UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2019

OR

For the transition period from                   to                  

Commission File Number 1-2116

ARMSTRONG WORLD INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code (717) 397-0611

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☒    No  ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ☐    No  ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter time period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act    ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ☐    No  ☒

The aggregate market value of the Common Stock of Armstrong World Industries, Inc. held by non-affiliates based on the closing price ($97.20 per share) on the New York Stock Exchange (trading symbol AWI) as of June 28, 2019 was approximately $4.7 billion.  As of February 18, 2020, the number of shares outstanding of the registrant's Common Stock was 47,987,627.

TABLE OF CONTENTS

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When we refer to “AWI,” the “Company,” “we,” “our” and “us”, we are referring to Armstrong World Industries, Inc. and its subsidiaries.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this Annual Report on Form 10-K and the documents incorporated by reference may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Those forward-looking statements are subject to various risks and uncertainties and include all statements that are not historical statements of fact and those regarding our intent, belief or expectations, including, but not limited to, our expectations concerning our residential and commercial markets and their effect on our operating results; our expectations regarding the payment of dividends; and our ability to increase revenues, earnings and earnings before interest, taxes, depreciation and amortization (as discussed below). Words such as “anticipate,” “expect,” “intend,” “plan,” “target,” “project,” “predict,” “believe,” “may,” “will,” “would,” “could,” “should,” “seek,” “estimate” and similar expressions are intended to identify such forward-looking statements. These statements are based on management’s current expectations and beliefs and are subject to a number of factors that could lead to actual results materially different from those described in the forward-looking statements. Although we believe that the assumptions underlying the forward-looking statements are reasonable, we can give no assurance that our expectations will be attained. Factors that could have a material adverse effect on our financial condition, liquidity, results of operations or future prospects or which could cause actual results to differ materially from our expectations include, but are not limited to:

Such forward-looking statements speak only as of the date they are made.  We expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statements to reflect any change in our expectations with regard thereto or change in events, conditions or circumstances on which any statement is based.

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PART I

Armstrong World Industries, Inc. (“AWI” or the “Company”) is a Pennsylvania corporation incorporated in 1891.  When we refer to “we,” “our” and “us” in this report, we are referring to AWI and its subsidiaries.

We are a leading producer of ceiling systems for use in the construction and renovation of commercial and residential buildings. We design, manufacture and sell ceiling and wall systems (primarily mineral fiber, fiberglass wool, metal, wood, wood fiber, glass-reinforced-gypsum and felt) throughout the Americas.

Acquisitions

In November 2019, we acquired the business and assets of MRK Industries, Inc. (“MRK”), based in Libertyville, Illinois. MRK is a manufacturer of specialty metal ceiling, wall and exterior solutions with one manufacturing facility. MRK’s operations, and its assets and liabilities, are included as a component of our Architectural Specialties segment.

In March 2019, we acquired the business and assets of Architectural Components Group, Inc. (“ACGI”), based in Marshfield, Missouri. ACGI is a manufacturer of custom wood ceilings and walls with one manufacturing facility. ACGI’s operations, and its assets and liabilities, are included as a component of our Architectural Specialties segment.

In August 2018, we acquired the business and assets of Steel Ceilings, Inc. (“Steel Ceilings”), based in Johnstown, Ohio. Steel Ceilings is a manufacturer of aluminum and stainless metal ceilings that include architectural, radiant and security solutions with one manufacturing facility. Steel Ceilings’ operations, and its assets and liabilities, are included as a component of our Architectural Specialties segment.  

In May 2018, we acquired the business and assets of Plasterform, Inc. (“Plasterform”), based in Mississauga, Ontario, Canada.  Plasterform is a manufacturer of architectural cast ceilings, walls, facades, columns and moldings with one manufacturing facility.  Plasterform’s operations, and its assets and liabilities, are included as a component of our Architectural Specialties segment.

In January 2017, we acquired the business and assets of Tectum, Inc. (“Tectum”), based in Newark, Ohio.  Tectum is a manufacturer of acoustical ceiling, wall and structural solutions for commercial building applications with two manufacturing facilities.  Tectum’s operations, and its assets and liabilities, are included as a component of our Architectural Specialties segment.  

Discontinued Operations

On September 30, 2019, we completed the previously announced sale of certain subsidiaries comprising our businesses and operations in Europe, the Middle East and Africa (including Russia) (“EMEA”) and the Pacific Rim, including the corresponding businesses and operations conducted by Worthington Armstrong Venture (“WAVE”), our joint venture with Worthington Industries, Inc. (“Worthington”) in which AWI holds a 50% interest (collectively, the “Sale”), to Knauf International GmbH (“Knauf”). The purchase price of $330.0 million was previously paid by Knauf to us during the third quarter of 2018 and is subject to certain post-closing adjustments for cash and debt as provided in the Share Purchase Agreement dated as of November 17, 2017, by and between us and Knauf (the “Purchase Agreement”), including adjustments based on the economic impact of any required regulatory remedies and a working capital adjustment.

On July 18, 2018, we entered into an amendment to the Purchase Agreement, pursuant to which Knauf irrevocably and unconditionally paid AWI (i) $250.0 million of the purchase price on August 1, 2018, and (ii) $80.0 million of the purchase price on September 15, 2018, which payments were credited against the aggregate consideration payable at closing. The amendment also provided for the reduction (from a maximum of $35.0 million to a maximum of $20.0 million) of potential adjustments to the purchase price consideration for the transaction based on the impact of remedies required to satisfy competition conditions. Following receipt of these payments, we remitted $70.0 million to WAVE in partial consideration of the purchase price payable in respect of the businesses and operations of WAVE under the transaction. WAVE subsequently paid each of AWI and Worthington a dividend of $35.0 million. We have recorded a $25.9 million payable to WAVE for their remaining portion of the proceeds from Knauf, which is reflected within Accounts payable and accrued expenses in the Consolidated Balance Sheets as of December 31, 2019. The transaction and final gain or loss amounts are subject to finalization of customary working capital and other adjustments, as provided in the Purchase Agreement. For the year ended December 31, 2019, payments to Knauf included $61.0 million of adjustments to cash consideration, estimated working capital adjustments and remedies, offset by $13.1 million of additional cash in international WAVE entities.

On December 7, 2018, the European Commission granted conditional clearance of the transaction, subject to certain commitments intended to address concerns regarding the overlap between the activities of AWI and Knauf, including the divestment by Knauf to a

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third party of certain mineral fiber and grid businesses and operations in Austria, Estonia, Germany, Ireland, Italy, Latvia, Lithuania, Portugal, Spain, Turkey and the United Kingdom (“UK”). This included our sales operations in each of the relevant countries, as well as our production facilities, and those of WAVE, located in Team Valley, UK.

On May 23, 2019, we entered into a Transition Services Agreement with Knauf for its benefit and the benefit of the buyer of the divestment business, pursuant to which we are providing certain transition technology, finance and information technology support services during the period between March 18, 2019 and September 30, 2020.

On September 23, 2019, the European Commission approved the Sale, as well as the terms of the sale of the divestment business by Knauf and the identity of the purchaser.

In connection with the closing of the Sale, we also entered into (i) an intellectual property License Agreement with Knauf for its benefit (and, under sublicense, to the buyer of the divestment business) under which they license certain patents, trademarks and know-how from us for use in certain licensed territories, and (ii) a Supply Agreement with Knauf under which the parties may continue to purchase certain products from each other following the closing of the Sale. WAVE also entered into similar agreements with Knauf for such purposes.

The EMEA and Pacific Rim segment historical financial results through September 30, 2019 have been reflected in AWI’s Consolidated Statements of Earnings and Comprehensive Income as discontinued operations for all periods presented, while the assets and liabilities of discontinued operations have been removed from AWI’s Consolidated Balance Sheet as of December 31, 2019.  

See Notes 5 and 6 to the Consolidated Financial Statements for additional information related to our acquisitions and discontinued operations.

We are focused on driving sustainable shareholder value by consistently delivering profitable sales and earnings growth, while maintaining a balanced approach to capital allocation.  Through our expanding architectural specialties offerings, bolstered by our acquisitions of Tectum, Plasterform, Steel Ceilings, ACGI and MRK, our innovative core ceilings portfolio, including our Total Acoustics® solutions and Sustain® family of products, and digitally enabled systems and tools, we are expanding our capabilities to sell into more spaces and sell more into every space. 

Markets

We are well positioned in the industry sectors and categories in which we operate, often holding a leadership position. Our products compete against mineral fiber and fiberglass products from other manufacturers, as well as drywall and a wide range of specialty ceiling products.  We compete directly with other domestic and international suppliers of these products. The major markets in which we compete are:

Commercial Construction.  Our revenue opportunities come from new construction as well as renovation of existing buildings.  Renovation work (also known as replacement/remodel) is estimated to represent the majority of the commercial market opportunity.  Most of our revenue comes from the following sectors of commercial construction – office, education, transportation, healthcare, government and retail.  We monitor U.S. construction starts and project activity.  Our revenue from new construction can lag behind construction starts by as much as 18 to 24 months.  We also monitor office vacancy rates, the Architecture Billings Index, state and local government spending, gross domestic product (“GDP”) and general employment levels, which can indicate movement in renovation and new construction opportunities.  We believe that these statistics, taking into account the time-lag effect, provide a reasonable indication of our future revenue opportunity from commercial renovation and new construction.  Additionally, we believe that customer preferences for product type, style, color, performance attributes (such as acoustics and sustainability), availability, affordability and ease of installation also affect our revenue.

In our Mineral Fiber segment, we estimate that a majority of our commercial market sales are used for renovation purposes by end-users of our products.  In our Architectural Specialties segment, we estimate that a majority of our commercial market sales are used for new construction and remodel purposes by end-users of our products. The end-use of our products is based on management estimates as such information is not easily determinable.

Residential Construction.  We also sell mineral fiber products for use in single and multi-family housing. We estimate that existing home renovation work represents the majority of the residential market opportunity.  Key U.S. statistics that indicate market opportunity include existing home sales (a key indicator for renovation opportunity), housing starts, housing completions, home prices, interest rates and consumer confidence.  

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Customers

We use our reputation, capabilities, service, innovation and brand recognition to develop long-standing relationships with our customers.  We principally sell commercial products to building materials distributors, who re-sell our products to contractors, subcontractors’ alliances, large architect and design firms, and major facility owners. We have important relationships with national home centers such as Lowe’s Companies, Inc. and The Home Depot, Inc., with wholesalers who re-sell our products to dealers who service builders, contractors and consumers, and also with architects and designers who specify products.

Approximately 73% of our consolidated net sales are to distributors.  Sales to large home centers account for slightly less than 10% of our consolidated net sales.  Our remaining sales are primarily to direct customers and retailers.  

Gross sales to two commercial distributors totaling $428.7 million, included within our Mineral Fiber and Architectural Specialties segments, individually exceeded 10% of our consolidated gross sales in 2019.  

Working Capital

We produce goods for inventory and sell on credit to our customers.  Generally, our distributors carry inventory as needed to meet local or rapid delivery requirements.  We sell our products to select, pre-approved customers using customary trade terms that allow for payment in the future.  These practices are typical within the industry.  

