UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number:
(Exact Name of Registrant as Specified in its Charter)
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( State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer |
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(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
Common Stock, $0.01 par value per share |
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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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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 period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.
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☒ |
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Accelerated filer |
☐ |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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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 Exchange Act). Yes
Number of shares of Armstrong World Industries, Inc.’s common stock outstanding as of October 21, 2020 –
TABLE OF CONTENTS
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3 |
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Item 1. |
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4 |
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Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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31 |
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Item 3. |
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39 |
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Item 4. |
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39 |
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Item 1. |
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40 |
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Item 1A. |
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40 |
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Item 2. |
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40 |
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Item 3. |
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41 |
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Item 4. |
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41 |
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Item 5. |
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41 |
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Item 6. |
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42 |
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2
When we refer to “AWI,” the “Company,” “we,” “our” or “us,” we are referring to Armstrong World Industries, Inc. and its subsidiaries.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q and the documents incorporated by reference herein 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 (“EBITDA”). 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:
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economic conditions; |
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construction activity; |
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public health epidemics or pandemics (like COVID-19); |
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competition; |
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key customers; |
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customer consolidation; |
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availability and costs of raw materials and energy; |
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Worthington Armstrong Venture (“WAVE”), our joint venture with Worthington Industries, Inc; |
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geographic concentration; |
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strategic transactions; |
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negative tax consequences; |
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environmental matters; |
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information technology disruptions and cybersecurity breaches; |
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claims; |
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litigation; |
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digitalization initiatives and new technology; |
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covenants in our debt agreements; |
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our indebtedness; |
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our liquidity; |
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defined benefit plan obligations; |
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intellectual property rights; |
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sustainability; |
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the tax consequences of the separation of our flooring business from our ceilings business; |
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international operations; |
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costs savings and productivity initiatives; |
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labor; |
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dividend payments; and |
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other risks detailed from time to time in our filings with the Securities and Exchange Commission (the “SEC”), press releases and other communications, including those set forth under “Risk Factors” included in our Amendment No. 1 to the Annual Report on Form 10-K/A for the year ended December 31, 2019, and in the documents incorporated by reference herein and therein. |
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 forward-looking statement is based.
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Armstrong World Industries, Inc., and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Income
(amounts in millions, except per share data)
Unaudited
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2020 |
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2019 |
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2020 |
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2019 |
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Net sales |
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$ |
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$ |
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$ |
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$ |
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Cost of goods sold |
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Gross profit |
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Selling, general and administrative expenses |
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Gain related to sale of fixed and intangible assets |
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( |
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- |
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- |
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Equity earnings from joint venture |
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( |
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( |
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( |
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Operating income |
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Interest expense |
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Other non-operating (income) expense, net |
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( |
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( |
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( |
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Earnings (loss) from continuing operations before income taxes |
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( |
) |
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Income tax expense (benefit) |
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( |
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Earnings (loss) from continuing operations |
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( |
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Net earnings from discontinued operations, net of tax expense of $ -, $ |
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- |
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- |
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(Loss) from disposal of discontinued businesses, net of tax (benefit) of $ -, ($ |
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( |
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( |
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( |
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( |
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Net (loss) from discontinued operations |
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( |
) |
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( |
) |
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( |
) |
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( |
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Net earnings (loss) |
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$ |
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$ |
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$ |
( |
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$ |
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Other comprehensive (loss) income, net of tax: |
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Foreign currency translation adjustments |
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( |
) |
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( |
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Derivative gain (loss), net |
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( |
) |
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( |
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( |
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Pension and postretirement adjustments |
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( |
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Total other comprehensive (loss) income |
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( |
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Total comprehensive income |
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$ |
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$ |
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$ |
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$ |
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Earnings (loss) per share of common stock, continuing operations: |
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Basic |
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$ |
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$ |
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$ |
( |
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$ |
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Diluted |
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$ |
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$ |
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$ |
( |
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$ |
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Earnings (loss) per share of common stock, discontinued operations: |
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Basic |
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$ |
- |
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$ |
( |
) |
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$ |
( |
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$ |
( |
) |
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Diluted |
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$ |
- |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
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Net earnings (loss) per share of common stock: |
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Basic |
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$ |
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$ |
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$ |
( |
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$ |
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Diluted |
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$ |
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$ |
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$ |
( |
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$ |
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Average number of common shares outstanding: |
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Basic |
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Diluted |
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See accompanying notes to Condensed Consolidated Financial Statements beginning on page 8.
4
Armstrong World Industries, Inc., and Subsidiaries
Condensed Consolidated Balance Sheets
(amounts in millions, except share and per share data)
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Unaudited |
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September 30, 2020 |
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December 31, 2019 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts and notes receivable, net |
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Inventories, net |
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Income taxes receivable |
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Other current assets |
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Total current assets |
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Property, plant, and equipment, less accumulated depreciation and amortization of $ |
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Operating lease assets |
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Finance lease assets |
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- |
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Prepaid pension costs |
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Investment in joint venture |
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Goodwill |
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Intangible assets, net |
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Deferred income taxes |
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- |
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Income taxes receivable |
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Other non-current assets |
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Total assets |
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$ |
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$ |
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Liabilities and Shareholders' Equity |
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Current liabilities: |
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Current installments of long-term debt |
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Accounts payable and accrued expenses |
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Operating lease liabilities |
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Finance lease liabilities |
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- |
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Income taxes payable |
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Total current liabilities |
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Long-term debt, less current installments |
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Operating lease liabilities |
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Finance lease liabilities |
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- |
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Postretirement benefit liabilities |
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Pension benefit liabilities |
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Other long-term liabilities |
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Income taxes payable |
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Deferred income taxes |
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Total non-current liabilities |
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Shareholders' equity: |
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Common stock, $ shares issued and |
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Capital in excess of par value |
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Retained earnings |
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Treasury stock, at cost, shares as of December 31, 2019 |
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( |
) |
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( |
) |
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Accumulated other comprehensive (loss) |
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( |
) |
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( |
) |
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Total shareholders' equity |
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Total liabilities and shareholders' equity |
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$ |
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$ |
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See accompanying notes to Condensed Consolidated Financial Statements beginning on page 8.
5
Armstrong World Industries, Inc., and Subsidiaries
Condensed Consolidated Statements of Shareholders’ Equity
(amounts in millions, except share data)
Unaudited
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Three Months Ended September 30, 2020 |
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Accumulated |
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Additional |
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Other |
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Common Stock |
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Paid-In |
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Retained |
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Treasury Stock |
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Comprehensive |
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Shares |
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Amount |
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Capital |
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Earnings |
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Shares |
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Amount |
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(Loss) |
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Total |
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June 30, 2020 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
) |
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$ |
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Stock issuance, net |
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- |
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- |
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- |
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- |
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- |
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- |
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- |
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Cash dividends - $ |
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- |
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- |
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- |
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( |
) |
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- |
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- |
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- |
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( |
) |
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Share-based employee compensation |
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- |
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- |
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- |
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- |
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- |
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- |
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Net earnings |
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- |
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- |
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- |
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- |
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- |
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|
- |
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Other comprehensive (loss) |
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|
- |
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|
- |
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|
|
- |
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- |
|
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- |
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|
- |
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( |
) |
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( |
) |
|
September 30, 2020 |
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$ |
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|
$ |
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|
$ |
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$ |
( |
) |
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$ |
( |
) |
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$ |
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Nine Months Ended September 30, 2020 |
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Accumulated |
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Additional |
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Other |
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||
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Common Stock |
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Paid-In |
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Retained |
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Treasury Stock |
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Comprehensive |
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Shares |
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Amount |
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Capital |
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Earnings |
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Shares |
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|
Amount |
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(Loss) |
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Total |
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||||||||
|
December 31, 2019 |
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|
|
|
|
$ |
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|
|
$ |
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|
|
$ |
|
|
|
|
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
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Stock issuance, net |
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|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Cash dividends - $ |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
Share-based employee compensation |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
Net (loss) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
Other comprehensive income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Acquisition of treasury stock |
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
September 30, 2020 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019 |
|
|||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
||
|
|
|
Common Stock |
|
|
Paid-In |
|
|
Retained |
|
|
Treasury Stock |
|
|
Comprehensive |
|
|
|
|
|
|||||||||||||
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Earnings |
|
|
Shares |
|
|
Amount |
|
|
(Loss) |
|
|
Total |
|
||||||||
|
June 30, 2019 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
Stock issuance, net |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Cash dividends - $ |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
Share-based employee compensation |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
Net earnings |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
Other comprehensive income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Acquisition of treasury stock |
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
September 30, 2019 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2019 |
|
|||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
||
|
|
|
Common Stock |
|
|
Paid-In |
|
|
Retained |
|
|
Treasury Stock |
|
|
Comprehensive |
|
|
|
|
|
|||||||||||||
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Earnings |
|
|
Shares |
|
|
Amount |
|
|
(Loss) |
|
|
Total |
|
||||||||
|
December 31, 2018 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
Cumulative effect impact of ASU 2017-12 adoption |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
Stock issuance, net |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Cash dividends - $ |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
Share-based employee compensation |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
Net earnings |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
Other comprehensive income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Acquisition of treasury stock |
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
September 30, 2019 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
See accompanying notes to Condensed Consolidated Financial Statements beginning on page 8.
