Armstrong World Industries AWI
August 20, 2007 - 10:43am EST by
lewis530
2007 2008
Price: 37.00 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 2,100 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

Sign up for free guest access to view investment idea with a 45 days delay.

 

Description

Armstrong World Industries is trading at 8.5x free cash flow (after capex) to Enterprise Value. Soon after coming out of bankruptcy the company announced on February 15th that it would pursue strategic alternatives.  In a private equity friendly environment, the stock headed into the mid 50's where it stayed until mid-July when investors began to realize that the private equity window is shut for now.  Due to the fact that Armstrong has not marketed their story and the fact that the stock was predominantly in the hands of investors who owned it for a likely takeout, Armstrong has recently traded down to a level significantly below fair value.
 
Valuation-
Armstrong should make $2.65-2.75 in 2007 and $3.00 in 2008.  Cash EPS is greater than GAAP EPS a go forward basis as its assets were marketed up to fair value when it came out of bankruptcy.  Annual depreciation will be $25mm more than Capex.  Armstrong expects to generate $300mm in free cash flow in 2007 (Cash EPS of $5.30).
 
Armstrong has two unique assets: a large deferred tax asset and an overfunded pension.  Armstrong has a $1.6 billion NOL in the US which, starting in 2007, results in the company not paying taxes until it is fully utilized.  At the end of 2006, the company valued its deferred tax assets as $552.7mm for federal tax purposes and $45.5mm for state tax purposes. Year to date the company has deferred 45mm in taxes.  Finally the company has a $500mm overfunded pension with which a strategic buyer could fund an underfunded pension.  Not including the overfunded pension, AWI is currently trading at 5x Ebitda with commercial (2/3 of Ebit) and residential (1/3 Ebit) competitors trading at 7-8x Ebitda.
 
Background:
 
Armstrong World Industries, Inc. (AWI), incorporated in 1891, is in the design and manufacture of flooring products and ceiling systems which are primarily used in the construction and renovation of commercial, institutional and residential buildings. The company first began the business in 1860, and its initial business line included the production of cork. From manufacturing of cork they graduated to developing fiberboard, which eventually led to the current business of ceiling board. AWI also entered in the business of Linoleum Flooring in 1909. This eventually led the company to develop and market Vinyl flooring.
 
As of December 31, 2006, the Company owned and operated 43 manufacturing plants in 12 countries, including 26 plants located throughout the United States. Three of its plants are leased and the remaining 40 are owned. In addition, Armstrong had an interest through its two joint ventures in eight additional plants in five countries. AWI sells its products in more than 80 countries. The Company principally sells products through building materials distributors, who resell its products to retailers, builders, contractors, installers and others.
 
On December 6, 2000, AWI filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court, in order to use the court-supervised reorganization process to achieve a resolution of its asbestos liability. During the time in bankruptcy, the company continued to operate its normal day-to-day operations through debtor-in possession financing. Armstrong finally emerged from bankruptcy on October 2, 2006. The plan of reorganization resulted in cash payments of approximately $1.1 billion made to the Asbestos Trust and Unsecured Creditors, funded by cash from the balance sheet and the proceeds from Armstrong's $1.1 billion bank refinancing. The refinancing consisted of term loans of $300 million with a five-year maturity and $500 million seven-year maturity and a $300 million revolver.
 
 2006 Consolidated Net Sales by Segment
Resilient Flooring   33%
 Building Products  30%
Wood Flooring       22%
Wave                      9%
Cabinets                  6%
 
2006 EBIT by Segment
Resilient Flooring   5%
Building Products   54%
Wood Flooring      19%
Wave                    19%
Cabinets                3%
 
Reportable Segments:
 
Resilient Flooring:  It produces and sources a broad range of floor coverings primarily for homes and commercial and institutional buildings. Manufactured products in this segment include vinyl sheet, vinyl tile, linoleum flooring, luxury vinyl tile, automotive carpeting and other specialized textile floor products. In addition, Resilient Flooring segment sources and sells laminate flooring products, ceramic tile products, adhesives, installation and maintenance materials and accessories.
 
 

Particulars
2004
2005
2006
LTM
Sales
1,262.3
1,232.6
1,207.7
1196.8
EBIT
-44
-28.4
11.4
27.6
Operating Margin (%)
-3.5%
-2.3%
0.9%
2.3%

 
                       
Wood Flooring: It produces and sources wood flooring products for use in new residential construction and renovation, with some commercial applications in stores, restaurants and high-end offices. The product offering includes solid wood (predominantly pre-finished), pre-finished engineered wood floors in various wood species (with oak being the primary species of choice) and related accessories.
 