Competition

The markets in which our products are sold are highly competitive.  Principal attributes of competition include product performance, product styling, service and price.  Competition comes from both domestic and international manufacturers.  Additionally, some of our products compete with alternative products or finishing solutions, namely, drywall and exposed structure (also known as open plenum).  Excess industry capacity exists for certain products, which tends to increase price competition.  The following companies are our primary competitors:

CertainTeed Corporation (a subsidiary of Saint-Gobain), Chicago Metallic Corporation (owned by Rockwool International A/S), Georgia-Pacific Corporation, Rockfon A/S (owned by Rockwool International A/S), USG Corporation (owned by Gebr. Knauf KG), Ceilings Plus (owned by USG Corporation), Rulon International, and 9Wood.

Raw Materials

We purchase raw materials from numerous suppliers worldwide in the ordinary course of business.  The principal raw materials include: clays, fiberglass, perlite, pigment, starch, waste paper, wood and wood fiber.  We manufacture most of the production needs for mineral wool at one of our manufacturing facilities.  Finally, we use aluminum and steel in the production of metal ceilings by us and by WAVE, our joint venture that manufactures ceiling grid.

We also purchase significant amounts of packaging materials and consume substantial amounts of energy, such as electricity and natural gas, and water.

In general, adequate supplies of raw materials are available to all of our operations.  However, availability can change for a number of reasons, including environmental conditions, laws and regulations, shifts in demand by other industries competing for the same materials, transportation disruptions and/or business decisions made by, or events that affect, our suppliers.  There is no assurance that these raw materials will remain in adequate supply to us.

Prices for certain high usage raw materials can fluctuate dramatically.  Cost increases for these materials can have a significant adverse impact on our manufacturing costs.  Given the competitiveness of our markets, we may not be able to recover the increased manufacturing costs through increasing selling prices to our customers.

Sourced Products

Some of the products that we sell are sourced from third parties.  Our primary sourced products include specialty ceiling products.  We purchase some of our sourced products from suppliers that are located outside of the U.S., primarily from Europe and the Pacific Rim.  Sales of sourced products represented approximately 12% of our total consolidated revenue in 2019.

In general, we believe we have adequate supplies of sourced products.  However, we cannot guarantee that the supply will remain adequate.

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Seasonality

Generally, our sales tend to be stronger in the second and third quarters of our fiscal year due to more favorable weather conditions, customer business cycles and the timing of renovation and new construction.  

Patent and Intellectual Property Rights

Patent protection is important to our business.  Our competitive position has been enhanced by patents on products and processes developed or perfected within AWI or obtained through acquisitions and licenses.  In addition, we benefit from our trade secrets for certain products and processes.

Patent protection extends for varying periods according to the date of patent filing or grant and the legal term of a patent in the various countries where patent protection is obtained.  The actual protection afforded by a patent, which can vary from country to country, depends upon the type of patent, the scope of its coverage and the availability of legal remedies.  Although we consider that, in the aggregate, our patents, licenses and trade secrets constitute a valuable asset of material importance to our business, we do not believe we are materially dependent upon any single patent or trade secret, or any group of related patents or trade secrets.

Certain of our trademarks, including without limitation,  , Armstrong®, ACOUSTIBuilt™, Airtite™, Calla®, Cirrus®, Cortega®, DESIGNFlex™, Dune™, Feltworks®, Humiguard®, Infusions®, InvisAcoustics™, Lyra®, MetalWorks™,  Optima®, Plasterform™, Soundscapes®, Sustain®, Tectum®, Total Acoustics®,  Ultima®, and WoodWorks®, are important to our business because of their significant brand name recognition.  Registrations are generally for fixed, but renewable, terms.

In connection with the separation and distribution of our former flooring business into a separate publicly-traded company, Armstrong Flooring, Inc. (“AFI”), in 2016, we entered into several agreements with AFI that, together with a plan of division, provided for the separation and allocation of assets between AWI and AFI.  These agreements include a Trademark License Agreement and a Transition Trademark License Agreement.  Pursuant to the Trademark License Agreement, AWI provided AFI with a perpetual, royalty-free license to utilize the “Armstrong” trade name and logo.  Pursuant to the Transition Trademark License Agreement, AFI provided us with a five-year royalty-free license to utilize the “Inspiring Great Spaces” tagline, logo and related color scheme.

In connection with the closing of the Sale, we entered into an intellectual property License Agreement with Knauf for its benefit (and, under sublicense, to the buyer of the divestment business) under which they license certain patents, trademarks and know-how from us for use in certain licensed territories.

We review the carrying value of trademarks at least annually for potential impairment.  See the “Critical Accounting Estimates” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Form 10-K for further information.

Employees

As of December 31, 2019, we had approximately 2,500 full time and part time employees. As of December 31, 2018, we had approximately 4,000 full-time and part-time employees, including 1,800 employees as part of our EMEA and Pacific Rim businesses. These employees were retained by Knauf and/or the buyer of the divestment business as a result of the Sale. The increase in employees, after taking into account the attrition from the Sale, is primarily attributable to the acquisitions of ACGI and MRK during 2019.

As of December 31, 2019, approximately 62% of our approximately 1,300 production employees in the U.S. were represented by labor unions.  A collective bargaining agreement covering approximately 230 employees at one U.S. plant will expire during 2020. We believe that our relations with our employees are satisfactory.

Research & Development

Research and development (“R&D”) activities are important and necessary in helping us improve our products’ competitiveness.  Principal R&D functions include the development and improvement of products and manufacturing processes.

Sustainability and Environmental Matters

The adoption of environmentally responsible building codes and standards such as the Leadership in Energy and Environmental Design (“LEED”) rating system established by the U.S. Green Building Council, has the potential to increase demand for products, systems and services that contribute to building sustainable spaces. Many of our products meet the requirements for the award of

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LEED credits, and we are continuing to develop new products, systems and services to address market demand for products that enable construction of buildings that require fewer natural resources to build, operate and maintain. Our competitors also have developed and introduced to the market products with an increased focus on sustainability.

We expect that there will be increased demand over time for products, systems and services that meet evolving regulatory and customer sustainability standards and preferences and decreased demand for products that produce significant greenhouse gas emissions. We also believe that our ability to continue to provide these products, systems and services to our customers will be necessary to maintain our competitive position in the marketplace.  We are committed to complying with all environmental laws and regulations that are applicable to our operations.

As a leading building products manufacturer, we are committed to operating as a strong corporate citizen across all areas of our business. This commitment is reflected in our ongoing initiatives to design and develop sustainable ceiling and wall products and solutions for every space.

Legal and Regulatory Proceedings

Regulatory activities of particular importance to our operations include proceedings under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), and state Superfund and similar type environmental laws governing existing or potential environmental contamination at three domestically owned locations allegedly resulting from past industrial activity. We are one of several potentially responsible parties in these matters and have agreed to jointly fund required investigation, while preserving our defenses to the liability.  We may also have rights of contribution or reimbursement from other parties or coverage under applicable insurance policies.  

Most of our facilities are affected by various federal, state and local environmental requirements relating to the discharge of materials or the protection of the environment.  We make expenditures necessary for compliance with applicable environmental requirements at each of our operating facilities. We have not experienced a material adverse effect upon our capital expenditures or competitive position as a result of environmental control legislation and regulations.

On September 8, 2017, Roxul USA, Inc. (d/b/a Rockfon) (“Rockfon”) filed litigation against us in the United States District Court for the District of Delaware (the “Court”) alleging anticompetitive conduct seeking remedial measures and unspecified damages.  Roxul USA, Inc. is a significant ceilings systems competitor with global headquarters in Europe and expanding operations in the Americas.  On April 3, 2019, we entered into a confidential settlement agreement with Rockfon to fully resolve the litigation between us, and Rockfon filed a Stipulation of Dismissal with Prejudice (“Dismissal”) with the Court.  Pursuant to the Dismissal, Rockfon formally dismissed all claims it had against AWI with prejudice.  All claims in the litigation have been fully and finally dismissed and released with AWI making a payment to Rockfon for its costs, expenses and attorneys’ fees.  Pursuant to the settlement, both parties acknowledged that (a) AWI denies all claims of wrongdoing and makes no admission of wrongdoing or of the truth of any of the claims or allegations contained in Rockfon’s complaint or otherwise alleged in the litigation; (b) all AWI exclusive distribution locations (i.e., any location where a reseller has agreed to sell only AWI ceiling system products) will remain exclusive to AWI under their respective distribution agreements, and (c) in all other non-exclusive or “open” distribution locations, resellers are free to purchase and resell ceiling systems products of any manufacturer at their discretion. During 2019, we incurred $19.7 million of expenses in connection with the matter, primarily relating to legal and professional fees incurred by us in connection with the litigation, including expenses and attorney’s fees paid under the settlement agreement. As a result of the settlement and Dismissal, we do not expect to incur additional future costs or expenses relating to the matter.

We are involved in various other lawsuits, claims, investigations and other legal matters from time to time that arise in the ordinary course of business, including matters involving our products, intellectual property, relationships with suppliers, relationships with distributors, relationships with competitors, employees and other matters. From time to time, for example, we may be a party to various litigation matters that involve product liability, tort liability and other claims under various allegations, including illness due to exposure to certain chemicals used in the workplace, or medical conditions arising from exposure to product ingredients or the presence of trace contaminants.  Such allegations may involve multiple defendants and relate to legacy products that we and other defendants purportedly manufactured or sold. We believe that any current claims are without merit and intend to defend them vigorously. For these matters, we also may have rights of contribution or reimbursement from other parties or coverage under applicable insurance policies.  When applicable and appropriate, we will pursue coverage and recoveries under those policies, but are unable to predict the outcome of those demands.  While complete assurance cannot be given to the outcome of these proceedings, we do not believe that any current claims, individually or in the aggregate, will have a material adverse effect on our financial condition, liquidity or results of operations.

Liabilities of $1.6 million and $12.4 million as of December 31, 2019 and December 31, 2018, respectively, were recorded for environmental liabilities that we consider probable and for which a reasonable estimate of the probable liability could be made.  See

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Note 27 to the Consolidated Financial Statements and Risk Factors in Item 1A of this Form 10-K, for information regarding the possible effects that compliance with environmental laws and regulations may have on our businesses and operating results.

Website

We maintain a website at http://www.armstrongceilings.com.  Information contained on our website is not incorporated into this document.  Annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, all amendments to those reports and other information about us are available free of charge through this website as soon as reasonably practicable after the reports are electronically filed with the SEC.  Reference in this Form 10-K to our website and the SEC’s website is an inactive text reference only.  

Unstable market and economic conditions could have a material adverse impact on our financial condition, liquidity or results of operations.

Our business is influenced by market and economic conditions, including inflation, deflation, interest rates, availability and cost of capital, consumer spending rates, energy availability and the effects of governmental initiatives to manage economic conditions.  Volatility in financial markets and the continued softness or further deterioration of national and global economic conditions could have a material adverse effect on our financial condition, liquidity or results of operations, including as follows:

Continued or sustained deterioration of economic conditions would likely exacerbate and prolong these adverse effects.

