What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-04-25 compared with 2022-10-25 · 113 added, 164 removed, 101 unchanged (73% of the section changed)

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

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

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 as the impact of the pandemic lessened.

Throughout the first nine months of 2022, our results of operations have continued to be impacted by delays in construction starts and extended project timelines, in addition to higher inflation, all of which were related, in part, to the pandemic and subsequent recovery.

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

As of September 30, 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.

We did not record any asset impairments, inventory charges or material bad debt reserves related to COVID-19 during the first nine months of 2022 or the full year of 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 November 2022, we acquired the business and assets of GC Products, Inc.

(“GC Products”), based in Lincoln, CA.

GC Products is a designer and manufacturer of glass-reinforced-gypsum, glass-reinforced-cement, molded ceiling and specialty wall products with one manufacturing facility.

The operations, assets and liabilities of GC Products are included in our Architectural Specialties segment.

The acquisition of GC Products did not have a material impact on our results of operations for the three months ended March 31, 2023.

Manufacturing Plants

As of September 30, 2022, we operated 16 manufacturing plants in two countries, with 14 plants located within the U.S.

As of March 31, 2023, we operated 16 manufacturing plants, with 14 plants located within the U.S.

and two plants in Canada.

This includes our closed St.

Helens, Oregon mineral fiber manufacturing plant, which was closed in the second quarter of 2018.

The facility was classified as an asset held for sale as of September 30, 2022.

WAVE operates six additional plants in the U.S.

This excludes our St.

Helens, Oregon mineral fiber manufacturing plant, which was closed in the second quarter of 2018, and was classified as an asset held for sale as of March 31, 2023.

WAVE operates seven additional plants in the U.S.

to produce suspension system (grid) products, which we use and sell in our ceiling systems.

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Products offer various performance attributes such as acoustical control, rated fire protection and aesthetic appeal.

We sell standard, premium and

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

customized products, a portion of which are derived from sourced products.

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 direct customers, primarily ceiling systems contractors.

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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 expenses related to our German defined benefit pension plan that was formerly reported in our Europe, the Middle East and Africa (including Russia) (“EMEA”) and Pacific Rim segments and was not included in the sale of certain subsidiaries comprising our businesses and operations in EMEA and the Pacific Rim to Knauf International GmbH.

Retirement Income Plan (“RIP”), the estimated fair value of interest rate swap contracts, outstanding borrowings under our senior secured credit facility and income tax balances.

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

Factors Affecting Revenues

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We closely monitor publicly available macroeconomic trends that provide insight into commercial construction market activity, including, but not limited to, 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, had minimal direct impact on our results of operations during the first nine months of 2022.

We noted several factors and trends within our markets that directly affected our business performance during the third quarter of 2022 compared to the third quarter of 2021, most importantly the elongated economic recovery due to the lessoning impact from the COVID-19 pandemic combined with on-going challenges to global supply chains and labor availability, in addition to the impact of higher inflation.

Our results benefited from improved performance within our Architectural Specialties segment, primarily driven by our recent acquisitions.

For the three months and nine months ended September 30, 2022, increased sales volumes contributed $17 million and $40 million, respectively, to revenue compared to the same periods in 2021.

The Company continues to monitor the impacts of COVID-19 and other global events, including the conflict in Ukraine, both of which had minimal direct impacts on our results of operations during the first quarter of 2023 and 2022.

Additionally, we have monitored, and will continue to monitor, the impact of domestic and international bank failures, which had no direct impact on our results of operations, financial condition and results of operations during the first quarter of 2023.

Several factors and trends within our markets affected our business performance during the first quarter of 2023 compared to the first quarter of 2022, most importantly rising interest rates, lower inflation on certain input costs, and the lessening impact of supply chain and labor availability constraints, all of which resulted in uneven market demand.

For the three months ended March 31, 2023, increased sales volumes contributed $21 million to net sales compared to the same period in 2022, primarily in our Mineral Fiber segment.

The increase in Mineral Fiber sales volumes was primarily driven by comparison to a weaker prior-year period due to reductions of inventory levels at certain customers, and partially due to current-year inventory level increases at our home center customers.

Average Unit Value .

