Armstrong Production Company a Study in Capital Structure

The Armstrong Production Company is an industry-leading firm in the field of manufacturing synthetic building materials for homes and commercial structures, based near St. Louis. Armstrong was fortunate in its initial stages to quickly secure inexpensive funding in the form of developmental loans issued by the State of Illinois, and thus was able to break even within three years of its founding in the early 1970s. Able to pour resources into its research and development segment, riding on the increasing demand for construction materials from the 1970s to 1980s, and issuing 15 million shares for the company in an initial public offering (20% of this is currently owned by the board of directors, with another 13% controlled through the company’s employee stock ownership plan). Armstrong Production was able to greatly expand without incurring an overwhelming amount of debt. Following the stock issue, debt composed only 10% of the firm’s capital structure, with equity (that is, money earned from issuing stocks and retaining earnings in the company) composing the rest. Wanting to diversify into consumer goods and furniture, as well as providing disincentive to opportunistic acquirers of companies with low debt, Armstrong’s board decided was persuaded to issue $145 million in bonds in the mid-1980s, after some hesitation concerning interest rates. The further expansion of the company proved a fiscally-sound decision, resulting in record annual earnings of $115 million in 1990. However, the next year, the construction boom of the last two decades came to an end and the construction materials industry contracted considerably, resulting in downsizing in many firms. Thanks to its push to diversify its products a few years earlier, Armstrong was able to weather the downturn relatively well, with earnings before taxes or interest stabilizing at about $85 million in 1996.

Currently, the company’s debt is $110 million, composing approximately 25% of the