Particulars
2004
2005
2006
LTM
Sales
832.1
833.9
837.6
820.7
EBIT
51.4
60.9
46
46.4
Operating Margin (%)
6.2%
7.3%
5.5%
5.7%

 
 
Building Products: It produces suspended mineral fiber, soft fiber and metal ceiling systems for use in commercial, institutional and residential settings. In addition, to Building Products segment sources complementary ceiling products. Their products are available in numerous colors, performance characteristics and designs, and offer attributes such as acoustical control, rated fire protection and aesthetic appeal. Commercial ceiling materials and accessories are sold to ceiling systems contractors and to resale distributors.
 

Particulars
2004
2005
2006
LTM
Sales
971.7
1047.6
1149.5
1230.2
EBIT
95.4
109.2
130.8
155
Operating Margin
9.8%
10.4%
11.4%
12.6%

 
Cabinets: It produces kitchen and bathroom cabinetry and related products, which are used primarily in the U.S. residential new construction and renovation markets. Cabinets segment provides design, fabrication and installation services to single and multi-family homebuilders, remodelers and consumers.
 

Particulars
2004
2005
2006
LTM
Sales
213.0
212.5
230.9
240.9
EBIT
1.4
-9.7
6.3
9.3
Operating Margin
0.7%
-4.6%
2.7%
3.9%

 
Equity Investment:  Investments in affiliates of $294.6 million at December 31, 2006, reflected the equity interest in 50% investment in WAVE joint venture and 50% investment in Kunshan Holdings Limited.
 
Wave JV: Worthington Armstrong Venture (“WAVE”), a 50%-owned joint venture between Armstrong World Industries, Inc. and Worthington Industries, is one of three global manufacturers of suspension grid systems for concealed and lay-in panel ceilings in commercial and residential ceiling markets. WAVE operates seven facilities in five countries: Aberdeen, Maryland; Benton Harbor, Michigan; and North Las Vegas, Nevada, within the United States; Shanghai, the Peoples Republic of China; Team Valley, United Kingdom; Valenciennes, France; and Madrid, Spain. Armstrong also sells the suspension grid systems from which the ceilings hang, which are manufactured through the WAVE joint venture with Worthington Industries. The company has an EBITDA margin of 35% with the annual growth in revenues at 35% CAGR.  The Joint Venture is accounted under the equity method of accounting and hence the revenues of the company are not consolidated along with the company. Revenues of the Joint Venture in FY 05 were $307.7 Mn. with an EBITDA of $39.3 Mn.
 

Particulars
2004
2005
2006
LTM
Sales
278.6
307.7
348.8
361.8
EBIT
31.6
39.3
46.7
42.1
Operating Margin
11.3%
12.7%
13.3%
11.6%

 
Market Segment:
North American Residential: Nearly 50% of the total consolidated net sales of the company are for North American Residential use. They are the largest provider for vinyl and wood products. Industry estimates are that existing home renovation (also known as replacement / remodel) work represents approximately two-thirds of the total North American residential market opportunity. Sales of ceiling products for residential use follow the trend of existing home sales, with a lag between the two.
North American Commercial:Nearly 33% of the total consolidated sales of the company are for North American Commercial use.  Renovation work is estimated to represent approximately three-fourths of the total North American commercial market opportunity.  Most of the company’s revenue comes from office, education, retail and healthcare sector. Company believes revenue from construction sector lags behind by as much as one year from the start of new construction.
Non-North America: The Majority of the revenues outside America come from Europe and from commercial segment.
 
 
FY 2006 Net Sales by major markets
 

Segment
North American Residential
North American Commercial
Non-North
American
Total
Resilient Flooring
40%
30%
30%
100%
Wood Flooring
95%
5%
-
100%
Building Products
10%
50%
40%
100%
Cabinets
100%
-
-
100%

Consolidated Net Sales by Geography:
Americas      76%
Europe          20%
Pacific Rim     4%
 
Company sells their products in over 80 countries across the world.
 
Customer:
 
They principally sell products through building materials distributors, who re-sell products to retailers, builders, contractors, installersand others. In the commercial sector, they sell to several contractors and to subcontractors’ alliances. In the North American retail channel, which sells to end-users in the residential and light commercial segments, they have important relationships with national home centers such as The Home Depot, Inc. and Lowe’s Companies, Inc. In the North American residential sector, they have important relationships with major homebuilders and buying groups.  Home Depot & Lowe’s Corporation together account for more the 22% of the receivable as of December 31, 2006
  
Shares with Asbestos Trust:
The Asbestos Trust is currently funded with $750 million of cash and owns roughly 37 million shares of the new common stock AWI or almost two-thirds of the stock. The Trust began paying claims in May. If this Trust is similar to others that have preceded it, the cash funds of $750 million will be fully spent within 12–18 months. The expectation therefore is that the Trust will need to liquidate a large percentage if not all of its stock at some future point in order to both diversify its investments and gain liquidity.
 