Our business is dependent on construction activity. Downturns in construction activity could have a material adverse effect on our financial condition, liquidity or results of operations.

Our businesses have greater sales opportunities when construction activity is strong and, conversely, have fewer opportunities when such activity declines.  The cyclical nature of commercial and residential construction activity, including construction activity funded by the public sector, tends to be influenced by prevailing economic conditions, including the rate of growth in gross domestic product, prevailing interest rates, government spending patterns, business, investor and consumer confidence and other factors beyond our control.  Prolonged downturns in construction activity could have a material adverse effect on our financial condition, liquidity or results of operations.

Our markets are highly competitive. Competition could reduce demand for our products or negatively affect our sales mix or price realization. Failure to compete effectively by meeting consumer preferences, developing and marketing innovative solutions, maintaining strong customer service and distribution relationships, and expanding our solutions capabilities and reach could adversely affect our results.

Our customers consider our products’ performance, product styling, customer service and price when deciding whether to purchase our products. Shifting consumer preference in our highly competitive markets, from acoustical solutions to other ceiling and wall products, for example, whether for performance or styling preferences or our inability to develop and offer new competitive performance features could have an adverse effect on our sales. Similarly, our ability to identify, protect and market new and innovative solutions is critical to our long-term growth strategy, namely to sell into more spaces and sell more solutions in every space. If our competitors offer discounts on certain products or provide new or alternative offerings that the marketplace perceives as more cost-effective, it could adversely affect our price realization. Any broad-based change to our price realization could cause our revenues and margins to decline.

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Sales fluctuations to and changes in our relationships with key customers could have a material adverse effect on our financial condition, liquidity or results of operations.

The loss, reduction, or fluctuation of sales to key customers, including independent distributors, or any adverse change in our business relationship with them, whether as a result of competition, industry consolidation or otherwise, could have a material adverse effect on our financial condition, liquidity or results of operations.

Customer consolidation, and competitive, economic and other pressures facing our customers, may negatively impact our operating margins and profitability.

A number of our customers, including distributors and contractors, have consolidated in recent years and consolidation could continue. Further consolidation could impact margin growth and profitability as larger customers may realize certain operational and other benefits of scale. The economic and competitive landscape for our customers is constantly changing, and our customers' responses to those changes could impact our business. These factors and others could have a material adverse impact on our business, financial condition or results of operations.

If the availability of raw materials or energy decreases, or the costs increase, and we are unable to pass along increased costs, our financial condition, liquidity or results of operations could be adversely affected.

The availability and cost of raw materials, packaging materials, energy and sourced products are critical to our operations and our results of operations.  For example, we use substantial quantities of natural gas and petroleum-based raw materials in our manufacturing operations.  The cost of some of these items has been volatile in recent years and availability has been limited at times.  We source some materials from a limited number of suppliers, which, among other things, increases the risk of unavailability.  Limited availability could cause us to reformulate products or limit our production.  Decreased access to raw materials and energy or significant increased cost to purchase these items and any corresponding inability to pass along such costs through price increases could have a material adverse effect on our financial condition, liquidity or results of operations.

The performance of our WAVE joint venture is important to our financial results.  Changes in the demand for, or quality of, WAVE products, or in the operational or financial performance of the WAVE joint venture, could have a material adverse effect on our financial condition, liquidity or results of operations.  Similarly, if there is a change with respect to our joint venture partner that adversely impacts its relationship with us, WAVE’s performance could be adversely impacted.

Our equity investment in our WAVE joint venture remains important to our financial results. WAVE’s markets are highly competitive, and changes in the demand for, or quality of, WAVE products, or in the operational or financial performance of the WAVE joint venture, could have a material adverse effect on its financial condition, liquidity or results of operations. Similarly, the availability and cost of raw materials, packaging materials, energy and sourced products are critical to WAVE’s operations and its results of operations.

We believe another important element in the success of this joint venture is the relationship with our partner, Worthington Industries, Inc.  If there is a change in ownership, a change of control, a change in management or management philosophy, a change in business strategy or another event with respect to our partner that adversely impacts our relationship, WAVE’s performance could be adversely impacted.  In addition, our partner may have economic or business interests or goals that are different from or inconsistent with our interests or goals, which may impact our ability to influence or align WAVE’s strategy and operations.

The geographic concentration of our business could subject us to greater risk than our competitors and could have a material adverse effect on our financial condition, liquidity or results of operations.

As a result of the recent divestiture of our Europe, Middle East and Africa (including Russia) and Pacific Rim businesses to Knauf International GmbH, we primarily operate in the United States, Canada and Latin America.  Our concentrated operations in the Americas could subject us to a greater degree of risk relative to our global, diversified competitors. We are particularly vulnerable to adverse events (including acts of terrorism, natural disasters, weather conditions, labor market disruptions and government actions) and economic conditions in the United States, Canada and Latin America. Adverse events or conditions in these geographic areas could have a material adverse effect on our financial condition, liquidity or results of operations.

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We may pursue strategic transactions, including mergers, acquisitions, joint ventures, strategic alliances or other investments, which could create risks and present unforeseen integration obstacles or costs, any of which could have a material adverse effect our financial condition, liquidity or results of operations.

We regularly evaluate potential mergers, acquisitions, joint ventures, strategic alliances or other investments that we believe could complement, enhance or expand our current businesses or product lines or that might otherwise offer us growth opportunities. Any such strategic transaction involves a number of risks, including potential disruption of our ongoing business and distraction of management, difficulty with integrating or separating personnel and business operations and infrastructure, and increasing or decreasing the scope, geographic diversity and complexity of our operations.  Strategic transactions could involve payment by us of a substantial amount of cash, assumption of liabilities and indemnification obligations, regulatory requirements, incurrence of a substantial amount of debt or issuance of a substantial amount of equity.  Certain strategic opportunities may not result in the consummation of a transaction or may fail to realize the intended benefits and synergies.  If we fail to consummate and integrate our strategic transactions in a timely and cost-effective manner, our financial condition, liquidity or results of operation could be materially and adversely affected.

Negative tax consequences can have an unanticipated effect on our financial results.

We are subject to the tax laws of the many jurisdictions in which we operate.  The tax laws are complex, and the manner in which they apply to our operations and results is sometimes open to interpretation.  Our income tax expense and reported net income may fluctuate significantly, and may be materially different than forecasted or experienced in the past.  Our financial condition, liquidity, results of operations or tax liability could be adversely affected by changes in effective tax rates, changes in our overall profitability, changes in tax legislation, the results of examinations of previously filed tax returns, and ongoing assessments of our tax exposures.

Our financial condition, liquidity, results of operations or tax liability could also be adversely affected by changes in the valuation of deferred tax assets and liabilities. We have substantial deferred tax assets related to U.S. domestic foreign tax credits (“FTCs”), a capital loss carryforward, and state net operating losses (“NOLs”), which are available to reduce our U.S. income tax liability and to offset future state taxable income.  However, our ability to utilize the current carrying value of these deferred tax assets may be impacted as a result of certain future events, such as changes in tax legislation and insufficient future taxable income prior to expiration of the FTCs, capital loss carryforwards, and NOLs.

We may be subject to liability under, and may make substantial future expenditures to comply with, environmental laws and regulations, which could have a material adverse effect on our financial condition, liquidity or results of operations.

We are actively involved in environmental investigation and remediation activities relating to several domestically owned, formerly owned and non-owned locations allegedly resulting from past industrial activity, for which our ultimate liability may exceed the currently estimated and accrued amounts.  See Note 27 to the Consolidated Financial Statements for further information related to our current environmental matters and the potential liabilities associated therewith. It is also possible that we could become subject to additional environmental matters and corresponding liabilities in the future.

The building materials industry has been subject to claims relating to raw materials such as silicates, polychlorinated biphenyl (“PCB”), PVC, formaldehyde, fire-retardants and claims relating to other issues such as mold and toxic fumes, as well as claims for incidents of catastrophic loss, such as building fires.  We have not received any significant claims involving our raw materials or our product performance; however, product liability insurance coverage may not be available or adequate in all circumstances to cover claims that may arise in the future.

In addition, our operations are subject to various environmental, health, and safety laws and regulations.  These laws and regulations not only govern our current operations and products, but also impose potential liability on us for our past operations.  Our costs to comply with these laws and regulations may increase as these requirements become more stringent in the future, and these increased costs may have a material adverse effect on our financial condition, liquidity or results of operations.

Our operating and information systems may experience a failure, a compromise of security, or a violation of data privacy laws or regulations, which could interrupt or damage our operations.

In the conduct of our business, we collect, use, transmit and store data on information systems, which are vulnerable to disruption and an increasing threat of continually evolving cybersecurity risks. These information systems may be disrupted or fail as a result of events that are wholly or partially beyond our control, including events such as natural disasters, power loss, software “bugs”, hardware defects, hacking, computer viruses, malware, ransomware or other cyber-attacks. All of these risks are also applicable where we rely on outside vendors to provide services, which may operate in a cloud environment. We are dependent on third-party vendors

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to operate secure and reliable systems which may include data transfers over the internet. Any events which deny us use of vital operating or information systems may seriously disrupt our normal business operations.

We also compete through our use of information technology. We strive to provide customers with timely, accurate, easy-to-access information about product availability, orders and delivery status using state-of-the-art systems. While we have processes for short-term failures and disaster recovery capability, a prolonged disruption of systems or other failure to meet customers’ expectations regarding the capabilities and reliability of our systems may have a material adverse effect on our operating results.

We could also experience a compromise of our information security due to technical system flaws, clerical, data input or record-keeping errors, or tampering or manipulation of our systems by employees or unauthorized third parties. Information security risks also exist with respect to the use of portable electronic devices, such as laptops and smartphones, which are particularly vulnerable to loss and theft. Any security breach or compromise of our information systems could significantly damage our reputation, cause the disclosure of confidential customer, employee, supplier or company information, including our intellectual property, and result in significant losses, litigation, fines and costs. The security measures we have implemented to protect against unauthorized access to our information systems and data may not be sufficient to prevent breaches. The regulatory environment related to information security, data collection and privacy is evolving, with new and constantly changing requirements applicable to our business, and compliance with those requirements could result in additional costs.

Additionally, our key partners, distributors or suppliers could experience a compromise of their information security due to technical system flaws, clerical, data input or record-keeping errors, or tampering or manipulation of their respective systems by employees or third parties, which may have an impact on our commercial sales, vendor, partner or other relationships.  

Adverse results caused by regulatory actions, product claims, environmental claims and other litigation could be costly.  Insurance coverage may not be available or adequate in all circumstances.

In the ordinary course of business, we are subject to various claims and litigation.  Any such claims, whether with or without merit, could be time consuming and expensive to defend and could divert management’s attention and resources.  While we strive to ensure that our products comply with applicable government regulatory standards and internal requirements, and that our products perform effectively and safely, customers from time to time could claim that our products do not meet warranty or contractual requirements, and users could claim to be harmed by use or misuse of our products.  These claims could give rise to breach of contract, warranty or recall claims, or claims for negligence, product liability, strict liability, personal injury or property damage.  They could also result in negative publicity.

