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Armstrong Flooring Inc – Post-Sale Debtors Seek Second Lengthy Set of Exclusivity Extensions; Cast Doubt on Current Trajectory of Bankruptcy Cases


January 3, 2023 – The Debtors filed a motion to extend (for a second time) the periods during which they have an exclusive right to file a Chapter 11 Plan, and solicit acceptances thereof, through and including May 3, 2023 and July 5, 2023, respectively [Docket No. 1067]. Absent the requested relief, the Plan filing and solicitation periods were scheduled to expire on January 3, 2023 and March 6, 2023, respectively.

This second extension motion reads much like the Debtors' first, albeit with some minor language shifts which, when combined with the lengthy nature of the second requested extensions, suggest the Debtors are struggling to come up with a consensual Plan.

Back in September 2022, the Debtors summed up their request for extra exclsuive time with: "The Debtors believe that the requested extensions of the Exclusive Periods will afford the key parties-in-interest time to negotiate a potential plan structure and prepare a draft plan in advance of the proposed extended Exclusive Periods."

That laguage has now evolved to: "The Debtors believe that the requested extensions of the Exclusive Periods will afford the key parties-in-interest time to evaluate the prospects for a plan, and, if feasible, negotiate and draft a plan in advance of the proposed extended Exclusive Periods."

Both motions included language noting that extensions would provide the "opportunity to evaluate whether a chapter 11 plan can be developed in the Chapter 11 Cases or whether an alternative exit is more appropriate,"

A hearing to consider the motion is scheduled for January 26, 2023, with objections due by January 17, 2023.

Case Status

On May 8, 2022, Armstrong Flooring Inc. and three affiliated debtors (NYSE: AFI; together “Armstrong” or the “Debtors”) filed for Chapter 11 protection with estimated assets of $517.0mn and estimated liabilities of $317.8mn ($160.5mn of funded debt). At filing, the Lancaster, PA based resilient flooring manufacturer noted its intention to continue a marketing/sale process that the Debtors began contemplating as far back as mid-2020.

On May 17, 2022, the Court hearing the Armstrong Flooring cases authorized the Debtors to access $24.0mn of new money debtor-in-possession (“DIP”) financing on an interim basis. The DIP financing is being made pursuant to a pair of DIP facilities: (a) a DIP Revolver Facility agented by Bank of America nominally in the amount of $90.0mn but, given existing, prepetition revolver borrowings and anticipated fees, incrementally providing net new money of $12.0mn and (b) a $12.0mn DIP Term Loan Facility agented by Pathlight Capital LP, with the full amount of the facility available with the interim order (NB: a final DIP order was issued on June 7th).

On July 13, 2022, the Court issued an order approving the sale of the Debtors' three main asset groups, ie: (i) their North American assets ($107.0mn, AHF/Gordon Brothers), (ii) their Australian assets ($31.0mn, Cowes Bay Group) and (iii) their Chinese assets ($59.0mn, Giant Group) [Docket Nos. 549, 550 and 551, respectively]. After resolving certain disputed issues regarding transfers of a trademark license (see just below) in connection with the sales, the Debtors closed the North America Sale to AHF/GB Consortium on July 25, 2022. The sale of the China assets to Giant Group closed on August 1, 2022, and the sale of the Australia-New Zealand assets to Cowes Bay Group closed on August 22, 2022.

On July 29th, the Court issued an order approving a settlement between the Debtors and Armstrong World Industries, Inc. and AWI Licensing LLC that results in the withdrawal of an appeal of a Court order authorizing the purchaser of the Debtors' assets to continue to use the Armstrong name and trademarks [Docket No. 642].

The Extension Motion

The extension motion [Docket No. 1067] states, “The Debtors have been under the protection of chapter 11 for approximately eight months, and during this time have made significant and material progress in administering these Chapter 11 Cases, including selling substantially of the Debtors’ assets through the North American Sale, the Australian Sale, and the China Sale. The extension requested in this Motion will provide the Debtors and their advisors the opportunity to evaluate whether a chapter 11 plan can be developed in the Chapter 11 Cases or whether an alternative exit is more appropriate, and to conduct necessary negotiations with the Debtors’ constituents.”

