ARMSTRONG WORLD INDUSTRIES INC 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS O F FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion should be read in conjunction with the financial statements, the accompanying notes, the cautionary note regarding forward-looking statements and risk factors included in this report and our Annual Report on Form 10-K for the year ended December 31, 2024. OVERVIEW AWI is an Americas leader in the design and manufacture of innovative interior and exterior architectural applications including ceilings, specialty walls and exterior metal solutions. We manufacture and source products made of numerous materials, including mineral fiber, fiberglass, metal, felt, wood, architectural resin and glass, wood fiber and glass-reinforced-gypsum. We also manufacture ceiling suspension system (grid) products through a joint venture with Worthington Enterprises, Inc. called Worthington Armstrong Venture (“WAVE”). Acquisitions and Investments in Unconsolidated Affiliates In September 2025, we acquired all of the issued and outstanding stock of Geometrik Manufacturing, Inc. (“Geometrik”), based in Kelowna, British Columbia, Canada. Geometrik is a leading Canadian designer and manufacturer of wood acoustical ceiling and wall systems. The operations, assets and liabilities of Geometrik are included in our Architectural Specialties segment. In December 2024, we acquired all of the issued and outstanding stock of A. Zahner Company (“Zahner”), based in Kansas City, Missouri. Zahner is a designer and manufacturer of exterior metal architectural solutions. The operations, assets and liabilities of Zahner are included in our Architectural Specialties segment. In April 2024, we acquired all of the issued and outstanding membership interests in 3form, LLC (“3form”) based in Salt Lake City, Utah, from Hunter Douglas, Inc. 3form is a designer and manufacturer of architectural resin and glass products used for specialty walls, partitions and ceilings. The operations, assets and liabilities of 3form are included in our Architectural Specialties segment. In January 2024, we entered into a strategic partnership and equity investment in Overcast Innovations LLC (“Overcast”) with McKinstry Essention, LLC whereby we acquired a 19.5% ownership interest in Overcast (currently 19.2%), 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 and losses in Overcast are included in our Unallocated Corporate segment. Manufacturing Plants As of September 30, 2025, we operated 21 manufacturing plants, including 18 plants located within the U.S. and three plants in Canada. WAVE operates seven additional plants in the U.S. to produce suspension system (grid) products, which we use and sell in our ceiling systems. Reportable Segments Our operating segments are as follows: Mineral Fiber, Architectural Specialties and Unallocated Corporate. Mineral Fiber – produces suspended mineral fiber and fiberglass 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. Segment results relating to WAVE consist primarily of equity earnings and reflect our 50% equity interest in the joint venture. Ceiling component products consist of ceiling perimeters and trim, in addition to grid products that support drywall ceiling systems. For some customers, WAVE sells its suspension system products to AWI for resale to customers. Mineral Fiber segment results reflect those sales transactions. The Mineral Fiber segment also includes all assets and liabilities not specifically allocated to our Architectural Specialties or Unallocated Corporate segment, including all property and related depreciation associated with our Lancaster, Pennsylvania headquarters. Operating results for the Mineral Fiber segment include a significant majority of allocated Corporate administrative expenses that represent a reasonable allocation of general services to support its operations. Architectural Specialties – designs, produces and sources specialty ceilings, walls, and other interior and exterior architectural applications including ceilings, specialty walls and exterior metal solutions primarily for use in commercial settings. Products are available in numerous materials, such as metal, felt, wood, architectural resin and glass, wood fiber and glass-reinforced-gypsum in 26 Management’s Discussion and Analysis of Financial Condition and Results of Operations various colors, shapes and designs. These products offer a range of design options and performance attributes such as acoustical control, rated fire protection, light, aesthetic appeal, energy conservation and building performance. 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. This segment’s revenues are primarily 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. 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 For information on our 2025 and 2024 net sales and disaggregated expenses by segment, see Note 2 to the Condensed Consolidated Financial Statements. For information on our segments’ 2025 and 2024 net sales disaggregated by major customer groups, see Note 3 to the Condensed Consolidated Financial Statements. Markets. We compete in the building products markets of the Americas. 