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(Exact name of Registrant
as specified in its charter)
iDelaware
i47-4303305
(State
or other jurisdiction of incorporation or organization)
(I.R.S. employer Identification number)
i1770 Hempstead Road
i17605
iLancaster
iPennsylvania
(Address
of principal executive offices)
(Zip Code)
i(717)
i672-9611
(Registrant’s
telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon
Stock, $0.0001 par value
iAFI
iNew York Stock Exchange
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYesþ No ¨
Indicate by check mark whether the
registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that registrant was required to submit such files.) iYesþ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,
a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☐
iNon-accelerated
filer
☑
Smaller reporting company
i☑
Emerging growth company
i☐
If
an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes i☐
No þ
Unless the context requires otherwise, "AFI," the "Company,""we,""our," or "us" refers to Armstrong Flooring Inc., a Delaware corporation and its consolidated subsidiaries. The Company also uses several other terms in this Quarterly Report on Form 10-Q, which are further defined below:
Certain statements in this Quarterly Report on Form 10-Q and the documents incorporated by reference may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995. Those forward-looking statements are subject to various risks and uncertainties and include all statements that are not historical statements of fact and those regarding our intent, belief or expectations, including, but not limited to, our expectations concerning our commercial and residential markets and their effect on our operating results, and our ability to increase revenues, income and earnings before interest, taxes, depreciation and amortization. Words such as “anticipate,”“expect,”“intend,”“plan,”“target,”“project,”“predict,”“believe,”“may,”“will,”“would,”“could,”“should,”“seek,”“estimate” and similar expressions are intended to identify such forward-looking statements. These statements are based on management’s current expectations and beliefs and are
subject to a number of factors that could lead to actual results materially different from those described in the forward-looking statements. Although we believe that the assumptions underlying the forward-looking statements are reasonable, we can give no assurance that our expectations will be attained. Factors that could have a material adverse effect on our financial condition, liquidity, results of operations or future prospects or which could cause actual results to differ materially from our expectations include, but are not limited to:
•execution of strategy;
•competition;
•availability and costs of raw materials and energy;
•key customers;
•construction
activity;
•liquidity;
•debt covenants;
•debt;
•pandemics, epidemics or other public health emergencies such as the outbreak of COVID-19;
•global economic conditions;
•international operations;
•environmental and regulatory matters;
•information systems and transition services;
•personnel;
•intellectual
property rights;
•claims and litigation;
•labor;
•outsourcing; and
•other risks detailed from time to time in our filings with the SEC, press releases and other communications, including those set forth under “Risk Factors” included in our Annual Report on Form 10-K and in the documents incorporated by reference.
Such forward-looking statements speak only as of the date they are made. We expressly disclaim any obligation to release publicly any updates or revisions to any
forward-looking statements to reflect any change in our expectations with regard thereto or change in events, conditions or circumstances on which any statement is based.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in millions,
except per share data)
NOTE 1. iBUSINESS AND BASIS OF PRESENTATION
Background
Armstrong
Flooring, Inc. is a leading global producer of resilient flooring products for use primarily in the construction and renovation of residential, commercial, and institutional buildings. AFI designs, manufactures, sources and sells resilient flooring products in North America and the Pacific Rim.
i
Basis of Presentation
These Condensed Consolidated Financial Statements are prepared in accordance with U.S. GAAP. The condensed consolidated financial statements include management estimates and judgments, where appropriate. Management uses estimates
to record many items including allowances for expected credit losses, inventory obsolescence, lower of cost or market or net realizable value charges, warranty reserves, sales-related accruals, pension and post-retirement liabilities, workers compensation, general liability and environmental claims and income taxes. When preparing an estimate, management determines the amount based upon the consideration of relevant information. Management may confer with outside parties, including outside counsel. Actual results may differ from these estimates. In the opinion of management, all adjustments of a normal recurring nature have been included to provide a fair statement of the results for the reporting periods presented. Operating results for the three and six months ended June 30, 2021 and 2020 included in this Quarterly Report on Form 10-Q are unaudited. Quarterly results
are not necessarily indicative of annual results, primarily due to the seasonality of the business and the possibility of changes in economic conditions between periods.
