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Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2019

Consolidation Policy. The consolidated financial statements and accompanying data in this report include the accounts of AWI and its majority-owned subsidiaries. All significant intercompany transactions have been eliminated from the consolidated financial statements.

Use of Estimates

Use of Estimates. We prepare our financial statements in conformity with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”), which requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses. When preparing an estimate, management determines the amount based upon the consideration of relevant internal and external information. Actual results may differ from these estimates.

Reclassifications

Reclassifications. Certain amounts in the prior year’s Consolidated Financial Statements and related notes have been recast to conform to the 2019 presentation.

Revision of Previously Issued Financial Statements

Revision of Previously Issued Financial Statements. During the second quarter of 2019, we revised the Consolidated Financial Statements and related notes included herein to correct an immaterial error related to the previously reported estimated loss on sale of our EMEA and Pacific Rim businesses. The immaterial correction increased the estimated loss on sale and reduced the assets held for sale by $35.2 million as of December 31, 2017. Notes 1, 6 and 15 have been updated to reflect the restatement. The impacts of this error correction are as follows:

Statements of Earnings and Comprehensive Income

	Year Ended
	December 31, 2017
	As Reported			As Adjusted
Loss on disposal of discontinued businesses, net of tax (benefit) of ($4.1)	$	(70.0	)	$	(105.2	)
Net loss from operations		(65.8	)		(101.0	)
Net earnings		154.8			119.6
Total comprehensive income		212.7			177.5
(Loss) per share of common stock, discontinued operations:
Basic	$	(1.23	)	$	(1.89	)
Diluted	$	(1.22	)	$	(1.87	)
Net earnings per share of common stock:
Basic	$	2.89		$	2.23
Diluted	$	2.86		$	2.21

Balance Sheets

	December 31, 2018
	As Reported		As Adjusted
Current assets of discontinued operations	$	279.5	$	244.3
Total current assets		752.8		717.6
Total assets		1,873.5		1,838.3
Retained earnings		865.0		829.8
Total shareholders' equity		261.2		226.0
Total liabilities and shareholders' equity		1,873.5		1,838.3

Statements of Shareholders’ Equity

	Retained Earnings				Total Shareholders' Equity
	As Reported		As Adjusted		As Reported		As Adjusted
December 31, 2017	$	633.4	$	598.2	$	419.3	$	384.1
December 31, 2018		865.0		829.8		261.2		226.0

Statements of Cash Flows

	Year Ended
	December 31, 2017
	As Reported		As Adjusted
Net earnings	$	154.8	$	119.6
Loss on disposal of discontinued operations		74.1		109.3

Discontinued Operations

	Year Ended
	December 31, 2017
	As Reported			As Adjusted
EMEA and Pacific Rim Businesses
(Loss) from disposal of discontinued businesses, before income tax	$	(74.0	)	$	(109.2	)
(Loss) gain from disposal of discontinued businesses, net of tax		(74.0	)		(109.2	)
Net (loss) earnings from discontinued operations		(69.8	)		(105.0	)
Total
(Loss) from disposal of discontinued businesses, before income tax	$	(74.1	)	$	(109.3	)
(Loss) gain from disposal of discontinued businesses, net of tax		(70.0	)		(105.2	)
Net (loss) earnings from discontinued operations		(65.8	)		(101.0	)

	December 31, 2018
	As Reported	As Adjusted
Property, plant, and equipment, less accumulated depreciation and amortization	$ 103.8	$ 68.6
Total non-current assets of discontinued operations	143.5	108.3
Total assets of discontinued operations	279.5	244.3

	Year Ended
	December 31, 2017
	As Reported		As Adjusted
Estimated loss on sale to Knauf		74.0		109.2

Accounts Payable and Accrued Expenses

	December 31, 2018
	As Reported		As Adjusted
Advance receipt of Knauf proceeds	$	237.6	$	202.4
Contingent liability payable to Knauf for adjustments to cash consideration		-		35.2

Revenue Recognition

Revenue Recognition. On January 1, 2018, we adopted Accounting Standards Codification (“ASC”) 606 - Revenue from Contracts with Customers and all the related amendments using the modified retrospective transition method. This adoption did not have a material impact on our financial condition, results of operations or cash flows as the amount and timing of substantially all of our revenues are recognized at a point in time.

