Discontinued Operations

6 Months Ended

Jun. 30, 2019

NOTE 5. DISCONTINUED OPERATIONS

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.

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. In 2017, we recorded an estimated loss of $74.0 million, which included $51.4 million of unfavorable Accumulated Other Comprehensive Income (“AOCI”) adjustments. In 2018, we recorded an estimated loss of $19.3 million, which included $25.5 million of unfavorable AOCI adjustments. As of June 30, 2019, we recorded an immaterial correction related to the previously reported estimated loss on sale of our EMEA and Pacific Rim businesses. The correction increased the estimated loss on sale and reduced the assets held for sale by $35.2 million as of December 31, 2017. During the three and six months ended June 30, 2019, we recorded a net loss of $6.8 million and $4.6 million, respectively. During the three and six months ended June 30, 2019, net losses included $0.6 million of unfavorable AOCI adjustments and $8.5 million of favorable AOCI adjustments, respectively. The AOCI adjustments related primarily to accumulated foreign currency translation amounts that will be subsequently reclassified from AOCI 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, we completed our separation of Armstrong Flooring, Inc. (“AFI”) by allocating the assets and liabilities related primarily to our Resilient and Wood Flooring segments to AFI and then distributing the common stock of AFI to our shareholders at a ratio of one share of AFI common stock for every two shares of AWI common stock.

In connection with the separation and distribution of AFI, we entered into several agreements with AFI that, together with a plan of division, provided 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 governed the relationship between AWI and AFI subsequent to the completion of the separation and distribution. These agreements included a Tax Matters Agreement, an Employee Matters Agreement, a Trademark License Agreement, a Transition Trademark License Agreement and a Campus Lease Agreement.

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.

	EMEA and Pacific Rim Businesses			Flooring Businesses			Total
Three Months Ended June 30, 2019
Net sales	$	106.7		$	-		$	106.7
Cost of goods sold		83.2			-			83.2
Gross profit		23.5			-			23.5
Selling, general and administrative expenses		20.4			-			20.4
Operating income		3.1			-			3.1
Other non-operating expense, net		0.6			-			0.6
Earnings from discontinued operations before income tax		2.5			-			2.5
Income tax expense		4.8			-			4.8
Net (loss) from discontinued operations, net of tax	$	(2.3	)	$	-		$	(2.3	)

(Loss) from disposal of discontinued businesses, before income tax	$	(6.8	)	$	-		$	(6.8	)
Income tax expense		-			0.1			0.1
(Loss) from disposal of discontinued businesses, net of tax	$	(6.8	)	$	(0.1	)	$	(6.9	)

Net (loss) from discontinued operations	$	(9.1	)	$	(0.1	)	$	(9.2	)

	EMEA and Pacific Rim Businesses			Flooring Businesses			Total
Six Months Ended June 30, 2019
Net sales	$	203.6		$	-		$	203.6
Cost of goods sold		158.9			-			158.9
Gross profit		44.7			-			44.7
Selling, general and administrative expenses		41.2			-			41.2
Operating income		3.5			-			3.5
Other non-operating expense, net		0.6			-			0.6
Earnings from discontinued operations before income tax		2.9			-			2.9
Income tax expense		4.7			-			4.7
Net (loss) from discontinued operations, net of tax	$	(1.8	)	$	-		$	(1.8	)

(Loss) from disposal of discontinued businesses, before income tax	$	(4.6	)	$	-		$	(4.6	)
Income tax expense		-			0.1			0.1
(Loss) from disposal of discontinued businesses, net of tax	$	(4.6	)	$	(0.1	)	$	(4.7	)

Net (loss) from discontinued operations	$	(6.4	)	$	(0.1	)	$	(6.5	)

	EMEA and Pacific Rim Businesses			Flooring Businesses			Total
Three Months Ended June 30, 2018
Net sales	$	114.6		$	-		$	114.6
Cost of goods sold		87.3			-			87.3
Gross profit		27.3			-			27.3
Selling, general and administrative expenses		19.7			-			19.7
Operating income		7.6			-			7.6
Interest expense		0.5			-			0.5
Other non-operating expense, net		1.4			-			1.4
Earnings from discontinued operations before income tax		5.7			-			5.7
Income tax expense		0.2			-			0.2
Net earnings from discontinued operations, net of tax	$	5.5		$	-		$	5.5

