What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-07-28 compared with 2020-04-27 · 136 added, 84 removed, 153 unchanged (59% of the section changed)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF 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, 2019.

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, our Annual Report on Form 10-K for the year ended December 31, 2019 and our Amendment No.

1 to the Annual Report on Form 10-K/A for the year ended December 31, 2019.

We are a leading producer of ceiling systems for use in the construction and renovation of commercial and residential buildings.

We design, manufacture and sell ceiling and wall systems ( primarily mineral fiber, fiberglass wool, metal, wood, wood fiber, glass-reinforced-gypsum and felt ) throughout the Americas.

The impact of the recent COVID-19 outbreak on our future consolidated results of operations is uncertain.

We expect a COVID-19 related decrease in customer demand across all our markets to negatively and materially impact our net sales and earnings for the remainder of 2020, with the most significant impact currently expected in the second and third quarters.

As of March 31, 2020, all of our manufacturing facilities were operational, excluding locations which were idled prior to the COVID-19 outbreak.

On April 24, 2020, we temporarily suspended operations at our recently acquired Libertyville, Illinois facility.

The impact of the COVID-19 outbreak on our future consolidated results of operations is uncertain.

We experienced a significant decrease in customer demand across all our markets during the second quarter of 2020 due to COVID-19.

Specifically, we noted delays in construction driven by temporary closures of non-life sustaining businesses, with the most significant impacts in major metropolitan areas impacted by COVID-19.

We currently expect lower net sales for the remainder of 2020 compared to 2019, with less of a comparative decline in the third and fourth quarters of 2020 than experienced in the second quarter of 2020.

In response to COVID-19, we have reduced capital expenditures and discretionary spending including compensation, travel and marketing reductions.

In addition, we deferred our U.S.

federal income tax payments through June 30, 2020.

We expect these actions to positively impact operating income and cash flows in the second half of 2020 compared to the second half of 2019.

As of June 30, 2020, all of our manufacturing facilities were operational, excluding a location which was idled prior to the COVID-19 outbreak.

In an effort to operate safely and responsibly, we continue to follow guidelines from governmental and local health authorities across our facilities and have implemented preventative measures that include working remotely, providing personal protective equipment, limiting group meetings, restricting air travel, enhancing cleaning and sanitizing procedures, and social distancing.

During March 2020, we borrowed an additional $100.0 million from our revolving credit facility and $30.0 million from our accounts receivable securitization facility, and temporarily suspended our share repurchase program.

We did not record any asset impairments, inventory charges or bad debt reserves related to COVID-19 during the first quarter of 2020 but future events may require such charges.

During the second quarter of 2020, we repaid $65.0 million of the revolving credit facility borrowings.

We did not record any asset impairments, inventory charges or bad debt reserves related to COVID-19 during the second quarter and first six months of 2020 but future events may require such charges.

We will continue to evaluate the nature and extent of the COVID-19 outbreak’s impact on our financial condition, results of operations and cash flows.

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The purchase price of $330.0 million was previously paid by Knauf to us during 2018 and was subject to certain post-closing adjustments for cash and debt as provided in the Purchase Agreement dated as of November 17, 2017, by and between us and Knauf (the “Purchase Agreement”), including adjustments based on the economic impact of any required regulatory remedies and a working capital adjustment.

We have recorded a $25.9 million payable to WAVE for their remaining portion of the proceeds from Knauf and a $6.2 million payable to Knauf for estimated working capital and other adjustments, both of which are reflected within Accounts payable and accrued expenses in the Condensed Consolidated Balance Sheets as of March 31, 2020.

The transaction and final gain or loss amounts are subject to finalization of customary working capital and other adjustments, as provided in the Purchase Agreement, which we expect to be completed in the second quarter of 2020.

During the second quarter of 2020, we remitted $20.0 million to WAVE for a portion of their remaining proceeds from Knauf.

As of June 30 2020, we have recorded a $5.9 million payable to WAVE for their remaining portion of the proceeds from Knauf and a $6.2 million payable to Knauf for estimated working capital and other adjustments, both of which are reflected within Accounts payable and accrued expenses in the Condensed Consolidated Balance Sheets as of June 30, 2020.

The final loss amounts are subject to finalization of customary

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

working capital and other adjustments, as provided in the Purchase Agreement .

We are currently in negotiations with Knauf related to the valuation of certain liabilities included in the Sale totaling $11 million, which we expect to be finalized in 2020 .

We have not accrued a liability for this matter as of June 30, 2020 .

In 2019, we entered into a Transition Services Agreement with Knauf for its benefit and the benefit of the buyer of the divestment business, pursuant to which we are providing certain transition technology, finance and information technology support services through September 30, 2020.

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The term of the granted licenses, with respect to each intellectual property right, extend until the expiration or abandonment of each such intellectual property right.

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

The EMEA and Pacific Rim segment historical financial results for the three months ended March 31, 2019 have been reflected in AWI’s Condensed Consolidated Statements of Operations and Comprehensive Income as discontinued operations , while the assets and liabilities of discontinued operations were removed from AWI’s Condensed Consolidated Balance Sheet as of September 30 , 2019 .

The EMEA and Pacific Rim segment historical financial results for the three and six months ended June 30, 2019 have been reflected in AWI’s Condensed Consolidated Statements of Operations and Comprehensive Income as discontinued operations, while the assets and liabilities of discontinued operations were removed from AWI’s Condensed Consolidated Balance Sheet as of September 30, 2019.

See Notes 4 and 5 to the Condensed Consolidated Financial Statements for additional information related to our acquisitions and discontinued operations.

Manufacturing Plants

As of March 31, 2020, we had 14 manufacturing plants in three countries, with 11 plants located within the U.S, which included our St.

As of June 30, 2020, we had 13 manufacturing plants in two countries, with 11 plants located within the U.S., which included our St.

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

We have two plants in Canada and one idled mineral fiber plant in China.

The idled plant in China is reported as a component of our Unallocated Corporate segment and is classified as an asset held for sale as of March 31, 2020 and December 31, 2019, as we entered into a sale agreement for the property during the third quarter of 2019 with closing expected during 2020.

We have two plants in Canada.

During the second quarter of 2020, we sold our idled plant in China, which had been classified as an asset held for sale.

WAVE operates six additional plants in the U.S.

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The majority of revenues are project driven, which can lead to more volatile sales patterns due to project scheduling uncertainty.

Operating results for the Architectural Specialties segment include a minor portion of allocated Corporate administrative expenses that represent a reasonable allocation of general services to support its operations.

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

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We closely monitor publicly available macroeconomic trends that provide insight into commercial and residential market activity, including GDP, office vacancy rates, the Architecture Billings Index, new commercial construction starts, state and local government spending, corporate profits and retail sales.

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

We noted several factors and trends within our markets that directly affected our b usiness performance during the first quarter of 20 20 compared to the first q uarter of 201 9 .

In our Mineral Fiber segment, softer demand for lower end products exceeded increased demand for high end products.

In our Architectural Specialties segment, we experienced strong growth due to increased market penetration and the impact of our 2019 acquisitions of ACGI and MRK (collectively, the “2019 Acquisitions”).

The 2019 Acquisitions contributed $8.2 million and $1.5 million of net sales during the first quarter of 2020 and 2019, respectively, with the first quarter of 2020 including an entire quarter of sales compared to one month of sales in the first quarter of 2019.

We noted several factors and trends within our markets that directly affected our business performance during the second quarter of 2020 compared to the second quarter of 2019, most importantly the aforementioned decrease in demand across all our markets as a result of COVID-19.

For the three and six months ended June 30, 2020, we experienced significant reductions in volumes of $68 million and $60 million in comparison to the same periods in 2019.

Revenues for our Architectural Specialties segment were also impacted by our 2019 acquisitions of ACGI and MRK (collectively, the “2019 Acquisitions”).

The following table presents the impact of the 2019 Acquisitions on our Architectural Specialties segment’s net sales (dollar amounts in millions):

Three Months Ended June 30,

Six Months Ended June 30,

Average Unit Value .

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

We estimate that unfavorable AUV decreased our Mineral Fiber and total consolidated net sales for three months ended March 31, 2020 by approximately $1 million compared to the same period in 2019.

We estimate that unfavorable AUV decreased our Mineral Fiber and total consolidated net sales for three and six months ended June 30, 2020 by approximately $1 million and $2 million, respectively, compared to the same periods in 2019.

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

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

In the first quarter of 2020, we implemented previously announced price increases on certain Mineral Fiber ceiling tile and grid products.

We may implement future pricing actions based on numerous factors.

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.

We expect sales to be weaker in these quarters during 2020 due to the impacts of COVID-19.

In comparison to the prior year, sales were weaker in the second quarter of 2020.

We expect sales to continue to be weaker in the second half of 2020 as compared to the prior year due to reduced demand related to COVID-19.

Factors Affecting Operating Costs

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Fluctuations in the prices of these inputs are generally beyond our control and have a direct impact on our financial results.

In the first quarter of 2020, lower costs for raw materials and energy positively impacted operating income by $2 million, compared to the same period in 2019.

As of March 31, 2020 and December 31, 2019, we had approximately 2,500 full-time and part-time employees.

For the three and six months ended June 30, 2020, lower costs for raw materials and energy positively impacted operating income by $1 million and $2 million, respectively, compared to the same periods in 2019.

As of June 30, 2020 and December 31, 2019, we had approximately 2,500 full-time and part-time employees.

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

RESULTS OF CONTINUING OPERATIONS

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(dollar amounts in millions)

Three Months Ended

Change is Favorable

Change is (Unfavorable)

Three Months Ended June 30,

Total consolidated net sales

Operating income

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

Consolidated net sales for the first quarter of 20 20 in creased 2.7% over the same period in 201 9 due to higher volumes of $ 8 million , partially offset by un favorable AUV of $ 1 million .

Mineral Fiber net sales increased by $ 1 million and Architectural Specialties net sales increased by $6 million .

The unfavorable AUV was driven by mix due to volume growth in Latin America and home centers , which have lower AUV than the Mineral Fiber segment average.

Cost of goods sold in the first quarter of 2020 was 63.3% of net sales, compared to 62.3% for the same period in 2019.

The increase in cost of goods sold as a percent of net sales for the first quarter of 2020 as compared to the same period in 2019 was primarily due to unfavorable AUV, partially offset by improved manufacturing productivity.

SG&A expenses in the first quarter of 2020 were $34.8 million, or 14.0% of net sales, compared to $55.6 million, or 23.0% of net sales, for the same period in 2019.

The decrease in SG&A expenses for the first quarter of 2020 as compared to the same period in 2019 was driven primarily by a $20 million decrease in legal and professional fees, driven by expenses and attorney’s fees incurred in the first quarter of 2019 under a settlement agreement with Roxul, USA, Inc.

Also contributing to the decrease in SG&A expenses was $5 million of lower incentive and deferred compensation expenses.

Equity earnings from our WAVE joint venture were $19.5 million for the first quarter of 2020, compared to $18.9 million in the first quarter of 2019.

The increase in WAVE earnings was primarily related to lower steel costs, partially offset by lower volumes and higher SG&A expenses.

Six Months Ended June 30,

Total consolidated net sales

Operating income

Consolidated net sales for the second quarter of 2020 decreased 25.3% over the same period in 2019 due to lower volumes of $68 million and unfavorable AUV of $1 million.

Mineral Fiber net sales decreased by $56 million and Architectural Specialties net sales decreased by $13 million.

Consolidated net sales for the first six months of 2020 decreased 12.1% due to lower volumes of $60 million and unfavorable AUV of $2 million.

Mineral Fiber net sales decreased by $55 million and Architectural Specialties net sales decreased by $7 million.

As previously noted, decreases in volumes for both our Mineral Fiber and Architectural Specialties segments were a result of lower market demand due to COVID-19.

Cost of goods sold in the second quarter of 2020 was 66.6% of net sales, compared to 62.0% for the same period in 2019.

Cost of goods sold in the first six months of 2020 was 64.8% compared to 62.1% for the same period in 2019.

The increase in cost of goods sold as a percent of net sales for the second quarter and first six months of 2020 was primarily due to unfavorable AUV, partially offset by improved manufacturing productivity and cost reduction actions.

The unfavorable AUV was driven by mix, primarily due to regional weakness in major metropolitan areas impacted by COVID-19.

SG&A expenses in the second quarter of 2020 were $33.0 million, or 16.2% of net sales, compared to $37.4 million, or 13.8% of net sales, for the same period in 2019.

SG&A expenses in the first six months of 2020 were $67.8 million, or 15.0% of net sales, compared to $93.0 million, or 18.1% of net sales, for the same period in 2019.

The decrease in SG&A expenses for the second quarter of 2020 as compared to the same period in 2019 was driven primarily by a $2 million increase in cost reimbursements, net of related expenses, earned under our Transition Services Agreement with Knauf and a $1 million reduction in incentive compensation expenses.

The decrease in SG&A expenses for the first six months of 2020 in comparison to the same period in 2019 was due to a $20 million decrease in legal and professional fees, driven by expenses and attorney’s fees incurred in the first quarter of 2019 under a settlement agreement with Roxul, USA, Inc.

(“Rockfon”) and a $4 million increase in cost reimbursements, net of related expenses, earned under our Transition Services Agreement with Knauf and a $2 million reduction in incentive compensation expenses.

The gain on sale of fixed and intangible assets represents a $14 million gain on the sale of our idled mineral fiber plant in China, which was reported as a component of our Unallocated Corporate segment.

Equity earnings from our WAVE joint venture were $13.5 million in the second quarter of 2020, compared to $21.2 million in the second quarter of 2019.

Equity earnings from our WAVE joint venture were $33.0 million in the first six months of 2020 compared to $40.1 million in the first six months of 2019.

The decrease in WAVE earnings in both periods was primarily related to lower volumes, partially offset by lower steel costs and a decrease in SG&A expenses.

Consistent with our results, demand for WAVE’s products were significantly impacted by COVID-19 throughout the second quarter of 2020.

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

Interest expense was $6.7 million for the first quarter of 2020, compared to $10.4 million in the first quarter of 2019.

The decrease in the first quarter of 2020 was primarily due to lower average borrowings outstanding during the first quarter of 2020, lower floating interest rates and the refinancing of our credit facility on September 30, 2019.

Other non-operating expense, net, was $369.4 million for the first quarter of 2020, compared to $5.5 million of income in the first quarter of 2019.

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

Interest expense was $ 5.9 million in the second quarter of 20 20 , compared to $ 9.5 million in the second quarter of 201 9 .

Interest expense was $ 12.6 million in the first six months of 2020 compared to $ 19.9 million in the first six months of 2019.

The decrease in both periods was primarily due to lower average borrowings outstanding and lower interest rates , which were a result of the refinancing of our credit facility on September 30, 2019.

Other non-operating income, net, was $4.4 in the second quarter of 2020 compared to $5.4 million in the second quarter of 2019.

The decrease primarily related to a decline in interest income.

Other non-operating expense, net, was $365.0 million in the first six months of 2020, compared to $10.9 million of income, net, in the first six months of 2019.

The increase in expense was primarily related to the $374.4 million settlement loss associated with our RIP.

See Note 16 to the Condensed Consolidated Financial Statements for further information.

Income tax benefit was $77.5 million for the first quarter of 2020 compared to $13.4 million of income tax expense in the first quarter of 2019.

Excluding the impact of the pension settlement in the first quarter of 2020, income tax expense was $18.3 million.

The effective tax rate was 25.8% for the first quarter of 2020 compared to 26.8% for the same period of 2019.

The effective tax rate was lower primarily due to unfavorable deferred tax adjustments recognized in the first quarter of 2019 related to share-based compensation.

Total Other Comprehensive Income (“OCI”) was $274.4 million in the first quarter of 2020 compared to $3.0 million for the first quarter of 2019.

The change in OCI was primarily driven by pension and postretirement adjustments, primarily a $374.4 million settlement loss related to our RIP.

Income tax expense was $11.4 million in the second quarter of 2020 compared to $19.4 million in the second quarter of 2019.

The effective tax rate for the second quarter of 2020 was 18.7% as compared to 23.3% for the same period of 2019.

The effective tax rate was lower primarily due to the favorable tax impact of the gain on sale of our idled mineral fiber plant in China in the second quarter of 2020.

