What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-10-24 compared with 2023-07-25 · 120 added, 102 removed, 146 unchanged (60% of the section changed)

4 unchanged sentences

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

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

Worthington”) called Worthington Armstrong Venture ( “

WAVE”).

In July 2023, we acquired all of the issued and outstanding stock of BOK Modern, LLC ( “

BOK”), based in San Rafael, California.

BOK is a designer of metal facade architectural solutions.

In November 2022, we acquired the business and assets of GC Products, Inc.

1 unchanged sentence

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 and six months ended June 30, 2023.

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

Manufacturing Plants

As of June 30, 2023, we operated 16 manufacturing plants, with 14 plants located within the U.S.

As of September 30, 2023, we operated 16 manufacturing plants, with 14 plants located within the U.S.

and two plants in Canada.

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 June 30, 2023.

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 September 30, 2023.

WAVE operates seven additional plants in the U.S.

15 unchanged sentences

Architectural Specialties –

produces, designs and sources ceilings and walls for use in commercial settings.

produces, designs and sources ceilings, walls and facades for use in commercial settings.

Products are available in numerous materials, such as metal, wood and felt, in addition to various colors, shapes and designs.

2 unchanged sentences

Architectural Specialties products are sold primarily to 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.

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.

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

Unallocated Corporate –

2 unchanged sentences

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

2 unchanged sentences

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 had minimal direct impacts on our results of operations during the first half of 2023 and 2022.

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

Several factors and trends within our markets affected our business performance during the second quarter of 2023 compared to the second quarter of 2022, most importantly softer demand, and an increase in interest rates, partially offset by a lower rate of inflation on certain input costs and the lessening impact of supply chain and labor availability constraints.

For the three months ended June 30, 2023, sales volumes decreased $12 million compared to the same period in 2022.

For the six months ended June 30, 2023, sales volumes increased $9 million compared to the same period in 2022 primarily due to a weaker prior-year period driven by reductions of inventory levels at certain customers in early 2022 and current-year inventory level increases at our home center customers in the first quarter of 2023, partially offset by softer demand in the second quarter of 2023.

The Company continues to monitor the impacts of geopolitical events, including, but not limited to, the conflict in Ukraine and the impact of domestic and international bank failures.

None of these events had a material direct impact on our financial condition or results of operations during the first nine months of 2023.

Several factors and trends within our markets affected our business performance during the third quarter of 2023 compared to the third quarter of 2022, notably increased interest rates and a lower rate of inflation on certain input costs and the lessening impact of supply chain and labor availability constraints, resulting in uneven demand.

For the three months ended September 30, 2023, sales volumes increased $2 million compared to the same period in 2022.

For the nine months ended September 30, 2023, sales volumes increased $11 million compared to the same period in 2022 primarily due to growth in our Architectural Specialties segment and the benefit of our growth initiatives.

Also contributing to the increase in sales volumes were the acquisitions of GC Products and BOK, which collectively contributed $3 million and $4 million to net sales in the three and nine months ended September 30, 2023, respectively.

These increases were partially offset by softer market demand in the first nine months of 2023 in comparison to the prior-year period.

Average Unit Value .

5 unchanged sentences

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.

Favorable AUV increased our total consolidated net sales for the three and six months ended June 30, 2023 by approximately $17 million and $23 million, respectively, compared to the same periods in 2022.

Favorable AUV increased our total consolidated net sales for the three and nine months ended September 30, 2023 by approximately $20 million and $43 million, respectively, compared to the same periods 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 rather attribute most changes in sales to volume.

During the first quarter of 2023, we implemented price increases on Mineral Fiber ceiling products.

In addition, during the first and second quarters price increases were implemented on grid products.

In the second quarter of 2023, we also announced price increases on Mineral Fiber products that will become effective in the third quarter of 2023.

During the first half of 2023, we implemented price increases on Mineral Fiber ceiling products and grid products.

In the third quarter of 2023, we implemented additional price increases on Mineral Fiber ceiling products.

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

10 unchanged sentences

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

In the three and six months ended June 30, 2023, higher costs for raw materials, partially offset by lower costs for energy, negatively impacted operating income by $1 million and $6 million, respectively, compared to the same periods 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 and six months ended June 30, 2023 and 2022, summarized as

In the three months ended September 30, 2023, higher costs for raw materials were more than offset by lower costs for energy, resulting in a $2 million benefit to operating income compared to the prior-year period.