(Loss) from disposal of discontinued businesses, before income tax	$	(5.7	)	$	-		$	(5.7	)
Income tax expense		-			0.1			0.1
(Loss) from disposal of discontinued business, net of tax	$	(5.7	)	$	(0.1	)	$	(5.8	)

Net (loss) from discontinued operations	$	(0.2	)	$	(0.1	)	$	(0.3	)

	EMEA and Pacific Rim Businesses			Flooring Businesses			Total
Six Months Ended June 30, 2018
Net sales	$	219.0		$	-		$	219.0
Cost of goods sold		165.1			-			165.1
Gross profit		53.9			-			53.9
Selling, general and administrative expenses		41.7			-			41.7
Operating income		12.2			-			12.2
Interest expense		0.9			-			0.9
Other non-operating expense, net		0.2			-			0.2
Earnings from discontinued operations before income tax		11.1			-			11.1
Income tax expense		1.7			-			1.7
Net earnings from discontinued operations, net of tax	$	9.4		$	-		$	9.4

(Loss) from disposal of discontinued businesses, before income tax	$	(23.4	)	$	-		$	(23.4	)
Income tax (benefit)		-			(0.3	)		(0.3	)
(Loss) gain from disposal of discontinued businesses, net of tax	$	(23.4	)	$	0.3		$	(23.1	)

Net (loss) earnings from discontinued operations	$	(14.0	)	$	0.3		$	(13.7	)

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 June 30, 2019 and December 31, 2018 related to our EMEA and Pacific Rim businesses.

	June 30, 2019		December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	10.0	$	10.0
Accounts and notes receivable, net		57.3		56.2
Inventories, net		65.0		59.8
Income tax receivable		5.4		1.8
Other current assets		10.4		8.2
Total current assets discontinued operations		148.1		136.0
Property, plant, and equipment, less accumulated depreciation and amortization ^{(1) (2)}		69.1		68.6
Prepaid pension costs ⁽¹⁾		28.8		28.9
Goodwill and intangible assets, net ⁽¹⁾		6.8		6.8
Deferred income taxes ⁽¹⁾		3.5		3.0
Lease ROU assets ⁽¹⁾		19.3		-
Other non-current assets ⁽¹⁾		1.1		1.0
Total non-current assets of discontinued operations ⁽¹⁾		128.6		108.3
Total assets of discontinued operations ⁽¹⁾	$	276.7	$	244.3
Liabilities
Current liabilities:
Accounts payable and accrued expenses	$	76.7	$	67.1
Income tax payable		2.9		1.1
Total current liabilities		79.6		68.2
Pension benefit liabilities ⁽³⁾		34.4		33.8
Lease non-current liabilities ⁽³⁾		11.3		-
Other long-term liabilities ⁽³⁾		2.0		1.8
Deferred income taxes ⁽³⁾		7.0		6.5
Total non-current liabilities of discontinued operations ⁽³⁾		54.7		42.1
Total liabilities of discontinued operations ⁽³⁾	$	134.3	$	110.3

(1)

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

(2)

Includes pre-tax estimated losses of $4.6 million recorded in the first six months of 2019. As of December 31, 2018, cumulative pre-tax estimated losses were $128.5 million.

(3)

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

The following is a summary of total estimated losses, capital expenditures, and operating lease information related to our EMEA and Pacific Rim businesses which are presented as discontinued operations and included as components of operating and investing cash flows on our Condensed Consolidated Statements of Cash Flows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018
Estimated loss on sale to Knauf ⁽¹⁾		6.8			5.7			4.6			23.4
Purchases of property, plant and equipment		(1.0	)		(2.0	)		(1.4	)		(3.2	)
Operating lease cost ⁽²⁾		2.6			-			4.9			-

	Six Months Ended
	June 30, 2019
ROU assets obtained in exchange for lease obligations ⁽³⁾		24.6

(1)

Represents comparison of the EMEA and Pacific Rim net assets to the expected sales proceeds to be received upon closure of the transaction.

(2)

We do not believe the amount of cash paid for amounts included in the measurement of lease liabilities to be materially different from our operating lease cost for the six months ended June 30, 2019.

(3)

Represents initial ROU assets recognized upon adoption on January 1, 2019. We did not obtain any new ROU assets in exchange for lease obligations during the six months ended June 30, 2019.