ValueAct Capital's new position in Armstrong World Industries (Part 3 of 6)
Armstrong’s profits drop in 2Q
Jeff Ubben’s hedge fund ValueAct Capital disclosed in a 13D filing in August that it had acquired 9,200,000 shares, or a 16.8% stake, in Armstrong World Industries Inc. (AWI). The company also saw a new passive stake acquired by Eton Park Capital.
Armstrong World Industries stock fell at the end of last month. Its 2Q14 earnings and revenue fell short of analysts’ expectations. Revenue was up 0.5% to $710 million compared to the same quarter last year. Adjusted diluted earnings per share (or EPS) fell 1% to $0.60. Net income declined 31.4% to $21 million. AWI said that consolidated net sales increased slightly compared to the same period last year. This was driven by favorable price and product mix despite lower volumes across all businesses in the Americas and Europe. Net income and operating income declined due to increased manufacturing and input costs—driven primarily by rising lumber costs and the margin impact of lower volumes.
Adjusted earnings before interest, taxes, depreciation, and amortization (or EBITDA) was up 3% year-over-year (or YoY). It was in the middle of AWI’s guidance range despite a “softer demand environment.” It said the adjusted EBITDA increase was driven by favorable price and mix, manufacturing productivity, and higher earnings from the Worthington Armstrong Venture (or WAVE).
Armstrong closes two flooring plants in Australia and China
The company said its results were also impacted by ~$8 million for reduction and other charges. This was mainly associated with the decision to close the resilient flooring plant in Thomastown, Australia and the engineered wood flooring plant in Kunshan, China. Management said on the earnings call that its Australian facility “was no longer economically viable given the shrinking size of the Australian vinyl tile market.” It plans to provide a cost-effective service to its Australian customers from its South Gate, California plant.
On the Kunshan engineered wood flooring plant, AWI said that “this facility manufactured wood flooring utilizing veneers shipped from the U.S. scraped by hand in China and then exported back to North America for sale. Rising labor and freight costs of these products have been among the factors negatively impacting our recent segment profitability.” The company has decided to onshore this production to its Somerset, Kentucky facility. Producing the desired scraped visuals will be more cost-effective in the U.S. This move will also allow for “lower transportation costs, reduced inventory levels and better customer service.”
Seeks strategic alternatives for struggling European Resilient Flooring business
AWI’s quarterly filing also noted that the company is exploring several strategic alternatives for its European Resilient Flooring business. The segment continues to achieve lower-than-expected operating results. A decision should be made before the end of 2014. It added that the carrying value of assets for the business was $187.5 million as of June 30, 2014. The property, plant, and equipment was $90.1 million. The inventory was $69.5 million. It represented the significant majority.
U.S. construction spending declines in June
The company said in its 10K filing that the cyclical nature of commercial and residential construction activity—including construction activity funded by the public sector—is influenced by prevailing economic conditions. The conditions include the rate of growth in gross domestic product (or GDP), prevailing interest rates, government spending patterns, and investor and consumer confidence.
The Commerce Department said U.S. construction spending fell 1.8% in June on a seasonally adjusted basis after increasing by a revised 0.8% in May. Spending on housing and government projects fell while non-residential building activity declined 1.6%. For more analysis on this, please read Overview: Construction spending June 2014. Other peers that can be influenced by the trends include USG Corp. (USG), Mohawk Industries Inc. (MHK), and Interface Inc. (TILE). Investors can also gain exposure to the segment through the S&P SPDR Homebuilder ETF (XHB). Its holdings include AWI, USG, and MHK.
Browse this series on Market Realist:
- Part 1 - Overview: ValueAct Capital’s new position in Armstrong
- Part 2 - Must-know: Armstrong World Industries’ business segments
- Part 4 - Why Armstrong faces soft demand environment in certain markets
- Investment & Company Information
- Armstrong World Industries