Other Factors:
WAVE is a 50/50% JV between Worthington Industries and Armstrong formed in 1992 to build metal suspension grid systems for ceiling tiles.  The JV is accounted for under the equity method of accounting, which means that the $350mm Revenue is not reported in the top line revenue number. The profits are listed as equity earnings from joint ventures; but, if you are comparing companies on a multiple of sales, then the $350mm JV sales would be added to result in nearly 4 billion in annual sales.  The company has stated that they expect the earnings of the Wave JV to be returned to the company as a dividend going forward.
 
Quick Model
 
 
 
 
FY 2006
FY 2007
FY 2008
Net Sales
3,425.9
3,503.7
3,577.3
 
 
 
 
Cost of Sales
2,689.1
2,655.2
2,707.4
 
 
 
 
Gross Profit
736.8
848.5
869.9
GM (%)
22%
24%
24%
 
 
 
 
SG&A
561
597.0
614.6
SG&A % of Sales
16%
17%
17%
 
 
 
 
Restructuring charges, net
11.7
0.1
 
Equity (earnings) from joint venture
-46.7
-43.5
-44.0
 
 
 
 
Operating Income
210.8
294.8
299.4
OM(%)
6%
8%
8%
 
 
 
 
Depreciation & Amortization
133.4
134.3
135.2
 
 
 
 
EBITDA
344.2
429.1
434.6
Margin (%)
10%
12%
12%
 
 
 
 
 
 
 
 
Interest expense
18.6
57.6
33
Other non-operating expenses
1.3
0.8
0
Other non-operating income
-11.5
-14
-12
Chapter 11 reorganization costs, net
-1,956
0.1
0
 
 
 
 
Earnings Before Taxes
2,157.9
250.3
278.4
EBT Margin
63%
7%
8%
 
 
 
 
Income Tax
730.4
98.3
107.3
Tax Rate (%)
34%
39%
39%
 
 
 
 
Income from Continuing Operations
1,427.5
152.0
171.1
Net Margin from Continuing Ops (%)
42%
4%
5%
 
 
 
 
(Loss) from continuing operations
-69.5
-5.8
0
 
 
 
 
Net Profit
1,358.0
146.2
171.1
Net Margin (%)
40%
4%
5%
 
 
 
 
 
 
 
 
 Diluted Weighted Average Shares
 
56.5
56.8
 
 
 
 
EPS - Continuing
 
2.69
3.01
 
Balance Sheet
Cash 347mm
Debt 712mm
 
Enterprise Value=2,469.6
-350mm (Value of NOL)
2,100mm   
 
2008 Free Cash Flow Estimate
$170mm Net Income
$25mm DA-Capex
$100mm Deferred Taxes (should last until 2011/2012)
$295mm Free Cash Flow Estimate
 
Catalyst
 

Coming out of bankruptcy the asbestos trust owns 2/3rds of the shares outstanding.  It has started to make payments to the beneficiaries of the trust, so it will likely need to liquidate at least part of its position within 12 months.  Since the current credit market reduces the odds of private equity buyer, Armstrong is left with 3 options.

 

Good

1- Begin marketing the company.  Armstrong trades at a significant discount to its peer group and once people understand the story, the stock should trade up.  Eventually the asbestos trust will sell its stock in a secondary.

 

Better

2- Sell to a strategic investor.  While Armstrong was hoping to be purchased by a private equity firm in the upper $50's, the company could now go back to a strategic buyer, such as Warren Buffett's Shaw group, and try to sell the company for $50 per share.  Armstrong should be worth more to a strategic buyer since it could use Armstrong's NOL quicker and apply $500mm to an underfunded pension.  Even without utilizing the overfunded pension, a strategic investor could pay Armstrong $50 and be paying 6x next year's Ebitda, a substantial discount to peers.

 

Best

3- Armstrong buys stock back from the Asbestos trust in a $1 billion Dutch tender at $40 per share.  The company can obtain a tax refund of either 2 or 10 years of previously paid taxes.  While a discount rate would be applied, the company should get approximately $350mm in a tax refund.  The recapitalized company would have a market cap of $1,300mm and $900mm in debt.  Even in this restrictive credit environment, the company should be able to finance the debt at 9%.  Based on consensus 2008 Ebit, this buyback would result in GAAP EPS of $4.50 and cash EPS near 5.00.  After the buyback, if Armstrong traded inline with its peers, the stock would trade in the $60s.