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 recently implemented and announced tariffs and geopolitical events, including but not limited to, conflicts in Ukraine and the Middle East, neither of which had a material direct impact on our financial condition, liquidity or results of operations in the first nine months of 2025 or 2024. In September 2025, GMS, Inc., one of our largest distributor customers, was acquired by The Home Depot, Inc. In August 2025, Lowe’s Companies, Inc., announced that it had entered into a definitive agreement to acquire Foundation Building Materials, Inc., another one of our largest distributor customers. This acquisition activity continues a trend of customer consolidation within the building products markets of the Americas referenced in the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2024 and had no impact on our financial condition, liquidity or results of operations in the first nine months of 2025. Several factors and trends within our markets affected our business performance during the three and nine months ended September 30, 2025 compared to the same periods in 2024, most notably an increase in net sales due to our December 2024 acquisition of Zahner and April 2024 acquisition of 3form. The increase in net sales attributable to the Geometrik acquisition was not material. For the three months ended September 30, 2025, sales volumes increased $24 million compared to the same period in 2024, with the Zahner and 3form acquisitions contributing $16 million to net sales. Also contributing to the increase in net sales was a $7 million increase in organic Architectural Specialties net sales and a $2 million increase in net sales due to higher sales volumes in our Mineral Fiber segment. For the nine months ended September 30, 2025, sales volumes increased $111 million compared to the same period in 2024 driven primarily by an $86 million increase in net sales from the Zahner and 3form acquisitions. Also contributing to the increase in net sales for the nine months ended September 30, 2025 was a $30 million increase in organic Architectural Specialties net sales, partially offset by a $5 million decrease in net sales due to lower sales volumes in our Mineral Fiber segment. Average Unit Value . We periodically modify sales prices of our products due to changes in costs for raw materials and energy, market conditions and the competitive environment. Typically, realized price increases are less than announced price increases because of project pricing, competitive adjustments and changing market conditions. We also offer a wide assortment of products that are differentiated by style, design and performance attributes. Pricing and margins for products within the assortment vary. In addition, changes in the relative quantity of products purchased at different price points can impact year-to-year comparisons of net sales and operating income. Within our Mineral Fiber segment, we focus on improving sales dollars per unit sold, or average unit value (“AUV”), as a measure that accounts for the varying assortment of products 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, 2025 by approximately $14 million and $43 million, respectively, compared to the same periods in 2024. Our Architectural Specialties segment revenues are primarily generated by 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 all changes in net sales to volume, including gross to net sales adjustments. During the first quarter and third quarter of 2025, we implemented price increases on Mineral Fiber ceiling products. During the first and second quarters of 2025, WAVE implemented price increases on grid products. Future pricing actions for Mineral Fiber, Architectural Specialties and WAVE products may be implemented based on numerous factors, including the impact of tariffs, the rate and pace of inflation and its impact on our business and the competitive environment. Seasonality . 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. 27 Management’s Discussion and Analysis of Financial Condition and Results of Operations 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, tariffs 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, resin and glass, wood and wood fiber. We manufacture substantially all of our mineral wool at one of our manufacturing facilities. We use aluminum and steel in the production of metal building products by us and by WAVE. Finally, natural gas and packaging materials also represent significant input costs. Fluctuations in the prices of these inputs impact our financial results. During the three and nine months ended September 30, 2025, higher energy and raw material costs negatively impacted operating income by $1 million and $3 million, respectively, compared to the same periods in 2024. Acquisition-Related Expenses and Losses In connection with our acquisitions of Geometrik in September 2025, 3form in April 2024, Insolcorp, LLC (“Insolcorp”) in October 2023 and BOK Modern, LLC (“BOK”) in July 2023, we recorded certain acquisition-related expenses and losses to operating income during the three and nine months ended September 30, 2025 and 2024, summarized as follows (dollar amounts in millions): Three Months Ended Nine Months Ended Affected Line Item in the Condensed September 30, September 30, Consolidated Statements of Earnings and 2025 2024 2025 2024 Comprehensive Income Inventory $ - $ - $ - $ 0.3 Cost of goods sold Acquisition costs 0.5 - 0.5 