Armstrong World Industries(AWI) - 2023 Q1 - Quarterly Report

Filing Information Form 10-Q Details This section details the company's Form 10-Q filing for Q1 2023, including its NYSE listing, filer status, and outstanding shares - Filing Type: Quarterly Report on Form 10-Q for the period ended March 31, 2023[1] - Registrant: Armstrong World Industries, Inc. (AWI), a Pennsylvania corporation[2] - Exchange: Common Stock ($0.01 par value per share) is traded on the New York Stock Exchange (Symbol: AWI)[1] - Filer Status: Large accelerated filer[3] - Outstanding Shares: 45,118,873 common shares outstanding as of April 20, 2023[3] Table of Contents Cautionary Note Regarding Forward-Looking Statements This section highlights that the report contains forward-looking statements subject to various risks and uncertainties, which could cause actual results to differ materially from expectations - Forward-looking statements are based on management's current expectations and beliefs, but actual results may differ due to various factors[12] - Key risk categories include[12] - Operational Risks: Changes in customer relationships, availability/costs of inputs, WAVE joint venture contribution, labor, cost savings initiatives, ESG objectives[13] - Strategic Risks: Digitalization initiatives, product innovation, integration of strategic transactions[14] - Financial Risks: Tax consequences, indebtedness, liquidity, debt covenants, defined benefit plan obligations[14] - Legal and Regulatory Risks: Environmental liability, claims/litigation, intellectual property, international operations[14] - General Economic and Other Factors: Economic conditions, construction activity, market competition, customer consolidation, IT disruptions, cybersecurity, third-party dependence, geographic concentration, dividend/repurchase ability, public health epidemics[15] PART I - FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for Armstrong World Industries, Inc. and its subsidiaries for Q1 2023, including earnings, balance sheets, equity, cash flows, and notes Condensed Consolidated Statements of Earnings and Comprehensive Income This section provides the company's unaudited condensed consolidated statements of earnings and comprehensive income for the three months ended March 31, 2023 and 2022 | Metric (in millions, except per share) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------------------------- | :-------------------------------- | :-------------------------------- | | Net sales | $310.2 | $282.6 | | Gross profit | $112.1 | $102.2 | | Operating income | $70.2 | $63.2 | | Net earnings | $47.3 | $44.4 | | Basic EPS | $1.04 | $0.94 | | Diluted EPS | $1.04 | $0.94 | | Total comprehensive income | $45.2 | $56.3 | - Net sales increased by $27.6 million (9.8%) year-over-year[18] - Net earnings increased by $2.9 million (6.5%) year-over-year[18] - Total comprehensive income decreased significantly from $56.3 million in Q1 2022 to $45.2 million in Q1 2023, primarily due to derivative losses[18] Condensed Consolidated Balance Sheets This section presents the company's unaudited condensed consolidated balance sheets as of March 31, 2023, and December 31, 2022 | Metric (in millions) | March 31, 2023 | December 31, 2022 | | :------------------------------- | :------------- | :---------------- | | Total assets | $1,687.9 | $1,687.2 | | Total current assets | $362.0 | $356.5 | | Cash and cash equivalents | $96.0 | $106.0 | | Total current liabilities | $166.3 | $182.7 | | Long-term debt | $660.6 | $651.1 | | Total shareholders' equity | $544.8 | $535.0 | - Total assets remained relatively stable, increasing slightly from $1,687.2 million to $1,687.9 million[20][22] - Cash and cash equivalents decreased by $10.0 million from year-end 2022[20] - Total current liabilities decreased by $16.4 million, primarily due to a reduction in accounts payable and accrued expenses and acquisition-related contingent consideration[21][56] - Total shareholders' equity increased by $9.8 million[22] Condensed Consolidated Statements of Shareholders' Equity This section presents the company's unaudited condensed consolidated statements of shareholders' equity for the three months ended March 31, 2023 and 2022 - Shareholders' equity increased from $535.0 million at December 31, 2022, to $544.8 million at March 31, 2023[24] - Key changes include net earnings of $47.3 million, share-based employee compensation of $3.6 