The accounting policies used in preparing the condensed consolidated financial statements in this Quarterly Report on Form 10-Q are the same as those used in preparing the Consolidated Financial Statements for the year ended December 31, 2020. These statements should therefore be read in conjunction with the Consolidated Financial Statements and notes that are included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
All significant intercompany transactions within AFI have been eliminated
from the condensed consolidated financial statements.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform with current year classifications.
i
Recently Adopted and Recently Issued Accounting Standards
On January 1, 2021 we adopted ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes."This
new standard eliminates certain exceptions in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, guidance on accounting for franchise taxes and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes. The adoption of the standard did not have a material impact on our financial condition, results of operations or cash flows.
There are no additional accounting standards that have been issued and become effective for the Company at a future date which are expected to have a material impact on our financial condition, results of operations or cash flows.
Less:
allowance for product claims, discounts, returns and losses
(i20.6)
(i18.4)
Total
accounts and notes receivable, net
$
i58.9
$
i43.0
(a)
Miscellaneous receivables primarily relate to insurance receivables, the current portion of a distributor note receivable and tax claim receivables not included in Customer trade account receivable.
/
Allowance for product claims, which is a portion of the allowance for product claims, discounts, returns and losses, represents expected reimbursements for cost associated with warranty repairs and customer accommodation claims, the majority of which is provided to our independent distributors through credits against customer trade accounts receivable from the independent distributor to AFI.
i
The
following table summarizes the activity for the allowance for product claims:
On
March 10, 2021the Company sold its South Gate Facility, previously classified as assets held-for-sale, for a purchase price of $i76.7 million. The Company received proceeds of $i65.3
million, net of fees, expenses and certain amounts held in an environmental-related escrow account. The Company realized a gain of $i46.0 million during the three months ended March 31, 2021 on the sale. At December 31, 2020, the Company had classified as Assets held-for-sale, $i17.8
million of primarily land and buildings related to the South Gate Facility that met all related criteria under U.S. GAAP.
During the three months ended June 30, 2021, the Company accelerated $i3.3 million of depreciation expense for property, plant and equipment for which no future alternative use was identified as part of the
Company's business transformation initiatives.
NOTE 5. iLEASES
The Company's leases, excluding short-term leases, have remaining terms of less than one year to iten
years, some of which include options to extend for up to iten years or more. The exercise of lease renewal options is at our sole discretion. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
i
The
following table summarizes components of lease expense:
Cash paid for amounts included in the measurement of lease liabilities:
Operating
cash flows from operating leases
$
i2.2
$
i2.8
Financing
cash flows from finance leases
i0.2
i0.2
ROU
assets obtained in exchange for lease obligations:
Operating leases
i12.3
i1.1
Finance
leases
i0.1
i0.3
/
During
the six months ended June 30, 2021, the Company added $i11.6 million of additional ROU assets related to the commencement of the Technical Center and Headquarters leases.
i
The
following table summarizes weighted average remaining lease term and weighted average discount rate:
Other
financing payable (including finance leases)
i0.9
i0.7
Total
principal balance outstanding, long-term debt
i55.5
i78.1
Less:
Deferred financing costs
(i5.9)
(i6.7)
Long-term
debt, net of unamortized debt issuance costs:
i49.6
i71.4
Total
$
i59.3
$
i79.8
/
Upon
the sale of our South Gate Facility, we made a mandatory payment of $i20.0 million to Pathlight Capital L.P. towards the principal balance on our Term Loan Facility as required by the Term Loan Agreement. As part of the mandatory payment, we paid an additional $i0.4
million in prepayment premium fees. Additional proceeds from the South Gate Facility sale were applied to outstanding borrowings under our Amended ABL Credit Facility. Upon completion of the sale, the temporary $i30.0 million restriction on available liquidity under the Amended ABL Credit Facility was removed.
During March 2021, we entered a new line of credit in China. The new credit limit is $i9.3
million with a one-year maturity date and a variable interest rate of i3.85% to i4.35%. The loan is secured by the land and building of our Chinese
facility.
The
caption Other assets on the Company's Condensed Consolidated Balance Sheets include prepaid pension assets of $i6.1 million and $i1.1
million at June 30, 2021 and December 31, 2020, respectively.
We expect to contribute an additional $i1.9 million to our U.S. postretirement benefit plans for the remainder of 2021.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in millions, except per share data)
NOTE 9. iFINANCIAL
INSTRUMENTS
The fair value of cash, accounts and notes receivable, trade accounts payable and accrued expenses approximate their carrying amounts due to the short-term maturities of these assets and liabilities.
