What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-04-26 compared with 2021-10-26 · 109 added, 170 removed, 107 unchanged (72% of the section changed)

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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 Annual Report on Form 10-K for the year ended December 31, 2021.

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.

AWI is a leader in the design, innovation and manufacture of ceiling and wall solutions in the Americas.

Our products primarily include mineral fiber, fiberglass wool, metal, wood, wood fiber, glass-reinforced-gypsum and felt.

We also manufacture ceiling suspension system (grid) products through a joint venture with Worthington Industries, Inc.

("Worthington") called Worthington Armstrong Venture ("WAVE").

The impact of the COVID-19 pandemic on our future consolidated results of operations remains uncertain.

In 2020, we experienced a significant decrease in customer demand throughout our business during the second through fourth quarters due to COVID-19.

Specifically, we noted delays in construction driven by temporary closures of non-essential businesses, with the most significant impacts in the major metropolitan areas impacted by COVID-19.

In response to COVID-19, we temporarily reduced capital expenditures and discretionary spending including compensation, travel and marketing expenses in 2020.

Customer demand continued to improve in the first nine months of 2021 but remained lower than pre-pandemic levels.

We continue to monitor and manage the impact of COVID-19 and its potential impacts to our business, most notably global supply chain and labor disruptions, which have contributed to raw material and transportation cost inflation, in addition to construction activity delays.

As of September 30, 2021, all of our manufacturing facilities were operational, excluding the St.

During 2020, we noted delays in construction driven by temporary closures of non-essential businesses, with the most significant impacts in certain major metropolitan areas impacted by COVID-19.

Beginning in 2021, market conditions began to improve and continued to do so in the first quarter of 2022, although the improvement was tempered by an uneven market recovery.

We continue to monitor and manage the impact of COVID-19 and its potential impacts to our business.

As of March 31, 2022, all of our manufacturing facilities were operational, excluding our St.

Helens, Oregon facility which was idled in the second quarter of 2018.

In an effort to operate safely and responsibly, we continue to follow guidelines from governmental health authorities across all our facilities and have implemented preventative measures that include working remotely, providing personal protective equipment, limiting group meetings, enhancing cleaning and sanitizing procedures, and social distancing.

We did not record any asset impairments, inventory charges or material bad debt reserves related to COVID-19 during the first nine months of 2021 or the full year of 2020, although future events may require such charges.

In an effort to operate safely and responsibly, we continue to follow guidelines from governmental health authorities across all our facilities.

We did not record any asset impairments, inventory charges or material bad debt reserves related to COVID-19 during the first quarter of 2022 or 2021, although future events may require such charges.

We will continue to evaluate the nature and extent of the COVID-19 pandemic’s impact on our financial condition, results of operations and cash flows.

In December 2020, we acquired all issued and outstanding equity of Arktura LLC (“Arktura”) and certain subsidiaries with operations in the United States and Argentina.

Arktura is a designer and fabricator of metal and felt ceilings, walls, partitions and facades with one manufacturing facility based in Los Angeles, California.

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.

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.

The operations, assets and liabilities of these acquisitions are included in our Architectural Specialties segment.

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

Discontinued Operations

In 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”).

In January 2021, we finalized post-closing adjustments to the purchase price related to certain pension liabilities assumed by Knauf in the Sale.

During the first quarter of 2021, we paid $11.8 million to Knauf as a result of this purchase price adjustment.

See Note 5 to the Condensed Consolidated Financial Statements for additional information related to our discontinued operations.

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

Manufacturing Plants

As of September 30, 2021, we operated 16 manufacturing plants in two countries, with 14 plants located within the U.S.

As of March 31, 2022, we operated 16 manufacturing plants in two countries, with 14 plants located within the U.S.

and two plants in Canada.

We closed our St.

Helens, Oregon mineral fiber manufacturing plant in the second quarter of 2018, and the facility was classified as an asset held for sale as of September 30, 2021.