1.0 SG&A expenses Loss related to change in fair value of contingent consideration 0.1 0.2 0.5 0.6 Loss related to change in fair value of contingent consideration Negative impact to operating income $ 0.6 $ 0.2 $ 1.0 $ 1.9 The inventory amount above reflects the post-acquisition expenses associated with recording inventory at fair value as part of purchase accounting for the 3form acquisition. Acquisition costs above reflect certain contingent third-party professional fees incurred due to the Geometrik and 3form acquisitions. The change in fair value of contingent consideration was related to our Geometrik, Insolcorp and BOK acquisitions and is remeasured quarterly during each acquisition's earn-out periods. See Note 15 to the Condensed Consolidated Financial Statements for further information. Depreciation of fixed assets acquired and amortization of intangible assets acquired have been excluded from the table above. Employees As of September 30, 2025 and December 31, 2024, we had approximately 3,800 and 3,600 full-time and part-time employees, respectively. RESULTS OF OPERATIONS See 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) 2025 2024 Change is Favorable Three Months Ended September 30, Total consolidated net sales $ 425.2 $ 386.6 10.0 % Operating income $ 117.2 $ 111.3 5.3 % Nine Months Ended September 30, Total consolidated net sales $ 1,232.5 $ 1,078.0 14.3 % Operating income $ 338.9 $ 292.4 15.9 % Consolidated net sales for the third quarter of 2025 increased 10.0% from the prior-year period due to higher volumes of $24 million and favorable AUV of $14 million. Architectural Specialties net sales increased $23 million and Mineral Fiber net sales increased $16 28 Management’s Discussion and Analysis of Financial Condition and Results of Operations million from the prior-year period. Architectural Specialties segment net sales improved due to a $16 million contribution from the acquisitions of Zahner and 3form and a $7 million increase in organic net sales. The increase in Mineral Fiber net sales was primarily driven by favorable AUV and modestly improved sales volumes. Consolidated net sales for the first nine months of 2025 increased 14.3% over the prior-year period due to higher volumes of $111 million and favorable AUV of $43 million. Architectural Specialties net sales increased $116 million and Mineral Fiber net sales increased $38 million over the prior-year period. Architectural Specialties segment net sales improved primarily due to an $86 million contribution from the acquisitions of Zahner and 3form and a $30 million increase in organic net sales. The increase in Mineral Fiber net sales was driven by favorable AUV, partially offset by lower sales volumes. Cost of goods sold in the third quarter of 2025 was 58.0% of net sales, compared to 57.6% for the same period in 2024. Cost of goods sold in the first nine months of 2025 was 59.1% of net sales, compared to 59.4% for the same period in 2024. The year-over-year increase in cost of goods sold as a percent of net sales for the third quarter of 2025 was primarily driven by increased manufacturing costs, partially offset by favorable AUV benefits and improved manufacturing productivity. The year-over-year decrease in cost of goods sold as a percent of net sales for the first nine months of 2025 was primarily driven by favorable AUV benefits and improved manufacturing productivity, partially offset by increased manufacturing costs. To a lesser extent, favorable inventory valuation impacts also contributed to the year-over-year decrease in cost of goods sold as a percent of net sales for the first nine months of 2025 compared to the same period in 2024. SG&A expenses in the third quarter of 2025 were $90.1 million, or 21.2% of net sales, compared to $77.6 million, or 20.1% of net sales, for the same period in 2024. The increase in SG&A expenses was primarily driven by a $4 million increase related to the acquisitions of Zahner and 3form, a $3 million increase in incentive compensation, a $2 million increase in Architectural Specialties selling expenses driven primarily by higher net sales as well as additional investments in selling capabilities, a $1 million increase in depreciation and amortization expense and a $1 million decrease in company-owned officer life insurance gains related to deferred compensation plans. SG&A expenses in the first nine months of 2025 were $252.1 million, or 20.5% of net sales, compared to $223.1 million, or 20.7% of net sales, for the same period in 2024. The year-over-year increase in SG&A expenses was primarily driven by a $24 million increase related to the acquisitions of Zahner and 3form, a $4 million increase in Architectural Specialties selling expenses driven primarily by higher net sales as well as additional investments in selling capabilities and a $3 million increase in incentive compensation. These increases were partially offset by a $2 million increase in company-owned officer life insurance gains related to deferred compensation plans and a prior-period increase in reserves for environmental remediation matters of $2 million that did not recur in the current period. Losses related to changes in the fair value of contingent consideration were $0.1 million in the third quarter of 2025, compared to $0.2 million for the third quarter of 