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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 and nine months ended September 30, 2022 by approximately $16 million and $64 million, respectively, compared to the same periods in 2021.

We estimate that favorable AUV increased our total consolidated net sales for the three months ended March 31, 2023 by approximately $6 million compared to the same period in 2022.

Our Architectural Specialties segment revenues are primarily earned based on individual contracts that include a mix of products, both manufactured by us and sourced from third parties, which varies by project.

As such, we do not track AUV performance for this segment, but attribute most changes in sales to volume.

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

In the third quarter of 2022, we announced increases on Mineral Fiber ceiling and certain Architectural Specialties products that will go into effect in the fourth quarter.

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

As such, we do not track AUV performance for this segment, but rather attribute most changes in sales to volume.

During the first quarter of 2023, 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 and its impact on our business.

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.

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 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.

We manufacture most of our 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.

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

For the three and nine months ended September 30, 2022, higher costs for raw materials and energy negatively impacted operating income by $11 million and $28 million, respectively, compared to the same periods in 2021.

2020 Acquisition-Related Expenses and (Gains) 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 (gains) losses to operating income in the three and nine months ended September 30, 2022 and 2021, summarized as follows (dollar amounts in millions):

Fluctuations in the prices of these inputs have an impact on our financial results.

In the first quarter of 2023, higher costs for raw materials and energy negatively impacted operating income by $4 million compared to the same period in 2022.

2020 Acquisition-Related Expenses and Losses

In connection with our acquisitions of Turf in July 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, 2023 and 2022, summarized as

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

follows (dollar amounts in millions):

Three Months Ended

Nine Months Ended

September 30,

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

Deferred revenue

Loss (gain) related to change in fair

value of contingent consideration

Loss (gain) related to change in fair

value of contingent consideration

Deferred cash and restricted stock

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

Loss related to change in fair value of contingent consideration

Deferred cash and restricted stock expenses

SG&A expenses

Cost of goods sold

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.

Net negative impact to operating income

The change in fair value of contingent consideration was related to our Turf acquisition and was remeasured quarterly during the acquisition's earn-out period which was completed on December 31, 2022.

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

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

As of September 30, 2022 and December 31, 2021, we had approximately 2,960 and 2,820 full-time and part-time employees, respectively.

RESULTS OF CONTINUING OPERATIONS

Please refer to Notes 2 and 4 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

As of March 31, 2023 and December 31, 2022, we had approximately 3,000 full-time and part-time employees.

RESULTS OF OPERATIONS

Please refer to Note 2 to the Condensed Consolidated Financial Statements for a reconciliation of operating income to consolidated net earnings before income taxes.

CONSOLIDATED RESULTS

(dollar amounts in millions)

Three Months Ended

Change is Favorable

Three Months Ended September 30,

Total consolidated net sales

Operating income

Nine Months Ended September 30,

Total consolidated net sales

Operating income

Consolidated net sales for the third quarter of 2022 increased 11.2% from prior-year results with higher volumes contributing $17 million and favorable AUV contributing $16 million.

Mineral Fiber net sales increased $19 million and Architectural Specialties net

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

sales increased $14 million from third-quarter 2021 results.

The increase in Mineral Fiber net sales was driven by improved AUV, due to favorable price partially offset by negative customer channel mix, and higher volumes.

Architectural Specialties net sales growth resulted from improved performance from our recent acquisitions compared to the same period in 2021 and positive impacts from increases in custom project sales.

Consolidated net sales for the first nine months of 2022 increased 12.7 % from the prior-year as favorable AUV contributed $64 million and higher volumes contributed $40 million.

Mineral Fiber net sales increased $60 million year-over-year and Architectural Specialties net sales increased $44 million.

The increase in Mineral Fiber net sales was driven by improved AUV and partially offset by lower volumes.

The favorable AUV was driven by favorable price, partially offset by negative customer channel mix.

The lower volumes resulted primarily from a reduction of inventory levels at certain distributor customers earlier in 2022 in addition to a deceleration of market conditions throughout the third quarter.

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

Cost of goods sold in the third quarter of 2022 was 63.8% of net sales, compared to 62.1% for the same period in 2021.

Cost of goods sold in the first nine months of 2022 was 63.6% of net sales, compared to 63.2% for the same period in 2021.