In addition, claims and investigations may arise related to patent infringement, distributor relationships, commercial contracts, antitrust or competition law requirements, employment matters, employee benefits issues, and other compliance and regulatory matters, including anti-corruption and anti-bribery matters.  While we have processes and policies designed to mitigate these risks and to investigate and address such claims as they arise, we cannot predict or, in some cases, control the costs to defend or resolve such claims.

We currently maintain insurance against some, but not all, of these potential claims. In the future, we may not be able to maintain insurance at commercially acceptable premium levels.  In addition, the levels of insurance we maintain may not be adequate to fully cover any and all losses or liabilities.  If any significant judgment or claim is not fully insured or indemnified against, it could have a material adverse impact. We cannot assure that the outcome of all current or future litigation will not have a material adverse effect on our financial condition, liquidity or results of operations.

We may not experience the anticipated benefits from our strategic initiatives, including investments in digitalization and new technology.

We continue to evaluate and may pursue strategic initiatives involving the development or utilization of new or innovative products, solutions and tools, as well as the expansion of our capabilities through digitalization. These initiatives are designed to grow revenue, improve profitability and increase shareholder value. Our results of operations and financial position could be materially and adversely affected if we are unable to successfully identify, execute and integrate these initiatives or if we are unable to complete these initiatives in a timely and efficient manner to realize competitive advantages and opportunities.

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The agreements that govern our indebtedness contain a number of covenants that impose significant operating and financial restrictions, including restrictions on our ability to engage in activities that may be in our best long-term interests.

The agreements that govern our indebtedness include covenants that, among other things, may impose significant operating and financial restrictions, including restrictions on our ability to engage in activities that may be in our best long-term interests.  These covenants may restrict our ability to:

Under the terms of our senior secured credit facility, we are required to maintain specified leverage and interest coverage ratios.  Our ability to meet these ratios could be affected by events beyond our control, and we cannot assure that we will meet them.  A breach of any of the restrictive covenants or ratios would result in a default under the senior secured credit facility.  If any such default occurs, the lenders under the senior secured credit facility may be able to elect to declare all outstanding borrowings under our facilities, together with accrued interest and other fees, to be immediately due and payable, or enforce their security interest.  The lenders may also have the right in these circumstances to terminate commitments to provide further borrowings.

Our indebtedness may adversely affect our cash flow and our ability to operate our business, make payments on our indebtedness and declare dividends on our capital stock.

Our level of indebtedness and degree of leverage could:

We may also incur additional indebtedness, which could exacerbate the risks described above.  In addition, to the extent that our indebtedness bears interest at floating rates, our sensitivity to interest rate fluctuations will increase.

Any of the above listed factors could have a material adverse effect on our financial condition, liquidity or results of operations.

We require a significant amount of liquidity to fund our operations, and borrowing has increased our exposure to negative unforeseen events.

Our liquidity needs vary throughout the year.  If our business experiences materially negative unforeseen events, we may be unable to generate sufficient cash flow from operations to fund our needs or maintain sufficient liquidity to operate and remain in compliance with our debt covenants, which could result in reduced or delayed planned capital expenditures and other investments and have a material adverse effect on our financial condition or results of operations.

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Significant changes in factors and assumptions used to measure our defined benefit plan obligations, actual investment returns on pension assets and other factors could negatively impact our operating results and cash flows.

We maintain significant pension and postretirement plans in the U.S.  The recognition of costs and liabilities associated with these plans for financial reporting purposes is affected by assumptions made by management and used by actuaries engaged by us to calculate the benefit obligations and the expenses recognized for these plans.

The inputs used in developing the required estimates are calculated using a number of assumptions, which represent management’s best estimate of the future.  The assumptions that have the most significant impact on reported results are the discount rate, the estimated long-term return on plan assets for the funded plans, retirement rates, and mortality rates and, for postretirement plans, the estimated inflation in health care costs.  These assumptions are generally updated annually.

Our U.S. pension plans were overfunded by $47.0 million as of December 31, 2019.  Our unfunded U.S. postretirement plan liabilities were $77.5 million as of December 31, 2019.  If our cash flows and capital resources are insufficient to fund our pension and postretirement plans obligations, we could be forced to reduce or delay investments and capital expenditures, seek additional capital, or restructure or refinance our indebtedness.

Our intellectual property rights may not provide meaningful commercial protection for our products or brands, which could adversely impact our financial condition, liquidity or results of operations.

We rely on our proprietary intellectual property, including numerous patents and registered trademarks, as well as our licensed intellectual property to market, promote and sell our products.  We monitor and protect against activities that might infringe, dilute, or otherwise harm our patents, trademarks and other intellectual property and rely on the patent, trademark and other laws of the U.S. and other countries.  However, we may be unable to prevent third parties from using our intellectual property without our authorization.  In addition, the laws of some non-U.S. jurisdictions, particularly those of certain emerging markets, provide less protection for our proprietary rights than the laws of the U.S. and present greater risks of counterfeiting and other infringement.  To the extent we cannot protect our intellectual property, unauthorized use and misuse of our intellectual property could harm our competitive position and have a material adverse effect on our financial condition, liquidity or results of operations.

Increased focus by governmental and non-governmental organizations, customers, consumers and investors on sustainability issues, including those related to climate change, may have a material adverse effect on our business, financial condition and results of operations and damage our reputation.

Increased focus by governmental and non-governmental organizations, customers, consumers and investors on sustainability issues, including those related to climate change, may have a material adverse effect on our business, financial condition and results of operations and damage our reputation. As climate change, land use, water use, deforestation, recyclability or recoverability of products, and other sustainability concerns become more prevalent, governmental and non-governmental organizations, customers, consumers and investors are increasingly focusing on these issues. This increased focus on environmental issues and sustainability may result in new or increased regulations and customer and investor demands that could cause us to incur additional costs or to make changes to our operations to comply with any such regulations and demands.

If the separation and distribution of Armstrong Flooring, Inc. (“AFI”) fails to qualify as a tax-free transaction for U.S. federal income tax purposes, then AFI, AWI and AWI’s shareholders could be subject to significant tax liability or tax indemnity obligations.

On April 1, 2016, we completed our previously announced separation of AFI by allocating the assets and liabilities related primarily to the Resilient Flooring 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 distribution, we received an opinion from our special tax counsel, on the basis of certain facts, representations, covenants and assumptions set forth in such opinion, substantially to the effect that, for U.S. federal income tax purposes, the separation and distribution should qualify as a transaction that generally is tax-free to us and our shareholders under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code.

Notwithstanding the tax opinion, the Internal Revenue Service (“IRS”) could determine on audit that the distribution should be treated as a taxable transaction if it determines that any of the facts, assumptions, representations or covenants set forth in the tax opinion is not correct or has been violated, or that the distribution should be taxable for other reasons, including as a result of a significant change in stock or asset ownership after the distribution, or if the IRS were to disagree with the conclusions of the tax opinion. If the distribution is ultimately determined to be taxable, the distribution could be treated as a taxable dividend to each U.S. holder of our common shares who receives shares of AFI in connection with the spinoff for U.S. federal income tax purposes, and such shareholders could incur significant U.S. federal income tax liabilities. In addition, we and/or AFI could incur significant U.S. federal income tax

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liabilities or tax indemnification obligations, whether under applicable law or the Tax Matters Agreement that we entered into with AFI, if it is ultimately determined that certain related transactions undertaken in anticipation of the distribution are taxable.

We are subject to risks associated with our international operations in Canada and Latin America. Legislative, political, regulatory and economic volatility, as well as vulnerability to infrastructure and labor disruptions, could have a material adverse effect on our financial condition, liquidity or results of operations.

A portion of our products move in international trade.  See Note 3 to the Consolidated Financial Statements for further information.  Our international trade is subject to currency exchange fluctuations, trade regulations, import duties, logistics costs, delays and other related risks.  Our international operations are also subject to various tax rates, credit risks in emerging markets, political risks, uncertain legal systems, and loss of sales to local competitors following currency devaluations in countries where we import products for sale.  In addition, our international growth strategy depends, in part, on our ability to expand our operations in Canada and Latin America.  However, some emerging markets have greater political and economic volatility and greater vulnerability to infrastructure and labor disruptions than established markets.  Similarly, our efforts to enhance the profitability or accelerate the growth of our operations in certain markets depends largely on the economic and geopolitical conditions in those local or regional markets.

In addition, in many countries outside of the United States, particularly in those with developing economies, it may be common for others to engage in business practices prohibited by laws and regulations applicable to us, such as the Foreign Corrupt Practices Act or similar local anti-corruption or anti-bribery laws.  These laws generally prohibit companies and their employees, contractors or agents from making improper payments to government officials for the purpose of obtaining or retaining business.  Failure to comply with these laws, as well as U.S. and foreign export and trading laws, could subject us to civil and criminal penalties.  As we continue to expand our business, we may have difficulty anticipating and effectively managing these and other risks that our operations may face, which may adversely affect our business outside the United States and our financial condition, liquidity or results of operations.

From time to time, we engage in cost-saving and productivity initiatives. Any such initiatives may not achieve expected savings in our operating costs or improved operating results.

We aggressively look for ways to make our operations more efficient and effective.  We may reduce, move, modify and expand our plants and operations, as well as our sourcing and supply chain arrangements, as needed, to control costs and improve productivity.  Such actions involve substantial planning, often require capital investments and may result in charges for fixed asset impairments or obsolescence and substantial severance costs.  Our ability to achieve cost savings and other benefits within expected time frames is subject to many estimates and assumptions.  These estimates and assumptions are subject to significant economic, competitive and other uncertainties, some of which are beyond our control.  If these estimates and assumptions are incorrect, if we experience delays, or if other unforeseen events occur, our financial condition, liquidity or results of operations could be materially and adversely affected.

Increased costs of labor, labor disputes, work stoppages or union organizing activity could delay or impede production and could have a material adverse effect on our financial condition, liquidity or results of operations.

Increased costs of labor, including the costs of employee benefits plans, labor disputes, work stoppages or union organizing activity could delay or impede production and have a material adverse effect on our financial condition, liquidity or results of operations.  As the majority of our manufacturing employees are represented by unions and covered by collective bargaining or similar agreements, we often incur costs attributable to periodic renegotiation of those agreements, which may be difficult to project.  We are also subject to the risk that strikes or other conflicts with organized personnel may arise or that we may become the subject of union organizing activity at our facilities that do not currently have union representation.  Prolonged negotiations, conflicts or related activities could also lead to costly work stoppages and loss of productivity.

We cannot provide any guarantee of future cash dividend payments or that we will be able to repurchase our common stock pursuant to a share repurchase program.

Since December 2018, our Board of Directors has declared a quarterly dividend on our common stock. The payment of any future cash dividends to our shareholders is not guaranteed and will depend on decisions that will be made by our Board of Directors and will be based upon our financial condition, results of operations, business requirements and our Board of Directors’ conclusion that the declaration of cash dividends is in the best interest of our shareholders and is in compliance with all laws and agreements applicable to the payment of dividends.