6
Armstrong World Industries, Inc., and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(amounts in millions)
Unaudited
|
|
|
Nine Months Ended |
|
|||||
|
|
|
September 30, |
|
|||||
|
|
|
2020 |
|
|
2019 |
|
||
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
Net (loss) earnings |
|
$ |
( |
) |
|
$ |
|
|
|
Adjustments to reconcile net (loss) earnings to net cash provided by operating activities: |
|
|||||||
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
Loss on disposal of discontinued operations |
|
|
|
|
|
|
|
|
|
Write-off debt refinancing fees |
|
|
- |
|
|
|
|
|
|
Gain related to sale of fixed and intangible assets |
|
|
( |
) |
|
|
- |
|
|
Deferred income taxes |
|
|
( |
) |
|
|
|
|
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
Equity earnings from joint venture |
|
|
( |
) |
|
|
( |
) |
|
U.S. pension cost (credit) |
|
|
|
|
|
|
( |
) |
|
Other non-cash adjustments, net |
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
Receivables |
|
|
|
|
|
|
( |
) |
|
Inventories |
|
|
( |
) |
|
|
( |
) |
|
Accounts payable and accrued expenses |
|
|
( |
) |
|
|
( |
) |
|
Income taxes receivable and payable, net |
|
|
|
|
|
|
( |
) |
|
Other assets and liabilities |
|
|
( |
) |
|
|
( |
) |
|
Net cash provided by operating activities |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
|
( |
) |
|
|
( |
) |
|
Return of investment from joint venture |
|
|
|
|
|
|
|
|
|
Cash paid for acquisitions |
|
|
( |
) |
|
|
( |
) |
|
Proceeds from the sale of assets |
|
|
|
|
|
|
- |
|
|
Payments of proceeds from Knauf to investment in joint venture |
|
|
( |
) |
|
|
- |
|
|
Payments to Knauf upon disposal of discontinued operations |
|
|
( |
) |
|
|
( |
) |
|
Other investing activities |
|
|
|
|
|
|
- |
|
|
Net cash (used for) investing activities |
|
|
( |
) |
|
|
( |
) |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
Proceeds from short-term debt |
|
|
|
|
|
|
- |
|
|
Payments of short-term debt |
|
|
( |
) |
|
|
- |
|
|
Proceeds from revolving credit facility |
|
|
|
|
|
|
|
|
|
Payments of revolving credit facility |
|
|
( |
) |
|
|
- |
|
|
Proceeds from long-term debt |
|
|
- |
|
|
|
|
|
|
Payments of long-term debt |
|
|
- |
|
|
|
( |
) |
|
Financing costs |
|
|
- |
|
|
|
( |
) |
|
Dividend paid |
|
|
( |
) |
|
|
( |
) |
|
Payments from share-based compensation plans, net of tax |
|
|
( |
) |
|
|
( |
) |
|
Payments for treasury stock acquired |
|
|
( |
) |
|
|
( |
) |
|
Payments for finance leases |
|
|
( |
) |
|
|
- |
|
|
Net cash (used for) financing activities |
|
|
( |
) |
|
|
( |
) |
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
( |
) |
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
|
|
|
|
( |
) |
|
Cash and cash equivalents at beginning of year of discontinued operations |
|
|
- |
|
|
|
|
|
|
Cash and cash equivalents at beginning of year of continuing operations |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period of continuing operations |
|
$ |
|
|
|
$ |
|
|
|
Supplemental Cash Flow Disclosures: |
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
|
|
|
$ |
|
|
|
Income tax payments, net |
|
|
|
|
|
|
|
|
|
Amounts in accounts payable for capital expenditures |
|
|
- |
|
|
|
|
|
See accompanying notes to Condensed Consolidated Financial Statements beginning on page 8.
7
Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
NOTE 1. BUSINESS AND BASIS OF PRESENTATION
Armstrong World Industries, Inc. (“AWI”) is a Pennsylvania corporation incorporated in 1891. When we refer to “AWI,” the “Company,” “we,” “our” or “us” in these notes, we are referring to AWI and its subsidiaries.
Except as disclosed in this Note, the accounting policies used in preparing the Condensed Consolidated Financial Statements in this Form 10-Q are the same as those used in preparing the Consolidated Financial Statements for the year ended December 31, 2019. These statements should therefore be read in conjunction with the Consolidated Financial Statements and notes that are included in the Amendment No. 1 to the Annual Report on Form 10-K/A for the fiscal year ended December 31, 2019. In the opinion of management, all adjustments of a normal recurring nature have been included to provide a fair statement of the results for the reporting periods presented. Operating results for the third quarter and first nine months of 2020 and 2019 included in this report are unaudited. Quarterly results are not necessarily indicative of annual earnings, primarily due to the different level of sales in each quarter of the year and the possibility of changes in general economic conditions.
These Condensed Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The statements include management estimates and judgments, where appropriate. Management utilizes estimates to record many items, including certain asset values, contingent purchase price liabilities, allowances for bad debts, inventory obsolescence and lower of cost and net realizable value charges, warranty reserves, workers’ compensation, general liability and environmental claims, and income taxes. When preparing an estimate, management determines the amount based upon the consideration of relevant information and may confer with outside parties, including external counsel. Actual results may differ from these estimates.
Certain prior year amounts have been reclassified in the Condensed Consolidated Financial Statements to conform to the 2020 presentation.
Acquisitions
In August 2020, we acquired the business and assets of Moz Designs, Inc. (“Moz”), based in Oakland, California. Moz is a designer and fabricator of custom architectural metal ceilings, walls, dividers and column covers for interior and exterior applications with one manufacturing facility. Moz’s operations, and its assets and liabilities, are included as a component of our Architectural Specialties segment.
In July 2020, we acquired all the issued and outstanding capital stock of TURF Design Inc. (“Turf”), with one manufacturing facility in Elgin, Illinois and a design center in Chicago, Illinois. Turf is a designer and manufacturer of acoustic felt ceilings and wall products. Turf’s operations, and its assets and liabilities, are included as a component of our Architectural Specialties segment.
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
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
See Note 4 for further information on our recent acquisitions.
Discontinued Operations
On September 30, 2019, we completed the 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
8
Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
million relating to these payments. During the third quarter of 2020, we remitted $
In 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 provided certain transition technology, finance and information technology support services, which are now substantially complete. In connection with the closing of the Sale, we also entered into (i) a royalty-free intellectual property License Agreement with Knauf under which they license patents, trademarks and know-how from us for use in licensed territories in which the business was conducted prior to the Sale, 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 term of the granted licenses, with respect to each intellectual property right, extend until the expiration or abandonment of each such intellectual property right.
The EMEA and Pacific Rim segment historical financial results for the three and nine months ended September 30, 2019 have been reflected in AWI’s Condensed Consolidated Statements of Operations and Comprehensive Income as discontinued operations, while the assets and liabilities of discontinued operations were removed from AWI’s Condensed Consolidated Balance Sheet as of September 30, 2019.
Recently Adopted 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. Effective January 1, 2020, we adopted this standard, which had no 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 recognizes an impairment charge for the amount by which the carrying value of the reporting unit goodwill exceeds the fair value. Effective January 1, 2020, we adopted this standard prospectively. Our adoption of this standard had no 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. Effective January 1, 2020, we adopted this standard, which resulted in additional disclosures for level 3 fair value measurements.
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. Effective January 1, 2020, we adopted this standard prospectively. Our adoption of this standard had no material impact on our financial condition, results of operations or cash flows.
In March 2020, the FASB issued ASU 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by the discontinuation of the London Interbank Offered Rate (LIBOR) and other interbank offered rates. This guidance is effective through December 31, 2022. Effective the second quarter of 2020 we adopted this standard, which had no impact on our financial condition, results of operations and cash flows.
Recently Issued Accounting Standards
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
9
Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
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 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.
COVID-19 Considerations
The COVID-19 outbreak has created significant volatility and economic disruption and the impact on our future consolidated results of operations is uncertain. The extent to which COVID-19 impacts our employees, operations, customers, suppliers and financial results depends on numerous evolving factors that we are not be able to accurately predict, including: the duration and scope of the pandemic; government actions taken in response to the pandemic; the impact on construction activity; the effect on our customers demand for our ceiling and wall systems; our ability to manufacture and sell our products; and the ability of our customers to pay for our products. While many of our products support life sustaining activities and essential construction, we, and certain of our customers or suppliers, may be impacted by state actions, orders and policies regarding the COVID-19 pandemic, including temporary closures of non-life sustaining businesses, shelter-in-place orders, and travel, social distancing and quarantine policies, the implementation and enforcement of which vary by individual U.S. states and by individual countries in the Americas. We did not record any asset impairments, inventory charges or bad debt reserves related to COVID-19 during the third quarter and first nine months of 2020 but future events may require such charges, which could have a material adverse effect on our financial condition, liquidity or results of operations.
NOTE 2. SEGMENT RESULTS
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mineral Fiber |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Architectural Specialties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Segment operating income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mineral Fiber |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Architectural Specialties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated Corporate |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Total consolidated operating income |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Total consolidated operating income |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-operating (income) expense, net |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Earnings (loss) from continuing operations before income taxes |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
10
Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
|
|
|
September 30, 2020 |
|
|
December 31, 2019 |
|
||
|
Segment assets |
|
|
|
|
|
|
|
|
|
Mineral Fiber |
|
$ |
|
|
|
$ |
|
|
|
Architectural Specialties |
|
|
|
|
|
|
|
|
|
Unallocated Corporate |
|
|
|
|
|
|
|
|
|
Total consolidated assets |
|
$ |
|
|
|
$ |
|
|
During the three and nine months ended September 30, 2020, we recorded a gain related to the sale of our idled mineral fiber plant in China. We received the majority of the proceeds in the third quarter of 2020 and the remaining receivable for the sale was $
NOTE 3. REVENUE
Revenue Recognition
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
Incremental costs to fulfill our customer arrangements are expensed as incurred, as the amortization period is less than
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.
Shipping and Handling
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.
Disaggregation of Revenues
Our Mineral Fiber and Architectural Specialties operating segments both manufacture and sell ceiling and wall systems (primarily mineral fiber, fiberglass wool, metal, wood, wood fiber, glass-reinforced-gypsum and felt) throughout the Americas. We disaggregate revenue based on our product-based segments and major customer channels, as they represent the most appropriate depiction of how the nature, amount and timing of revenues and cash flows are affected by economic factors. Net sales by major customer channel are as follows:
11
Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
Distributors – represents net sales to building materials distributors who re-sell our products to contractors, subcontractors’ alliances, large architect and design firms, and major facility owners. Geographically, this category includes sales throughout the U.S., Canada, and Latin America.
Home centers – represents net sales to home centers, such as Lowe’s Companies, Inc. and The Home Depot, Inc. This category includes sales primarily to U.S. customers.
Direct customers – represents net sales to contractors, subcontractors, and large architect and design firms. This category includes sales primarily to U.S. customers.
Retailers and other – represents net sales to independent retailers and certain national account customers, including wholesalers who re-sell our products to dealers who service builders, contractors and consumers, online customers, major facility owners, group purchasing organizations and maintenance, repair and operating (“MRO”) entities. Geographically, this category includes sales throughout the U.S. and Canada.
The following tables provide net sales by major customer group within our Mineral Fiber and Architectural Specialties segments for the three and nine months ended September 30, 2020 and 2019:
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
Mineral Fiber |
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Distributors |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Home centers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct customers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retailers and other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
Architectural Specialties |
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Distributors |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Direct customers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retailers and other |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
NOTE 4. ACQUISITIONS
We account for acquisitions under the acquisition method and the results of operations of acquired operations are included in the condensed consolidated financial statements from the acquisition date. Acquisition related costs are expensed as incurred. We allocate total consideration to the assets acquired and liabilities assumed based on their estimated fair values, with the remaining unallocated amount recorded as goodwill. The fair value of acquired intangible assets is estimated by applying discounted cash flow models based on significant level 3 inputs not observable in the market. Key assumptions are developed based on each acquirees’ historical experience, future projections and comparable market data including future cash flows, long-term growth rates, implied royalty rates, attrition rates and discount rates.
MOZ
On August 24, 2020, we acquired the business and assets of Moz for a purchase price of $
The contingent consideration is payable upon achievement of certain future performance objectives through 2021. The fair value of contingent consideration will be remeasured at each reporting period, and any future adjustments will be recorded as a component of
12
Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
selling, general and administrative (“SG&A”) expenses in our Condensed Consolidated Statements of Operations and Comprehensive Income.
