Armstrong World Industries(AWI) - 2021 Q4 - Annual Report

Form 10-K Cover Page - This is an Annual Report on Form 10-K for the fiscal year ended December 31, 2021, for Armstrong World Industries, Inc. (AWI)[2] - The company's common stock is registered on the New York Stock Exchange under the trading symbol AWI[1] - The aggregate market value of common stock held by non-affiliates was approximately $5.0 billion as of June 30, 2021[2] - As of February 16, 2022, there were 47,084,127 shares of common stock outstanding[2] Cautionary Note Regarding Forward-Looking Statements Forward-Looking Statements and Associated Risks The report contains forward-looking statements subject to various risks in operations, strategy, finance, legal, and general economic factors - The company has identified several categories of risks that could cause actual results to differ materially from expectations[10] Identified Risk Categories | Risk Category | | :--------------------------------------------- | | Risks Related to Our Operations | | Risks Related to Our Strategy | | Risks Related to Financial Matters | | Risks Related to Legal and Regulatory Matters | | Risks Related to General Economic and Other Factors | PART I Business AWI is a leading designer and manufacturer of ceiling systems in the Americas, operating through Mineral Fiber and Architectural Specialties segments, focusing on growth through innovation and acquisitions - AWI is a leading manufacturer and designer of ceiling systems in the Americas, with products including mineral fiber, fiberglass wool, metal, wood, and felt[14] - The company's strategic initiatives focus on leveraging innovation, digitalization, and the trend toward healthier and sustainable indoor environments[19] - In 2021, approximately 70% of consolidated net sales were to distributors, with sales to large home centers accounting for slightly less than 10%[29] - Gross sales to distributors Foundation Building Materials, Inc. and GMS Inc. individually exceeded 10% of consolidated gross sales in 2021, totaling $495.8 million[29] Reportable Segments AWI's operations are organized into three reportable segments: Mineral Fiber, Architectural Specialties, and Unallocated Corporate, each with distinct product offerings and financial characteristics - Mineral Fiber: Produces mineral and soft fiber ceiling systems for commercial and residential use. This segment includes the results of the WAVE joint venture, which manufactures grid products[16] - Architectural Specialties: Produces and sources ceilings and walls from materials like metal, felt, and wood for commercial settings. This segment's revenues are often project-driven, leading to more volatile sales patterns[17] - Unallocated Corporate: Includes non-allocated corporate assets and liabilities such as cash, debt, and certain pension plan statuses[18] Acquisitions and Discontinued Operations The company pursued growth through acquisitions in Architectural Specialties and completed the sale of its EMEA and Pacific Rim businesses in 2019 - A series of acquisitions from 2019-2020, including Arktura, Moz, Turf, MRK, and ACGI, have been integrated into the Architectural Specialties segment[20][22] - The sale of the EMEA and Pacific Rim businesses was completed in 2019, and a final purchase price adjustment of $11.8 million was paid to the buyer, Knauf, in Q1 2021[23] Human Capital and Sustainability AWI's sustainability program focuses on People, Planet, and Product, emphasizing community, environmental reduction, and sustainable offerings, with a workforce of approximately 2,800 employees - The sustainability program is organized around three pillars: People (community, diversity, safety), Planet (reducing GHG, water, waste), and Product (sustainable materials, meeting customer goals)[40][41][42] Workforce Demographics (as of Dec 31, 2021) | Metric | Value | | :--- | :--- | | Total Employees | ~2,800 | | U.S. Production Employees | ~1,300 | | Unionized U.S. Production Employees | ~58% | | Executive Leadership Gender Diversity | 43% (up from 20% in 2020) | Risk Factors The company identifies numerous operational, strategic, financial, legal, and general economic risks that could adversely affect its business and financial performance Risks Related to Our Operations Operational risks include sales fluctuations from key customers, input cost volatility, WAVE joint venture performance, labor issues, and failure to achieve productivity savings - The loss or reduction of sales to key customers, including independent distributors and national home centers, could materially harm financial results[56] - Increased costs or decreased availability of raw materials, energy, or sourced products could adversely affect financial condition if costs cannot be passed on to customers[57] - The company's financial results are significantly impacted by its equity investment in the WAVE joint venture; any adverse changes in WAVE's performance or its relationship with partner Worthington Industries could be detrimental[59][60] Risks Related to Financial Matters Financial risks include negative tax consequences, limitations