Fair value of all other financial instruments are as follows:
The
fair values of our net foreign currency contracts were estimated from market quotes, which are considered to be Level 1 inputs.
Borrowings under the Amended ABL Credit Facility, foreign line of credit and the Term Loan Facility are quoted in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the liability (Level 2 inputs).
We do not have any assets or liabilities that are valued using Level 3 unobservable inputs.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in millions, except per share data)
NOTE 10. iLITIGATION
AND RELATED MATTERS
Environmental Matters.
Environmental Compliance
Our manufacturing and research facilities are affected by various federal, state and local requirements relating to the discharge of materials and the protection of the environment. We make expenditures necessary for compliance with applicable environmental requirements at each of our operating facilities. These regulatory requirements continually change, therefore we cannot predict with certainty future expenditures associated with compliance with environmental requirements.
Environmental Sites
In connection with our current or legacy manufacturing operations, or those of former owners, we may from time to time become involved in the investigation, closure and/or remediation
of existing or potential environmental contamination under the Comprehensive Environmental Response, Compensation and Liability Act, and state or international Superfund and similar type environmental laws. For those matters, we may have rights of contribution or reimbursement from other parties or coverage under applicable insurance policies; however, we cannot predict with certainty the future identification of or expenditure for any investigation, closure or remediation of any environmental site.
Summary of Financial Position
There were ino
material liabilities recorded as of June 30, 2021 and December 31, 2020 for potential environmental liabilities that we consider probable and for which a reasonable estimate of the probable liability could be made.
Other Claims
We are involved in various lawsuits, claims, investigations and other legal matters from time to time that arise in the ordinary course of conducting business, including matters involving our products, intellectual property, relationships with suppliers, relationships with distributors, relationships with competitors, employees and other matters. For example, we are currently a party to various litigation matters that involve product liability, tort liability and other claims under a wide range of allegations, including illness due to exposure to certain chemicals
used in the workplace, or medical conditions arising from exposure to product ingredients or the presence of trace contaminants. In some cases, these allegations involve multiple defendants and relate to legacy products that we and other defendants purportedly manufactured or sold. We believe these claims and allegations to be without merit and intend to defend them vigorously. For these matters, we also may have rights of contribution or reimbursement from other parties or coverage under applicable insurance policies.
On November 15, 2019, a shareholder filed a putative class action complaint in the United States District Court for the Central District of California alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5, promulgated thereunder, based on alleged false and/or misleading statements or omissions made between March
6, 2018 and November 4, 2019. On March 2, 2020, the court issued an order appointing a lead plaintiff and lead counsel. On July 2, 2020, the lead plaintiff filed an amended complaint asserting similar violations and expanding the alleged class period to cover alleged false and/or misleading statements or omissions made between March 6, 2018 and March 3, 2020. On August 17, 2020, the Company moved to dismiss the amended complaint, and the lead plaintiff filed an opposition on October 1, 2020. On November
30, 2020, the Company reached a settlement in principle to fully resolve this matter. The settlement agreement provides in part for a settlement payment of $i3.75 million in exchange for the dismissal and a release of all claims against the defendants. Neither the Company nor any individual defendant admits any wrongdoing through the settlement agreement. The $i3.75
million settlement payment was paid by our insurance provider under our relevant insurance policy. On January 15, 2021, the lead plaintiff filed a motion for preliminary approval of the settlement. On February 23, 2021, the court granted preliminary approval of the settlement, preliminary certification of the settlement class and approval to provide notice to the class. On July 20, 2021 the court entered judgement approving the class action settlement and issued an order dismissing the case in its entirety with prejudice. The Company has recognized a corresponding $i3.75
million insurance receivable and $i3.75 million accrued expense related to this matter in the captions Accounts and notes receivable, net and Accounts payable and accrued expenses on the Consolidated Balance Sheets as of June 30, 2021.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in millions, except per share data)
While complete assurance cannot be given to the outcome of these proceedings, we do not believe that any of these matters, individually or in the aggregate, will have a material adverse effect on our financial condition, results of operations, or cash
flows.
NOTE 11. iREVENUE
We disaggregate revenue based on customer geography as geography represents the most appropriate depiction of how the nature, timing and uncertainty of revenues and cash flows are impacted by economic factors.
i
The
following table presents our revenues disaggregated by geographic area based upon the location of the customer.
For
the three months ended June 30, 2021 we recognized an income tax expense related to various foreign jurisdictions.