We recognize revenue upon transfer of control of our products to the customer, which typically occurs upon shipment. Our main performance obligation to our customers is the delivery of products in accordance with purchase orders. Each purchase order confirms the transaction price for the products purchased under the arrangement. Direct sales to building materials distributors, home centers, direct customers and retailers represent the majority of our sales. Our standard sales terms are Free On Board (“FOB”) shipping point. We have some sales terms that are FOB destination. At the point of shipment, the customer is required to pay under normal sales terms. Our normal payment terms in most cases are 45 days or less and our sales arrangements do not have any material financing components. In addition, our customer arrangements do not produce contract assets or liabilities that are material to our consolidated financial statements. Within our Architectural Specialties segment, the majority of revenues are customer project driven, which includes a minority of revenues derived from the sale of customer specified customized products that have no alternative use to us. The manufacturing cycle for these custom products is typically short.

Incremental costs to fulfill our customer arrangements are expensed as incurred, as the amortization period is less than one year.

Our products are sold with normal and customary return provisions. We provide limited warranties for defects in materials or factory workmanship, sagging and warping, and certain other manufacturing defects. Warranties are not sold separately to customers. Our product warranties place certain requirements on the purchaser, including installation and maintenance in accordance with our written instructions. In addition to our warranty program, under certain limited circumstances, we will occasionally at our sole discretion provide a customer accommodation repair or replacement. Warranty repairs and replacements are most commonly made by professional installers employed by or affiliated with our independent distributors. Reimbursement for costs associated with warranty repairs are provided to our independent distributors through a credit against accounts receivable from the distributor to us. Sales returns and warranty claims have historically not been material and do not constitute separate performance obligations.

We often offer incentive programs to our customers, primarily volume rebates and promotions. The majority of our rebates are designated as a percentage of annual customer purchases. We estimate the amount of rebates based on actual sales for the period and accrue for the projected incentive programs costs. We record the costs of rebate accruals as a reduction to the transaction price. Other sales discounts, including early pay promotions, are deducted immediately from the sales invoice.

See Note 4 to the Consolidated Financial Statements for additional information related to our revenues.

Shipping and Handling Costs

Shipping and Handling Costs. We account for product shipping and handling costs as fulfillment activities and present the associated costs in costs of goods sold in the period in which we sell our product.

Advertising Costs

Advertising Costs. We recognize advertising expenses as they are incurred.

Research and Development Costs

Research and Development Costs. We expense research and development costs as they are incurred.

Pension and Postretirement Benefits

Pension and Postretirement Benefits. We have benefit plans that provide for pension, medical and life insurance benefits to certain eligible employees when they retire from active service. See Note 18 to the Consolidated Financial Statements for disclosures on pension and postretirement benefits.

Taxes

Taxes. The provision for income taxes has been determined using the asset and liability approach of accounting for income taxes to reflect the expected future tax consequences of events recognized in the financial statements. Deferred income tax assets and liabilities are recognized by applying enacted tax rates to temporary differences that exist as of the balance sheet date, which result from differences in the timing of reported taxable income between tax and financial reporting.

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 and foreign source income, 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 generally not used as positive evidence related to the realization of the deferred tax assets in the assessment.

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.

Taxes collected from customers and remitted to governmental authorities are reported on a net basis.

Earnings per Share

Earnings per Share. Basic earnings per share is computed by dividing the earnings attributable to common shares by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings.

Cash and Cash Equivalents

Cash and Cash Equivalents. Cash and cash equivalents include cash on hand, short-term investments that have maturities of three months or less when purchased and restricted cash.