from indebtedness, and significant defined benefit plan obligations sensitive to actuarial assumptions and investment returns - The company's level of indebtedness could limit flexibility, create a competitive disadvantage, and restrict its ability to refinance debt or return cash to shareholders[70] - Debt agreements contain restrictive covenants that limit the ability to incur more debt, pay dividends, make acquisitions, and sell assets[74][75] - As of December 31, 2021, U.S. pension plans were overfunded by $71.6 million, while unfunded U.S. postretirement plan liabilities were $78.0 million. Changes in assumptions could negatively impact results[77] Risks Related to General Economic and Other Factors General economic risks include dependency on cyclical construction activity, intense competition, IT disruptions, cybersecurity threats, and public health pandemics like COVID-19 - The business is dependent on cyclical commercial and residential construction activity, and prolonged downturns could materially harm financial results[93] - Highly competitive markets could reduce demand, negatively affect sales mix, or impact price realization if the company fails to innovate or meet consumer preferences[94] - The COVID-19 pandemic continues to create uncertainty regarding construction activity, supply chain disruptions, inflation, and labor shortages, which could adversely affect financial results[105] Properties AWI operates 16 manufacturing plants across the U.S. and Canada, with its corporate headquarters in Lancaster, Pennsylvania, and additional plants managed by the WAVE joint venture Manufacturing Plant Locations by Segment | Operating Segment | Number of Plants | Location of Principal Facilities | | :---------------------- | :--------------- | :------------------------------------------------------------- | | Mineral Fiber | 6 | U.S. (Florida, Georgia, Ohio, Oregon, Pennsylvania and West Virginia) | | Architectural Specialties | 10 | U.S. (California, Illinois, Missouri and Ohio), Canada (Quebec and Ontario) | - The company owns its corporate headquarters in Lancaster, PA and operates a total of 16 manufacturing plants. An additional 6 plants are operated by the WAVE joint venture[108] Legal Proceedings Information regarding the company's significant legal proceedings, primarily environmental matters, is incorporated by reference from Note 27 to the Consolidated Financial Statements - For a description of significant legal proceedings, see the 'Environmental Matters' section of Note 27 to the Consolidated Financial Statements[110] Mine Safety Disclosures This item is not applicable to the company - Not applicable[111] PART II Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities AWI's common stock trades on the NYSE, with $0.861 per share in dividends declared in 2021 and an active share repurchase program totaling $686.2 million since inception - The company declared total dividends of $0.861 per share in 2021[115] - Since inception through Dec 31, 2021, the company has repurchased 10.5 million shares for a total cost of $686.2 million under its share repurchase program[118] Issuer Purchases of Equity Securities (Q4 2021) | Period | Total Shares Purchased | Average Price Paid per Share | Shares Purchased as Part of Program | Max Value Remaining in Program (End of Period) | | :---------------------- | :--------------------- | :--------------------------- | :---------------------------------- | :--------------------------------------------- | | October 1 – 31, 2021 | 73,635 | $97.10 | 72,191 | $536,779,481 | | November 1 – 30, 2021 | 94,229 | $111.99 | 94,144 | $526,235,713 | | December 1 – 31, 2021 | 114,071 | $111.63 | 111,544 | $513,779,480 | | Total | 281,935 | | 277,879 | | Management's Discussion and Analysis of Financial Condition and Results of Operations AWI's 2021 consolidated net sales increased 18.1% to $1.11 billion, driven by volume and AUV, while operating income grew 2.0% to $260.0 million, with strong liquidity from a $1 billion credit facility 2021 vs 2020 Consolidated Results Consolidated net sales increased 18.1% to $1,106.6 million in 2021, driven by volume and AUV, while operating income grew 2.0% to $260.0 million, tempered by higher SG&A expenses Consolidated Results from Continuing Operations (in millions) | Metric | 2021 | 2020 | Change | | :------------------------- | :-------- | :------ | :-------- | | Total consolidated net sales | $1,106.6 | $936.9 | +18.1% | | Operating income | $260.0 | $254.8 | +2.0% | - The increase in net sales was driven by favorable Average Unit Value (AUV) contributing $71 million and higher volumes contributing $99 million (of which $64 million was from 2020 acquisitions)[143] - Equity earnings from the WAVE joint venture increased to $87.7 million in 2021 from $64.0 million in 2020, driven by favorable AUV and higher volumes[146] Reportable Segment Results Mineral Fiber segment sales grew 12.7% with 19.4% operating income increase, while Architectural Specialties sales rose 36.6% but operating income sharply fell 81.2% due to acquisition costs and margin pressures Mineral