Income tax benefit was $66.1 million in the first six months of 2020 compared to $32.8 of income tax expense in the first six months of 2019.

Excluding the impact of the pension settlement that occurred in the first quarter of 2020, income tax expense was $29.7 million in the first six months of 2020.

The effective tax rate was 27.6% in the first six months of 2020 compared to 24.6% in the same period of 2019.

The effective tax rate for the first six months of 2020 was higher than the effective tax rate for the same period in 2019 primarily due to the tax effects of the pension settlement and the gain on sale of our idled mineral fiber plant in China in the second quarter of 2020.

Total Other Comprehensive Loss (“OCL”) was $2.6 million in the second quarter of 2020 compared to $4.5 million in the second quarter of 2019.

Total Other Comprehensive Income (“OCI”) was $271.8 million in the first six months of 2020 compared to OCL of $1.5 million in the first six months of 2019.

The change in OCL in the second quarter of 2020 compared to the same period in 2019 was primarily driven by derivative gains/losses.

Derivative gain/loss represents the mark-to-market value adjustments of our derivative assets and liabilities and the recognition of gains and losses previously deferred in OCI.

The change in OCI in the first six months of 2020 was primarily driven by pension and postretirement adjustments, primarily a $374.4 million settlement loss related to our RIP.

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

Also impacting the change in OCI was foreign currency translation adjustments and derivative gains/losses.

Also impacting the change in OCI in both periods was 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.

Amounts in the first quarter of 2020 were driven primarily by changes in the Canadian dollar.

Amounts in the first quarter of 2019 were primarily driven by changes in the exchange rates of the Russian ruble and the British pound.

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.

Amounts in the second quarter and first six months of 2020 were driven primarily by changes in the Canadian dollar.

Amounts in the second quarter of 2019 were primarily driven by changes in the exchange rates of the British pound and the Russian ruble.

Amounts in the first six months of 2019 were driven primarily by changes in the Russian ruble and the Canadian dollar.

REPORTABLE SEGMENT RESULTS

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(dollar amounts in millions)

Three Months Ended

Change is Favorable

Change is (Unfavorable)

Three Months Ended June 30,

Total segment net sales

Operating income

Net sales increased in the first quarter of 2020 due to higher volumes of $2 million, partially offset by unfavorable AUV of $1 million.

The unfavorable AUV was driven by mix due to volume growth in Latin America and home centers, which have lower AUV than the Mineral Fiber segment average.

Six Months Ended June 30,

Total segment net sales

Operating income

Net sales decreased in the second quarter of 2020 due to lower volumes of $55 million and unfavorable AUV of $1 million.

The decrease in net sales in the first six months of 2020 was due to lower volumes of $53 million and unfavorable AUV of $2 million.

The decreases in volumes were driven by a significant decrease in demand due to the COVID-19 pandemic, which impacted all of our markets.

The unfavorable AUV was driven by mix, primarily due to regional weakness in major metropolitan areas impacted by COVID-19.

Operating income decreased in the second quarter of 2020 primarily due to a $35 million negative impact due to lower volumes, an $8 million reduction in WAVE equity earnings and a $5 million negative impact from lower AUV.

Partially offsetting these decreases to operating income was a $10 million reduction in manufacturing costs, a $2 million increase in cost reimbursements, net of related

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

Operating income increased in the first quarter of 2020 primarily due to a $20 million decrease in legal and professional fees associated with the 2019 settlement agreement with Rockfon and a $ 4 million decrease in manufacturing costs.

Also contributing to the increase in operating income was lower incentive and deferred compensation expenses, partially offset by the negative impact of lower AUV driven by volume growth in Latin America and Canada.

expenses, earned under our Transition Services Agreement with Knauf, and a $1 million reduction in incentive compensation expenses.

Operating income decreased in the first six months of 2020 primarily due to a $35 million negative impact due to lower volumes, a $10 million negative impact from lower AUV and a $7 million reduction in WAVE equity earnings.

Partially offsetting these decreases to operating income was a $20 million decrease in legal and professional fees incurred in the first quarter of 2019 under a settlement agreement Rockfon, a $14 million reduction in manufacturing costs, a $4 million increase in cost reimbursements, net of related expenses, earned under our Transition Services Agreement with Knauf, and a $3 million reduction in incentive compensation expenses.

Architectural Specialties

(dollar amounts in millions)

Three Months Ended

Change is Favorable/

(Unfavorable)

Change is (Unfavorable)

Three Months Ended June 30,

Total segment net sales

Operating income

Net sales for the first quarter of 2020 increased $7 million due to the 2019 Acquisitions, partially offset by unfavorable project timing.

Operating income for the first quarter of 2020 decreased due to additional investments in selling and design capacities and intangible asset amortization expense related to the 2019 Acquisitions, partially offset by the positive impact of higher volumes.

Six Months Ended June 30,

Total segment net sales

Operating income

Net sales in the second quarter and first half of 2020 decreased $13 million and $7 million, respectively, due to a reduction in demand across almost all product categories and geographies as a result of the COVID-19 pandemic.

Net sales for the first half of 2020 increased $6 million due to the impact of the 2019 Acquisitions.

Operating income in the second quarter and first six months of 2020 decreased due to the negative impact of lower sales volumes.

Also contributing to the decrease in operating income was additional amortization expense related to the 2019 Acquisitions.

Unallocated Corporate

Unallocated corporate expenses were $1.5 million for the first quarter of 2020 compared to $2.1 million in the same period of 2019.

The decline was primarily due to the absence of depreciation and amortization related to our idled mineral fiber plant in China, which was classified as an asset held for sale as of September 30, 2019.

Unallocated corporate operating income was $13 million in the second quarter of 2020 compared to $2 million of expense in the same period of 2019.

Unallocated corporate income was $11 million in the first six months of 2020 compared to $4 million of expense in the first six months of 2019.

The increase in both periods was driven primarily by a $14 million gain on the sale of our idled mineral fiber plant in China.

See Note 2 to the Condensed Consolidated Financial Statements for further information.

FINANCIAL CONDITION AND LIQUIDITY

The discussion that follows includes cash flows related to discontinued operations for the comparable 2019 period.

Operating activities for the first three months of 2020 provided $25.7 million of cash, compared to $14.7 million for the first three months of 2019.

The increase was primarily due higher cash earnings, partially offset by working capital changes.

Net cash provided by investing activities was $9.9 million for the first three months of 2020, compared to $38.0 million used for the first three months of 2019.

The increase in investing cash flows was a result of the acquisition of ACGI in the first quarter of 2019 with no similar activity in the first quarter of 2020.

Net cash provided by financing activities was $66.8 million for the first three months of 2020, compared to $29.9 million used for the first three months of 2019.

The favorable change of cash was primarily due to increased borrowings, partially offset by increased payments of long-term debt and higher repurchases of outstanding common stock.

Operating activities in the first six months of 2020 provided $78.7 million of cash, compared to $47.0 million in the first six months of 2019.

The increase was primarily due to lower working capital changes and lower U.S.

federal income tax payments.

Net cash provided by investing activities was $10.3 million in the first six months of 2020, compared to $31.6 million used in the first six months of 2019.

The increase in investing cash flows was a result of the acquisition of ACGI in the first six months of 2019 with no similar activity in 2020 and lower purchases of property, plant and equipment, partially offset by a reduction of investing cash flows due to the remittance of Knauf proceeds to WAVE in the second quarter of 2020.

Net cash used for financing activities was $16.7 million in the first six months of 2020, compared to $102.6 million in the first six months of 2019.

The favorable change of cash was primarily due to increased borrowings and lower repurchases of outstanding common stock, partially offset by increased payments of debt.

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 $1,000.0 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 $500.0 million Term Loan A.

We have a $1,000.0 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

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

a $500.0 million Term Loan A.

The $1,0 0 0.0 million senior credit facility is secured by the capital stock of material U.S.

subsidiaries and a pledge of 65% of the stock of our material first-tier foreign subsidiary in Canada.

subsidiaries and a pledge of 65% of the stock of our material first- tier foreign subsidiar y in Canada .

The unpaid balances of the revolving credit facility and Term Loan A may be prepaid without penalty at the maturity of their respective interest reset periods.

Any principal amounts paid on the Term Loan A may not be re-borrowed.