We entered into a sale agreement for the property during the first quarter of 2021, with closing expected in the fourth quarter of 2021.

Helens, Oregon mineral fiber manufacturing plant in the second quarter of 2018, and the facility was classified as an asset held for sale as of March 31, 2022.

WAVE operates six additional plants in the U.S.

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Mineral Fiber –

produces suspended mineral fiber and soft fiber ceiling systems for use in commercial and residential settings.

produces suspended mineral fiber and soft fiber ceiling systems.

Our mineral fiber products offer various performance attributes such as acoustical control, rated fire protection, aesthetic appeal, and health and sustainability features.

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).

Ceiling products are sold to resale distributors, ceiling systems contractors and 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.

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Ceiling component products consist of ceiling perimeters and trim, in addition to grid products that support drywall ceiling systems.

For a limited number of geographies and customers, WAVE sells its suspension systems products to AWI for resale to customers.

For some customers, WAVE sells its suspension systems products to AWI for resale to customers.

Mineral Fiber segment results reflect those sales transactions.

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We sell standard, premium and customized products, a portion of which are 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.

Architectural Specialties products are sold primarily to

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

resale distributors and direct customers, primarily ceiling systems contractors.

The majority of this segment's 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.

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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.

Our Unallocated Corporate segment also includes all income and expenses formerly reported in our Europe, the Middle East and Africa (including Russia) ("EMEA") and Pacific Rim segments that were not included in the sale of certain subsidiaries comprising our businesses and operations in EMEA and the Pacific Rim to Knauf International GmbH ("Knauf"), including the corresponding businesses and operations conducted by WAVE, our joint venture with Worthington in which AWI holds a 50% interest (collectively, the “Sale”).

Factors Affecting Revenues

For information on our 2021 net sales by segment, see Notes 2 and 3 to the Condensed Consolidated Financial Statements.

We compete in the commercial and residential construction markets of the Americas.

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 2021 compared to the third quarter of 2020, most importantly an increase in demand as the negative financial impacts of the COVID-19 pandemic lessened.

Although the magnitude of year-over-year volume growth lessened compared to the second quarter of 2021, it remains a key factor for the nine-month period ended September 30, 2021.

For the three and nine months ended September 30, 2021, increases in sales volumes contributed $4 million and $28 million, respectively, to revenue growth from the 2020 periods.

In addition, our 2020 acquisitions of Turf, Moz and Arktura (collectively, the “2020 Acquisitions”) benefited revenues by $24 million and $58 million, for the three and nine months ended September 30, 2021, respectively.

The 2020 Acquisitions contributed $8 million of revenues for the three and nine months ended September 30, 2020.

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

For information on our segments' 2022 net sales by segment, see Notes 2 and 3 to the Condensed Consolidated Financial Statements.

We compete in the building product construction markets of the Americas.

We closely monitor publicly available macroeconomic trends that provide insight into construction 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.

The company continues to monitor the impacts of global events, including the conflict in Ukraine, which due to our Americas-only geography, did not impact our results of operations during the first quarter of 2022.

We noted several factors and trends within our markets that directly affected our business performance during the first quarter of 2022 compared to the first quarter of 2021, most importantly the continuing recovery from the COVID-19 pandemic in terms of business and commercial construction activity, partially offset by continued challenges to global supply chains and labor availability, and improved performance within our Architectural Specialties segment, partially driven by our recent acquisitions.

Demand continues to be tempered by delays in construction starts and extended project timelines, which, in addition to the inflationary environment, has impacted inventory levels within our distributor customer channel.

In addition, the uneven market recovery has resulted in variability in demand increases across different geographies.

For the three months ended March 31, 2022, increased sales volumes contributed $8 million to revenue compared to the same period in 2021.

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.

Typically, realized price increases are less than the announced price increases because of project pricing, competitive adjustments and changing market conditions.

We also offer a wide assortment of products that are differentiated by style, design and performance attributes.

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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 this measure accounts for the varying assortment of products impacting our revenues.

