Armstrong World Industries(AWI) - 2020 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements This section presents Armstrong World Industries, Inc.'s unaudited condensed consolidated financial statements and notes for Q2 and YTD 2020 and 2019 Condensed Consolidated Statements of Operations and Comprehensive Income Net sales and operating income decreased significantly in Q2 and YTD 2020, with a substantial net loss for the six-month period due to a pension settlement Q2 & YTD 2020 Financial Performance (in millions, except per share data) | Metric | Q2 2020 | Q2 2019 | YTD 2020 | YTD 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $203.2 | $272.0 | $451.9 | $514.1 | | Gross Profit | $67.8 | $103.4 | $159.1 | $194.8 | | Operating Income | $62.4 | $87.2 | $138.4 | $141.9 | | Earnings (Loss) from Continuing Operations | $49.5 | $63.7 | $(173.1) | $100.1 | | Net Earnings (Loss) | $50.3 | $54.5 | $(175.9) | $93.6 | | Diluted EPS from Continuing Operations | $1.03 | $1.28 | $(3.61) | $2.01 | Condensed Consolidated Balance Sheets Total assets increased to $1,544.3 million as of June 30, 2020, driven by cash and receivables, with total liabilities and shareholders' equity also growing Balance Sheet Summary (in millions) | Account | June 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total Current Assets | $320.0 | $244.4 | | Total Assets | $1,544.3 | $1,493.3 | | Total Current Liabilities | $156.9 | $155.2 | | Total Liabilities | $1,141.4 | $1,128.4 | | Total Shareholders' Equity | $402.9 | $364.9 | Condensed Consolidated Statements of Cash Flows Net cash from operating activities increased to $78.7 million for YTD 2020, driven by favorable working capital and lower tax payments, with investing activities providing cash Six Months Ended June 30 Cash Flow Summary (in millions) | Cash Flow Category | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $78.7 | $47.0 | | Net cash provided by (used for) investing activities | $10.3 | $(31.6) | | Net cash (used for) financing activities | $(16.7) | $(102.6) | | Net increase (decrease) in cash | $71.8 | $(85.4) | | Cash and cash equivalents at end of period | $117.1 | $250.3 | Notes to Condensed Consolidated Financial Statements The notes provide detailed information on accounting policies, acquisitions, segment results, debt structure, a significant pension settlement, and litigation matters - In February 2020, the company settled $1,045.3 million of retiree defined benefit pension obligations, resulting in a settlement loss of $374.4 million recorded in the first quarter[99][101] - During Q2 2020, the company sold its idled mineral fiber plant in China, recording a gain of $14.1 million[45] - Subsequent to the quarter end, on July 27, 2020, the company acquired TURF Design Inc. for $70.0 million in cash, plus up to $48.0 million in contingent consideration[41] Segment Net Sales (in millions) | Segment | Q2 2020 | Q2 2019 | YTD 2020 | YTD 2019 | | :--- | :--- | :--- | :--- | :--- | | Mineral Fiber | $157.9 | $214.1 | $355.6 | $410.8 | | Architectural Specialties | $45.3 | $57.9 | $96.3 | $103.3 | | Total Net Sales | $203.2 | $272.0 | $451.9 | $514.1 | Segment Operating Income (in millions) | Segment | Q2 2020 | Q2 2019 | YTD 2020 | YTD 2019 | | :--- | :--- | :--- | :--- | :--- | | Mineral Fiber | $45.6 | $79.4 | $115.6 | $127.0 | | Architectural Specialties | $4.3 | $9.5 | $11.8 | $18.7 | | Unallocated Corporate | $12.5 | $(1.7) | $11.0 | $(3.8) | | Total Operating Income | $62.4 | $87.2 | $138.4 | $141.9 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the significant negative impact of COVID-19 on customer demand and sales in Q2 2020, covering consolidated and segment results, company responses, and liquidity Overview and COVID-19 Impact The company experienced a significant decrease in customer demand in Q2 2020 due to COVID-19, leading to reduced capital expenditures, deferred tax payments, and a suspended share repurchase program - The company experienced a significant decrease in customer demand in Q2 2020 due to COVID-19, with lower net sales expected for the remainder of 2020 compared to 2019[152] - In response to COVID-19, the company has reduced capital expenditures, discretionary spending (compensation, travel, marketing), and deferred U.S. federal income tax payments[152] - To bolster liquidity, the company borrowed an additional $100.0 million from its revolving credit facility and $30.0 million from its accounts receivable securitization facility in March 2020, and temporarily suspended its share repurchase program[154] Results of Continuing Operations Consolidated net sales for Q2 2020 fell 25.3% to $203.2 million, with operating income decreasing 28.4%, primarily due to lower volumes and reduced legal fees Consolidated Results Summary (in millions) | Period | Net Sales | % Change | Operating Income | % Change | | :--- | :--- | :--- | :--- | :--- | | Q2 2020 | $203.2 | (25.3)% | $62.4 | (28.4)% | | YTD 2020 | $451.9 | (12.1)% | $138.4 | (2.5)% | - The decrease in SG&A for the first six months of 2020 was largely due to a $20 million decrease in legal and professional fees, driven by expenses incurred in Q1 2019 under a settlement with Rockfon[179] - Other non-operating expense for the first six months of 2020 was $365.0 million, primarily due to the $374.4 million settlement loss associated with the U.S. Retirement Income Plan (RIP)[184] Reportable Segment Results Both Mineral Fiber and Architectural Specialties segments saw significant Q2 2020 declines in net sales and operating income due to lower volumes and demand, while Unallocated Corporate income increased from a plant sale - Mineral Fiber: Q2 2020 net sales decreased 26.2% due to lower volumes ($55M) and unfavorable AUV ($1M). Operating income fell 42.6% due to lower volumes, reduced WAVE equity earnings, and unfavorable AUV[188][189] - Architectural Specialties: Q2 2020 net sales decreased 21.8% ($13M) due to reduced demand across most product categories as a result of COVID-19. Operating income fell 54.7% due to lower sales volumes and increased amortization expense from 2019 acquisitions[192][193] - Unallocated Corporate: Operating income increased in Q2 and YTD 2020 primarily due to a $14 million gain on the sale of the company's idled mineral fiber plant in China[194] Financial Condition and Liquidity As of June 30, 2020, the company held $117.1 million in cash and $370.0 million available credit, with operating cash flow increasing to $78.7 million for YTD 2020, and was compliant with all debt covenants - As of June 30, 2020, the company had $117.1 million of cash and cash equivalents and $370.0 million available under its revolving credit facility[207] - The company is subject to two main financial covenants: an interest coverage ratio (>= 3.0 to 1.0) and a leverage ratio (<= 3.75 to 1.0). As of June 30, 2020, the company was in compliance with all covenants[200] - In March 2020, the company amended its Accounts Receivable Securitization Facility, decreasing it to $30.0 million and extending the maturity. As of June 30, 2020, the facility was fully drawn[204] Quantitative and Qualitative Disclosures About Market Risk This section refers to the company's 2019 Annual Report on Form 10-K for detailed information on its exposure to market risks, including interest rate, foreign currency, and commodity price risks - The company directs investors to its 2019 Annual Report on Form 10-K for a full discussion of its exposure to market risks[210] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2020, with no material changes to internal control over financial reporting during the quarter - The principal executive officer and chief financial officer concluded that the company's disclosure controls and procedures were effective as of June 30, 2020[211] - No material changes were made to the company's internal control over financial reporting during the fiscal quarter ended June 30, 2020[211] PART II - OTHER INFORMATION Legal Proceedings This section incorporates by reference Note 21, detailing the company's involvement in environmental matters at three domestic sites and other ordinary course litigation - The company refers to Note 21 for details on legal proceedings, which primarily concern environmental investigation and remediation at several sites[213] Risk Factors The company highlights public health pandemics, specifically COVID-19, as a material risk due to uncertainty regarding its duration, government actions, and impact on construction and customer demand - The company identifies public health epidemics like COVID-19 as a significant risk factor, citing uncertainty regarding its duration, government responses, and impact on construction activity and customer demand[214] Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 0.4 million shares for $34.4 million during YTD 2020, temporarily suspending the program in March, but later approving an additional $500 million authorization, totaling $1.2 billion - The share repurchase program was temporarily suspended in March 2020[216] - On July 28, 2020, the Board of Directors approved an additional $500.0 million for the share repurchase program, increasing the total authorization to $1.2 billion and extending it through December 31, 2023[216] Share Repurchase Summary | Period | YTD Repurchases (shares) | YTD Cost (millions) | Since Inception Repurchases (shares) | Since Inception Cost (millions) | | :--- | :--- | :--- | :--- | :--- | | Six Months Ended June 30, 2020 | 0.4 million | $34.4 | 9.6 million | $596.2 | Exhibits This section lists the exhibits filed as part of the Quarterly Report on Form 10-Q, including CEO and CFO certifications and XBRL data files