For the nine months ended September 30, 2023, higher costs for raw materials were partially offset by lower costs for energy, negatively impacting operating income by $4 million compared to the same period in 2022.

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

follows (dollar amounts in millions):

Acquisition-Related Expenses and Losses

In connection with our acquisitions of TURF Design, Inc.

( “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 and nine months ended September 30, 2023 and 2022, summarized as follows (dollar amounts in millions):

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

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

5 unchanged sentences

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.

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 17 to the Condensed Consolidated Financial Statements for further information.

1 unchanged sentence

continued employment with AWI.

We did not record any similar acquisition-related expenses or losses related to BOK or GC Products for the three and nine months ended September 30, 2023.

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

As of June 30, 2023 and December 31, 2022, we had approximately 3,000 full-time and part-time employees.

As of September 30, 2023 and December 31, 2022, we had approximately 3,100 and 3,000 full-time and part-time employees, respectively.

RESULTS OF OPERATIONS

3 unchanged sentences

Change is Favorable

Three Months Ended June 30,

Three Months Ended September 30,

Total consolidated net sales

Operating income

Six Months Ended June 30,

Nine Months Ended September 30,

Total consolidated net sales

Operating income

Consolidated net sales for the second quarter of 2023 increased 1.4% over the prior-year period driven by favorable AUV of $17 million, partially offset by lower sales volumes of $12 million.

Mineral Fiber net sales decreased slightly from the prior-year period while Architectural Specialties net sales increased $5 million compared to prior-year period results.

The change in Mineral Fiber net sales was primarily driven by improved AUV that was more than offset by lower sales volumes.

Architectural Specialties net sales improved due to growth across most product categories.

Consolidated net sales for the first six months of 2023 increased 5.3% over the prior-year period as favorable AUV contributed $23 million and higher volumes contributed $9 million.

Consolidated net sales for the third quarter of 2023 increased 6.9% over the prior-year period driven by favorable AUV of $20 million and higher sales volumes of $2 million.

Mineral Fiber net sales increased $16 million, while Architectural Specialties net sales increased $6 million compared to prior-year period results.

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

Architectural Specialties net sales improved primarily due to growth in metal product sales and contributions from the acquisitions of GC Products and BOK.

Consolidated net sales for the first nine months of 2023 increased 5.8% over the prior-year period as favorable AUV contributed $43 million and higher volumes contributed $11 million.

Mineral Fiber net sales increased $41 million and Architectural Specialties net sales increased $13 million over the prior-year period.

The increase in Mineral Fiber net sales was primarily driven by favorable AUV and to a lesser extent, higher volumes.

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 second quarter of 2023 was 61.9% of net sales, compared to 63.3% for the same period in 2022.

Cost of goods sold in the first six months of 2023 was 62.9% of net sales, compared to 63.5% for the same period in 2022.

The decreases in cost of goods sold as a percentage of net sales for the second quarter and first six months of 2023 compared to the same periods in 2022 were driven primarily by a favorable AUV benefit due to the rate and pace of raw material and energy cost increases in the prior-year periods, in addition to current-year improved manufacturing productivity.

The increase in Mineral Fiber net sales was primarily driven by favorable AUV.

Architectural Specialties net sales improved primarily due to growth in metal and felt product sales, and partially due to contributions from the acquisitions of GC Products and BOK.

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

SG&A expenses in the second quarter of 2023 were $61.9 million, or 19.0% of net sales, compared to $61.5 million, or 19.2% of net sales, for the same period in 2022.

The year-over-year increase in SG&A expenses was driven primarily by a $3 million increase in selling expenses, primarily related to investments in support of our digital initiatives and higher costs in our Architectural Specialties segment, partially offset by a reduction in acquisition-related expenses and a benefit from current cost savings initiatives implemented in the first quarter of 2023.

SG&A expenses in the first six months of 2023 were $124.6 million, or 19.6% of net sales, compared to $118.6 million or 19.6% of net sales, for the same period in 2022.

The year-over-year increase in SG&A expenses was driven primarily by an $8 million increase in selling expenses, primarily related to investments in support of our digital initiatives and higher costs in our Architectural Specialties segment, in addition to $3 million in severance costs related to current-year cost savings initiatives.