We estimate that favorable AUV increased our total consolidated net sales for the three and nine months ended September 30, 2021, by approximately $26 million and $48 million, compared to the same periods in 2020.

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.

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 and like-for-like pricing impacting our revenues.

We estimate that favorable AUV increased our total consolidated net sales for the three months ended March 31, 2022 by approximately $23 million compared to the same period in 2021.

Our Architectural Specialties segment generates revenues that are primarily 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 most changes in sales to volume.

During the first, second and third quarters of 2021, we implemented price increases on certain Mineral Fiber ceiling, grid products and certain Architectural Specialties products.

During the first quarter of 2022, we implemented price increases on Mineral Fiber ceiling, grid products and certain Architectural Specialties products.

We may implement future pricing actions based on numerous factors, namely the rate and pace of inflation impact on our business.

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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 primarily for fiberglass, perlite and starch.

Other raw materials include aluminum, clays, felt, pigment, recycled paper, steel, wood and wood fiber.

We manufacture most of the production needs for mineral wool at one of our manufacturing facilities.

Our largest raw material expenditures are primarily for fiberglass, perlite, recycled paper and starch.

Other raw materials include aluminum, clays, felt, pigment, steel, wood and wood fiber.

We manufacture most of our mineral wool needs at one of our

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

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, 2021, higher costs for raw materials and energy negatively impacted operating income by $5 million and $8 million, respectively, compared to the same periods in 2020.

2020 Acquisition-Related Impacts

In connection with the 2020 Acquisitions, we recorded certain acquisition-related gains and losses to operating income in the three and nine months ended September 30, 2021, summarized as follows (dollar amounts in millions):

Global supply chain and labor disruptions have contributed to raw material and transportation cost inflation.

In the first quarter of 2022, higher costs for raw materials and energy negatively impacted operating income by $7 million compared to the same period in 2021.

2020 Acquisition-Related Expenses and Losses

In connection with our acquisitions of TURF Design, Inc.

("Turf") in July 2020, Moz Designs, Inc.

("Moz") in August 2020, and Arktura LLC ("Arktura") in December 2020, we recorded certain acquisition-related expenses and losses to operating income in the three months ended March 31, 2022 and 2021, summarized as follows (dollar amounts in millions):

Three Months Ended

September 30, 2021

Nine Months Ended

September 30, 2021

Affected Line Item in the Condensed Consolidated Statement of Operations and Comprehensive Income

Affected Line Item in the Condensed Consolidated Statement of Earnings and Comprehensive Income

Deferred revenue

Change in fair value of contingent consideration

Loss related to change in fair value of contingent consideration

Deferred cash and restricted stock expenses

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Cost of goods sold

Net negative (positive) impact to operating income

The deferred revenue and inventory amounts above reflect the post-acquisition charges associated with recording these liabilities and assets at fair value as part of purchase accounting.

The estimated fair value of contingent consideration is related to our Moz and Turf acquisitions and is remeasured and recorded quarterly during each acquisition's respective earn-out period.

Net negative impact to operating income

The deferred revenue and inventory amounts above reflect the post-acquisition expenses associated with recording these liabilities and assets at fair value as part of purchase accounting.

The change in fair value of contingent consideration is related to our Moz and Turf acquisitions and is remeasured quarterly during each acquisition's respective earn-out period.

See Note 14 to the Condensed Consolidated Financial Statements for further information.

Expenses related to the deferred cash and restricted stock awards for Arktura’s former owners and employees are recorded over their respective service periods, as such payments are subject to the former awardees’

continued employment with AWI.

Purchase accounting expenses related to depreciation of fixed asset fair value adjustments and intangible asset amortization expenses have been excluded from the table above.

See Note 4 to the Condensed Consolidated Financial Statements for further information.

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

As of September 30, 2021 and December 31, 2020, we had approximately 2,800 and 2,700 full-time and part-time employees, respectively.

Depreciation of fixed assets acquired and amortization of intangible assets acquired have been excluded from the table above.

