In third-quarter 2014, Armstrong World reported adjusted earnings of $0.83 per share, a 2% decline year over year, impacted by lower volumes, higher SG&A expenses and input costs. Also, its net sales fell 0.2% year over year to $728 million and came below management's guidance range. The company slashed its adjusted earnings per share outlook to the range of $2.00 $2.15. Soft demand environment, fundamental challenges across its Resilient and Wood Flooring businesses, pricing pressure and raw material inflation continue to weigh on the company's performance. Thus, we are reiterating our Underperform recommendation on Armstrong World with a target price of $43.
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 30, 2014, the company operated 34 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 renovation.
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 (Approximately 48% of revenues in the third quarter of fiscal 2014) 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 33%) 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 19%) 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 this segment.
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