Fiber Segment Results (in millions) | Metric | 2021 | 2020 | Change | | :-------------------- | :------ | :------ | :------ | | Total segment net sales | $818.5 | $726.0 | +12.7% | | Operating income | $261.2 | $218.7 | +19.4% | Architectural Specialties Segment Results (in millions) | Metric | 2021 | 2020 | Change | | :-------------------- | :------ | :------ | :------- | | Total segment net sales | $288.1 | $210.9 | +36.6% | | Operating income | $4.2 | $22.3 | (81.2)% | Financial Condition and Liquidity Cash from operating activities was $187.2 million in 2021, supported by a $1,000.0 million credit facility, with total borrowings of $633.7 million and $98.1 million in cash Cash Flow Summary (in millions) | Cash Flow Activity | 2021 | 2020 | | :---------------------- | :-------- | :-------- | | Net Cash from Operating | $187.2 | $218.8 | | Net Cash for Investing | ($13.9) | ($141.1) | | Net Cash for Financing | ($212.1) | $13.5 | - As of Dec 31, 2021, the company had $633.7 million in long-term debt outstanding and $335.0 million available under its revolving credit facility[160][165] Critical Accounting Estimates Management identifies critical accounting estimates for U.S. pension/postretirement costs, income taxes, asset impairment, environmental liabilities, and business combinations, all requiring significant judgment - U.S. Pension/Postretirement Costs: Assumptions for discount rates, long-term return on plan assets, and health care cost inflation significantly impact reported results[169] - Income Taxes: Judgments on future taxable income are critical for assessing the need for valuation allowances against deferred tax assets, which totaled $60.6 million at year-end 2021[176][177] - Impairment of Assets: Annual impairment tests for goodwill and indefinite-lived intangibles rely on assumptions about revenue growth, cash flows, and discount rates[179][180] - Business Combinations: Allocating purchase prices for acquisitions requires significant estimates for intangible assets and contingent consideration, which are remeasured quarterly[186] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate changes on variable-rate debt, managed with $450.0 million in interest rate swaps, with a 0.25% LIBOR increase potentially raising 2022 interest expense by $0.6 million - A hypothetical 0.25% increase in LIBOR from Dec 31, 2021 levels would increase 2022 interest expense by approximately $0.6 million, including the effect of interest rate swaps[194] Outstanding Interest Rate Swaps (as of Dec 31, 2021) | Notional Amount (millions) | Coverage Period | Risk Coverage | | :------------------------- | :------------------------- | :------------ | | $200.0 | Nov 2018 to Nov 2023 | USD-LIBOR | | $100.0 | Mar 2021 to Mar 2025 | USD-LIBOR | | $50.0 | Mar 2020 to Mar 2022 | USD-LIBOR | | $100.0 (2x$50.0) | Mar 2021 to Mar 2024 | USD-LIBOR | Financial Statements and Supplementary Data This section presents AWI's audited consolidated financial statements for 2021, including KPMG's unqualified opinion, showing $183.2 million net earnings, and detailed notes on key financial matters Report of Independent Registered Public Accounting Firm KPMG LLP issued an unqualified opinion on AWI's financial statements and internal controls, identifying pension and postretirement benefit obligations as a critical audit matter due to discount rate subjectivity - KPMG LLP issued an unqualified opinion, stating the financial statements are presented fairly and the company maintained effective internal control over financial reporting[208][215] - The audit identified the evaluation of pension and postretirement benefit obligations as a critical audit matter, citing the subjectivity and complexity of evaluating the discount rates[220][221] Consolidated Financial Statements The consolidated financial statements show 2021 net sales of $1,106.6 million, operating income of $260.0 million, and net earnings of $183.2 million, a significant turnaround from a $99.1 million net loss in 2020 Consolidated Statement of Operations Highlights (in millions) | Metric | 2021 | 2020 | 2019 | | :----------------------------------- | :-------- | :------- | :-------- | | Net sales | $1,106.6 | $936.9 | $1,038.1 | | Operating income | $260.0 | $254.8 | $317.4 | | Earnings (loss) from cont. ops. | $185.3 | ($84.1) | $242.3 | | Net earnings (loss) | $183.2 | ($99.1) | $214.5 | | Diluted EPS | $3.82 | ($2.07) | $4.32 | Consolidated Balance Sheet Highlights (in millions) | Metric | Dec 31, 2021 | Dec 31, 2020 | | :--------------------------- | :----------- | :----------- | | Total current assets | $321.9 | $311.8 | | Total assets | $1,710.0 | $1,718.5 | | Total current liabilities | $209.6 | $172.3 | | Total long-term debt | $606.4 | $690.5 | | Total shareholders' equity | $519.7 | $450.9 | Notes to Consolidated Financial Statements The notes provide comprehensive details on segment information, revenue disaggregation, acquisitions, debt, pension obligations (including a $1,045.3 million settlement), share-based compensation, and environmental liabilities - Note 5 (Acquisitions): Pro forma results assuming