Concentration of Credit

Concentration of Credit. We principally sell products to customers in building products industries in various geographic regions. Revenues from two commercial distributors, included within our Mineral Fiber and Architectural Specialties segments, individually exceeded 10% of our revenues in 2019. Gross sales to these two customers totaled $428.7 million in 2019. Revenues from three commercial distributors individually exceeded 10% of our revenues in 2018 and 2017. Gross sales to these three customers totaled $459.3 million and $426.1 million in 2018 and 2017, respectively. We monitor the creditworthiness of our customers and generally do not require collateral.

Receivables

Receivables. We sell our products to select, pre-approved customers using customary trade terms that allow for payment in the future. Customer trade receivables, customer notes receivable and miscellaneous receivables (which include supply related rebates and other), net of allowances for doubtful accounts, customer credits and warranties are reported in accounts and notes receivable, net. Cash flows from the collection of receivables are classified as operating cash flows on the consolidated statements of cash flows.

We establish credit-worthiness prior to extending credit. We estimate the recoverability of receivables each period. This estimate is based upon new information in the period, which can include the review of any available financial statements and forecasts, as well as discussions with legal counsel and the management of the debtor company. As events occur, which impact the collectability of the receivable, all or a portion of the receivable is reserved. Account balances are charged off against the allowance when the potential for recovery is considered remote. We do not have any off-balance sheet credit exposure related to our customers.

Inventories

Inventories. Inventories are valued at the lower of cost and net realizable value. See Note 8 to the Consolidated Financial Statements for further information on our accounting for inventories.

Property Plant and Equipment

Property Plant and Equipment. Property plant and equipment is recorded at cost reduced by accumulated depreciation. Depreciation expense is recognized on a straight-line basis over the assets’ estimated useful lives. Machinery and equipment includes manufacturing equipment (depreciated over 3 to 15 years), computer equipment (depreciated over 3 to 5 years) and office furniture and equipment (depreciated over 5 to 7 years). Within manufacturing equipment, assets that are subject to accelerated obsolescence or wear out quickly, such as dryer components, are depreciated over shorter periods (3 to 7 years). Heavy production equipment, such as conveyors and production presses, are depreciated over longer periods (13 to 15 years). Buildings are depreciated over 15 to 30 years, depending on factors such as type of construction and use. Computer software is depreciated over 3 to 7 years.

Property, plant and equipment is tested for impairment by asset group when indicators of impairment are present, such as operating losses and/or negative cash flows. If an indication of impairment exists, we compare the carrying amount of the asset group to the

estimated undiscounted future cash flows expected to be generated by the asset group. The estimate of an asset group’s fair value is based on discounted future cash flows expected to be generated by the asset group, 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, we record an impairment charge equal to the difference between the fair value and carrying value of the asset group. Impairments of assets related to our manufacturing operations are recorded in cost of goods sold.

When assets are disposed of or retired, their costs and related depreciation are removed from the financial statements, and any resulting gains or losses normally are reflected in cost of goods sold or selling, general and administrative (“SG&A”) expenses depending on the nature of the asset.

Asset Retirement Obligations

Asset Retirement Obligations. We recognize the fair value of obligations associated with the retirement of tangible long-lived assets in the period in which they are incurred. Upon initial recognition of a liability, the discounted cost is capitalized as part of the related long-lived asset and depreciated over the corresponding asset’s useful life. Over time, accretion of the liability is recognized as an operating expense to reflect the change in the liability’s present value.

