No Fooling, Armstrong World Industries To Spinoff Armstrong Flooring On April 1

Nearly a decade ago, we wrote about Armstrong World Industries(AWI) as it emerged from a long bankruptcy that resulted from asbestos liabilities.  At the time, we thought the stock looked expensive. Ten years later, the stock price is basically in the same place, and Armstrong is spinning off its flooring business, completing a dismantling begun with the 2012 sale of its cabinet business. It may be true that your floor is somebody else’s ceiling, but Armstrong World Industries will no longer sell both.

Armstrong World shareholders as of March 21 will receive one share of Armstrong Flooring Inc. common stock on April 1 for every two shares of Armstrong World Industries held.  The transaction is expected to be tax free to shareholders and the new company will trade under the symbol AFI.

Last week, the new company’s Form 10 was declared effective by the SEC.  The company will begin with $60 million in net debt, a number that should be manageable even with the company’s weak profitability. The company’s pro forma results for the past few years:

	Years Ended December 31,
		2015				2014				2013				2012 (Unaudited)				2011 (Unaudited)
(amounts in millions)
Statement of operations data
Net sales		$	1,188.7			$	1,220.4			$	1,262.8			$	1,209.8			$	1,245.5
Operating income			17.9				10.8				40.6				83.6				60.6
Earnings from continuing operations			9.0				2.8				26.9				51.9				38.5

Revenue and profit have both declined, and the new company will be faced with the difficult challenge of reversing these worrisome trends. Another potential concern is whether the company might be subject to the product liability problems that Lumber Liquidators(LL) has had. So far there is no indication that this might be the case, but there is some litigation as the company describes in the form 10:

For example, we are currently a party to various litigation matters that involve product liability, tort liability and other claims under a wide range of allegations, including illness due to exposure to certain chemicals used in the workplace, or medical conditions arising from exposure to product ingredients or the presence of trace contaminants. In some cases, these allegations involve multiple defendants and relate to legacy products that we and other defendants purportedly manufactured or sold. We believe these claims and allegations to be without merit and intend to defend them vigorously. While complete assurance cannot be given to the outcome of these proceedings, we do not believe that any of these matters, individually or in the aggregate, will have a material adverse effect on our financial condition, liquidity or results of operations.

At the Armstrong Flooring’s when-issued close of $13.13 on March 21, the company has a market cap of $364 million. With the light debt load, if independence allows the company to move profitability back to historic levels, this could prove an attractive price.

Disclosure: The author holds no position in any stock mentioned