the 2020 acquisitions occurred on Jan 1, 2018, show net sales of $1,009.0 million and a net loss of ($69.2 million) for 2020[302][303] - Note 18 (Pensions): In Q1 2020, the company settled $1,045.3 million of retiree pension obligations, resulting in a $374.4 million settlement loss recorded in other non-operating expense[367][368] - Note 27 (Litigation): As of Dec 31, 2021, the company had recorded $0.7 million in liabilities for probable environmental remediation costs at two domestic sites[459] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2021, with no material changes to internal control over financial reporting in Q4 2021 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[467] - No changes in internal control over financial reporting occurred during Q4 2021 that materially affected, or are reasonably likely to materially affect, internal controls[468] PART III Directors, Executive Officers and Corporate Governance This section provides information on executive officers and incorporates details on directors, corporate governance, and Codes of Ethics by reference from the 2022 Proxy Statement Executive Officers (as of Feb 22, 2022) | Name | Age | Title | | :------------------ | :-- | :----------------------------------------------------------------- | | Victor D. Grizzle | 60 | President & CEO, Director | | Charles M. Chiappone| 59 | Senior Vice President, Ceiling and Wall Solutions | | Mark A. Hershey | 52 | Senior Vice President, Americas | | Austin So | 48 | Senior Vice President, General Counsel and Chief Compliance Officer| | Brian L. MacNeal | 55 | Senior Vice President, Chief Financial Officer | | James T. Burge | 46 | Vice President, Controller | | Ellen R. Romano | 60 | Senior Vice President, Human Resources | - Information regarding directors and corporate governance is incorporated by reference from the company's 2022 proxy statement[484] Executive Compensation All information regarding executive compensation is incorporated by reference from the company's proxy statement for its 2022 annual meeting of shareholders - The information required by Item 11 is incorporated by reference from the Company's proxy statement for its 2022 annual meeting of shareholders[485] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters All information regarding security ownership and equity compensation plans is incorporated by reference from the company's proxy statement for its 2022 annual meeting of shareholders - The information required by Item 12 is incorporated by reference from the Company's proxy statement for its 2022 annual meeting of shareholders[487] Certain Relationships and Related Transactions, and Director Independence All information regarding related person transactions and director independence is incorporated by reference from the company's proxy statement for its 2022 annual meeting of shareholders - The information required by Item 13 is incorporated by reference from the Company's proxy statement for its 2022 annual meeting of shareholders[488] Principal Accountant Fees and Services All information regarding principal accountant fees and services, including the Audit Committee Report, is incorporated by reference from the company's 2022 proxy statement - The information required by Item 14 is incorporated by reference from the Company's proxy statement for its 2022 annual meeting of shareholders[489] PART IV Exhibits and Financial Statement Schedules This section lists all documents filed as part of the Form 10-K, including financial statements for AWI and WAVE, credit agreements, incentive plans, and required CEO/CFO certifications - The filing includes financial statements for AWI and its joint venture, WAVE[491] - Key exhibits filed include the Amended and Restated Credit Agreement, various long-term incentive plan documents, and CEO/CFO certifications under Sarbanes-Oxley[491][493][495] Form 10-K Summary This item is not applicable as noted in the report - None[497] Signatures Signatures of Officers and Directors The Form 10-K report was duly signed on February 22, 2022, by the company's principal executive, financial, and accounting officers, and a majority of the Board of Directors - The report was signed by Victor D. Grizzle (CEO), Brian L. MacNeal (CFO), James T. Burge (Controller), and nine directors on February 22, 2022[498][499] SCHEDULE II - Valuation and Qualifying Reserves Valuation and Qualifying Reserves This schedule details the activity in the company's valuation and qualifying accounts for 2019-2021, covering provisions for bad debts, discounts, warranties, and inventory obsolescence Valuation and Qualifying Reserves - 2021 Activity (in millions) | Reserve Category | Beginning Balance | Additions to Earnings | Deductions | Ending Balance | | :------------------------------- | :---------------- | :-------------------- | :--------- | :------------- | | Provision for bad debts | $1.4 | $0.4 | ($0.8) | $1.0 | | Provision for discounts | $1.3 | $21.7 | ($21.3) | $1.7 | | Provision for warranties | $0.9 | $3.9 | ($4.0) | $0.8 | | Provision for inventory obsolescence | $0.0 | $0.3 | ($0.1) | $0.2 |