 

* If Armstrong used the proceeds of the tax refund and the cash on their balance sheet, then Armstrong might be able to borrow $400mm at 9% while leaving the $500mm in long-term debt it currently has on its balance sheet at a 7% avg cost.  This would reduce their interest expense by $10mm and result in EPS 19 cents higher than the estimate above.  It is unclear how the covenants of the existing debt would be impacted by raising additional debt.

Catalyst

see above
    sort by    

    Description

    Armstrong World Industries is trading at 8.5x free cash flow (after capex) to Enterprise Value. Soon after coming out of bankruptcy the company announced on February 15th that it would pursue strategic alternatives.  In a private equity friendly environment, the stock headed into the mid 50's where it stayed until mid-July when investors began to realize that the private equity window is shut for now.  Due to the fact that Armstrong has not marketed their story and the fact that the stock was predominantly in the hands of investors who owned it for a likely takeout, Armstrong has recently traded down to a level significantly below fair value.
     
    Valuation-
    Armstrong should make $2.65-2.75 in 2007 and $3.00 in 2008.  Cash EPS is greater than GAAP EPS a go forward basis as its assets were marketed up to fair value when it came out of bankruptcy.  Annual depreciation will be $25mm more than Capex.  Armstrong expects to generate $300mm in free cash flow in 2007 (Cash EPS of $5.30).
     
    Armstrong has two unique assets: a large deferred tax asset and an overfunded pension.  Armstrong has a $1.6 billion NOL in the US which, starting in 2007, results in the company not paying taxes until it is fully utilized.  At the end of 2006, the company valued its deferred tax assets as $552.7mm for federal tax purposes and $45.5mm for state tax purposes. Year to date the company has deferred 45mm in taxes.  Finally the company has a $500mm overfunded pension with which a strategic buyer could fund an underfunded pension.  Not including the overfunded pension, AWI is currently trading at 5x Ebitda with commercial (2/3 of Ebit) and residential (1/3 Ebit) competitors trading at 7-8x Ebitda.
     
    Background:
     
    Armstrong World Industries, Inc. (AWI), incorporated in 1891, is in the design and manufacture of flooring products and ceiling systems which are primarily used in the construction and renovation of commercial, institutional and residential buildings. The company first began the business in 1860, and its initial business line included the production of cork. From manufacturing of cork they graduated to developing fiberboard, which eventually led to the current business of ceiling board. AWI also entered in the business of Linoleum Flooring in 1909. This eventually led the company to develop and market Vinyl flooring.
     
    As of December 31, 2006, the Company owned and operated 43 manufacturing plants in 12 countries, including 26 plants located throughout the United States. Three of its plants are leased and the remaining 40 are owned. In addition, Armstrong had an interest through its two joint ventures in eight additional plants in five countries. AWI sells its products in more than 80 countries. The Company principally sells products through building materials distributors, who resell its products to retailers, builders, contractors, installers and others.
     
    On December 6, 2000, AWI filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court, in order to use the court-supervised reorganization process to achieve a resolution of its asbestos liability. During the time in bankruptcy, the company continued to operate its normal day-to-day operations through debtor-in possession financing. Armstrong finally emerged from bankruptcy on October 2, 2006. The plan of reorganization resulted in cash payments of approximately $1.1 billion made to the Asbestos Trust and Unsecured Creditors, funded by cash from the balance sheet and the proceeds from Armstrong's $1.1 billion bank refinancing. The refinancing consisted of term loans of $300 million with a five-year maturity and $500 million seven-year maturity and a $300 million revolver.
     
     2006 Consolidated Net Sales by Segment
    Resilient Flooring   33%
     Building Products  30%
    Wood Flooring       22%
    Wave                      9%
    Cabinets                  6%
     
    2006 EBIT by Segment
    Resilient Flooring   5%
    Building Products   54%
    Wood Flooring      19%
    Wave                    19%
    Cabinets                3%
     
    Reportable Segments:
     
    Resilient Flooring:  It produces and sources a broad range of floor coverings primarily for homes and commercial and institutional buildings. Manufactured products in this segment include vinyl sheet, vinyl tile, linoleum flooring, luxury vinyl tile, automotive carpeting and other specialized textile floor products. In addition, Resilient Flooring segment sources and sells laminate flooring products, ceramic tile products, adhesives, installation and maintenance materials and accessories.
     
     

    Particulars
    2004
    2005
    2006
    LTM
    Sales
    1,262.3
    1,232.6
    1,207.7
    1196.8
    EBIT
    -44
    -28.4
    11.4
    27.6
    Operating Margin (%)
    -3.5%
    -2.3%
    0.9%
    2.3%

     
                           
    Wood Flooring: It produces and sources wood flooring products for use in new residential construction and renovation, with some commercial applications in stores, restaurants and high-end offices. The product offering includes solid wood (predominantly pre-finished), pre-finished engineered wood floors in various wood species (with oak being the primary species of choice) and related accessories.
     