The increase in cost of goods sold in both periods was driven by higher input cost inflation, partially offset by favorable AUV performance and improved manufacturing productivity.

SG&A expenses in the third quarter of 2022 were $59.3 million, or 18.2% of net sales, compared to $62.3 million, or 21.3% of net sales, for the same period in 2021.

The third-quarter 2022 decrease in SG&A expenses was driven primarily by a $4 million decrease in intangible asset amortization and acquisition-related expenses related to the Architectural Specialties segment, and a $3 million decrease in incentive compensation expense partially offset by a $2 million benefit recorded in the prior-year period related to a 2020 Coronavirus Aid, Relief, and Economic Act Employee Retention Credit (“ERC Benefit”) and a $1 million increase in selling expenses.

SG&A expenses in the first nine months of 2022 were $177.9 million, or 19.2% of net sales, compared to $176.5 million, or 21.4% of net sales, for the 2021 period.

The increase in SG&A expenses for the first nine months of 2022 compared to the same period in 2021 was driven by a $14 million increase in selling expenses in support of increased sales and growth initiatives and a $2 million ERC Benefit recorded in the prior-year period partially offset by a $15 million decrease in intangible asset amortization and acquisition-related expenses related to the Architectural Specialties segment.

During the third quarter and first nine months of 2022, we recorded $7.1 million and $13.3 million, respectively, of remeasurement losses for changes in the fair value of contingent consideration related to the acquisition of Turf.

During the same periods in 2021, we recorded $0.3 million and $9.8 million, respectively, of remeasurement gains related to the acquisitions of Turf and Moz.

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

Equity earnings from our WAVE joint venture were $22.2 million in the third quarter of 2022, compared to $23.4 million in the prior-year period, and were $61.7 million in the first nine months of 2022 compared to $68.1 million in the first nine months of 2021.

The decrease in WAVE earnings during the third quarter and first nine months of 2022 compared to the same periods in 2021 resulted primarily from lower volumes and higher steel cost partially offset by favorable AUV.

Volumes for WAVE during the first nine months of 2022 were negatively impacted by a reduction of inventory levels at certain distributor customers in addition to a deceleration of market conditions throughout the third quarter.

Consolidated net sales for the first quarter of 2023 increased 9.8% over the prior-year period as higher volumes contributed $21 million and favorable AUV contributed $6 million.

Mineral Fiber net sales increased $25 million and Architectural Specialties net sales increased $2 million over the prior-year period.

The increase in Mineral Fiber segment net sales was primarily driven by higher volumes, and partially due to improved AUV.

The increase in Mineral Fiber segment sales volumes was primarily driven by a recovery of sales volumes compared to a weaker prior-year period due to inventory level reductions at certain customers and partially due to current-year inventory level increases at our home center customers.

The favorable AUV was primarily driven by positive like-for-like pricing, partially offset by unfavorable geographic mix.

Architectural Specialties segment net sales improved due to growth across most product categories, partially offset by lower metal product sales.

Cost of goods sold in the first quarter of 2023 was 63.9% of net sales, compared to 63.8% for the same period in 2022.

The increase in cost of goods sold as a percent of net sales for the first quarter of 2023 was driven by raw material and energy inflation and inventory valuation impacts, partially offset by favorable AUV performance and improved manufacturing productivity.

SG&A expenses in the first quarter of 2023 were $62.7 million, or 20.2% of net sales, compared to $57.1 million, or 20.2% of net sales, for the same period in 2022.

The year-over-year increase in SG&A expenses was driven primarily by a $5 million increase in selling expenses, primarily related to investments in our Architectural Specialties segment and higher costs in support of our digital selling initiatives, in addition to $3 million in severance costs related to cost savings initiatives in the current-year quarter, partially offset by a $1 million reduction in acquisition-related expenses.

Equity earnings from our WAVE joint venture were $20.8 million in the first quarter of 2023, compared to $18.2 million in the first quarter of 2022.

WAVE earnings growth was primarily driven by lower steel costs and the benefits of a recovery of sales volumes compared to a weaker prior-year period due to inventory level reductions at certain customers.

These benefits were partially offset by the impact of unfavorable AUV.

