Armstrong World Industries Boosts Share Repurchase by $500 Million- Buyback Wednesdays

Key Insights:

• Armstrong World Industries, Inc. (AWI) is a global company that specializes in creating and producing building materials for walls and ceilings.
• Education and office sectors are major sales drivers, each contributing 30% to net sales.
• With the economic environment in the home building industry stabilizing and supply chain disruptions normalizing, there is upside potential for future growth.
• Low debt despite acquisitions, disciplined capital allocation, and significant cash flows should help the company weather an economic slowdown or recession.

With a market cap of $3.43 billion, Armstrong World Industries, Inc. (AWI) operates a manufacturing network comprising 16 facilities, along with 7 additional facilities dedicated to its WAVE joint venture, which provides services for various settings, including homes, workplaces, healthcare facilities, classrooms, and commercial spaces. AWI’s prominent clientele includes Lowe’s Companies (LOW), The Home Depot (HD), and other direct customers and retailers.

AWI operates in two main segments:

• Mineral Fiber: This division is responsible for manufacturing suspended mineral fiber and soft fiber ceiling systems. These ceiling products are distributed to resale distributors, ceiling systems contractors, wholesalers, and retailers, including major home centers.
• Architectural Specialties: Within this segment, AWI produces, designs, and sources ceilings and walls tailored for commercial applications. The products offered include metal, felt, and wood options, available in various colors, shapes, and designs.

Source: Armstrong Worldwide – Investor Presentation

On July 19, 2023, AWI made an announcement to expand its share repurchase program by an additional $500 million, which represents approximately 15% of its market capitalization at the time of the announcement.

Current Scenario:

According to a survey conducted by the National Association of Home Builders (NAHB), builder confidence has been increasing most of this year. Additionally, the number of apartments under construction has reached a record 994,000, making it the highest count since May 1973.

The results of the July NAHB survey indicated that despite the presence of higher interest rates, builders have reduced their reliance on sales incentives due to a more stable market and limited availability of resale inventory options. Only 22% of builders reported price cuts in July, showing a decline from 25% in June and 27% in May.

This renewed confidence is also evident in the prices of homebuilders like Lennar Corporation (LEN), which has seen a 56% increase over the last year, as well as home improvement retailers like The Home Depot, Inc. (HD) and Lowe’s Companies, Inc. (LOW), which have shown gains of 6.2% and 20.12% respectively over the same period.

This surge in homebuilding activity is positive for AWI as it provides roofing materials for residential buildings. However, the commercial real estate market in the U.S. is currently under significant pressure, resulting in less demand for the company. The CEO of the company, Vic Grizzle, mentioned that he observed weak demand in areas where return-to-office activity has stalled. Nevertheless, he anticipates demand from larger projects tied to the Infrastructure Bill in 2024 and beyond.

Acquisitions & Divestitures:

AWI has broadened its product portfolio and capabilities through acquisitions and partnerships. It follows quite a conservative M&A strategy as its debt levels have been reduced despite acquisitions.

2018 – Acquired Plasterform and Steel Ceilings

2019 – Acquired Architectural Components Group and MRK Industries

2020 – Acquired TURF Design, Moz Designs and Arktura

In 2016, Armstrong spun off the flooring business into a new company, Armstrong Flooring. In September 2019, it divested its WAVE joint venture in EMEA and the Pacific Rim, as well as Armstrong France and WAVE France, for ~$330 million.

Recently, on July 24, 2023, Armstrong World Industries (AWI) made an announcement about its acquisition of BŌK Modern, LLC (BŌK), a renowned company known for its innovative architectural metal systems designed for both interior and exterior applications. The acquisition was financed using AWI’s available cash, and specific financial details of the deal were not disclosed.

Source: Armstrong Worldwide – Investor Presentation

Recent Product Launches:

To power its growth beyond acquisitions, the company regularly introduces new products. For instance, in June 2018, it unveiled the DESIGNFlex Ceiling Systems, allowing architects and designers to creatively mix and match panel shapes, sizes, colors, and textures with minimum orders. Subsequently, in June 2019, the company introduced the ACOUSTIBuilt Seamless Acoustical Ceilings, providing a drywall-like appearance while maintaining excellent acoustic performance.

In October 2020, the company launched the 24/7 Defend product portfolio, offering cost-effective solutions that promote healthier and safer spaces, along with cleaner air. Finally, in July 2022, a partnership with Price Industries was announced, aiming to accelerate the development of comprehensive solutions for promoting healthy indoor environments. As part of this collaboration, AWI launched StrataCleanIQ, a ceiling-mounted filtration unit that uses MERV 13 filtration technology.

Capital Allocation:

Over the past three years, AWI has demonstrated a disciplined approach to capital allocation, allocating $210 million to capital expenditures, making four AS acquisitions totaling $168 million, and returning over $400 million to shareholders through share repurchases and dividends. Notably, the company has successfully covered its dividend and interest expenses using less than 50% of the cash generated from its operations over the last five years, indicating the sustainability of the dividend in the long run.

AWI’s commitment to its shareholders is evident as it has returned more than $1 billion through dividends and share repurchases since 2016, while simultaneously making nine strategic acquisitions to expand its capabilities within the Architectural Specialties segment.

Source: Armstrong Worldwide – Investor Presentation

The company offers a low dividend yield of 1.33% and maintains a low payout ratio of 20.67%. Given the low payout ratio, the dividend appears secure, leaving room for potential dividend growth or special distributions in the future.

