Armstrong World Industries Reports Third Quarter 2015 Results

OREANDA-NEWS. Armstrong World Industries, Inc. (NYSE: AWI), a global leader in the design and manufacture of floors and ceilings systems, today reported third quarter 2015 results.  

Third Quarter Results from continuing operations
(Amounts in millions except per share data)		Three Months Ended September 30,
		2015		2014		Change
Net sales		$658.5		$678.9		(3.0%)
Operating income		79.7		85.8		(7.1%)
Net income		30.3		46.7		(35.1%)
Diluted earnings per share		$0.54		$0.84		(35.7%)

Excluding the unfavorable impact from foreign exchange of $29 million, consolidated net sales increased 1.3% compared to the prior year period driven by higher volumes and favorable price and mix performance. 

Operating income declined compared to the prior year period driven by increased SG&A expense to support go-to-market initiatives in the Americas Resilient business, costs associated with the previously announced separation project, higher non-cash U.S. pension expense, unfavorable price and mix and higher manufacturing costs; which were only partially offset by lower input costs and the margin impact of higher volumes.  Net income was negatively impacted compared to the prior year by foreign exchange rate losses on the translation of unhedged cross-currency intercompany loans denominated in Russian Rubles used to fund construction of a mineral fiber ceilings plant that was completed in the first quarter of 2015 and by R&D tax credits that had an outsized benefit in the prior year that did not repeat.

"On a comparable foreign exchange basis sales increased 1% in the third quarter with improvement across virtually all of our businesses," said Matt Espe, CEO.  "I'm especially pleased to report that our Worldwide Building Products business delivered yet another record adjusted EBITDA quarter despite challenging conditions in emerging markets.  Globally, ceiling sales were up 2% and EBITDA up 6%, as our Americas business continues to benefit from price over inflation, productivity improvements and mix gains."

Additional (non-GAAP*) Financial Metrics from continuing operations
(Amounts in millions except per share data)		Three Months Ended September 30,
		2015			2014		Change
Adjusted operating income		$98			$93		5%
Adjusted net income		$45			$49		(8%)
Adjusted diluted earnings per share		$0.80			$0.88		(9%)
Free cash flow		$64			$60		8%

 

(Amounts in millions)			Three Months Ended September 30,
			2015		2014		Change
Adjusted EBITDA
	Building Products		$109		$103		6%
	Resilient Flooring		24		25		(1%)
	Wood Flooring		14		9		57%
	Unallocated Corporate		(19)		(15)		(22%)
Consolidated Adjusted EBITDA			$128		$122		5%

*The Company uses the above non-GAAP adjusted measures, as well as other non-GAAP measures mentioned below, in managing the business and believes the adjustments provide meaningful comparisons of operating performance between periods. Adjusted operating income,  adjusted EBITDA, adjusted net income, and adjusted EPS exclude the impact of foreign exchange, restructuring charges and related costs, impairments, the non-cash impact of the U.S. pension plan, separation costs and certain other gains and losses.  Free cash flow is defined as cash from operations and dividends received from the WAVE joint venture, less expenditures for property and equipment, less restricted cash, and is adjusted to remove the impact of cash used or proceeds received for acquisitions and divestitures.  The company believes free cash flow is useful because it provides insight into the amount of cash that the Company has available for discretionary uses, after expenditures for capital commitments and adjustments for acquisitions/divestitures.  Adjusted figures are reported in comparable dollars using the budgeted exchange rate for 2015, and are reconciled to the most comparable GAAP measures in tables at the end of this release.   

Adjusted operating income and adjusted EBITDA both improved by 5% in the third quarter of 2015 when compared to the prior year period.  The improvement in adjusted EBITDA was driven by lower input costs, the margin impact of higher volumes and higher earnings from WAVE which were only partially offset by higher SG&A spending primarily to support go-to-market initiatives in the Americas Resilient business, unfavorable price and mix performance, and increased manufacturing expenses.  Adjusted earnings per share is calculated using a 39% adjusted tax rate in both periods.  The increase in free cash flow was driven by improvements in working capital and lower capital expenditures which were only partially offset by lower cash earnings. 

