Friday, March 24, 2023

Distressed State of affairs, Pursuing a Pressured Sale

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

Armstrong Flooring (AFI), the 2016 spin from Armstrong World Industries (AWI), designs and manufactures resilient flooring merchandise and sells by means of distributors otherwise you may stroll by their vinyl tile shows in large field dwelling shops like Residence Depot.  Armstrong is a recognizable title however they are much smaller than market leaders Mohawk (MHK) and Shaw (owned by BRK), because the spin they’ve had a difficult time and now on account of covid provide chain disruptions and ensuing inflation (a few of their uncooked materials prices are up 100%), discover themselves on life help.  

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, lately 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-K:

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 nasty signal and the “and different stakeholders” language on the finish is one other trace {that a} restructuring is an actual risk right here.  Later in the identical 8-Ok:

The Amended ABL Credit score Facility contains sure milestones (“Milestones”) associated to the Firm’s consideration of a sale of the Firm or different strategic alternate options. These milestones embrace: (i) a requirement that the Firm ship a confidential data memorandum relating to the sale course of to potential consumers, buyers and/or refinancing sources by January 14, 2022, (ii) a requirement that the Firm trigger Houlihan to supply a abstract to the ABL Agent by February 18, 2022 of all written indications of curiosity relating to the acquisition of the Firm or another transaction which might be acquired 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 vital redaction), (iv) a requirement that the Firm enter right into a definitive settlement for the acquisition of the Firm by March 31, 2022 which supplies 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 moderately passable to the ABL Agent, and (v) a requirement that the Firm consummate the sale of the Firm or an analogous transaction by no later than Might 15, 2022.

Whereas the corporate is bleeding money, the steadiness sheet does not look horrible, they personal virtually of their actual property and manufacturing amenities.  Final March, they offered certainly one of their production and warehouse facilities in South Gate, CA for $76.7MM (probably the one with probably the most important worth) which they partially used to pay down debt after which burned by means of the remaining.  I learn a remark someplace that this firm is nice at promoting property, however not operating the corporate, again in 2018 they sold their wood flooring segment for $90MM or 7.2x phase EBITDA on the time.  They went on to make use of many of the proceeds to do a Dutch tender supply at $11.10/share, the inventory trades under $1.50/share immediately.

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 title is value one thing and so are the property, plant and tools on the steadiness sheet, the flip aspect of inflation is the substitute value of those manufacturing amenities should be important 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 may get utterly worn out.  Fairness holders are mainly counting on the kindness of others (or PE flooded with dry powder) to bail them out.

Different ideas:

  • Their previous hardwood flooring phase, now referred to as AHF Merchandise, lately modified palms between PE sponsors (I did not discover a worth or a number of disclosed anyplace), and the debt raised early this month was on lower than favorable phrases, SOFR + 625, which suggests the credit score market is moderately cautious on flooring corporations immediately.
  • They beforehand guided to 10% EBITDA margins in a normalized setting, on LTM revenues that will be ~$60MM towards 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 current earnings name mentioned they will make investments $160MM this 12 months to increase their LVT manufacturing capability.  Two of AFI’s owned manufacturing amenities produce LVT immediately, these amenities plus the model may make it value for MHK or one other strategic purchaser to take out AFI.

Once more, it is a dangerous thought, do your personal due diligence.

Disclosure: I personal shares of AFI

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