More Background

Events Leading to the Chapter 11 Filing

In a declaration in support of first day filings (the “Vermette” Declaration), Michel S. Vermette, the Debtors’ President and CEO provides: “In early 2020, the Company embarked on a strategy to modernize operations and become more profitable (the 'Transformation Plan'). The Transformation Plan had three components: (i) expand customer reach; (ii) simplify product offerings and operations; and (iii) strengthen core capabilities.

In an effort to implement the Transformation Plan, the Company expended significant resources. SG&A increased significantly as the Company sought to modernize its operations, develop a more profitable go-to-market strategy and otherwise achieve the objectives of the Transformation Plan. The Company made some progress implementing this new strategy. 

However, the effects of the developing COVID-19 pandemic began to place considerable stress on the Company's operations notwithstanding the implementation of COVID- 19 protocols designed to keep plants operating and maintaining sales force momentum. Among other things, the Company faced extended shutdowns of certain manufacturing facilities, supply chain disruptions, inflation, and an overall decline in sales of flooring products. These hurdles, influenced in large part by the COVID-19 pandemic, caused continued losses and higher-than- anticipated negative cash flows, resulting in less liquidity available to effectuate the Transformation Plan.

Net sales for the year 2020 decreased 6.6% compared to the prior year, primarily due to pandemic-related business disruptions. This occurred on top of a 14% year-over-year decrease in sales during 2019 due, in part, to U.S. tariff changes and market share loss in certain product categories. From 2019 to 2020, the Company’s liquidity decreased from $89.6 million to $52.7 million.

The Company experienced some performance improvements through early 2021, due, in part, to the implementation of certain cost-saving measures, a phased relocation of the Company’s corporate headquarters, ongoing initiatives to improve manufacturing efficiency and customer experiences, the launch of new products, and the sale of the Company’s South Gate, California plant. However, the Company's profits continued to be hampered by inflationary pressures and supply chain challenges.

For example, the Company increased prices—up to 10% for residential products and up to 15% for commercial products—and implemented an ocean freight surcharge in an effort to increase revenue in the fourth quarter of 2021. However, the Company’s margins were narrowed by product and transportation cost increases of approximately $85 million in 2021 alone. Simply stated, the Company’s increasing costs significantly outpaced its pricing power. Accordingly, the Company was cash flow negative in 2021 and projected that it would continue to be cash flow negative throughout 2022 and would exhaust any remaining liquidity under the ABL Credit Facility by 2023.

About the Debtors

According to the Debtors: Armstrong is “a global leader in the design and manufacture of innovative flooring solutions that inspire beauty wherever your life happens. Headquartered in Lancaster, Pennsylvania, Armstrong Flooring continually builds on its resilient, 150-year legacy by delivering on its mission to create a stronger future for customers through adaptive and inventive solutions. The company safely and responsibly operates seven manufacturing facilities globally, working to provide the highest levels of service, quality, and innovation to ensure it remains as strong and vital as its 150-year heritage."

The Vermette Declaration adds: "The Company is a leading global producer of resilient flooring products for use primarily in the construction and renovation of commercial, residential, and institutional buildings. On April 1, 2016, the Company became an independent publicly-traded company when Armstrong World Industries, Inc. ('AWI'), a public corporation, separated its Resilient Flooring and Wood Flooring businesses from its Building Products business. As a result of the
spin-off, the Company and AWI each became independent, publicly-traded companies, with the Company owning and operating the Resilient Flooring and Wood Flooring segments, and AWI continuing to own and operate a ceilings business.

The Company’s flooring products include, but are not limited to, vinyl composition tile, vinyl sheet, and luxury vinyl tile, which is the Company’s fastest-growing
resilient flooring product category. The Company sells its products in North American commercial and residential markets as well as in commercial markets in the Pacific Rim (primarily China and Australia). The majority of the Company’s sales are in North America, where the Company is the largest producer of resilient flooring products.

The Company’s corporate headquarters are located in Lancaster, Pennsylvania. The Debtors maintain flooring plants in Illinois, Mississippi, Oklahoma, and Pennsylvania; Armstrong’s non-debtor affiliates maintain international flooring plants in China and Australia "

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The post Armstrong Flooring Inc – Post-Sale Debtors Seek Second Lengthy Set of Exclusivity Extensions; Cast Doubt on Current Trajectory of Bankruptcy Cases appeared first on Daily Bankrupt Company Updates | Bankrupt Company News.

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