2024, and $0.5 million in the first nine months of 2025, compared to $0.6 million for the same period in 2024. Losses were related to our Insolcorp and BOK acquisitions. See Note 15 to the Condensed Consolidated Financial Statements for further information. During the three and nine months ended September 30, 2025, we recorded $0.9 million and $0.8 million, respectively, of net gains on sales of fixed assets. During the same periods in 2024, we recorded $0.2 million and $0.3 million, respectively, of net losses on sales and impairment of fixed assets. During the third quarter of 2025, we recorded a $0.9 million gain on the sale of a parcel of land at a Mineral Fiber plant. During the third quarter of 2024, we recorded a $4.9 million impairment charge for undeveloped land adjacent to our Corporate headquarters. Also in the third quarter of 2024, we recorded a $4.6 million gain on the sale of our idled Mineral Fiber plant in St. Helens, Oregon. Equity earnings from unconsolidated subsidiaries were $28.0 million in the third quarter of 2025, compared to $25.2 million in the third quarter of 2024, and were $86.5 million in the first nine months of 2025, compared to $78.7 million in the same period in 2024. WAVE equity earnings were $28.2 million in the third quarter of 2025, compared to $25.5 million in the third quarter of 2024, and $87.1 million in the first nine months of 2025, compared to $79.4 million in the same period of 2024. The year-over-year increases in WAVE equity earnings for the third quarter and first nine months of 2025 were primarily driven by the benefit from favorable AUV, partially offset by the negative impact of lower sales volumes. See Note 8 to the Condensed Consolidated Financial Statements for further information. Interest expense was $8.2 million in the third quarter of 2025, compared to $10.5 million in the third quarter of 2024, and $25.3 million in the first nine months of 2025, compared to $30.6 million in the first nine months of 2024. The decreases in interest expense for the third quarter and first nine months of 2025, in comparison to the same periods in 2024, were primarily due to lower average debt balances. Other non-operating income, net, was $0.5 million in the third quarter of 2025 compared to $3.0 million in the third quarter of 2024, and $1.9 million in the first nine months of 2025 compared to $9.3 million in the first nine months of 2024. The decreases in other non-operating income, net, for the third quarter and first nine months of 2025, in comparison to the same periods in 2024, were primarily driven by the non-service cost components of pension and postretirement net periodic benefit costs. 29 Management’s Discussion and Analysis of Financial Condition and Results of Operations Income tax expense was $23.2 million in the third quarter of 2025 compared to $26.9 million in the third quarter of 2024. The effective tax rate for the third quarter of 2025 was 21.2% compared to 25.9% for the same period of 2024. Income tax expense was $72.3 million in the first nine months of 2025 compared to $68.4 million in the first nine months of 2024. The effective tax rate for the first nine months of 2025 was 22.9% compared to 25.2% for the same period of 2024. The decreases in the effective tax rates for the third quarter and first nine months of 2025, in comparison to the same periods in 2024, were primarily due to the benefits recognized from statute closures and federal investment tax credits. Total Other Comprehensive Loss (“OCL”) was $0.3 million in the third quarter of 2025 compared to total OCL of $6.4 million in the third quarter of 2024. Total Other Comprehensive Income (“OCI”) was $1.0 million in the first nine months of 2025 compared to OCL of $8.2 million in the first nine months of 2024. The decrease in OCL for the third quarter of 2025 compared to the same period in 2024 was due to a decrease in interest rate swap derivative losses and favorable pension and postretirement adjustments, partially offset by unfavorable foreign currency translation adjustments. The change from OCL to OCI for the first nine months of 2025 compared to the same period for 2024 was due to favorable pension and postretirement adjustments, a decrease in interest rate swap derivative losses, and an increase in income from foreign currency translation adjustments. Foreign currency translation adjustments represent the change in the U.S. dollar value of assets and liabilities denominated in foreign currencies. Foreign currency translation adjustments in 2025 and 2024 were driven primarily by changes in the Canadian dollar relative to the U.S. dollar. Pension and postretirement adjustments represent the amortization of actuarial gains and losses related to our defined benefit pension and postretirement plans. Derivative losses represent the mark-to-market value fair adjustments for our derivative assets and liabilities, and the recognition of gains and losses previously deferred in Accumulated Other Comprehensive (Loss). REPORTABLE SEGMENT RESULTS Mineral Fiber (dollar amounts in millions) 2025 2024 Change is Favorable Three Months Ended September 30, Total segment net sales $ 274.0 $ 258.0 6.2 % Operating income $ 98.7 $ 93.0 6.1 % Nine Months Ended September 30, Total segment net sales $ 786.1 $ 747.8 5.1 % Operating income $ 281.6 $ 