TURF
On July 27, 2020, we acquired all the issued and outstanding capital stock of Turf for a purchase price of $
The contingent consideration is payable upon achievement of certain future performance objectives through 2022. The contingent consideration includes up to $
MRK
On November 25, 2019, we acquired the business and assets of MRK for a purchase price of $
ACGI
On March 4, 2019, we acquired the business and assets of ACGI for a purchase price of $
The 2020 and 2019 acquisitions, both individually and in the aggregate, did not have a material impact on reported net sales or operating income for the three and nine months ended September 30, 2020 and 2019.
NOTE 5. DISCONTINUED OPERATIONS
EMEA AND PACIFIC RIM BUSINESSES
On November 17, 2017, we agreed to sell certain subsidiaries comprising our businesses in EMEA and the Pacific Rim to Knauf. The Sale was completed on September 30, 2019. Prior to completion of the Sale, each quarter, we compared the anticipated sales proceeds from Knauf to the carrying value of EMEA and Pacific Rim net assets. We recorded an estimated loss when the carrying value exceeded the anticipated sales proceeds. Net gains were only recorded to the extent of previous estimated losses.
During the three and nine months ended September 30, 2019, we recorded a loss on sale of $
See Note 1 for further discussion of the Sale.
13
Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
FLOORING BUSINESSES
Separation and Distribution of AFI
On April 1, 2016, we completed our separation of Armstrong Flooring, Inc. (“AFI”) by allocating the assets and liabilities related primarily to our Resilient and Wood Flooring segments to AFI and then distributing the common stock of AFI to our shareholders at a ratio of one share of AFI common stock for every two shares of AWI common stock.
European Resilient Flooring
During the second quarter of 2020, we recorded a gain of $
Summarized Financial Information of Discontinued Operations
The following tables detail the businesses and line items that comprise discontinued operations on the Condensed Consolidated Statements of Operations and Comprehensive Income.
|
|
|
EMEA and Pacific Rim Businesses |
|
|
|
Three Months Ended September 30, 2020 |
|
|
|
|
|
(Loss) from disposal of discontinued businesses, before income tax |
|
$ |
( |
) |
|
Income tax (benefit) |
|
|
- |
|
|
(Loss) from disposal of discontinued businesses, net of tax |
|
$ |
( |
) |
|
|
|
|
|
|
|
Net (loss) from discontinued operations |
|
$ |
( |
) |
|
|
|
EMEA and Pacific Rim Businesses |
|
|
Flooring Businesses |
|
|
Total |
|
|||
|
Nine Months Ended September 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) gain from disposal of discontinued businesses, before income tax |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
Income tax (benefit) |
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
(Loss) gain from disposal of discontinued businesses, net of tax |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings from discontinued operations |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
|
|
EMEA and Pacific Rim Businesses |
|
|
Flooring Businesses |
|
|
Total |
|
|||
|
Three Months Ended September 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
|
|
|
$ |
- |
|
|
$ |
|
|
|
Cost of goods sold |
|
|
|
|
|
|
- |
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
- |
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
|
|
|
|
- |
|
|
|
|
|
|
Operating income |
|
|
|
|
|
|
- |
|
|
|
|
|
|
Other non-operating expense, net |
|
|
|
|
|
|
- |
|
|
|
|
|
|
Earnings from discontinued operations before income tax |
|
|
|
|
|
|
- |
|
|
|
|
|
|
Income tax expense |
|
|
|
|
|
|
- |
|
|
|
|
|
|
Net earnings from discontinued operations, net of tax |
|
$ |
|
|
|
$ |
- |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) from disposal of discontinued businesses, before income tax |
|
$ |
( |
) |
|
$ |
- |
|
|
$ |
( |
) |
|
Income tax (benefit) |
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
(Loss) gain from disposal of discontinued business, net of tax |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings from discontinued operations |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
14
Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
|
|
|
EMEA and Pacific Rim Businesses |
|
|
Flooring Businesses |
|
|
Total |
|
|||
|
Nine Months Ended September 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
|
|
|
$ |
- |
|
|
$ |
|
|
|
Cost of goods sold |
|
|
|
|
|
|
- |
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
- |
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
|
|
|
|
- |
|
|
|
|
|
|
Operating income |
|
|
|
|
|
|
- |
|
|
|
|
|
|
Other non-operating expense, net |
|
|
|
|
|
|
- |
|
|
|
|
|
|
Earnings from discontinued operations before income tax |
|
|
|
|
|
|
- |
|
|
|
|
|
|
Income tax expense |
|
|
|
|
|
|
- |
|
|
|
|
|
|
Net earnings from discontinued operations, net of tax |
|
$ |
|
|
|
$ |
- |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) from disposal of discontinued businesses, before income tax |
|
$ |
( |
) |
|
$ |
- |
|
|
$ |
( |
) |
|
Income tax (benefit) |
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
(Loss) gain from disposal of discontinued businesses, net of tax |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings from discontinued operations |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
The following is a summary of total gains and losses, capital expenditures and operating lease information related to our former EMEA and Pacific Rim businesses, and gains on the dissolution of our previously discontinued flooring entity, which are presented as discontinued operations and included as components of operating and investing cash flows on our Condensed Consolidated Statements of Cash Flows.
|
|
|
Nine Months Ended |
|
|
|||||
|
|
|
September 30, |
|
|
|||||
|
|
|
2020 |
|
|
2019 |
|
|
||
|
Loss on sale to Knauf (1) |
|
$ |
|
|
|
$ |
- |
|
|
|
Estimated loss on sale to Knauf (2) |
|
|
- |
|
|
|
|
|
|
|
Gain on dissolution of flooring entity (3) |
|
|
( |
) |
|
|
- |
|
|
|
Purchases of property, plant and equipment |
|
|
- |
|
|
|
( |
) |
|
|
Operating lease cost (4) |
|
|
- |
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations (5) |
|
|
- |
|
|
|
|
|
|
|
|
(1) |
Represents working capital and other adjustments. |
|
|
(2) |
Represents comparison of the EMEA and Pacific Rim net assets to the expected final sales proceeds. |
|
|
(3) |
Represents AOCI adjustments related to accumulated foreign currency translation amounts. |
|
|
(4) |
The amount of cash paid for amounts included in the measurement of lease liabilities was not materially different from the operating lease cost for the nine months ended September 30, 2019. |
|
|
(5) |
Represents initial right-of-use assets recognized upon adoption on January 1, 2019. We did |
NOTE 6. ACCOUNTS AND NOTES RECEIVABLE
|
|
|
September 30, 2020 |
|
|
December 31, 2019 |
|
||
|
Customer receivables |
|
$ |
|
|
|
$ |
|
|
|
Miscellaneous receivables |
|
|
|
|
|
|
|
|
|
Less allowance for warranties, discounts and losses |
|
|
( |
) |
|
|
( |
) |
|
Accounts and notes receivable, net |
|
$ |
|
|
|
$ |
|
|
We sell our products to select, pre-approved customers whose businesses are affected by changes in economic and market conditions. We consider these factors and the financial condition of each customer when establishing our allowance for losses from doubtful accounts.
15
Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
As of September 30, 2020, miscellaneous receivables includes $
NOTE 7. INVENTORIES
|
|
|
September 30, 2020 |
|
|
December 31, 2019 |
|
||
|
Finished goods |
|
$ |
|
|
|
$ |
|
|
|
Goods in process |
|
|
|
|
|
|
|
|
|
Raw materials and supplies |
|
|
|
|
|
|
|
|
|
Less LIFO reserves |
|
|
( |
) |
|
|
( |
) |
|
Total inventories, net |
|
$ |
|
|
|
$ |
|
|
NOTE 8. OTHER CURRENT ASSETS
|
|
|
September 30, 2020 |
|
|
December 31, 2019 |
|
||
|
Prepaid expenses |
|
$ |
|
|
|
$ |
|
|
|
Assets held for sale |
|
|
- |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Total other current assets |
|
$ |
|
|
|
$ |
|
|
As of December 31, 2019, assets held for sale included the assets of our idled mineral fiber plant in China, which was sold during the second quarter of 2020. See Note 2 for further information.
NOTE 9. EQUITY INVESTMENT
Investment in joint venture reflects our
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Net sales |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Gross profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In connection with the sale of WAVE’s European and Pacific Rim businesses and operations to Knauf on September 30, 2019, WAVE recorded a $
NOTE 10. LEASES
We enter into operating and finance leases for certain manufacturing plants, warehouses, equipment and automobiles. Our leases have remaining lease terms of
We have lease agreements with lease and nonlease components, which we have elected to combine to determine the ROU assets and lease liabilities. Short-term leases with an initial term of
As most of our leases do not provide an implicit rate, we use our incremental borrowing rate (“IBR”) based on information that is available at the lease commencement date to compute the present value of lease payments. Relevant information used in determining
16
Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
the IBR includes the transactional currency of the lease and the lease term. We used the IBR on January 1, 2019 for operating leases that commenced prior to that date. As of September 30, 2020, we did not have any material leases that had not yet commenced.
The following table presents our lease costs:
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Operating lease cost |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Finance lease cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of leased assets |
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
Interest on lease liabilities |
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
The following table presents supplemental cash flow information related to our leases:
|
|
|
|
|
|
|
Nine Months Ended |
|
|||||
|
|
|
|
|
|
|
September 30, |
|
|||||
|
|
|
|
|
|
|
2020 |
|
|
2019 |
|
||
|
Cash paid for amounts included in the measurement of lease liabilities |
|
|
|
|
|
|
|
|
||||
|
Operating cash flows from operating leases |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
Operating cash flows from finance leases |
|
|
|
|
|
|
|
|
|
|
- |
|
|
Financing cash flows from finance leases |
|
|
|
|
|
|
|
|
|
|
- |
|
|
ROU assets obtained in exchange for lease liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases (1) |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
Finance leases |
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
(1) |
|
The following table presents the weighted average assumptions used to compute our ROU assets and lease liabilities:
|
|
|
September 30, 2020 |
|
|
December 31, 2019 |
|
||
|
Weighted average remaining lease term (in years) |
|
|
|
|
|
|
|
|
|
Operating leases |
|
|
|
|
|
|
||
|
Finance leases |
|
|
|
|
|
- |
|
|
|
Weighted average discount rate |
|
|
|
|
|
|
|
|
|
Operating leases |
|
|
|
% |
|
|
|
% |
|
Finance leases |
|
|
|
% |
|
|
- |
|
Undiscounted future minimum lease payments as of September 30, 2020, by year and in the aggregate, having non-cancelable lease terms in excess of one year are as follows:
|
|
|
Operating Leases |
|
|
Finance Leases |
|
||
|
Maturity of lease liabilities |
|
|
|
|
|
|
|
|
|
2020 (1) |
|
$ |
|
|
|
$ |
|
|
|
2021 |
|
|
|
|
|
|
|
|
|
2022 |
|
|
|
|
|
|
|
|
|
2023 |
|
|
|
|
|
|
|
|
|
2024 |
|
|
|
|
|
|
|
|
|
Thereafter |
|
|
|
|
|
|
|
|
|
Total lease payments |
|
|
|
|
|
|
|
|
|
Less interest |
|
|
( |
) |
|
|
( |
) |
|
Present value of lease liabilities |
|
$ |
|
|
|
$ |
|
|
|
|
(1) |
Scheduled maturities of lease liabilities represent the time period of October 1, 2020 to December 31, 2020. |
17
Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
NOTE 11. GOODWILL AND INTANGIBLE ASSETS
The following table details amounts related to our goodwill and intangible assets as of September 30, 2020 and December 31, 2019.
|
|
|
|
|
September 30, 2020 |
|
|
December 31, 2019 |
|
||||||||||
|
|
|
Estimated Useful Life |
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
||||
|
Amortizing intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Developed technology |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and brand names |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete agreements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Non-amortizing intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and brand names |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|||||
|
|
|
September 30, |
|
|||||
|
|
|
2020 |
|
|
2019 |
|
||
|
Amortization expense |
|
$ |
|
|
|
$ |
|
|
The increase in goodwill and other intangible assets as of September 30, 2020 resulted from the acquisitions of Moz and Turf. See Note 4 to the Condensed Consolidated Financial Statements for additional details.
