NOTE 4. ACQUISITION AND DISCONTINUED OPERATIONS

Acquisition of Steel Ceilings

On August 16, 2018, we acquired the business and assets of Steel Ceilings. The $12.3 million purchase price, which is subject to customary working capital adjustments, was allocated to the assets acquired and the liabilities assumed based on their estimated fair values, with the remaining amount recorded as goodwill. In October 2018, we sold certain assets related to an acquired product line to WAVE for $2.0 million. Accordingly, as of September 30, 2018, these held for sale assets are recorded as a component of Other Current Assets on our Condensed Consolidated Balance Sheet. The total fair value of tangible assets acquired, less liabilities assumed, was $4.4 million. The total fair value of identifiable intangible assets acquired was mostly comprised of amortizable customer relationships of $1.4 million and tradenames of $1.3 million, resulting in $3.2 million of goodwill. These amounts are subject to adjustment until completion of our purchase accounting analysis. All of the acquired goodwill is deductible for tax purposes.

Acquisition of Plasterform

On May 31, 2018, we acquired the business and assets of Plasterform. The $11.6 million purchase price was allocated to the assets acquired and the liabilities assumed based on their estimated fair values, with the remaining amount recorded as goodwill. The total fair value of tangible assets acquired, less liabilities assumed, was $1.9 million. The total fair value of identifiable intangible assets acquired, comprised of amortizable customer relationships, was $4.8 million, resulting in $4.9 million of goodwill. All of the acquired goodwill is deductible for tax purposes.

Acquisition of Tectum

In January 2017, we acquired the business and assets of Tectum. The $31.2 million purchase price was allocated to the tangible and intangible assets acquired and the liabilities assumed based on their estimated fair values, with the remaining unallocated amount recorded as goodwill. The total fair value of tangible assets acquired, less liabilities assumed, was $4.4 million. The total fair value of intangible assets acquired, comprised of amortizable customer relationships and non-amortizing brand names, was $16.0 million, resulting in $10.8 million of goodwill. All of the acquired goodwill is deductible for tax purposes.

EMEA AND PACIFIC RIM BUSINESSES

On November 17, 2017, we agreed to sell certain subsidiaries comprising our businesses in EMEA and the Pacific Rim to Knauf. Pursuant to the Purchase Agreement, prior to the closing, we and Knauf will enter into (i) an agreement relating to the mutual supply of certain products after the closing, (ii) an agreement relating to the use of certain intellectual property by Knauf after the closing, including the Armstrong trade name and (iii) an agreement relating to certain transition services to be provided by AWI to Knauf after closing for a period of up to one year. WAVE and Knauf will also enter into similar agreements for such purposes.

Each quarter we compare the anticipated sales proceeds from Knauf to the carrying value of EMEA and Pacific Rim net assets. We record an estimated loss if the carrying value exceeds the anticipated sales proceeds. Net gains can only be recorded to the extent of previous estimated losses. During the fourth quarter of 2017 we recorded an estimated loss of $74.0 million, which included $51.4 million of AOCI adjustments. During the six months ended June 30, 2018, we recorded an estimated loss of $23.4 million, which included $13.9 million of unfavorable AOCI adjustments. During the three months ended September 30, 2018, we recorded a net gain of $2.4 million, which included $7.6 million of unfavorable AOCI adjustments. As a result, we recorded total estimated losses of $21.0 million during the nine months ended September 30, 2018, which included $21.5 million of unfavorable AOCI adjustments. These AOCI adjustments related to accumulated foreign currency translation amounts that will be subsequently reclassified to earnings from discontinued operations upon sale of our EMEA and Pacific Rim businesses.

See Note 1 for further discussion of the divestiture status.