253.9 10.9 % Mineral Fiber net sales increased $16 million in the third quarter of 2025 compared to the prior-year quarter due to $14 million of favorable AUV and $2 million of higher sales volumes. The improvement in AUV was due to favorable like-for-like price, with a modest contribution from mix. The increased volumes and favorable mix were driven by our strong execution, along with benefits from our growth initiatives. For the first nine months of 2025, net sales increased $38 million from the prior-year period, primarily due to $43 million of favorable AUV, partially offset by lower sales volumes of $5 million. The improvement in AUV was due to favorable like-for-like price and, to a lesser extent, favorable mix. Our strong execution and benefits from growth initiatives contributed to positive volume and mix growth, partially offset by a decrease in volumes driven by home centers and Latin America. Cost of goods sold during the three months ended September 30, 2025 was $155 million, or 56.7% of net sales, compared to $147 million, or 56.8% of net sales, in the prior-year period. Gross profit increased $7 million, or 6.5%, compared to the prior-year period due to a $9 million benefit from favorable AUV and a $1 million benefit from higher sales volumes, partially offset by a $3 million increase in manufacturing costs. Cost of goods sold during the nine months ended September 30, 2025 was $460 million, or 58.5% of net sales, compared to $440 million, or 58.8% of net sales, in the prior-year period. Gross profit increased $18 million, or 5.8%, compared to the prior-year period due to a $25 million benefit from favorable AUV, partially offset by a $3 million negative impact from lower sales volumes and a $4 million increase in manufacturing costs. SG&A expenses during the three months ended September 30, 2025 were $49 million, or 17.9% of net sales, compared to $44 million, or 16.9% of net sales, in the prior-year period. The year-over-year increase in SG&A expenses was primarily driven by a $2 million increase in incentive compensation, a $1 million increase in depreciation and amortization expense and a $1 million decrease in company-owned officer life insurance gains related to deferred compensation plans. SG&A expenses during the nine months ended September 30, 2025 were $132 million, or 16.8% of net sales, compared to $133 million, or 17.8% of net sales, in the prior-year period. The year-over-year decrease in SG&A expenses was primarily driven by a $2 30 Management’s Discussion and Analysis of Financial Condition and Results of Operations million increase in company-owned officer life insurance gains related to deferred compensation plans and a prior period increase in reserves for environmental remediation matters of $2 million that did not recur in the current period. These decreases were partially offset by a $3 million increase in incentive compensation. Equity earnings from our WAVE joint venture were $28.2 million in the three months ended September 30, 2025, compared to $25.5 million in the prior-year period. Equity earnings from our WAVE joint venture were $87.1 million in the first nine months of 2025, compared to $79.4 million in the prior-year period. The year-over-year increases in WAVE earnings for the third quarter and first nine months of 2025 were primarily driven by the benefit from favorable AUV, partially offset by the negative impact of lower sales volumes. Architectural Specialties (dollar amounts in millions) 2025 2024 Change is Favorable Three Months Ended September 30, Total segment net sales $ 151.2 $ 128.6 17.6 % Operating income $ 19.3 $ 19.2 0.5 % Nine Months Ended September 30, Total segment net sales $ 446.4 $ 330.2 35.2 % Operating income $ 59.7 $ 41.1 45.3 % Net sales increased $23 million in the third quarter of 2025 compared to the same period in 2024, driven primarily by a $16 million increase from the acquisitions of Zahner and 3form, in addition to a $7 million increase in organic net sales driven by strong growth across most of our specialty product categories. For the first nine months of 2025, net sales improved by $116 million from the prior-year period, primarily due to an $86 million increase from the acquisitions of Zahner and 3form, in addition to a $30 million increase in organic net sales driven by strong growth across most of our specialty product categories. Cost of goods sold during the three months ended September 30, 2025 was $91 million, or 60.3% of net sales, compared to $76 million, or 58.7% of net sales, in the prior-year period. The increase in costs of goods sold as a percentage of net sales was driven primarily by an increase in manufacturing costs within our organic business, partially offset by improved custom project margins. Gross profit increased $7 million, or 13.2%, compared to the prior-year period due primarily to a $6 million benefit from the acquisitions of Zahner and 3form. Cost of goods sold during the nine months ended September 30, 2025 was $267 million, or 59.9% of net sales, compared to $199 million, or 60.4% of net sales, in the prior-year period. Gross profit increased $48 million, or 36.9%, compared to the prior-year period. The acquisitions of Zahner and 3form contributed a $34 million benefit to gross profit, with the remaining increase driven by improved custom