Item 1. Financial Statements
ITEM 1. FINANCIAL STATEMENTS
Armstrong World Industries, Inc., and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Income
(amounts in millions, except per share data)
Unaudited
Three Months Ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Net sales
$
246.3
$
277.1
$
698.2
$
791.2
Cost of goods sold
155.1
165.4
447.9
484.7
Gross profit
91.2
111.7
250.3
306.5
Selling, general and administrative expenses
41.0
41.3
108.8
134.3
Gain related to sale of fixed and intangible assets
( 6.9
)
-
( 21.0
)
-
Equity earnings from joint venture
( 15.2
)
( 42.9
)
( 48.2
)
( 83.0
)
Operating income
72.3
113.3
210.7
255.2
Interest expense
6.1
11.7
18.7
31.6
Other non-operating (income) expense, net
( 3.2
)
( 5.1
)
361.8
( 16.0
)
Earnings (loss) from continuing operations before income taxes
69.4
106.7
( 169.8
)
239.6
Income tax expense (benefit)
15.2
16.0
( 50.9
)
48.8
Earnings (loss) from continuing operations
54.2
90.7
( 118.9
)
190.8
Net earnings from discontinued operations, net of tax
expense of $ -, $ 2.5 , $ - and $ 7.2
-
4.8
-
3.0
(Loss) from disposal of discontinued businesses, net of tax
(benefit) of $ -, ($ 5.0 ), ($ 1.4 ) and ($ 4.9 )
( 0.2
)
( 22.3
)
( 3.0
)
( 27.0
)
Net (loss) from discontinued operations
( 0.2
)
( 17.5
)
( 3.0
)
( 24.0
)
Net earnings (loss)
$
54.0
$
73.2
$
( 121.9
)
$
166.8
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments
( 6.2
)
78.6
( 8.2
)
84.6
Derivative gain (loss), net
1.5
( 2.7
)
( 12.3
)
( 15.9
)
Pension and postretirement adjustments
( 0.8
)
5.5
286.8
11.2
Total other comprehensive (loss) income
( 5.5
)
81.4
266.3
79.9
Total comprehensive income
$
48.5
$
154.6
$
144.4
$
246.7
Earnings (loss) per share of common stock, continuing operations:
Basic
$
1.13
$
1.86
$
( 2.48
)
$
3.90
Diluted
$
1.13
$
1.83
$
( 2.48
)
$
3.84
Earnings (loss) per share of common stock, discontinued operations:
Basic
$
-
$
( 0.36
)
$
( 0.06
)
$
( 0.49
)
Diluted
$
-
$
( 0.35
)
$
( 0.06
)
$
( 0.48
)
Net earnings (loss) per share of common stock:
Basic
$
1.13
$
1.50
$
( 2.54
)
$
3.41
Diluted
$
1.13
$
1.48
$
( 2.54
)
$
3.36
Average number of common shares outstanding:
Basic
47.9
48.7
47.9
48.8
Diluted
48.0
49.5
47.9
49.6
See accompanying notes to Condensed Consolidated Financial Statements beginning on page 8.
4
Armstrong World Industries, Inc., and Subsidiaries
Condensed Consolidated Balance Sheets
(amounts in millions, except share and per share data)
Unaudited
September 30, 2020
December 31, 2019
Assets
Current assets:
Cash and cash equivalents
$
138.8
$
45.3
Accounts and notes receivable, net
90.1
85.1
Inventories, net
77.4
68.5
Income taxes receivable
5.3
30.0
Other current assets
11.7
15.5
Total current assets
323.3
244.4
Property, plant, and equipment, less accumulated depreciation and amortization of
$ 491.0 and $ 447.5 , respectively
514.8
524.6
Operating lease assets
20.3
35.3
Finance lease assets
20.4
-
Prepaid pension costs
116.4
94.8
Investment in joint venture
44.9
58.5
Goodwill
108.2
53.0
Intangible assets, net
428.2
411.9
Deferred income taxes
-
10.4
Income taxes receivable
0.6
2.5
Other non-current assets
56.6
57.9
Total assets
$
1,633.7
$
1,493.3
Liabilities and Shareholders' Equity
Current liabilities:
Current installments of long-term debt
25.0
6.3
Accounts payable and accrued expenses
100.8
143.5
Operating lease liabilities
4.4
5.2
Finance lease liabilities
1.8
-
Income taxes payable
0.3
0.2
Total current liabilities
132.3
155.2
Long-term debt, less current installments
656.5
604.5
Operating lease liabilities
15.6
30.1
Finance lease liabilities
18.8
-
Postretirement benefit liabilities
67.0
71.0
Pension benefit liabilities
45.2
46.6
Other long-term liabilities
72.6
37.8
Income taxes payable
21.1
19.3
Deferred income taxes
162.0
163.9
Total non-current liabilities
1,058.8
973.2
Shareholders' equity:
Common stock, $ 0.01 par value per share, 200 million shares authorized, 62,512,968
shares issued and 47,859,751 shares outstanding as of September 30, 2020 and
62,263,395 , shares issued and 47,992,348 shares outstanding as of December 31, 2019
0.6
0.6
Capital in excess of par value
552.6
555.7
Retained earnings
857.1
1,008.2
Treasury stock, at cost, 14,653,217 shares as of September 30, 2020 and 14,271,047
shares as of December 31, 2019
( 857.9
)
( 823.5
)
Accumulated other comprehensive (loss)
( 109.8
)
( 376.1
)
Total shareholders' equity
442.6
364.9
Total liabilities and shareholders' equity
$
1,633.7
$
1,493.3
See accompanying notes to Condensed Consolidated Financial Statements beginning on page 8.
5
Armstrong World Industries, Inc., and Subsidiaries
Condensed Consolidated Statements of Shareholders’ Equity
(amounts in millions, except share data)
Unaudited
Three Months Ended September 30, 2020
Accumulated
Additional
Other
Common Stock
Paid-In
Retained
Treasury Stock
Comprehensive
Shares
Amount
Capital
Earnings
Shares
Amount
(Loss)
Total
June 30, 2020
47,856,179
$
0.6
$
551.7
$
812.8
14,653,217
$
( 857.9
)
$
( 104.3
)
$
402.9
Stock issuance, net
3,572
-
-
-
-
-
-
-
Cash dividends - $ 0.20 per common share
-
-
-
( 9.7
)
-
-
-
( 9.7
)
Share-based employee compensation
-
-
0.9
-
-
-
-
0.9
Net earnings
-
-
-
54.0
-
-
-
54.0
Other comprehensive (loss)
-
-
-
-
-
-
( 5.5
)
( 5.5
)
September 30, 2020
47,859,751
$
0.6
$
552.6
$
857.1
14,653,217
$
( 857.9
)
$
( 109.8
)
$
442.6
Nine Months Ended September 30, 2020
Accumulated
Additional
Other
Common Stock
Paid-In
Retained
Treasury Stock
Comprehensive
Shares
Amount
Capital
Earnings
Shares
Amount
(Loss)
Total
December 31, 2019
47,992,348
$
0.6
$
555.7
$
1,008.2
14,271,047
$
( 823.5
)
$
( 376.1
)
$
364.9
Stock issuance, net
249,573
-
-
-
-
-
-
-
Cash dividends - $ 0.60 per common share
-
-
-
( 29.2
)
-
-
-
( 29.2
)
Share-based employee compensation
-
-
( 3.1
)
-
-
-
-
( 3.1
)
Net (loss)
-
-
-
( 121.9
)
-
-
-
( 121.9
)
Other comprehensive income
-
-
-
-
-
-
266.3
266.3
Acquisition of treasury stock
( 382,170
)
-
-
-
382,170
( 34.4
)
-
( 34.4
)
September 30, 2020
47,859,751
$
0.6
$
552.6
$
857.1
14,653,217
$
( 857.9
)
$
( 109.8
)
$
442.6
Three Months Ended September 30, 2019
Accumulated
Additional
Other
Common Stock
Paid-In
Retained
Treasury Stock
Comprehensive
Shares
Amount
Capital
Earnings
Shares
Amount
(Loss)
Total
June 30, 2019
48,661,946
$
0.6
$
538.1
$
905.7
13,393,176
$
( 740.3
)
$
( 461.0
)
$
243.1
Stock issuance, net
116,586
-
-
-
-
-
-
-
Cash dividends - $ 0.175 per common share
-
-
-
( 8.6
)
-
-
-
( 8.6
)
Share-based employee compensation
-
-
11.3
-
-
-
-
11.3
Net earnings
-
-
-
73.2
-
-
-
73.2
Other comprehensive income
-
-
-
-
-
-
81.4
81.4
Acquisition of treasury stock
( 347,304
)
-
-
-
347,304
( 33.1
)
-
( 33.1
)
September 30, 2019
48,431,228
$
0.6
$
549.4
$
970.3
13,740,480
$
( 773.4
)
$
( 379.6
)
$
367.3
Nine Months Ended September 30, 2019
Accumulated
Additional
Other
Common Stock
Paid-In
Retained
Treasury Stock
Comprehensive
Shares
Amount
Capital
Earnings
Shares
Amount
(Loss)
Total
December 31, 2018
48,808,239
$
0.6
$
547.4
$
829.8
12,745,485
$
( 692.2
)
$
( 459.6
)
$
226.0
Cumulative effect impact of ASU 2017-12
adoption
-
-
-
( 0.1
)
-
-
0.1
-
Stock issuance, net
617,984
-
-
-
-
-
-
-
Cash dividends - $ 0.525 per common share
-
-
-
( 26.2
)
-
-
-
( 26.2
)
Share-based employee compensation
-
-
2.0
-
-
-
-
2.0
Net earnings
-
-
-
166.8
-
-
-
166.8
Other comprehensive income
-
-
-
-
-
-
79.9
79.9
Acquisition of treasury stock
( 994,995
)
-
-
-
994,995
( 81.2
)
-
( 81.2
)
September 30, 2019
48,431,228
$
0.6
$
549.4
$
970.3
13,740,480
$
( 773.4
)
$
( 379.6
)
$
367.3
See accompanying notes to Condensed Consolidated Financial Statements beginning on page 8.