million, offset by cash dividends of $11.7 million and acquisition of treasury stock of $27.3 million[24] - Accumulated other comprehensive loss increased from $(100.1) million to $(102.2) million[24] Condensed Consolidated Statements of Cash Flows This section presents the company's unaudited condensed consolidated statements of cash flows for the three months ended March 31, 2023 and 2022 | Cash Flow Activity (in millions) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash from operating activities | $26.2 | $16.7 | | Net cash from investing activities | $(1.5) | $0.2 | | Net cash from financing activities | $(34.7) | $(39.2) | | Net (decrease) in cash | $(10.0) | $(22.0) | | Cash and cash equivalents (end) | $96.0 | $76.1 | - Net cash provided by operating activities increased by $9.5 million year-over-year, primarily due to favorable working capital changes, notably in inventory[27][136] - Net cash used in investing activities shifted from a $0.2 million inflow in Q1 2022 to a $1.5 million outflow in Q1 2023, driven by increased purchases of property, plant, and equipment[27][136] - Net cash used for financing activities decreased by $4.5 million, mainly due to decreased payments on borrowings and fewer stock repurchases, partially offset by higher acquisition-related contingent consideration payments[27][137] Notes to Condensed Consolidated Financial Statements This section provides detailed notes to the unaudited condensed consolidated financial statements, offering further context and breakdowns of various accounts and transactions NOTE 1. BUSINESS AND BASIS OF PRESENTATION This note outlines the company's identity, confirms the consistency of accounting policies with the prior annual report, and mentions the acquisition of GC Products, Inc. - AWI is a Pennsylvania corporation incorporated in 1891[30] - Accounting policies are consistent with the December 31, 2022, Form 10-K, with minor reclassifications for 2023 presentation[31][32] - Acquisition: GC Products, Inc. (designer/manufacturer of glass-reinforced-gypsum, glass-reinforced-cement, molded ceiling, and specialty wall products) was acquired in November 2022 and is included in the Architectural Specialties segment[33] NOTE 2. SEGMENT RESULTS This note provides a breakdown of net sales, operating income, and segment assets by the company's two product-based segments: Mineral Fiber and Architectural Specialties, along with Unallocated Corporate | Segment | Three Months Ended March 31, 2023 (Net Sales in millions) | Three Months Ended March 31, 2022 (Net Sales in millions) | | :---------------------- | :-------------------------------------------- | :-------------------------------------------- | | Mineral Fiber | $228.4 | $203.2 | | Architectural Specialties | $81.8 | $79.4 | | Total net sales | $310.2 | $282.6 | | Segment | Three Months Ended March 31, 2023 (Operating Income in millions) | Three Months Ended March 31, 2022 (Operating Income in millions) | | :---------------------- | :--------------------------------------------------- | :--------------------------------------------------- | | Mineral Fiber | $63.8 | $57.6 | | Architectural Specialties | $7.2 | $6.5 | | Unallocated Corporate | $(0.8) | $(0.9) | | Total operating income | $70.2 | $63.2 | | Segment | March 31, 2023 (Segment Assets in millions) | December 31, 2022 (Segment Assets in millions) | | :---------------------- | :------------------------------ | :--------------------------------- | | Mineral Fiber | $1,118.9 | $1,096.9 | | Architectural Specialties | $385.3 | $387.5 | | Unallocated Corporate | $183.7 | $202.8 | | Total assets | $1,687.9 | $1,687.2 | - Mineral Fiber net sales increased by 12.4% and operating income increased by 10.8% year-over-year[34][35] - Architectural Specialties net sales increased by 3.0% and operating income increased by 10.8% year-over-year[34][35] NOTE 3. REVENUE This note disaggregates revenue by major customer channels within the Mineral Fiber and Architectural Specialties segments, providing insight into sales distribution - Revenue is disaggregated by product-based segments and major customer channels (Distributors, Home centers, Direct customers, Other) to reflect how economic factors affect revenue and cash flows[39] | Mineral Fiber Customer Channel | Three Months Ended March 31, 2023 (Net Sales in millions) | Three Months Ended March 31, 2022 (Net Sales in millions) | | :----------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Distributors | $159.8 | $143.5 | | Home centers | $31.1 | $28.1 | | Direct customers | $14.7 | $14.3 | | Other | $22.8 | $17.3 | | Total | $228.4 | $203.2 | | Architectural Specialties Customer Channel | Three Months Ended March 31, 2023 (Net Sales in millions) | Three Months Ended March 31, 2022 (Net Sales in millions) | | :--------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Distributors | $39.2 | $38.8 | | Direct customers | $42.0 | $39.4 | | Other | $0.6 | $1.2 | | Total | $81.8 | $79.4 | NOTE 4. ACCOUNTS AND NOTES RECEIVABLE This note details the composition of accounts and notes receivable, net, including customer and miscellaneous receivables, and the allowance for warranties, discounts, and losses | Receivable Type (in millions) | March 31, 2023 | December 31, 2022 | | :---------------------------------------- | :------------- | :---------------- | | Customer receivables | $118.7 | $107.4 | | Miscellaneous receivables | $6.9 | $8.2 | | Less allowance for warranties, discounts, and losses | $(3.7) | $(3.2) | | Accounts and notes receivable, net | $121.9 | $112.4 | - All outstanding Employee Retention Credit (ERC) receivables of $4.8 million were collected during the first quarter of 2023[46] NOTE 5. INVENTORIES This note provides a breakdown of inventories, net, by finished goods, goods in process, raw materials and supplies, and LIFO reserves | Inventory Type (in millions) | March 31, 2023 | December 31, 2022 | | :--------------------------- | :------------- | :---------------- | | Finished goods | $59.8 | $60.9 | | Goods in process | $6.8 | $6.5 | | Raw materials and supplies | $69.4 | $63.0 | | Less LIFO reserves | $(22.6) | $(20.4) | | Total inventories, net | $113.4 | $110.0 | - Total inventories, net, increased by $3.4 million from December 31, 2022, to March 31, 2023[47] NOTE 6. OTHER CURRENT ASSETS This note details the components of other current assets, including prepaid expenses, fair value of derivative assets, assets held for sale, and other miscellaneous items | Other Current Assets (in millions) | March 31, 2023 | | :--------------------------------- | :------------- | | Prepaid expenses | $18.2 | | Fair value of derivative assets | $6.5 | | Assets held for sale | $4.6 | | Other | $1.1 | | Total other current assets | $30.4 | - Assets held for sale include the property, plant, and equipment of the idled Mineral Fiber plant in St. Helens, Oregon[48] NOTE 7. EQUITY INVESTMENT This note provides condensed financial data for WAVE, the 50% equity method joint venture with Worthington Industries, Inc., reflected within the Mineral Fiber segment - WAVE is a 50% equity interest joint venture with Worthington Industries, Inc., accounted for using the equity method and reflected in the Mineral Fiber segment[49] | WAVE Financial Data (in millions) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net sales | $109.5 | $110.4 | | Gross profit | $62.3 | $54.8 | | Net earnings | $43.8 | $38.2 | - WAVE's net earnings increased by $5.6 million (14.7%) year-over-year[50] NOTE 8. LEASES This note discloses a new operating lease for a manufacturing facility in the Architectural Specialties segment, which will commence in Q2 2023 - A new operating lease for an Architectural Specialties manufacturing facility, with an estimated $13 million right-of-use asset and corresponding lease liability, will be recognized in Q2 2023[53] NOTE 9. GOODWILL AND INTANGIBLE ASSETS This note provides a detailed breakdown of amortizing and non-amortizing intangible assets, including their estimated useful lives and accumulated amortization, as well as goodwill | Intangible Asset Type (in millions) | Estimated Useful Life | March 31, 2023 (Gross Carrying Amount) | March 31, 2023 (Accumulated Amortization) | December 31, 2022 (Gross Carrying Amount) | December 31, 2022 (Accumulated Amortization) | | :---------------------------------- | :-------------------- | :------------------------------------- | :---------------------------------------- | :---------------------------------------- | :------------------------------------------- | | Amortizing Intangible Assets: | | | | | | | Customer relationships | 6-20 years | $182.1 | $144.4 | $182.1 | $142.0 | | Developed technology | 13-20 years | $94.1 | $83.6 | $93.8 | $83.3 | | Software | 7 years | $9.1 | $2.9 | $9.1 | $2.6 | | Trademarks and brand names | 3-10 years | $4.0 | $2.8 | $4.0 | $2.6 | | Non-compete