Armstrong World reported 11% year over year decline in 3Q13
earnings to $0.87 per share. Higher labor costs associated with
added crews at several solid wood plants to meet increased demand,
and increased manufacturing and input costs dragged down the
profits despite a rise in revenues. The company trimmed full-year
2013 sales and EPS guidance due to ongoing challenges in the Wood
business and volume declines in commercial markets in the U.S. and
Europe. Furthermore, raw material inflation remains a concern.
Nevertheless, Armstrong World will benefit from its investment in
Asia, recovery in residential construction, pricing initiatives and
share repurchases. Thus, we initiate our coverage on Armstrong
World with a Neutral recommendation and set a target price of
Incorporated in 1891 and based in Pennsylvania, Armstrong World
Industries, Inc. (AWI) is a leading global producer of flooring
products and ceiling systems used primarily in the construction and
renovation of residential, commercial and institutional buildings.
The company designs, manufactures and sells flooring products
(mainly resilient and wood) and ceiling systems (mostly mineral
fiber, fiberglass and metal) across the globe.
As of Sep 31, 2012, the company operated 35 manufacturing plants
in 8 countries, including 20 plants located throughout the U.S. In
addition, through its joint venture with Worthington Industries,
Inc. Worthington Armstrong Venture (WAVE) the company has an
interest in eight additional plants located in six countries. These
plants are engaged in the production of suspension system (grid)
products for Armstrong's ceiling systems.
The major markets the company caters to are -
North American Residential The company's ceiling and wood
flooring products are used in new home construction and home
North American Commercial Ceilings and Resilient Flooring are
used in commercial and institutional buildings both for new
construction as well as renovation.
Outside of North America Most of the revenues generated outside
North America come from new constructions and renovations in the
commercial sector in Europe.
The company reports the performance of its business under the
following operating segments Building Products, Resilient Flooring,
Wood Flooring and Unallocated Corporate.
Building Products (Approximately 46% of total third-quarter 2013
revenue) produces suspended mineral fiber, soft fiber and metal
ceiling systems for use in commercial, institutional and
residential settings and its products are sold worldwide. The
segment also sources complementary ceiling products.
Resilient Flooring (Approximately 34%) produces and sources a
wide range of floor coverings mainly for homes, and commercial and
institutional buildings. The products are sold globally and the
portfolio includes vinyl sheet, vinyl tile and linoleum flooring.
In addition, the segment sources and sells laminate flooring
products, vinyl tile products, vinyl sheet products, adhesives, and
installation and maintenance materials and accessories. .
Wood Flooring (Approximately 20%) produces and sources wood
flooring products for use in new residential construction and
renovation. It also finds usage in some commercial applications in
stores, restaurants and high-end offices. The product offering
includes pre-finished solid and engineered wood floors in various
wood species and related accessories. The company derives almost
the entire Wood Flooring revenues from North America.
Unallocated Corporate includes assets, liabilities, income and
expenses that have not been allocated to the business units.
Balance sheet items classified as Unallocated Corporate are mainly
income tax related accounts, cash and cash equivalents, the
Armstrong brand name, the U.S. prepaid pension cost and long-term
debt. Expenses for the corporate departments and certain benefit
plans are allocated to the reportable segments based on known
metrics, such as specific activity, headcount or net sales. The
remaining items, which cannot be attributed to the reportable
segments without a high degree of generalization, are reported in
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