    Particulars
    2004
    2005
    2006
    LTM
    Sales
    832.1
    833.9
    837.6
    820.7
    EBIT
    51.4
    60.9
    46
    46.4
    Operating Margin (%)
    6.2%
    7.3%
    5.5%
    5.7%

     
     
    Building Products: It produces suspended mineral fiber, soft fiber and metal ceiling systems for use in commercial, institutional and residential settings. In addition, to Building Products segment sources complementary ceiling products. Their products are available in numerous colors, performance characteristics and designs, and offer attributes such as acoustical control, rated fire protection and aesthetic appeal. Commercial ceiling materials and accessories are sold to ceiling systems contractors and to resale distributors.
     

    Particulars
    2004
    2005
    2006
    LTM
    Sales
    971.7
    1047.6
    1149.5
    1230.2
    EBIT
    95.4
    109.2
    130.8
    155
    Operating Margin
    9.8%
    10.4%
    11.4%
    12.6%

     
    Cabinets: It produces kitchen and bathroom cabinetry and related products, which are used primarily in the U.S. residential new construction and renovation markets. Cabinets segment provides design, fabrication and installation services to single and multi-family homebuilders, remodelers and consumers.
     

    Particulars
    2004
    2005
    2006
    LTM
    Sales
    213.0
    212.5
    230.9
    240.9
    EBIT
    1.4
    -9.7
    6.3
    9.3
    Operating Margin
    0.7%
    -4.6%
    2.7%
    3.9%

     
    Equity Investment:  Investments in affiliates of $294.6 million at December 31, 2006, reflected the equity interest in 50% investment in WAVE joint venture and 50% investment in Kunshan Holdings Limited.
     
    Wave JV: Worthington Armstrong Venture (“WAVE”), a 50%-owned joint venture between Armstrong World Industries, Inc. and Worthington Industries, is one of three global manufacturers of suspension grid systems for concealed and lay-in panel ceilings in commercial and residential ceiling markets. WAVE operates seven facilities in five countries: Aberdeen, Maryland; Benton Harbor, Michigan; and North Las Vegas, Nevada, within the United States; Shanghai, the Peoples Republic of China; Team Valley, United Kingdom; Valenciennes, France; and Madrid, Spain. Armstrong also sells the suspension grid systems from which the ceilings hang, which are manufactured through the WAVE joint venture with Worthington Industries. The company has an EBITDA margin of 35% with the annual growth in revenues at 35% CAGR.  The Joint Venture is accounted under the equity method of accounting and hence the revenues of the company are not consolidated along with the company. Revenues of the Joint Venture in FY 05 were $307.7 Mn. with an EBITDA of $39.3 Mn.
     

    Particulars
    2004
    2005
    2006
    LTM
    Sales
    278.6
    307.7
    348.8
    361.8
    EBIT
    31.6
    39.3
    46.7
    42.1
    Operating Margin
    11.3%
    12.7%
    13.3%
    11.6%

     
    Market Segment:
    North American Residential: Nearly 50% of the total consolidated net sales of the company are for North American Residential use. They are the largest provider for vinyl and wood products. Industry estimates are that existing home renovation (also known as replacement / remodel) work represents approximately two-thirds of the total North American residential market opportunity. Sales of ceiling products for residential use follow the trend of existing home sales, with a lag between the two.
    North American Commercial:Nearly 33% of the total consolidated sales of the company are for North American Commercial use.  Renovation work is estimated to represent approximately three-fourths of the total North American commercial market opportunity.  Most of the company’s revenue comes from office, education, retail and healthcare sector. Company believes revenue from construction sector lags behind by as much as one year from the start of new construction.
    Non-North America: The Majority of the revenues outside America come from Europe and from commercial segment.
     
     
    FY 2006 Net Sales by major markets
     

    Segment
    North American Residential
    North American Commercial
    Non-North
    American
    Total
    Resilient Flooring
    40%
    30%
    30%
    100%
    Wood Flooring
    95%
    5%
    -
    100%
    Building Products
    10%
    50%
    40%
    100%
    Cabinets
    100%
    -
    -
    100%

    Consolidated Net Sales by Geography:
    Americas      76%
    Europe          20%
    Pacific Rim     4%
     
    Company sells their products in over 80 countries across the world.
     
