What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-04-27 compared with 2020-10-27 · 116 added, 191 removed, 116 unchanged (73% of the section changed)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion should be read in conjunction with the financial statements, the accompanying notes, the cautionary note regarding forward-looking statements and risk factors included in this report and our Amendment No.

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

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

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

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

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

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

In 2020, we experienced a significant decrease in customer demand within both segments during the second through fourth quarters due to COVID-19.

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

We experienced less of a comparative decline in net sales during the third quarter of 2020 compared to the second quarter of 2020, as construction resumed across many parts of the U.S.

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

In response to COVID-19, we continue to reduce capital expenditures and discretionary spending including compensation, travel and marketing expenses.

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

As of September 30, 2020, all of our manufacturing facilities were operational, excluding the St.

We experienced less of a comparative decline in net sales during the second half of 2020 compared to the second quarter of 2020, as construction resumed across many parts of the U.S.

Customer demand continued to improve in the first quarter of 2021 but remained lower than pre-pandemic levels.

In response to COVID-19, we reduced capital expenditures and discretionary spending including compensation, travel and marketing expenses temporarily in 2020.

As of March 31, 2021, all of our manufacturing facilities were operational, excluding the St.

Helens, Oregon facility which was idled prior to the COVID-19 outbreak.

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

During the first quarter of 2020, we borrowed an additional $100.0 million from our revolving credit facility and $30.0 million from our accounts receivable securitization facility.

During the second quarter of 2020, we repaid $65.0 million of the revolving credit facility borrowings and during the third quarter of 2020 we repaid $30.0 million in connection with the maturity of our accounts receivable securitization facility.

Our share repurchase 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.

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.

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

We did not record any asset impairments, inventory charges or material bad debt reserves related to COVID-19 during the first quarters of 2021 and 2020 but future events may require such charges.

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

In December 2020, we acquired all of the issued and outstanding equity of Arktura LLC (“Arktura”) and certain subsidiaries with operations in the United States and Argentina.

Arktura is a designer and fabricator of metal and felt ceilings, walls, partitions and facades with one manufacturing facility based in Los Angeles, California.

In August 2020, we acquired the business and assets of Moz Designs, Inc.

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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.

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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.

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

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.

The operations, assets and liabilities of these acquisitions are included in our Architectural Specialties segment.

See Note 4 to the Condensed Consolidated Financial Statements for additional information related to our 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.

In 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 million 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 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 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 not 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.

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

In January 2021, we finalized the post-closing adjustments to purchase price related to certain pension liabilities assumed by Knauf in the Sale.

During the first quarter of 2021, we paid $11.8 million to Knauf related to this purchase price adjustment.

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

See Note 5 to the Condensed Consolidated Financial Statements for additional information related to our discontinued operations.

Manufacturing Plants

As of September 30, 2020, we had 15 manufacturing plants in two countries, with 13 plants located within the U.S., which included our St.

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

We have two plants in Canada.

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

As of March 31, 2021, we had 16 manufacturing plants in two countries, with 14 plants located within the U.S.

and two plants located in Canada.

We closed our St.

Helens, Oregon mineral fiber manufacturing plant in the second quarter of 2018, and the facility was classified as an asset held for sale as of March 31, 2021.

We entered into a sale agreement for the property during the first quarter of 2021, with closing expected during 2021 .

WAVE operates six additional plants in the U.S.

4 unchanged sentences

Mineral Fiber – produces suspended mineral fiber and soft fiber ceiling systems for use in commercial and residential settings.

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

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

Commercial ceiling products are sold to resale distributors and to ceiling systems contractors.

5 unchanged sentences

Mineral Fiber segment results reflect those sales transactions.

The Mineral Fiber segment also includes all assets and liabilities not specifically allocated to our Architectural Specialties or Unallocated Corporate segment, including all property and

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

related depreciation associated with our Lancaster, PA headquarters.

The Mineral Fiber segment also includes all assets and liabilities not specifically allocated to our Architectural Specialties or Unallocated Corporate segment, including all property and related depreciation associated with our Lancaster, PA headquarters.

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

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

We sell standard and customized products, with the majority of Architectural Specialties revenues derived from sourced products.

We sell standard and customized products, and a portion of our Architectural Specialties revenues are derived from sourced products.

Architectural Specialties products are sold primarily to resale distributors and ceiling systems contractors.

1 unchanged sentence

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

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

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

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

5 unchanged sentences

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

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

For the three and nine months ended September 30, 2020, we experienced significant reductions in volumes of $28 million and $88 million in comparison to the same periods in 2019.

