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Rating Action:

Moody's changes Armstrong's rating outlook to stable from positive

21 Nov 2017

New York, November 21, 2017 -- Moody's Investors Service ("Moody's") changed Armstrong World Industries, Inc.'s (Armstrong) rating outlook to stable from positive following the company's recent announcement that it is selling its EMEA and Pacific Rim businesses and operations to Knauf International GmbH (Knauf ) for net cash of approximately $250 million. Most cash proceeds will be returned to shareholders, rather than repaying debt. Larger payments to shareholders reflects a more aggressive financial strategy than Moody's previous expectations. Additionally, by selling its operations outside North America the company is further reducing its scale and geographic diversification. In related rating actions, Moody's affirmed Armstrong's B1 Corporate Family Rating, its B1-PD Probability of Default Rating, and B1 ratings assigned to the company's bank credit facilities. The Speculative Grade Liquidity Rating is affirmed at SGL-1 as well.

Armstrong recently announced that it is selling its international businesses, including overseas operations of its WAVE joint venture, to Knauf for an enterprise value of $330 million, nearly 13x adjusted EBITDA for the combined Armstrong and WAVE businesses. The agreement includes the businesses and operations of the WAVE joint venture in EMEA and the Pacific Rim, as well as Armstrong France and WAVE France. Armstrong will realize approximately $250 million in net cash. Closing is anticipated in mid-2018.

The following ratings/assessments are affected by this action:

» Corporate Family Rating affirmed at B1;

» Probability of Default Rating affirmed at B1-PD;

» Senior Secured Revolving Credit Facility due 2021 affirmed at B1 (LGD3);

» Senior Secured Term Loan A due 2021 affirmed at B1 (LGD3);

» Senior Secured Term Loan B due 2023 affirmed at B1 (LGD3);

» Speculative Grade Liquidity Rating affirmed at SGL-1.

» Outlook, Changed to Stable from Positive

RATINGS RATIONALE

Change in rating outlook to stable from positive reflects a more aggressive financial policy towards shareholder friendly activities than previously anticipated. In addition to most of net proceeds from the asset sale going to shareholders, Armstrong has authorization to repurchase up to an additional $280 million of its common stock, further benefiting shareholders. Since inception of its share repurchase program in July 2016, Armstrong has spent $119.1 million. Lower levels of revenues and resulting earnings without debt reduction supports stabilization of ratings as well.

Armstrong's B1 Corporate Family Rating can accommodate ongoing shareholder friendly activities such as potential dividends and share repurchases, despite loss of overseas earnings and resulting cash flows. Pro forma revenues excluding international business will decline by almost 33% to approximately $875 million for LTM 3Q17 versus $1.3 billion. Adjusted debt-to-EBITDA on pro forma basis worsens to about 3.1x from 2.8x at September 30, 2017. Consistent with Moody's standard adjustments, we add an additional $140 million to balance sheet debt for pension liabilities and operating lease commitments. Moody's estimates pro forma EBITA margins actually improving to nearly 30% from 21% for LTM 3Q17, indicating that Armstrong's overseas operations were low margin business relative to its North American operations.

Armstrong's ratings benefit from sound fundamentals for US private non-residential construction, main driver of Armstrong's revenues and resulting earnings. Our performance expectations for commercial construction considers trends in The Architectural Billings Index, or ABI, a key indicator of future expectations for construction projects amongst architects published by the American Institute of Architects. The ABI Index trended up in October, to 51.7 from 49.1 in September. The index has been above 50 for ten of the past 12 months, indicating an aggregate increase in billings, and illustrating that nonresidential construction has upside potential. Armstrong's financial performance and favorable operating leverage continue to produce robust profit margins. We anticipate EBITA margins improving to about 30%, in-line with current pro forma performance. The domestic operations of WAVE JV, Worthington Armstrong Venture, remain a critical earnings and cash flow contributor.

Armstrong's very good liquidity profile characterized by free cash flow generation and revolver availability is a credit enhancer, giving it financial flexibility to contend with high levels of shareholder friendly activities. Armstrong has an extended maturity profile with nearest maturity in 2019, when its securitization facility expires, followed by its revolver credit facility and Term Loan A coming due in 2021. Term loan amortization is $32.5 million in 2018, but remains very manageable relative to free cash flow generation.

Nevertheless, Armstrong's credit quality is constrained by its lack of scale with pro forma revenues about $0.8 billion, geographic and single-product concentrations, highly competitive markets, which could create operating and financial pressures, and longer-term uncertainty related to end market cyclicality. Ongoing share repurchases reduces cash that otherwise could be used for liquidity or debt reduction. However, we expect the program tempered should acquisitions occur or economic conditions deteriorate. Armstrong may pursue debt-financed acquisitions, boosting earnings with low costs of capital. ValueAct Group, an activist shareholder, has a sizeable ownership position and will influence future actions towards maximizing shareholder returns.

Positive rating actions over intermediate term is unlikely, since we anticipate more shareholder-friendly activities. Despite solid credit metrics, Armstrong's business profile characterized by small revenue base and geographic and single-product concentrations are significant credit constraints and difficult to overcome. However, Armstrong's ratings could be upgraded if revenues were to approach $1.3 billion while maintaining current debt credit metrics.

A downgrade is not anticipated over the next 12 to 18 months. However, negative rating pressures will result if Armstrong performs below Moody's expectations, resulting in the following credit metrics (ratios include Moody's standard adjustments) and characteristics:

» Debt-to-EBITDA sustained above 4.5x

» EBITA-to-interest expense remains below 3.5x

» Deterioration in liquidity profile

» Large shareholder distributions

» Large debt-financed acquisitions

The principal methodology used in these ratings was Global Manufacturing Companies published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Armstrong World Industries, Inc. ("Armstrong"), headquartered in Lancaster, PA, is a North American manufacturer and distributor of ceiling systems used in construction and renovation of commercial and institutional buildings. ValueAct Group is the majority shareholder of Armstrong, owning about 17% of the company's stock. Pro forma revenues excluding international operations for the 12 months through September 30, 2017 totaled approximately $870 million.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Peter Doyle
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Glenn B. Eckert
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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