    Customer:
     
    They principally sell products through building materials distributors, who re-sell products to retailers, builders, contractors, installersand others. In the commercial sector, they sell to several contractors and to subcontractors’ alliances. In the North American retail channel, which sells to end-users in the residential and light commercial segments, they have important relationships with national home centers such as The Home Depot, Inc. and Lowe’s Companies, Inc. In the North American residential sector, they have important relationships with major homebuilders and buying groups.  Home Depot & Lowe’s Corporation together account for more the 22% of the receivable as of December 31, 2006
      
    Shares with Asbestos Trust:
    The Asbestos Trust is currently funded with $750 million of cash and owns roughly 37 million shares of the new common stock AWI or almost two-thirds of the stock. The Trust began paying claims in May. If this Trust is similar to others that have preceded it, the cash funds of $750 million will be fully spent within 12–18 months. The expectation therefore is that the Trust will need to liquidate a large percentage if not all of its stock at some future point in order to both diversify its investments and gain liquidity.
     
    Other Factors:
    WAVE is a 50/50% JV between Worthington Industries and Armstrong formed in 1992 to build metal suspension grid systems for ceiling tiles.  The JV is accounted for under the equity method of accounting, which means that the $350mm Revenue is not reported in the top line revenue number. The profits are listed as equity earnings from joint ventures; but, if you are comparing companies on a multiple of sales, then the $350mm JV sales would be added to result in nearly 4 billion in annual sales.  The company has stated that they expect the earnings of the Wave JV to be returned to the company as a dividend going forward.
     
    Quick Model
     
     
     
     
    FY 2006
    FY 2007
    FY 2008
    Net Sales
    3,425.9
    3,503.7
    3,577.3
     
     
     
     
    Cost of Sales
    2,689.1
    2,655.2
    2,707.4
     
     
     
     
    Gross Profit
    736.8
    848.5
    869.9
    GM (%)
    22%
    24%
    24%
     
     
     
     
    SG&A
    561
    597.0
    614.6
    SG&A % of Sales
    16%
    17%
    17%
     
     
     
     
    Restructuring charges, net
    11.7
    0.1
     
    Equity (earnings) from joint venture
    -46.7
    -43.5
    -44.0
     
     
     
     
    Operating Income
    210.8
    294.8
    299.4
    OM(%)
    6%
    8%
    8%
     
     
     
     
    Depreciation & Amortization
    133.4
    134.3
    135.2
     
     
     
     
    EBITDA
    344.2
    429.1
    434.6
    Margin (%)
    10%
    12%
    12%
     
     
     
     
     
     
     
     
    Interest expense
    18.6
    57.6
    33
    Other non-operating expenses
    1.3
    0.8
    0
    Other non-operating income
    -11.5
    -14
    -12
    Chapter 11 reorganization costs, net
    -1,956
    0.1
    0
     
     
     
     
    Earnings Before Taxes
    2,157.9
    250.3
    278.4
    EBT Margin
    63%
    7%
    8%
     
     
     
     
    Income Tax
    730.4
    98.3
    107.3
    Tax Rate (%)
    34%
    39%
    39%
     
     
     
     
    Income from Continuing Operations
    1,427.5
    152.0
    171.1
    Net Margin from Continuing Ops (%)
    42%
    4%
    5%
     
     
     
     
    (Loss) from continuing operations
    -69.5
    -5.8
    0
     
     
     
     
    Net Profit
    1,358.0
    146.2
    171.1
    Net Margin (%)
    40%
    4%
    5%
     
     
     
     
     
     
     
     
     Diluted Weighted Average Shares
     
    56.5
    56.8
     
     
     
     
    EPS - Continuing
     
    2.69
    3.01
     
    Balance Sheet
    Cash 347mm
    Debt 712mm
     
    Enterprise Value=2,469.6
    -350mm (Value of NOL)
    2,100mm   
     
    2008 Free Cash Flow Estimate
    $170mm Net Income
    $25mm DA-Capex
    $100mm Deferred Taxes (should last until 2011/2012)
    $295mm Free Cash Flow Estimate
     
    Catalyst
     

    Coming out of bankruptcy the asbestos trust owns 2/3rds of the shares outstanding.  It has started to make payments to the beneficiaries of the trust, so it will likely need to liquidate at least part of its position within 12 months.  Since the current credit market reduces the odds of private equity buyer, Armstrong is left with 3 options.

     

    Good

    1- Begin marketing the company.  Armstrong trades at a significant discount to its peer group and once people understand the story, the stock should trade up.  Eventually the asbestos trust will sell its stock in a secondary.

     

    Better

    2- Sell to a strategic investor.  While Armstrong was hoping to be purchased by a private equity firm in the upper $50's, the company could now go back to a strategic buyer, such as Warren Buffett's Shaw group, and try to sell the company for $50 per share.  Armstrong should be worth more to a strategic buyer since it could use Armstrong's NOL quicker and apply $500mm to an underfunded pension.  Even without utilizing the overfunded pension, a strategic investor could pay Armstrong $50 and be paying 6x next year's Ebitda, a substantial discount to peers.