For the six months ended June 30, 2021 we recognized an income taxbenefit consisting of a U.S. income tax benefit offset by foreign income tax expense from various jurisdictions. The U.S. income tax benefit relates to a reduction in the Company’s deferred tax liabilities due to the sale of the South Gate Facility.
For the three months and six months ended June 30, 2020, we recognized an income tax benefit consisting
of a U.S. income tax benefit and a foreign income tax expense from various jurisdictions. The U.S. income tax benefit relates to a reduction in our valuation allowance due to the tax impact of the gains in other comprehensive income.
As of June 30, 2021, we consider foreign unremitted income to be permanently reinvested.
Weighted
average common shares, vested not yet issued
i255,592
i346,845
i252,060
i331,987
Weighted
average common shares outstanding - Basic
i21,941,454
i21,921,440
i21,929,509
i21,883,011
Dilutive
impact of stock-based compensation plans
i—
i—
i158,570
i—
Weighted
average common shares outstanding - Diluted
i21,941,454
i21,921,440
i22,088,079
i21,883,011
Income
(loss) per share of common stock:
Basic income (loss) per share of common stock
$
(i0.89)
$
(ii0.29/)
$
i0.35
$
(i0.89)
Diluted
income (loss) per share of common stock
(i0.89)
(ii0.29/)
ii0.35/
(i0.89)
/
In
periods when there is a net loss, diluted loss per share is calculated using weighted average common shares outstanding, as inclusion of potentially dilutive common shares would be anti-dilutive.
Performance-based employee compensation awards are considered potentially dilutive in periods in which the performance conditions are met.
The following stock-based compensation awards were excluded from the computation of diluted income (loss) per share of common stock:
Potentially dilutive common shares excluded from diluted computation, as inclusion would be anti-dilutive or because performance conditions were not met
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in millions, except per share data)
The amounts reclassified from Accumulated other comprehensive (loss) and the affected line item of the Condensed Consolidated Statements of Operations are presented in the table below.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion supplements and should be read in conjunction with the accompanying unaudited condensed consolidated financial statements as well as the audited consolidated financial statements of the Company, including the notes thereto, included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2020, which includes additional information about the
Company's critical accounting policies, contractual obligations, and transactions that support the financial results and provides a more comprehensive summary of the Company's outlooks, trends and strategies for 2021 and beyond.
Executive Overview
We are a leading global producer of flooring products for use primarily in the construction and renovation of commercial, residential and institutional buildings. We design, manufacture, source and sell resilient flooring products primarily in North America and the Pacific Rim. As of June 30, 2021, we
operated seven manufacturing plants in three countries, including five manufacturing plants located throughout the U.S. (Illinois, Mississippi, Oklahoma and two in Pennsylvania) and one plant each in China and Australia.
During early 2020, we established a multi-year strategic roadmap to transform and modernize our operations to become a leaner, faster-growing and more profitable business. The transformation encompasses three critical objectives: (i) expanding customer reach; (ii) simplifying product offerings and operations; and (iii) strengthening core capabilities. In addition, we have implemented a new operating model to more effectively accomplish these objectives by: (i) placing customers first by aligning services and products through a more seamless value chain; (ii) leading the industry in product innovation; (iii) simplifying processes and operating complexity to become
more competitive and efficient; (iv) realigning the go-to-market model to reach all relevant channels and customers; (v) implementing system changes to improve operations, reduce costs and reignite organic growth; and (vi) investing thoughtfully with a return-focused mindset. The goal of this focused strategy is to transform and modernize AFI, resulting in a company that is more agile, faster-growing and more profitable.
Building on the positive momentum and achievements from the prior year, during 2021, despite experiencing inflationary and supply chain headwinds, we have (i) completed the phased relocation of our new corporate headquarters and Technical Center including a first-of-its-kind design center to showcase our full capabilities, with expected cost savings of approximately 60% when fully annualized; (ii) launched several new key products including additions to the American
Charm collection and the introduction of NexProTM, NexproTM XMB, and Rest & RefugeTM; (iii) commenced shipments from the Company's new fully operational west coast distribution center; (iv) continued to execute on our multichannel go-to-market strategy, including expanded rebranding initiatives and the launch of the new distributor-driven Armstrong® Flooring SignatureTM brand and the Armstrong® Flooring ProTM brand that is focused on the builder and multi-family channels; (v) continued initiatives aimed at improving manufacturing efficiency and customer experiences; (vi) continued to make investments in both talent and process improvements; and (vii)
made our initial sales to the hospitality channel in the second quarter.