agreements | 3-5 years | $5.8 | $2.9 | $5.8 | $2.6 | | Other | Various | $1.1 | $0.1 | $1.1 | $0.1 | | Total Amortizing Intangible Assets | | $296.2 | $236.7 | $295.9 | $233.2 | | Non-Amortizing Intangible Assets: | | | | | | | Trademarks and brand names | Indefinite | $345.1 | - | $345.0 | - | | Total Intangible Assets | | $641.3 | | $640.9 | | | Goodwill | Indefinite | $167.3 | - | $167.3 | - | | Amortization Expense (in millions) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Amortization expense | $3.5 | $4.8 | - Goodwill remained constant at $167.3 million[55] NOTE 10. OTHER NON-CURRENT ASSETS This note details the components of other non-current assets, including cash surrender value of company-owned life insurance policies, investment in employee deferred compensation plans, and fair value of derivative assets | Other Non-Current Assets (in millions) | March 31, 2023 | December 31, 2022 | | :------------------------------------- | :------------- | :---------------- | | Cash surrender value of COLI policies | $42.1 | $42.8 | | Investment in employee deferred comp. | $7.4 | $7.7 | | Fair value of derivative assets | $1.9 | $7.7 | | Other | $0.8 | $1.2 | | Total other non-current assets | $52.2 | $59.4 | - Total other non-current assets decreased by $7.2 million from December 31, 2022, to March 31, 2023, primarily due to a decrease in the fair value of derivative assets[55] NOTE 11. ACCOUNTS PAYABLE AND ACCRUED EXPENSES This note provides a breakdown of accounts payable and accrued expenses, highlighting trade and other payables, employment costs, and acquisition-related contingent consideration | Accounts Payable & Accrued Expenses (in millions) | March 31, 2023 | December 31, 2022 | | :------------------------------------------------ | :------------- | :---------------- | | Payables, trade and other | $96.9 | $105.0 | | Employment costs | $11.9 | $20.0 | | Current portion of pension and postretirement | $9.9 | $9.9 | | Acquisition-related contingent consideration | $- | $15.2 | | Other | $18.6 | $22.4 | | Total accounts payable and accrued expenses | $137.3 | $172.5 | - Total accounts payable and accrued expenses decreased by $35.2 million, largely due to the payment of acquisition-related contingent consideration[56][72] NOTE 12. INCOME TAX EXPENSE This note details the income tax expense and effective tax rate for the quarter, explaining the primary driver for the year-over-year change | Income Tax Metric (in millions) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------------------ | :-------------------------------- | :-------------------------------- | | Earnings before income taxes | $63.9 | $59.4 | | Income tax expense | $16.6 | $15.0 | | Effective tax rate | 26.0% | 25.3% | - The effective tax rate increased to 26.0% in Q1 2023 from 25.3% in Q1 2022, primarily due to an increase in the valuation allowance for capital loss carryforwards[59] NOTE 13. DEBT This note describes the company's long-term debt, consisting of a senior credit facility and a bi-lateral letter of credit facility, and provides details on outstanding borrowings and available credit - Long-term debt includes a $950.0 million variable rate senior credit facility ($500.0 million revolving credit, $450.0 million Term Loan A) and a $25.0 million bi-lateral letter of credit facility[61] | Debt Component (in millions) | March 31, 2023 (Outstanding) | December 31, 2022 (Outstanding) | | :--------------------------- | :--------------------------- | :------------------------------ | | Term Loan A | $450.0 | $450.0 | | Revolving credit facility | $220.0 | $205.0 | | Financing Arrangement (in millions) | Limit | March 31, 2023 (Used) | Available | | :---------------------------------- | :---- | :-------------------- | :-------- | | Bi-lateral facility | $25.0 | $8.1 | $16.9 | | Revolving credit facility | $150.0| $- | $150.0 | | Total | $175.0| $8.1 | $166.9 | NOTE 14. PENSIONS AND OTHER BENEFIT PROGRAMS This note details the components of net periodic benefit costs (credits) for U.S. defined benefit pension plans and retiree health and life insurance benefits | Net Periodic Benefit Costs (Credits) (in millions) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------------------------------------- | :-------------------------------- | :-------------------------------- | | U.S. defined benefit plans: | | | | Net periodic pension cost | $- | $- | | Retiree health and life insurance