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Rating Action:

Moody's upgrades Armstrong's CFR to Ba3; rating outlook stable

29 Jan 2019

New York, January 29, 2019 -- Moody's Investors Service, ("Moody's") upgraded Armstrong World Industries, Inc.'s ("Armstrong") Corporate Family Rating to Ba3 from B1 and its Probability of Default Rating to Ba3-PD from B1-PD. Moody's projects financial performance and resulting key debt credit metrics improving over the next 12 to 18 months, warranting higher ratings. In related rating actions, Moody's upgraded the company's senior secured bank credit facility to Ba3 from B1, and affirmed its SGL-1 Speculative Grade Liquidity Rating. Rating outlook is stable.

The following ratings/assessments are affected by today's action:

Upgrades:

..Issuer: Armstrong World Industries, Inc.

.... Probability of Default Rating, Ba3-PD from B1-PD

.... Corporate Family Rating, Ba3 from B1

....Senior Secured Bank Credit Facility, Ba3 (LGD3) from B1 (LGD3)

Outlook Actions:

..Issuer: Armstrong World Industries, Inc.

....Outlook, Remains Stable

Affirmations:

..Issuer: Armstrong World Industries, Inc.

.... Speculative Grade Liquidity Rating, Affirmed SGL-1

RATINGS RATIONALE

The upgrade of Armstrong's Corporate Family Rating to Ba3 from B1 results from Moody's expectations of better debt credit metrics due to a combination of growing revenues, strong operating margins, while maintaining conservative financial policies. Moody's projects by mid-2020 revenues approaching $1.1 billion, EBITA margin remaining around 28%, in-line with current performance, and resulting interest coverage, measured as EBITA-to-interest expense, staying above 6.0x over same time horizon. Moody's forecasts debt-to-EBITDA declining to about 2.4x by mid-2020 from 2.7x at September 30, 2018, and free cash flow-to-debt in excess of 23% over same time period (all ratios includes Moody's standard adjustments). Low cash interest payments of approximately $33 million per year are major contributor to free cash flow generation.

Fundamentals for U.S. private non-residential construction, main driver of Armstrong's revenues and resulting earnings, remain sound and supports growth. 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 trended down in December 2018 to 50.4 from 54.7 in November 2018. Index readings over 50 indicate an aggregate growth in billings. Over the next 12 to 18 months, we anticipate the index will continue to suggest reasonable end market demand.

However, risks remain. Although sound now, U.S. non-residential private construction activity is cyclical. Its embedded volatility poses a credit risk to Armstrong. This market could contract quickly and have a negative impact on the company's financial profile. An economic downturn would weaken cash flows and debt service capabilities. Also, Moody's believes that Armstrong may use higher level of capital deployment for share repurchases. From July 29, 2016, initiation of share repurchase program, through 3Q18, Armstrong has spent approximately $350.2 million for share repurchases, capital that could otherwise be deployed towards reducing debt and improving company's balance sheet or enhancing liquidity. Moody's projections include share repurchases similar to the level for the previous year. However, we believe future share repurchases will be tempered by economic conditions, acquisitions, and free cash flow generation.

Armstrong's business profile, characterized by limited revenue base and focus on ceiling systems, are credit constraints and difficult to overcome. Armstrong is a small company in terms of revenues. When compared with other manufacturers, average revenue for "Ba" rated companies under the Global Manufacturing Companies Methodology is in excess of $3.25 billion, over three times our projected revenues for Armstrong. Despite great operating margins, Armstrong's revenue base limits absolute levels of earnings, which may constrain financial flexibility in a downturn and dictates that the company maintain a low amount of debt in its capital structure. In addition, Armstrong focuses on ceiling systems sold into competitive markets. Combination of each creates a business profile that is difficult to overcome.

Armstrong's SGL-1 Speculative Grade Liquidity Rating reflects our view that the company will maintain a very good liquidity profile over next 12 months, generating free cash flow throughout the year. It has the ability to generate free cash flow in each of its fiscal quarters, though the company generates most cash flows in second half of each calendar year. Cash on hand totaled $327 million at September 30, 2018, and is more than sufficient to meet any shortfall in operating cash flow, as well as support growth of working capital and capital expenditures. Augmenting cash flows and cash is significant availability under Armstrong's $200 million revolving credit facility expiring in 2021.

The stable rating outlook reflects our expectations that Armstrong's credit profile, such as EBITA Margins continuing above 15%, will remain supportive of its Ba3 Corporate Family Rating over the next 12 to 18 months.

Positive rating actions could ensue if Armstrong's operating performance improves and yields the following credit metric (ratio incorporates Moody's standard adjustments) and characteristics:

» Revenues nearing $1.5 billion

» EBITA margins remaining above 20%

» Debt-to-EBITDA sustained below 2.5x

» Maintenance of very good liquidity

» Ongoing trends in end markets that support growth

Negative rating actions could ensue if Armstrong's operating performance deteriorates, resulting in credit metrics (all ratios incorporate Moody's standard adjustments) or characteristics such as:

» EBITA margins below 15%

» Debt-to-EBITDA sustained above 3.5x

» Significant deterioration in company's liquidity

» Large debt-financed acquisitions

» Greater than anticipated share repurchases

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., headquartered in Lancaster, PA, is a North American manufacturer and distributor of ceiling systems used in construction and renovation of commercial and institutional buildings. Revenues for the 12 months through September 30, 2018 approximate $950 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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