project margins and operating leverage. SG&A expenses in the three months ended September 30, 2025 were $41 million, or 26.9% of net sales, compared to $34 million, or 26.4% of net sales, in the prior-year period. The increase in SG&A expenses was primarily driven by a $4 million increase related to the acquisitions of Zahner and 3form and a $2 million increase in selling expenses driven primarily by higher net sales as well as additional investments in selling capabilities. SG&A expenses in the first nine months of 2025 were $119 million, or 26.7% of net sales, compared to $90 million, or 27.1% of net sales, in the prior-year period. The increase in SG&A expenses was primarily driven by a $24 million increase related to the acquisitions of Zahner and 3form and a $4 million increase in selling expenses driven primarily by higher net sales as well as additional investments in selling capabilities. Unallocated Corporate Unallocated Corporate operating loss was $1 million in the third quarter of 2025 and 2024. Unallocated Corporate operating loss was $2 million in the first nine months of 2025 and $3 million in the first nine months of 2024. 31 Management’s Discussion and Analysis of Financial Condition and Results of Operations FINANCIAL CONDITION AND LIQUIDITY Cash Flow Operating activities for the first nine months of 2025 provided $245.5 million, compared to $180.2 million for the first nine months of 2024. The favorable change in cash from operating activities was primarily due to higher cash earnings compared to the prior-year period, including a benefit from a decrease in income taxes paid due to the impact of 2025 Federal tax reform. Net cash provided by investing activities was $16.8 million in the first nine months of 2025, compared to $61.2 million used for investing activities in the first nine months of 2024. The favorable change in cash from investing activities in the first nine months of 2025 compared to the same period in 2024 was primarily due to $94 million of cash paid for the 3form acquisition in 2024 and an increase in dividends from WAVE, partially offset by a decrease in proceeds from the sale of fixed assets and an increase in purchases of property, plant and equipment. Net cash used for financing activities was $252.0 million in the first nine months of 2025, compared to $115.7 million cash used in the first nine months of 2024. The unfavorable change in cash used for financing activities was primarily due to increased debt repayments, net of borrowings, under our credit facility. Borrowings were significantly higher in the prior year primarily due to the 3form acquisition. Also contributing to the increase in cash used for financing activities was an increase in repurchases of our outstanding common stock. Liquidity Our liquidity needs for operations vary throughout the year. We retain lines of credit to facilitate our seasonal cash flow needs, since cash flow is historically lower during the first and fourth quarters of our fiscal year. We have a $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, 2025, 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. As of September 30, 2025, the total principal balance outstanding under our senior credit facility was $410.6 million under Term Loan A. We had no balance outstanding under the revolving credit facility as of September 30, 2025. 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 September 30, 2025, 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. We use interest rate swaps to minimize the fluctuations in earnings caused by interest rate volatility associated with our senior credit facility. The following table summarizes our interest rate swaps (dollar amounts in millions): Coverage Period Notional Amount Risk Coverage Trade Date November 2023 to December 2025 $ 50.0 USD-SOFR October 23, 2023 March 2025 to March 2026 $ 50.0 USD-SOFR March 27, 2025 March 2024 to June 2026 $ 50.0 USD-SOFR March 25, 2024 March 2025 to September 2026 $ 25.0 USD-SOFR March 27, 2025 November 2023 to December 2026 $ 50.0 USD-SOFR October 10, 2023 March 2024 to June 2027 $ 50.0 USD-SOFR March 27, 2024 November 2023 to November 2027 $ 50.0 USD-SOFR September 29, 2023 June 2024 to June 2028 $ 50.0 USD-SOFR June 26, 2024 Under the terms of all interest rate swaps, we pay a fixed rate monthly and receive a floating rate based on SOFR. 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. 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 companies and financial institutions and typically can only be drawn upon in the 32 Management’s Discussion and Analysis of Financial Condition and Results of Operations 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, 2025 Financing Arrangements Limit Used Available Bi-lateral facility $ 25.0 $ 7.7 $ 17.3 Revolving credit facility 150.0 - 150.0 Total $ 175.0 $ 7.7 $ 167.3 As of September 30, 2025, we had $90.1 million of cash and cash equivalents, $71.2 million in the U.S. and $18.9 million in foreign jurisdictions, primarily Canada. As of September 30, 2025, we also had $500 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, acquisitions and scheduled payments of debt obligations. CRITICAL ACCOUNTING ESTIMATES 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, 2024. 33 ITEM 3. 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, 2024.