Third Quarter Segment Highlights
Building Products
		Three Months Ended September 30,
		2015			2014		Change
Total segment net sales		$335.9			$351.7		(4.5%)
Operating income		$89.8			$86.6		3.7%

Excluding the unfavorable impact of foreign exchange of approximately $23 million, net sales increased as favorable price and mix offset the impact of lower volumes, primarily in EMEA and the Pacific Rim.  Operating income increased in the third quarter of 2015 as the margin impact of lower volumes was more than offset by favorable price and mix performance, lower manufacturing and input costs and higher earnings from WAVE.

Resilient Flooring
		Three Months Ended September 30,
		2015			2014		Change
Total segment net sales		$192.1			$190.2		1.0%
Operating income		$14.3			$14.9		(4.0%)

Net sales increased driven by volume growth in both the Americas and Pacific Rim, which was only partially offset by unfavorable price and mix.  Volume improvement in the Americas commercial business was partially aided by favorable market share shifts as a result of competitive product availability issues and our service proposition relative to competition.  Operating income declined driven by unfavorable price and mix performance, increased SG&A expenses to support go-to-market initiatives in the Americas and higher manufacturing costs, primarily due to LVT plant construction expenses, which were only partially offset by lower input costs and the margin impact of higher volumes.  The comparison was also impacted by approximately $3 million of charges related to the closure of our Thomastown, Australia facility that was closed during the third quarter of 2014.

Wood Flooring
		Three Months Ended September 30,
		2015			2014		Change
Total segment net sales		$130.5			$137.0		(4.7%)
Operating income		$10.4			$2.0		Favorable

Net sales decreased as positive mix performance was unable to offset unfavorable price and volume declines as a result of engineered wood product availability challenges.  Operating income improved driven by lower input costs which more than offset the margin impact of unfavorable price and mix, lower volumes, higher manufacturing expense and an increase in SG&A expense.  The comparison was also impacted by $4 million of severance and other charges associated with the closure of our engineered wood flooring plant in Kunshan China that was closed during the third quarter of 2014. 

Corporate
Unallocated corporate expense of $34.8 million increased from $17.7 million in the prior year due to increased U.S. pension costs of $7 million and separation costs of $7 million.

Year to Date Results from continuing operations

Excluding the unfavorable impact from foreign exchange of $72 million, consolidated net sales decreased compared to the prior year period as volume declines were only partially offset by favorable price and mix.

Operating income declined by 12% driven primarily by higher non-cash U.S. pension costs and costs associated with the previously announced separation project.  Adjusted EBITDA improved slightly over the prior year period as lower input costs and favorable price and mix offset higher SG&A expenses, the margin impact of lower volumes, increased manufacturing expenses and lower earnings from WAVE.  The increase in free cash flow was driven by improvements in working capital and lower capital expenditures, which were only partially offset by lower cash earnings and dividends from the WAVE joint venture.

Market Outlook and 2015 Guidance ⁽¹⁾ 

"We're updating our full year sales guidance to reflect third quarter results and the pressure we're experiencing due to continued volatility in foreign exchange rates," said Dave Schulz, CFO.  "Despite pressure from foreign exchange headwinds, we continue to expect to benefit from lower input costs, primarily in our flooring businesses, and are increasing our full year adjusted EBITDA and adjusted EPS guidance at the midpoint." 

The Company now expects full year sales to be in the $2.4 to $2.45 billion range, adjusted EBITDA to be in the $370 to $390 million range and adjusted EPS to be in the range of $2.15 to $2.35 per diluted share.

⁽¹⁾ Sales guidance includes the impact of foreign exchange.  Guidance metrics, other than sales, are presented using 2015 budgeted foreign exchange rates.  Adjusted EPS guidance for 2015 is calculated based on an adjusted effective tax rate of 39%.