Thursday, December 1, 2022
HomeValue InvestingDistressed State of affairs, Pursuing a Pressured Sale

Distressed State of affairs, Pursuing a Pressured Sale


That is doubtlessly a horrible thought, it is just a teeny tiny tracker place, it might go to zero, however I wished to throw this on the market in case others know extra about state of affairs and are variety sufficient to share.

Armstrong Flooring (AFI), the 2016 spin from Armstrong World Industries (AWI), designs and manufactures resilient flooring merchandise and sells by way of distributors otherwise you would possibly stroll by their vinyl tile shows in large field house shops like Dwelling Depot.  Armstrong is a recognizable identify however they are much smaller than market leaders Mohawk (MHK) and Shaw (owned by BRK), for the reason that spin they’ve had a difficult time and now as a result of covid provide chain disruptions and ensuing inflation (a few of their uncooked materials prices are up 100%), discover themselves on life assist.  

The corporate has tried to implement worth will increase to offset inflation however appear to be a step behind leading to gross margins being squeezed to close zero and the corporate burning money.  Their time period mortgage lender, Pathlight Capital, not too long ago prolonged Armstrong Flooring one other $35MM to repay their ABL facility and shore up the close to time period steadiness sheet.  A stipulation of the time period mortgage modification was the corporate has to attempt to promote itself ASAP.  From the 8-Ok:

The Firm additionally introduced it retained Houlihan Lokey Capital, Inc. (“Houlihan”) to help with a course of for the sale of the Firm and with the consideration of different strategic alternate options. Based mostly on all of the elements deemed related by the Board of Administrators of the Firm (the “Board”), the Board decided this course of to be in the perfect pursuits of the Firm and {that a} sale of the Firm or one other strategic transaction are the perfect means to maximise worth for the Firm’s stockholders and different stakeholders.

Houlihan is thought for his or her restructuring enterprise, in order that’s a foul signal and the “and different stakeholders” language on the finish is one other trace {that a} restructuring is an actual chance right here.  Later in the identical 8-Ok:

The Amended ABL Credit score Facility consists of sure milestones (“Milestones”) associated to the Firm’s consideration of a sale of the Firm or different strategic alternate options. These milestones embody: (i) a requirement that the Firm ship a confidential data memorandum relating to the sale course of to potential patrons, buyers and/or refinancing sources by January 14, 2022, (ii) a requirement that the Firm trigger Houlihan to offer a abstract to the ABL Agent by February 18, 2022 of all written indications of curiosity relating to the acquisition of the Firm or an alternate transaction which might be obtained on or earlier than that date, (iii) a requirement that the Firm notify the ABL Agent by February 28, 2022 whether or not any binding letter of intent for the acquisition of the Firm has been entered into previous to such date and, thereafter, offering copies of any such letter of intent entered into after such date (topic to any mandatory redaction), (iv) a requirement that the Firm enter right into a definitive settlement for the acquisition of the Firm by March 31, 2022 which offers for a purchase order worth in an quantity enough to repay in full the excellent loans beneath the Amended ABL Credit score Facility and the Amended Time period Mortgage Facility and in any other case be in type and substance fairly passable to the ABL Agent, and (v) a requirement that the Firm consummate the sale of the Firm or an identical transaction by no later than Might 15, 2022.

Whereas the corporate is bleeding money, the steadiness sheet does not look horrible, they personal nearly of their actual property and manufacturing amenities.  Final March, they bought considered one of their manufacturing and warehouse amenities in South Gate, CA for $76.7MM (possible the one with essentially the most vital worth) which they partially used to pay down debt after which burned by way of the remainder.  I learn a remark someplace that this firm is nice at promoting belongings, however not operating the corporate, again in 2018 they bought their wooden flooring section for $90MM or 7.2x section EBITDA on the time.  They went on to make use of many of the proceeds to do a Dutch tender provide at $11.10/share, the inventory trades beneath $1.50/share right now.

That is previous to the extra liquidity injection, however even proforma, AFI trades a big low cost to e book worth.

New administration, Michel Vermette (previously a division head at MHK), arrived on the scene in late 2019, began to implement a brand new technique, invested closely in a gross sales drive, however they’ve run out of liquidity on the improper time.  The model identify is price one thing and so are the property, plant and tools on the steadiness sheet, the flip aspect of inflation is the alternative value of those manufacturing amenities should be vital and presumably in extra of what they’re carried at on the steadiness sheet.  However AFI shouldn’t be negotiating from a place of energy (no kidding!) and fairness might get utterly worn out.  Fairness holders are principally counting on the kindness of others (or PE flooded with dry powder) to bail them out.

Different ideas:

  • Their outdated hardwood flooring section, now known as AHF Merchandise, not too long ago modified arms between PE sponsors (I did not discover a worth or a number of disclosed wherever), and the debt raised early this month was on lower than favorable phrases, SOFR + 625, which implies the credit score market is slightly cautious on flooring firms right now.
  • They beforehand guided to 10% EBITDA margins in a normalized surroundings, on LTM revenues that may be ~$60MM in opposition to a enterprise worth of $114.5MM ex-pension legal responsibility or $168.7MM with the pension legal responsibility.
  • The market is transferring in the direction of “luxurious vinyl tile” or LVT, MHK on a latest earnings name stated they’ll make investments $160MM this yr to increase their LVT manufacturing capability.  Two of AFI’s owned manufacturing amenities produce LVT right now, these amenities plus the model might make it price for MHK or one other strategic purchaser to take out AFI.

Once more, this can be a dangerous thought, do your individual due diligence.

Disclosure: I personal shares of AFI

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