Armstrong World Industries reports 41.4% increase in Q2 net income to US$37.9M as favorable foreign exchange offsets flat sales

LANCASTER, Pennsylvania , August 1, 2011 (press release) – Armstrong World Industries, Inc. (NYSE:AWI - News), a global leader in the design and manufacture of floors, ceilings, and cabinets, today reported second quarter 2011 results.

Highlights for the Second Quarter of 2011

Adjusted EBITDA of $109 million, up 24% over the 2010 period
Operating Income of $72.7 million, up 37.4% over the 2010 period
Cost reduction program exceeding targeted savings
Macro economic climate remains challenging

Second Quarter Results
Consolidated net sales increased approximately $24 million or 3% compared to the prior year period. Excluding a $24 million favorable foreign exchange impact for the quarter, sales were relatively flat compared to the prior year period. On a consolidated level, price and mix were able to offset broad volume declines in all businesses and geographies, except in the Wood business and in Asia where volume grew. Volume declines in the European flooring markets reflect the exit from the residential flooring business in fourth quarter of 2010, and the simplification of our country and product offerings in Europe. Excluding the impact of these actions, volumes in European flooring showed slight improvement.

Operating income and net income both increased due to the cost reduction actions initiated in 2010, which resulted in lower manufacturing costs and core SG&A expenses when compared to the same period last year. Input cost inflation increased $15 million versus second quarter 2010, primarily driven a broad array of input items including PVC, plasticizers and Titanium Dioxide.

"I am pleased to announce that, on an adjusted basis, EBITDA was up 24% from Q2 2010 levels, on relatively flat sales," said Matt Espe, President and CEO. "Volumes were down in most of our business reflecting the cautionary economic environment in which we continue to operate. We were, however, able to achieve increased profitability through the continued execution of our cost savings plans, pricing ability, mix gains from new products and leverage of LEAN investments."

Improvements in adjusted operating income and EBITDA were driven by reductions in manufacturing costs, coupled with the impact of better pricing and reductions in SG&A expenses, which were partially offset by increased input costs. The reduction in free cash flow was primarily due to a smaller decrease in working capital than in the second quarter of 2010, higher capital expenditures, and higher interest expense.

Second Quarter Segment Highlights

Building Products
The increase in net sales was driven by favorable foreign exchange of approximately $12 million and better price and mix, which were partially offset by lower volumes in the Americas and Western Europe. Operating income increased as price offset inflation and improvements in mix and reduced manufacturing costs were offset slightly by lower volumes.

Resilient Flooring
Net sales decreased slightly as favorable foreign exchange of approximately $11 million and improved product mix and price were more than offset by volume declines in the Americas and Europe. Net sales declines in the European markets for both periods reflects the volume reductions related to the restructuring of our European flooring business which included the exit of the residential flooring business and simplifying our country and product offerings. Excluding the impact of these actions, volumes in the European markets showed slight improvement.

The increase in operating income was due to reduced manufacturing costs, improved price and reductions in SG&A expenses, which were partially offset by volume declines and raw material inflation. Operating income for the 2011 period included $5.9 million of severance and restructuring related costs in Europe. European operating income was impacted by a $2.1 million fixed asset impairment charge in the 2010 period.

Wood Flooring
Net sales increased in the second quarter as price, volume and mix were all positive contributors. Operating income increased as a result of reduced manufacturing and SG&A costs and improved sales.

Cabinets
Net sales decreased primarily due to less favorable product mix. Operating income improved primarily due to reduced SG&A expenses, which were partially offset by unfavorable product mix.

Corporate

Unallocated corporate expense of $9.9 million decreased from $10.8 million in the prior year. The second quarter 2011 expense included a $6.2 million lower pension credit compared to 2010. The second quarter 2010 expense included a $3.0 million impairment charge related to the termination of flight operations.

Year to Date Results

For the six months ended June 30, 2011, reported net sales were $1,433.8 million compared to $1,383.7 million in 2010. Excluding a $29 million favorable impact from exchange rates, net sales increased by 1.5% percent as volume declines were more than offset by price and mix.

Reported operating income for the first six months was $124.8 million compared to operating income of $66.3 million for the same period in 2010. Adjusted EBITDA of $202 million increased 40% compared to Adjusted EBITDA of $144 million in the prior year period. Significant reductions in manufacturing costs and SG&A expenses, coupled with price and mix gains more than offset the negative margin impact of inflation in input costs.

Free cash flow for the first six months of 2011 was $6 million compared to $59 million for 2010 primarily due changes in working capital, higher interest expense and increased capital expenditures in 2011.

Market Outlook and 2011 Guidance

Management's macro economic outlook for 2011 is down slightly from the beginning of the year and the end of the first quarter. Entering the year U.S. and Western European markets were expected to be relatively flat. Management projected new home starts in the U.S. to be around 600,000 and anticipated repair and remodel activity in North America to be flat to slightly down and commercial repair remodel activity slightly up. "We now expect our residential and commercial end markets opportunity to be slightly lower as the domestic economic recovery appears to be delayed," said Tom Mangas, Senior Vice President and CFO. "We continue to expect emerging markets' GDP to continue to grow in the high single digit range."

Management is raising the low end of sales guidance driven by foreign exchange trends, and raising the lower end of EBITDA guidance by $10 million to $385 million. Savings opportunities in excess of the previously announced $150 million initiative have been identified. "We now expect to save approximately $165 million and have accelerated some savings initially expected in 2012 into 2011. 2011 savings are now expected to be approximately $90 million, up from $65 million incorporated in our previous guidance," said Mangas.

For the third quarter of 2011, sales are expected to be between $780 and $830 million and Adjusted EBITDA to be in the range of $115 to $130 million. Additional forward looking non-GAAP metrics are available on our web site at http://www.armstrong.com/ under the Investor Relations tab.

Earnings Webcast

Management will conduct a discussion for shareholders during a live Internet broadcast beginning at 1:00 p.m. Eastern time today. This event will be broadcast live on the Company's Web site, www.armstrong.com. From the homepage, click "For Investors" to access the call and the accompanying slide presentation. The replay of this event will also be available on the Company's Web site.

Forestweb Editor's Note: In an omitted table, the company reported Q2 net income of US$37.9 million and net sales of $748.6 million. For the same quarter a year ago, the company reported net income of $26.8 million and net sales of $724.8 million.

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