See Note 7 to the Condensed Consolidated Financial Statements for further information.

Interest expense was $7.0 million in the third quarter of 2022 compared to $6.1 million in the third quarter of 2021.

Interest expense was $17.9 million in the first nine months of 2022 compared to $17.4 million in the first nine months of 2021.

The increase in interest expense was primarily due to higher interest rates on floating rate debt.

Other non-operating income, net, was $1.4 million in the third quarter of 2022 and 2021.

Other non-operating income, net, was $4.1 million in the first nine months of 2022, compared to $4.3 million in the first nine months of 2021.

Other non-operating income, net, is primarily comprised of the non-service cost components of pension and postretirement net period benefit costs.

Income tax expense was $13.2 million in the third quarter of 2022 compared to $16.6 million in the third quarter of 2021.

The effective tax rate for the third quarter of 2022 was 19.5% compared to 24.6% for the same period of 2021.

The effective tax rate for the third quarter of 2022 was lower compared to the same period in 2021 primarily due to the benefits recognized from federal and state statute closures in the current year.

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

Income tax expense was $43.2 million in the first nine months of 2022 compared to $48.0 million in the first nine months of 2021.

The effective tax rate was 22.2% in the first nine months of 2022 compared to 25.1% in the same period of 2021.

The effective tax for the first nine months of 2022 was lower compared to the same period in 2021 primarily due to the benefits recognized from statute closures, in addition to a reduction in our valuation allowance for capital loss carryforwards.

Total Other Comprehensive Income (“OCI”) was $3.0 million in the third quarter of 2022 compared to $0.1 million in the third quarter of 2021.

OCI was $17.1 million in the first nine months of 2022 compared to $6.5 million in the first nine months of 2021.

The increase in OCI in the third quarter and first nine months of 2022 compared to the same periods in 2021 was primarily driven by derivative gains.

Derivative gain 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 foreign currency translation adjustments and pension and postretirement adjustments.

Interest expense was $8.7 million in the first quarter of 2023 compared to $5.1 million in the first quarter of 2022.

The increase was primarily due to higher interest rates on floating rate debt.

Other non-operating income, net, was $2.4 million in the first quarter of 2023 compared to $1.3 million in the first quarter of 2022.

Other non-operating income, net, is primarily comprised of the non-service cost components of pension and postretirement net periodic benefit costs.

Income tax expense was $16.6 million in the first quarter of 2023 compared to $15.0 million in the first quarter of 2022.

The effective tax rate for the first quarter of 2023 was 26.0% compared to 25.3% for the same period of 2022.

The increase in the effective tax rate for the first quarter of 2023 was primarily due to an increase in our valuation allowance for capital loss carryforwards recorded in the current quarter.

Total Other Comprehensive Loss (“OCL”) was $2.1 million in the first quarter of 2023 compared to Other Comprehensive Income (“OCI”) of $11.9 million in the first quarter of 2022.

The change in OCL in the first quarter of 2023 compared to the same period in 2022 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 OCL 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.

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

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

Amounts in the first quarter of 2023 and 2022 were driven primarily by changes in the Canadian dollar.

REPORTABLE SEGMENT RESULTS

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(dollar amounts in millions)

Change is Favorable/(Unfavorable)

Three Months Ended September 30,

Total segment net sales

Operating income

Nine Months Ended September 30,

Three Months Ended

Change is Favorable

Total segment net sales

Operating income

Third-quarter 2022 net sales increased $19 million compared to the prior-year period due to favorable AUV of $16 million and higher sales volumes of $3 million.

For the first nine months of 2022, net sales improved $60 million from the prior-year period due to favorable AUV of $64 million, partially offset by a negative impact of $4 million from lower sales volumes.

The improvement in AUV in both the third quarter and first nine months of 2022 was driven by favorable price, partially offset by negative customer channel mix.

The volume increase for the third quarter of 2022 was driven by growth in the home center customer channel and growth in Latin America, partially offset by headwinds from a deceleration of market conditions throughout the third quarter.

Volumes for the first nine months of 2022 were negatively impacted by a reduction of inventory levels at certain distributor customers earlier in 2022 in addition to deceleration of market conditions throughout the third quarter.

