Armstrong Flooring, Inc. :AFI-US: Earnings Analysis: Q1, 2017 By the Numbers : June 6, 2017

Armstrong Flooring, Inc. reports financial results for the quarter ended March 31, 2017.

Highlights

  • Summary numbers: Revenues of USD 265.30 million, Net Earnings of USD -7.80 million.
  • Gross margins widened from 16.34% to 17.79% compared to the same period last year, operating (EBITDA) margins now 2.53% from 2.08%.
  • Change in operating cash flow of -15.57% compared to same period last year is about the same as change in earnings, likely no significant movement in accruals or reserves.
  • Earnings declined although operating margins improved from -1.94% to -1.85%.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2017-03-31 2016-12-31 2016-09-30 2016-06-30 2016-03-31
Relevant Numbers (Quarterly)
Revenues (mil) 265.3 271.5 313.2 323.3 283.4
Revenue Growth (%YOY) -6.39 N/A N/A N/A N/A
Earnings (mil) -7.8 -6.3 8.3 5.7 -4.3
Earnings Growth (%YOY) -81.4 N/A N/A N/A N/A
Net Margin (%) -2.94 -2.32 2.65 1.76 -1.52
EPS -0.28 -0.23 0.29 0.2 -0.16
Return on Equity (%) -5.05 -4.04 5.44 3.62 -2.59
Return on Assets (%) -3.39 -2.81 3.54 2.44 -1.95

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Market Share Versus Profits

Revenues History
Earnings History

Compared to the same period last year, AFI-US‘s change in revenue was close to the amount of its change in earnings. It remains to be seen how the rest of its peer group’s results will turn out and if AFI-US‘s performance is a sign of any major shift in the composition of market share in this sector. Also, for comparison purposes, revenues changed by -2.28% and earnings by -23.81% compared to the previous period.

Earnings Growth Analysis

The company’s year-on-year earnings decline did not come as a result of a contraction in gross margins or because of any cost control issues. Both gross margins and operating margins (EBITDA) margins actually improved over this time frame. Gross margins went from 16.34% to 17.79%, while operating margins improved from 2.08% to 2.53% over this period. For comparison, gross margins were 16.54% and EBITDA margins 1.14% in the immediate last period.

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

AFI-US‘s gross margin improvement has not produced any big difference in its working capital. Working capital days are currently 91.34, compared to last year’s level of 72.38 days. This leads Capital Cube to conclude that the improvements in gross margins are likely from operating decisions and not trade-offs with the balance sheet.

Cash Versus Earnings – Sustainable Performance?

It is important to examine a company�s cash versus earnings numbers to gauge whether its performance is sustainable.

AFI-US‘s year-on-year change in operating cash flow of -15.57% is around its change in earnings. This suggests that there are likely no significant movement in accruals or reserves for managing earnings this period.

Margins

Despite an overall improvement in operating (EBIT) margins, the company’s earnings fell. EBIT margins went from -1.94% to -1.85%. The decline in earnings appears to be largely because of one-time items. Pretax margins declined from -1.66% to -3.73%.

EBIT Margin History
PreTax Margin History

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Company Profile

Armstrong Flooring, Inc. engages in the production of resilient and wood flooring products. Its residential flooring products include hardwood, vinyl sheet, luxury vinyl plank and tile, vinyl tile, laminate and linoleum. The firm’s commercial flooring solutions include bio-flooring, hardwood, laminate, linoleum and luxury vinyl tile. Its products are primarily used in the construction and renovation of residential, commercial and institutional buildings. The company designs, manufactures and sells its range of products throughout North America and the Pacific Rim. Armstrong Flooring was founded in 2016 and is headquartered in Lancaster, PA.

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