As of March 31, 2022 and December 31, 2021, we had approximately 2,900 and 2,800 full-time and part-time employees, respectively.

RESULTS OF CONTINUING OPERATIONS

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(dollar amounts in millions)

Change is Favorable/(Unfavorable)

Three Months Ended September 30,

Total consolidated net sales

Operating income

Nine Months Ended September 30,

Three Months Ended

Change is Favorable

Total consolidated net sales

Operating income

Consolidated net sales for the third quarter of 2021 increased 18.6% over the prior-year period.

Improved AUV contributed $26 million of favorability and higher volumes, primarily due to the impact of the 2020 Acquisitions, contributed $20 million.

Mineral Fiber net sales increased $27 million and Architectural Specialties net sales increased $19 million from the third-quarter 2020 results.

The increase in Mineral Fiber segment net sales was primarily driven by positive like-for-like pricing and favorable customer channel mix.

The increase in Architectural Specialties net sales was driven by a $16 million contribution from our 2020 Acquisitions and a lower COVID-19 impact when compared to the prior period.

Consolidated net sales for the first nine months of 2021 increased 18.0% as higher volumes, including the impact of the 2020 Acquisitions, contributed $78 million and favorable AUV contributed $48 million.

Mineral Fiber net sales increased $68 million year-over-year and Architectural Specialties net sales increased $58 million.

The increase in Mineral Fiber segment net sales was driven by improved AUV and both segments experienced improved sales volumes as market demand continued to recover from COVID-19 impacts.

The Architectural Specialties segment net sales also benefited $50 million from the 2020 Acquisitions.

Cost of goods sold in the third quarter of 2021 was 62.1% of net sales, compared to 63.0% for the same period in 2020.

Cost of goods sold in the first nine months of 2021 was 63.2% compared to 64.2% for the same period in 2020.

The decrease in cost of goods sold as a percent of net sales for the third quarter of 2021 resulted from favorable AUV performance, which more than offset higher raw material, energy and freight inflation and the impact of cost increases that were curtailed in 2020 at the height of the COVID-19 pandemic.

For the first nine months of 2021, the decrease in cost of goods sold as a percent of net sales was due to favorable AUV performance and improved manufacturing productivity, which was partially offset by higher inflation and the impact of cost increases that we reduced in 2020 at the height of the COVID-19 pandemic.

SG&A expenses in the third quarter of 2021 were $62.3 million, or 21.3% of net sales, compared to $41.0 million, or 16.6% of net sales, for the same period in 2020.

SG&A expenses in the first nine months of 2021 were $176.5 million, or 21.4% of net sales, compared to $108.8 million, or 15.6% of net sales, for the 2020 period.

The third-quarter 2021 increase in SG&A expenses was driven primarily by an $8 million increase in SG&A expenses due to the impact of the 2020 Acquisitions, a $5 million increase in incentive and deferred compensation expenses and a $2 million increase in spending related to continued digital growth initiatives.

Also contributing to the increase in SG&A expenses was a resumption of more normalized spending that was curtailed in 2020 at the height of the COVID-19 pandemic.

The increase in SG&A expenses for the first nine months of 2021 compared to the same period in 2020 was driven by a $33 million increase in SG&A expenses due to the 2020 Acquisitions, including intangible asset amortization of $13 million, a $15 million increase in incentive and deferred compensation expenses, a $6 million decrease in cost reimbursements, net of related expenses, earned under our Transition Services Agreement with Knauf ("Knauf TSA") in 2020 and a $3 million increase in spending related to digital growth initiatives.

Also contributing to the increase in SG&A expenses was an increase in discretionary spending.

Consolidated net sales for the first quarter of 2022 increased 12.2% over the prior-year period as favorable AUV contributed $23 million and higher volumes contributed $8 million.

Mineral Fiber net sales increased $15 million and Architectural Specialties net sales increased $16 million over the pri or-year period.