Goodwill and Intangible Assets

Goodwill and Intangible Assets. Our definite-lived intangible assets are primarily customer relationships (amortized over 3 to 20 years) and developed technology (amortized over 15 years). We review significant definite-lived intangible assets for impairment when indicators of impairment exist. We review our businesses for indicators of impairment such as operating losses and/or negative cash flows. If an indication of impairment exists, we compare the carrying amount of the asset group to the estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying value exceeds the undiscounted future cash flows, the fair value of the asset group is determined. The estimate of an asset group’s fair value is based on discounted future cash flows expected to be generated by the asset group, or based on management’s estimated exit price assuming the assets could be sold in an orderly transaction between market participants. If the fair value is less than the carrying value of the asset group, we record an impairment charge equal to the difference between the fair value and carrying value of the asset group.

Our indefinite-lived assets include goodwill and other intangibles, primarily trademarks and brand names, with Armstrong representing our primary trademark. Trademarks and brand names are integral to our corporate identity and are expected to contribute indefinitely to our cash flows. Accordingly, they have been assigned an indefinite life. We conduct our annual impairment tests on these indefinite-lived intangible assets and goodwill during the fourth quarter. These assets undergo more frequent tests if an indication of possible impairment exists. When performing 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. Methodologies used for valuing our intangible assets did not change from prior periods.

See Note 13 to the Consolidated Financial Statements for disclosure on intangible assets.

Foreign Currency Transactions

Foreign Currency Transactions. Assets and liabilities of our subsidiaries operating outside the United States which are accounted in a functional currency other than U.S. dollars are translated using the period end exchange rate. Revenues and expenses are translated at exchange rates effective during each month. Foreign currency translation gains or losses are included as a component of accumulated other comprehensive (loss) within shareholders' equity. Gains or losses on foreign currency transactions are recognized through earnings

Financial Instruments and Derivatives

Financial Instruments and Derivatives. From time to time, we use derivatives and other financial instruments to offset the effect of interest rate variability. See Notes 19 and 20 to the Consolidated Financial Statements for further discussion.

Share-Based Employee Compensation

Share-based Employee Compensation. We generally recognize share-based compensation expense on a straight-line basis over the vesting period for the entire award. Compensation expense for performance-based awards with non-market-based conditions are also recognized over the vesting period for the entire award, however, compensation expense may vary based on the expectations for actual performance relative to defined performance measures. We estimate forfeitures based on actual historical forfeitures. See Note 22 to the Consolidated Financial Statements for additional information on share-based employee compensation.

Subsequent Events

Subsequent Events. 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.

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 Retirement Income Plan (“RIP”). See Note 18 to the Consolidated Financial Statements for further information.

Recently Adopted and Recently Issued Accounting Standards

Recently Adopted Accounting Standards

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases,” which amends accounting for leases, most notably by requiring a lessee to recognize the assets and liabilities that arise from a lease agreement. Specifically, this new guidance requires lessees to recognize a liability to make lease payments and a right-of-use (“ROU”) asset representing its right to use the underlying asset for the lease term, with limited exceptions.

In January 2018, the FASB issued ASU 2018-01, “Land Easement Practical Expedient for Transition to Topic 842,” which permits an entity to elect an optional transition practical expedient to not evaluate under Topic 842 land easements that exist at transition or expired before the adoption of Topic 842 and that were not previously accounted for as leases under Topic 840. In July 2018, the FASB issued ASU 2018-10, “Codification Improvements to Topic 842, Leases,” which affects narrow aspects of the guidance issued in the amendments in Update 2016-02. In July 2018, the FASB also issued ASU 2018-11, “Targeted Improvements,” which allows companies to adopt ASC Topic 842 without revising comparative period reporting or disclosures and provides an optional practical expedient for lessors to not separate lease and non-lease components of a contract when certain criteria are met.

Effective January 1, 2019, we adopted these standards using the modified retrospective transition method and have applied all practical expedients related to leases existing at the date of initial application. Upon adoption, the most significant change was to the Consolidated Balance Sheet related to the recognition of new ROU assets and lease liabilities on a continuing operations basis. Upon adoption we recognized ROU assets and lease liabilities of $29.2 million, based on the present value of the future minimum rental payments for existing operating leases. We have no leases that classify as financing arrangements. As required by the lease ASC updates, we expanded our disclosure of leases. See Note 12 for additional information.