On March 10, 2021 we completed the sale of our South Gate Facility for a total purchase price of $76.7 million. The Company received proceeds of $65.3 million, net of fees, expenses and certain amounts held in an environmental-related escrow account. The Company recognized a gain of $46.0 million on the sale. Concurrent with the sale, the Company paid $20.4 million to Pathlight Capital L.P., including a $20.0 million mandatory repayment of our Term Loan Facility and $0.4 million of prepayment premium fees. Additionally,
upon completion of the sale, the temporary $30.0 million restriction on available liquidity under the Amended ABL Credit Facility was removed.
COVID-19
As the COVID-19 pandemic continues, we have seen the overall impact on our business decline. However, we remain committed to safeguarding our employees and the communities in which we operate, while continuing to deliver our products to customers. We have experienced the impact of the imbalance of global shipping capacity and demand which has led to delays in the receipt of goods from China and Vietnam at U.S. ports. Additionally, while overall economic activity has improved, some of our customers' commercial projects in the retail, office, medical and educational sectors continue to be postponed. These factors have led to a softer demand environment in certain states and channels. The
ultimate duration and impact of the pandemic on our future results is unknown.
Looking forward, the Company remains committed to profitable growth over the medium and long-term; however, results will continue to be
negatively impacted by inflation, supply chain disruptions and the timing of price increases as well as COVID-19 in 2021, primarily in the commercial markets served by the Company as well as costs associated with Company's on-going business transformation initiatives. The Company's view for the remainder of 2021 is supported by the below factors, which should be considered in the context of other risks, trends and strategies described in the Company's Annual Report on Form 10-K for the year ended December 31, 2020:
•The
Company expects sales to improve during the full year 2021 compared to 2020 as a result of decreased COVID-19 pressures, the impact of recently announced price increases, continued expansion into additional market segments, and positive trends in residential end markets and new product introductions.
•Operating results in the short-term will be negatively impacted by incremental expenses necessary to execute the Company's business transformation initiatives. This includes anticipated higher Selling, general and administrative expenses, primarily during the remainder of 2021, to support the Company's go-to-market changes. Funding for these initiatives will be aided by the deployment of capital associated with the sale of the
Company's South Gate Facility.
•As the Company navigates 2021, it is focused on several uncertainties, which may impact operating results, including navigating the continued impact of COVID-19, inflationary and labor pressures as well as continued global logistics and shipping challenges. The global logistic and shipping challenges delayed a substantial number of anticipated order deliveries from the second quarter of 2021 until the third quarter of 2021 and the Company continues to maintain a strong backlog.
•During the second quarter of 2021, the Company continued to
experience higher product and transportation costs, which offset a favorable product mix for the quarter. The higher product and transportation costs were driven by the unusual inflationary impacts of the transitory macro-economic recovery which have been higher than historic norms. As a result, the Company currently estimates that total product and transportation costs for the full-year 2021 will be approximately $60 million to $65 million higher than prior year on a comparable basis. The Company is committed to cost containment efforts to offset the impact of inflation and the Company's ability to manage these costs will continue to impact the
Company's gross margins, results of operations and cash flows for the remainder of 2021.
•The Company has instituted multiple price increases during the six months ended June 30, 2021. However, increased costs have outpaced the Company's price increases to this point. A third price increase has been announced for August 2021.
•As the Company continues to execute against its multi-year strategic roadmap, the primary areas of focus for 2021 continue to include: (i) continued focus on improving the customer experience while
also improving overall profitability; (ii) continued introduction of compelling products into the markets the Company serves; and (iii) expansion of existing and entry into new market segments.
Geographic Areas
See Note 11, Revenue, in Part I "Financial Statements" to the Condensed Consolidated Financial Statements for additional financial information by geographic areas.