Cost of goods sold in the third quarter of 2023 was 59.3% of net sales, compared to 63.8% for the same period in 2022.

The year-over-year decrease in cost of goods sold as a percentage of net sales for the third quarter of 2023 was driven primarily by favorable AUV margin and lower input costs, including favorable inventory valuation impacts, in addition to current-year improved manufacturing productivity and improved Architectural Specialties project margins.

Cost of goods sold in the first nine months of 2023 was 61.6% of net sales, compared to 63.6% for the same period in 2022.

The year-over-year decrease in cost of goods sold as a percentage of net sales for the first nine months of 2023 was driven primarily by favorable AUV margin, improved manufacturing productivity and improved Architectural Specialties project margins, partially offset by higher input costs, including unfavorable inventory valuation impacts.

SG&A expenses in the third quarter of 2023 were $64.6 million, or 18.6% of net sales, compared to $59.3 million, or 18.2% 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 advertising expense and higher costs in our Architectural Specialties segment and an increase in incentive compensation, partially offset by a benefit from current cost savings initiatives implemented in the first quarter of 2023.

SG&A expenses in the first nine months of 2023 were $189.2 million, or 19.2% of net sales, compared to $177.9 million or 19.2% of net sales, for the same period in 2022.

The year-over-year increase in SG&A expenses was driven primarily by a $13 million increase in selling expenses, primarily related to higher costs in our Architectural Specialties segment, investments in support of our digital initiatives and advertising expense, $3 million in severance costs related to current-year cost savings initiatives and a $2 million increase in incentive compensation.

These increased costs were partially offset by savings from current year cost savings initiatives and lower acquisition-related expenses.

Equity earnings from our WAVE joint venture were $24.9 million in the second quarter of 2023, compared to $21.3 million in the second quarter of 2022 and were $45.7 million in the first six months of 2023 compared to $39.5 million in the same period of 2023.

The increase in WAVE earnings during the second quarter of 2023 compared to the same period in 2022 was primarily driven by the benefits of lower steel costs, partially offset by lower volumes due to softer demand.

The increase in WAVE earnings during the first six months of 2023 compared to the same period in 2022 was primarily due to the benefits of lower steel costs, partially offset by lower volumes due to softer demand and unfavorable AUV due to negative mix.

Equity earnings from our WAVE joint venture were $23.4 million in the third quarter of 2023, compared to $22.2 million in the third quarter of 2022 and were $69.1 million in the first nine months of 2023 compared to $61.7 million in the same period of 2022.

The increase in WAVE earnings during the third quarter of 2023 compared to the same period in 2022 was primarily driven by the benefits of lower steel costs and higher volumes, partially offset by unfavorable AUV.

The increase in WAVE earnings during the first nine months of 2023 compared to the same period in 2022 was primarily due to the benefits of lower steel costs, partially offset by unfavorable AUV.

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

Interest expense was $9.2 million in the second quarter of 2023 compared to $5.8 million in the second quarter of 2022.

Interest expense was $17.9 million in the first six months of 2023 compared to $10.9 million in the first six months of 2022.

The increases for the second quarter and first six months of 2023 in comparison to the same periods in 2022 were due to slightly higher average debt coupled with higher interest rates on floating rate debt.

Other non-operating income, net, was $2.2 million in the second quarter of 2023 compared to $1.4 million in the second quarter of 2022.

Other non-operating income, net was $4.6 million in the first six months of 2023 compared to $2.7 million in the first six months of 2022.

Interest expense was $8.8 million in the third quarter of 2023 compared to $7.0 million in the third quarter of 2022.

Interest expense was $26.7 million in the first nine months of 2023 compared to $17.9 million in the first nine months of 2022.

The increases for the third quarter and first nine months of 2023 in comparison to the same periods in 2022 were due to higher interest rates on floating rate debt, partially offset by lower average debt balances.

Other non-operating income, net, was $2.3 million in the third quarter of 2023 compared to $1.4 million in the third quarter of 2022.

Other non-operating income, net was $6.9 million in the first nine months of 2023 compared to $4.1 million in the first nine months 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 $19.8 million in the second quarter of 2023 compared to $15.0 million in the second quarter of 2022.

