AWI Armstrong World Industries Inc

Key Highlights

• Operating income from continuing operations of $71.0 million, up 20% over Q3'15
• Adjusted EBITDA from continuing operations of $97 million, flat versus Q3'15
• AUV accelerates in the Americas, improving sales by $6 million over Q3'15
• Full year 2016 adjusted EBITDA and revenue guidance ranges narrowed, midpoints unchanged

LANCASTER, Pa., October 31, 2016 -- Armstrong World Industries, Inc. (NYSE:AWI), a global leader in the design and manufacture of innovative commercial and residential ceiling, wall and suspension system solutions, today reported financial results for the third quarter ended September 30, 2016.  

As previously announced, on April 1, 2016, AWI completed the separation of its legacy flooring business that now operates as Armstrong Flooring Inc. (NYSE:AFI), an independent, publicly-traded company.  Beginning in the second quarter of 2016, AFI's historical results are reflected in AWI's Consolidated Financial Statements as a discontinued operation and are excluded from results of continuing operations. 

Excluding the unfavorable impact from foreign exchange of $7 million, consolidated net sales increased 1.7% compared to the prior year period driven by improvement in average sales dollars per unit sold, or average unit value ("AUV") in all regions.  Lower volumes in the Pacific Rim and Americas were only partially offset by higher volumes in Europe (including Russia), Middle East and Africa ("EMEA"). 

The improvement in operating income compared to the prior year period was driven by lower SG&A costs and improvements in AUV, which were only partially offset by the margin impact from lower volumes.  Net income benefitted from the favorable settlement of income tax positions taken on previous returns.   

"While third quarter sales globally were up 2% excluding the impact of foreign exchange, sales in our U.S. commercial channel were up 5%," said Vic Grizzle, CEO.  "Our solutions selling efforts helped to accelerate our AUV achievement this quarter, driven by continued strong growth in high end products and positive like-for-like pricing."

*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, AFI separation costs and certain other gains and losses.  Adjusted results reflect the allocation of corporate costs into the segments and were held constant in 2015 for comparability purposes.  Adjusted figures are reported in comparable dollars using the budgeted exchange rate for 2016, and are reconciled to the most comparable GAAP measures in tables at the end of this release.   

Adjusted operating income improved by 1% and adjusted EBITDA was flat in the third quarter when compared to the prior year period.  Improvements in AUV and lower manufacturing and input costs offset the margin impact of lower volumes, higher SG&A expenses and lower earnings from the Worthington Armstrong Venture ("WAVE") joint venture.  Adjusted earnings per share is calculated using a 39% adjusted tax rate in both periods. 

Third Quarter Segment Highlights

Effective April 1, 2016, the former Building Products operating segment was disaggregated into the following three distinct geographical segments:  Americas (including Canada), EMEA and Pacific Rim.  The Unallocated Corporate segment historically included assets, liabilities, income and expenses that had not been allocated to the geographical segments, including AFI separation costs.

Net sales in the Americas for the third quarter increased 2.0%, driven by improvement in AUV partially offset by lower volumes primarily in the retail channel and Latin America.  On an as reported basis, operating income decreased, driven by higher SG&A expenses and manufacturing costs, due to increased corporate cost allocation as a result of the AFI separation.  The margin impact of lower volumes and lower earnings from WAVE also negatively impacted operating income.  These costs more than offset the margin impact of improvements in AUV. 

Excluding the unfavorable impact of foreign exchange of approximately $6 million, net sales in EMEA for the third quarter increased 1.9%, driven by higher volumes, as higher sales in Russia more than offset lower sales in the Middle East and continental Europe.  On an as reported basis, operating income increased, driven by lower manufacturing and input costs and lower SG&A costs along with higher earnings from WAVE.  The improvement in SG&A costs over the prior year period reflects the benefit of prior cost reduction actions and strong cost control to mitigate softer end markets. 

Excluding the unfavorable impact of foreign exchange of approximately $1 million, net sales in the Pacific Rim for the third quarter decreased 1.7%, as improvements in AUV were more than offset by lower volumes.  On an as reported basis, operating income increased due to improvements in AUV and lower manufacturing and input costs, which were only partially offset by lower volumes.  SG&A costs also improved over the prior year period reflecting the benefit of prior cost reduction actions and strong cost control to mitigate softer end markets. 

Unallocated Corporate

As a result of the AFI separation on April 1, 2016, the majority of the AWI corporate support functions were incorporated into the Americas segment.  As a result, unallocated corporate support expenses decreased significantly during the three months ended September 30, 2016 when compared to the same period in 2015. 

On an as reported basis, unallocated corporate expense of $2.7 million decreased from $30.5 million in the prior year, due to the inclusion of corporate costs within the Americas segment.  The expenses flowing through this segment in 2016 are costs and expenses related to the AFI separation.           

Year to Date Results from continuing operations

Excluding the unfavorable impact from foreign exchange of approximately $18 million, year to date consolidated net sales increased 2.2% compared to the prior year period, driven by higher volumes in the Americas and improvements in AUV.   

On an as reported basis, operating income increased by 7.2% despite higher separation expenses.  Separation expenses in the first nine months of 2016 were $33 million, compared to $17 million in the prior year period.  The improvement in operating income was driven by lower SG&A expenses reflecting cost control measures plus the net impact of the separation, strong earnings from WAVE, and the margin impact of favorable AUV. 