Since July 2016, our Board of Directors has approved share repurchases up to a total of $700.0 million. Repurchases under the program may be made through open market, block and privately-negotiated transactions, including Rule 10b5-1 plans, at times and in

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amounts as management deems appropriate, subject to market and business conditions, regulatory requirements and other factors. The program does not obligate the company to repurchase any particular amount of common stock and may be suspended or discontinued at any time without notice. Furthermore, there can be no assurance that we will be able to repurchase our common stock and we may discontinue plans to repurchase common stock at any time.

None.

We own a 100-acre, multi-building campus in Lancaster, Pennsylvania comprising the site of our corporate headquarters and most of our non-manufacturing operations.

As of December 31, 2019, we had 14 manufacturing plants in three countries, with 11 plants located throughout the U.S., which included our St. Helens, Oregon mineral fiber manufacturing facility, which closed in the second quarter of 2018.  During 2019, as part of our acquisitions of ACGI and MRK, we acquired two additional plants located in Missouri and Illinois, respectively. We have two plants in Canada and one idle mineral fiber plant in China. The idle plant in China is reported as a component of our Unallocated Corporate segment and is classified as an asset held for sale as of December 31, 2019, as we entered into a sale agreement for the property during the third quarter of 2019 with closing expected in the second quarter of 2020.

WAVE operates five additional plants in the U.S. to produce suspension system (grid) products, which we use and sell in our ceiling systems.

Five of our plants are leased and the remaining nine are owned.  

Sales and administrative offices are leased and/or owned worldwide, and leased facilities are utilized to supplement our owned warehousing facilities.

Production capacity and the extent of utilization of our facilities are difficult to quantify with certainty.  In any one facility, utilization of our capacity varies periodically depending upon demand for the product that is being manufactured.  We believe our facilities are adequate and suitable to support the business.  Additional incremental investments in plant facilities are made as appropriate to balance capacity with anticipated demand, improve quality and service, and reduce costs.

See the “Specific Material Events” section of the “Environmental Matters” section of Note 27 to the Consolidated Financial Statements, which is incorporated herein by reference, for a description of our significant legal proceedings.

Not applicable.

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PART II

AWI’s common shares trade on the New York Stock Exchange under the ticker symbol “AWI.”  As of February 18, 2020, there were approximately 230 holders of record of AWI’s common stock.

Dividends are payable when declared by our Board of Directors and in accordance with restrictions set forth in our debt agreements. In general, our debt agreements allow us to make “restricted payments,” which include dividends and stock repurchases, subject to certain limitations and other restrictions and provided that we are in compliance with the financial and other covenants of our debt agreements and meet certain liquidity requirements after giving effect to the restricted payment. We declared dividends, on a quarterly basis, totaling $0.725 per share in 2019. On February 19, 2020, our Board of Directors declared a dividend of $0.20 per common share outstanding. The dividend will be paid on March 20, 2020, to shareholders of record as of the close of business on March 5, 2020. For further discussion of the debt agreements, see the Financial Condition and Liquidity section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and Risk Factors in Item 1A in this Form 10-K.

Issuer Purchases of Equity Securities

On July 29, 2016, we announced that our Board of Directors had approved a share repurchase program pursuant to which we were authorized to repurchase up to $150.0 million of our outstanding shares of common stock through July 31, 2018 (the “Program”).  On October 30, 2017, we announced that our Board of Directors had approved an additional $250.0 million authorization to repurchase shares under the Program. The Program was also extended through October 31, 2020. On July 31, 2018, we announced that our Board of Directors had approved an additional $300.0 million authorization to repurchase shares, increasing the total authorized amount under the Program to $700.0 million, excluding commissions.

Repurchases under the Program may be made through open market, block and privately-negotiated transactions, including Rule 10b5-1 plans, at such times and in such amounts as management deems appropriate, subject to market and business conditions, regulatory requirements and other factors.  The Program does not obligate AWI to repurchase any particular amount of common stock and may be suspended or discontinued at any time without notice. 

On August 2, 2018, we entered into an accelerated share repurchase (“ASR”) agreement with Deutsche Bank AG under the Program. The ASR included a pre-payment of $150.0 million to Deutsche Bank AG, at which time we received 1,766,004 shares. The ASR terminated on October 8, 2018, with an additional 389,825 shares returned on that day to complete the ASR.

During 2019, we repurchased 1.5 million shares under the Program for a cost of $131.2 million, excluding commissions, or an average price of $86.02 per share. Since inception, including the ASR, we have repurchased 9.2 million shares under the Program for a cost of $561.8 million, excluding commissions, or an average price of $60.98 per share.

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The following selected historical consolidated financial data should be read in conjunction with our audited consolidated financial statements, the accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Form 10-K.  The selected historical consolidated financial data for the periods presented have been derived from our audited consolidated financial statements.

Notes:

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Armstrong World Industries, Inc. (“AWI”) is a Pennsylvania corporation incorporated in 1891.

This discussion should be read in conjunction with the financial statements, the accompanying notes, the cautionary note regarding forward-looking statements and risk factors included in this Form 10-K.

Overview

We are a leading producer of ceiling systems for use in the construction and renovation of commercial and residential buildings. We design, manufacture and sell ceiling and wall systems (primarily mineral fiber, fiberglass wool, metal, wood, wood fiber, glass-reinforced-gypsum and felt) throughout the Americas.

Acquisitions

In November 2019, we acquired the business and assets of MRK Industries, Inc. (“MRK”), based in Libertyville, Illinois. MRK is a manufacturer of specialty metal ceiling, wall and exterior solutions with one manufacturing facility. MRK’s operations, and its assets and liabilities, are included as a component of our Architectural Specialties segment.  

In March 2019, we acquired the business and assets of Architectural Components Group, Inc. (“ACGI”), based in Marshfield, Missouri. ACGI is a manufacturer of custom wood ceilings and walls with one manufacturing facility. ACGI’s operations, and its assets and liabilities, are included as a component of our Architectural Specialties segment.

In August 2018, we acquired the business and assets of Steel Ceilings, Inc. (“Steel Ceilings”), based in Johnstown, Ohio. Steel Ceilings is a manufacturer of aluminum and stainless metal ceilings that include architectural, radiant and security solutions with one manufacturing facility. Steel Ceilings’ operations, and its assets and liabilities, are included as a component of our Architectural Specialties segment.

In May 2018, we acquired the business and assets of Plasterform, Inc. (“Plasterform”), based in Mississauga, Ontario, Canada. Plasterform is a manufacturer of architectural cast ceilings, walls, facades, columns and moldings with one manufacturing facility. Plasterform’s operations, and its assets and liabilities, are included as a component of our Architectural Specialties segment.

In January 2017, we acquired the business and assets of Tectum, Inc. (“Tectum”), based in Newark, Ohio. Tectum is a manufacturer of acoustical ceiling, wall and structural solutions for commercial building applications with two manufacturing facilities. Tectum’s operations, and its assets and liabilities, are included as a component of our Architectural Specialties segment.

Discontinued Operations

On September 30, 2019, we completed the previously announced sale of certain subsidiaries comprising our businesses and operations in Europe, the Middle East and Africa (including Russia) (“EMEA”) and the Pacific Rim, including the corresponding businesses and operations conducted by Worthington Armstrong Venture (“WAVE”), our joint venture with Worthington Industries, Inc. (“Worthington”) in which AWI holds a 50% interest (collectively, the “Sale”), to Knauf International GmbH (“Knauf”). The purchase price of $330.0 million was previously paid by Knauf to us during the third quarter of 2018 and is subject to certain post-closing adjustments for cash and debt as provided in the Share Purchase Agreement dated as of November 17, 2017, by and between us and Knauf (the “Purchase Agreement”), including adjustments based on the economic impact of any required regulatory remedies and a working capital adjustment.

On July 18, 2018, we entered into an amendment to the Purchase Agreement, pursuant to which Knauf irrevocably and unconditionally paid AWI (i) $250.0 million of the purchase price on August 1, 2018, and (ii) $80.0 million of the purchase price on September 15, 2018, which payments were credited against the aggregate consideration payable at closing. The amendment also provided for the reduction (from a maximum of $35.0 million to a maximum of $20.0 million) of potential adjustments to the purchase price consideration for the transaction based on the impact of remedies required to satisfy competition conditions. Following receipt of these payments, we remitted $70.0 million to WAVE in partial consideration of the purchase price payable in respect of the businesses and operations of WAVE under the transaction.  WAVE subsequently paid each of AWI and Worthington a dividend of $35.0 million.  We have recorded a $25.9 million payable to WAVE for their remaining portion of the proceeds from Knauf, which is reflected within Accounts payable and accrued expenses in the Consolidated Balance Sheets as of December 31, 2019. The transaction and final gain or loss amounts are subject to finalization of customary working capital and other adjustments, as provided in the Purchase Agreement. For the year ended December 31, 2019, payments to Knauf included $61.0 million of adjustments to cash consideration, estimated working capital adjustments and remedies, offset by $13.1 million of additional cash in international WAVE entities.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

On December 7, 2018, the European Commission granted conditional clearance of the transaction, subject to certain commitments intended to address concerns regarding the overlap between the activities of AWI and Knauf, including the divestment by Knauf to a third party of certain mineral fiber and grid businesses and operations in Austria, Estonia, Germany, Ireland, Italy, Latvia, Lithuania, Portugal, Spain, Turkey and the United Kingdom (“UK”). This included our sales operations in each of the relevant countries, as well as our production facilities, and those of WAVE, located in Team Valley, UK.

On May 23, 2019, we entered into a Transition Services Agreement with Knauf for its benefit and the benefit of the buyer of the divestment business, pursuant to which we are providing certain transition technology, finance and information technology support services during the period between March 18, 2019 and September 30, 2020.

On September 23, 2019, the European Commission approved the Sale, as well as the terms of the sale of the divestment business by Knauf and the identity of the purchaser.

In connection with the closing of the Sale, we also entered into (i) an intellectual property License Agreement with Knauf for its benefit (and, under sublicense, to the buyer of the divestment business) under which they license certain patents, trademarks and know-how from us for use in certain licensed territories, and (ii) a Supply Agreement with Knauf under which the parties may continue to purchase certain products from each other following the closing of the Sale. WAVE also entered into similar agreements with Knauf for such purposes.

The EMEA and Pacific Rim segment historical financial results through September 30, 2019 have been reflected in AWI’s Consolidated Statements of Earnings and Comprehensive Income as discontinued operations for all periods presented, while the assets and liabilities of discontinued operations have been removed from AWI’s Consolidated Balance Sheet as of December 31, 2019.  

See Notes 5 and 6 to the Consolidated Financial Statements for additional information related to our acquisitions and discontinued operations.

Manufacturing Plants

As of December 31, 2019, we had 14 manufacturing plants in three countries, with 11 plants located within the U.S, which included our St. Helens, Oregon mineral fiber manufacturing facility, which closed in the second quarter of 2018.  During 2019, as part of our acquisitions of ACGI and MRK, we acquired two additional plants located in Missouri and Illinois, respectively. We have two plants in Canada and one idle mineral fiber plant in China. The idle plant in China is reported as a component of our Unallocated Corporate segment and is classified as an asset held for sale as of December 31, 2019, as we entered into a sale agreement for the property during the third quarter of 2019 with closing expected in the second quarter of 2020.