The effective tax rate for the second quarter of 2023 was 24.8% compared to 22.3% for the same period of 2022.

Income tax expense was $36.4 million in the first six months of 2023 compared to $30.0 million in the first six months of 2022.

The effective tax rate was 25.3% in the first six months of 2023 compared to 23.7% in the same period of 2022.

The effective tax rates for the second quarter and first six months of 2023 were higher compared to the same periods in 2022 due primarily to a reduction in our valuation allowance for capital loss carryforwards recorded in 2022.

Total Other Comprehensive Income (“OCI”) was $0.4 million in the second quarter of 2023 compared to OCI of $2.2 million in the second quarter of 2022.

Total Other Comprehensive Loss (“OCL”) was $1.7 million for the first six months of 2023 compared to OCI of $14.1 million in the first six months of 2022.

The change in OCI in the second quarter and first six months of 2023 compared to the same periods in 2022 were primarily driven by derivative gains/losses, partially offset by foreign currency translation adjustments.

Income tax expense was $24.2 million in the third quarter of 2023 compared to $13.2 million in the third quarter of 2022.

The effective tax rate for the third quarter of 2023 was 25.8% compared to 19.5% for the same period of 2022.

The effective tax rate for the third quarter of 2023 was higher compared to the same period in 2022 primarily due to the benefits recognized from federal and state statute closures in the prior year.

Income tax expense was $60.6 million in the first nine months of 2023 compared to $43.2 million in the first nine months of 2022.

The effective tax rate was 25.5% in the first nine months of 2023 compared to 22.2% in the same period of 2022.

The effective tax rate for the first nine months of 2023 was higher compared to the same period in 2022 primarily due to the benefits recognized in the prior year from federal and state statute closures and the prior year reduction in our valuation allowance for capital loss carryforwards.

Total Other Comprehensive Loss (“OCL”) was $2.6 million in the third quarter of 2023 compared to Other Comprehensive Income (“OCI”) of $3.0 million in the third quarter of 2022.

Total OCL was $4.3 million for the first nine months of 2023 compared to OCI of $17.1 million in the first nine months of 2022.

The change in OCI in the third quarter and first nine months of 2023 compared to the same periods in 2022 were primarily driven by derivative gains/losses, partially offset by foreign currency translation adjustments.

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.

1 unchanged sentence

dollar value of assets and liabilities denominated in foreign currencies.

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

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

Also impacting the change in OCI were pension and postretirement adjustments, which represented the amortization of actuarial gains and losses related to our defined benefit pension and postretirement plans.

3 unchanged sentences

(dollar amounts in millions)

Change is (Unfavorable)/Favorable

Three Months Ended June 30,

Change is Favorable

Three Months Ended September 30,

Total segment net sales

Operating income

Six Months Ended June 30,

Nine Months Ended September 30,

Total segment net sales

Operating income

Mineral Fiber net sales decreased in the second quarter of 2023 due to $17 million of lower sales volumes, partially offset by $16 million of favorable AUV.

The decrease in volumes in the second quarter was driven primarily by softer market demand.

The increase in AUV in the second quarter was driven primarily by favorable price, while mix was essentially unchanged as positive product mix was offset by unfavorable channel mix.

For the first six months of 2023, net sales improved by $25 million from the prior-year, primarily due to $22 million of favorable AUV and $3 million of increased sales volumes.

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

The increase in volumes primarily resulted from a recovery of sales volumes compared to a weaker prior-year period due to inventory level reductions at certain customers in early 2022 and partially due to current-year inventory level increases at our home center customers during the first quarter of 2023, partially offset by softer demand.

Second-quarter 2023 operating income increased primarily due to a $14 million benefit from favorable AUV, a $4 million increase in WAVE equity earnings and benefits driven by current year cost savings initiatives.

These increases were partially offset by a $12 million decrease from lower sales volumes, and a $2 million increase in selling expenses, primarily in support of our digital initiatives.

Operating income for the first six months of 2023 increased primarily due to a $19 million benefit from favorable AUV, a $6 million increase in WAVE equity earnings and a benefit driven by current year cost savings initiatives.

