Brian L. MacNeal
Senior Vice President and
Chief Financial Officer
| Phone: | (717) 396-4791 |
| Fax: | (717) 396-3531 |
E-Mail: blmacneal@armstrongceilings.com
May 22, 2017
Via EDGAR
Mr. Terence O’Brien
Branch Chief
Office of Manufacturing and Construction
U.S. Securities and Exchange Commission
100 F Street N.E.
Washington D.C. 20549-4631
Re:Armstrong World Industries, Inc.
Form 10-K for Fiscal Year Ended December 31, 2016
Filed February 27, 2017
File No. 1-02116
Dear Mr. O’Brien:
We acknowledge receipt of your comment letter dated May 3, 2017. For your convenience in reviewing our response, we have repeated each comment and presented our response thereto.
Form 10-K for Fiscal Year Ended December 31, 2016
Results of Operations, page 23
Comment
Armstrong World Industries
2500 Columbia Avenue, Lancaster, PA 17603
717.397.0611 | www.armstrongceilings.com
Mr. Terence O’Brien | May 22, 2017 |
| component of 2016 net periodic cost. Explain how the decrease in your discount rate resulted in a decrease in net actuarial losses. |
Armstrong Response
In response to the Staff’s comments, we note that the $49.3 million of net gains related to our worldwide pension and postretirement plans and recorded as a component of other comprehensive income for fiscal year 2016 was comprised of two items: (1) $29.1 million of amortization of unrecognized net actuarial losses and prior service costs and (2) $20.2 million of net gains, due primarily to approximately $20 million of net asset related gains for our U.S. Retirement Income Plan (“RIP”), which were the result of our actual 2016 asset returns exceeding our actuarial estimated returns.
On page 20 of the management and discussion analysis section of our 2016 Form 10-K, the $81.8 million decrease in net actuarial losses, recorded as a component of accumulated other comprehensive income, was primarily due to $48.3 million of pre-tax amortization of net actuarial losses for our U.S. pension plans and $33.9 million of actual asset return experience in excess of the actuarially estimated asset return assumptions for our RIP. The corrected sentence should have read as follows:
“Excluding the impact of the separation of AFI, we recognized a decrease in net actuarial losses related to our U.S. pension benefit plans of $81.8 million in 2016 primarily due to change in actuarial assumptions (most significantly a 28 basis point decrease in the discount rate) and the amortization of net actuarial losses recorded as a component of 2016 net periodic pension costs.”
The 28 basis point drop in the discount rate in 2016 caused an increase in net actuarial losses, which was mostly offset by a decrease in net actuarial losses caused by an actuarial change in mortality tables.
We do not believe the above error was material to our 2016 Form 10-K filing. Beginning with our June 30, 2017 Form 10-Q, we will enhance our disclosures of changes to other comprehensive income related to pension and postretirement plans to specify the impacts of individual actuarial assumptions.
Financial Statements
Consolidated Statements of Earnings and Comprehensive Income (Loss), page 40
Note 3- Nature of Operations, page 48
Comment
| 2. | Please expand your disclosure to provide the entity-wide information about your products required by ASC 280-10-50-40. For instance, we note disclosure elsewhere that your Tectum acquisition will fall under your architectural specialties product line. |
Armstrong Response
We acknowledge the Staff’s comment. Beginning with our December 31, 2017 Form 10-K filing, we will expand our disclosures to include the product sale information below.
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Mr. Terence O’Brien | May 22, 2017 |
Consolidated net sales for our major product groupings for the years ended December 31, 2016, 2015 and 2014 (amounts in millions) were:
2016 |
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| 2015 |
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| 2014 |
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Core Ceilings | $ | 1,044.3 |
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| $ | 1,066.9 |
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| $ | 1,125.6 |
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Architectural Specialties |
| 190.2 |
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| 164.4 |
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| 168.7 |
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Total net sales | $ | 1,234.5 |
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| $ | 1,231.3 |
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| $ | 1,294.3 |
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Our Core Ceilings revenues represent sales of mineral fiber and fiberglass wool ceiling panel products. In certain markets, we sell grid products manufactured by our Worthington Armstrong Venture (“WAVE”) joint venture directly to our customers. Core Ceilings revenues also include those grid product sales.
Architectural Specialties revenues represent sales of products of non-traditional forms and materials, including metal and wood. Sales of our recent Tectum acquisition are also included in Architectural Specialties revenues starting in the first quarter of 2017.
Form 8-K February 27, 2017
Exhibit 99.1 Press Release
Market Outlook and 2017 Guidance
Comment
| 3. | We note you disclose expectations of Adjusted EBITDA, Adjusted EPS, and Free Cash Flow for 2017 without presenting and reconciling to corresponding GAAP amounts. Please revise your disclosures pursuant to the guidance provided in Question 102.10 of the updated Compliance and Disclosure Interpretations issued on May 17, 2016. Address this comment as it relates to your disclosures in your Earnings Call Presentation in Exhibit 99.2 and your Investor Presentation in Exhibit 99.3. |
Armstrong Response
In response to the Staff’s comment, below are reconciliations of our 2017 forecasted Adjusted EBITDA, Adjusted Diluted EPS, and Free Cash Flow to the most comparable GAAP measures.
