What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-04-30 compared with 2023-10-24 · 118 added, 172 removed, 94 unchanged (76% of the section changed)

3 unchanged sentences

We manufacture and source products made of numerous materials, including mineral fiber, fiberglass wool, metal, wood, felt, wood fiber, and glass-reinforced-gypsum.

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

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.

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

(“Worthington”) called Worthington Armstrong Venture (“WAVE”).

Acquisitions and Investments in Unconsolidated Affiliates

In January 2024, we entered into a strategic partnership and equity investment in Overcast Innovations LLC (“Overcast”) with McKinstry Essention, LLC whereby we contributed $5.5 million in exchange for a 19.5% ownership interest in Overcast, with future rights to increase our ownership interest.

Overcast is a solutions company offering prefabricated ceiling cloud systems, modular grid platforms and engineering design services to reduce waste and inefficiencies in the built environment.

Our investment and equity earnings in Overcast are included in our Unallocated Corporate segment.

In October 2023, we acquired a portion of the business and certain assets of Insolcorp, LLC (“Insolcorp”), based in Albemarle, NC, used to develop, test and manufacture energy saving products deployed in building and roofing installations.

The acquired operations, assets and liabilities of Insolcorp are included in our Mineral Fiber segment.

In July 2023, we acquired all of the issued and outstanding stock of BOK Modern, LLC (“BOK”), based in San Rafael, CA.

BOK is a designer of metal facade architectural solutions.

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 BOK and GC Products are included in our Architectural Specialties segment.

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

Manufacturing Plants

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

As of March 31, 2024, we operated 16 manufacturing plants, including 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 September 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 March 31, 2024.

WAVE operates seven additional plants in the U.S.

3 unchanged sentences

Mineral Fiber, Architectural Specialties and Unallocated Corporate.

Mineral Fiber –

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.

Ceiling products are sold to resale distributors, ceiling systems contractors and wholesalers and retailers (including large home centers).

Mineral Fiber – produces suspended mineral fiber and soft fiber ceiling systems.

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

Ceiling products are primarily 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.

1 unchanged sentence

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

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

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

Mineral Fiber segment results reflect those sales transactions.

1 unchanged sentence

Operating results for the Mineral Fiber segment include a significant majority of allocated Corporate administrative expenses that represent a reasonable allocation of general services to support its operations.

Architectural Specialties –

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

Architectural Specialties – produces, designs and sources ceilings, walls and facades primarily 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.

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

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

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

We sell standard, premium and customized products, a portion of which are sourced from third-party producers.

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

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

revenues are project driven, which can lead to more variability in sales patterns.

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 –

includes certain assets, liabilities, income and expenses that have not been allocated to our other business segments and consists of:

cash and cash equivalents, the net funded status of our U.S.

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

Unallocated Corporate – includes certain assets, liabilities, income and expenses that have not been allocated to our other business segments and consists of:

cash and cash equivalents, our Overcast investment and related equity earnings/losses, 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 secured credit facility and income tax balances.

Factors Affecting Revenues

1 unchanged sentence

We compete in the building product markets of the Americas.

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 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.

We closely monitor publicly available macroeconomic data and trends that provide insight into commercial construction market activity, including, but not limited to, gross domestic product, 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 geopolitical events, none of which had a material direct impact on our financial condition, liquidity or results of operations the first three months of 2024 or 2023.

Several factors and trends within our markets affected our business performance during the first quarter of 2024 compared to the first quarter of 2023.

For the three months ended March 31, 2024, sales volumes decreased $4 million compared to the prior-year period, due primarily to prior-year period inventory level increases at our home center customers that did not occur in the current-year period, partially offset by a $3 million contribution from the July 2023 acquisition of BOK.

Average Unit Value .

4 unchanged sentences

In addition, changes in the relative quantity of products purchased at different price points can impact year-to-year comparisons of net sales and operating income.

Within our Mineral Fiber segment, we focus on improving sales dollars per unit sold, or average unit value (“AUV”), as a measure that accounts for the varying assortment of products and like-for-like pricing impacting our revenues.

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.

Favorable AUV contributed approximately $20 million to our total consolidated net sales for the three months ended March 31, 2024 compared to the same period in 2023.

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 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.

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

During the first quarter of 2024, we implemented price increases on Mineral Fiber ceiling products and WAVE implemented price increases on grid products.

Future pricing actions may be implemented based on numerous factors, including 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 projects.

Historically, our sales tend to be stronger in the second and third quarters of our fiscal year due to more favorable weather conditions, customer business cycles and the timing of renovation and new construction projects.

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 SG&A 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 clays, felt, pigment, wood and wood fiber.

Other raw materials include clay, felt, pigment, wood, and wood fiber.

We manufacture most of our mineral wool at one of our manufacturing facilities.