NOTE 12. OTHER NON-CURRENT ASSETS
|
|
|
September 30, 2020 |
|
|
December 31, 2019 |
|
||
|
Cash surrender value of Company owned life insurance policies |
|
$ |
|
|
|
$ |
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Total other non-current assets |
|
$ |
|
|
|
$ |
|
|
NOTE 13. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
|
|
|
September 30, 2020 |
|
|
December 31, 2019 |
|
||
|
Payables, trade and other |
|
$ |
|
|
|
$ |
|
|
|
Employment costs |
|
|
|
|
|
|
|
|
|
Current portion of pension and postretirement liabilities |
|
|
|
|
|
|
|
|
|
Payable to Knauf for purchase price adjustments |
|
|
- |
|
|
|
|
|
|
Payable to WAVE for receipt of Knauf proceeds |
|
|
- |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Total accounts payable and accrued expenses |
|
$ |
|
|
|
$ |
|
|
NOTE 14. INCOME TAX EXPENSE
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Earnings (loss) from continuing operations before income taxes |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Income tax expense (benefit) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Effective tax rate |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
18
Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
The effective tax rate in the third quarter of 2020 was higher than the same period in 2019, largely driven by the absence of the beneficial tax impact of our share of WAVE’s gain on sale of its discontinued European and Pacific Rim businesses and the absence of a benefit related to a statute closure, both recognized in 2019. These increases were both partially offset by the current year tax benefit related to the sale of our idled mineral fiber plant in China. The effective tax rate for the first nine months of 2020 was higher than the effective tax rate for the same period in 2019 primarily due to the tax effects of our first quarter of 2020 pension settlement and the absence of benefits related to the WAVE gain on sale and statute closure from 2019, partially offset by the benefits related to the sale of our idled mineral fiber plant in China. See Note 16 for additional details related to our pension settlement.
It is reasonably possible that the amount of unrecognized tax benefits could significantly increase or decrease within the next twelve months. However, an estimate of the range of reasonably possible outcomes cannot be reliably made at this time. Changes to unrecognized tax benefits could result from the completion of ongoing examinations, the expiration of statutes of limitations or other unforeseen circumstances.
NOTE 15. DEBT
As of September 30, 2020 and December 31, 2019, our long-term debt included borrowings outstanding under our $
During the third quarter of 2020, we repaid $
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 and 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.
|
|
|
September 30, 2020 |
|
|||||||||
|
Financing Arrangements |
|
Limit |
|
|
Used |
|
|
Available |
|
|||
|
Bi-lateral facility |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving credit facility |
|
|
|
|
|
|
- |
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
19
Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
NOTE 16. PENSIONS AND OTHER BENEFIT PROGRAMS
Following are the components of net periodic benefit costs (credits):
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
U.S. defined benefit plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost of benefits earned during the period |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Interest cost on projected benefit obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected return on plan assets |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Amortization of net actuarial loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
Special termination benefits |
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
Net periodic pension cost (credit) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
Retiree health and life insurance benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost of benefits earning during the period |
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
Interest cost on projected benefit obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service credit |
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
Amortization of net actuarial gain |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Net periodic postretirement (credit) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
We also have an unfunded defined benefit pension plan in Germany, which was not acquired by Knauf in connection with the Sale. This plan is reported as a component of our Unallocated Corporate segment. Net periodic pension cost for this plan was immaterial for the three and nine months ended September 30, 2020 and 2019.
The service cost component of net benefit cost has been presented in the Condensed Consolidated Statements of Operations and Comprehensive Income within cost of goods sold and SG&A expenses for all periods presented, which are the same line items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are presented in the Condensed Consolidated Statements of Operations and Comprehensive Income separately from the service cost component within other non-operating expense (income), net.
During February 2020, we entered into agreements with Athene Annuity and Life Company (“AAIA”) and Athene Annuity & Life Assurance Company of New York (“AANY”) to transfer certain benefit obligations and assets of our U.S. Retirement Income Plan (“RIP”) to AAIA and AANY. Under the agreements, we effectively settled $
As a result of the transaction, we recorded a $
During the third quarter of 2020, we offered an early retirement incentive benefit to employees at one of our manufacturing plants who met certain age and years of service criteria. The consideration period for eligible employees ended on September 30, 2020. Based on eligible employee elections to participate, we recorded a charge of $
20
Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
NOTE 17. FINANCIAL INSTRUMENTS
We do not hold or issue financial instruments for trading purposes.
|
|
|
September 30, 2020 |
|
|
December 31, 2019 |
|
||||||||||
|
|
|
Carrying amount |
|
|
Estimated fair value |
|
|
Carrying amount |
|
|
Estimated fair value |
|
||||
|
(Liabilities), net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt, including current portion |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
Interest rate swap contracts |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Contingent consideration |
|
|
( |
) |
|
|
( |
) |
|
|
- |
|
|
|
- |
|
The carrying amounts of cash and cash equivalents, receivables, accounts payable, accrued expenses and short-term debt approximate fair value because of the short-term maturity of these instruments. The fair value estimates of long-term debt are based on quotes from a major financial institution of recently observed trading levels of our Term Loan A debt. The fair value estimates for interest rate swap contracts are estimated by obtaining quotes from major financial institutions with verification by internal valuation models. The fair value estimates for contingent consideration are estimated based on a Monte Carlo simulation.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Three levels of inputs may be used to measure fair value:
Level 1 — Quoted prices in active markets for identical assets or liabilities;
Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data; or
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
The fair value measurement of liabilities measured at fair value on a recurring basis and reported on the Condensed Consolidated Balance Sheets is summarized below:
|
|
|
September 30, 2020 |
|
|
December 31, 2019 |
|
||||||||||
|
|
|
Fair value based on |
|
|
Fair value based on |
|
||||||||||
|
|
|
Other observable inputs |
|
|
Other unobservable inputs |
|
|
Other observable inputs |
|
|
Other unobservable inputs |
|
||||
|
|
|
Level 2 |
|
|
Level 3 |
|
|
Level 2 |
|
|
Level 3 |
|
||||
|
Assets/(liabilities), net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contracts |
|
$ |
( |
) |
|
$ |
- |
|
|
$ |
( |
) |
|
$ |
- |
|
|
Contingent consideration |
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
The contingent consideration liability represents estimated future contingent purchase price payments related to the Moz and Turf acquisitions. The significant unobservable inputs used in the fair value measurement of the contingent consideration liability include the financial projections over the earn-out period, the volatility of the underlying financial metrics and estimated discount rates.
The following table summarizes the weighted-average of the significant unobservable inputs as of September 30, 2020:
|
|
|
Moz |
|
|
Turf |
|
||
|
Unobservable input |
|
|
|
|
|
|
|
|
|
Volatility |
|
|
|
% |
|
|
|
% |
|
Discount rates |
|
|
|
% |
|
|
|
% |
Unobservable inputs were weighted based on the relative fair value of the components of contingent consideration. The fair value of the contingent consideration liability will be remeasured at each reporting period, and any future adjustments will be recorded as a
21
Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
component of SG&A expenses in our Condensed Consolidated Statements of Operations and Comprehensive Income. See Note 4 for further information.
NOTE 18. DERIVATIVE FINANCIAL INSTRUMENTS
We are exposed to market risk from changes in foreign exchange rates, interest rates and commodity prices that could impact our results of operations, cash flows and financial condition. We use swaps to hedge interest rate exposures. At inception, interest rate swap derivatives that we designate as hedging instruments are formally documented as a hedge of a forecasted transaction or “cash flow” hedge. We also formally assess, both at inception and at least quarterly thereafter, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in the cash flows of the hedged item. If it is determined that a derivative ceases to be a highly effective hedge, or if the anticipated transaction is no longer probable of occurring, we discontinue hedge accounting and any future mark-to-market adjustments are recognized in earnings. We use derivative financial instruments as risk management tools and not for speculative trading purposes.
Counterparty Risk
We only enter into derivative transactions with established financial institution counterparties having an investment-grade credit rating. We monitor counterparty credit default swap levels and credit ratings on a regular basis. All of our derivative transactions with counterparties are governed by master International Swap and Derivatives Association agreements (“ISDAs”) with netting arrangements. These agreements can limit our exposure in situations where we have gain and loss positions outstanding with a single counterparty. We do not post nor do we receive cash collateral with any counterparty for our derivative transactions. These ISDAs do not have any credit contingent features; however, a default under our bank credit facility would trigger a default under these agreements. Exposure to individual counterparties is controlled and we consider the risk of counterparty default to be negligible.