FLOORING BUSINESSES

Separation and Distribution of AFI

On April 1, 2016, in connection with the separation and distribution of AFI, we entered into several agreements with AFI that, together with a plan of division, provide for the separation and allocation between AWI and AFI of the flooring assets, employees, liabilities and obligations of AWI and its subsidiaries attributable to periods prior to, at and after AFI’s separation from AWI, and govern the relationship between AWI and AFI subsequent to the completion of the separation and distribution. These agreements include a Transition Services Agreement, a Tax Matters Agreement, an Employee Matters Agreement, a Trademark License Agreement, a Transition Trademark License Agreement and a Campus Lease Agreement. Under the Transition Services Agreement, AWI and AFI provided various services to each other during a transition period that expired on December 31, 2017.

European Resilient Flooring

On December 4, 2014, our Board of Directors approved the cessation of funding to our DLW subsidiary, which at that time was our European flooring business. As a result, DLW management filed for insolvency in Germany on December 11, 2014. The German insolvency court subsequently appointed an administrator (the “Administrator”) to oversee DLW operations.

In April 2017, we entered into a settlement agreement and mutual release with the Administrator on behalf of the DLW estate to settle all claims of the Administrator related to the insolvency for a cash payment of $11.8 million.

Summarized Financial Information of Discontinued Operations

The following tables detail the businesses and line items that comprise discontinued operations on the Condensed Consolidated Statements of Earnings and Comprehensive Income.

During the third quarter of 2018, a non-cash income tax benefit of $4.6 million was recorded within discontinued operations due to the reversal of reserves for uncertain tax provisions as a result of an expiration of the federal statute of limitations to review previously filed income tax returns.

	EMEA and Pacific Rim Businesses			Flooring Businesses			Total

Three months ended September 30, 2018:
Net sales	$	112.7		$	-		$	112.7
Cost of goods sold		87.1			-			87.1
Gross profit		25.6			-			25.6
Selling, general and administrative expenses		20.2			-			20.2
Operating income		5.4			-			5.4
Interest expense		0.4			-			0.4
Other non-operating expense, net		0.5			-			0.5
Earnings from discontinued operations before income tax		4.5			-			4.5
Income tax (benefit)		(0.5	)		-			(0.5	)
Net earnings from discontinued operations, net of tax	$	5.0		$	-		$	5.0

Gain on disposal of discontinued businesses, before income tax	$	2.4		$	-		$	2.4
Income tax (benefit)		-			(4.6	)		(4.6	)
Gain on disposal of discontinued businesses, net of tax	$	2.4		$	4.6		$	7.0

Net earnings from discontinued operations	$	7.4		$	4.6		$	12.0

	EMEA and Pacific Rim Businesses			Flooring Businesses			Total
Nine months ended September 30, 2018:
Net sales	$	331.7		$	-		$	331.7
Cost of goods sold		252.2			-			252.2
Gross profit		79.5			-			79.5
Selling, general and administrative expenses		61.9			-			61.9
Operating income		17.6			-			17.6
Interest expense		1.3			-			1.3
Other non-operating expense, net		0.7			-			0.7
Earnings from discontinued operations before income tax		15.6			-			15.6
Income tax expense		1.2			-			1.2
Net earnings from discontinued operations, net of tax	$	14.4		$	-		$	14.4

(Loss) on disposal of discontinued businesses, before income tax	$	(21.0	)	$	-		$	(21.0	)
Income tax (benefit)		-			(4.9	)		(4.9	)
(Loss) gain on disposal of discontinued businesses, net of tax	$	(21.0	)	$	4.9		$	(16.1	)

Net (loss) earnings from discontinued operations	$	(6.6	)	$	4.9		$	(1.7	)

	EMEA and Pacific Rim Businesses			Flooring Businesses			Total
Three months ended September 30, 2017:
Net sales	$	118.0		$	-		$	118.0
Cost of goods sold		90.8			-			90.8
Gross profit		27.2			-			27.2
Selling, general and administrative expenses		19.5			-			19.5
Operating income		7.7			-			7.7
Interest expense		0.3			-			0.3
Other non-operating (income), net		(1.0	)		-			(1.0	)
Earnings from discontinued operations before income tax		8.4			-			8.4
Income tax expense		2.2			-			2.2
Net earnings from discontinued operations, net of tax	$	6.2		$	-		$	6.2