Third-quarter 2022 operating income increased from the prior-year period primarily due to a $16 million favorable AUV margin impact, a $3 million decrease in incentive compensation expense, and a $2 million increase resulting from higher sales volumes.

These increases were partially offset by a $16 million increase in manufacturing costs, primarily driven by elevated raw material and energy inflation and a $2 million ERC benefit recorded in the prior-year period.

Operating income for the first nine months of 2022 compared to the same period in 2021 benefited from a $55 million favorable AUV margin impact, offset by a $37 million increase in manufacturing costs, primarily driven by increased raw material and energy costs, a $7 million increase in selling expenses, primarily due to investments in growth initiatives, a $6 million decrease in equity earnings, a $4 million decrease resulting from lower sales volumes and a $2 million ERC benefit recorded in the prior-year period.

Net sales increased in the first quarter of 2023 due to $19 million of higher sales volumes and $6 million of favorable AUV.

The increase in volumes was driven primarily by a recovery of sales volumes compared to a weaker prior-year period due to inventory level reductions at certain customers, and partially due to current-year inventory level increases at our home center customers.

The improvement in AUV was driven by favorable like-for-like price, partially offset by unfavorable geographic mix.

Operating income increased in the first quarter of 2023 primarily due to a $12 million benefit from higher sales volumes, a $5 million benefit from favorable AUV and a $3 million increase in equity earnings.

These benefits were partially offset by an $8 million increase in manufacturing costs, primarily driven by raw material and energy inflation, and inventory valuation impacts, partially offset by improved manufacturing productivity.

Also partially offsetting the favorability was $3 million in severance costs related to cost savings initiatives in the current-year quarter and a $3 million increase in selling expenses, partially in support of digital growth initiatives.

Architectural Specialties

(dollar amounts in millions)

Change is Favorable/(Unfavorable)

Three Months Ended September 30,

Total segment net sales

Operating income

Nine Months Ended September 30,

Three Months Ended

Change is Favorable

Total segment net sales

Operating income

Operating income (loss)

Net sales increased $2 million in the first quarter of 2023 compared to the same period in 2022, driven by growth across most product categories, partially offset by lower metal product sales.

Net sales growth was also negatively impacted by the timing of custom project sales.

Operating income increased in the first quarter of 2023 primarily due to a $2 million margin benefit from increased sales and favorable project mix and a $1 million reduction in acquisition-related expenses, partially offset by a $2 million increase in selling expenses.

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

Net sales increased $14 million and $44 million in the third quarter and first nine months of 2022, respectively, compared to the prior-year periods.

These increases were primarily due to improved performance from our recent acquisitions compared to the same periods in 2021 and positive impacts from custom project sales.

Operating income for the third quarter of 2022 compared to the same period in 2021 was positively impacted by a $7 million margin benefit from increased sales and a $2 million reduction in intangible asset amortization, partially offset by higher selling expenses of $2 million and a $2 million increase in manufacturing costs.

The year-over-year decrease in operating income was also impacted by a $6 million increase in acquisition-related expenses and losses, primarily due to the change in the fair value of contingent consideration.

Operating income for the first nine months of 2022 compared to the same period in 2021 was positively impacted by a $23 million margin benefit from increased sales and an $11 million reduction in intangible asset amortization, partially offset by higher selling expenses of $7 million, primarily related to additional investments in selling capabilities and incentive compensation, and a $5 million increase in manufacturing costs.

Also impacting the change in operating income was a $19 million increase in acquisition-related expenses and losses, primarily due to the change in the fair value of contingent consideration.

Unallocated Corporate

Unallocated Corporate operating loss was $1 million in the third quarter of 2022 and 2021.

Unallocated Corporate operating loss was $3 million in the first nine months of 2022, compared to $4 million in the first nine months of 2021.

Unallocated Corporate operating loss was $1 million in the first quarter of 2023 and 2022.

FINANCIAL CONDITION AND LIQUIDITY

Operating activities for the first nine months of 2022 provided $119.2 million of cash, compared to $137.9 million in the first nine months of 2021.

The decrease was primarily due to negative working capital changes in accounts payable and accrued expenses and inventory, primarily due to timing and an increase in income tax payments.