6
Armstrong World Industries, Inc., and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(amounts in millions)
Unaudited
Nine Months Ended
September 30,
2020
2019
Cash flows from operating activities:
Net (loss) earnings
$
( 121.9
)
$
166.8
Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:
Depreciation and amortization
61.6
52.4
Loss on disposal of discontinued operations
4.4
31.9
Write-off debt refinancing fees
-
2.7
Gain related to sale of fixed and intangible assets
( 21.0
)
-
Deferred income taxes
( 87.0
)
37.9
Share-based compensation
4.7
7.1
Equity earnings from joint venture
( 48.2
)
( 83.0
)
U.S. pension cost (credit)
369.7
( 5.7
)
Other non-cash adjustments, net
0.7
2.3
Changes in operating assets and liabilities:
Receivables
0.2
( 4.4
)
Inventories
( 7.8
)
( 8.4
)
Accounts payable and accrued expenses
( 20.7
)
( 27.0
)
Income taxes receivable and payable, net
28.4
( 33.1
)
Other assets and liabilities
( 14.7
)
( 18.1
)
Net cash provided by operating activities
148.4
121.4
Cash flows from investing activities:
Purchases of property, plant and equipment
( 33.0
)
( 44.0
)
Return of investment from joint venture
61.4
64.4
Cash paid for acquisitions
( 74.2
)
( 43.4
)
Proceeds from the sale of assets
19.1
-
Payments of proceeds from Knauf to investment in joint venture
( 25.9
)
-
Payments to Knauf upon disposal of discontinued operations
( 6.4
)
( 47.9
)
Other investing activities
6.8
-
Net cash (used for) investing activities
( 52.2
)
( 70.9
)
Cash flows from financing activities:
Proceeds from short-term debt
30.0
-
Payments of short-term debt
( 30.0
)
-
Proceeds from revolving credit facility
170.0
120.0
Payments of revolving credit facility
( 100.0
)
-
Proceeds from long-term debt
-
500.0
Payments of long-term debt
-
( 790.4
)
Financing costs
-
( 2.9
)
Dividend paid
( 29.1
)
( 25.9
)
Payments from share-based compensation plans, net of tax
( 7.8
)
( 8.6
)
Payments for treasury stock acquired
( 34.4
)
( 81.2
)
Payments for finance leases
( 1.2
)
-
Net cash (used for) financing activities
( 2.5
)
( 289.0
)
Effect of exchange rate changes on cash and cash equivalents
( 0.2
)
0.8
Net increase (decrease) in cash and cash equivalents
93.5
( 237.7
)
Cash and cash equivalents at beginning of year of discontinued operations
-
10.0
Cash and cash equivalents at beginning of year of continuing operations
45.3
325.7
Cash and cash equivalents at end of period of continuing operations
$
138.8
$
98.0
Supplemental Cash Flow Disclosures:
Interest paid
$
18.2
$
26.9
Income tax payments, net
6.3
46.3
Amounts in accounts payable for capital expenditures
-
0.7
See accompanying notes to Condensed Consolidated Financial Statements beginning on page 8.
7
Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
NOTE 1. BUSINESS AND BASIS OF PRESENTATION
Armstrong World Industries, Inc. (“AWI”) is a Pennsylvania corporation incorporated in 1891. When we refer to “AWI,” the “Company,” “we,” “our” or “us” in these notes, we are referring to AWI and its subsidiaries.
Except as disclosed in this Note, the accounting policies used in preparing the Condensed Consolidated Financial Statements in this Form 10-Q are the same as those used in preparing the Consolidated Financial Statements for the year ended December 31, 2019. These statements should therefore be read in conjunction with the Consolidated Financial Statements and notes that are included in the Amendment No. 1 to the Annual Report on Form 10-K/A for the fiscal year ended December 31, 2019. In the opinion of management, all adjustments of a normal recurring nature have been included to provide a fair statement of the results for the reporting periods presented. Operating results for the third quarter and first nine months of 2020 and 2019 included in this report are unaudited. Quarterly results are not necessarily indicative of annual earnings, primarily due to the different level of sales in each quarter of the year and the possibility of changes in general economic conditions.
These Condensed Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The statements include management estimates and judgments, where appropriate. Management utilizes estimates to record many items, including certain asset values, contingent purchase price liabilities, allowances for bad debts, inventory obsolescence and lower of cost and net realizable value charges, warranty reserves, workers’ compensation, general liability and environmental claims, and income taxes. When preparing an estimate, management determines the amount based upon the consideration of relevant information and may confer with outside parties, including external counsel. Actual results may differ from these estimates.
Certain prior year amounts have been reclassified in the Condensed Consolidated Financial Statements to conform to the 2020 presentation.
Acquisitions
In August 2020, we acquired the business and assets of Moz Designs, Inc. (“Moz”), based in Oakland, California. Moz is a designer and fabricator of custom architectural metal ceilings, walls, dividers and column covers for interior and exterior applications with one manufacturing facility. Moz’s operations, and its assets and liabilities, are included as a component of our Architectural Specialties segment.
In July 2020, we acquired all the issued and outstanding capital stock of TURF Design Inc. (“Turf”), with one manufacturing facility in Elgin, Illinois and a design center in Chicago, Illinois. Turf is a designer and manufacturer of acoustic felt ceilings and wall products. Turf’s operations, and its assets and liabilities, are included as a component of our Architectural Specialties segment.
In November 2019, we acquired the business and assets of MRK Industries, Inc. (“MRK”), based in Libertyville, Illinois. MRK is a manufacturer of specialty metal ceiling, wall and exterior solutions with one manufacturing facility. MRK’s operations, and its assets and liabilities, are included as a component of our Architectural Specialties segment.
In March 2019, we acquired the business and assets of Architectural Components Group, Inc. (“ACGI”), based in Marshfield, Missouri. ACGI is a manufacturer of custom wood ceilings and walls with one manufacturing facility. ACGI’s operations, and its assets and liabilities, are included as a component of our Architectural Specialties segment.
See Note 4 for further information on our recent acquisitions.
Discontinued Operations
On September 30, 2019, we completed the sale of certain subsidiaries comprising our businesses and operations in Europe, the Middle East and Africa (including Russia) (“EMEA”) and the Pacific Rim, including the corresponding businesses and operations conducted by Worthington Armstrong Venture (“WAVE”), our joint venture with Worthington Industries, Inc. (“Worthington”) in which AWI holds a 50 % interest (collectively, the “Sale”), to Knauf International GmbH (“Knauf”). 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. During the three and nine months ended September 30, 2020, we remitted $ 5.9 and $ 25.9 million, respectively, to WAVE for their portion of the proceeds from Knauf. During the nine months ended September 30, 2020, WAVE paid each of AWI and Worthington dividends of $ 13.0
8
Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
million relating to these payments. During the third quarter of 2020, we remitted $ 6.4 million to Knauf for working capital and other adjustments . Final adjustments are subject to negotiations with Knauf related to the valuation of certain liabilities included in the Sale , which we expect to be finalized in 2020. The final valuation could result in an increase to those liabilities of $ 11.0 million ; however, we have no t accrued a liability for this matter as of September 30, 2020 as payment is not probable .
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 provided certain transition technology, finance and information technology support services, which are now substantially complete. In connection with the closing of the Sale, we also entered into (i) a royalty-free intellectual property License Agreement with Knauf under which they license patents, trademarks and know-how from us for use in licensed territories in which the business was conducted prior to the Sale, and (ii) a Supply Agreement with Knauf under which the parties may continue to purchase certain products from each other following the closing of the Sale. WAVE also entered into similar agreements with Knauf for such purposes. 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.
The EMEA and Pacific Rim segment historical financial results for the three and nine months ended September 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.
Recently Adopted Accounting Standards
In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments," which requires immediate recognition of estimated credit losses that are expected to occur over the remaining life of many financial assets. This standard applies to all financial assets, including trade receivables. Our current accounts receivable policy uses historical and current information to estimate the amount of probable credit losses in our existing accounts receivable balances. Effective January 1, 2020, we adopted this standard, which had no material impact on our financial condition, results of operations or cash flows.
In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other,” which simplifies the subsequent measurement of goodwill by eliminating the second step from the current goodwill impairment test. Under this standard, an entity recognizes an impairment charge for the amount by which the carrying value of the reporting unit goodwill exceeds the fair value. Effective January 1, 2020, we adopted this standard prospectively. Our adoption of this standard had no impact on our financial condition or results of operations.
In August 2018, the FASB issued ASU 2018-13, “Changes to the Disclosure Requirements for Fair Value Measurement.” This standard eliminates the current requirement to disclose the amount or reason for transfers between level 1 and level 2 of the fair value hierarchy and the requirement to disclose the valuation methodology for level 3 fair value measurements. The standard includes additional disclosure requirements for level 3 fair value measurements, including the requirement to disclose the changes in unrealized gains and losses in other comprehensive income during the period and permits the disclosure of other relevant quantitative information for certain unobservable inputs. Effective January 1, 2020, we adopted this standard, which resulted in additional disclosures for level 3 fair value measurements.
In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract,” which amends ASC 350-40 Intangibles – Goodwill and Other – Internal-Use Software. The ASU requires implementation costs incurred by customers in cloud computing arrangements to be deferred and recognized over the term of the arrangement, if these costs were capitalized by the customer in a software licensing arrangement. Effective January 1, 2020, we adopted this standard prospectively. Our adoption of this standard h ad no material impact on our financial condition, results of operations or cash flows.
In March 2020, the FASB issued ASU 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by the discontinuation of the London Interbank Offered Rate (LIBOR) and other interbank offered rates. This guidance is effective through December 31, 2022. Effective the second quarter of 2020 we adopted this standard, which had no impact on our financial condition, results of operations and cash flows.
Recently Issued Accounting Standards
In August 2018, the FASB issued ASU 2018-14, “ Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans,” which amends ASC 715-20, Compensation – Retirement Benefits – Defined Benefit Plans. The ASU modifies the
9
Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The disclosure requirements to be removed include the amounts in accumulated other comprehensive income expected to be recognized in net periodic benefit costs over the next fiscal year, the amount and timing of plan assets expected to be returned to the employer and the effect of a one percentage point change in assumed health care cost trend rates on the aggregate service cost and benefit obligation for postretirement health care benefits. The new disclosure requirements include the interest crediting rates for cash balance plans, and an explanation of significant gains and losses related to changes in benefit obligations. This guidance is effective for fiscal years ending after December 15, 2020. We are evaluating the impact the adoption of this standard will have on our disclosures.
In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes,” which removes exceptions to the general principles in ASC Topic 740 – Income Taxes for allocating tax expense between financial statement components, accounting basis differences resulting from an ownership change in foreign investments and interim period income tax accounting for year-to-date losses that exceed projected losses. This guidance is effective for fiscal years beginning after December 15, 2020. We are evaluating the impact the adoption of this standard will have on our financial condition and results of operations.