The increase in Mineral Fiber segment net sales was driven by improved AUV, partially offset by lower volumes resulting primarily from a reduction of inventory levels at certain distributor customers.

Architectural Specialties segment net sales improved due to an increase in custom project sales, improved performance from our recent acquisitions compared to the same period in 2021 and positive impacts from price increases.

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

During the third quarter and nine months ended September 30, 2021, we recorded $0.3 million and $9.8 million, respectively, of income from a change in the fair value of contingent consideration related to the acquisitions of Turf and Moz.

See Note 15 to the Condensed Consolidated Financial Statements for further information.

During the third quarter and nine months ended September 30, 2020, we recorded $6.9 million and $21.0 million of gains, respectively, related to the sale of fixed and intangible assets from the sale of our idled Mineral Fiber plant in China, which was reported as a component of our Unallocated Corporate segment.

There was no similar activity in 2021.

Equity earnings from our WAVE joint venture were $23.4 million in the third quarter of 2021, compared to $15.2 million in the third quarter of 2020.

Equity earnings from our WAVE joint venture were $68.1 million in the first nine months of 2021 compared to $48.2 million in the first nine months of 2020.

The increase in WAVE earnings for the third quarter of 2021 compared to the same period in 2020 was primarily related to favorable AUV which was partially offset by increased steel costs.

The increase in WAVE earnings for the first nine months of 2021 compared to the same period in 2020 was related to favorable AUV and higher volumes, which was partially offset by increased steel costs and SG&A expenses.

See Note 9 to the Condensed Consolidated Financial Statements for further information.

Interest expense was $6.1 million in both the third quarter of 2021 and the third quarter of 2020.

Interest expense was $17.4 million in the first nine months of 2021 compared to $18.7 million in the first nine months of 2020.

The decrease in interest expense in the first nine months of 2021 compared to the prior period was due to lower interest rates, partially offset by an increase in average borrowings.

Other non-operating income, net, was $1.4 million in the third quarter of 2021 compared to $3.2 million in the third quarter of 2020.

Other non-operating income, net, was $4.3 million in the first nine months of 2021, compared to $361.8 million of expense, net, in the first nine months of 2020.

The decrease in income for the third quarter of 2021 compared to the same period in 2020 was primarily due to lower credits from non-service cost components of pension and postretirement net period benefit costs.

The change in other non-operating income, net, for the first nine months of 2021 compared to the same period in 2020 was primarily related to a $374.4 million settlement loss related to our RIP that was recorded in the first quarter of 2020, partially offset by lower credits from non-service cost components of pension and postretirement net period benefit costs.

Cost of goods sold in the first quarter of 2022 was 63.8% of net sales, compared to 65.3% for the same period in 2021.

The decrease in cost of goods sold as a percent of net sales for the first quarter of 2022 was driven by favorable AUV performance and improved manufacturing productivity, partially offset by higher inflation.

SG&A expenses in the first quarter of 2022 were $57.1 million, or 20.2% of net sales, compared to $54.2 million, or 21.5% of net sales, for the same period in 2021.

The increase in SG&A expenses for the first quarter of 2022 compared to the same period in 2021 was driven primarily by a $7 million increase in selling expenses which was partially offset by a $4 million decrease in intangible asset amortization related to the Architectural Specialties segment.

Equity earnings from our WAVE joint venture were $18.2 million in the first quarter of 2022, compared to $21.0 million in the first quarter of 2021.

The decrease in WAVE earnings was primarily related to lower volumes, also resulting primarily from a reduction of inventory levels at certain distributor customers, and increased SG&A expenses.

See Note 8 to the Condensed Consolidated Financial Statements for further information.

Income tax expense was $16.6 million in the third quarter of 2021 compared to $15.2 million in the third quarter of 2020.

The effective tax rate for the third quarter of 2021 was 24.6% compared to 21.9% for the same period of 2020.

The effective tax rate for the third quarter of 2021 was higher compared to the same period in 2020, due primarily to the absence of a benefit related to the sale of our idled Mineral Fiber plant in China recognized in 2020.