These decreases were partially offset by higher cash earnings.

Net cash provided by investing activities was $8.1 million in the first nine months of 2022, compared to $5.4 million used in the first nine months of 2021.

The favorable change in cash compared to the same period in 2021 was primarily due to the absence of the purchase price adjustments paid to Knauf.

Net cash used for financing activities was $137.6 million in the first nine months of 2022, compared to $175.1 million in the first nine months of 2021.

The favorable change in cash was primarily due to an increase in net borrowings under our revolving credit facility, partially offset by an increase in repurchases of outstanding common stock and payments of acquisition-related contingent consideration in 2022.

Operating activities for the first three months of 2023 provided $26.2 million of cash, compared to $16.7 million in the first three months of 2022.

The increase was primarily due to favorable working capital changes, most notably in inventory.

Net cash used in investing activities was $1.5 million in the first three months of 2023, compared to $0.2 million of cash provided in the first three months of 2022.

The unfavorable change in cash in the first quarter of 2023 compared to the same period in 2022 was primarily due to increased purchases of property, plant and equipment, partially offset by an increase in dividends from WAVE.

Net cash used for financing activities was $34.7 million in the first three months of 2023, compared to $39.2 million in the first three months of 2022.

The favorable change in cash was primarily due to decreased payments on borrowings and a decrease in repurchases of outstanding common stock, partially offset by higher payments of acquisition-related contingent consideration in 2023.

Our liquidity needs for operations vary throughout the year.

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We have a $950.0 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 $450.0 million Term Loan A.

The revolving credit facility and Term Loan A are currently priced at 1.50% 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.

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, 2022, total borrowings outstanding under our senior credit facility were $450.0 million under Term Loan A and $235.0 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.

As of September 30, 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 revolving credit facility and Term Loan A are currently priced at 1.625% over SOFR, plus a 10-basis point adjustment.

The revolving credit facility and Term Loan A mature in December 2027.

We also have a $25.0 million bi-lateral letter of credit facility separate from the senior secured credit facility.

As of March 31, 2023, total borrowings outstanding under our senior credit facility were $450.0 million under Term Loan A and $220.0 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 (subject to certain exceptions for certain acquisitions).

As of March 31, 2023, we were in compliance with all covenants of the senior credit facility.

In July 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to replace LIBOR rates with the SOFR effective in mid-2023.

The Alternative Reference Rates Committee (“ARRC”) has proposed that the SOFR rate represents best practice as the alternative to USD-LIBOR for use in derivatives and other financial contracts that are currently indexed to USD-LIBOR.

ARRC has proposed a paced market transition plan to SOFR from USD-LIBOR.

In the second quarter of 2020, we adopted Accounting Standards Update 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting,”

("ASU 2020-04") which provides optional expedients and exceptions for applying U.S.

GAAP to contracts, hedging relationships and other transactions affected by the discontinuation of LIBOR.

In March 2023, we amended our interest rate swaps in accordance with ASU 2020-04, changing our hedged interest rate from LIBOR to SOFR.

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

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November 2018 to November 2023

November 28, 2018

March 2021 to March 2025

September 19, 2022

September 2022 to December 2023

March 10, 2020

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March 2021 to March 2024

September 19, 2022

September 2022 to December 2023

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.

November 28, 2018

March 2021 to March 2025

Under the terms of our interest rate swaps above, we pay a fixed rate monthly and receive 1-month SOFR, inclusive of a 0% floor.

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

As of March 31, 2023, these swaps are designated as cash flow hedges against changes in SOFR for a portion of our variable rate debt.

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, 2022

March 31, 2023

Financing Arrangements

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Revolving credit facility

As of September 30, 2022, we had $86.8 million of cash and cash equivalents, $73.0 million in the U.S.

and $13.8 million in various foreign jurisdictions, primarily Canada.

As of September 30, 2022, we also had $265.0 million available under our revolving credit facility.

As of March 31, 2023, we had $96.0 million of cash and cash equivalents, $80.7 million in the U.S.

and $15.3 million in foreign jurisdictions, primarily Canada.

As of March 31, 2023, we also had $280.0 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.

There have been no material changes to our critical accounting estimates disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.

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