Condensed Consolidated Results from Continuing Operations
Below is a summary of comparative results of operations for the three and six months ended June 30, 2021 and 2020:
Three
months ended June 30,
Six Months Ended June 30,
(Dollars in millions)
2021
2020
2021
2020
Net
sales
$
168.1
$
145.6
$
317.0
$
284.3
Cost of goods sold
146.9
120.9
275.9
236.3
Gross
profit
21.2
24.7
41.1
48.0
Selling, general and administrative expenses
39.5
30.3
77.6
66.9
Gain
on sale of property
—
—
(46.0)
—
Operating income (loss)
(18.3)
(5.6)
9.5
(18.9)
Interest
expense
2.8
1.2
6.3
1.8
Other expense (income), net
(2.3)
(0.5)
(4.4)
(0.9)
Income
(loss) before income taxes
(18.8)
(6.3)
7.6
(19.8)
Income tax expense (benefit)
0.7
—
(0.1)
(0.3)
Net
income (loss)
$
(19.5)
$
(6.3)
$
7.7
$
(19.5)
Net sales
Net sales by percentage
point change are shown in the table below:
Three
Months Ended June 30,
Change
Percentage Point Change Due to
(Dollars in millions)
2021
2020
$
%
Price
Volume
Mix
Currency
$
168.1
$
145.6
$
22.5
15.5
%
5.7
%
(9.9)
%
17.0
%
2.7
%
Six
Months Ended June 30,
Change
Percentage Point Change Due to
(Dollars in millions)
2021
2020
$
%
Price
Volume
Mix
Currency
$
317.0
$
284.3
$
32.7
11.5
%
4.0
%
(12.1)
%
17.5
%
2.1
%
Net
sales for the three months ended June 30, 2021 increased $22.5 million and 15.5% compared to the three months ended June 30, 2020. For the six months ended June 30, 2021, net sales increased $32.7 million and 11.5% compared to the six months ended June 30, 2020. These increases reflect growth in each region in which the Company operates. Demand improvements, favorable product mix and impacts from previously announced pricing initiatives drove sales increases in both Commercial and Residential channels, offset by supply chain disruptions (including the impact of winter storms during the first quarter of 2021) despite strong demand.
Cost
of goods sold
Cost of goods sold for the three months ended June 30, 2021 was 87.4% of net sales compared to 83.0% of net sales in the three months ended June 30, 2020. For the three months ended June 30, 2021, costs of goods sold increased $26.0 million and 21.5% compared to the three months ended June 30, 2020. For the six months ended June 30, 2021, cost of goods sold was 87.0% of net sales compared to 83.1% of net sales in the six months ended June 30, 2020. For the six months ended June 30, 2021, costs of goods sold increased $39.6 million and 16.8% compared to the six months
ended June 30, 2020. These increases were primarily attributable to volume, inflation related to the cost of freight and raw materials and supply interruptions which caused manufacturing inefficiencies. In addition, the first quarter of 2021 was impacted by manufacturing inefficiencies caused by winter storms which affected multiple manufacturing plants and the second quarter of 2021 was impacted by a $4.5 million charge, which included $3.3 million of accelerated depreciation expense for property, plant and equipment for which no alternative use was identified and a $1.2 million inventory rationalization charge related to the Company's business transformation initiatives.
Selling, general and administrative expenses for the three months ended June 30, 2021 increased $9.2 million and 30.4% compared to the three months ended June 30, 2020 and increased $10.7 million and 16.0% for the six months ended June 30, 2021. The increases in both periods were due primarily to increased headcount in our sales organization to support changes in our go-to-market strategy, higher incentive compensation accruals compared to the same periods in prior year, increased advertising and promotion costs compared to the same periods in prior year and cost reduction measures implemented during
2020, in response to the impact of COVID-19, which did not repeat during the current year. In addition, there were incremental expenses of $0.3 million and $0.8 million related to the relocation of the Company's headquarters during the three months and six months ended June 30, 2021, respectively. We expect current year costs to be more indicative of our future cost structure.
Business transformation costs
Beginning in 2018, the Company commenced a multi-year business transformation which resulted in a strategic roadmap formally announced during 2020. The multi-year roadmap encompasses three critical objectives: (i) expanding
customer reach; (ii) simplifying product offerings and operations; and (iii) strengthening core capabilities. Such costs (or gains) are included in the captions Costs of goods sold; Selling, general and administrative expenses; or Gain (loss) on sale of property on the Company's Consolidated Statements of Operations as required by U.S. GAAP. A summary of business transformation costs (or gains) included in these captions for the periods presented include:
Site
exit and relocation costs - Site exit and relocation costs include costs associated with exit or disposal activities, including asset write-downs, and non-recurring costs associated with relocation of Company operations. Costs incurred during the both the three and six months ended June 30, 2021 related to the Company's corporate headquarters relocation.