Commodity Price Risk
We purchase natural gas and other various commodities for use in the manufacturing process. Although we are exposed to fluctuations in commodity pricing, we currently have
Currency Rate Risk – Sales and Purchases
As of September 30, 2020, our only major foreign currency exposure is to the Canadian dollar. We currently have
Interest Rate Risk
We utilize interest rate swaps to minimize the fluctuations in earnings caused by interest rate volatility. These swaps are designated as cash flow hedges against changes in LIBOR for a portion of our variable rate debt. The following table summarizes our interest rate swaps as of September 30, 2020:
|
Trade Date |
|
Notional Amount |
|
|
Coverage Period |
|
Risk Coverage |
|
|
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|
$ |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
Under the terms of the November 2016 swap maturing in
Under the terms of the November 2018 swap maturing in
Under the terms of the forward starting November 2018 swap maturing in
22
Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
Under the terms of the March 2020 swap maturing in
Under the terms of the forward starting March 2020 swaps maturing in
Financial Statement Impacts
The following tables detail amounts related to our derivatives as of September 30, 2020 and December 31, 2019. We did
|
|
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Derivative Assets |
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Derivative Liabilities |
|
||||||||||||||
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Fair Value |
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Fair Value |
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||||||||||
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Balance Sheet Location |
|
September 30, 2020 |
|
|
December 31, 2019 |
|
|
Balance Sheet Location |
|
September 30, 2020 |
|
|
December 31, 2019 |
|
||||
|
Interest rate swap contracts |
|
Other current assets |
|
$ |
- |
|
|
$ |
- |
|
|
Accounts payable and accrued expenses |
|
$ |
|
|
|
$ |
- |
|
|
Interest rate swap contracts |
|
Other non-current assets |
|
|
- |
|
|
|
|
|
|
Other long-term liabilities |
|
|
|
|
|
|
|
|
|
|
|
Amount of (Loss) Recognized in AOCI |
|
|
Location of Gain (Loss) Reclassified from AOCI into Net Earnings (Loss) |
|
Gain (Loss) Reclassified from AOCI into Net Earnings (Loss) |
|
||||||||||||||||||
|
|
|
Nine Months Ended |
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|||||||||||||||
|
|
|
September 30, |
|
|
|
|
September 30, |
|
|
September 30, |
|
|||||||||||||||
|
|
|
2020 |
|
|
2019 |
|
|
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||||
|
Derivatives in cash flow hedging relationships |
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|||||||
|
Interest rate swap contracts |
|
|
( |
) |
|
|
( |
) |
|
Interest expense |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Total |
|
$ |
( |
) |
|
$ |
( |
) |
|
Total gain (loss) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
As of September 30, 2020, the amount of existing losses in AOCI expected to be recognized in earnings over the next twelve months was $
NOTE 19. OTHER LONG-TERM LIABILITIES
|
|
|
September 30, 2020 |
|
|
December 31, 2019 |
|
||
|
Long-term deferred compensation arrangements |
|
|
|
|
|
|
|
|
|
Fair value of derivative liabilities |
|
|
|
|
|
|
|
|
|
Fair value of contingent consideration related to acquired businesses |
|
|
|
|
|
|
- |
|
|
Other |
|
|
|
|
|
|
|
|
|
Total other long-term liabilities |
|
$ |
|
|
|
$ |
|
|
NOTE 20. SHAREHOLDERS’ EQUITY
Common Stock Repurchase Plan
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 $
23
Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
$
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.
During the nine months ended September 30, 2020, we repurchased
Dividends
In February, April and July 2020, our Board of Directors declared $
Accumulated Other Comprehensive (Loss)
|
|
|
Foreign Currency Translation Adjustments |
|
|
Derivative (Loss) (1) |
|
|
Pension and Postretirement Adjustments (1) |
|
|
Total Accumulated Other Comprehensive (Loss) (1) |
|
||||
|
Balance, June 30, 2020 |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
(104.3 |
) |
|
Other comprehensive (loss) income before reclassifications, net of tax (expense) of $ -, ($ |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Amounts reclassified from accumulated other comprehensive (loss) |
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Net current period other comprehensive (loss) income |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Balance, September 30, 2020 |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
(109.8 |
) |
|
|
|
Foreign Currency Translation Adjustments |
|
|
Derivative (Loss) (1) |
|
|
Pension and Postretirement Adjustments (1) |
|
|
Total Accumulated Other Comprehensive (Loss) (1) |
|
||||
|
Balance, December 31, 2019 |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
(376.1 |
) |
|
Other comprehensive (loss) income before reclassifications, net of tax (expense) benefit of $ -, $ |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Amounts reclassified from accumulated other comprehensive (loss) |
|
|
- |
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
Net current period other comprehensive (loss) income |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
Balance, September 30, 2020 |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
(109.8 |
) |
24
Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
|
|
|
Foreign Currency Translation Adjustments |
|
|
Derivative Gain (Loss) (1) |
|
|
Pension and Postretirement Adjustments (1) |
|
|
Total Accumulated Other Comprehensive (Loss) (1) |
|
||||
|
Balance, June 30, 2019 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
(461.0 |
) |
|
Other comprehensive (loss) income before reclassifications, net of tax benefit (expense) of $ -, $ |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Amounts reclassified from accumulated other comprehensive (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current period other comprehensive income (loss) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
Balance, September 30, 2019 |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
(379.6 |
) |
|
|
|
Foreign Currency Translation Adjustments |
|
|
Derivative Gain (Loss) (1) |
|
|
Pension and Postretirement Adjustments (1) |
|
|
Total Accumulated Other Comprehensive (Loss) (1) |
|
||||
|
Balance, December 31, 2018 |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
(459.6 |
) |
|
Impact of ASU 2017-12 adoption |
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications, net of tax benefit (expense) of $ -, $ |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Amounts reclassified from accumulated other comprehensive (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current period other comprehensive income (loss) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
Balance, September 30, 2019 |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
(379.6 |
) |
|
|
(1) |
Amounts are net of tax. |
25
Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
|
|
|
Amounts Reclassified from Accumulated Other Comprehensive (Loss) |
|
|
Affected Line Item in the Condensed Consolidated Statements of Operations and Comprehensive Income |
|||||||||||||
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
||||||||||
|
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
|
|
||||
|
Derivative Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contracts, before tax |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Interest expense |
|
Tax impact |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Income tax expense |
|
Total (income) loss, net of tax |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and Postretirement Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service credit amortization |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Other non-operating (income) expense, net |
|
Amortization of net actuarial (gain) loss |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-operating (income) expense, net |
|
Settlement |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
Other non-operating (income) expense, net |
|
Total (income) loss, before tax |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax impact |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Income tax expense |
|
Total (income) loss from continuing operations, net of tax |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments related to Sale to Knauf (1) |
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
Total (income) loss, net of tax |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments related to Sale to Knauf (1) |
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reclassifications for the period |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
(1) |
Represents estimated amounts reclassified out of AOCI as of September 30, 2019 related to the Sale and included as a component of (Loss) gain from disposal of discontinued operations on the Condensed Consolidated Statements of Operations and Comprehensive Income. |
NOTE 21. LITIGATION AND RELATED MATTERS
ENVIRONMENTAL MATTERS
Environmental Compliance
Our manufacturing and research facilities are affected by various federal, state and local requirements relating to the discharge of materials and the protection of the environment. We make expenditures necessary for compliance with applicable environmental requirements at each of our operating facilities. While these expenditures are not typically material, the applicable regulatory requirements continually change and, as a result, we cannot predict with certainty the amount, nature or timing of future expenditures associated with environmental compliance.
Environmental Sites
Summary
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 environmental laws at three domestically owned locations allegedly resulting from past industrial activity.
26
Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
In each location, we are one of multiple potentially responsible parties and have agreed to jointly fund the required investigation and remediation, 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 are currently pursuing coverage and recoveries under those policies with respect to certain of the sites, including the Macon, GA site and the Elizabeth City, NC site, each of which is summarized below. These efforts have included
Between 2017 and 2019, we entered settlement agreements totaling $
Estimates of our future liability at the environmental sites are based on evaluations of currently available facts regarding each individual site. We consider factors such as our activities associated with the site, existing technology, presently enacted laws and regulations and prior company experience in remediating contaminated sites. Although current law imposes joint and several liability on all parties at Superfund sites, our contribution to the remediation of these sites is expected to be limited by the number of other companies potentially liable for site remediation. As a result, our estimated liability reflects only our expected share. 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, if any.
Specific Material Events
St Helens, OR
In August 2010, we entered into a Consent Order (the “Consent Order”) with the Oregon Department of Environmental Quality (“ODEQ”), along with Kaiser Gypsum Company, Inc. (“Kaiser”), and Owens Corning Sales LLC (“OC”), with respect to our St. Helens, Oregon facility, which was previously owned by Kaiser and then OC. The Consent Order required the parties to complete a remedial investigation and feasibility study on the upland, lowland and in-water portions of the site.
Through voluntary mediation in November 2017 with ODEQ, OC and Kaiser, we reached settlement with ODEQ documented in a Public Notice and proposed consent judgment (“Consent Judgment”); in exchange for a release from ODEQ for all contamination claims against us, we would pay $
ODEQ approved a final Upland Operable Unit Remedial Action Construction Completion and Final Closeout Report and issued a Conditional No Further Action Determination, including the Easement and Equitable Servitude, which was recorded in Columbia County, Oregon. On February 24, 2020, ODEQ filed the Certification of Completion for the satisfactory completion of the work conducted by us pursuant to the Consent Judgment. As a result of the settlements with ODEQ and Kaiser, and these actions by ODEQ, we do not expect to incur any future material costs relating to this matter.
Macon, GA
The U.S. Environmental Protection Agency (the “EPA”) has listed
In September 2010, we entered into an Administrative Order on Consent for a Removal Action (the “Removal Action”) with the EPA to investigate PCB contamination in
27
Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
the Removal Action. The Operable Unit 1 response action for the WWTP Landfill is complete and the final report was submitted to the EPA on
It is probable that we will incur field investigation, engineering and oversight costs associated with a remedial investigation and feasibility study (“RI/FS”) with respect to the remainder of the Superfund site, which includes the other landfill on our property, as well as areas on and adjacent to our property and Rocky Creek (the “Remaining Site,” also known as “Operable Unit 2”). On September 25, 2015, AWI and other Potential Responsible Parties (“PRPs”) received a Special Notice Letter from the EPA under CERCLA inviting AWI and the PRPs to enter into the negotiation of an agreement to conduct an RI/FS of Operable Unit 2. We and the other PRPs entered into a settlement agreement with the EPA effective September 18, 2018, in response to the Special Notice Letter to conduct the RI/FS. The PRPs submitted a complete RI/FS work plan in the second quarter of 2019, which the EPA approved on September 11, 2019. Investigative work on this portion of the site commenced in December 2019 and remains ongoing. We anticipate that the EPA will require significant investigative work for Operable Unit 2. We may ultimately incur costs in remediating any contamination discovered during the RI/FS. The current estimate of future liability at this site includes only our estimated share of the costs of the investigative work that, at this time, we anticipate the EPA will require the PRPs to perform. We are unable to reasonably estimate our final share of the total costs associated with the investigation work or any resulting remediation therefrom, although such amounts may be material to any one quarter's or year's results of operations in the future. However, we do not expect the total future costs to have a material adverse effect on our liquidity or financial condition as the cash payments may be made over many years.
Elizabeth City, NC
This site is a former cabinet manufacturing facility that was operated by Triangle Pacific Corporation, now known as Armstrong Wood Products, Inc. (“Triangle Pacific” or “AWP”), from 1977 until 1996. The site was formerly owned by the U.S. Navy (“Navy”) and Westinghouse, now CBS Corporation (“CBS”). We assumed ownership of the site when we acquired the stock of Triangle Pacific in 1998. Prior to our acquisition, the North Carolina Department of Environment and Natural Resources listed the site as a hazardous waste site. In 1997, Triangle Pacific entered into a cost sharing agreement with Westinghouse whereby the parties agreed to share equally in costs associated with investigation and potential remediation. In 2000, Triangle Pacific and CBS entered into an Administrative Order on Consent to conduct an RI/FS with the EPA for the site. In 2007, we and CBS entered into an agreement with the Navy whereby the Navy agreed to pay of defined past and future investigative costs up to a certain amount, which has now been exhausted. The EPA approved the RI/FS work plan in August 2011. In January 2014, we submitted the draft Remedial Investigation and Risk Assessment reports and conducted supplemental investigative work based upon agency comments to those reports. In connection with the separation of AFI in 2016, we agreed to retain any legacy environmental liabilities associated with the AWP site. The EPA published an Interim Action Proposed Plan for the site in April 2018 seeking public comment through June 7, 2018. The EPA evaluated comments, including ours, and has published its Interim Record Of Decision selecting an interim cleanup approach. On September 25, 2018, AWI and CBS received a Special Notice Letter from the EPA under CERCLA inviting AWI and CBS to enter into the negotiation of a settlement agreement to conduct or finance the response action at the site. During the third quarter of 2018, we increased our reserve for the cost of the interim cleanup, which we expect to be shared with CBS and the Navy. In response to the September 2018 Special Notice Letter, AWI and CBS submitted a good faith offer to EPA on May 28, 2019, and negotiations among parties remain ongoing. The current estimate of future liability at this site includes only our estimated share of the costs of the interim remedial action that, at this time, we anticipate the EPA will require the PRPs to perform. We are unable to reasonably estimate our final share of the total costs associated with the final remediation or any resulting remediation therefrom, although such amounts may be material to any one quarter's or year's results of operations in the future. However, we do not expect the total future costs to have a material adverse effect on our liquidity or financial condition as the cash payments may be made over many years.