WAVE operates five additional plants in the U.S. to produce suspension system (grid) products, which we use and sell in our ceiling systems.

Reportable Segments 

Our operating segments are as follows:  Mineral Fiber, Architectural Specialties and Unallocated Corporate.  

Mineral Fiber – produces suspended mineral fiber and soft fiber ceiling systems for use in commercial and residential settings.  Products offer various performance attributes such as acoustical control, rated fire protection and aesthetic appeal.  Commercial ceiling products are sold to resale distributors and to ceiling systems contractors.  Residential ceiling products are sold primarily to wholesalers and retailers (including large home centers).  The Mineral Fiber segment also includes the results of WAVE, which manufactures and sells suspension system (grid) products and ceiling component products that are invoiced by both AWI and WAVE.  Segment results relating to WAVE consist primarily of equity earnings and reflect our 50% equity interest in the joint venture.  Ceiling component products consist of ceiling perimeters and trim, in addition to grid products that support drywall ceiling systems.  To a lesser extent, however, in some geographies and for some customers, WAVE sells its suspension systems products to AWI for resale to customers.  Mineral Fiber segment results reflect those sales transactions.  The Mineral Fiber segment also includes all assets and liabilities not specifically allocated to our Architectural Specialties or Unallocated Corporate segment, including all property and related depreciation associated with our Lancaster, PA headquarters.  Operating results for the Mineral Fiber segment include a significant majority of allocated Corporate administrative expenses that represent a reasonable allocation of general services to support its operations.  

Architectural Specialties – produces and sources ceilings and walls for use in commercial settings.  Products are available in numerous materials, such as metal and wood, in addition to various colors, shapes and designs.  Products offer various performance attributes

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

such as acoustical control, rated fire protection and aesthetic appeal.  We sell standard and customized products, with the majority of Architectural Specialties revenues derived from sourced products. Architectural Specialties products are sold primarily to resale distributors and ceiling systems contractors.  The majority of revenues are project driven, which can lead to more volatile sales patterns due to project scheduling uncertainty.  Operating results for the Architectural Specialties segment include a minor portion of allocated Corporate administrative expenses that represent a reasonable allocation of general services to support its operations.

Unallocated Corporate - includes assets, liabilities, income and expenses that have not been allocated to our other business segments and consist of: cash and cash equivalents, the net funded status of our U.S. Retirement Income Plan (“RIP”), the estimated fair value of interest rate swap contracts, outstanding borrowings under our senior credit facility and income tax balances. Our Unallocated Corporate segment also includes all assets, liabilities, income and expenses formerly reported in our EMEA and Pacific Rim segments that were not included in the Sale.

Factors Affecting Revenues

For information on our segments’ 2019 net sales by geography, see Note 3 to the Consolidated Financial Statements included in this Form 10-K.

Markets. We compete in the commercial and residential construction markets. We closely monitor publicly available macroeconomic trends that provide insight into commercial and residential market activity, including GDP, office vacancy rates, the Architecture Billings Index, new commercial construction starts, state and local government spending, corporate profits and retail sales.  

We noted several factors and trends within our markets that directly affected our business performance during 2019. In our Mineral Fiber segment, softer demand for lower end products exceeded increased demand for high end products. In our Architectural Specialties segment, we experienced strong growth due to the impact of the 2018 acquisitions of Plasterform and Steel Ceilings (collectively, the “2018 Acquisitions”) and the 2019 acquisitions of ACGI and MRK (collectively, the “2019 Acquisitions”).  Our Architectural Specialties segment also experienced increased market penetration as a result of an expanded range of product offerings, and new construction activity.

The following table presents the impact of the 2018 Acquisitions and the 2019 Acquisitions on our Architectural Specialties segment (dollar amounts in millions):

Average Unit Value. We periodically modify sales prices of our products due to changes in costs for raw materials and energy, market conditions and the competitive environment. In certain cases, realized price increases are less than the announced price increases because of project pricing, competitive reactions and changing market conditions. We also offer a wide assortment of products that are differentiated by style, design and performance attributes. Pricing and margins for products within the assortment vary. In addition, changes in the relative quantity of products purchased at different price points can impact year-to-year comparisons of net sales and operating income. Within our Mineral Fiber segment, we focus on improving sales dollars per unit sold, or average unit value (“AUV”), as a measure that accounts for the varying assortment of products impacting our revenues. We estimate that favorable AUV increased our Mineral Fiber and total consolidated net sales for 2019 by approximately $44 million compared to 2018. Our Architectural Specialties segment generates revenues that are generally earned based on individual contracts that include a mix of products, both manufactured by us and sourced from third parties that vary by project. As such, we do not track AUV performance for this segment, but rather attribute all changes in sales to volume.

In the first and third quarters of 2019, we implemented price increases on certain Mineral Fiber ceiling tile and Architectural Specialties products. In the fourth quarter of 2019, we announced a price increase on Mineral Fiber ceiling tile and grid products to be effective in the first quarter of 2020. We may implement future pricing actions based on numerous factors.

Seasonality. Generally, our sales tend to be stronger in the second and the third quarters of our fiscal year due to more favorable weather conditions, customer business cycles and the timing of renovation and new construction.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

Factors Affecting Operating Costs

Operating Expenses.  Our operating expenses are comprised of direct production costs (principally raw materials, labor and energy), manufacturing overhead costs, freight, costs to purchase sourced products and selling, general, and administrative (“SG&A”) expenses. 

Our largest individual raw material expenditures are for fiberglass, perlite, starch, waste paper, wood, wood fiber, aluminum, steel, pigments and clays. We manufacture most of the production needs for mineral wool at one of our manufacturing facilities. Natural gas and packaging materials are also significant input costs. Fluctuations in the prices of these inputs are generally beyond our control and have a direct impact on our financial results. In 2019, costs for raw materials and energy negatively impacted operating income by $1 million, compared to 2018.

CRITICAL ACCOUNTING ESTIMATES

In preparing our consolidated financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”), we are required to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.  We evaluate our estimates and assumptions on an on-going basis, using relevant internal and external information.  We believe that our estimates and assumptions are reasonable.  However, actual results may differ from what was estimated and could have a significant impact on the financial statements.

We have identified the following as our critical accounting estimates.  We have discussed these critical accounting estimates with our Audit Committee.

U.S. Pension Credit and Postretirement Benefit Costs – We maintain significant pension and postretirement plans in the U.S.  Our defined benefit pension and postretirement benefit costs are developed from actuarial valuations.  These valuations are calculated using a number of assumptions, which represent management’s best estimate of the future.  The assumptions that have the most significant impact on reported results are the discount rate, the estimated long-term return on plan assets and the estimated inflation in health care costs.  These assumptions are generally updated annually.

Management utilizes the Aon Hewitt AA only above median yield curve, which is a hypothetical AA yield curve comprised of a series of annualized individual discount rates, as the primary basis for determining discount rates.  As of December 31, 2019 and 2018, we assumed discount rates of 3.16% and 4.30%, respectively, for the U.S. defined benefit pension plans.  As of December 31, 2019 and 2018, we assumed a discount rates of 3.14% and 4.31%, respectively, for the U.S. postretirement plan.  The effects of the change in discount rate will be amortized into earnings as described below.  Absent any other changes, a one-quarter percentage point increase or decrease in the discount rates for the U.S. pension and postretirement plans would not have a material impact on 2020 operating or non-operating income.

We manage two U.S. defined benefit pension plans, our RIP, which is a qualified funded plan, and a nonqualified unfunded plan.  For the RIP, the expected long-term return on plan assets represents a long-term view of the future estimated investment return on plan assets.  This estimate is determined based on the target allocation of plan assets among asset classes and input from investment professionals on the expected performance of the asset classes over 10 to 30 years.  Historical asset returns are monitored and considered when we develop our expected long-term return on plan assets.  An incremental component is added for the expected return from active management based on historical information obtained from the plan’s investment consultants.  These forecasted gross returns are reduced by estimated management fees and expenses.  Over the 10-year period ended December 31, 2019, the historical annualized return was approximately 7.9% compared to an average expected return of 6.5%. The actual gain on plan assets incurred for 2019 was 16.6%, net of fees. The difference between the actual and expected rate of return on plan assets will be amortized into earnings as described below.

The expected long-term return on plan assets used in determining our 2019 U.S. pension cost was 5.75%.  We have assumed a return on plan assets for 2020 of 5.25%.  The 2020 expected return on assets was calculated in a manner consistent with 2019.  A one-quarter percentage point increase or decrease in this assumption would increase or decrease 2020 non-operating income by approximately $3.7 million.

Contributions to the unfunded pension plan were $4.0 million in 2019 and were made on a monthly basis to fund benefit payments.  We estimate the 2020 contributions will be approximately $3.9 million.  See Note 18 to the Consolidated Financial Statements for more information.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

The estimated inflation in health care costs represents a 5-10 year view of the expected inflation in our postretirement health care costs.  We separately estimate expected health care cost increases for pre-65 retirees and post-65 retirees due to the influence of Medicare coverage at age 65, as illustrated below:

The difference between the actual and expected health care costs is amortized into earnings as described below.  As of December 31, 2019, health care cost increases are estimated to decrease ratably until 2026, after which they are estimated to be constant at 4.50%.  A one percentage point increase or decrease in the assumed health care cost trend rate would not have a material impact on 2020 operating or non-operating income.  See Note 18 to the Consolidated Financial Statements for more information.

Actual results that differ from our various pension and postretirement plan estimates are captured as actuarial gains/losses.  When certain thresholds are met, the gains and losses are amortized into future earnings over the remaining life expectancy of participants.  Changes in assumptions could have significant effects on earnings in future years.

Total net actuarial losses related to our U.S. pension benefit plans decreased by $36.6 million in 2019 primarily due to a better than expected return on assets, partially offset by changes in actuarial assumptions (most significantly a 114 basis point decrease in the discount rate).  The $36.6 million actuarial gain impacting our U.S. pension plans is reflected as a component of other comprehensive income in our Consolidated Statement of Earnings and Comprehensive Income along with actuarial gains and losses from our foreign pension plan and our U.S. postretirement benefit plan.

On February 20, 2020, we entered into a commitment agreement with a third-party insurance company to partially settle approximately $1.0 billion of retiree benefit obligations under our RIP. See Note 18 to the Consolidated Financial Statements for further information.

Income Taxes – Our effective tax rate is primarily determined based on our pre-tax income, statutory income tax rates in the jurisdictions in which we operate, and the tax impacts of items treated differently for tax purposes than for financial reporting purposes.  Some of these differences are permanent, such as expenses that are not deductible in our tax returns, and some differences are temporary, reversing over time, such as depreciation expense.  These temporary differences create deferred income tax assets and liabilities.  Deferred income tax assets are also recorded for net operating losses (“NOL”), capital loss carryforwards, and foreign tax credit (“FTC”) carryforwards.