Income tax expense was $48.0 million in the first nine months of 2021 compared to $50.9 million of income tax benefit in the first nine months of 2020.

The effective tax rate was 25.1% in the first nine months of 2021 compared to 30.0% in the same period of 2020.

Excluding the impact of our pension settlement and the gain on sale of our idled Mineral Fiber plant in China recorded in the first nine months of 2020, the effective tax rate for the first nine months of 2021 was higher compared to the same period in 2020 due to state law changes enacted in 2021 and a reduction in favorable permanent adjustments.

Total Other Comprehensive Income (“OCI”) was $0.1 million in the third quarter of 2021 compared to Total Other Comprehensive Loss (“OCL”) of $5.5 million in the third quarter of 2020.

OCI was $6.5 million in the first nine months of 2021 compared to OCI of $266.3 million in the first nine months of 2020.

The change in OCI in the third quarter of 2021 compared to the same period in 2020 was primarily driven by foreign currency translation adjustments.

Interest expense was $5.1 million in the first quarter of 2022 compared to $5.7 million in the first quarter of 2021.

The decrease was primarily due to lower average borrowings and lower effective interest rates.

Other non-operating income, net, was $1.3 million in the first quarter of 2022 and 2021.

Income tax expense was $15.0 million in the first quarter of 2022 compared to $12.2 million in the first quarter of 2021.

The effective tax rate for the first quarter of 2022 was 25.3% compared to 24.6% for the same period of 2021.

The effective tax rate for the first quarter of 2022 was higher compared to the same period in 2021 due primarily to a reduced benefit from share-based compensation.

Total Other Comprehensive Income (“OCI”) was $11.9 million in the first quarter of 2022 compared to $4.6 million in the first quarter of 2021.

The change in OCI in the first quarter of 2022 compared to the same period in 2021 was primarily driven by 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.

Also impacting the change in OCI were pension and postretirement adjustments and foreign currency translation adjustments.

Pension and postretirement adjustments represent the amortization of actuarial gains and losses related to our defined benefit pension and postretirement plans.

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 2021 compared to the same period in 2020 was driven by pension and postretirement adjustments, primarily related to the absence of the $278.6 settlement loss, net of taxes, related to our RIP.

Pension and postretirement adjustments represent the amortization of actuarial gains and losses related to our defined benefit pension and postretirement plans.

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.

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

Amounts in the first quarter of 2022 and 2021 were driven primarily by changes in the Canadian dollar.

REPORTABLE SEGMENT RESULTS

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(dollar amounts in millions)

Change is Favorable

Three Months Ended September 30,

Total segment net sales

Operating income

Nine Months Ended September 30,

Three Months Ended

Change is Favorable/(Unfavorable)

Total segment net sales

Operating income

Third-quarter 2021 net sales increased $27 million primarily due to favorable AUV.

The improvement in AUV was driven by favorable price and customer channel mix.

For the first nine months of 2021, net sales improved $68 million from the prior-year period due to $47 million of favorable AUV and $21 million due to higher sales volumes.

For the nine-month period, increased volumes were driven by comparison against a prior-year period that was negatively impacted by the pandemic.

Third-quarter 2021 operating income increased 17.9% year-over-year primarily due to a $20 million benefit from favorable AUV, an $8 million increase in WAVE equity earnings and a $4 million benefit related to a 2020 Coronavirus Aid, Relief, and Economic Recovery Act Employee Retention Credit ("ERC benefit"), partially offset by a $10 million increase in manufacturing costs, a $4 million increase in incentive and deferred compensation expenses and a $2 million increase in spending related to digital growth initiatives.

In addition, operating income was impacted by more normalized discretionary spending that had been curtailed in 2020 at the height of the COVID-19 pandemic.