Employee termination costs - Costs of involuntary termination benefits associated with one-time benefit arrangements provided as part of an exit or disposal activity are recognized by the Company when a formal plan for reorganization is approved at the appropriate level of management and communicated to
the affected employees. The employee termination benefit costs during the three and six months ended June 30, 2020 relate to our former CFO.
Product and asset rationalization - As part the Company's on-going business transformation efforts, it may from time-to-time determine to stop producing certain products. As a result, the Company may incur accelerated depreciation charges for certain assets and inventory reserve charges to reflect inventory at estimated market value. Costs incurred during the three and six months ended June 30, 2021 related to such determinations.
Net gains - Net gains result from the sale of redundant properties (primarily land and buildings) and non-core assets. During the six months ended June 30, 2021 net gains related to the sale of our South Gate Facility which was classified as Assets held-for-sale during 2020. See Note 4, Property, Plant and Equipment, in Part I “Financial Statements” for additional discussion related to this transaction.
Interest expense
Interest expense increased $1.6 million and $4.5 million for the three and six months ended June 30, 2021, respectively, compared to the three and six months ended
June 30, 2020 due to higher interest rates on debt outstanding resulting from our June 2020 refinancing.
Other (income) expense, net
Other income increased $1.8 million and $3.5 million, respectively, for the three and six months ended June 30, 2021, respectively, compared to the three and six months ended June 30, 2020 primarily reflecting the positive impact from changes in actuarial assumptions related to defined-benefit pension and postretirement plans.
Income tax
We recorded income tax expense of $0.7 million for the three months ended June 30,
2021 compared to no income tax expense for the three months ended June 30, 2020. The 2021 expense relates to foreign income tax expense from various jurisdictions.
We recorded an income tax benefit of $0.1 million for the six months ended June 30, 2021 compared to a benefit of $0.3 million for the six months ended June 30, 2020, consisting of U.S. income tax benefit offset by a foreign income tax expense from various jurisdictions. The U.S. income tax benefit relates to a reduction in the Company’s deferred tax liabilities due to the sale of the South Gate Facility.
Liquidity
and Capital Resources
The March 2021 sale of our South Gate Facility had a significant positive effect on the Company's overall liquidity and capital resources.
Upon the sale of our South Gate Facility we made a mandatory payment of $20.0 million to Pathlight Capital L.P. towards the principal balance on our Term Loan Facility as required by the Term Loan Agreement. As part of this mandatory payment, we paid an additional $0.4 million in prepayment premium fees.
Additional proceeds from the South Gate Facility sale were applied to outstanding borrowings under our Amended ABL Credit Facility. Additionally, upon completion of the sale, the
temporary $30.0 million restriction on available liquidity under the Amended ABL Credit Facility was removed.
During March 2021, we entered into a new line of credit in China. The new credit limit is $9.3 million with a one-year maturity date and a variable interest rate of 3.85% to 4.35%. The loan is secured by the land and building of our Chinese facility. There was $i4.6 million outstanding under the new line of credit at June 30, 2021. Subsequent to entering into the new line of credit in
China, in April 2021, we repaid $3.5 million of borrowings outstanding under an existing local borrowing arrangement in China which matured in February 2021.
Cash Flow Summary
The table below shows our cash (used for) provided by operating, investing and financing activities:
Net
cash provided by (used for) operating activities
$
(i31.7)
$
(i6.9)
Net
cash provided by (used for) investing activities
i54.3
(i10.9)
Net
cash provided by (used for) financing activities
(i21.8)
i25.0
Operating
Activities - Net cash used for operating activities for the six months ended June 30, 2021 was $i31.7 million, an increase in use of $24.8 million from the six months ended June 30, 2020. The increase was the result of changes in working capital, primarily related to receivables, accounts payable and accrued expenses and the impact of the gain on the sale of the South Gate Facility, offsetting
higher net income.
Investing Activities - Net cash provided by investing activities for the six months ended June 30, 2021 was $i54.3
million, an increase of $65.2 million from the cash used for investing activities during the six months ended June 30, 2020. The increase is due to the sale of our South Gate Facility.
Financing Activities - Net cash used for financing activities for the six months ended June 30, 2021 was $i21.8 million,
a decrease of $46.8 million from net cash provided by financing activities for the six months ended June 30, 2020. The decrease was due to new term loan financing of $70.0 million in prior year and higher payments on long-term debt during 2021, offsetting lower net borrowings under the revolving credit facility.