benefits: | | | | Net periodic postretirement (credit) | $(0.8) | $(0.4) | - Service cost components are presented in cost of goods sold and SG&A expenses, while other components are in other non-operating income, net[65] NOTE 15. FINANCIAL INSTRUMENTS AND CONTINGENT CONSIDERATION This note provides fair value estimates for financial instruments and acquisition-related contingent consideration, explaining valuation methodologies and impact of changes | Financial Instrument (in millions) | March 31, 2023 (Carrying Amount) | March 31, 2023 (Estimated Fair Value) | December 31, 2022 (Carrying Amount) | December 31, 2022 (Estimated Fair Value) | | :--------------------------------- | :------------------------------- | :------------------------------------ | :---------------------------------- | :--------------------------------------- | | Total long-term debt | $(666.2) | $(645.5) | $(651.1) | $(645.3) | | Interest rate swap contracts | $8.4 | $8.4 | $11.4 | $11.4 | | Acquisition-related contingent consideration | $- | $- | $(15.2) | $(15.2) | - Fair value estimates for long-term debt are based on quotes from financial institutions, while interest rate swaps use quotes and internal models[67] - Acquisition-related contingent consideration for Turf was paid out in Q1 2023, resulting in a zero balance at period end[72] | Contingent Consideration (in millions) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------------------------- | :-------------------------------- | :-------------------------------- | | Fair value at beginning of period | $15.2 | $12.8 | | Cash consideration paid | $(15.2) | $(8.6) | | Loss related to change in fair value | $- | $0.1 | | Fair value at end of period | $- | $4.3 | NOTE 16. DERIVATIVE FINANCIAL INSTRUMENTS This note describes the company's use of interest rate derivatives to manage market risk, specifically hedging variable rate debt, and addresses counterparty risk and the transition from LIBOR to SOFR - AWI uses interest rate swaps as cash flow hedges to manage interest rate volatility on variable rate debt, not for speculative trading[73][75] - Counterparty risk is managed by engaging only with investment-grade financial institutions and utilizing netting arrangements[74] - In March 2023, interest rate swaps were amended to change the hedged interest rate from LIBOR to SOFR, in accordance with ASU 2020-04[75] | Derivative Assets (in millions) | Balance Sheet Location | March 31, 2023 (Fair Value) | December 31, 2022 (Fair Value) | | :--------------------------------- | :--------------------------- | :-------------------------- | :----------------------------- | | Interest rate swap contracts | Other current assets | $6.5 | $3.7 | | Interest rate swap contracts | Other non-current assets | $1.9 | $7.7 | - As of March 31, 2023, $8.8 million of existing gains in Accumulated Other Comprehensive Income (AOCI) are expected to be recognized in net earnings over the next twelve months[80] NOTE 17. SHAREHOLDERS' EQUITY This note details the company's common stock repurchase program, dividend declarations, and the components of accumulated other comprehensive (loss) - The Board approved a share repurchase program of up to $1,200.0 million through December 31, 2023, with $321.8 million remaining as of March 31, 2023[81] - During Q1 2023, AWI repurchased 0.4 million shares for $27.0 million at an average price of $73.51 per share[82] - Quarterly dividends of $0.254 per share were declared in February and April 2023[84] | Accumulated Other Comprehensive (Loss) (in millions) | December 31, 2022 | March 31, 2023 | | :------------------------------------------------- | :---------------- | :------------- | | Foreign Currency Translation Adjustments | $0.5 | $0.4 | | Derivative (Loss) | $9.5 | $7.3 | | Pension and Postretirement Adjustments | $(110.1) | $(109.9) | | Total Accumulated Other Comprehensive (Loss) | $(100.1) | $(102.2) | - Total accumulated other comprehensive loss increased from $(100.1) million to $(102.2) million, primarily due to derivative losses[85] NOTE 18. LITIGATION AND RELATED MATTERS This note details the company's environmental liabilities and ongoing litigation, including remediation efforts at Superfund sites and the financial impact of these matters - AWI is involved in the investigation and remediation of environmental contamination at two domestically owned locations (Macon, GA, and Elizabeth City, NC) under CERCLA and