AWI has been proactive in buying back its own shares, reducing the diluted share count from 58.4 million in 2013 to 46 million at the end of Q1, 2023. During the first half of 2023, AWI repurchased 0.8 million shares for a total cost of $57 million. Notably, the company has retired approximately 9% of its outstanding shares since June 2019. This significant reduction in shares outstanding demonstrates AWI’s preference for buybacks as a means of returning capital to shareholders, alongside dividends.

High Profitability:

For nine consecutive quarters, the company has accomplished double-digit year-over-year sales growth in its specialty segment, leading to robust gross profit and EBITDA margins, even in the face of macroeconomic pressures. The company’s ability to maintain strong pricing power, implement successful acquisitions, and carry out productivity initiatives has contributed significantly to its ongoing profitability. Currently, the trailing twelve months’ gross profit margin is 36.41%, resulting in a net margin of 16.32%, while the EBITDA margin stands at 24.79%.

Over the past eight years, the company has shown gradual revenue growth, starting from $805.1 million in 2015 and reaching $1.26 billion in 2022.

Healthy Balance Sheet:

Over the course of the last ten years, the company has displayed impressive progress in reducing its debt burden, with long-term debt gradually decreasing from $1.06 billion in 2013 to $660.6 million in 2023. Currently, the company’s net debt, excluding capital leases, stands at $563.7 million. What makes this achievement even more commendable is that the company managed to lower its debt while engaging in acquisitions, distributing dividends, and authorizing share buybacks. At present, AWI holds $102.5 million in cash & short-term investments.

Q1 2023 Results:

AWI generated strong first-quarter results.

• Consolidated net sales increased 10% year-over-year, while adjusted EBITDA grew 9%.
• The company’s adjusted free cash flow also saw significant improvement, rising by $10 million or approximately 50% compared to the previous year.
• The Mineral Fiber segment was a key contributor to the good start, with double-digit sales and adjusted EBITDA growth of $10 million or 13%, as well as adjusted EBITDA margin expansion up 20 basis points compared to the prior year.
• The Architectural Specialties had a slower start to 2023 with year-over-year sales growth of 3% and a $1 million decline in adjusted EBITDA.
• The company repurchased $27 million worth of shares in the quarter.

Source: Armstrong Worldwide – Investor Presentation

Looking forward, CEO Vic Grizzle expressed optimism about the various areas of growth for the company,

“Overall bidding activity did turn positive in the quarter, with pockets of strength in areas like transportation and municipal spending with investments in airports, metro stations, and convention centers. Healthcare is also an active area, along with education and datacenters. Still early days, but it’s increasingly clear that ceilings have an important role to play in healthy, sustainable buildings of the future.”

Bottom Line:

AWI has made significant investments in innovative solutions and has successfully developed digitally enabled systems and tools to enhance customer efficiency. The company has also expanded its wood flooring manufacturing capacity, diversified its product lines, and improved product quality. Despite these positive efforts, AWI faces tough competition from alternative finishing products like drywall and competitors such as Georgia-Pacific, USG Corporation, and Hunter Douglas, among others.

The commercial real estate market is experiencing challenges due to factors like high-interest rates, upcoming refinancing needs, and the increasing trend of remote work, leading to reduced demand for office buildings. A potential rise in the unemployment rate could further exacerbate the issue, resulting in higher vacancies in commercial properties.

Despite facing recent headwinds, AWI remains highly profitable and continues to grow. AWI shares are trading at $76.13, which reflects a 34% decline from their all-time highs of $115.38 on December 8, 2021. The stock trades at a forward P/E of 16 and a forward EV/EBITDA of 10. While not particularly expensive, it is also not attractive enough at this juncture to compel me to start a position.

Welcome to edition 69 of Buyback Wednesdays, a weekly series that tracks the top stock buyback announcements during the prior week. The companies in the list below are the ones that announced the most significant buybacks as a percentage of their market caps. They are not the largest buybacks in absolute dollar terms. A word of caution. Some of these companies could be low-volume small-cap or micro-cap stocks with a market cap below $2 billion.

As companies have started to announce Q2 earnings, buyback activity has picked up some momentum with thirteen announcements last week in contrast to three announcements made in the previous week.

Top 5 Stock Buyback Announcements 

1. Pasithea Therapeutics Corp. (KTTA): $0.61

On July 20, 2023, the Board of Directors of this biotechnology company authorized the repurchase of up to approximately 5.7 million shares of the Company’s outstanding common stock, through a $4.0 million tender offer at an anticipated cash purchase price of $0.70 per share. This is equal to 21.82% of its market cap at announcement.

2. Wells Fargo & Company (WFC): $45.48

On July 25, 2023, the Board of Directors of this financial services company approved a new $30 billion share repurchase program, equal to around 17.58% of its market cap at announcement.

3. Armstrong World Industries, Inc. (AWI): $78.03

 On July 19, 2023, the Board of Directors of this ceiling products manufacturer authorized an additional $500 million share repurchase program, equal to around 14.93% of its market cap at announcement.

4. MasterCraft Boat Holdings, Inc. (MCFT): $30.45

 On July 24, 2023, the Board of Directors of this recreational powerboat manufacturer authorized a new $50 million share repurchase program, equal to around 10% of its market cap at announcement.

5. First BanCorp. (FBP): $14.07

 On July 24, 2023, the Board of Directors of this bank authorized a new $225 million share repurchase program, equal to around 8.76% of its market cap at announcement.

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