By FCNews staff
Armstrong Flooring has entered into a definitive agreement to sell its wood flooring business to an affiliate of American Industrial Partners (AIP). The deal, which is expected to be completed at the end of the fourth quarter, is valued at $100 million—subject to customary adjustments for working capital, debt and other matters.
According to Don Maier, Armstrong Flooring CEO, the transaction allows Armstrong Flooring to intensify its focus on LVT, rigid core, as well as its wide range of resilient products, including vinyl composition tile and resilient sheet. “After carefully evaluating multiple options, we determined that separating the resilient and wood businesses is the best way to empower both businesses to better realize their core strengths,” Maier stated during a conference call. “With this divestiture, Armstrong will become a pure resilient flooring company focused on a key growth area within the industry by harnessing our rich legacy to drive continued innovation and growth.”
More importantly, Maier said the transaction improves Armstrong’s financial profile and increases its financial flexibility and capital allocation opportunities. (During the call, he noted Armstrong’s resilient margins were 680 basis points higher than that of its wood business last year.) What’s more, he said the divestiture of the wood business reduces cyclical variability and improves the company’s end-market mix.
“Over the last few years, the wood flooring industry has felt the impact of dynamic forces confronting the industry, including significant competitive pressures,” Maier stated. “The acceleration of these trends has created the need for a more focused strategy and use of resources. Therefore, we believe now is the right time to deepen our focus on LVT and other resilient flooring categories.”
Industry observers believe the seeds of the divestiture were planted back in the summer of 2017, when Armstrong Flooring had announced plans to consolidate its wood manufacturing operations, paring down production to six plants in the U.S. The move resulted in the closure of two manufacturing facilities—Jackson, Tenn., and Vicksburg, Miss.—and the elimination of more than 300 jobs. Earlier that year, Armstrong realigned its residential and commercial divisions and combined resilient and wood manufacturing operations, resulting in the loss of 40 positions. And in a clear sign that Armstrong was doubling down on the fast-growing resilient market, the company purchased the VCT business from Mannington in the spring of 2017.
“Resilient is the fastest growing segment within flooring, highlighted by the LVT category, which is growing by 27%,” Maier stated, adding that last year, the resilient segment generated 90% of Armstrong Flooring’s EBITDA on just 60% of sales. “This transaction—which is valued at 7.2 times the wood flooring segment’s trailing 12-month adjusted EDITDA and 14.3 times the segment’s 2017 adjusted EBITDA—creates a much stronger position in our product and market mix. The exclusive focus on resilient improves the profitability of our strong portfolio of award-winning products, and we will be better positioned to allocate investments to resilient. In addition, we will now have a more balanced market exposure with North American resilient sales approximating 60% commercial, where our margins are generally better.”
So what does all this mean for customers who sell Armstrong Flooring wood products, particularly the venerable Bruce brand? Under the terms of the deal, AIP will gain Armstrong Flooring’s wood flooring product portfolio (including the Bruce brand and all other wood flooring segment brands such as HomerWood) as well as the existing network of wood floor manufacturing facilities, staffed by an experienced employees. To ensure a seamless transition for its customers, AIP will have full access to the Armstrong Flooring brand for the sale of wood products for two years after closing.
Rick Hoffman, partner at AIP, believes this strategic decision empowers both the resilient and wood flooring businesses to better realize their core strengths and pursue strategies for growth, product innovation and quality, and exceptional service to customers. “Our companies look forward to working closely with each other to ensure a seamless transition for employees, customers and suppliers.”
With the sale, Armstrong said it expects to generate annualized savings of approximately $5 million to $6 million. In connection with the divestiture, the company expects to incur one-time charges of $1 million to $2 million in the fourth quarter. These charges relate primarily to severance expenses. By the end of 2018, Armstrong expects to offset the impact of essentially all shared costs reassigned to the resilient flooring business segment through the benefit of its cost optimization plan, along with transition service agreements with AIP.
Market reaction
Mike Barrett, president and CEO of Glen Burnie, Md.-based Haines, the industry’s largest distributor and Armstrong partner for more than 100 years, expressed support for Armstrong’s strategies upon hearing the news. “As their largest distributor, we will evaluate this change and look forward to building a similarly strong relationship with AIP as we go through the transition year. Our focus will be to continue to have a portfolio of products that allow us to find solutions for our customers’ needs, and we believe the wood products are a nice fit with our offering. At this point, there is no impact to Haines. We will work with AIP and Armstrong over the coming weeks and months to understand our role with both organizations as we move forward.”
Scott Rozmus, CEO of FlorStar Sales, Romeoville, Ill., said the company is still digesting the news. “With that said, it appears we will have ongoing opportunity with the new wood team and ownership, much of which will consist of familiar faces. It is my understanding that some folks from AFI’s wood team will be joining the new ownership team. Assuming this is true, I would anticipate we will know the folks involved. At the same time, Armstrong Flooring has additional resources to invest in an even more focused manner on their core businesses. So, while change begets risk, there is also opportunity here for sure.”
For other Armstrong distributors, it’s going to be business as usual. “Armstrong wood is an important part of what we do,” said Paul Castagliulo, president of Belknap White Group, Mansfield, Mass. “We expect to have a solid partnership with the new owners and look forward to continuing to represent the line and serving our customers.”
Rick Holden, COO, Derr Flooring, Willow Grove, Pa., said he was surprised by the move based on Armstrong’s commitment to the wood flooring sector, particularly over the last 12 months.However, he does not envision a change for Derr Flooring. “Our company has been successfully selling Bruce Hardwood for 100 years, and we are looking forward to continuing that tradition in the future,” he told FCNews.
Ed duDomaine, president and CEO of Gesco/Shnier, Canada’s largest wholesaler, is an Armstrong distributor, albeit not on the wood side. “Increased focus on vinyl and LVT is positive to us,” he said.
Armstrong investors seemed pleased with the news. The company’s stock was up 6% on midday trading on Nov. 15.