state laws[88] - Settlement agreements with legacy insurance carriers between 2017-2021 totaled $53.0 million, recorded as reductions to cost of goods sold and SG&A expenses[90] - As of March 31, 2023, insurance recoveries in excess of cumulative expenses were $3.4 million, which will offset future expenses[90] - Total environmental liabilities recorded were $0.5 million as of March 31, 2023 and December 31, 2022, for probable liabilities with reasonable estimates[98] - The company does not expect the total future costs for environmental matters to have a material adverse effect on liquidity or financial condition, as payments may be made over many years[95][97] NOTE 19. NET EARNINGS PER SHARE This note provides a reconciliation of net earnings to net earnings attributable to common shares and basic to diluted shares outstanding for EPS calculations | EPS Calculation (in millions) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :---------------------------- | :-------------------------------- | :-------------------------------- | | Net earnings | $47.3 | $44.4 | | Net earnings attributable to common shares | $47.3 | $44.3 | | Shares Outstanding (in millions) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------------------- | :-------------------------------- | :-------------------------------- | | Basic shares outstanding | 45.4 | 47.1 | | Dilutive effect of common stock equivalents | 0.1 | 0.1 | | Diluted shares outstanding | 45.5 | 47.2 | - Anti-dilutive stock awards excluded from diluted EPS computation were 74,629 in Q1 2023, significantly higher than 7,676 in Q1 2022[104] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's Q1 2023 financial condition and results, analyzing revenues, costs, segment performance, and liquidity Overview AWI leads in ceiling and wall solutions across the Americas, operating 16 plants and segmenting operations into Mineral Fiber, Architectural Specialties, and Unallocated Corporate - AWI is a leader in the design, innovation, and manufacture of ceiling and wall solutions in the Americas[107] - Operates 16 manufacturing plants (14 U.S., 2 Canada), excluding an idled plant in St. Helens, Oregon, classified as an asset held for sale[109] - WAVE, a joint venture with Worthington Industries, Inc., operates seven additional plants for suspension system products[109] - Reportable segments: Mineral Fiber, Architectural Specialties, and Unallocated Corporate[110] - The acquisition of GC Products in November 2022 did not materially impact Q1 2023 results[108] Factors Affecting Revenues Q1 2023 revenue was influenced by rising interest rates, lower inflation, and easing supply chain constraints, with increased sales volumes and favorable AUV driving net sales growth - Market conditions in Q1 2023 were characterized by rising interest rates, lower inflation on certain input costs, and easing supply chain/labor constraints, resulting in uneven market demand[116] - Increased sales volumes contributed $21 million to net sales in Q1 2023 compared to Q1 2022, primarily in the Mineral Fiber segment[116] - Favorable Average Unit Value (AUV) increased total consolidated net sales by approximately $6 million in Q1 2023[117] - Price increases were implemented on Mineral Fiber ceiling, grid products, and certain Architectural Specialties products in Q1 2023[118] - Sales are historically stronger in Q2 and Q3 due to favorable weather, customer business cycles, and project timing[118] Factors Affecting Operating Costs Operating costs are driven by raw materials, labor, energy, manufacturing overhead, freight, and SG&A, with higher raw material and energy costs negatively impacting Q1 2023 operating income - Operating expenses include direct production costs (raw materials, labor, energy), manufacturing overhead, freight, sourced product costs, and SG&A expenses[119] - Higher costs for raw materials and energy negatively impacted operating income by $4 million in Q1 2023 compared to Q1 2022[119] | Acquisition-Related Expenses (in millions) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :----------------------------------------- | :-------------------------------- | :-------------------------------- | | Loss related to change in fair value of contingent consideration | $- | $0.1 | | Deferred cash and restricted stock expenses | $1.3 | $2.0 | | Net negative impact to operating income | $1.3 | $2.1 | - Acquisition-related expenses decreased from $2.1 million in Q1 2022 to $1.3 million in Q1 2023, as the earn-out period for Turf acquisition was completed[122] - The company had approximately 3,000 full-time and part-time employees as of March 31, 2023[123] Results of Operations Consolidated net sales increased by 9.8% in Q1 2023, driven by higher volumes and favorable AUV, with operating income growing despite increased costs, supported by strong equity earnings from WAVE | Metric (in millions) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (%) | | :------------------- | :-------------------------------- | :-------------------------------- | :--------- | | Total consolidated net sales | $310.2 | $282.6 | 9.8% | | Operating income | $70.2 | $63.2 | 11.1% | - Consolidated net sales increased by $27.6 million (9.8%) year-over-year, with $21 million from higher volumes and $6 million from favorable AUV[125] - Cost of goods sold as a percentage of net sales slightly increased to 63.9% in Q1 2023 from 63.8% in Q1 2022, due to raw material/energy inflation and inventory valuation impacts, partially offset by AUV and productivity[126] - SG&A expenses increased by $5.6 million to $62.7 million, driven by higher selling expenses (Architectural Specialties investments, digital initiatives) and $3 million in severance costs, partially offset by a $1 million reduction in acquisition-related expenses[126] - Equity earnings from WAVE joint venture increased to $20.8 million in Q1 2023 from $18.2 million in Q1 2022, driven by lower steel costs and sales volume recovery[127] - Interest expense increased to $8.7 million from $5.1 million due to higher interest rates on floating rate debt[128] - Total Other Comprehensive Loss was $2.1 million in Q1 2023, a significant change from OCI of $11.9 million in Q1 2022, primarily due to derivative gains/losses[129] Reportable Segment Results Mineral Fiber segment saw significant net sales and operating income growth from higher volumes and favorable AUV, while Architectural Specialties also grew sales and operating income from product expansion and project mix | Mineral Fiber Segment (in millions) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (%) | | :---------------------------------- | :-------------------------------- | :-------------------------------- | :--------- | | Total segment net sales | $228.4 | $203.2 | 12.4% | | Operating income | $63.8 | $57.6 | 10.8% | - Mineral Fiber net sales increased by $25 million, with $19 million from higher volumes and $6 million from favorable AUV[130] - Mineral Fiber operating income increased due to higher sales volumes ($12 million benefit), favorable AUV ($5 million benefit), and increased equity earnings ($3 million), partially offset by higher manufacturing costs ($8 million) and increased selling/severance expenses ($6 million)[131] | Architectural Specialties Segment (in millions) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (%) | | :---------------------------------------------- | :-------------------------------- | :-------------------------------- | :--------- | | Total segment net sales | $81.8 | $79.4 | 3.0% | | Operating income (loss) | $7.2 | $6.5 | 10.8% | - Architectural Specialties net sales increased by $2 million, driven by growth across most product categories, despite lower metal product sales and timing of custom project sales[132] - Architectural Specialties operating income increased due to a $2 million margin benefit from increased sales and favorable project mix, and a $1 million reduction in acquisition-related expenses, partially offset by a $2 million increase in selling expenses[133] Financial Condition and Liquidity Liquidity is supported by cash from operations and a $950.0 million senior credit facility, with increased operating cash flow, cash used in investing, and reduced financing outflows, while remaining in compliance with debt covenants - Operating activities provided $26.2 million of cash in Q1 2023, up from $16.7 million in Q1 2022, primarily due to favorable working capital changes in inventory[136] - Net cash used in investing activities was $1.5 million in Q1 2023, compared to $0.2 million provided in Q1 2022, mainly due to increased capital expenditures[136] - Net cash used for financing activities decreased to $34.7 million in Q1 2023 from $39.2 million in Q1 2022, driven by lower debt payments and stock repurchases, partially offset by higher contingent consideration payments[137] - The