     

    Best

    3- Armstrong buys stock back from the Asbestos trust in a $1 billion Dutch tender at $40 per share.  The company can obtain a tax refund of either 2 or 10 years of previously paid taxes.  While a discount rate would be applied, the company should get approximately $350mm in a tax refund.  The recapitalized company would have a market cap of $1,300mm and $900mm in debt.  Even in this restrictive credit environment, the company should be able to finance the debt at 9%.  Based on consensus 2008 Ebit, this buyback would result in GAAP EPS of $4.50 and cash EPS near 5.00.  After the buyback, if Armstrong traded inline with its peers, the stock would trade in the $60s.

     

    * If Armstrong used the proceeds of the tax refund and the cash on their balance sheet, then Armstrong might be able to borrow $400mm at 9% while leaving the $500mm in long-term debt it currently has on its balance sheet at a 7% avg cost.  This would reduce their interest expense by $10mm and result in EPS 19 cents higher than the estimate above.  It is unclear how the covenants of the existing debt would be impacted by raising additional debt.

    Catalyst

    see above

    Messages


    SubjectTax Refund
    Entry08/20/2007 01:31 PM
    Memberruby831
    Can you explain in more detail the $350MM tax refund AWI is entitled to if they were to buy back stock from the trust?

    SubjectTax Refund
    Entry08/20/2007 02:08 PM
    Memberlewis530
    The company has two options in regards to its 1.6billion NOL. The company can either receive a one time check for around $350mm or can shield US pretax income of around $550mm (which would likely take them 5 years)

    If Armstrong doesn't leverage up, the company would shield taxes for the next few years as they would have a large taxable income base. However, if the company did a large buyback the increased interest expense would reduce taxable income and therefore it would make more sense for the company to obtain a one time tax refund (plus the company would also need the cash to do the buyback)

    Two options to try to maximize the value of the NOL. The decision comes down to how quickly they will generate the pretax income necessary to utilize the NOL.

    SubjectWas in the middle of writing t
    Entry08/22/2007 03:32 PM
    Memberrrjj52
    ...I was in the middle of writing this idea up for VIC and completely agree with the stated thesis. I would add the following thoughts... This stock has all the attributes that people hate today (in paranthesis I discuss why we still like it): 1). Deal risk (agree that a deal or recap is still highly, highly likely); 2). Residential homes exposure (much more of a replacement/commercial business with significant international exposure on the EBIT line than people give credit for) ; 3). crowded hedge fund ownership (principally funds that were merger arbs and/or have delevered/reduced equity exposure in the recent turmoil); and 4). non-promotional management (assume not talking b/c still trying to sell the company or figure out a recap).

    I think of upside similarly to the write-up, but would also add that downside is incredibly well protected at these levels -- assuming all the segments that are principally in the residential business are worth zero and giving a discounted value to the NOL, the overfunded pension, and a discounted multiple to strategic deals in the commercial sector (8.5x vs. generally 10x ebitda), and putting all the corporate overhead on the commercial business completely supports today's price of about $37-38 on 2007 estimates and supports a low $40s price on 2008 estimates.

    The other point to highlight is that most investors get scared of the stock when they see the drop in value and assume that the asbestos trust must have plans to screw other investors. However, if one reads through the asbestos trust agreement, one will see that there are very strong piggy-back rights for common shareholders on anything above 5% of holdings that the trust does and management can push back to some degree on the asbestos trust in terms of timing of a debt or equity offering. That, combined with the facts that the Trust is incented to maximize value to claimants, does not have a gun to its head in terms of needing to access more cash today, and that the company continues to pay down debt with FCF and will be completely debt free by the end of next year would lead one to believe that a recap/dutch tender would be highly likely if a strategic or private equity deal does not materialize. Levered at 2.5x 2008E ebitda, the company could buyback over 50% of today's market value. I also believe that the company could take advantage of the NOL under such a dutch tender scenario...

    Oh, and the company has been reporting outstanding results/improvements in recent quarters, but all earnings calls are generally less than 25 minutes and generally focus on deal questions...

    Thanks for the write-up...

    Subjectwrite-up
    Entry08/22/2007 05:09 PM
    Memberlewis530
    Yeah the conference calls have been pretty short which indicates that people haven't spent time on the story. Though when the stock was trading at $55 it wasn't worth doing the work. I think Armstrong knows that the longer they take to get a deal the more likely the asbestos trust has to sell to them and it would be huge for the stock if they bought 50% of the stock.