These benefits were partially offset by a $9 million increase in manufacturing costs, primarily driven by input cost inflation and inventory valuation impacts, partially offset by improved manufacturing productivity, a $5 million increase in selling expenses, primarily in support of our digital initiatives and $3 million in severance costs related to current-year cost savings initiatives.

Mineral Fiber net sales increased $16 million in the third quarter of 2023 due to $18 million of favorable AUV, partially offset by $2 million of lower sales volumes.

The increase in AUV in the third quarter was driven primarily by favorable price, and to a lesser extent, favorable mix, that resulted largely from positive customer channel mix.

The decrease in sales volumes was primarily due to softer market demand and lower sales within our Latin America channel, partially offset by the benefit from our growth initiatives.

For the first nine months of 2023, net sales improved by $41 million from the prior-year, primarily due to $40 million of favorable AUV and $1 million of increased sales volumes.

The favorable AUV was driven primarily by favorable price, partially offset by unfavorable mix.

The increase in volumes primarily resulted from current-year inventory level increases at our home center customers during the first quarter of 2023 and the benefit of our growth initiatives, partially offset by softer market demand.

Third-quarter 2023 operating income increased primarily due to an $11 million benefit from favorable AUV and a $6 million benefit from lower input costs, including favorable inventory valuation impacts.

These increases were partially offset by a $3 million increase in selling expenses, primarily due to advertising expense, and an increase in incentive compensation.

Operating income for the first nine months of 2023 increased primarily due to a $29 million benefit from favorable AUV, an $8 million increase in WAVE equity earnings and a benefit from current year cost savings initiatives.

These benefits were partially offset by an $8 million increase in selling expenses, primarily driven by increased advertising expense and investments in support of our digital initiatives, $3 million in severance costs related to current-year cost savings initiatives and a $3 million increase from higher manufacturing and input costs, primarily driven by negative impacts from inventory valuations, partially offset by improved manufacturing productivity.

Architectural Specialties

1 unchanged sentence

Change is Favorable

Three Months Ended June 30,

Three Months Ended September 30,

Total segment net sales

Operating income

Six Months Ended June 30,

Nine Months Ended September 30,

Total segment net sales

Operating income

Net sales increased $5 million in the second quarter of 2023 compared to the same period in 2022 due to growth across most product categories and favorable project mix.

Net sales increased $7 million in the first six months of 2023 compared to the same period in 2022, driven by growth across most product categories and favorable project mix, partially offset by lower metal product sales.

Operating income increased in the second quarter of 2023 due to a $7 million benefit from increased sales volumes and improved project margins.

Also contributing to the increase in operating income was a $7 million reduction in acquisition-related expenses, primarily due to the absence of the change in fair value of contingent consideration related to the acquisition of Turf, which was recorded in the prior-year period.

Net sales increased $6 million in the third quarter of 2023 compared to the same period in 2022 driven primarily by growth in metal product sales and contributions from the acquisitions of GC Products and BOK.

Net sales increased $13 million in the first nine months of 2023 compared to the same period in 2022, driven by growth in metal and felt product sales and contributions from the acquisitions of GC Products and BOK.

Operating income increased in the third quarter of 2023 due to an $8 million benefit from increased sales and improved custom project margins and an $8 million reduction in acquisition-related expenses, primarily due to the absence of the change in fair value of contingent consideration related to the acquisition of Turf that was recorded in the prior-year period.

These benefits were partially offset by a $2 million increase in manufacturing costs and a $2 million increase in selling expenses.

Operating income for the first six months of 2023 compared to the same period in 2022 was positively impacted by a $9 million benefit from increased sales volumes and improved project margins, in addition to an $8 million reduction in acquisition-related expenses, primarily due to the absence of the change in fair value of contingent consideration related to the acquisition of Turf, which

Operating income for the first nine months of 2023 compared to the same period in 2022 was positively impacted by an $18 million benefit from increased sales and improved custom project margins, in addition to a $15 million reduction in acquisition-related expenses, primarily due to the absence of the change in fair value of contingent consideration related to the acquisition of Turf that

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

2 unchanged sentences

Unallocated Corporate

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

Unallocated Corporate operating loss was $2 million in the first six months of 2023 and 2022.

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

Unallocated Corporate operating loss was $2 million in the first nine months of 2023 and $3 million in the first nine months of 2022.

FINANCIAL CONDITION AND LIQUIDITY

Operating activities for the first six months of 2023 provided $93.9 million of cash, compared to $63.1 million in the first six months of 2022.

The increase was primarily due to favorable working capital changes, most notably in inventories and receivables.

Net cash used in investing activities was $6.0 million in the first six months of 2023, compared to $1.6 million in the first six months of 2022.

The unfavorable change in cash in the first six months of 2023 compared to the same period in 2022 was primarily due to increased purchases of property, plant and equipment and cash paid for the acquisition of a co-ownership interest in certain software-related intellectual property, partially offset by an increase in dividends from WAVE.

Net cash used for financing activities was $92.6 million in the first six months of 2023, compared to $80.2 million in the first six months of 2022.

The unfavorable change in cash was primarily due to a decrease in net borrowings under our revolving credit facility, partially offset by a decrease in repurchases of outstanding common stock and a decrease in debt payments.

Operating activities for the first nine months of 2023 provided $176.4 million of cash, compared to $119.2 million in the first nine months of 2022.

The increase was primarily due to favorable working capital changes, most notably in inventories and accounts receivable, and a favorable change in net income taxes payable.

Net cash used in investing activities was $10.6 million in the first nine months of 2023, compared to net cash provided from investing activities of $8.1 million in the first nine months of 2022.

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

Net cash used for financing activities was $175.1 million in the first nine months of 2023, compared to $137.6 million in the first nine months of 2022.

The unfavorable change in cash was primarily due to lower proceeds from borrowings under our revolving credit facility, partially offset by a decrease in repurchases of outstanding common stock and a decrease in long-term debt payments.

Our liquidity needs for operations vary throughout the year.

1 unchanged sentence

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 1.375% over SOFR, plus a 10-basis point adjustment.

As of September 30, 2023, the revolving credit facility and Term Loan A were priced at 1.375% over the Secured Overnight Financing Rate ( “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 June 30, 2023, total borrowings outstanding under our senior credit facility were $450.0 million under Term Loan A and $205.0 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 June 30, 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 ASU 2020-04 which provides optional expedients and exceptions for applying U.S.

As of September 30, 2023, total borrowings outstanding under our senior credit facility were $450.0 million under Term Loan A and $175.0 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 consolidated cash 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 September 30, 2023, we were in compliance with all covenants of the senior credit facility.

In July 2017, the Financial Conduct Authority (the authority that regulates the London Interbank Offered Rate (“LIBOR”)) announced its intent to replace LIBOR rates with the SOFR effective in mid-2023.

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

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

In the second quarter of 2020, we adopted ASU 2020-04 which provided optional expedients and exceptions for applying U.S.

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

2 unchanged sentences

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

The following table summarizes our interest rate swaps (dollar amounts in millions):

The following tables summarize our interest rate swaps, including forward-starting interest rate swaps (dollar amounts in millions):

Coverage Period

Risk Coverage

November 28, 2018

November 2018 to November 2023

September 19, 2022

November 28, 2018

September 2022 to December 2023

September 19, 2022

March 2021 to March 2024

March 10, 2020

3 unchanged sentences

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.

As of June 30, 2023, these swaps are designated as cash flow hedges against changes in SOFR for a portion of our variable rate debt.

Under the terms of our interest rate swaps above, on a monthly basis, we pay a fixed rate monthly and receive a floating rate based on SOFR, inclusive of a 0% floor.

Coverage Period

Risk Coverage

November 2023 to June 2024

September 18, 2023

November 2023 to November 2027

September 29, 2023

Under the terms of our forward-starting interest rate swaps above, during the coverage period on a monthly basis, we will pay a fixed rate and receive a floating rate based on SOFR.

As of September 30, 2023, all of the 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.

2 unchanged sentences

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

June 30, 2023

September 30, 2023

Financing Arrangements

1 unchanged sentence

Revolving credit facility

As of June 30, 2023, we had $101.6 million of cash and cash equivalents, $84.8 million in the U.S.

As of September 30, 2023, we had $96.6 million of cash and cash equivalents, $77.6 million in the U.S.

and $19.0 million in foreign jurisdictions, primarily Canada.

As of June 30, 2023, we also had $295.0 million available under our revolving credit facility.

As of September 30, 2023, we also had $325.0 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.

5 unchanged sentences

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