Operating income increased in the first nine months of 2021 primarily due to a $35 million benefit from favorable AUV, a $20 million increase in WAVE equity earnings, a $12 million benefit from higher volumes and a $4 million ERC benefit, partially offset by a $14 million increase in manufacturing costs, a $13 million increase in incentive and deferred compensation expenses, a $6 million decrease related to our Knauf TSA, a $3 million increase in spending related to digital growth initiatives and an increase in discretionary spending.

Net sales increased in the first quarter of 2022 due to $23 million of favorable AUV, partially offset by lower sales volumes of $8 million.

The improvement in AUV was driven primarily by favorable price.

The decrease in volumes was primarily driven by a reduction of inventory levels at certain distributor customers.

Operating income decreased in the first quarter of 2022 primarily due to a $7 million increase in manufacturing costs, primarily increased raw material and energy costs, a $6 million decrease resulting from lower sales volumes, a $5 million increase in selling expenses, primarily related to investments in growth initiatives and incentive compensation, and a $3 million decrease in equity earnings driven by lower volumes.

These costs were partially offset by $18 million of favorable AUV.

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

Architectural Specialties

(dollar amounts in millions)

Three Months Ended

Change is Favorable/(Unfavorable)

Three Months Ended September 30,

Total segment net sales

Operating income

Nine Months Ended September 30,

Total segment net sales

Operating income

Net sales increased $19 million and $58 million in the third quarter and the first nine months of 2021, respectively.

Net sales from 2020 Acquisitions in the third quarter and the first nine months of 2021 contributed $16 million and $50 million to these increases, respectively.

An improvement in sales volumes due to a rebound in economic activity compared to the prior year when negative COVID-19 impacts were significantly higher contributed to year-over-year net sales growth for both periods.

Third-quarter 2021 operating income decreased primarily due to an $8 million increase in SG&A expenses, including a $1 million increase in amortization expense, related to the 2020 Acquisitions and the negative margin impact of delays from custom project driven revenues, partially offset by the positive impact of increased sales.

Operating income decreased in the first nine months of 2021 primarily due to a $13 million increase in amortization expense related to the 2020 Acquisitions, an $11 million increase in acquisition-related charges, an increase in manufacturing costs and SG&A expenses resulting primarily from additional investments in manufacturing capacity and selling and design capabilities and the negative margin impact of delays from custom project driven revenues.

These costs were partially offset by the positive impact of higher sales volumes and a $10 million gain due to a change in the fair value of contingent consideration related to Moz and Turf.

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

Operating income (loss)

Net sales increased $16 million in the first quarter of 2022 primarily due to an increase in custom project sales, improved performance from our recent acquisitions compared to the same period in 2021 and positive impacts from price increases.

Operating income increased in the first quarter of 2022 primarily due to a $9 million benefit from net sales growth and a $4 million reduction in intangible asset amortization.

These benefits were partially offset by a $2 million increase in selling expenses, primarily related to additional investments in selling capabilities and incentive compensation.

Unallocated Corporate

Unallocated Corporate operating loss was $1 million in the third quarter of 2021, compared to income of $5 million in the third quarter of 2020.

Unallocated Corporate operating loss was $4 million in the first nine months of 2021, compared to income of $16 million in the first nine months of 2020.

The change in Unallocated Corporate operating loss in both periods was primarily related to the absence of the gain on the sale of our idled Mineral Fiber plant in China.

Unallocated Corporate operating loss was $1 million in the first quarter of 2022, compared to $2 million in the first quarter of 2021.

FINANCIAL CONDITION AND LIQUIDITY

Operating activities for the first nine months of 2021 provided $137.9 million of cash, compared to $148.4 million in the first nine months of 2020.

The decrease was primarily due to lower cash earnings and an increase in income tax payments, partially offset by positive working capital changes.

Net cash used for investing activities was $5.4 million in the first nine months of 2021, compared to $52.2 million of cash used in the first nine months of 2020.

The favorable change in cash used in 2021 compared to 2020 was primarily due to a decrease in cash paid for acquisitions and the absence of the remittance of Knauf proceeds to WAVE, partially offset by a decrease in proceeds from the sale of fixed assets and an increase in purchases of property, plant and equipment.