Summary of Financial Position
Total liabilities of $
28
Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
been used. As assessments and remediation activities progress at each site, these liabilities are reviewed to reflect new information as it becomes available and adjusted to reflect amounts actually incurred and paid. These liabilities are undiscounted.
The estimated liabilities above do not take into account any claims for recoveries from insurance or third parties. It is our policy to record insurance recoveries as assets in the Condensed Consolidated Balance Sheets when probable. For insurance recoveries that are reimbursements of prior environmental expenditures, the income statement impact is recorded within cost of goods sold and SG&A expenses, which are the same income statement categories within which environmental expenditures were historically recorded. We also incur costs to pursue environmental insurance recoveries, which are expensed as incurred. Insurance recoveries in excess of historical environmental spending are recorded on the balance sheet as a part of other long-term liabilities and released as future environmental spending occurs or the liability is settled.
Actual costs to be incurred at identified sites may vary from our estimates. Based on our knowledge of the identified sites, it is not possible to reasonably estimate future costs in excess of amounts already recognized.
OTHER CLAIMS
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 the first six months of 2019, we incurred $
We are involved in other various 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 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.
NOTE 22. EARNINGS PER SHARE
The following table is a reconciliation of earnings (loss) to earnings (loss) attributable to common shares used in our basic and diluted (Loss) Earnings Per Share (“EPS”) calculations for the three and nine months ended September 30, 2020 and 2019. EPS components may not add due to rounding.
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Earnings (loss) from continuing operations |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
(Earnings) allocated to participating vested share awards |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Earnings (loss) from continuing operations attributable to common shares |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
29
Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
The following table is a reconciliation of basic shares outstanding to diluted shares outstanding for the three and nine months ended September 30, 2020 and 2019 (shares in millions):
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Basic shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of common stock equivalents |
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
Diluted shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to the net loss for the nine months ended September 30, 2020, all common stock equivalents were considered anti-dilutive. Anti-dilutive stock awards excluded from the computation of diluted EPS for the three and nine months ended September 30, 2020 were
30
Management’s Discussion and Analysis of Financial Condition and Results of Operations
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 report and our Amendment No. 1 to the Annual Report on Form 10-K/A for the year ended December 31, 2019.
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.
COVID-19
The impact of the COVID-19 outbreak on our future consolidated results of operations is uncertain. We experienced a significant decrease in customer demand across all our markets during the second quarter of 2020 due to COVID-19. Specifically, we noted delays in construction driven by temporary closures of non-life sustaining businesses, with the most significant impacts in major metropolitan areas impacted by COVID-19. We experienced less of a comparative decline in net sales during the third quarter of 2020 compared to the second quarter of 2020, as construction resumed across many parts of the U.S. We currently expect lower net sales for the fourth quarter of 2020 compared to 2019, with less of a comparative decline than experienced in the second and third quarters of 2020. In response to COVID-19, we continue to reduce capital expenditures and discretionary spending including compensation, travel and marketing expenses. We expect these actions to positively impact operating income and cash flows in the fourth quarter of 2020 compared to the fourth quarter of 2019.
As of September 30, 2020, all of our manufacturing facilities were operational, excluding the St. Helens, Oregon facility which was idled prior to the COVID-19 outbreak. In an effort to operate safely and responsibly, we continue to follow guidelines from governmental and local health authorities across our facilities and have implemented preventative measures that include working remotely, providing personal protective equipment, limiting group meetings, restricting air travel, enhancing cleaning and sanitizing procedures, and social distancing.
During the first quarter of 2020, we borrowed an additional $100.0 million from our revolving credit facility and $30.0 million from our accounts receivable securitization facility. During the second quarter of 2020, we repaid $65.0 million of the revolving credit facility borrowings and during the third quarter of 2020 we repaid $30.0 million in connection with the maturity of our accounts receivable securitization facility. Our share repurchase program was temporarily suspended in the first quarter of 2020 in response to uncertainties surrounding COVID-19. On October 21, 2020, we elected to restart the Program and currently have $603.8 million remaining under the Board’s repurchase authorization. We did not record any asset impairments, inventory charges or bad debt reserves related to COVID-19 during the third quarter and first nine months of 2020 but future events may require such charges. We will continue to evaluate the nature and extent of the COVID-19 outbreak’s impact on our financial condition, results of operations and cash flows.
Acquisitions
In August 2020, we acquired the business and assets of Moz Designs, Inc. (“Moz”), based in Oakland, California. Moz is a designer and fabricator of custom architectural metal ceilings, walls, dividers and column covers for interior and exterior applications with one manufacturing facility. Moz’s operations, and its assets and liabilities, are included as a component of our Architectural Specialties segment.
In July 2020, we acquired all the issued and outstanding capital stock of TURF Design Inc. (“Turf”), with one manufacturing facility in Elgin, Illinois and a design center in Chicago, Illinois. Turf is a designer and manufacturer of acoustic felt ceilings and wall products. Turf’s operations, and its assets and liabilities, are included as a component of our Architectural Specialties segment.
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.
31
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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.
Discontinued Operations
On September 30, 2019, we completed the 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 2018 and was subject to certain post-closing adjustments for cash and debt as provided in the 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. During the three and nine months ended September 30, 2020, we remitted $5.9 million and $25.9 million, respectively, to WAVE for their portion of the proceeds from Knauf. During the nine months ended September 30, 2020, WAVE paid each of AWI and Worthington dividends of $13.0 million relating to these payments. During the third quarter of 2020, we remitted $6.4 million to Knauf for working capital and other adjustments. Final adjustments are subject to the valuation of certain liabilities included in the Sale, which we expect to be finalized in 2020. The final valuation could result in an increase to those liabilities of $11.0 million; however, we have not accrued a liability for this matter as of September 30, 2020 as payment is not probable.
In 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 provided certain transition technology, finance and information technology support services, which are now substantially complete. In connection with the closing of the Sale, we also entered into (i) a royalty-free intellectual property License Agreement with Knauf under which they license patents, trademarks and know-how from us for use in licensed territories in which the business was conducted prior to the Sale, 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 term of the granted licenses, with respect to each intellectual property right, extend until the expiration or abandonment of each such intellectual property right.
The EMEA and Pacific Rim segment historical financial results for the three and nine months ended September 30, 2019 have been reflected in AWI’s Condensed Consolidated Statements of Operations and Comprehensive Income as discontinued operations, while the assets and liabilities of discontinued operations were removed from AWI’s Condensed Consolidated Balance Sheet as of September 30, 2019.
See Notes 4 and 5 to the Condensed Consolidated Financial Statements for additional information related to our acquisitions and discontinued operations.
Manufacturing Plants
As of September 30, 2020, we had 15 manufacturing plants in two countries, with 13 plants located within the U.S., which included our St. Helens, Oregon mineral fiber manufacturing facility, which closed in the second quarter of 2018. We have two plants in Canada. During the second quarter of 2020, we sold our idled plant in China, which had been classified as an asset held for sale.
WAVE operates six 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
32
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 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 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 2020 net sales by segment, see Notes 2 and 3 to the Condensed Consolidated Financial Statements included in this Form 10-Q.
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 the third quarter of 2020 compared to the third quarter of 2019, most importantly the aforementioned decrease in demand across all our markets as a result of COVID-19. For the three and nine months ended September 30, 2020, we experienced significant reductions in volumes of $28 million and $88 million in comparison to the same periods in 2019. Revenues for our Architectural Specialties segment were also positively impacted by our 2019 acquisitions of ACGI and MRK (collectively, the “2019 Acquisitions”) and our 2020 acquisitions of Turf and Moz (collectively, the “2020 Acquisitions”). The following table presents the impact of the 2019 Acquisitions and the 2020 Acquisitions on our Architectural Specialties segment’s net sales (dollar amounts in millions):
|
|
|
2020 |
|
|
2019 |
|
||
|
Three Months Ended September 30, |
|
|
|
|
|
|
|
|
|
2019 Acquisitions |
|
$ |
7.8 |
|
|
$ |
7.1 |
|
|
2020 Acquisitions |
|
$ |
7.7 |
|
|
$ |
- |
|
|
Total |
|
$ |
15.5 |
|
|
$ |
7.1 |
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
|
|
|
2019 Acquisitions |
|
$ |
22.0 |
|
|
$ |
14.9 |
|
|
2020 Acquisitions |
|
$ |
7.7 |
|
|
$ |
- |
|
|
Total |
|
$ |
29.7 |
|
|
$ |
14.9 |
|
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 unfavorable AUV decreased our Mineral Fiber and total consolidated net sales for three and nine months ended September 30, 2020 by approximately $3 million and $5 million, respectively, compared to the same periods in 2019. 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.
33
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Seasonality. Historically, 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. In comparison to the prior year, sales were weaker in the third quarter of 2020. We expect sales to continue to be weaker in the fourth quarter of 2020 as compared to the prior year due to reduced demand related to COVID-19.
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 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. For the three and nine months ended September 30, 2020, lower costs for raw materials and energy positively impacted operating income by $1 million and $3 million, respectively, compared to the same periods in 2019.
Employees
As of September 30, 2020 and December 31, 2019, we had approximately 2,500 full-time and part-time employees.
RESULTS OF CONTINUING OPERATIONS
Please refer to Notes 2 and 5 to the Condensed Consolidated Financial Statements for a reconciliation of operating income to consolidated earnings from continuing operations before income taxes and additional financial information related to discontinued operations.