2 unchanged sentences

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

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

In the first quarter of 2024, lower energy and freight costs positively impacted operating income by $2 million compared to the same period in 2023.

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

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):

In connection with our acquisitions of Insolcorp in October 2023, BOK in July 2023 and Arktura LLC (“Arktura”) in December 2020, we recorded certain acquisition-related expenses, gains and losses to operating income in the three months ended March 31, 2024 and 2023, summarized as follows (dollar amounts in millions):

Three Months Ended

Nine Months Ended

September 30,

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

Loss related to change in fair value of

(Gain) related to change in fair value of

contingent consideration

Loss related to change in fair value of contingent consideration

Deferred cash and restricted stock

(Gain) related to change in fair value of

contingent consideration

Deferred cash and restricted stock expenses

SG&A expenses

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.

Net (positive) negative impact to operating income

The change in fair value of contingent consideration was related to our BOK and Insolcorp acquisitions, and was remeasured quarterly during each acquisition's earn-out periods.

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 awardees’

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.

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

The Company and the former owners of Arktura mutually agreed upon the separation of their service effective in the fourth quarter of 2023.

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

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

As of March 31, 2024 and December 31, 2023, we had approximately 3,100 full-time and part-time employees.

RESULTS OF OPERATIONS

3 unchanged sentences

Change is Favorable

Three Months Ended September 30,

Total consolidated net sales

Operating income

Nine Months Ended September 30,

Three Months Ended March 31,

Total consolidated net sales

Operating income

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.

Consolidated net sales for the first quarter of 2024 increased 5.2% over the prior-year period primarily due to favorable AUV of $20 million, partially offset by lower volumes of $4 million.

Mineral Fiber net sales increased $11 million and Architectural Specialties net sales increased $5 million over the prior-year period.

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

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 $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.

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

Architectural Specialties segment net sales improved primarily due to contributions from the acquisition of BOK and increased custom metal project net sales.

Cost of goods sold in the first quarter of 2024 was 61.9% of net sales, compared to 63.9% for the same period in 2023.

The year-over-year decrease in cost of goods sold as a percent of net sales was driven primarily by favorable AUV performance, improved manufacturing productivity and lower input costs.

SG&A expenses in the first quarter of 2024 were $65.7 million, or 20.1% of net sales, compared to $62.7 million, or 20.2% of net sales, for the same period in 2023.

The year-over-year increase in SG&A expenses was driven primarily by a $2 million increase in selling expenses related to the acquisition of BOK and investments in our Architectural Specialties segment, in addition to an increase in deferred compensation related charges.

The prior-year period also included severance costs of $3 million that did not repeat in the current-year period.

Equity earnings from unconsolidated subsidiaries were $27.2 million in the first quarter of 2024, compared to $20.8 million in the first quarter of 2023.

WAVE equity earnings were $27.4 million in the first quarter of 2024, while Overcast equity losses were $0.2 million.

The $6.6 million increase in WAVE equity earnings was primarily driven by the benefit from higher sales volumes and favorable AUV.

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

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 $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.

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

Interest expense was $9.0 million in the first quarter of 2024 compared to $8.7 million in the first quarter of 2023.

The increase in interest expense was primarily due to higher interest rates on floating rate debt and increases in finance lease liabilities, partially offset by lower average debt balances.

Other non-operating income, net, was $3.1 million in the first quarter of 2024 compared to $2.4 million in the first quarter of 2023.

The increase in other non-operating income, net, was primarily driven by the non-service cost components of postretirement net periodic benefit costs.

Income tax expense was $20.3 million in the first quarter of 2024 compared to $16.6 million in the first quarter of 2023.

The effective tax rate for the first quarter of 2024 was 25.3% compared to 26.0% for the same period of 2023.

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

Total Other Comprehensive Loss (“OCL”) was $0.9 million in the first quarter of 2024 compared to $2.1 million in the first quarter of 2023.

The change in OCL in the first quarter of 2024 compared to the same period in 2023 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 Accumulated Other Comprehensive Income.

Partially offsetting the reduction in OCL due to the change in derivative gains/losses was an increase in OCL from 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 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.

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

Amounts in the first quarter of 2024 and 2023 were driven primarily by changes in the Canadian dollar.

REPORTABLE SEGMENT RESULTS

2 unchanged sentences

Change is Favorable

Three Months Ended September 30,

Total segment net sales

Operating income

Nine Months Ended September 30,

Three Months Ended March 31,

Total segment net sales

Operating income

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.

Net sales increased $11 million in the first quarter of 2024 due to $19 million of favorable AUV, partially offset by $8 million of lower sales volumes.

The improvement in AUV was driven by favorable like-for-like price and favorable mix.

The decrease in volumes was primarily driven by prior-year period inventory level increases at our home center customers that did not occur in the current-year period.