Deferred income tax assets and liabilities are recognized by applying enacted tax rates to temporary differences that exist as of the balance sheet date.  We reduce the carrying amounts of deferred tax assets by a valuation allowance if, based on the available evidence, it is more likely than not that such assets will not be realized.  The need to establish valuation allowances for deferred tax assets is assessed quarterly. In assessing the requirement for, and amount of, a valuation allowance in accordance with the more likely than not standard, we give appropriate consideration to all positive and negative evidence related to the realization of the deferred tax assets.  This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, capital gain income, and foreign source income (“FSI”), the duration of statutory carryforward periods, and our experience with operating loss and tax credit carryforward expirations.  A history of cumulative losses is a significant piece of negative evidence used in our assessment.  If a history of cumulative losses is incurred for a tax jurisdiction, forecasts of future profitability are not used as positive evidence related to the realization of the deferred tax assets in the assessment.

As of December 31, 2019, we have recorded valuation allowances totaling $75.5 million for various federal and state deferred tax assets.  While we have considered future taxable income in assessing the need for the valuation allowances based on our best available projections, if these estimates and assumptions change in the future or if actual results differ from our projections, we may be required to adjust our valuation allowances accordingly.  Such adjustments could be material to our Consolidated Financial Statements.

As further described in Note 16 to the Consolidated Financial Statements, our Consolidated Balance Sheet as of December 31, 2019 includes deferred income tax assets of $155.8 million.  Included in this amount are deferred federal income tax assets for FTC carryforwards of $13.1 million, federal and state capital loss carryforwards of $16.0 million, and state NOL deferred income tax assets of $54.8 million. We have established valuation allowances in the amount of $75.5 million consisting of $13.1 million for federal deferred tax assets related to FTC carryovers, $46.4 million for state deferred tax assets, primarily operating loss carryovers, and $16.0 million for federal and state deferred tax assets related to capital loss carryovers. Inherent in determining our effective tax rate are

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

judgments regarding business plans and expectations about future operations.  These judgments include the amount and geographic mix of future taxable income, the amount of FSI, limitations on usage of NOL carryforwards, the impact of ongoing or potential tax audits, and other future tax consequences.

We estimate we will need to generate future U.S. taxable income of approximately $681.6 million for state income tax purposes during the respective realization periods (ranging from 2020 to 2039) in order to fully realize the net state NOL deferred income tax assets.

Our ability to utilize deferred tax assets may be impacted by certain future events, such as changes in tax legislation and insufficient future taxable income prior to expiration of certain deferred tax assets.

We recognize the tax benefits of an uncertain tax position if those benefits are more likely than not to be sustained based on existing tax law.  Additionally, we establish a reserve for tax positions that are more likely than not to be sustained based on existing tax law, but uncertain in the ultimate benefit to be sustained upon examination by the relevant taxing authorities.  Unrecognized tax benefits are subsequently recognized at the time the more likely than not recognition threshold is met, the tax matter is effectively settled or the statute of limitations for the relevant taxing authority to examine and challenge the tax position has expired, whichever is earlier.

Impairments of Long-Lived Tangible, Intangible Assets and Goodwill – Our indefinite-lived assets include goodwill and other intangibles, primarily trademarks and brand names. Trademarks and brand names are integral to our corporate identity and expected to contribute indefinitely to our corporate cash flows.  Accordingly, they have been assigned an indefinite life.  We conduct our annual impairment tests for these indefinite-lived intangible assets and goodwill during the fourth quarter. These assets undergo more frequent tests if an indication of possible impairment exists.  We conduct impairment tests for tangible assets and definite-lived intangible assets when indicators of impairment exist, such as operating losses and/or negative cash flows.  

In connection with the performance of an impairment test for tangible assets and definite-lived intangible assets, we compare the carrying amount of the asset group to the estimated undiscounted future cash flows expected to be generated by the assets.  If the undiscounted cash flows of the asset group/reporting unit are less than the carrying value, an estimate of an asset group’s/reporting unit’s fair value is based on discounted future cash flows expected to be generated by the asset group/reporting unit, or based on management’s estimated exit price assuming the assets could be sold in an orderly transaction between market participants or estimated salvage value if no sale is assumed.  If the fair value is less than the carrying value of the asset group/reporting unit, we record an impairment charge equal to the difference between the fair value and carrying value of the asset group/reporting unit.

In connection with the performance of an impairment test for indefinite-lived intangible assets and goodwill, we compare the carrying amount of the asset (when testing indefinite-lived intangible assets) and reporting unit (when testing goodwill) to the estimated fair value. For indefinite-lived intangible assets, the estimated fair value is based on discounted future cash flows using the relief from royalty method.  For goodwill, the estimated fair value is based on discounted future cash flows expected to be generated by the reporting unit. If the fair value is less than the carrying value of the asset/reporting unit, we record an impairment charge equal to the difference between the fair value and carrying value of the asset/reporting unit.

The principal assumptions used in our impairment tests for definite-lived intangible assets is operating profit adjusted for depreciation and amortization and, if required to estimate the fair value, the discount rate.  The principal assumptions used in our impairment tests for indefinite-lived intangible assets include revenue growth rate, discount rate and royalty rate.  The principal assumptions utilized in our impairment tests for goodwill include after-tax cash flows growth rates and discount rate.  Revenue growth rates, after-tax cash flows growth rates and operating profit assumptions are derived from those used in our operating plan and strategic planning processes.  The discount rate assumption is calculated based upon an estimated weighted average cost of capital which reflects the overall level of inherent risk and the rate of return a market participant would expect to achieve.  The royalty rate assumption represents the estimated contribution of the intangible assets to the overall profits of the related businesses.

In 2019, indefinite-lived intangibles and goodwill were tested for impairment based on our identified asset groups/reporting units. There were no material impairment charges recorded in 2019, 2018 or 2017 related to intangible assets. We did not test tangible assets within our continuing operations for impairment in 2019, 2018 or 2017 as no indicators of impairment existed.

The cash flow estimates used in applying our impairment tests are based on management’s analysis of information available at the time of the impairment test.  Actual cash flows lower than the estimate could lead to significant future impairments.  If subsequent testing indicates that fair values have declined, the carrying values would be reduced and our future statements of income would be affected.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

We cannot predict the occurrence of certain events that might lead to material impairment charges in the future.  Such events may include, but are not limited to, the impact of economic environments, particularly related to the commercial and residential construction industries, material adverse changes in relationships with significant customers, or strategic decisions made in response to economic and competitive conditions.  See Notes 3 and 13 to the Consolidated Financial Statements for further information.

Environmental Liabilities – We are actively involved in the investigation, closure and/or remediation of existing or potential environmental contamination under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), and state Superfund and similar type environmental laws at several domestically owned, formerly owned and non-owned locations allegedly resulting from past industrial activity.  In a few cases, we are one of several potentially responsible parties and have agreed to jointly fund the required investigation, while preserving our defenses to the liability.  We may also have rights of contribution or reimbursement from other parties or coverage under applicable insurance policies.  

We provide for environmental remediation costs and penalties when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable.  Accruals are estimates based on the judgment of management related to ongoing proceedings.  Estimates of our future liability at the environmental sites are based on evaluations of currently available facts regarding each individual site.  In determining the probability of contribution, we consider the solvency of other parties, the site activities of other parties, whether liability is being disputed, the terms of any existing agreements and experience with similar matters, and the effect of our October 2006 Chapter 11 reorganization upon the validity of the claim.  

We evaluate the measurement of recorded liabilities each reporting period based on current facts and circumstances specific to each matter.  The ultimate losses incurred upon final resolution may materially differ from the estimated liability recorded.  Changes in estimates are recorded in earnings in the period in which such changes occur.

We are unable to predict the extent to which any recoveries from other parties or coverage under insurance policies might cover our final share of costs for these sites.  Our final share of investigation and remediation costs may exceed any such recoveries, and such amounts net of insurance recoveries may be material.

ACCOUNTING PRONOUNCEMENTS EFFECTIVE IN FUTURE PERIODS

See Note 2 to the Consolidated Financial Statements for further information.

RESULTS OF OPERATIONS

This section of this Form 10-K generally discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018. Discussions of 2017 items and year-to-year comparisons between 2018 and 2017 that are not included in this Form 10-K can be found in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2018.

Unless otherwise indicated, net sales in these results of operations are reported based upon the AWI location where the sale was made.  Please refer to Notes 3 and 6 to the Consolidated Financial Statements for a reconciliation of segment operating income to consolidated earnings from continuing operations before income taxes and additional financial information related to discontinued operations.

2019 COMPARED TO 2018

CONSOLIDATED RESULTS FROM CONTINUING OPERATIONS

(dollar amounts in millions)

Consolidated net sales increased due to favorable AUV of $44 million and higher volumes of $19 million. Mineral Fiber net sales increased by $25 million and Architectural Specialties net sales increased by $38 million.

Cost of goods sold was 61.9% of net sales in 2019, compared to 65.8% in 2018.  The decrease in cost of goods sold as a percent of net sales in comparison to 2018 was driven primarily by a $27 million reduction in cost of goods sold due to savings from the closure of

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

our St. Helens manufacturing plant during the second quarter of 2018, combined with the absence of accelerated depreciation and related costs attributable to the closed facility, and increased price realization in excess of inflation.

SG&A expenses in 2019 were $174.3 million, or 16.8% of net sales, compared to $159.0 million, or 16.3% of net sales, in 2018.  The increase in SG&A expenses was primarily due to a $13 million increase in legal and professional fees, including expenses and attorney’s fees paid under our litigation settlement agreement with Roxul USA, Inc. (“Rockfon”).  Also contributing to the increase in SG&A expenses was the impact of the 2018 Acquisitions and the 2019 Acquisitions.  Partially offsetting the impact of these increases in SG&A expenses was $5 million of cost reimbursements, net of expenses, earned in 2019 under our Transition Services Agreement with Knauf and a $4 million reduction in share-based compensation expense.

Equity earnings from our WAVE joint venture were $96.6 million in 2019, compared to $74.9 million in 2018.  During 2019 and as a result of the Sale, we recorded a $21 million increase in WAVE equity earnings, representing our share of WAVE’s gain on sale of its discontinued European and Pacific Rim businesses, net of a $4 million write-off related to our WAVE fresh-start reporting for customer relationship and developed technology intangible assets.  Excluding the impact of our portion of WAVE’s gain on the Sale and the write-off, WAVE equity earnings increased as a result of increases in AUV, partially offset by investments in manufacturing and lower volumes.  Negatively impacting WAVE equity earnings for 2019 was a $1 million partial pension settlement charge.  See Note 11 to the Consolidated Financial Statements for further information.    

Interest expense was $38.4 million in 2019, compared to $39.2 million in 2018. The decrease in interest expense in 2019 was driven primarily by lower interest rates and the refinancing of our credit facility on September 30, 2019. In connection with the refinancing, we wrote off $2.7 million of unamortized debt financing costs, included as a component of interest expense, related to our previous credit facility.

Other non-operating income was $20.4 million in 2019, compared to $32.5 million in 2018. The decrease was primarily related to lower credits from non-service cost components associated with our RIP. See Note 18 to the Consolidated Financial Statements for further information.