COVID-19 Considerations
The COVID-19 outbreak has created significant volatility and economic disruption and the impact on our future consolidated results of operations is uncertain . The extent to which COVID-19 impacts our employees, operations, customers, suppliers and financial results depends on numerous evolving factors that we are not be able to accurately predict, including: the duration and scope of the pandemic; government actions taken in response to the pandemic; the impact on construction activity; the effect on our customers demand for our ceiling and wall systems; our ability to manufacture and sell our products; and the ability of our customers to pay for our products. While many of our products support life sustaining activities and essential construction, we, and certain of our customers or suppliers, may be impacted by state actions, orders and policies regarding the COVID-19 pandemic, including temporary closures of non-life sustaining businesses, shelter-in-place orders, and travel, social distancing and quarantine policies, the implementation and enforcement of which vary by individual U.S. states and by individual countries in the Americas. We did not record any asset impairments, inventory charges or bad debt reserves related to COVID-19 during the third quarter and first nine months of 2020 but future events may require such charges, which could have a material adverse effect on our financial condition, liquidity or results of operations.
NOTE 2. SEGMENT RESULTS
Three Months Ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Net sales
Mineral Fiber
$
187.3
$
218.6
$
542.9
$
629.4
Architectural Specialties
59.0
58.5
155.3
161.8
Total net sales
$
246.3
$
277.1
$
698.2
$
791.2
Three Months Ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Segment operating income (loss)
Mineral Fiber
$
58.1
$
103.5
$
173.7
$
230.5
Architectural Specialties
9.1
11.6
20.9
30.3
Unallocated Corporate
5.1
( 1.8
)
16.1
( 5.6
)
Total consolidated operating income
$
72.3
$
113.3
$
210.7
$
255.2
Three Months Ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Total consolidated operating income
$
72.3
$
113.3
$
210.7
$
255.2
Interest expense
6.1
11.7
18.7
31.6
Other non-operating (income) expense, net
( 3.2
)
( 5.1
)
361.8
( 16.0
)
Earnings (loss) from continuing operations before income taxes
$
69.4
$
106.7
$
( 169.8
)
$
239.6
10
Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
September 30, 2020
December 31, 2019
Segment assets
Mineral Fiber
$
1,110.9
$
1,139.9
Architectural Specialties
258.8
161.8
Unallocated Corporate
264.0
191.6
Total consolidated assets
$
1,633.7
$
1,493.3
During the three and nine months ended September 30, 2020, we recorded a gain related to the sale of our idled mineral fiber plant in China. We received the majority of the proceeds in the third quarter of 2020 and the remaining receivable for the sale was $ 2.4 million as of September 30, 2020.
NOTE 3. REVENUE
Revenue Recognition
We recognize revenue upon transfer of control of our products to the customer, which typically occurs upon shipment. Our main performance obligation to our customers is the delivery of products in accordance with purchase orders. Each purchase order confirms the transaction price for the products purchased under the arrangement. Direct sales to building materials distributors, home centers, direct customers and retailers represent the majority of our sales. Our standard sales terms are Free On Board (“FOB”) shipping point. We have some sales terms that are FOB destination. At the point of shipment, the customer is required to pay under normal sales terms. Our normal payment terms in most cases are 45 days or less and our sales arrangements do not have any material financing components. In addition, our customer arrangements do not produce contract assets or liabilities that are material to our consolidated financial statements. Within our Architectural Specialties segment, the majority of revenues are customer project driven, which includes a minority of revenues derived from the sale of customer specified customized products that have no alternative use to us. The manufacturing cycle for these custom products is typically short.
Incremental costs to fulfill our customer arrangements are expensed as incurred, as the amortization period is less than one year .
Our products are sold with normal and customary return provisions. We provide limited warranties for defects in materials or factory workmanship, sagging and warping, and certain other manufacturing defects. Warranties are not sold separately to customers. Our product warranties place certain requirements on the purchaser, including installation and maintenance in accordance with our written instructions. In addition to our warranty program, under certain limited circumstances, we will occasionally at our sole discretion provide a customer accommodation repair or replacement. Warranty repairs and replacements are most commonly made by professional installers employed by or affiliated with our independent distributors. Reimbursement for costs associated with warranty repairs are provided to our independent distributors through a credit against accounts receivable from the distributor to us. Sales returns and warranty claims have historically not been material and do not constitute separate performance obligations.
We often offer incentive programs to our customers, primarily volume rebates and promotions. The majority of our rebates are designated as a percentage of annual customer purchases. We estimate the amount of rebates based on actual sales for the period and accrue for the projected incentive programs costs. We record the costs of rebate accruals as a reduction to the transaction price. Other sales discounts, including early pay promotions, are deducted immediately from the sales invoice.
Shipping and Handling
We account for product shipping and handling costs as fulfillment activities and present the associated costs in costs of goods sold in the period in which we sell our product.
Disaggregation of Revenues
Our Mineral Fiber and Architectural Specialties operating segments both manufacture and sell ceiling and wall systems (primarily mineral fiber, fiberglass wool, metal, wood, wood fiber, glass-reinforced-gypsum and felt) throughout the Americas. We disaggregate revenue based on our product-based segments and major customer channels, as they represent the most appropriate depiction of how the nature, amount and timing of revenues and cash flows are affected by economic factors. Net sales by major customer channel are as follows:
11
Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
Distributors – represents net sales to building materials distributors who re-sell our products to contractors, subcontractors’ alliances, large architect and design firms, and major facility owners. Geographically, this category includes sales throughout the U.S., Canada, and Latin America.
Home centers – represents net sales to home centers, such as Lowe’s Companies, Inc. and The Home Depot, Inc. This category includes sales primarily to U.S. customers.
Direct customers – represents net sales to contractors, subcontractors, and large architect and design firms. This category includes sales primarily to U.S. customers.
Retailers and other – represents net sales to independent retailers and certain national account customers, including wholesalers who re-sell our products to dealers who service builders, contractors and consumers, online customers, major facility owners, group purchasing organizations and maintenance, repair and operating (“MRO”) entities. Geographically, this category includes sales throughout the U.S. and Canada.
The following tables provide net sales by major customer group within our Mineral Fiber and Architectural Specialties segments for the three and nine months ended September 30, 2020 and 2019:
Three Months Ended
Nine Months Ended
September 30,
September 30,
Mineral Fiber
2020
2019
2020
2019
Distributors
$
138.6
$
168.0
$
395.1
$
474.0
Home centers
22.5
20.0
67.6
64.3
Direct customers
13.8
15.8
41.9
47.4
Retailers and other
12.4
14.8
38.3
43.7
Total
$
187.3
$
218.6
$
542.9
$
629.4
Three Months Ended
Nine Months Ended
September 30,
September 30,
Architectural Specialties
2020
2019
2020
2019
Distributors
$
36.0
$
39.7
$
103.9
$
108.5
Direct customers
23.0
16.7
49.8
48.8
Retailers and other
-
2.1
1.6
4.5
Total
$
59.0
$
58.5
$
155.3
$
161.8
NOTE 4. ACQUISITIONS
We account for acquisitions under the acquisition method and the results of operations of acquired operations are included in the condensed consolidated financial statements from the acquisition date. Acquisition related costs are expensed as incurred. We allocate total consideration to the assets acquired and liabilities assumed based on their estimated fair values, with the remaining unallocated amount recorded as goodwill. The fair value of acquired intangible assets is estimated by applying discounted cash flow models based on significant level 3 inputs not observable in the market. Key assumptions are developed based on each acquirees’ historical experience, future projections and comparable market data including future cash flows, long-term growth rates, implied royalty rates, attrition rates and discount rates.
MOZ
On August 24, 2020, we acquired the business and assets of Moz for a purchase price of $ 4.2 million and additional contingent consideration payable in 2022 not to exceed $ 4.7 million. The total fair value of liabilities assumed, less tangible assets acquired, was $ 0.5 million. The total fair value of identifiable intangible assets acquired was $ 3.2 million, comprised of non-amortizable tradenames of $ 1.7 million and amortizable customer relationships of $ 1.5 million, resulting in $ 4.0 million of goodwill. All of the acquired goodwill is deductible for tax purposes . The fair value of liabilities assumed included $ 2.5 million for contingent consideration. Valuations for assets acquired and liabilities assumed are based on preliminary estimates that are subject to revisions and may result in adjustments to preliminary values as valuations are finalized.
The contingent consideration is payable upon achievement of certain future performance objectives through 2021. The fair value of contingent consideration will be remeasured at each reporting period, and any future adjustments will be recorded as a component of
12
Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
selling, general and administrative (“SG&A”) expenses in our Condensed Consolidated Statements of Operations and Comprehensive Income.
TURF
On July 27, 2020, we acquired all the issued and outstanding capital stock of Turf for a purchase price of $ 70.0 million and additional contingent consideration payable in 2022 and 2023 not to exceed $ 48.0 million. The total fair value of tangible assets acquired, less liabilities assumed, was $ 4.8 million. The total fair value of identifiable intangible assets acquired was $ 27.9 million, mostly comprised of non-amortizable tradenames of $ 9.6 million in addition to amortizable customer relationships of $ 7.7 million, patents of $ 5.8 million and a non-compete agreement of $ 3.3 million, resulting in $ 50.7 million of goodwill. All of the acquired goodwill is deductible for tax purposes . The fair value of liabilities assumed included $ 13.4 million for contingent consideration. Valuations for assets acquired and liabilities assumed are based on preliminary estimates that are subject to revisions and may result in adjustments to preliminary values as valuations are finalized.
The contingent consideration is payable upon achievement of certain future performance objectives through 2022. The contingent consideration includes up to $ 24.0 million in additional cash consideration for performance at certain revenue and EBITDA growth targets. Full payout for target performance requires compounded annual growth rates in excess of 23 % through 2022. The contingent consideration also includes up to $ 24.0 million in additional cash consideration for performance over revenue and EBITDA growth targets. Full payout for achievement over target performance requires compounded annual growth rates in excess of 38 % through 2022. The fair value of contingent consideration will be remeasured at each reporting period, and any future adjustments will be recorded as a component of SG&A expenses in our Condensed Consolidated Statements of Operations and Comprehensive Income.
MRK
On November 25, 2019, we acquired the business and assets of MRK for a purchase price of $ 13.3 million. The total fair value of tangible assets acquired, less liabilities assumed, was $ 2.9 million, resulting in $ 10.4 million of goodwill. All of the acquired goodwill is deductible for tax purposes .
ACGI
On March 4, 2019, we acquired the business and assets of ACGI for a purchase price of $ 42.9 million. The total fair value of tangible assets acquired, less liabilities assumed, was $ 7.3 million. The total fair value of identifiable intangible assets acquired was $ 12.0 million, mostly comprised of amortizable customer relationships of $ 7.4 million and amortizable tradenames of $ 2.8 million, resulting in $ 23.6 million of goodwill. All of the acquired goodwill is deductible for tax purposes .
The 2020 and 2019 acquisitions, both individually and in the aggregate, did not have a material impact on reported net sales or operating income for the three and nine months ended September 30, 2020 and 2019.
NOTE 5. DISCONTINUED OPERATIONS
EMEA AND PACIFIC RIM BUSINESSES
On November 17, 2017, we agreed to sell certain subsidiaries comprising our businesses in EMEA and the Pacific Rim to Knauf. The Sale was completed on September 30, 2019. Prior to completion of the Sale, each quarter, we compared the anticipated sales proceeds from Knauf to the carrying value of EMEA and Pacific Rim net assets. We recorded an estimated loss when the carrying value exceeded the anticipated sales proceeds. Net gains were only recorded to the extent of previous estimated losses.
During the three and nine months ended September 30, 2019, we recorded a loss on sale of $ 27.3 million and $ 31.9 million, respectively. During the three and nine months ended September 30, 2020, we recorded a loss of $ 0.2 million and $ 5.2 million, respectively, representing working capital and other adjustments.
See Note 1 for further discussion of the Sale.
13
Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
FLOORING BUSINESSES
Separation and Distribution of AFI
On April 1, 2016, we completed our separation of Armstrong Flooring, Inc. (“AFI”) by allocating the assets and liabilities related primarily to our Resilient and Wood Flooring segments to AFI and then distributing the common stock of AFI to our shareholders at a ratio of one share of AFI common stock for every two shares of AWI common stock.
European Resilient Flooring
During the second quarter of 2020, we recorded a gain of $ 0.8 million related to Accumulated Other Comprehensive Income (“AOCI”) adjustments from a previously discontinued foreign flooring entity, which was dissolved in the second quarter of 2020. The AOCI adjustments related to accumulated foreign currency translation amounts.
Summarized Financial Information of Discontinued Operations
The following tables detail the businesses and line items that comprise discontinued operations on the Condensed Consolidated Statements of Operations and Comprehensive Income.
EMEA and Pacific Rim Businesses
Three Months Ended September 30, 2020
(Loss) from disposal of discontinued businesses, before income tax
$
( 0.2
)
Income tax (benefit)
-
(Loss) from disposal of discontinued businesses, net of tax
$
( 0.2
)
Net (loss) from discontinued operations
$
( 0.2
)
EMEA and Pacific Rim Businesses
Flooring
Businesses
Total
Nine Months Ended September 30, 2020
(Loss) gain from disposal of discontinued businesses, before income tax
$
( 5.2
)
$
0.8
$
( 4.4
)
Income tax (benefit)
( 1.4
)
-
( 1.4
)
(Loss) gain from disposal of discontinued businesses, net of tax
$
( 3.8
)
$
0.8
$
( 3.0
)
Net (loss) earnings from discontinued operations
$
( 3.8
)
$
0.8
$
( 3.0
)
EMEA and Pacific Rim Businesses
Flooring
Businesses
Total
Three Months Ended September 30, 2019
Net sales
$
115.5
$
-
$
115.5
Cost of goods sold
86.8
-
86.8
Gross profit
28.7
-
28.7
Selling, general and administrative expenses
20.4
-
20.4
Operating income
8.3
-
8.3
Other non-operating expense, net
1.0
-
1.0
Earnings from discontinued operations before income tax
7.3
-
7.3
Income tax expense
2.5
-
2.5
Net earnings from discontinued operations, net of tax
$
4.8
$
-
$
4.8
(Loss) from disposal of discontinued businesses, before income tax
$
( 27.3
)
$
-
$
( 27.3
)
Income tax (benefit)
-
( 5.0
)
( 5.0
)
(Loss) gain from disposal of discontinued business, net of tax
$
( 27.3
)
$
5.0
$
( 22.3
)
Net (loss) earnings from discontinued operations
$
( 22.5
)
$
5.0
$
( 17.5
)
14
Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
EMEA and Pacific Rim Businesses
Flooring
Businesses
Total
Nine Months Ended September 30, 2019
Net sales
$
319.1
$
-
$
319.1
Cost of goods sold
245.7
-
245.7
Gross profit
73.4
-
73.4
Selling, general and administrative expenses
61.6
-
61.6
Operating income
11.8
-
11.8
Other non-operating expense, net
1.6
-
1.6
Earnings from discontinued operations before income tax
10.2
-
10.2
Income tax expense
7.2
-
7.2
Net earnings from discontinued operations, net of tax
$
3.0
$
-
$
3.0
(Loss) from disposal of discontinued businesses, before income tax
$
( 31.9
)
$
-
$
( 31.9
)
Income tax (benefit)
-
( 4.9
)
( 4.9
)
(Loss) gain from disposal of discontinued businesses, net of tax
$
( 31.9
)
$
4.9
$
( 27.0
)
Net (loss) earnings from discontinued operations
$
( 28.9
)
$
4.9
$
( 24.0
)
The following is a summary of total gains and losses, capital expenditures and operating lease information related to our former EMEA and Pacific Rim businesses, and gains on the dissolution of our previously discontinued flooring entity, which are presented as discontinued operations and included as components of operating and investing cash flows on our Condensed Consolidated Statements of Cash Flows.
Nine Months Ended
September 30,
2020
2019
Loss on sale to Knauf (1)
$
5.2
$
-
Estimated loss on sale to Knauf (2)
-
31.9
Gain on dissolution of flooring entity (3)
( 0.8
)
-
Purchases of property, plant and equipment
-
( 3.0
)
Operating lease cost (4)
-
7.4
Right-of-use assets obtained in exchange for lease obligations (5)
-
24.6
(1)
Represents working capital and other adjustments.
(2)
Represents comparison of the EMEA and Pacific Rim net assets to the expected final sales proceeds.
(3)
Represents AOCI adjustments related to accumulated foreign currency translation amounts.
(4)
The amount of cash paid for amounts included in the measurement of lease liabilities was not materially different from the operating lease cost for the nine months ended September 30, 2019.
(5)
Represents initial right-of-use assets recognized upon adoption on January 1, 2019. We did no t obtain any new right-of-use assets in exchange for lease obligations during the nine months ended September 30, 2019.
NOTE 6. ACCOUNTS AND NOTES RECEIVABLE
September 30, 2020
December 31, 2019
Customer receivables
$
83.0
$
82.4
Miscellaneous receivables
10.7
5.0
Less allowance for warranties, discounts and losses
( 3.6
)
( 2.3
)
Accounts and notes receivable, net
$
90.1
$
85.1
We sell our products to select, pre-approved customers whose businesses are affected by changes in economic and market conditions. We consider these factors and the financial condition of each customer when establishing our allowance for losses from doubtful accounts.
15
Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
As of September 30, 2020, miscellaneous receivables includes $ 5.7 million related to proceeds from company-owned life insurance policies and $ 2.4 million related to proceeds from the sale of our idled plant in China.
NOTE 7. INVENTORIES
September 30, 2020
December 31, 2019
Finished goods
$
43.1
$
40.2
Goods in process
4.6
4.0
Raw materials and supplies
40.5
35.0
Less LIFO reserves
( 10.8
)
( 10.7
)
Total inventories, net
$
77.4
$
68.5
NOTE 8. OTHER CURRENT ASSETS
September 30, 2020
December 31, 2019
Prepaid expenses
$
10.1
$
7.5
Assets held for sale
-
6.6
Other
1.6
1.4
Total other current assets
$
11.7
$
15.5
As of December 31, 2019, assets held for sale included the assets of our idled mineral fiber plant in China, which was sold during the second quarter of 2020. See Note 2 for further information.
NOTE 9. EQUITY INVESTMENT
Investment in joint venture reflects our 50 % equity interest in WAVE. The WAVE joint venture is reflected within the Mineral Fiber segment in our condensed consolidated financial statements using the equity method of accounting. The European and Pacific Rim businesses of WAVE were included in the Sale to Knauf on September 30, 2019. Accordingly, WAVE’s European and Pacific Rim historical financial statement results have been reflected in WAVE’s consolidated financial statements as a discontinued operation for all periods presented. Condensed financial statement data for WAVE is summarized below on a continuing operations basis.
Three Months Ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Net sales
$
86.3
$
99.9
$
257.0
$
302.3
Gross profit
49.4
56.9
145.7
168.4
Net earnings
33.4
43.9
103.3
127.3
In connection with the sale of WAVE’s European and Pacific Rim businesses and operations to Knauf on September 30, 2019, WAVE recorded a $ 50.9 million gain on sale. As such, during the third quarter of 2019, we recorded our 50 % share of WAVE’s gain on sale of discontinued operations of $ 25.5 million, included as a component of Equity earnings from joint venture in our Condensed Consolidated Statements of Operations and Comprehensive Income .
NOTE 10. LEASES
We enter into operating and finance leases for certain manufacturing plants, warehouses, equipment and automobiles. Our leases have remaining lease terms of 1 to 17 years . Several leases include options for us to purchase leased items at fair value or renew for up to 5 years, or multiple 5-year renewal periods. Some of our leases include early termination options. We consider all of these options in determining the lease term used to establish our right-of-use (“ROU”) assets and lease liabilities when it is reasonably certain that we will exercise that option. Our lease agreements do not contain any residual value guarantees or material restrictive covenants.
We have lease agreements with lease and nonlease components, which we have elected to combine to determine the ROU assets and lease liabilities. Short-term leases with an initial term of 12 months or less are not recorded on the balance sheet. We recognize lease expense for these leases on a straight-line basis over the lease term. Short-term lease expense and variable lease cost was not material for the three and nine months ended September 30, 2020 and 2019.
As most of our leases do not provide an implicit rate, we use our incremental borrowing rate (“IBR”) based on information that is available at the lease commencement date to compute the present value of lease payments. Relevant information used in determining
16
Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
the IBR includes the transactional currency of the lease and the lease term. We used the IBR on January 1, 2019 for operating leases that commenced prior to that date. As of September 30, 2020 , we did no t have any material leases that had not yet commenced .
The following table presents our lease costs:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Operating lease cost
$
0.7
$
1.7
$
4.2
$
5.0
Finance lease cost
Amortization of leased assets
1.3
-
1.3
-
Interest on lease liabilities
0.4
-
0.4
-
The following table presents supplemental cash flow information related to our leases:
Nine Months Ended
September 30,
2020
2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases
$
4.2
$
5.0
Operating cash flows from finance leases
0.4
-
Financing cash flows from finance leases
1.2
-
ROU assets obtained in exchange for lease liabilities
Operating leases (1)
$
4.1
$
39.4
Finance leases
7.5
-
(1)
The nine months ended September 30, 2019 includes initial ROU assets of $ 29.2 million recognized upon adoption on January 1, 2019 .
The following table presents the weighted average assumptions used to compute our ROU assets and lease liabilities:
September 30, 2020
December 31, 2019
Weighted average remaining lease term (in years)
Operating leases
6.9
8.6
Finance leases
11.1
-
Weighted average discount rate
Operating leases
4.1
%
4.4
%
Finance leases
3.7
%
-
Undiscounted future minimum lease payments as of September 30, 2020, by year and in the aggregate, having non-cancelable lease terms in excess of one year are as follows:
Operating Leases
Finance Leases
Maturity of lease liabilities
2020 (1)
$
1.3
$
0.6
2021
4.9
2.6
2022
4.0
2.6
2023
3.1
2.5
2024
2.2
2.4
Thereafter
7.7
14.8
Total lease payments
23.2
25.5
Less interest
( 3.2
)
( 4.9
)
Present value of lease liabilities
$
20.0
$
20.6
(1)
Scheduled maturities of lease liabilities represent the time period of October 1, 2020 to December 31, 2020.
17
Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
NOTE 11. GOODWILL AND INTANGIBLE ASSETS
The following table details amounts related to our goodwill and intangible assets as of September 30, 2020 and December 31, 2019.
September 30, 2020
December 31, 2019
Estimated
Useful Life
Gross
Carrying
Amount
Accumulated Amortization
Gross
Carrying
Amount
Accumulated Amortization
Amortizing intangible assets
Customer relationships
2-20 years
$
198.1
$
124.8
$
188.9
$
114.9
Developed technology
15 - 19 years
91.4
76.4
85.0
72.1
Trademarks and brand names
5-10 years
3.9
1.1
3.9
0.6
Non-compete agreements
5 years
3.5
0.2
0.2
-
Other
Various
1.5
0.5
0.1
0.1
Total
$
298.4
$
203.0
$
278.1
$
187.7
Non-amortizing intangible assets
Trademarks and brand names
Indefinite
332.8
321.5
Total intangible assets
$
631.2
$
599.6
Goodwill
Indefinite
$
108.2
$
53.0
Nine Months Ended
September 30,
2020
2019
Amortization expense
$
15.4
$
14.7
The increase in goodwill and other intangible assets as of September 30, 2020 resulted from the acquisitions of Moz and Turf. See Note 4 to the Condensed Consolidated Financial Statements for additional details.
NOTE 12. OTHER NON-CURRENT ASSETS
September 30, 2020
December 31, 2019
Cash surrender value of Company owned life insurance policies
$
50.0
$
53.5
Other
6.6
4.4
Total other non-current assets
$
56.6
$
57.9
NOTE 13. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
September 30, 2020
December 31, 2019
Payables, trade and other
$
69.0
$
79.4
Employment costs
10.1
16.5
Current portion of pension and postretirement liabilities
10.5
10.5
Payable to Knauf for purchase price adjustments
-
1.2
Payable to WAVE for receipt of Knauf proceeds
-
25.9
Other
11.2
10.0
Total accounts payable and accrued expenses
$
100.8
$
143.5
NOTE 14. INCOME TAX EXPENSE
Three Months Ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Earnings (loss) from continuing operations before income taxes
$
69.4
$
106.7
$
( 169.8
)
$
239.6
Income tax expense (benefit)
15.2
16.0
( 50.9
)
48.8
Effective tax rate
21.9
%
15.0
%
30.0
%
20.4
%
18
Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
The effective tax rate in the third quarter of 2020 was higher than the same period in 2019, largely driven by the absence of the beneficial tax impact of our share of WAVE’s gain on sale of its discontinued European and Pacific Rim businesses and the absence of a benefit related to a statute closure, both recognized in 2019. These increases were both partially offset by the current year tax benefit related to the sale of our idled mineral fiber plant in China. The effective tax rate for the first nine months of 2020 was higher than the effective tax rate for the same period in 2019 primarily due to the tax effects of our first quarter of 2020 pension settlement and the absence of benefits related to the WAVE gain on sale and statute closure from 2019, partially offset by the benefits related to the sale of our idled mineral fiber plant in China. See Note 16 for additional details related to our pension settlement.
It is reasonably possible that the amount of unrecognized tax benefits could significantly increase or decrease within the next twelve months. However, an estimate of the range of reasonably possible outcomes cannot be reliably made at this time. Changes to unrecognized tax benefits could result from the completion of ongoing examinations, the expiration of statutes of limitations or other unforeseen circumstances.
NOTE 15. DEBT
As of September 30, 2020 and December 31, 2019, our long-term debt included borrowings outstanding under our $ 1,000.0 million variable rate senior credit facility, which is composed 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. As of September 30, 2020 and December 31, 2019, borrowings outstanding under our revolving credit facility were $ 185.0 million and $ 115.0 million, respectively. Our Term Loan A was fully drawn as of September 30, 2020 and December 31, 2019. We also have a $ 25.0 million letter of credit facility, also known as our bi-lateral facility.
During the third quarter of 2020, we repaid $ 30.0 million under our Accounts Receivable Securitization Facility with the Bank of Nova Scotia (the “funding entity”) which matured in September 2020 . Interest on borrowings under this amended facility was calculated at a 90-day commercial paper rate. Under this facility, we sold accounts receivables to Armstrong Receivables Company, LLC (“ARC”), a Delaware entity that is consolidated in these financial statements. ARC is a 100 % wholly owned single member LLC special purpose entity created specifically for this transaction; therefore, any receivables sold to ARC were not available to the general creditors of AWI. ARC used this facility to borrow cash or issue letters of credit. When ARC borrowed cash under this facility, ARC sold an undivided percentage ownership interest in the purchased accounts receivables to the funding entity. We had the unilateral right to repurchase the funding entity’s purchased interest in the accounts receivables and, as a result, borrowings under this facility were reported as debt in the Condensed Consolidated Balance Sheets. Borrowings under this facility were obligations of ARC and not AWI. ARC contracted with and paid a servicing fee to AWI to manage, collect and service the purchased accounts receivables. All new receivables under the program were continuously purchased by ARC with the proceeds from collections of receivables previously purchased. There were no borrowings outstanding under this facility as of December 31, 2019.
We utilize lines of credit and other commercial commitments in order to ensure that adequate funds are available to meet operating requirements. Letters of credit are currently arranged through our revolving credit facility and our bi-lateral facility. Letters of credit may be issued to third party suppliers, insurance and financial institutions and typically can only be drawn upon in the event of AWI’s failure to pay its obligations to the beneficiary. The following table presents details related to our letters of credit facilities:
September 30, 2020
Financing Arrangements
Limit
Used
Available
Bi-lateral facility
25.0
10.9
14.1
Revolving credit facility
150.0
-
150.0
Total
$
175.0
$
10.9
$
164.1
19
Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
NOTE 16. PENSIONS AND OTHER BENEFIT PROGRAMS
Following are the components of net periodic benefit costs (credits):
Three Months Ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
U.S. defined benefit plans:
Pension benefits
Service cost of benefits earned during the period
$
1.4
$
1.2
$
4.2
$
3.6
Interest cost on projected benefit obligation
2.8
12.5
12.7
37.7
Expected return on plan assets
( 6.6
)
( 20.0
)
( 28.0
)
( 60.1
)
Amortization of net actuarial loss
0.8
4.8
5.5
14.4
Settlement
-
-
374.4
-
Special termination benefits
2.0
-
2.0
-
Net periodic pension cost (credit)
$
0.4
$
( 1.5
)
$
370.8
$
( 4.4
)
Retiree health and life insurance benefits
Service cost of benefits earning during the period
-
0.1
-
0.1
Interest cost on projected benefit obligation
0.4
0.6
1.4
1.8
Amortization of prior service credit
( 0.1
)
-
( 0.2
)
( 0.1
)
Amortization of net actuarial gain
( 1.7
)
( 2.2
)
( 5.0
)
( 6.4
)
Net periodic postretirement (credit)
$
( 1.4
)
$
( 1.5
)
$
( 3.8
)
$
( 4.6
)
We also have an unfunded defined benefit pension plan in Germany, which was not acquired by Knauf in connection with the Sale. This plan is reported as a component of our Unallocated Corporate segment. Net periodic pension cost for this plan was immaterial for the three and nine months ended September 30, 2020 and 2019.
The service cost component of net benefit cost has been presented in the Condensed Consolidated Statements of Operations and Comprehensive Income within cost of goods sold and SG&A expenses for all periods presented, which are the same line items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are presented in the Condensed Consolidated Statements of Operations and Comprehensive Income separately from the service cost component within other non-operating expense (income), net.
During February 2020, we entered into agreements with Athene Annuity and Life Company (“AAIA”) and Athene Annuity & Life Assurance Company of New York (“AANY”) to transfer certain benefit obligations and assets of our U.S. Retirement Income Plan (“RIP”) to AAIA and AANY. Under the agreements, we effectively settled $ 1,045.3 million of retiree defined benefit pension obligations related to approximately 10,300 retirees and beneficiaries (the “Transferred Participants”), which were irrevocably transferred to AAIA and AANY and which guarantees the pension benefits of the Transferred Participants. During the third quarter of 2020, these amounts were immaterially adjusted due to customary data reconciliations with AAIA and AANY.
As a result of the transaction, we recorded a $ 374.4 million settlement loss in the first quarter of 2020, which was reflected as a component of other non-operating expense. The RIP’s assets and liabilities were remeasured as of the settlement date, resulting in a remaining projected benefit obligation of $ 387.5 million, which covered approximately 3,000 deferred vested and active participants, and fair value of plan assets of $ 499.6 million. The discount rate used to determine the projected benefit obligation at the settlement date was 3.07 %, compared to 3.16 % used as of December 31, 2019. The expected long-term return on plan assets remained at 5.25 % and did not change as a result of the settlement.
During the third quarter of 2020, we offered an early retirement incentive benefit to employees at one of our manufacturing plants who met certain age and years of service criteria. The consideration period for eligible employees ended on September 30, 2020. Based on eligible employee elections to participate, we recorded a charge of $ 2.0 million within other non-operating expense, which increased the projected benefit obligation of the RIP. The enhanced retirement benefits did not result in a curtailment.
20
Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
NOTE 17. FINANCIAL INSTRUMENTS
We do not hold or issue financial instruments for trading purposes. The estimated fair values of our financial instruments are as follows:
September 30, 2020
December 31, 2019
Carrying
amount
Estimated
fair value
Carrying
amount
Estimated
fair value
(Liabilities), net:
Total long-term debt, including current portion
$
( 681.5
)
$
( 681.5
)
$
( 610.8
)
$
( 610.8
)
Interest rate swap contracts
( 30.6
)
( 30.6
)
( 14.3
)
( 14.3
)
Contingent consideration
( 15.9
)
( 15.9
)
-
-
The carrying amounts of cash and cash equivalents, receivables, accounts payable, accrued expenses and short-term debt approximate fair value because of the short-term maturity of these instruments. The fair value estimates of long-term debt are based on quotes from a major financial institution of recently observed trading levels of our Term Loan A debt. The fair value estimates for interest rate swap contracts are estimated by obtaining quotes from major financial institutions with verification by internal valuation models. The fair value estimates for contingent consideration are estimated based on a Monte Carlo simulation.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Three levels of inputs may be used to measure fair value:
Level 1 — Quoted prices in active markets for identical assets or liabilities;
Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data; or
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
The fair value measurement of liabilities measured at fair value on a recurring basis and reported on the Condensed Consolidated Balance Sheets is summarized below:
September 30, 2020
December 31, 2019
Fair value based on
Fair value based on
Other
observable
inputs
Other
unobservable
inputs
Other
observable
inputs
Other
unobservable
inputs
Level 2
Level 3
Level 2
Level 3
Assets/(liabilities), net:
Interest rate swap contracts
$
( 30.6
)
$
-
$
( 14.3
)
$
-
Contingent consideration
-
( 15.9
)
-
-
The contingent consideration liability represents estimated future contingent purchase price payments related to the Moz and Turf acquisitions. The significant unobservable inputs used in the fair value measurement of the contingent consideration liability include the financial projections over the earn-out period, the volatility of the underlying financial metrics and estimated discount rates.
The following table summarizes the weighted-average of the significant unobservable inputs as of September 30, 2020:
Moz
Turf
Unobservable input
Volatility
27.6
%
27.2
%
Discount rates
4.7
%
4.7
%
Unobservable inputs were weighted based on the relative fair value of the components of contingent consideration. The fair value of the contingent consideration liability will be remeasured at each reporting period, and any future adjustments will be recorded as a
21
Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
component of SG&A expenses in our Condensed Consolidated Statements of Operations and Comprehensive Income. See Note 4 for further information.
NOTE 18. DERIVATIVE FINANCIAL INSTRUMENTS
We are exposed to market risk from changes in foreign exchange rates, interest rates and commodity prices that could impact our results of operations, cash flows and financial condition. We use swaps to hedge interest rate exposures. At inception, interest rate swap derivatives that we designate as hedging instruments are formally documented as a hedge of a forecasted transaction or “cash flow” hedge. We also formally assess, both at inception and at least quarterly thereafter, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in the cash flows of the hedged item. If it is determined that a derivative ceases to be a highly effective hedge, or if the anticipated transaction is no longer probable of occurring, we discontinue hedge accounting and any future mark-to-market adjustments are recognized in earnings. We use derivative financial instruments as risk management tools and not for speculative trading purposes.
Counterparty Risk
We only enter into derivative transactions with established financial institution counterparties having an investment-grade credit rating. We monitor counterparty credit default swap levels and credit ratings on a regular basis. All of our derivative transactions with counterparties are governed by master International Swap and Derivatives Association agreements (“ISDAs”) with netting arrangements. These agreements can limit our exposure in situations where we have gain and loss positions outstanding with a single counterparty. We do not post nor do we receive cash collateral with any counterparty for our derivative transactions. These ISDAs do not have any credit contingent features; however, a default under our bank credit facility would trigger a default under these agreements. Exposure to individual counterparties is controlled and we consider the risk of counterparty default to be negligible.
Commodity Price Risk
We purchase natural gas and other various commodities for use in the manufacturing process. Although we are exposed to fluctuations in commodity pricing, we currently have no outstanding positions and do not expect to enter into any commodity derivative products.
Currency Rate Risk – Sales and Purchases
As of September 30, 2020, our only major foreign currency exposure is to the Canadian dollar. We currently have no outstanding positions and do not expect to enter into any foreign exchange derivative products.
Interest Rate Risk
We utilize interest rate swaps to minimize the fluctuations in earnings caused by interest rate volatility. These swaps are designated as cash flow hedges against changes in LIBOR for a portion of our variable rate debt. The following table summarizes our interest rate swaps as of September 30, 2020:
Trade Date
Notional
Amount
Coverage Period
Risk Coverage
November 13, 2016
$
200.0
November 2016 to March 2021
USD-LIBOR
November 28, 2018
$
200.0
November 2018 to November 2023
USD-LIBOR
November 28, 2018
$
100.0
March 2021 to March 2025
USD-LIBOR
March 6, 2020
$
50.0
March 2020 to March 2022
USD-LIBOR
March 10, 2020
$
50.0
March 2021 to March 2024
USD-LIBOR
March 11, 2020
$
50.0
March 2021 to March 2024
USD-LIBOR
Under the terms of the November 2016 swap maturing in 2021 , we receive 3-month LIBOR and pay a fixed rate over the hedged period, in addition to a basis rate swap to convert the floating rate risk under our November 2016 Swap from 3-month LIBOR to 1-month LIBOR. As a result, we receive 1-month LIBOR and pay a fixed rate over the hedged period.
Under the terms of the November 2018 swap maturing in 2023 , we pay a fixed rate over the hedged amount and receive 1-month LIBOR. This is inclusive of a 0 % floor.
Under the terms of the forward starting November 2018 swap maturing in 2025 , we will pay a fixed rate monthly and receive 1-month LIBOR. This is inclusive of a 0 % floor.
22
Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
Under the terms of the March 2020 swap maturing in 2022 , we pay a fixed rate over the hedged amount and receive 1-month LIBOR. This is inclusive of a 0 % floor.
Under the terms of the forward starting March 2020 swaps maturing in 2024 , we will pay a fixed rate monthly and receive 1-month LIBOR. These are inclusive of a 0 % floor.
Financial Statement Impacts
The following tables detail amounts related to our derivatives as of September 30, 2020 and December 31, 2019. We did no t have any derivative assets or liabilities not designated as hedging instruments as of September 30, 2020 or December 31, 2019. The derivative asset and liability amounts below are shown gross and have not been netted.
Derivative Assets
Derivative Liabilities
Fair Value
Fair Value
Balance Sheet
Location
September 30,
2020
December 31,
2019
Balance Sheet
Location
September 30,
2020
December 31,
2019
Interest rate swap contracts
Other current assets
$
-
$
-
Accounts payable and accrued expenses
$
0.9
$
-
Interest rate swap contracts
Other non-current assets
-
1.3
Other long-term liabilities
29.7
15.6
Amount of (Loss)
Recognized in AOCI
Location of Gain (Loss)
Reclassified from
AOCI into Net Earnings (Loss)
Gain (Loss) Reclassified
from AOCI into Net Earnings (Loss)
Nine Months Ended
Three Months Ended
Nine Months Ended
September 30,
September 30,
September 30,
2020
2019
2020
2019
2020
2019
Derivatives in cash flow hedging relationships
Interest rate swap contracts
( 12.9
)
( 22.9
)
Interest expense
1.9
( 0.5
)
3.7
( 1.5
)
Total
$
( 12.9
)
$
( 22.9
)
Total gain (loss)
$
1.9
$
( 0.5
)
$
3.7
$
( 1.5
)
As of September 30, 2020, the amount of existing losses in AOCI expected to be recognized in earnings over the next twelve months was $ 8.1 million.
NOTE 19. OTHER LONG-TERM LIABILITIES
September 30, 2020
December 31, 2019
Long-term deferred compensation arrangements
14.4
14.0
Fair value of derivative liabilities
29.7
15.6
Fair value of contingent consideration related to acquired businesses
15.9
-
Other
12.6
8.2
Total other long-term liabilities
$
72.6
$
37.8
NOTE 20. SHAREHOLDERS’ EQUITY
Common Stock Repurchase Plan
On July 29, 2016, we announced that our Board of Directors had approved a share repurchase program pursuant to which we were authorized to repurchase up to $ 150.0 million of our outstanding shares of common stock through July 31, 2018 (the “Program”). On October 30, 2017, we announced that our Board of Directors had approved an additional $ 250.0 million authorization to repurchase shares under the Program. The Program was also extended through October 31, 2020 . On July 31, 2018, we announced that our Board of Directors had approved an additional $ 300.0 million authorization to repurchase shares, increasing the total authorized amount under the Program to $ 700.0 million, excluding commissions. On July 28, 2020, we announced that our Board of Directors had approved an additional $ 500.0 million authorization to repurchase shares, increasing the total authorized amount under the Program to
23
Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
$ 1,200.0 m illion, excluding commissions, and extending the Program through December 31, 2023. The Program was temporarily suspended in the first quarter of 2020 in response to uncertainties surrounding COVID-19. On October 21, 2020, we elected to restart the Program and currently have $ 603.8 million remaining under the Board’s repurchase authorization.
Repurchases under the Program may be made through open market, block and privately-negotiated transactions, including Rule 10b5-1 plans, at such times and in such amounts as management deems appropriate, subject to market and business conditions, regulatory requirements and other factors. The Program does not obligate AWI to repurchase any particular amount of common stock and may be suspended or discontinued at any time without notice.
During the nine months ended September 30, 2020, we repurchased 0.4 million shares under the Program for a total cost of $ 34.4 million, excluding commissions, or an average price of $ 89.99 per share. Since inception, through September 30, 2020, we have repurchased 9.6 million shares under the Program for a total cost of $ 596.2 million, excluding commissions, or an average price of $ 62.13 per share.
Dividends
In February, April and July 2020, our Board of Directors declared $ 0.20 per share quarterly dividends, which were paid to shareholders in March, May and August 2020 , respectively. On October 21, 2020, our Board of Directors declared a $ 0.21 per share quarterly dividend to be paid in November 2020 .
Accumulated Other Comprehensive (Loss)
Foreign
Currency
Translation Adjustments
Derivative
(Loss) (1)
Pension and Postretirement Adjustments (1)
Total
Accumulated
Other
Comprehensive
(Loss) (1)
Balance, June 30, 2020
$
7.4
$
( 22.3
)
$
( 89.4
)
$
(104.3
)
Other comprehensive (loss) income before reclassifications,
net of tax (expense) of $ -, ($ 0.9 ), ($ 0.2 ) and ($ 1.1 )
( 6.2
)
3.0
( 0.1
)
( 3.3
)
Amounts reclassified from accumulated other
comprehensive (loss)
-
( 1.5
)
( 0.7
)
( 2.2
)
Net current period other comprehensive (loss) income
( 6.2
)
1.5
( 0.8
)
( 5.5
)
Balance, September 30, 2020
$
1.2
$
( 20.8
)
$
( 90.2
)
$
(109.8
)
Foreign
Currency
Translation Adjustments
Derivative
(Loss) (1)
Pension and Postretirement Adjustments (1)
Total
Accumulated
Other
Comprehensive
(Loss) (1)
Balance, December 31, 2019
$
9.4
$
( 8.5
)
$
( 377.0
)
$
(376.1
)
Other comprehensive (loss) income before reclassifications,
net of tax (expense) benefit of $ -, $ 3.5 , ($ 3.1 ) and $ 0.4
( 8.2
)
( 9.4
)
8.5
( 9.1
)
Amounts reclassified from accumulated other
comprehensive (loss)
-
( 2.9
)
278.3
275.4
Net current period other comprehensive (loss) income
( 8.2
)
( 12.3
)
286.8
266.3
Balance, September 30, 2020
$
1.2
$
( 20.8
)
$
( 90.2
)
$
(109.8
)
24
Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
Foreign
Currency
Translation Adjustments
Derivative
Gain (Loss) (1)
Pension and Postretirement Adjustments (1)
Total
Accumulated
Other
Comprehensive
(Loss) (1)
Balance, June 30, 2019
$
( 68.7
)
$
( 7.8
)
$
( 384.5
)
$
(461.0
)
Other comprehensive (loss) income before reclassifications,
net of tax benefit (expense) of $ -, $ 1.1 , ($ 0.1 ) and $ 1.0
( 2.6
)
( 3.1
)
0.1
( 5.6
)
Amounts reclassified from accumulated other
comprehensive (loss)
81.2
0.4
5.4
87.0
Net current period other comprehensive income (loss)
78.6
( 2.7
)
5.5
81.4
Balance, September 30, 2019
$
9.9
$
( 10.5
)
$
( 379.0
)
$
(379.6
)
Foreign
Currency
Translation Adjustments
Derivative
Gain (Loss) (1)
Pension and Postretirement Adjustments (1)
Total
Accumulated
Other
Comprehensive
(Loss) (1)
Balance, December 31, 2018
$
( 74.7
)
$
5.3
$
( 390.2
)
$
(459.6
)
Impact of ASU 2017-12 adoption
-
0.1
-
0.1
Other comprehensive income (loss) before reclassifications,
net of tax benefit (expense) of $ -, $ 5.9 , ($ 1.1 ) and $ 4.8
3.4
( 17.1
)
1.5
( 12.2
)
Amounts reclassified from accumulated other
comprehensive (loss)
81.2
1.2
9.7
92.1
Net current period other comprehensive income (loss)
84.6
( 15.9
)
11.2
79.9
Balance, September 30, 2019
$
9.9
$
( 10.5
)
$
( 379.0
)
$
(379.6
)
(1)
Amounts are net of tax.
25
Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
Amounts
Reclassified from
Accumulated Other
Comprehensive
(Loss)
Affected Line Item in the
Condensed Consolidated
Statements of Operations
and Comprehensive
Income
Three Months Ended September 30,
Nine Months Ended September 30,
2020
2019
2020
2019
Derivative Adjustments:
Interest rate swap contracts, before tax
$
( 1.9
)
$
0.5
$
( 3.7
)
$
1.5
Interest expense
Tax impact
0.4
( 0.1
)
0.8
( 0.3
)
Income tax expense
Total (income) loss, net of tax
( 1.5
)
0.4
( 2.9
)
1.2
Pension and Postretirement Adjustments:
Prior service credit amortization
( 0.1
)
( 0.1
)
( 0.2
)
( 0.1
)
Other non-operating (income) expense, net
Amortization of net actuarial (gain) loss
( 0.9
)
2.7
0.5
8.0
Other non-operating (income) expense, net
Settlement
-
-
374.4
-
Other non-operating (income) expense, net
Total (income) loss, before tax
( 1.0
)
2.6
374.7
7.9
Tax impact
0.3
( 0.7
)
( 96.4
)
( 1.7
)
Income tax expense
Total (income) loss from continuing operations, net of tax
( 0.7
)
1.9
278.3
6.2
Adjustments related to Sale to Knauf (1)
-
3.5
-
3.5
Total (income) loss, net of tax
( 0.7
)
5.4
278.3
9.7
Foreign currency translation adjustments related to
Sale to Knauf (1)
-
81.2
-
81.2
Total reclassifications for the period
$
( 2.2
)
$
87.0
$
275.4
$
92.1
(1)
Represents estimated amounts reclassified out of AOCI as of September 30, 2019 related to the Sale and included as a component of (Loss) gain from disposal of discontinued operations on the Condensed Consolidated Statements of Operations and Comprehensive Income.
NOTE 21. LITIGATION AND RELATED MATTERS
ENVIRONMENTAL MATTERS
Environmental Compliance
Our manufacturing and research facilities are affected by various federal, state and local requirements relating to the discharge of materials and the protection of the environment. We make expenditures necessary for compliance with applicable environmental requirements at each of our operating facilities. While these expenditures are not typically material, the applicable regulatory requirements continually change and, as a result, we cannot predict with certainty the amount, nature or timing of future expenditures associated with environmental compliance.
Environmental Sites
Summary
We are actively involved in the investigation, closure and/or remediation of existing or potential environmental contamination under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) and state Superfund and similar environmental laws at three domestically owned locations allegedly resulting from past industrial activity.
26
Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
In each location, we are one of multiple potentially responsible parties and have agreed to jointly fund the required investigation and remediation, while preserving our defenses to the liability. We may also have rights of contribution or reimbursement from other parties or coverage under applicable insurance policies. We are currently pursuing coverage and recoveries under those policies with respect to certain of the sites, including the Macon, GA site and the Elizabeth City, NC site, each of which is summarized below. These efforts have included two active and independent litigation matters against legacy primary and excess policy insurance carriers for recovery of fees and costs incurred by us in connection with our investigation and remediation activities for such sites. As described below, the litigation matter in Oregon relating to the St. Helens, OR site was dismissed in the second quarter of 2019 in connection with our settlement with the State of Oregon. Other than disclosed below, we are unable to predict the outcome of these matters or the timing of any recoveries, whether through settlement or otherwise. We are also unable to predict the extent to which any recoveries might cover our final share of investigation and remediation costs for these sites. Our final share of investigation and remediation costs may exceed any such recoveries, and such amounts net of insurance recoveries may be material.
Between 2017 and 2019, we entered settlement agreements totaling $ 39.8 million with certain legacy insurance carriers to resolve ongoing litigation and recover fees and costs previously incurred by us in connection with certain environmental sites. These settlements were recorded as a $ 9.2 million reduction to cost of goods sold and a $ 30.6 million reduction to SG&A expenses reflecting the same income statement categories where environmental expenditures were historically recorded. In the first nine months of 2020, we entered into two new settlement agreements totaling $ 0.2 million. These settlements were recorded as a reduction to SG&A expenses. We anticipate that we may enter into additional settlement agreements in the future, which may or may not be material, with other legacy insurers to obtain reimbursement or contribution for environmental site expenses.
Estimates of our future liability at the environmental sites are based on evaluations of currently available facts regarding each individual site. We consider factors such as our activities associated with the site, existing technology, presently enacted laws and regulations and prior company experience in remediating contaminated sites. Although current law imposes joint and several liability on all parties at Superfund sites, our contribution to the remediation of these sites is expected to be limited by the number of other companies potentially liable for site remediation. As a result, our estimated liability reflects only our expected share. In determining the probability of contribution, we consider the solvency of other parties, the site activities of other parties, whether liability is being disputed, the terms of any existing agreements and experience with similar matters, and the effect of our October 2006 Chapter 11 reorganization upon the validity of the claim, if any.
Specific Material Events
St Helens, OR
In August 2010, we entered into a Consent Order (the “Consent Order”) with the Oregon Department of Environmental Quality (“ODEQ”), along with Kaiser Gypsum Company, Inc. (“Kaiser”), and Owens Corning Sales LLC (“OC”), with respect to our St. Helens, Oregon facility, which was previously owned by Kaiser and then OC. The Consent Order required the parties to complete a remedial investigation and feasibility study on the upland, lowland and in-water portions of the site.
Through voluntary mediation in November 2017 with ODEQ, OC and Kaiser, we reached settlement with ODEQ documented in a Public Notice and proposed consent judgment (“Consent Judgment”); in exchange for a release from ODEQ for all contamination claims against us, we would pay $ 8.6 million to the State of Oregon and perform a previously scoped remedial action for the upland area. We submitted the settlement payment to ODEQ and completed the remedial action for the upland area in 2019.
ODEQ approved a final Upland Operable Unit Remedial Action Construction Completion and Final Closeout Report and issued a Conditional No Further Action Determination, including the Easement and Equitable Servitude, which was recorded in Columbia County, Oregon. On February 24, 2020, ODEQ filed the Certification of Completion for the satisfactory completion of the work conducted by us pursuant to the Consent Judgment. As a result of the settlements with ODEQ and Kaiser, and these actions by ODEQ, we do not expect to incur any future material costs relating to this matter.
Macon, GA
The U.S. Environmental Protection Agency (the “EPA”) has listed two landfills located on a portion of our facility in Macon, GA, along with the former Macon Naval Ordnance Plant landfill adjacent to our property, portions of Rocky Creek, and certain tributaries leading to Rocky Creek (collectively, the “Macon Site”) as a Superfund site on the National Priorities List due to the presence of contaminants, most notably polychlorinated biphenyls (“PCBs”).
In September 2010, we entered into an Administrative Order on Consent for a Removal Action (the “Removal Action”) with the EPA to investigate PCB contamination in one of the landfills on our property, the Wastewater Treatment Plant Landfill (the “WWTP Landfill,” also known as “Operable Unit 1”). After completing an investigation of the WWTP Landfill and submitting our final Engineering Evaluation/Cost Analysis, the EPA issued an Action Memorandum in July 2013 selecting our recommended remedy for
27
Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
the Removal Action. The Operable Unit 1 response action for the WWTP Landfill is complete and the final report was submitted to the EPA on October 11, 2016 . The EPA approved the final report on November 28, 2016, and a Post-Removal Control Plan (the “Plan”) was submitted to the EPA on March 28, 2017. That Plan will monitor the effectiveness of the WWTP Landfill response action over a five-year period and our estimate of future liabilities includes these tasks.
It is probable that we will incur field investigation, engineering and oversight costs associated with a remedial investigation and feasibility study (“RI/FS”) with respect to the remainder of the Superfund site, which includes the other landfill on our property, as well as areas on and adjacent to our property and Rocky Creek (the “Remaining Site,” also known as “Operable Unit 2”). On September 25, 2015, AWI and other Potential Responsible Parties (“PRPs”) received a Special Notice Letter from the EPA under CERCLA inviting AWI and the PRPs to enter into the negotiation of an agreement to conduct an RI/FS of Operable Unit 2. We and the other PRPs entered into a settlement agreement with the EPA effective September 18, 2018, in response to the Special Notice Letter to conduct the RI/FS. The PRPs submitted a complete RI/FS work plan in the second quarter of 2019, which the EPA approved on September 11, 2019. Investigative work on this portion of the site commenced in December 2019 and remains ongoing. We anticipate that the EPA will require significant investigative work for Operable Unit 2. We may ultimately incur costs in remediating any contamination discovered during the RI/FS. The current estimate of future liability at this site includes only our estimated share of the costs of the investigative work that, at this time, we anticipate the EPA will require the PRPs to perform. We are unable to reasonably estimate our final share of the total costs associated with the investigation work or any resulting remediation therefrom, although such amounts may be material to any one quarter's or year's results of operations in the future. However, we do not expect the total future costs to have a material adverse effect on our liquidity or financial condition as the cash payments may be made over many years.
Elizabeth City, NC
This site is a former cabinet manufacturing facility that was operated by Triangle Pacific Corporation, now known as Armstrong Wood Products, Inc. (“Triangle Pacific” or “AWP”), from 1977 until 1996. The site was formerly owned by the U.S. Navy (“Navy”) and Westinghouse, now CBS Corporation (“CBS”). We assumed ownership of the site when we acquired the stock of Triangle Pacific in 1998. Prior to our acquisition, the North Carolina Department of Environment and Natural Resources listed the site as a hazardous waste site. In 1997, Triangle Pacific entered into a cost sharing agreement with Westinghouse whereby the parties agreed to share equally in costs associated with investigation and potential remediation. In 2000, Triangle Pacific and CBS entered into an Administrative Order on Consent to conduct an RI/FS with the EPA for the site. In 2007, we and CBS entered into an agreement with the Navy whereby the Navy agreed to pay one third of defined past and future investigative costs up to a certain amount, which has now been exhausted. The EPA approved the RI/FS work plan in August 2011. In January 2014, we submitted the draft Remedial Investigation and Risk Assessment reports and conducted supplemental investigative work based upon agency comments to those reports. In connection with the separation of AFI in 2016, we agreed to retain any legacy environmental liabilities associated with the AWP site. The EPA published an Interim Action Proposed Plan for the site in April 2018 seeking public comment through June 7, 2018. The EPA evaluated comments, including ours, and has published its Interim Record Of Decision selecting an interim cleanup approach. On September 25, 2018, AWI and CBS received a Special Notice Letter from the EPA under CERCLA inviting AWI and CBS to enter into the negotiation of a settlement agreement to conduct or finance the response action at the site. During the third quarter of 2018, we increased our reserve for the cost of the interim cleanup, which we expect to be shared with CBS and the Navy. In response to the September 2018 Special Notice Letter, AWI and CBS submitted a good faith offer to EPA on May 28, 2019, and negotiations among parties remain ongoing. The current estimate of future liability at this site includes only our estimated share of the costs of the interim remedial action that, at this time, we anticipate the EPA will require the PRPs to perform. We are unable to reasonably estimate our final share of the total costs associated with the final remediation or any resulting remediation therefrom, although such amounts may be material to any one quarter's or year's results of operations in the future. However, we do not expect the total future costs to have a material adverse effect on our liquidity or financial condition as the cash payments may be made over many years.
Summary of Financial Position
Total liabilities of $ 1.5 million and $ 1.6 million as of September 30, 2020 and December 31, 2019, respectively, were recorded for environmental liabilities that we consider probable and for which a reasonable estimate of the probable liability could be made. As of September 30, 2020 and December 31, 2019, $ 0.5 million and $ 0.1 million, respectively, of environmental liabilities were reflected within Accounts payable and accrued expenses. During the three and nine months ended September 30, 2020, we did no t record any additional reserves for environmental liabilities. During the three months ended September 30, 2019, we did not record any additional reserves for environmental liabilities. During the nine months ended September 30, 2019, we recorded $ 1.0 million of additional reserves for environmental liabilities. Where existing data is sufficient to estimate the liability, that estimate has been used; where only a range of probable liabilities is available and no amount within that range is more likely than any other, the lower end of the range has
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Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
been used. As assessments and remediation activities progress at each site, these liabilities are reviewed to reflect new information as it becomes available and adjusted to reflect amounts actually incurred and paid. These liabilities are undiscounted .
The estimated liabilities above do not take into account any claims for recoveries from insurance or third parties. It is our policy to record insurance recoveries as assets in the Condensed Consolidated Balance Sheets when probable. For insurance recoveries that are reimbursements of prior environmental expenditures, the income statement impact is recorded within cost of goods sold and SG&A expenses, which are the same income statement categories within which environmental expenditures were historically recorded. We also incur costs to pursue environmental insurance recoveries, which are expensed as incurred. Insurance recoveries in excess of historical environmental spending are recorded on the balance sheet as a part of other long-term liabilities and released as future environmental spending occurs or the liability is settled.
Actual costs to be incurred at identified sites may vary from our estimates. Based on our knowledge of the identified sites, it is not possible to reasonably estimate future costs in excess of amounts already recognized.
OTHER CLAIMS
On September 8, 2017, Roxul USA, Inc. (d/b/a Rockfon) (“Rockfon”) filed litigation against us in the United States District Court for the District of Delaware (the “Court”) alleging anticompetitive conduct seeking remedial measures and unspecified damages. Roxul USA, Inc. is a significant ceilings systems competitor with global headquarters in Europe and expanding operations in the Americas. On April 3, 2019, we entered into a confidential settlement agreement with Rockfon to fully resolve the litigation between us, and Rockfon filed a Stipulation of Dismissal with Prejudice (“Dismissal”) with the Court. Pursuant to the Dismissal, Rockfon formally dismissed all claims it had against AWI with prejudice. All claims in the litigation have been fully and finally dismissed and released with AWI making a payment to Rockfon for its costs, expenses and attorneys’ fees. Pursuant to the settlement, both parties acknowledged that (a) AWI denies all claims of wrongdoing and makes no admission of wrongdoing or of the truth of any of the claims or allegations contained in Rockfon’s complaint or otherwise alleged in the litigation; (b) all AWI exclusive distribution locations (i.e., any location where a reseller has agreed to sell only AWI ceiling system products) will remain exclusive to AWI under their respective distribution agreements, and (c) in all other non-exclusive or “open” distribution locations, resellers are free to purchase and resell ceiling systems products of any manufacturer at their discretion. During the first six months of 2019, we incurred $ 19.7 million of expenses in connection with the matter, primarily relating to legal and professional fees incurred by us in connection with the litigation, including expenses and attorney’s fees paid under the settlement agreement. As a result of the settlement and Dismissal, we do not expect to incur additional future costs or expenses relating to the matter.
We are involved in other various lawsuits, claims, investigations and other legal matters from time to time that arise in the ordinary course of business, including matters involving our products, intellectual property, relationships with suppliers, relationships with distributors, relationships with competitors, employees and other matters. From time to time, for example, we may be a party to litigation matters that involve product liability, tort liability and other claims under various allegations, including illness due to exposure to certain chemicals used in the workplace; or medical conditions arising from exposure to product ingredients or the presence of trace contaminants. Such allegations may involve multiple defendants and relate to legacy products that we and other defendants purportedly manufactured or sold. We believe that any current claims are without merit and intend to defend them vigorously. For these matters, we also may have rights of contribution or reimbursement from other parties or coverage under applicable insurance policies. When applicable and appropriate, we will pursue coverage and recoveries under those policies, but are unable to predict the outcome of those demands. While complete assurance cannot be given to the outcome of these proceedings, we do not believe that any current claims, individually or in the aggregate, will have a material adverse effect on our financial condition, liquidity or results of operations.
NOTE 22. EARNINGS PER SHARE
The following table is a reconciliation of earnings (loss) to earnings (loss) attributable to common shares used in our basic and diluted (Loss) Earnings Per Share (“EPS”) calculations for the three and nine months ended September 30, 2020 and 2019. EPS components may not add due to rounding.
Three Months Ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Earnings (loss) from continuing operations
$
54.2
$
90.7
$
( 118.9
)
$
190.8
(Earnings) allocated to participating vested share awards
( 0.1
)
( 0.2
)
( 0.1
)
( 0.4
)
Earnings (loss) from continuing operations attributable to common shares
$
54.1
$
90.5
$
( 119.0
)
$
190.4
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Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
(dollar amounts in millions, except share data)
The following table is a reconciliation of basic shares outstanding to diluted shares outstanding for the three and nine months ended September 30, 2020 and 2019 (shares in millions):
Three Months Ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Basic shares outstanding
47.9
48.7
47.9
48.8
Dilutive effect of common stock equivalents
0.1
0.8
-
0.8
Diluted shares outstanding
48.0
49.5
47.9
49.6
Due to the net loss for the nine months ended September 30, 2020, all common stock equivalents were considered anti-dilutive. Anti-dilutive stock awards excluded from the computation of diluted EPS for the three and nine months ended September 30, 2020 were 26,460 and 340,750 , respectively. Anti-dilutive stock awards excluded from the computation of diluted EPS for the three and nine months ended September 30, 2019 were 549 and 10,313 , respectively.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.