Gain on disposal of discontinued businesses, before income tax	$	-		$	-		$	-
Income tax (benefit)		-			(5.9	)		(5.9	)
Gain on disposal of discontinued business, net of tax	$	-		$	5.9		$	5.9

Net earnings from discontinued operations	$	6.2		$	5.9		$	12.1

	EMEA and Pacific Rim Businesses			Flooring Businesses			Total
Nine months ended September 30, 2017:
Net sales	$	318.8		$	-		$	318.8
Cost of goods sold		254.9			-			254.9
Gross profit		63.9			-			63.9
Selling, general and administrative expenses		57.1			-			57.1
Operating income		6.8			-			6.8
Interest expense		0.9			-			0.9
Other non-operating (income), net		(2.1	)		-			(2.1	)
(Loss) from discontinued operations before income tax		8.0			-			8.0
Income tax expense		8.7			-			8.7
(Loss) from discontinued operations, net of tax	$	(0.7	)	$	-		$	(0.7	)

(Loss) on disposal of discontinued businesses, before income tax	$	-		$	(0.1	)	$	(0.1	)
Income tax (benefit)		-			(5.4	)		(5.4	)
Gain on disposal of discontinued business, net of tax	$	-		$	5.3		$	5.3

Net (loss) gain from discontinued operations	$	(0.7	)	$	5.3		$	4.6

The following is a summary of the carrying amount of major classes of assets and liabilities classified as assets and liabilities of discontinued operations as of September 30, 2018 and December 31, 2017 related to our EMEA and Pacific Rim businesses.

	September 30, 2018		December 31, 2017
Assets
Current assets:
Cash and cash equivalents	$	10.0	$	-
Accounts and notes receivable, net		60.6		61.4
Inventories, net		63.9		59.2
Income tax receivable		7.1		3.1
Other current assets		9.4		12.9
Total current assets discontinued operations		151.0		136.6
Property, plant, and equipment, less accumulated depreciation and amortization ^{(1) (2)}		102.0		131.3
Prepaid pension costs ⁽¹⁾		26.6		26.1
Goodwill and intangible assets, net ⁽¹⁾		7.0		7.2
Deferred income taxes ⁽¹⁾		2.8		4.0
Other non-current assets ⁽¹⁾		0.9		0.9
Total non-current assets of discontinued operations ⁽¹⁾		139.3		169.5
Total assets of discontinued operations ⁽¹⁾	$	290.3	$	306.1
Liabilities
Current liabilities:
Accounts payable and accrued expenses	$	68.5	$	78.6
Income tax payable		6.5		1.3
Total current liabilities		75.0		79.9
Pension benefit liabilities ⁽³⁾		35.1		34.7
Other long-term liabilities ⁽³⁾		1.8		1.8
Deferred income taxes ⁽³⁾		5.3		12.1
Total non-current liabilities of discontinued operations ⁽³⁾		42.2		48.6
Total liabilities of discontinued operations ⁽³⁾	$	117.2	$	128.5

(1)

Presented as Current assets of discontinued operations on the Condensed Consolidated Balance Sheets.

(2)

Includes pre-tax estimated losses of $21.0 million recorded in the first nine months of 2018 and $74.0 million recorded in the fourth quarter of 2017.

(3)

Presented as Current liabilities of discontinued operations on the Condensed Consolidated Balance Sheets.

The following is a summary of total depreciation and amortization, capital expenditures and estimated losses presented as discontinued operations and included as components of operating and investing cash flows on our Condensed Consolidated Statements of Cash Flows:

	EMEA and Pacific Rim Businesses
Three months ended September 30, 2018:
Reversal of previous estimated loss on sale to Knauf		(2.4	)
Purchases of property, plant and equipment		(1.3	)

Nine months ended September 30, 2018:
Estimated losses on sale to Knauf		21.0
Purchases of property, plant and equipment		(4.5	)

Three months ended September 30, 2017:
Depreciation and amortization		5.7
Purchases of property, plant and equipment		(1.6	)

Nine months ended September 30, 2017:
Depreciation and amortization		16.5
Purchases of property, plant and equipment		(8.4	)