Net cash used for financing activities was $175.1 million in the first nine months of 2021, compared to $2.5 million in the first nine months of 2020.

The unfavorable change of cash was primarily due to a decrease in proceeds from borrowings, higher debt payments in 2021 and higher repurchases of outstanding common stock.

Operating activities for the first three months of 2022 provided $16.7 million of cash, compared to $19.6 million in the first three months of 2021.

The decrease was primarily due to negative working capital changes in inventory and accounts payable and accrued expenses, partially offset by higher cash earnings and a decrease in income tax payments.

Net cash provided by investing activities was $0.2 million in the first three months of 2022, compared to $8.8 million of cash used in the first three months of 2021.

The favorable change in cash in the first quarter of 2022 compared to the same period in 2021 was primarily due to the absence of the purchase price adjustments paid to Knauf, partially offset by a decrease in dividends from WAVE.

Net cash used for financing activities was $39.2 million in the first three months of 2022, compared to $26.2 million in the first three months of 2021.

The unfavorable change in cash was primarily due to a decrease in proceeds from borrowings, higher repurchases of outstanding common stock, and payments of acquisition-related contingent consideration in 2022, partially offset by decreased payments on borrowings.

Our liquidity needs for operations vary throughout the year.

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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 revolving credit facility and Term Loan A are currently priced at 1.25% over LIBOR.

The senior credit facility also has a $25.0 million letter of credit facility, also known as our bi-lateral facility.

The revolving credit facility and Term Loan A mature in September 2024.

The $1,000.0 million senior credit facility is secured by the capital stock of material U.S.

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Any principal amounts paid on the Term Loan A may not be re-borrowed.

As of September 30, 2021, total borrowings outstanding under our senior credit facility were $155.0 million under the revolving credit facility and $475.0 million under Term Loan A.

Additionally, we have a $25.0 million letter of credit facility, also known as our bi-lateral facility.

As of March 31, 2022, total borrowings outstanding under our senior credit facility were $462.5 million under Term Loan A and $180.0 million under the revolving credit 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.

September 30, 2021, we were in compliance with all covenants of the senior credit facility.

As of March 31, 2022, we were in compliance with all covenants of the senior credit facility.

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

The Term Loan A is currently priced on a variable interest rate basis.

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March 2021 to March 2024

March 11, 2020

March 2021 to March 2024

Under the terms of our interest rate swaps above, we pay a fixed rate monthly and receive 1-month LIBOR, 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.

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

We utilize lines of credit and other commercial commitments to ensure that adequate funds are available to meet operating requirements.

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The following table presents details related to our letters of credit facilities (dollar amounts in millions):

September 30, 2021

March 31, 2022

Financing Arrangements

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Revolving credit facility

As of September 30, 2021, we had $94.3 million of cash and cash equivalents, $80.4 million in the U.S.

As of March 31, 2022, we had $76.1 million of cash and cash equivalents, $63.8 million in the U.S.

and $12.3 million in various foreign jurisdictions, primarily Canada.

As of September 30, 2021, we also had $345.0 million available under our revolving credit facility.

We believe cash on hand and cash generated from operations, together with borrowing capacity under our credit facility, 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 our discretionary spending, capital expenditures and other costs in light of the uncertainty related to the COVID-19 pandemic.

As of March 31, 2022, we also had $320.0 million available under our revolving credit facility.

We believe cash on hand and cash generated from operations, together with borrowing capacity under our credit facility, will be adequate to address our near-term liquidity needs based on current expectations of our business operations, capital expenditures and scheduled payments of debt obligations.

CRITICAL ACCOUNTING ESTIMATES

There have been no material changes to our critical accounting estimates disclosed in our 2021 Annual Report on Form 10-K.

QUANTITATIVE AND QUALITAT IVE DISCLOSURES ABOUT MARKET RISK

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis