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, 2025. 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, architectural resin and glass, wood, 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 In February 2026, we acquired all of the issued and outstanding shares of Event Scape Inc. and Eventscape U.S. Holdings Inc. (collectively, “Eventscape”), headquartered in Toronto, Ontario, Canada. Eventscape is a designer, manufacturer and installer of ceilings, walls and facades made of a broad range of materials. The operations, assets and liabilities of Eventscape are included in our Architectural Specialties segment. In December 2025, we acquired all of the issued and outstanding stock of FGM-Parallel LLC (“Parallel”), based in Englewood, Colorado. Parallel is a designer and manufacturer of extruded aluminum products primarily used in exterior architectural applications. The operations, assets and liabilities of Parallel are included in our Architectural Specialties segment. In September 2025, we acquired all of the issued and outstanding shares of Geometrik Manufacturing, Inc. (“Geometrik”), based in Kelowna, British Columbia, Canada. Geometrik is a designer and manufacturer of wood acoustical ceiling and wall systems. The operations, assets and liabilities of Geometrik are included in our Architectural Specialties segment. Manufacturing Plants As of March 31, 2026, we operated 24 manufacturing plants, including 20 plants located within the U.S. and four 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, structural and walkable grid 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 primarily for use in commercial settings. Products are available in numerous materials, such as metal, felt, architectural resin and glass, wood, wood fiber and glass-reinforced-gypsum in 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 direct customers, primarily ceiling systems contractors, and resale 25 Management’s Discussion and Analysis of Financial Condition and Results of Operations distributors. 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 Innovations LLC (“Overcast”) investment and related equity earnings and 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 2026 and 2025 net sales and disaggregated expenses by segment, see Note 2 to the Condensed Consolidated Financial Statements. For information on our 2026 and 2025 net sales disaggregated by major customer groups, see Note 3 to the Condensed Consolidated Financial Statements. Throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations, we define organic as consolidated and/or Architectural Specialties results excluding the impacts of the Eventscape, Parallel and Geometrik acquisitions. We define the impacts of Eventscape, Parallel and Geometrik as inorganic consolidated and/or Architectural Specialties results. Markets. We compete in the building product 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 (“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 governmental trade policies and geopolitical events, including the conflict in Iran, none of which had a material direct impact on our financial condition, liquidity or results of operations in the first three months of 2026 or 2025. Several factors and trends within our markets affected our business performance during the first quarter of 2026 compared to the first quarter of 2025. For the three months ended March 31, 2026, sales volumes increased $17 million compared to the prior-year period, due primarily to a $10 million increase in organic Architectural Specialties net sales and a $5 million inorganic increase due to our February 2026 acquisition of Eventscape, our December 2025 acquisition of Parallel and our September 2025 acquisition of Geometrik. Also contributing to the increase in net sales was a $2 million increase from higher 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 by $10 million for the three months ended March 31, 2026 compared to the same period in 2025. Our Architectural Specialties segment revenues are primarily generated from individual contracts that include project-specific mixes of manufactured and sourced products. As such, we do not manage or evaluate performance using AUV for this segment but rather attribute all changes in net sales to volume, including gross to net sales adjustments. During the first quarter of 2026, we implemented price increases on Mineral Fiber ceiling products and 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. 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. 26 Management’s Discussion and Analysis of Financial Condition and Results of Operations Our largest raw material expenditures are primarily for fiberglass, perlite, recycled paper, and starch. Other raw materials include clays, felt, pigment, architectural 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, we also purchase significant amounts of packaging materials and consume substantial amounts of energy, such as electricity and natural gas, and water. Fluctuations in the prices of these inputs impact our financial results. In the first quarter of 2026, higher raw material and energy costs negatively impacted operating income by $2 million compared to the same period in 2025. Acquisition-Related Expenses and Losses In connection with our acquisitions of Eventscape in February 2026 and BOK Modern, LLC (“BOK”) in July 2023, we recorded certain acquisition-related expenses and losses to operating income in the three months ended March 31, 2026 and 2025, summarized as follows (dollar amounts in millions): Three Months Ended Affected Line Item in the Condensed March 31, Consolidated Statements of Earnings and 2026 2025 Comprehensive Income Acquisition costs $ 2.6 $ - SG&A expenses Loss related to change in fair value of contingent consideration - 0.3 SG&A expenses Negative impact to operating income $ 2.6 $ 0.3 Acquisition costs above reflect certain third-party professional fees incurred due to the Eventscape acquisition. The change in fair value of contingent consideration was related to our BOK acquisition and is remeasured quarterly during the 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 March 31, 2026 and December 31, 2025, we had approximately 4,000 and 3,800 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) 2026 2025 Change is Favorable (Unfavorable) Three Months Ended March 31, Consolidated net sales $ 409.9 $ 382.7 7.1 % Consolidated operating income $ 94.2 $ 98.5 (4.4 )% Consolidated net sales for the first quarter of 2026 increased 7.1% from the prior-year quarter due to higher volumes of $17 million and favorable AUV of $10 million. Architectural Specialties net sales increased $15 million and Mineral Fiber net sales increased $12 million from the prior-year quarter. Architectural Specialties segment net sales improved due to a $10 million increase in organic net sales and a $5 million inorganic contribution from Eventscape, Parallel and Geometrik. The increase in Mineral Fiber net sales was primarily driven by favorable AUV and modestly improved sales volumes. Cost of goods sold in the first quarter of 2026 was $254.6 million, or 62.1% of net sales, compared to $232.8 million, or 60.8% of net sales, in the prior-year quarter. The increase in cost of goods sold as a percent of net sales was primarily driven by higher organic manufacturing costs, including raw material and energy inflation and unfavorable inventory valuation impacts, as well as an increase in inorganic costs related to our 2026 and 2025 acquisitions. Also contributing to the increase in cost of goods sold was a $2 million tariff adjustment that was recorded in the first quarter of 2026. These increases were partially offset by favorable AUV benefits and improved manufacturing productivity. 27 Management’s Discussion and Analysis of Financial Condition and Results of Operations SG&A expenses in the first quarter of 2026 were $88.4 million, or 21.6% of net sales, compared to $78.0 million, or 20.4% of net sales, in the prior-year quarter. The increase in SG&A expenses was primarily driven by a $3 million increase in severance expenses, a $2 million inorganic increase related to our 2026 and 2025 acquisitions, due to an increase in acquisition costs, and a $2 million increase in Architectural Specialties organic selling expenses, driven primarily by higher net sales and increased investments in selling resources to support growth across the segment. Equity earnings from unconsolidated subsidiaries were $27.3 million in the first quarter of 2026, compared to $26.6 million in the first quarter of 2025. WAVE equity earnings were $27.4 million in the first quarter of 2026, compared to $26.8 million in the first quarter of 2025. The increase in WAVE equity earnings was primarily driven by the benefit from favorable AUV, partially offset by the negative impact of lower sales volumes and higher steel costs. See Note 8 to the Condensed Consolidated Financial Statements for further information. Interest expense was $7.3 million in the first quarter of 2026, compared to $8.5 million in the first quarter of 2025. The decrease in interest expense was primarily due to lower average debt balances. Other non-operating income, net, was $1.5 million in the first quarter of 2026 compared to $0.7 million in the first quarter of 2025. The increase in other non-operating income, net, for the first quarter of 2026 in comparison to the prior-year quarter was primarily driven by the non-service cost components of pension and postretirement net periodic benefit costs. Income tax expense was $21.6 million in the first quarter of both 2026 and 2025. The effective tax rate for the first quarter of 2026 was 24.4% compared to 23.8% in the prior-year quarter. The increase in the effective tax rate for the first quarter of 2026 in comparison to the same period in 2025 was primarily due to federal investment tax credit benefits recognized in the prior-year quarter that did not recur in the current-year quarter. Total Other Comprehensive Income (“OCI”) was $1.0 million in the first quarter of 2026 compared to total Other Comprehensive Loss (“OCL”) of $0.6 million in the first quarter of 2025. The change from OCL to OCI for the first quarter of 2026 compared to the prior-year quarter was primarily due to interest rate swap derivative gains, partially offset by unfavorable foreign currency translation adjustments, driven primarily by the Canadian dollar. Derivative gains and 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). Foreign currency translation adjustments represent the change in the U.S. dollar value of assets and liabilities denominated in foreign currencies. REPORTABLE SEGMENT RESULTS Mineral Fiber (dollar amounts in millions) 2026 2025 Change is Favorable Three Months Ended March 31, Total segment net sales $ 257.2 $ 245.1 4.9 % Total segment operating income $ 85.5 $ 84.5 1.2 % Mineral Fiber net sales increased $12 million in the first quarter of 2026 compared to the prior-year quarter due to $10 million of favorable AUV, which was driven primarily by favorable like-for-like price, and $2 million of higher sales volumes driven primarily by solid commercial execution in an uneven market. Cost of goods sold during the first quarter of 2026 was $155.3 million, or 60.4% of net sales, compared to $148.0 million, or 60.4% of net sales, in the prior-year quarter. Gross profit increased $5 million, or 4.9%, compared to the prior-year quarter due to a $9 million benefit from favorable AUV and a $1 million benefit from higher sales volumes. These benefits were partially offset by a $5 million increase in manufacturing costs, including raw material and energy inflation and unfavorable inventory valuation impacts, partially offset by improved manufacturing productivity. SG&A expenses during the first quarter of 2026 were $43.8 million, or 17.0% of net sales, compared to $39.4 million, or 16.1% of net sales, in the prior-year quarter. The increase in SG&A expenses was primarily driven by a $2 million increase in severance expenses and a $1 million decrease in company-owned officer life insurance gains related to deferred compensation plans. 