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Mr. Terence O’Brien | May 22, 2017 |
(amounts in millions)
Year Ended December 31, 2017 |
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| Low |
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| High |
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Net income | $ | 155 |
| to | $ | 165 |
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Add: Interest expense |
| 35 |
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| 35 |
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Less: Other non-operating (income) |
| (3 | ) |
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| (3 | ) |
Add: Income tax expense |
| 108 |
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| 108 |
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Operating income | $ | 295 |
| to | $ | 305 |
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Less: U.S. pension (credit) (1) |
| (25 | ) |
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| (25 | ) |
Add: Depreciation and amortization |
| 80 |
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| 80 |
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Adjusted EBITDA | $ | 350 |
| to | $ | 360 |
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(1) | U.S. pension (credit) represents the budgeted actuarial net periodic benefit cost recorded as a component of operating income. We do not expect to make cash contributions to our U.S. Retirement Income Plan in 2017 based on guidelines established by the Pension Benefit Guaranty Corporation. |
Adjusted Diluted Earnings per Share
(amounts in millions, except per share amounts)
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| Year Ended December 31, 2017 |
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| Low |
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| High |
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| Total |
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| Per Diluted Share (1) |
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| Total |
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| Per Diluted Share (1) |
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Net income | $ | 155 |
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| $ | 2.77 |
| to | $ | 165 |
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| $ | 2.95 |
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Add: Interest expense |
| 35 |
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| 35 |
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Less: Other non-operating (income) |
| (3 | ) |
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| (3 | ) |
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Add: Income tax expense |
| 108 |
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| 108 |
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Operating income | $ | 295 |
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| to | $ | 305 |
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Less: U.S. pension (credit) (2) |
| (25 | ) |
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| (25 | ) |
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Interest expense |
| (35 | ) |
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| (35 | ) |
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Adjusted earnings before income taxes | $ | 235 |
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| $ | 245 |
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Income tax expense |
| (89 | ) |
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| (94 | ) |
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Adjusted net income | $ | 146 |
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| $ | 2.60 |
| to | $ | 151 |
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| $ | 2.70 |
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(1) | Based on 56 million of diluted shares outstanding. |
(2) | U.S. pension (credit) represents the budgeted actuarial net periodic benefit cost recorded as a component of operating income. We do not expect to make cash contributions to our U.S. Retirement Income Plan in 2017 based on guidelines established by the Pension Benefit Guaranty Corporation. |
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Mr. Terence O’Brien | May 22, 2017 |
Adjusted Free Cash Flow
(amounts in millions)
Year Ended December 31, 2017 |
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| Low |
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| High |
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Net cash provided by operating activities | $ | 160 |
| to | $ | 175 |
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Add: Return of investment from joint venture |
| 70 |
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| 70 |
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Adjusted net cash provided by operating activities | $ | 230 |
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| $ | 245 |
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Less: Capital expenditures |
| (100 | ) |
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| (100 | ) |
Adjusted Free Cash Flow | $ | 130 |
| to | $ | 145 |
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We will include similar reconciliations in our Earnings Press Release, Earnings Call Presentation, and Investor Presentations in all future filings.
Supplemental Reconciliations of GAAP to non-GAAP Results
Comment
| 4. | Please disclose the nature of your non-cash impact of U.S. Pension adjustment. Also, please do not characterize the pension adjustment as “non-cash,” as pension obligations ultimately settle in cash. |
Armstrong Response
We acknowledge the Staff’s comments and note that, in future filings, we will revise all references to the impact of our U.S. Pension adjustment to state, “U.S. pension (credit) expense.” We will furthermore footnote this non-GAAP amount by stating the following: “U.S. pension (credit) expense represents the actuarial net periodic benefit cost recorded as a component of operating income. For all periods presented, we were not required and did not make cash contributions to our U.S. Retirement Income Plan based on guidelines established by the Pension Benefit Guaranty Corporation.”
