Shares of Armstrong World Industries, Inc. AWI rose as much as 4.6% since the company reported its second-quarter 2015 results on Jul 30. Armstrong World’s adjusted earnings per share increased an impressive 23% to 81 cents from 66 cents in the year-ago quarter driven by the favorable impact from foreign currency transaction. Earnings also surpassed the Zacks Consensus Estimate of 55 cents by a wide margin of 47%.
Including one-time items, earnings per share grew 10% to 53 cents from the prior-year quarter figure of 48 cents.
Operational Update
Net sales declined 4% on a year-over-year basis to $633 million and also missed the Zacks Consensus Estimate of $654 million. Excluding the unfavorable impact from foreign exchange of $24 million, net sales decreased 0.4% year over year due to lower volumes primarily in the Wood business and Building Products in EMEA, which offset the impact of favorable price and mix.
Cost of sales went down 7.3% year over year to $474.8 million. Gross profit declined 7.4% to $157.9 million from $147 million in the year-ago quarter. Consequently, gross margin increased 270 basis points (bps) year over year to 25%.
Selling, general and administrative (SG&A) expenses increased 5.9% year over year to $106 million. Adjusted operating income grew 13% year over year to $82 million. Operating margin also expanded 190 bps year over year to 13%.
Segment Performance
Building Products: Net sales at the Building Products segment decreased 5.4% to $306 million. Excluding the unfavorable impact of foreign exchange, sales increased slightly as favorable price and mix offset the impact of lower volumes, primarily in EMEA markets.
Adjusted operating profit for the segment was $64 million compared with $66 million in the year-ago quarter. Improved price and mix, and lower manufacturing and input costs were partially offset by the impact of decreased volumes and higher SG&A expenses.
Resilient Flooring: The Resilient Flooring segment’s sales went up 1.9% year over year to $199.9 million from $196.2 in the year-ago quarter. Net sales increased due to strong volume growth in the Americas commercial business which offset the impact of unfavorable price and mix.
The segment’s adjusted operating profit increased 8.7% year over year to $25 million as productivity, lower input costs and the margin impact of higher volumes were partially offset by higher SG&A expenses and the unfavorable impact from price and mix.
Wood Flooring: Net sales in the reported quarter declined 9.1% year over year to $126.7 million due to decline in volume. The segment posted adjusted income of $8 million, which improved significantly from $3 million in the prior-year quarter driven by lower manufacturing and input costs.
Financials
Cash and cash equivalents were at $201.6 million for the period of six months ended Jun 30, 2015 compared with $159.7 million as of Jun 30, 2014. Armstrong World generated cash flow from operations of $58.9 million during the first half of 2015 compared with $22.4 million in the prior-year quarter.
In Feb 2015, Armstrong World approved a plan to separate the company into two independent industry-leading public companies. One will focus on its profitable commercial ceilings business while the other will focus on residential and commercial flooring.
The separation will increase the flexibility to pursue domestic and international growth opportunities and enable management to focus on each company's distinct priorities, market opportunities and distribution channels. The separation is expected to be completed in the first quarter of 2016.
Upon separation Dave Schulz, the current CFO of Armstrong World, will be joining Armstrong Flooring as the Chief Operating Officer. While Brian MacNeal, who is currently Vice President of Finance for the building products division will become the CFO of Armstrong World.
Outlook
Armstrong World expects 2015 sales to be in the $2.4 billion to $2.5 billion range, which reflects foreign exchange headwinds and restrained market activity in Europe and U.S. repair and remodel. The company also narrowed its adjusted earnings per share outlook and expects it to be in the range of $2.05 to $2.35. However, it reaffirmed adjusted EBITDA view in the range of $355 million to $385 million.
Armstrong World continues to see market-related weakness in North American ceilings and remains concerned about significant economic declines in Russia and China. However, strength in new construction, repair and remodel activity, order backlog and visibility of the large projects remains tailwinds for the company in the second half of the year.
Armstrong World currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the sector include Quanex Building Products Corp. NX, Gibraltar Industries, Inc. ROCK and PGT, Inc. PGTI. All these stocks carry a Zacks Rank #1 (Strong Buy).
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