CONSOLIDATED RESULTS FROM CONTINUING OPERATIONS
(dollar amounts in millions)
|
|
|
2020 |
|
|
2019 |
|
|
Change is (Unfavorable) |
|
|||
|
Three Months Ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated net sales |
|
$ |
246.3 |
|
|
$ |
277.1 |
|
|
|
(11.1 |
)% |
|
Operating income |
|
$ |
72.3 |
|
|
$ |
113.3 |
|
|
|
(36.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated net sales |
|
$ |
698.2 |
|
|
$ |
791.2 |
|
|
|
(11.8 |
)% |
|
Operating income |
|
$ |
210.7 |
|
|
$ |
255.2 |
|
|
|
(17.4 |
)% |
Consolidated net sales for the third quarter of 2020 decreased 11.1% over the same period in 2019 due to lower volumes of $28 million and unfavorable AUV of $3 million. Mineral Fiber net sales decreased by $32 million and Architectural Specialties net sales increased by $1 million. Consolidated net sales for the first nine months of 2020 decreased 11.8% due to lower volumes of $88 million and unfavorable AUV of $5 million. Mineral Fiber net sales decreased by $86 million and Architectural Specialties net sales decreased by $7 million. As previously noted, decreases in volumes for both our Mineral Fiber and Architectural Specialties segments were a result of lower market demand due to COVID-19, partially offset by the impact of our 2020 Acquisitions and 2019 Acquisitions in the Architectural Specialties Segment.
Cost of goods sold in the third quarter of 2020 was 63.0% of net sales, compared to 59.7% for the same period in 2019. Cost of goods sold in the first nine months of 2020 was 64.2% compared to 61.3% for the same period in 2019. The increase in cost of goods sold as a percent of net sales for the third quarter and first nine months of 2020 was primarily due to unfavorable AUV and the impact of the 2020 Acquisitions and 2019 Acquisitions, partially offset by improved manufacturing productivity and cost reduction actions. The unfavorable AUV was partially driven lower mix due to regional weakness in major metropolitan areas impacted by COVID-19.
SG&A expenses in the third quarter of 2020 were $41.0 million, or 16.6% of net sales, compared to $41.3 million, or 14.9% of net sales, for the same period in 2019. SG&A expenses in the first nine months of 2020 were $108.8 million, or 15.6% of net sales, compared to $134.3 million, or 17.0% of net sales, for the same period in 2019. The decrease in SG&A expenses for the third quarter
34
Management’s Discussion and Analysis of Financial Condition and Results of Operations
of 2020 as compared to the same period in 2019 was driven primarily by a $3 million reduction in incentive based compensation and lower selling expenses, offset by an increase in SG&A expenses due to the impact of the 2020 Acquisitions and 2019 Acquisitions.
The decrease in SG&A expenses for the first nine months of 2020 in comparison to the same period in 2019 was due to a $20 million decrease in legal and professional fees, driven by expenses and attorney’s fees incurred in the first quarter of 2019 under a settlement agreement with Roxul, USA, Inc. (“Rockfon”), a $5 million reduction in incentive based compensation and $4 million increase in cost reimbursements, net of related expenses, earned under our Transition Services Agreement with Knauf. These decreases in SG&A expenses were partially offset by an increase in SG&A expenses due to the impact of the 2020 Acquisitions and 2019 Acquisitions.
The gain related to the sale of fixed and intangible assets in the third quarter and first nine months of 2020 was due to the sale of our idled mineral fiber plant in China, which was reported within our Unallocated Corporate segment.
Equity earnings from our WAVE joint venture were $15.2 million in the third quarter of 2020, compared to $42.9 million in the third quarter of 2019. Equity earnings from our WAVE joint venture were $48.2 million in the first nine months of 2020 compared to $83.0 million in the first nine months of 2019. Consistent with our results, demand for WAVE’s products were significantly impacted by COVID-19 throughout the third quarter of 2020. The decrease in WAVE earnings in both periods was primarily related to lower volumes and unfavorable AUV, partially offset by lower steel costs. Also contributing to the decrease in equity earnings was a $25.5 million increase in WAVE equity earnings in the third quarter of 2019, representing our 50% 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 relationships and developed technology intangible assets, and an increase in selling and administrative charges from AWI and Worthington Industries, Inc for the three and nine months ended September 30, 2020. See Note 9 to the Condensed Consolidated Financial Statements for further information.
Interest expense was $6.1 million in the third quarter of 2020, compared to $11.7 million in the third quarter of 2019. Interest expense was $18.7 million in the first nine months of 2020 compared to $31.6 million in the first nine months of 2019. The decrease in both periods was primarily due to lower average borrowings outstanding and lower interest rates, which were a result of the refinancing of our credit facility on September 30, 2019.
Other non-operating income, net, was $3.2 in the third quarter of 2020 compared to $5.1 million in the third quarter of 2019. The decrease primarily related to a $2 million special termination benefit charge recorded in the third quarter of 2020 related to our RIP. Other non-operating expense, net, was $361.8 million in the first nine months of 2020, compared to $16.0 million of income, net, in the first nine months of 2019. The increase in expense was primarily related to the $374.4 million settlement loss and the $2 million special termination benefit charge, both related to our RIP. See Note 16 to the Condensed Consolidated Financial Statements for further information.
Income tax expense was $15.2 million in the third quarter of 2020 compared to $16.0 million in the third quarter of 2019. The effective tax rate for the third quarter of 2020 was 21.9% as compared to 15.0% for the same period of 2019. The effective tax rate was higher primarily due to the absence of a beneficial tax impact of our share of WAVE’s gain on sale of its discontinued European and Pacific Rim businesses and the absence of a benefit related to a statute closure, both recognized in 2019. These rate increases were both partially offset by the current year tax benefit related to the sale of our mineral fiber plant in China.
Income tax benefit was $50.9 million in the first nine months of 2020 compared to $48.8 million of income tax expense in the first nine months of 2019. Excluding the impact of the pension settlement that occurred in the first quarter of 2020, income tax expense was $45.0 million in the first nine months of 2020. The effective tax rate was 30.0% in the first nine months of 2020 compared to 20.4% in the same period of 2019. The effective tax rate was higher than the same period in 2019 primarily due to the tax effects of our first quarter of 2020 pension settlement and the absence of benefits related to the WAVE gain on sale and statute closure from 2019, partially offset by the benefits recognized on the sale of our mineral fiber plant in China.
Total Other Comprehensive Loss (“OCL”) was $5.5 million in the third quarter of 2020 compared to Total Other Comprehensive Income (“OCI”) of $81.4 million in the third quarter of 2019. Total OCI was $266.3 million in the first nine months of 2020 compared to $79.9 million in the first nine months of 2019. The change in OCI in the third quarter of 2020 compared to the same period in 2019 was primarily driven by foreign currency translation adjustments, primarily $81.2 million of foreign currency translation adjustments that were reclassified out of Accumulated Other Comprehensive Income (“AOCI”) concurrent with the Sale in third quarter of 2019. Foreign currency translation adjustments represent the change in the U.S. dollar value of assets and liabilities denominated in foreign currencies. The change in OCI in the first nine months of 2020 was primarily driven by pension and postretirement adjustments, primarily a $374.4 million partial settlement loss related to our RIP, partially offset by the absence of the aforementioned reclassification of foreign currency translation adjustments related to the Sale in the third quarter of 2019. Pension and postretirement adjustments represent the amortization of actuarial gains and losses related to our defined benefit pension and postretirement plans.
35
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Also impacting the change in OCI in both periods were derivative gains/losses. 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)
|
|
|
2020 |
|
|
2019 |
|
|
Change is (Unfavorable) |
|
|||
|
Three Months Ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment net sales |
|
$ |
187.3 |
|
|
$ |
218.6 |
|
|
|
(14.3 |
)% |
|
Operating income |
|
$ |
58.1 |
|
|
$ |
103.5 |
|
|
|
(43.9 |
)% |
|
|
|
|
|
|
|
|
|
|||||
|
Nine Months Ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment net sales |
|
$ |
542.9 |
|
|
$ |
629.4 |
|
|
|
(13.7 |
)% |
|
Operating income |
|
$ |
173.7 |
|
|
$ |
230.5 |
|
|
|
(24.6 |
)% |
Net sales decreased in the third quarter of 2020 due to lower volumes of $29 million and unfavorable AUV of $3 million. The decrease in net sales in the first nine months of 2020 was due to lower volumes of $81 million and unfavorable AUV of $5 million. The decreases in volumes were driven by a significant decrease in demand due to the COVID-19 pandemic. The unfavorable AUV was partially driven by lower mix due to regional weakness in major metropolitan areas impacted by COVID-19.
Operating income decreased in the third quarter of 2020 primarily due to a $28 million reduction in WAVE equity earnings, a $20 million negative impact due to lower volumes, and a $5 million impact from lower AUV. Partially offsetting these decreases to operating income was a $6 million reduction in manufacturing costs and a $2 million reduction in incentive compensation expenses.
Operating income decreased in the first nine months of 2020 primarily due to a $56 million negative impact due to lower volumes, a $35 million reduction in WAVE equity earnings and a $15 million impact from lower AUV. Partially offsetting these decreases to operating income was a $20 million decrease in legal and professional fees incurred in the first quarter of 2019 under a settlement agreement with Rockfon, a $19 million reduction in manufacturing costs, a $6 million reduction in incentive compensation expenses and a $4 million increase in cost reimbursements, net of related expenses, earned under our Transition Services Agreement with Knauf.
Architectural Specialties
(dollar amounts in millions)
|
|
|
2020 |
|
|
2019 |
|
|
Change is Favorable/(Unfavorable) |
|
|||
|
Three Months Ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment net sales |
|
$ |
59.0 |
|
|
$ |
58.5 |
|
|
|
0.9 |
% |
|
Operating income |
|
$ |
9.1 |
|
|
$ |
11.6 |
|
|
|
(21.6 |
)% |
|
|
|
|
|
|
|
|
|
|||||
|
Nine Months Ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment net sales |
|
$ |
155.3 |
|
|
$ |
161.8 |
|
|
|
(4.0 |
)% |
|
Operating income |
|
$ |
20.9 |
|
|
$ |
30.3 |
|
|
|
(31.0 |
)% |
Net sales increased $1 million in the third quarter of 2020 and decreased $7 million for the first nine months of 2020. Net sales in both periods were negatively impacted by a reduction in demand across almost all product categories and geographies as a result of the COVID-19 pandemic. Net sales for the third quarter and first nine months of 2020 increased $8 million and $15 million, respectively, due to the impact of the 2020 Acquisitions and 2019 Acquisitions.
Operating income in the third quarter and first nine months of 2020 decreased due to the impact of lower sales, excluding the impact of the 2020 Acquisitions and 2019 Acquisitions. Also contributing to the decrease in operating income was additional amortization expense related to the 2020 Acquisitions and the 2019 Acquisitions.
Unallocated Corporate
Unallocated corporate operating income was $5 million in the third quarter of 2020 compared to $2 million of operating loss in the same period of 2019. Unallocated corporate operating income was $16 million in the first nine months of 2020 compared to $6 million
36
Management’s Discussion and Analysis of Financial Condition and Results of Operations
of operating loss in the first nine months of 2019. The increase in both periods was primarily due to the gain related to the sale of our idled mineral fiber plant in China. See Note 2 to the Condensed Consolidated Financial Statements for further information.
FINANCIAL CONDITION AND LIQUIDITY
Cash Flow
The discussion that follows includes cash flows related to discontinued operations for the comparable 2019 period.