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,” which amends the financial reporting of hedging relationships in order to better portray the economic results of an entity’s risk management activities in its financial statements. In addition, the guidance simplifies the application of current hedge accounting guidance. Effective January 1, 2019, we adopted the guidance, which had no material impact on our financial condition, results of operations or cash flows.

In June 2018, the FASB issued ASU 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting,” which simplifies the aspects of accounting for nonemployee share-based payment transactions resulting from expanding the scope of ASC Topic 718 – Compensation – Stock Compensation, to include share-based payment transactions for acquiring goods and services from non-employees. Effective January 1, 2019, we adopted this standard using the modified retrospective transition method. Our adoption of this standard had no material impact on our financial condition, results of operations or cash flows.

Recently Issued Accounting Standards

In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments," which requires immediate recognition of estimated credit losses that are expected to occur over the remaining life of many financial assets. This standard applies to all financial assets, including trade receivables. Our current accounts receivable policy uses historical and current information to

estimate the amount of probable credit losses in our existing accounts receivable balances. This new guidance is effective for annual and interim periods in fiscal years beginning after December 15, 2019. The adoption of this standard will not have a material impact on our financial condition, results of operations or cash flows.

In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other,” which simplifies the subsequent measurement of goodwill by eliminating the second step from the current goodwill impairment test. Under this standard, an entity would recognize an impairment charge for the amount by which the carrying value of the reporting unit goodwill exceeds the fair value. This new guidance is effective for annual and interim periods in fiscal years beginning after December 15, 2019. The adoption of this standard will not have a material impact on our financial condition or results of operations.

In August 2018, the FASB issued ASU 2018-13, “Changes to the Disclosure Requirements for Fair Value Measurement.” This standard eliminates the current requirement to disclose the amount or reason for transfers between level 1 and level 2 of the fair value hierarchy and the requirement to disclose the valuation methodology for level 3 fair value measurements. The standard includes additional disclosure requirements for level 3 fair value measurements, including the requirement to disclose the changes in unrealized gains and losses in other comprehensive income during the period and permits the disclosure of other relevant quantitative information for certain unobservable inputs. This new guidance is effective for annual and interim periods beginning after December 15, 2019. The adoption of this standard will not have a material impact on our disclosures.

In August 2018, the FASB issued ASU 2018-14, “Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans,” which amends ASC 715-20, Compensation – Retirement Benefits – Defined Benefit Plans. The ASU modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The disclosure requirements to be removed include the amounts in accumulated other comprehensive income expected to be recognized in net periodic benefit costs over the next fiscal year, the amount and timing of plan assets expected to be returned to the employer and the effect of a one percentage point change in assumed health care cost trend rates on the aggregate service cost and benefit obligation for postretirement health care benefits. The new disclosure requirements include the interest crediting rates for cash balance plans, and an explanation of significant gains and losses related to changes in benefit obligations. This guidance is effective for fiscal years ending after December 15, 2020. We are evaluating the impact the adoption of this standard will have on our disclosures.

In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract,” which amends ASC 350-40 Intangibles – Goodwill and Other – Internal-Use Software. The ASU requires implementation costs incurred by customers in cloud computing arrangements to be deferred and recognized over the term of the arrangement, if these costs were capitalized by the customer in a software licensing arrangement. This guidance is effective for fiscal years beginning after December 15, 2019. The adoption of this standard will not have a material impact on our financial condition, results of operations or cash flows.

In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes,” which removes exceptions to the general principles in ASC Topic 740 – Income Taxes for allocating tax expense between financial statement components, accounting basis differences resulting from an ownership change in foreign investments and interim period income tax accounting for year-to-date losses that exceed projected losses. This guidance is effective for fiscal years beginning after December 15, 2020. We are evaluating the impact the adoption of this standard will have on our financial condition and results of operations.