Sources and Uses of Cash
Our primary sources of liquidity are, and we anticipate that they will continue to be, cash generated from operations and borrowings under our credit facilities. We believe these sources are sufficient to fund our capital needs, including the costs of our business transformation initiatives, planned capital expenditures and to meet our interest and other contractual obligations in the near term. Our liquidity needs for operations vary throughout the year with the majority
of our cash flows generated in the second and third quarters.
As of June 30, 2021 there were borrowings of $i9.0 million outstanding under our Amended ABL Credit Facility, while outstanding letters of credit were $6.6 million. Total net availability under the Amended ABL Credit Facility and Term Loan Facility as of June 30, 2021 was $72.3 million.
We are required
to pay a commitment fee, payable quarterly in arrears, on the average daily unused amount of the revolving Amended ABL Credit Facility, which varies according to the net leverage ratio and was 0.50% as of June 30, 2021. Outstanding letters of credit issued under the Amended ABL Credit Facility are subject to fees which will be due quarterly in arrears based on the applicable margin described above plus a fronting fee. The total rate for letters of credit was 4.125% as of June 30, 2021.
Our foreign subsidiaries had available lines of credit totaling $9.3 million and there were $4.6 million borrowings under these lines of credit as of June 30, 2021. Total
availability under these foreign lines of credit as of June 30, 2021 was $4.7 million.
Based on the foregoing, the Company had total liquidity (including Cash and cash equivalents) of $91.6 million at June 30, 2021.
Debt Covenants
The Amended ABL Credit Facility requires,
among other things, that we maintain a minimum Consolidated Cash Flow (as defined in the Amendment) for the three-fiscal quarter period ending September 30, 2020 and for any four-fiscal quarter period ending thereafter and during a Financial Covenant Trigger Period (as defined in the Amendment) and maintain a minimum Consolidated Fixed Charge Coverage Ratio (as defined in the Amendment) of at least 1.00 to 1.00.
The Term Loan Agreement contains a number of covenants that, among other things and subject to certain exceptions, restrict our ability to create liens, to undertake fundamental changes, to incur debt, to sell or dispose of assets, to make investments, to make restricted payments such as dividends, distributions or equity repurchases, to change the nature of our businesses, to enter into transactions with affiliates and to enter
into certain burdensome agreements.
At June 30, 2020, we were in compliance with all covenants.
Cash Management
The Company has various cash management systems throughout the world that centralize cash in various bank accounts where it is economically justifiable and legally permissible to do so. These centralized cash balances are then redeployed to other operations to reduce short-term borrowings and to finance working capital needs or capital expenditures. Due to the transitory nature of cash balances, they are normally invested in bank deposits that can be withdrawn at will or in very liquid short-term bank time deposits. The
Company's policy is to primarily use the banks that participate in our Amended ABL credit facility located in the various countries in which the Company operates. The Company monitors the creditworthiness of banks and when appropriate will adjust banking operations to reduce or eliminate exposure to less creditworthy banks.
At
June 30, 2021, our Cash and cash equivalents totaled $i14.6 million, of which $3.1 million was held in the U.S. and $11.5 million held by non-U.S. subsidiaries. At June 30, 2021 none of our consolidated cash and cash equivalents had regulatory restrictions that would preclude the transfer of funds with and among subsidiaries. While
our remaining non-U.S. cash and cash equivalents can be transferred with and among subsidiaries, the majority of these non-U.S. cash balances will be used to support the ongoing working capital needs and continued growth of our non-U.S. operations.
Recent Accounting Pronouncements
See Note 1, Business and Basis of Presentation, in Part I “Financial Statements” for a discussion of recent accounting pronouncements, including accounting pronouncements that are effective in future periods.
Item
3. Quantitative and Qualitative Disclosures About Market Risk
Market risks have not changed significantly from those disclosed in “Quantitative and Qualitative Disclosures About Market Risk” and included in Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The
Company maintains a system of disclosure controls and procedures to give reasonable assurance that information required to be disclosed in the Company's reports filed or submitted under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. These controls and procedures also give reasonable assurance that information required to be disclosed in such reports is accumulated and communicated to management to allow timely decisions regarding required disclosures.
As of June 30, 2021, the Company's CEO and CFO, together with management, conducted an evaluation
of the effectiveness of the Company's disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based on that evaluation, the CEO and CFO concluded that these disclosure controls and procedures are effective at the reasonable assurance level described above.
Change in Internal Controls over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that occurred during the Company's most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.†
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