Operating activities in the first nine months of 2020 provided $148.4 million of cash, compared to $121.4 million in the first nine months of 2019. The increase was primarily due to higher cash earnings, partially offset by lower tax payments.
Net cash used for investing activities was $52.2 million in the first nine months of 2020, compared to $70.9 million in the first nine months of 2019. Cash used for investing activities decreased in comparison to 2019 due to lower payments to Knauf, proceeds from the sale of our idled mineral fiber plant in China in the first nine months of 2020 and lower purchases of property, plant and equipment, partially offset by the remittance of Knauf proceeds to WAVE in the first nine months of 2020 and an increase in cash paid for acquisitions.
Net cash used for financing activities was $2.5 million in the first nine months of 2020, compared to $289.0 million in the first nine months of 2019. The favorable change of cash was primarily due to decreased debt payments and lower repurchases of outstanding common stock, partially offset by a reduction in proceeds from borrowings.
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 historically lower during the first and fourth quarters of our fiscal year. We have a $1,000.0 million variable rate senior credit facility, which is comprised 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 $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 subsidiary in 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 September 30, 2020, total borrowings outstanding under our senior credit facility were $185.0 million under the revolving credit facility and $500.0 million under Term Loan A. As of September 30, 2020, we had a $25.0 million letter of credit facility, also known as our bi-lateral facility.
The 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 September 30, 2020, we were in compliance with all covenants of the senior credit facility and currently do not expect any covenant violations due to the impacts of COVID-19.
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):
|
Trade Date |
|
Notional Amount |
|
|
Coverage Period |
|
Risk Coverage |
|
|
November 13, 2016 |
|
$ |
200.0 |
|
|
November 2016 to March 2021 |
|
USD-LIBOR |
|
November 28, 2018 |
|
$ |
200.0 |
|
|
November 2018 to November 2023 |
|
USD-LIBOR |
|
November 28, 2018 |
|
$ |
100.0 |
|
|
March 2021 to March 2025 |
|
USD-LIBOR |
|
March 6, 2020 |
|
$ |
50.0 |
|
|
March 2020 to March 2022 |
|
USD-LIBOR |
|
March 10, 2020 |
|
$ |
50.0 |
|
|
March 2021 to March 2024 |
|
USD-LIBOR |
|
March 11, 2020 |
|
$ |
50.0 |
|
|
March 2021 to March 2024 |
|
USD-LIBOR |
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.
37
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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.
Under the terms of the March 2020 swap maturing in 2022, we pay a fixed rate over the hedged amount and receive 1-month LIBOR. This is inclusive of a 0% floor.
Under the terms of the forward starting March 2020 swaps maturing in 2024, we will pay a fixed rate monthly and receive 1-month LIBOR. These are 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.
As of September 30, 2020, we had $138.8 million of cash and cash equivalents, $127.1 million in the U.S and $11.7 million in various foreign jurisdictions, primarily Canada.
During the third quarter of 2020, we repaid $30.0 million under our Accounts Receivable Securitization Facility with the Bank of Nova Scotia (the “funding entity”) which matured in September 2020. Interest on borrowings under this amended facility was calculated at a 90-day commercial paper rate. Under this facility, we sold 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 LLC special purpose entity created specifically for this transaction; therefore, any receivables sold to ARC were not available to the general creditors of AWI. ARC used this facility to borrow cash or issue letters of credit. When ARC borrowed cash under this facility, ARC sold an undivided percentage ownership interest in the purchased accounts receivables to the funding entity. We had the unilateral right to repurchase the funding entity’s purchased interest in the accounts receivables and, as a result, borrowings under this facility were reported as debt in the Condensed Consolidated Balance Sheets. Borrowings under this facility were obligations of ARC and not AWI. ARC contracted with and paid a servicing fee to AWI to manage, collect and service the purchased accounts receivables. All new receivables under the program were continuously purchased by ARC with the proceeds from collections of receivables previously purchased. There were no borrowings outstanding under this facility as of December 31, 2019.
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 and 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 presents details related to our letters of credit facilities:
|
|
|
September 30, 2020 |
|
|||||||||
|
Financing Arrangements |
|
Limit |
|
|
Used |
|
|
Available |
|
|||
|
Bi-lateral facility |
|
|
25.0 |
|
|
|
10.9 |
|
|
|
14.1 |
|
|
Revolving credit facility |
|
|
150.0 |
|
|
|
- |
|
|
|
150.0 |
|
|
Total |
|
$ |
175.0 |
|
|
$ |
10.9 |
|
|
$ |
164.1 |
|
As of September 30, 2020, we had $138.8 million of cash and cash equivalents and $315.0 million available under our revolving credit facility. We believe cash on hand and cash generated from operations, together with borrowing capacity under our credit facilities, will be adequate to address our near-term liquidity needs. The impacts of COVID-19 could create volatility in financial markets which may impact the terms under which we access capital. We continue to evaluate reductions in discretionary spending, capital expenditures and other costs.
CONTRACTUAL OBLIGATIONS
Information related to our contractual obligations at December 31, 2019 can be found in our Amendment No. 1 to the Annual Report on Form 10-K/A for the year ended December 31, 2019, Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations. Our long-term debt obligations as of September 30, 2020 increased by $70.7 million, primarily due to additional borrowings under our revolving credit facility, net of repayments. During the third quarter of 2020, we recorded $15.9 million of contingent consideration payable related to the acquisitions of Moz and Turf which will be paid out upon achievement of future performance objectives. See Note 4 to the Condensed Consolidated Financial Statements for further information.
38
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding our exposure to certain market risks, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Amendment No. 1 to the Annual Report on Form 10-K/A for the year ended December 31, 2019.
ITEM 4. CONTROLS AND PROCEDURES
|
(a) |
Evaluation of Disclosure Controls and Procedures. The Securities and Exchange Commission defines the term “disclosure controls and procedures” to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Based on the evaluation of the effectiveness of our disclosure controls and procedures by our management, with the participation of our principal executive officer and our chief financial officer, as of September 30, 2020, our principal executive officer and our chief financial officer have concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file or submit under the Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. |
|
(b) |
Changes in Internal Control Over Financial Reporting. There have been no material changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Act) during the fiscal quarter ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. |
39
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 21 to the Condensed Consolidated Financial Statements, which is incorporated herein by reference.
ITEM 1A. RISK FACTORS
For a discussion of our potential risks and uncertainties, see the risk factor below and the information under the heading “Risk Factors” in our Amendment No. 1 to the Annual Report on Form 10-K/A for the year ended December 31, 2019.
Public health epidemics or pandemics, such as the COVID-19 outbreak, could have a material adverse effect on our financial condition, liquidity or results of operations.
The COVID-19 outbreak has created significant volatility, uncertainty and economic disruption. The extent to which COVID-19, or other public health epidemics, impacts our employees, operations, customers, suppliers and financial results will depend on numerous evolving factors that we may not be able to accurately predict, including: the duration and scope of the pandemic (and whether there is a resurgence or multiple resurgences in the future); government actions taken in response to the pandemic; the impact on construction activity; the effect on our customers demand for our ceiling and wall systems; our ability to manufacture and sell our products; and the ability of our customers to pay for our products. For example, while many of our products support life sustaining activities and essential construction, we, and certain of our customers or suppliers, may be impacted by state actions, orders and policies regarding the recent COVID-19 pandemic, including temporary closures of non-life sustaining businesses, shelter-in-place orders, and travel, social distancing and quarantine policies, the implementation and enforcement of which vary by individual U.S. states and by individual countries in the Americas. Any of these events could have material adverse effect on our financial condition, liquidity or results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) Issuer Purchases of Equity Securities
|
Period |
|
Total Number of Shares Purchased (1) |
|
|
Average Price Paid per Share |
|
|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
|
|
Maximum Approximate Value of Shares that may yet be Purchased under the Plans or Programs |
|
||||
|
July 1 – 31, 2020 |
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
603,779,225 |
|
|
August 1 – 31, 2020 |
|
|
60 |
|
|
$ |
71.24 |
|
|
|
- |
|
|
$ |
603,779,225 |
|
|
September 1 – 30, 2020 |
|
|
123 |
|
|
$ |
69.63 |
|
|
|
- |
|
|
$ |
603,779,225 |
|
|
Total |
|
|
183 |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
(1) |
Includes shares reacquired through the withholding of shares to pay employee tax obligations upon the exercise of options or vesting of restricted shares previously granted under our long-term incentive plans. |
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. On July 28, 2020, we announced that our Board of Directors had approved an additional $500.0 million authorization to repurchase shares, increasing the total authorized amount under the Program to $1,200.0 million, excluding commissions, and extending the Program through December 31, 2023. The Program was temporarily suspended in the first quarter of 2020 in response to uncertainties surrounding COVID-19. On October 21, 2020, we elected to restart the Program and currently have $603.8 million remaining under the Board’s repurchase authorization.
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.
40
During the nine months ended September 30, 2020, we repurchased 0.4 million shares under the Program for a total cost of $34.4 million, excluding commissions, or an average price of $89.99 per share. Since inception, through September 30, 2020, we have repurchased 9.6 million shares under the Program for a total cost of $596.2 million, excluding commissions, or an average price of $62.13 per share.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
ITEM 5. OTHER INFORMATION
None.
41
ITEM 6. EXHIBITS
The following exhibits are filed as part of this Quarterly Report on Form 10-Q:
|
Exhibit No. |
|
Description |
|
|
|
|
|
3.1 |
|
|
|
|
|
|
|
3.2 |
|
|
|
|
|
|
|
31.1 |
|
|
|
|
|
|
|
31.2 |
|
|
|
|
|
|
|
32.1 |
|
Certification of Chief Executive Officer required by Rule 13a and 18 U.S.C. Section 1350. † |
|
|
|
|
|
32.2 |
|
Certification of Chief Financial Officer required by Rule 13a and 18 U.S.C. Section 1350. † |
|
|
|
|
|
101.INS |
|
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. † |
|
|
|
|
|
101.SCH |
|
Inline XBRL Taxonomy Extension Schema. † |
|
|
|
|
|
101.CAL |
|
Inline XBRL Taxonomy Extension Calculation Linkbase. † |
|
|
|
|
|
101.DEF |
|
Inline XBRL Taxonomy Extension Definition Linkbase. † |
|
|
|
|
|
101.LAB |
|
Inline XBRL Taxonomy Extension Label Linkbase. † |
|
|
|
|
|
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase. † |
|
|
|
|
|
104 |
|
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 has been formatted in Inline XBRL. |
|
† |
Filed herewith. |
42
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
Armstrong World Industries, Inc. |
|
|
|
|
|
|
By: |
|
/s/ Brian L. MacNeal |
|
|
|
Brian L. MacNeal, Senior Vice President and |
|
|
|
Chief Financial Officer (Principal Financial Officer) |
|
|
|
|
|
By: |
|
/s/ Stephen F. McNamara |
|
|
|
Stephen F. McNamara, Vice President and |
|
|
|
Controller (Principal Accounting Officer) |
Date: October 27, 2020
43