Comment
| 5. | We note you present two reconciliations of Earnings (loss) from continuing operations, reported to Adjusted EBITDA. Please fully explain each adjustment reflected in the second reconciliation. In this regard, items such as pre-tax adjustment items, reversal of adjusted expenses, and ordinary tax are just a few line items that warrant an explanation of what the adjustment represents and how such amount was determined. |
Armstrong Response
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Mr. Terence O’Brien | May 22, 2017 |
We acknowledge the Staff’s comments related to our GAAP to non-GAAP reconciliations of Earnings (loss) from continuing operations included within our Earnings Press Release. In response to the Staff’s comment, below are revised reconciliations for the three months and years ended December 31, 2016 and 2015:
Adjusted Diluted Earnings per Share
(amounts in millions, except per share amounts)
Three Months Ended December 31, |
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| Year Ended December 31, |
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| 2016 |
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| 2015 |
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| 2016 |
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| 2015 |
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| Total |
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| Per Diluted Share (1) |
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| Total |
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| Per Diluted Share (1) |
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| Total |
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| Per Diluted Share (1) |
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| Total |
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| Per Diluted Share (1) |
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Earnings (loss) from continuing operations, As Reported | $ | 29 |
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| $ | 0.51 |
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| $ | (14 | ) |
| $ | (0.25 | ) |
| $ | 94 |
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| $ | 1.68 |
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| $ | 27 |
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| $ | 0.47 |
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Add: Income taxes, as reported |
| 6 |
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| 2 |
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| 50 |
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| 53 |
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Earnings (loss) from continuing operations before income taxes, As Reported | $ | 35 |
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| $ | (12 | ) |
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| $ | 144 |
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| $ | 80 |
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Add: U.S. pension expense (2) |
| 3 |
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| 4 |
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| 13 |
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| 15 |
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Add: Corporate cost adjustments (3) |
| - |
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| 9 |
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| - |
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| 20 |
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Add: Separation costs |
| 1 |
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| 17 |
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| 34 |
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| 34 |
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Add: China idle plant costs |
| 1 |
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| 5 |
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| 4 |
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| 5 |
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Add: Europe cost reductions |
| - |
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| 2 |
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| - |
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| 2 |
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Add: Settlement of interest rate swap |
| - |
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| - |
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| 11 |
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| - |
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Add: Foreign exchange impact |
| 2 |
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| 2 |
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| 1 |
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| 1 |
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Adjusted earnings before income taxes (4) | $ | 41 |
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| $ | 27 |
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| $ | 209 |
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| $ | 158 |
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Adjusted income tax expense @ 39% for 2016 and 2015 |
| (16 | ) |
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| (11 | ) |
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| (81 | ) |
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| (62 | ) |
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Adjusted net income | $ | 25 |
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| $ | 0.45 |
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| $ | 16 |
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| $ | 0.29 |
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| $ | 128 |
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| $ | 2.29 |
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| $ | 96 |
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| $ | 1.72 |
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(1) | Based on 56 million of diluted shares outstanding on an as reported and adjusted basis for all periods presented. |
(2) | U.S. pension expense represents the actuarial net periodic benefit cost recorded as a component of operating income. For all periods presented, we were not required and did not make cash contributions to our U.S. Retirement Income Plan based on guidelines established by the Pension Benefit Guaranty Corporation. |
(3) | Includes adjustments to Corporate costs and geographic allocations of Corporate support functions due to the AFI separation and are reflected to assist in comparison to the 2016 AWI results. The adjustments include removal of certain costs not applicable to the current AWI structure. |
(4) | Amounts may not add due to rounding. |
We will include similar reconciliations in our Earnings Press Release, Earnings Call Presentation, and Investor Presentations in all future filings.
Exhibit 99.2 Earnings Call Presentation
Basis of Presentation, page 3
Comment
| 6. | You identify the items that are adjusted for comparable dollars and other adjustments and indicate that these adjustments result in non-GAAP measures. In accordance with |
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Mr. Terence O’Brien | May 22, 2017 |
| Regulation G, please provide the most comparable GAAP measures and provide a quantitative reconciliation of each non-GAAP measure to the most comparable GAAP measure. In addition, in order to avoid confusion to readers, please ensure you appropriately label your non-GAAP measures throughout your presentation. |
Specifically, please label the net sales, gross profit, operating income, EBITDA and earnings per share line items you have presented “as adjusted” or something similar so that readers do not confuse these measures with GAAP amounts. Please address this comment as it relates to your presentation of non-GAAP measures in your Investor Presentation found in Exhibit 99.3.
Armstrong Response
Based on the Staff’s comments, we will add a note to the Basis of Presentation page in all future filings of our Earnings Call Presentations to direct the reader to the quantitative reconciliations of each non-GAAP measure to the most comparable GAAP measure that are contained later in the Earnings Call Presentations (as revised in the comment responses above).
Finally, in future filings we will also properly label all non-GAAP measures as “Adjusted” throughout our Earnings Press Release, Earnings Call Presentation, and Investor Presentation.
Cash Flow Reconciliation, page 17
Comment
| 7. | Your computation of free cash flow differs from the typical calculation (cash flows from operating activities as presented in the statement of cash flows under GAAP, less capital expenditures). Therefore, please revise the title of this non-GAAP measure so it is not confused with free cash flow as typically calculated. See Question 102.07 of the Non-GAAP Compliance and Disclosure Interpretations. Please address this comment as it relates to your presentation of free cash flow in your Investor Presentation found in Exhibit 99.3. |
Armstrong Response
We acknowledge the Staff’s comments and, in future filings, we will reference our computed free cash flows as “Adjusted Free Cash Flows.”
If you have any questions or would like further clarification, please feel free to contact Steve McNamara at (717) 396-3420 or me at (717) 396-4791.
Sincerely,
/s/ Brian L. MacNeal
Brian L. MacNeal
Senior Vice President and Chief Financial Officer
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