    Recently the stock price movement has been similar to the other deal stocks (AAP, AA, PBY, WEN, ect) except the fundamentals support a $50 stock.

    I am still hoping that a strategic steps in as they should value the company $7-10 (quicker use of NOL and overfunded pension) more than anyone else.

    thanks for the info.

    SubjectTrust Cash Balance
    Entry09/12/2007 11:06 AM
    Memberruby831
    Is the trust required to file any annual or quarterly documents outlining the number of claims and the cash paid out. Most importantly, is there any way to get updates on the current cash balance?

    SubjectAWI
    Entry09/13/2007 02:21 PM
    Memberlewis530
    They are not required to file anything and seems like Armstrong's only contact with the trust's lawyer. You can go to armstrongworldasbestostrust.com to find more details, but I haven't been able to get information from them.

    AWI claimed that the typical selling process takes 6-9 months, and we are 7.5 months in so I would think more detail would be given on the quarterly call.

    I assume it is in the Trust's interest to keep quiet about the trust balance and there has been no information flow as far as I know from them.

    Still think the most value is created by getting a refund of 2 years back of taxes paid then getting a loan to take the asbestos trust out.

    Sorry I can't be of more help.

    Subjectawi
    Entry10/04/2007 05:36 PM
    Memberlewis530
    any thoughts? Hoping to hear something on the call (likely end of strategic and a start of buyback). Numbers should be pretty safe even next year as they can get to $3 in 2008 just from debt paydown.

    Subjectre: awi
    Entry10/08/2007 01:56 PM
    Memberrrjj52
    Agree with your post. Believe that negative industry headwinds is priced in here. Think that recent tax refund is positive. I don't have my hopes set on an update on the strategic review for this quarter call, but we will see... I think there are so many moving pieces to this company (sell the whole thing, recap, sell pieces and do recap, etc.) and so many options that it may not be until later in the 4Q that we hear something definitive...

    Subjectawi
    Entry11/01/2007 09:30 AM
    Memberlewis530
    I am now out of AWI. I couldn't handle the risk to commercial construction as it seems like the overall commercial construction replacement demand has signficantly slowed Sept and Oct and is more likely to be down next year than up next year or at least flatish. The EPS numbers are likely to be met from reduced interest expense, but I am afraid of current business environment. This quarter is probably fine, more worried about the 2008 estimates.
    The stock is incredibly cheap on an EV/Ebitda basis but I'm just scared of the stock reaction if Ebitda is flat to down next year. There is a very large buyer right now who is likely playing the takeout speculation, but I am on the sidelines through the quarter.

    SubjectRe: AWI
    Entry11/10/2007 02:03 PM
    Memberrrjj52
    We have actually grown our position in AWI and were very pleased with the quarter. We still very much believe that the strategic alternatives process is ongoing (the company spent more $ on it in the 3Q than in the 2Q and 1Q combined) and the likely outcome will probably be selling the company in pieces and, if any piece remains, doing a recap or large special dividend with the proceeds. There is a large overfunded pension and NOL and we imagine that a lot of time/$ has to be spent to figure the ramifications out if the company is broken up... The quarter was very strong, the outlook was honest and non-promotional, and the company said that it would end the year with $50 million in net debt and would be comfortable being back toward 3x net debt to ebitda... At that multiple, AWI could buy back 1/2 of the market cap of the company and you still have the significant NOL, overfunded pension, and $400 million+ in ebitda generated from ops...

    SubjectRE: Re: AWI
    Entry03/12/2008 09:58 AM
    Memberbeech625
    Now that the strategic alternative process is behind them, what do you think about the company at current prices?

    Thanks in advance.

    SubjectValuation
    Entry03/14/2008 05:20 PM
    Memberlewis530
    Valuation is cheap, but compared to the other office names which have been cut in half I don't know how cheap it is. I exited back in October as I don't have enough data on how ugly the non-residential downturn is going to be this time around. Unlike others there is no debt risk, but upside to numbers is going to be difficult with both housing and office soft. I don't understand why they are sticking with exploring strategic options rather than hitting the road and explaining their story to investors. If you think the downturn in offic is going to be small and quick then probably interesting, not sure it is more interesting than KNL at current valuation though.
    Sorry, not much help right now.

    SubjectRE: Valuation
    Entry03/14/2008 05:45 PM
    Memberfinn520
    What do you mean by "sticking with exploring strategic options"? My impression from the last conference call was that they have ended that and are looking to aggressively market the company. Have you heard otherwise?

    "We announced this morning that we have ended our strategic review process...Now that we are able to talk to investors...we will be aggressive about it...We believe in this company and we look forward to telling others why they should believe in it too."

    Thanks.
      Back to top