28 Management’s Discussion and Analysis of Financial Condition and Results of Operations Equity earnings from our WAVE joint venture were $27.4 million in the first quarter of 2026, compared to $26.8 million in the prior-year quarter. The slight increase in WAVE earnings was primarily driven by the benefit from favorable AUV, partially offset by the negative impact of lower sales volumes and higher steel costs. Architectural Specialties (dollar amounts in millions) 2026 2025 Change is Favorable (Unfavorable) Three Months Ended March 31, Total segment net sales $ 152.7 $ 137.6 11.0 % Total segment operating income $ 9.3 $ 14.8 (37.2 )% Architectural Specialties net sales increased $15 million in the first quarter of 2026 compared to the prior-year quarter due to a $10 million increase in organic net sales driven by growth within our metal and wood categories and a $5 million inorganic contribution from our 2026 and 2025 acquisitions. Cost of goods sold during the first quarter of 2026 was $99.0 million, or 64.8% of net sales, compared to $84.4 million, or 61.3% of net sales, in the prior-year quarter. The increase in cost of goods sold as a percentage of net sales was primarily driven by a $5 million increase in costs related to our 2026 and 2025 acquisitions and a $3 million increase in manufacturing costs within our organic business, which was primarily driven by higher employee costs and the impact of growth investments. Also contributing to the increase in cost of goods sold was a $2 million tariff adjustment that was recorded in the first quarter of 2026. Gross profit increased $1 million, or 0.9%, compared to the prior-year quarter due to a $6 million benefit from higher organic net sales, partially offset by the cost of goods sold impacts discussed above. SG&A expenses in the first quarter of 2026 were $44.4 million, or 29.1% of net sales, compared to $38.4 million, or 27.9% of net sales, in the prior-year quarter. The increase in SG&A expenses was primarily driven by a $2 million inorganic increase related to the 2026 and 2025 acquisitions, due to an increase in acquisition costs, a $2 million increase in organic selling expenses driven primarily by higher net sales and increased investments in selling resources to support growth and a $1 million increase in severance expenses. Unallocated Corporate Unallocated Corporate operating loss was $1 million in the first quarter of 2026 and 2025. FINANCIAL CONDITION AND LIQUIDITY Cash Flow Net cash provided by operating activities for the first three months of 2026 was $32.1 million, compared to $41.0 million for the first three months of 2025. The unfavorable change in operating activities is primarily due to an unfavorable timing related change in receivables, partially offset by a favorable timing related change in accounts payable and accrued expenses. Also contributing to the decrease in operating activities was an unfavorable change in net income tax payables. Net cash used for investing activities was $51.4 million in the first three months of 2026, compared to $6.0 million of cash provided by investing activities in the first three months of 2025. The unfavorable change in cash used for investing activities was primarily due to the acquisition of Eventscape, partially offset by an increase in dividends from WAVE. Net cash used for financing activities was $13.2 million in the first three months of 2026, compared to $43.6 million for the first three months of 2025. The favorable change in cash used for financing activities was primarily due to increased net borrowings due to the Eventscape acquisition, partially offset by 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 $910.6 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 $410.6 million Term Loan A. As of March 31, 2026, the revolving credit facility and Term Loan A were priced at 1.25% over the Secured Overnight Financing Rate (“SOFR”). The revolving credit facility and Term 29 Management’s Discussion and Analysis of Financial Condition and Results of Operations Loan A mature in December 2030. We also have a $25.0 million bi-lateral letter of credit facility and a $0.7 million letter of credit facility. As of March 31, 2026, the total principal balances outstanding under our senior credit facility included $408.0 million under Term Loan A and $75.0 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, 2026, 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, including forward interest rate swaps (dollar amounts in millions): Coverage Period Notional Amount Risk Coverage Trade Date 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 March 2026 to December 2028 $ 50.0 USD-SOFR March 19, 2026 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 use 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, our bi-lateral facility, and letter of credit 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 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): March 31, 2026 Financing Arrangements Limit Used Available Bi-lateral facility $ 25.0 $ 7.7 $ 17.3 Letter of credit facility 0.7 0.5 0.2 Revolving credit facility 150.0 - 150.0 Total $ 175.7 $ 8.2 $ 167.5 As of March 31, 2026, we had $79.8 million of cash and cash equivalents, $55.7 million in the U.S. and $24.1 million in foreign jurisdictions, primarily Canada. As of March 31, 2026, we also had $425 million available under our revolving credit facility. We believe cash on hand and cash generated from operations, together with borrowing capacity under our credit facility, will be adequate to address our near-term liquidity needs based on current expectations of our business operations, capital expenditures and scheduled payments of debt obligations. CRITICAL ACCOUNTING ESTIMATES There have been no material changes to our critical accounting estimates disclosed in our Annual Report on Form 10-K for the year ended December 31, 2025. 30 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, 2025.