Shares of Armstrong World Industries, Inc. (AWI) fell 9% to close at $53.86 on Feb 24, following the decline in its fourth-quarter 2013 adjusted earnings to 32 cents per share from 34 cents in the year-ago quarter. Higher manufacturing and input costs, along with increased SG&A expenses dragged down profits despite the rise in revenues. Earnings also missed the Zacks Consensus Estimate of 41 cents.
However, including one-time items, earnings increased 33% to 20 cents per share from the prior-year quarter figure of 15 cents.
Operational Update
Net sales rose 8% year over year to $661 million, surpassing the Zacks Consensus Estimate of $653 million. Higher volumes in Wood Flooring and Building Products, along with positive price and mix led to a year-over-year improvement.
Cost of sales increased 10% year over year to $527 million. Gross profit dipped to $134 million from $135.7 million in the year-ago quarter. Gross margin contracted 180 basis points (bps) year over year to 20.3%.
Selling, general and administrative expenses increased 10.5% to $116.8 million in order to support emerging market and architectural specialties growth initiatives. Adjusted operating income decreased 12.7% year over year to $41 million due to a rise in manufacturing and input costs as well as SG&A expenses. Operating margin contracted 150 bps year over year to 6.2%.
Segment Performance
Building Products: Net sales at the Building Products segment increased 9.3% to $320 million, aided by higher volumes, along with positive price and mix. Adjusted operating profit for the segment was $54 million flat with the year-ago quarter. Higher volumes, improved price and higher earnings from WAVE were offset by rise in SG&A expenses as well as raw materials and plant start up costs in Russia.
Resilient Flooring: The Resilient Flooring segment reported a decline in sales to $208 million, compared with $212 in the year-ago quarter due to lower volumes in the Americas, partially offset by improved mix. The segment reported adjusted operating profit of $7 million against a loss of $1 million in the year-ago quarter.
Wood Flooring: Net sales in the reported quarter grew 23.5% year over year to $133 million. The improvement was driven by strong volume growth owing to favorable pricing, increased demand from independent distributors and home center channel as well as gains in new residential construction. However, the segment posted break-even results as compared with a profit of $9 million in the prior-year quarter.
Financials
Armstrong ended 2013 with cash and cash equivalents of $135 million, down from $336 million as of 2012-end. Cash flow from operations was $214 million as of Dec 31, 2013, against $220 million as of Dec 31, 2012.
Armstrong generated free cash flow of $68 million for 2013 compared with $88 million in 2012. The decline in free cash flow was primarily due to lower cash earnings and higher capital expenditures, partially offset by improvement in working capital and lower cash interest expense.
Full-Year 2013 Performance
For full-year 2013, Armstrong reported adjusted earnings per share of $2.04, down 19% from $2.53 in 2012. The results fell short of the Zacks Consensus Estimate of $2.29. Including one-time items, earnings per share (EPS) was $1.71, compared with $2.41 in the prior year.
Revenues for the year 2013 increased 4% year over year to $2719.9 million, driven by the positive impact of price, volume and mix. However, sales were negatively impacted by about $26 million due to the sale of the Patriot wood flooring distribution business in the third quarter of 2012. Revenues fell short of the Zacks Consensus Estimate of $2727 million.
Outlook
For 2014, Armstrong World expects U.S. GDP in the range of 2.5% to 3.0%, which will likely translate into upbeat commercial activity. However, persistent weakness in education healthcare remains a concern. The company guided residential repair and remodel activity to be slightly up and projected the improvement of new residential construction with new home starts expected to be about 1.1 million in 2014.
Armstrong World anticipates its full-year 2014 sales guidance to be in the range of $2.8– $2.9 billion. The company forecasts adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) in the band of $400–$430 million for 2014. The company guided its full-year adjusted EPS range of $2.55–$2.80 while free cash flow is anticipated to be between $60 and $100 million.
For the first quarter of 2014, Armstrong World expects sales to be between $625 and $665 million and adjusted EBITDA in the range of $75–$90 million.
Our View
The company will benefit from investments in emerging markets and Architectural Specialties. Positive price and mix, and growth in core commercial markets will also enhance the company’s prospects. However, challenging market conditions in Europe and Australia remain concerns.
Pennsylvania-based Armstrong World is a leading global producer of flooring products and ceiling systems for use in the construction and renovation of residential, commercial and institutional buildings. Armstrong also designs, manufactures and sells kitchen and bathroom cabinets in the U.S.
Armstrong currently carries a short-term Zacks Rank #3 (Hold). Some better-ranked stocks in the sector include CaesarStone Sdot-Yam Ltd. (CSTE), USG Corporation (USG) and Wolseley plc (WOSYY). While CaesarStone has a Zacks Rank #1 (Strong Buy), USG Corporation and Wolseley carry a Zacks Rank #2 (Buy).
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