company has a $950.0 million variable rate senior credit facility ($500.0 million revolving credit, $450.0 million Term Loan A) and a $25.0 million bi-lateral letter of credit facility[138] - As of March 31, 2023, total borrowings outstanding were $450.0 million under Term Loan A and $220.0 million under the revolving credit facility[138] - AWI was in compliance with all covenants of the senior credit facility as of March 31, 2023[139] - Interest rate swaps were amended in March 2023 to transition from LIBOR to SOFR[140] - As of March 31, 2023, AWI had $96.0 million in cash and cash equivalents and $280.0 million available under its revolving credit facility[144] Critical Accounting Estimates There have been no material changes to the critical accounting estimates previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022 - No material changes to critical accounting estimates since the December 31, 2022 Annual Report on Form 10-K[145] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section refers to the Annual Report on Form 10-K for detailed information regarding the company's exposure to market risks - For detailed information on market risk exposure, refer to Item 7A of the Annual Report on Form 10-K for the year ended December 31, 2022[146] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2023, with no material changes in internal control over financial reporting during the quarter - Disclosure controls and procedures were effective as of March 31, 2023[147] - No material changes in internal control over financial reporting occurred during the fiscal quarter ended March 31, 2023[147] PART II - OTHER INFORMATION Item 1. Legal Proceedings This section refers to Note 18 of the Condensed Consolidated Financial Statements for details on legal proceedings, primarily environmental matters - Legal proceedings information is incorporated by reference from Note 18 to the Condensed Consolidated Financial Statements[149] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022 - No material changes to risk factors since the December 31, 2022 Annual Report on Form 10-K[150] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's common stock repurchase activities under its approved program, including the number of shares purchased, average price, and remaining authorization | Period | Total Number of Shares Purchased (1) | Average Price per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Approximate Value of Shares that may yet be Purchased under the Plans or Programs | | :--------------------- | :----------------------------------- | :---------------------- | :------------------------------------------------------------------------------- | :-------------------------------------------------------------------------------------- | | January 1 – 31, 2023 | 137,225 | $72.87 | 137,225 | $338,788,146 | | February 1 – 28, 2023 | 55,467 | $79.63 | 50,252 | $334,788,244 | | March 1 – 31, 2023 | 189,463 | $72.25 | 179,792 | $321,788,971 | | Total | 382,155 | | 367,269 | | - The Board approved a share repurchase program of up to $1,200.0 million through December 31, 2023[152] - As of March 31, 2023, $321.8 million remained under the repurchase authorization[151][153] - During Q1 2023, 0.4 million shares were repurchased for $27.0 million at an average price of $73.51 per share[153] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - No defaults upon senior securities[154] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not Applicable[154] Item 5. Other Information The company reported no other information for this item - None[154] Item 6. Exhibits This section lists the exhibits filed as part of the Quarterly Report on Form 10-Q, primarily consisting of Inline XBRL documents for financial data tagging - Exhibits include Inline XBRL Instance Document, Taxonomy Extension Schema, Calculation Linkbase, Definition Linkbase, Label Linkbase, and Presentation Linkbase[155] - The cover page is formatted in Inline XBRL[155] Signatures Report Signatures The report is signed by Christopher P. Calzaretta, Senior Vice President and Chief Financial Officer, and James T. Burge, Vice President and Controller, on April 25, 2023 - Signed by Christopher P. Calzaretta, Senior Vice President and Chief Financial Officer (Principal Financial Officer)[158] - Signed by James T. Burge, Vice President and Controller (Principal Accounting Officer)[158] - Date of signature: April 25, 2023[158]