Operating income increased in the first quarter of 2024 primarily due to a $13 million benefit from favorable AUV, a $7 million increase in WAVE equity earnings and a $3 million decrease in manufacturing and input costs, partially offset by a $5 million decrease from lower sales volumes.

Operating income was also negatively impacted by a $2 million increase in SG&A expenses, which included increases in deferred compensation related charges and higher depreciation, partially offset by the benefit from severance expense recorded in the prior-year period.

Architectural Specialties

1 unchanged sentence

Change is Favorable

Three Months Ended September 30,

Total segment net sales

Operating income

Nine Months Ended September 30,

Three Months Ended March 31,

Total segment net sales

Operating income

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 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

was recorded in the prior-year period.

These benefits were partially offset by a $5 million increase in manufacturing costs and a $4 million increase in selling expenses.

Net sales increased $5 million primarily driven by the contribution of BOK and increased custom metal project net sales.

Operating income increased in first quarter of 2024 primarily due to a $4 million margin benefit from increased sales, driven primarily by improved custom project margins, and a $1 million reduction in acquisition-related expenses.

These increases were partially offset by higher manufacturing costs and selling expenses due in part to the acquisition of BOK and additional investments in selling capabilities.

Unallocated Corporate

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.

Unallocated Corporate operating loss was $1 million in the first quarter of 2024 and 2023.

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

FINANCIAL CONDITION AND LIQUIDITY

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.

Operating activities for the first three months of 2024 provided $26.4 million, compared to $26.2 million for the first three months of 2023.

The favorable change in the first quarter of 2024 compared to the same period in 2023 was due to higher cash earnings and the absence of contingent consideration payments in excess of acquisition-date fair value, offset by unfavorable working capital changes in accounts receivable, accounts payable and accrued expenses.

The unfavorable changes in working capital were timing related, and for accrued expenses, also driven by the impact of changes in incentive compensation accruals.

Net cash provided by investing activities was $5.9 million in the first three months of 2024, compared to $1.5 million of cash used in the first three months of 2023.

The favorable change in the first quarter of 2024 compared to the same period in 2023 was due to decreased purchases of property, plant and equipment, proceeds received from company owned life-insurance policies, and an increase in WAVE dividends.

These increases were partially offset by cash paid for our first quarter of 2024 equity investment in Overcast.

Net cash used for financing activities was $33.1 million in the first three months of 2024, compared to $34.7 million in the first three months of 2023.

The favorable change in the first quarter of 2024 compared to the same period in 2023 was primarily due to a decrease in repurchases of outstanding common stock and lower payments of acquisition-related contingent consideration, partially offset by increased repayments on borrowings under our credit facility.

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.

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 are currently 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 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.

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

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

We also have a $25.0 million bi-lateral letter of credit facility.

As of March 31, 2024, the total principal balances outstanding under our senior credit facility were $444.4 million under Term Loan A and $140.0 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, 2024, we were in compliance with all covenants of the senior credit facility.

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

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

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

Coverage Period

Risk Coverage

November 2018 to November 2023

November 28, 2018

September 2022 to December 2023

November 2023 to June 2024

September 18, 2023

March 2021 to March 2025

November 28, 2018

November 2023 to December 2025

October 23, 2023

March 2024 to June 2026

March 25, 2024

March 2021 to March 2024

November 2023 to December 2026

October 10, 2023

March 2024 to June 2027

March 27, 2024

March 2021 to March 2025

November 28, 2018

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.

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

As of March 31, 2024, these swaps are designated as cash flow hedges against changes in SOFR 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.

Letters of credit are currently arranged through our revolving credit facility and our bi-lateral facility.

Letters of credit may be issued to third-party suppliers, insurance and financial institutions and typically can only be drawn upon in the event of AWI’s failure to pay its obligations to the beneficiary.

Letters of credit may be issued to third party suppliers, insurance companies and financial institutions and typically can only be drawn upon in the event of AWI’s failure to pay its obligations to the beneficiary.

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

September 30, 2023

March 31, 2024

Financing Arrangements

1 unchanged sentence

Revolving credit facility

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

As of March 31, 2024, we had $69.6 million of cash and cash equivalents, $52.2 million in the U.S.

and $17.4 million in foreign jurisdictions, primarily Canada.

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.

As of March 31, 2024, we also had $360.0 million available under our revolving credit facility.

CRITICAL ACCOUNTING ESTIMATES

1 unchanged sentence

QUANTITATIVE AND QUALITAT IVE DISCLOSURES ABOUT MARKET RISK

For information regarding our exposure to certain market risks, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,”

in our Annual Report on Form 10-K for the year ended December 31, 2022.

For information regarding our exposure to certain market risks, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the year ended December 31, 2023.

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