $120.0 million under the revolver and $500.0 million under Term Loan A. AWI was in compliance with its debt covenants.
- Available capacity under the revolving credit facility was $150.0 million. Letters of credit and other facilities had stated aggregate availability of $161.0 million, although the accounts receivable securitization facility showed $2.5 million used above its stated limit.
- Shareholders’ equity was $367.3 million at September 30, 2019, compared with $226.0 million at December 31, 2018. AWI repurchased 1.0 million shares for $81.2 million during the first nine months.
Material changes, outlook and risks
- AWI acquired ACGI on March 4, 2019 for $43.4 million, adding custom wood ceilings and walls to Architectural Specialties. The filing states that the acquisition was not material to reported sales or operating income for the periods presented.
- Management cited softer demand for lower-end Mineral Fiber products, while Architectural Specialties benefited from acquisitions, market penetration and new construction activity. Architectural Specialties revenue is project-driven and may be volatile due to project scheduling.
- Management implemented and may pursue additional price increases in response to raw-material, energy and sourced-product costs. Raw-material and energy costs had no Q3 operating-income impact year over year and negatively affected nine-month operating income by $2 million.
- No specific quantitative earnings, revenue or EBITDA guidance is provided in the filing. Management said it expects current liquidity resources to meet foreseeable needs.
- The Knauf transaction remains subject to customary working-capital and other purchase-price adjustments. AWI recorded a $29.9 million payable to WAVE related to proceeds and received $2.5 million of additional net consideration from Knauf during Q3.
- The refinancing generated a $2.7 million write-off of unamortized debt-financing costs and reduced interest-rate spreads, while increasing exposure to variable interest rates. AWI uses interest-rate swaps to hedge portions of this exposure.
- AWI settled the Rockfon antitrust litigation in April 2019 and incurred $19.7 million of related expenses during the first nine months. The filing states that no additional costs are expected from that matter.
- Environmental liabilities totaled $2.1 million at September 30, 2019. Potential future costs at the Macon, Georgia and Elizabeth City, North Carolina sites cannot be reasonably estimated and may be material; insurance and third-party recoveries may offset some costs.
- The company adopted the new lease standard on January 1, 2019, recognizing $29.2 million of right-of-use assets and lease liabilities at adoption. It also disclosed a previously identified immaterial correction that reduced 2018 assets and equity by $35.2 million.
- Principal risks include economic and construction conditions, competition and customer concentration, raw-material and energy costs, WAVE performance, debt covenants and liquidity, environmental matters, litigation, cybersecurity, labor, pension obligations, international operations and execution of cost-savings initiatives.
Important facts for investors to verify
- Whether the $25.5 million WAVE disposal gain and the $84.7 million AOCI reclassification are nonrecurring and how continuing earnings perform without them.
- The final purchase-price adjustments and any additional liabilities or recoveries related to the Knauf transaction, including the $29.9 million payable to WAVE.
- Post-refinancing leverage, variable-rate exposure, covenant headroom and the March 2020 maturity of the accounts receivable securitization facility.
- The sustainability of Mineral Fiber volume trends, pricing and mix improvements, and the profitability of the acquired Architectural Specialties businesses.
- Potential costs and timing of environmental remediation at the Macon and Elizabeth City sites, net of insurance or third-party recoveries.
- Cash requirements for dividends, share repurchases, capital expenditures, acquisitions and debt service relative to the reduced cash balance.