Income tax expense was $57.1 million in 2019, compared to $53.1 million in 2018.  The effective tax rate for 2019 was 19.1% as compared to a rate of 21.9% for 2018. The effective tax rate was lower in 2019 as a result of our share of WAVE’s gain on sale of its EMEA and Pacific Rim businesses having no related income tax expense, in addition to a favorable impact of state deferred tax asset adjustments.

Total other comprehensive income (loss) (“OCI”) was $83.4 million of income in 2019, compared to a $59.4 million loss for 2018.  The change was driven by $83.8 million of Accumulated Other Comprehensive Income (“AOCI”) adjustments related primarily to foreign currency translation adjustments that were reclassified out of AOCI concurrent with the Sale. Foreign currency translation adjustments represent the change in the U.S. dollar value of assets and liabilities denominated in foreign currencies. Also impacting the change in OCI in both periods was pension and postretirement adjustments and derivative losses. Pension and postretirement adjustments represent the amortization of actuarial gains and losses related to our defined benefit pension and postretirement plans. Derivative gain/loss represents the mark-to-market value adjustments of our derivative assets and liabilities and the recognition of gains and losses previously deferred in OCI.

REPORTABLE SEGMENT RESULTS

Mineral Fiber

(dollar amounts in millions)

Net sales increased due to favorable AUV of $44 million, partially offset by lower volumes of $19 million. The favorable AUV was due to favorable price and improved mix from the sale of higher end ceiling tile products.    

Operating income increased due primarily to a $21 million increase in WAVE equity earnings relating to the Sale.  Also contributing to the increase was $31 million of favorable AUV and a $27 million increase in operating income due to savings from the closure of our St. Helens manufacturing plant during the second quarter of 2018, combined with the absence of accelerated depreciation and related costs attributable to the closed facility. Partially offsetting the operating income increase was a $13 million increase in costs

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

associated with the Rockfon litigation settlement, a $12 million negative impact from lower volumes, $5 million of cost reimbursements, net of related expenses, earned in 2019 under our Transition Services Agreement with Knauf, and a $4 million reduction in share-based compensation expense.

Architectural Specialties

(dollar amounts in millions)

Net sales increased due to the full year impact of the 2018 Acquisitions, and the 2019 Acquisitions (see table in Factors Affecting Revenue), in addition to higher volumes from increased market penetration as a result of an expanded range of product offerings, and new construction activity.

Operating income increased due to the positive impact of higher sales volume, partially offset by additional investments in selling and design capacities and intangible asset amortization expense related to the 2018 Acquisitions and the 2019 Acquisitions.

Unallocated Corporate

Unallocated Corporate expense of $8 million decreased from $9 million in the prior year primarily due to lower service cost associated with our RIP.

FINANCIAL CONDITION AND LIQUIDITY

Cash Flow

The discussion that follows includes cash flows related to discontinued operations, primarily operations sold in the Sale.

Operating activities for 2019 provided $182.7 million of cash, compared to $203.2 million of cash provided in 2018.  The decrease was primarily due to an increase in working capital, most notably a decrease in receipts of environmental insurance settlements, partially offset by higher cash earnings.

Net cash used for investing activities was $89.1 million for 2019, compared to $309.6 million of cash provided in 2018.  The decrease resulted primarily from $47.9 million of payments to Knauf as a result of the Sale combined with the absence of $330.0 million of proceeds received from Knauf in 2018 related to the sale of our EMEA and Pacific Rim businesses, partially offset by $70.0 million of payments to WAVE. Also contributing to the decrease was the cash paid for the acquisitions of ACGI and MRK, and a decrease in dividends from our WAVE joint venture.

Net cash used for financing activities was $384.9 million in 2019, compared to $329.3 million in 2018.  The unfavorable change in use of cash was primarily due to higher net debt payments as a result of our September 2019 debt refinancing, higher share tax withholdings from employee stock awards and the payment of dividends, partially offset by a lower repurchases of outstanding common stock.

Liquidity

Our liquidity needs for operations vary throughout the year.  We retain lines of credit to facilitate our seasonal cash flow needs, since cash flow is generally lower during the first and fourth quarters of our fiscal year.  

As of June 30, 2019, total debt outstanding under our $1,050.0 million variable rate senior credit facility was $525.0 million under Term Loan A and $241.9 million under Term Loan B, with no borrowings outstanding under the revolving credit facility. On July 3, 2019, we used cash on hand to make a voluntary prepayment of $100.0 million of the debt outstanding under Term Loan B. Term Loan B was priced at 2.75% over the London Interbank Offered Rate (“LIBOR”). On September 30, 2019, we refinanced our $1,050.0 million variable rate senior credit facility, using cash on hand to pay down a portion of the debt outstanding, including the debt outstanding under Term Loan B. The $1,000.0 million amended senior credit facility is composed of a $500.0 million revolving credit facility (with a $150.0 million sublimit for letters of credit) and a $500.0 million Term Loan A.  The terms of the amended credit facility resulted in a lower interest rate spread for both the revolving credit facility (2.00% to 1.50% over LIBOR) and Term Loan A (1.75% to 1.50% over LIBOR). We also extended the maturity of both the revolving credit facility and Term Loan A from April 2021

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

to September 2024. The $1,000.0 million senior credit facility is secured by the capital stock of material U.S. subsidiaries and a pledge of 65% of the stock of our material first-tier foreign subsidiaries, primarily Canada. The unpaid balances of the revolving credit facility and Term Loan A may be prepaid without penalty at the maturity of their respective interest reset periods.  Any principal amounts paid on the Term Loan A may not be re-borrowed.

As of December 31, 2019, total borrowings outstanding under our senior credit facility were $115.0 million under the revolving credit facility and $500.0 million under Term Loan A.  

The refinanced senior credit facility includes two financial covenants that require the ratio of consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) to consolidated cash interest expense minus cash consolidated interest income to be greater than or equal to 3.0 to 1.0 and requires the ratio of consolidated funded indebtedness, minus AWI and domestic subsidiary unrestricted cash and cash equivalents up to $100 million, to EBITDA to be less than or equal to 3.75 to 1.0.  As of December 31, 2019, we were in compliance with all covenants of the senior credit facility.

The Term Loan A is fully drawn and is currently priced on a variable interest rate basis.  The following table summarizes our interest rate swaps (dollar amounts in millions):

Under the terms of the November 2016 swap maturing in 2021, we receive 3-month LIBOR and pay a fixed rate over the hedged period, in addition to a basis rate swap to convert the floating rate risk under our November 2016 swap from 3-month LIBOR to 1-month LIBOR.  As a result, we receive 1-month LIBOR and pay a fixed rate over the hedged period.

Under the terms of the November 2018 swap maturing in 2023, we pay a fixed rate over the hedged amount and receive a 1-month LIBOR. This is inclusive of a 0% floor.

Under the terms of the forward starting November 2018 swap maturing in 2025, we will pay a fixed rate monthly and receive 1-month LIBOR. This is inclusive of a 0% floor.

These swaps are designated as cash flow hedges against changes in LIBOR for a portion of our variable rate debt.  

During the fourth quarter of 2019, we used proceeds from our revolving credit facility to pay off a $35.0 million variable rate, tax exempt industrial development bond that financed the construction of a plant in prior years. The bond was remarketed by an agent on a regular basis at a market-clearing interest rate.

As of December 31, 2019, we had $45.3 million of cash and cash equivalents, $29.8 million in the U.S and $15.5 million in various foreign jurisdictions, primarily Canada.

As of December 31, 2019, we had a $36.2 million Accounts Receivable Securitization Facility with the Bank of Nova Scotia (the “funding entity”) that matures in March 2020. Under this facility, we sell accounts receivables to Armstrong Receivables Company, LLC (“ARC”), a Delaware entity that is consolidated in these financial statements.  ARC is a 100% wholly-owned single member limited liability company special purpose entity created specifically for this transaction; therefore, any receivables sold to ARC are not available to the general creditors of AWI.  ARC then sells an undivided interest in the purchased accounts receivables to the funding entity.  This undivided interest acts as collateral for drawings on the facility.  Any borrowings under this facility are obligations of ARC and not AWI.  ARC contracts with and pays a servicing fee to AWI to manage, collect and service the purchased accounts receivables.  All new receivables under the program are continuously purchased by ARC with the proceeds from collections of receivables previously purchased. During the first quarter of 2020, we expect to amend the facility to reduce the purchase limit from $36.2 million to $30.0 million and to extend its maturity to March 2021.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

We utilize lines of credit and other commercial commitments in order to ensure that adequate funds are available to meet operating requirements.  Letters of credit are currently arranged through our revolving credit facility, our bi-lateral facility and our securitization facility.  Letters of credit may be issued to third party suppliers, insurance and financial institutions and typically can only be drawn upon in the event of AWI’s failure to pay its obligations to the beneficiary. The following table presents details related to our letters of credit (dollar amounts in millions):

As of December 31, 2019, there was no restricted cash under our accounts receivable securitization facility for letters of credit issued in excess of our maximum limit. As of December 31, 2018, $6.0 million of letters of credit issued under our accounts receivable securitization facility in excess of our maximum limit was classified as restricted cash and reported as a component of Cash and cash equivalents on our Consolidated Balance Sheets.  

We believe that cash on hand and cash generated from operations, together with lines of credit, availability under our revolving credit facility, will be adequate to address our foreseeable liquidity needs based on current expectations of our business operations, capital expenditures and scheduled payments of debt obligations.

OFF-BALANCE SHEET ARRANGEMENTS

No disclosures are required pursuant to Item 303(a)(4) of Regulation S-K.

CONTRACTUAL OBLIGATIONS

As part of our normal operations, we enter into numerous contractual obligations that require specific payments during the term of the various agreements.  The following table includes amounts ongoing under contractual obligations existing as of December 31, 2019.  Only known payments that are dependent solely on the passage of time are included.  Obligations under contracts that contain minimum payment amounts are shown at the minimum payment amount.  Contracts that contain variable payment structures without minimum payments are excluded.  Purchase orders that are entered into in the normal course of business are also excluded because they are generally cancelable and not legally binding.  Amounts are presented below based upon the currently scheduled payment terms.  Actual future payments may differ from the amounts presented below due to changes in payment terms or events affecting the payments.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

The table above excludes $34.7 million of unrecognized tax benefit liabilities under ASC 740 “Income Taxes.”  Due to the uncertainty relating to these positions, we are unable to reasonably estimate the ultimate amount or timing of the settlement of these issues. See Note 16 to the Consolidated Financial Statements for more information.

This table excludes obligations related to postretirement benefits (retiree health care and life insurance) since we voluntarily provide these benefits.  The amount of benefit payments we made in 2019 was $9.4 million.  See Note 18 to the Consolidated Financial Statements for additional information regarding future expected cash payments for postretirement benefits.

Letters of credit are currently arranged through our bi-lateral facility. Letters of credit may be issued to third party suppliers, insurance and financial institutions and typically can only be drawn upon in the event of AWI’s failure to pay its obligations to the beneficiary. The following table summarizes the commitments we have available for use as of December 31, 2019.