As of March 31, 2020, total borrowings outstanding under our senior credit facility were $195.0 million under the revolving credit facility and $500.0 million under Term Loan A.

As of June 30, 2020 , total borrowings outstanding under our senior credit facility were $ 130.0 million under the revolving credit facility and $ 500 .0 million under Term Loan A .

The senior credit facility includes two financial covenants that require the ratio of consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) to consolidated cash interest expense minus cash consolidated interest income to be greater than or equal to 3.0 to 1.0 and requires the ratio of consolidated funded indebtedness, minus AWI and domestic subsidiary unrestricted cash and cash equivalents up to $100 million, to EBITDA to be less than or equal to 3.75 to 1.0.

As of March 31, 2020, we were in compliance with all covenants of the senior credit facility and currently do not expect any covenant violations due to the impacts of COVID-19.

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

The T e rm Loan A is fully drawn and is currently priced on a variable interest rate basis .

As of June 30, 2020, we were in compliance with all covenants of the senior credit facility and currently do not expect any covenant violations due to the impacts of COVID-19.

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

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

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These swaps are designated as cash flow hedges against changes in LIBOR for a portion of our variable rate debt.

As of March 31, 2020, we had $146.9 million of cash and cash equivalents, $133.6 million in the U.S and $13.3 million in various foreign jurisdictions, primarily Canada.

As of June 30, 2020, we had $117.1 million of cash and cash equivalents, $104.2 million in the U.S and $12.9 million in various foreign jurisdictions, primarily Canada.

In March 2020, we amended and decreased our $36.2 million Accounts Receivable Securitization Facility with the Bank of Nova Scotia (the “funding entity”) to $30.0 million and we extended the maturity to September 2020.

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All new receivables under the program are continuously purchased by ARC with the proceeds from collections of receivables previously purchased .

As of March 31, 2020, total borrowings outstanding under this facility were $30.0 million, which were classified as Short-term debt in the Condensed Consolidated Balance Sheets, and no letters of credit were issued under this facility .

There were no borrowings outstanding under this facility as of December 31, 2019.

As of March 31, 2020 we had a $25.0 million letter of credit facility, also known as our bi-lateral facility.

As of June 30, 2020, total borrowings outstanding under this facility were $30.0 million, which were classified as Short-term debt in the Condensed Consolidated Balance Sheets, and no letters of

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

credit were issued under this facility .

There were no borrowings outstanding under this facility as of December 31, 2019.

As of June 3 0 , 2020 we had a $25.0 million letter of credit facility, also known as our bi-lateral facility .

We utilize lines of credit and other commercial commitments in order to ensure that adequate funds are available to meet operating requirements.

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The following table presents details related to our letters of credit facilities:

March 31, 2020

June 30, 2020

Financing Arrangements

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Revolving credit facility

As of March 31, 2020, we had $146.9 million of cash and cash equivalents and $305.0 million available under our revolving credit facility.

As of June 30, 2020, we had $117.1 million of cash and cash equivalents and $370.0 million available under our revolving credit facility.

We believe cash on hand and cash generated from operations, together with borrowing capacity under our credit facilities, will be adequate to address our near-term liquidity needs.

The impacts of COVID-19 could create volatility in financial markets which may impact the terms under which we access capital.

We will continue to assess whether reductions in discretionary spending, capital expenditures and other variable costs are necessary to meet our liquidity needs.

We continue to evaluate reductions in discretionary spending, capital expenditures and other costs.

CONTRACTUAL OBLIGATIONS

Information related to our contractual obligations at December 31, 2019 can be found in our 2019 Annual Report on Form 10-K, Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations.

Our current and long-term debt obligations as of March 31, 2020 increased by $110.2 million, primarily due to additional borrowings under our revolving credit facility, net of repayments, of $80.0 million and additional borrowings under our accounts receivable securitization facility of $30.0 million.

Our short-term and long-term debt obligations as of June 30, 2020 increased by $45.5 million, primarily due to additional borrowings under our revolving credit facility, net of repayments, of $15.0 million and additional borrowings under our accounts receivable securitization facility of $30.0 million.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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Item 2. Management’s Discussion and Analysis