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Analyst Blog

Shares of Armstrong World Industries, Inc. (AWI - Analyst Report) slumped over 11% after the company reported its second-quarter 2014 results on Jul 25. Adjusted earnings fell 1% year over year to 60 cents per share impacted by lower volumes and rising lumber costs, partly offset by favorable price and mix. Earnings also missed the Zacks Consensus Estimate of 65 cents.

Including one-time items, earnings plunged 25.5% to 38 cents per share from the prior-year quarter figure of 51 cents.

Operational Update

Net sales rose 0.5% year over year to $710 million but lagged the Zacks Consensus Estimate of $723 million. Revenues came in at the lower end of management’s guidance range of $710???$750 million. Positive price and mix led to the year-over-year improvement partly offset by lower volumes.

Cost of sales went up 2% year over year to $554 million. Gross profit declined to $155.7 million from $164 million in the year-ago quarter. Consequently, gross margin contracted 140 basis points (bps) year over year to 21.9%.

Selling, general and administrative (SG&A) expenses decreased 3.2% year over year to $114.7 million, due to higher spending on promotional activity. Adjusted operating income dropped 5% year over year to $66 million. Operating margin also declined 60 bps year over year at 9.3%.


Segment Performance

Building Products: Net sales at the Building Products segment increased 2.3% to $323.5 million, aided by positive mix and price, partly offset by lower volumes. Adjusted operating profit for the segment was $65 million compared with $66 million in the year-ago quarter. Improved price and mix and higher earnings from WAVE were offset by higher manufacturing and input cost.

Resilient Flooring: The Resilient Flooring segment reported a decline in sales to $247 million, compared with $251 in the year-ago quarter due to lower volumes in the Americas and Europe, partially offset by improved mix. The segment’s adjusted operating profit remained flat at $18 million from the year-ago quarter.

Wood Flooring: Net sales in the reported quarter inched up 0.9% year over year to $139 million driven by positive price and mix. The segment posted adjusted operating profit of $3 million, flat with the prior-year quarter.

Financials

Cash and cash equivalents were $152.6 million as of Jun 30, 2014 compared with $304.7 million as of Jun 30, 2013. Cash flow from operations was $22.4 million in the reported quarter compared with $43.2 million in the prior-year quarter.

Guidance

Armstrong World Industries lowered its full year 2014 adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) guidance to the band of $370–$400 million from $400–$430 million. Adjusted earnings per share is  expected to lie in the range of $2.15 -$2.40. For full year 2014 free cash flow is expected to be in the range of $20–$60 million.

For the third quarter of 2014, the company expects sales to be between $740—$780 million and adjusted EBITDA in the range of $110–$130 million.

Our View

Armstrong World Industries expects that both residential and commercial discretionary repair and remodel spend will remain flat to down for the full year and overall commercial volumes will also be down.

The company will benefit from improvements in unemployment and housing prices while restrained demand for discretionary projects remains concern in the near term. Moreover challenging market conditions in Europe and Australia continue to pose as headwinds.  

PA-based Armstrong World Industries is a leading global producer of flooring products and ceiling systems for use in the construction and renovation of residential, commercial and institutional buildings. The company also designs, manufactures and sells kitchen and bathroom cabinets in the U.S.

At present, Armstrong World Industries has a Zacks Rank #5 (Strong Sell). However, some better-ranked stocks in the sector include Quanex Building Products Corporation (NX - Snapshot Report), United Rentals, Inc. (URI - Snapshot Report) and Beazer Homes USA Inc. (BZH - Snapshot Report). All of these stocks carry a Zacks Rank #2 (Buy).

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