Armstrong Flooring Inc. enters bankruptcy

July 2022 | DEALFRONT | BANKRUPTCY & CORPORATE RESTRUCTURING

Financier Worldwide Magazine

July 2022 Issue

Armstrong Flooring Inc, a publicly traded flooring manufacturer founded in 1860, has filed for Chapter 11 bankruptcy protection in the US Bankruptcy Court for the District of Delaware, noting that it could not raise prices enough to counter supply chain disruptions and higher costs for materials and transportation.

The Chapter 11 filing came after the company spent months trying to find a buyer and haggling with lenders, according to court papers. Armstrong said it owed creditors $317.8m and had assets worth $517m. The company’s bankruptcy also includes subsidiaries AFI Licensing LLC, Armstrong Flooring Latin America Inc. and Armstrong Flooring Canada Ltd.

In November 2021, Armstrong warned about whether it could continue as a going concern long term and noted in May that it was seeking a buyer and would likely file for bankruptcy protection. The company will continue to work with advisers at Houlihan Lokey Capital to find a buyer throughout the bankruptcy.

“Our business and team members have been working diligently to strengthen our financial foundation in the face of several macroeconomic trends – including supply chain challenges, the current inflationary environment and continued headwinds from the COVID-19 pandemic,” said Michel Vermette, president and chief executive of Armstrong Flooring. “With the support of our Board of Directors, we have determined that using the Chapter 11 process to effectuate a potential sale is the right next step for our Company.

“As we have said previously, we firmly believe in the value and potential of Armstrong Flooring – and we are confident that this definitive action puts us in the best possible position to preserve and maximize value for our stakeholders,” he continued. “In the meantime, we are open for business and remain firmly committed to our customers, vendors and employees as we navigate the path forward.”

The company and its subsidiaries design, manufacture, source and sell vinyl sheets, planks and flooring products in North America and the Pacific Rim. Its products are used in the construction and renovation of commercial, residential and institutional buildings.

The company has struggled over the last 12 months as product and transportation costs have increased. Armstrong experienced additional product and transportation costs of $85m, according to Mr Vermette. Though Armstrong raised prices for retail customers by 10 percent and for commercial customers by 15 percent, it was not enough to stave off bankruptcy. “Simply stated, the company’s increasing costs significantly outpaced its pricing power,” Mr Vermette said in a court filing.

As it struggled with higher costs, Armstrong haggled with its lenders, which imposed harsh restrictions that hampered its turnaround efforts, according to court documents.

Armstrong Flooring was spun out of Armstrong World Industries, which exited bankruptcy in 2006 after winning court approval for a plan to deal with lawsuits related to asbestos. The substance can cause fatal lung diseases, including cancer. Armstrong Flooring became a separate, publicly traded company in 2016.

In order to fund and preserve its operations during the Chapter 11 process, Armstrong has entered into a credit agreement, subject to Bankruptcy Court approval, providing for $30m of debtor-in-possession (DIP) financing. Upon approval by the Bankruptcy Court, the DIP financing will provide Armstrong Flooring with the necessary liquidity to operate and cover administrative expenses as it pursues a value-maximising sale. Indeed, the company expects to experience as little disruption to its ordinary-course operations as possible, including support for payment of employee wages and certain benefit programmes.

In March, the company reported $1.41 earnings per share for the first quarter of 2022. The company had revenue of $164.4m for the quarter. Armstrong Flooring had a negative return on equity of 39.6 percent and a negative net margin of 8.16 percent in Q1.

Mr Vermette was hired as chief executive in September 2019 and announced a multi-year strategic plan to revamp the company in early March 2020, just prior to the coronavirus (COVID-19) pandemic shutting down entire economies and seriously disrupting supply chains across the world.

Richard Summerfield