Market Outlook and 2016 Guidance ⁽¹⁾ 

AWI is narrowing its expected ranges for full year 2016 constant currency sales and adjusted EBITDA to $1.24 to $1.27 billion and $315 to $325 million, respectively, with the mid-points of both ranges unchanged.  AWI now expects adjusted earnings per share to be in the range of $2.20 to $2.30 per diluted share.

⁽¹⁾ Guidance metrics are presented using 2016 budgeted foreign exchange rates.  Adjusted EPS guidance for 2016 is calculated based on an adjusted effective tax rate of 39%.

Earnings Webcast
Management will host a live Internet broadcast beginning at 11:00 a.m. Eastern time today, to discuss third quarter 2016 results.  This event will be broadcast live on the company's web site.  To access the call and accompanying slide presentation, go to www.armstrongceilings.com and click Investors.  The replay of this event will also be available on the company's web site for up to one year after the date of the call.

Uncertainties Affecting Forward-Looking Statements

Disclosures in this release, including without limitation, those relating to future financial results, market conditions and guidance, and in our other public documents and comments, contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Those statements provide our future expectations or forecasts and can be identified by our use of words such as "anticipate," "estimate," "expect." "project," "intend," "plan," "believe," "outlook," "target," "predict," "may," "will," "would," "could," "should," "seek," and other words or phrases of similar meaning in connection with any discussion of future operating or financial performance.  Forward-looking statements, by their nature, address matters that are uncertain and involve risks because they relate to events and depend on circumstances that may or may not occur in the future.  As a result, our actual results may differ materially from our expected results and from those expressed in our forward-looking statements.  A more detailed discussion of the risks and uncertainties that could cause our actual results to differ materially from those projected, anticipated or implied is included in the "Risk Factors" and "Management's Discussion and Analysis" sections of our reports on Forms 10-K and 10-Q filed with the U.S. Securities and Exchange Commission ("SEC").  Forward-looking statements speak only as of the date they are made.  We undertake no obligation to update any forward-looking statements beyond what is required under applicable securities law.

About Armstrong and Additional Information

More details on the AWI's performance can be found in its quarterly report on Form 10-Q for the quarter ended September 30, 2016 that AWI expects to file with the SEC today.

Armstrong World Industries, Inc. (AWI) is a global leader in the design and manufacture of innovative commercial and residential ceiling, wall and suspension system solutions. With 3,700 employees and fiscal 2015 revenues from ceiling operations in excess of $1.2 billion, AWI operates from a global manufacturing network of 24 facilities, including 9 plants dedicated to its WAVE joint venture. On April 1, 2016, AWI completed the separation of its legacy flooring business that now operates as Armstrong Flooring Inc., an independent, publicly-traded company.  For more information, visit www.armstrongceilings.com.

Additional forward looking non-GAAP metrics are available on the AWI's web site at www.armstrongceilings.com under the Investor Relations tab. The website is not part of this release and references to our website address in this release are intended to be inactive textual references only.

                                                                       
Supplemental Reconciliations of GAAP to non-GAAP Results (unaudited)
(Amounts in millions, except per share data)

To supplement its consolidated financial statements presented in accordance with accounting principles generally accepted in the United States ("GAAP"), the Company provides additional measures of performance adjusted to 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.  Adjusted results reflect the allocation of corporate costs into the segments and were held constant in 2015 for comparability purposes.  Adjusted figures are reported in comparable dollars using the budgeted exchange rate for 2016.  The Company uses these adjusted performance measures in managing the business, including communications with its Board of Directors and employees, and believes that they provide users of this financial information with meaningful comparisons of operating performance between current results and results in prior periods. The Company believes that these non-GAAP financial measures are appropriate to enhance understanding of its past performance, as well as prospects for its future performance.  A reconciliation of these adjustments to the most directly comparable GAAP measures is included in this release and on the Company's website. These non-GAAP measures should not be considered in isolation or as a substitute for the most comparable GAAP measures.  Non-GAAP financial measures utilized by the Company may not be comparable to non-GAAP financial measures used by other companies.

CONSOLIDATED RESULTS FROM CONTINUING OPERATIONS

*Excludes accelerated depreciation associated with cost reduction initiatives reflected below.  Actual D&A as reported is; $19.7 million for the three months ended September 30, 2016, $19.7 million for the three months ended September 30, 2015, $58.7 million for the nine months ended September 30, 2016, and $58.0 million for the nine months ended September 30, 2015. 
** Includes adjustments to Corporate costs and geographic allocations of Corporate support functions due to the Separation to assist in comparison to 2016 AWI results.  The adjustments include changes in geographic allocations and removal of certain costs not applicable to the current AWI structure. 

*Adjusted results exclude $10.7 million of interest expense recorded in the first quarter of 2016 related to the settlement of interest rate swaps incurred in connection with the company's refinancing of its credit facility. 
**Includes adjustments to Corporate costs and geographic allocations of Corporate support functions due to the Separation to assist in comparison to 2016 AWI results.  The adjustments include changes in geographic allocations and removal of certain costs not applicable to the current AWI structure. 

Source: Armstrong World Industries

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