Revenues for our Architectural Specialties segment were also positively impacted by our 2019 acquisitions of ACGI and MRK (collectively, the “2019 Acquisitions”) and our 2020 acquisitions of Turf and Moz (collectively, the “2020 Acquisitions”).

The following table presents the impact of the 2019 Acquisitions and the 2020 Acquisitions on our Architectural Specialties segment’s net sales (dollar amounts in millions):

Three Months Ended September 30,

2019 Acquisitions

2020 Acquisitions

Nine Months Ended September 30,

2019 Acquisitions

2020 Acquisitions

We noted several factors and trends within our markets that directly affected our business performance during the first quarter of 2021 compared to the first quarter of 2020, most importantly the aforementioned decrease in demand as a result of COVID-19.

For the three months ended March 31, 2021, we experienced a significant reduction in volumes of $17 million in comparison to the same period in 2020.

Revenues for our Architectural Specialties segment were positively impacted by $17 million due to our 2020 acquisitions of Turf, Moz and Arktura (collectively, the “2020 Acquisitions”).

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

Average Unit Value .

5 unchanged sentences

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

We estimate that unfavorable AUV decreased our Mineral Fiber and total consolidated net sales for three and nine months ended September 30, 2020 by approximately $3 million and $5 million, respectively, compared to the same periods in 2019.

We estimate that favorable AUV increased our total consolidated net sales for the three months ended March 31, 2021 by approximately $ 5 million, compared to the same period in 20 20 .

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

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

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

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

During the first quarter of 2021, we implemented price increases on certain Mineral Fiber ceiling and grid products.

In the first quarter of 2021, we announced a price increase on Mineral Fiber ceiling tile and grid products and certain Architectural Specialties products to be effective in the second quarter of 2021.

We may implement future pricing actions based on numerous factors.

Seasonality .

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

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

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

Factors Affecting Operating Costs

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Our operating expenses are comprised of direct production costs (principally raw materials, labor and energy), manufacturing overhead costs, freight, costs to purchase sourced products and selling, general, and administrative (“SG&A”) expenses.

Our largest raw material expenditures are for fiberglass, perlite, starch, waste paper, wood, wood fiber, aluminum, steel, pigments and clays.

Our largest raw material expenditures are for aluminum, clays, felt, fiberglass, perlite, pigment, recycled paper, starch, steel, wood and wood fiber.

We manufacture most of the production needs for mineral wool at one of our manufacturing facilities.

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

For the three and nine months ended September 30, 2020, lower costs for raw materials and energy positively impacted operating income by $1 million and $3 million, respectively, compared to the same periods in 2019.

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

For the three months ended March 31, 2021, higher costs for raw materials and energy negatively impacted operating income by $1 million compared to the same period in 2020.

2020 Acquisition-Related Charges

In connection with the 2020 Acquisitions, we incurred certain acquisition-related charges in the first quarter of 2021, summarized as follows (dollar amounts in millions):

Three Months Ended

March 31, 2021

Affected Line Item in the Condensed Consolidated Statement of Operations and Comprehensive Income

Deferred revenue

Change in fair value of contingent consideration

SG&A expenses

Deferred cash arrangements

SG&A expenses

Inventory step-up

Cost of goods sold

The deferred revenue and inventory amounts reflect the post-acquisition charges associated with recording these liabilities and assets at fair value as part of purchase accounting.

The estimated fair value of contingent consideration for Moz and Turf is remeasured at each reporting period.

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

Purchase accounting expenses related to depreciation of fixed asset fair value adjustments and intangible asset amortization expenses have been excluded from the table above.

See Note 4 to the Condensed Consolidated Financial Statements for further information.

As of March 31, 2021 and December 31, 2020, we had approximately 2,800 and 2,700 full-time and part-time employees, respectively.

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

RESULTS OF CONTINUING OPERATIONS

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(dollar amounts in millions)

Change is (Unfavorable)

Three Months Ended September 30,

Total consolidated net sales

Operating income

Nine Months Ended September 30,

Three Months Ended

Change is Favorable/(Unfavorable)

Total consolidated net sales

Operating income

Consolidated net sales for the third quarter of 2020 decreased 11.1% over the same period in 2019 due to lower volumes of $28 million and unfavorable AUV of $3 million.

Consolidated net sales for the first quarter of 2021 increased 1.3% over the same period in 2020 due to favorable AUV of $5 million, partially offset by lower volumes of $2 million.

Mineral Fiber net sales decreased by $9 million and Architectural Specialties net sales increased by $12 million.

Consolidated net sales for the first nine months of 2020 decreased 11.8% due to lower volumes of $88 million and unfavorable AUV of $5 million.

Mineral Fiber net sales decreased by $86 million and Architectural Specialties net sales decreased by $7 million.

As previously noted, decreases in volumes for both our Mineral Fiber and Architectural Specialties segments were a result of lower market demand due to COVID-19, partially offset by the impact of our 2020 Acquisitions and 2019 Acquisitions in the Architectural Specialties Segment.

Cost of goods sold in the third quarter of 2020 was 63.0% of net sales, compared to 59.7% for the same period in 2019.

Cost of goods sold in the first nine months of 2020 was 64.2% compared to 61.3% for the same period in 2019.

The increase in cost of goods sold as a percent of net sales for the third quarter and first nine months of 2020 was primarily due to unfavorable AUV and the impact of the 2020 Acquisitions and 2019 Acquisitions, partially offset by improved manufacturing productivity and cost reduction actions.

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

SG&A expenses in the third quarter of 2020 were $41.0 million, or 16.6% of net sales, compared to $41.3 million, or 14.9% of net sales, for the same period in 2019.

SG&A expenses in the first nine months of 2020 were $108.8 million, or 15.6% of net sales, compared to $134.3 million, or 17.0% of net sales, for the same period in 2019.

The decrease in SG&A expenses for the third quarter

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

of 2020 as compared to the same period in 2019 was driven primarily by a $3 million reduction in incentive based compensation and lower selling expenses, offset by an increase in SG&A expenses due to the impact of the 2020 Acquisitions and 2019 Acquisitions .

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

(“Rockfon”), a $5 million reduction in incentive based compensation and $4 million increase in cost reimbursements, net of related expenses, earned under our Transition Services Agreement with Knauf.

These decreases in SG&A expenses were partially offset by an increase in SG&A expenses due to the impact of the 2020 Acquisitions and 2019 Acquisitions.

The gain related to the sale of fixed and intangible assets in the third quarter and first nine months of 2020 was due to the sale of our idled mineral fiber plant in China, which was reported within our Unallocated Corporate segment.

Equity earnings from our WAVE joint venture were $15.2 million in the third quarter of 2020, compared to $42.9 million in the third quarter of 2019.

Equity earnings from our WAVE joint venture were $48.2 million in the first nine months of 2020 compared to $83.0 million in the first nine months of 2019.

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

The decrease in WAVE earnings in both periods was primarily related to lower volumes and unfavorable AUV, partially offset by lower steel costs.

Also contributing to the decrease in equity earnings was a $25.5 million increase in WAVE equity earnings in the third quarter of 2019, representing our 50% share of WAVE’s gain on sale of its discontinued European and Pacific Rim businesses, net of a $4 million write-off related to our WAVE fresh-start reporting for customer relationships and developed technology intangible assets, and an increase in selling and administrative charges from AWI and Worthington Industries, Inc for the three and nine months ended September 30, 2020.

As previously noted, decreases in volumes for both our Mineral Fiber and Architectural Specialties segments were a result of lower market demand due to COVID-19, offset by the $17 million increase in net sales due to our 2020 Acquisitions in the Architectural Specialties Segment.

Cost of goods sold in the first quarter of 2021 was 65.3% of net sales, compared to 63.3% for the same period in 2020.

The increase in cost of goods sold as a percent of net sales for the first quarter of 2021 was primarily due to the impact of the 2020 Acquisitions, most notably the impact of post-acquisition expenses, in addition to the impact of lower mix due to changes in sales by customer group, which was impacted by COVID-19.

The increases in cost of goods sold as a percent of net sales in comparison to 2020 were partially offset by manufacturing productivity.

SG&A expenses in the first quarter of 2021 were $54.4 million, or 21.6% of net sales, compared to $34.8 million, or 14.0% of net sales, for the same period in 2020.

The increase in SG&A expenses for the first quarter of 2021 as compared to the same period in 2020 was driven primarily by a $12 million increase in SG&A expenses due to the impact of the 2020 Acquisitions, including intangible asset amortization, and a $7 million increase in incentive and deferred compensation expenses.

Equity earnings from our WAVE joint venture were $21.0 million in the first quarter of 2021, compared to $19.5 million in the first quarter of 2020.

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

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

Interest expense was $6.1 million in the third quarter of 2020, compared to $11.7 million in the third quarter of 2019.

Interest expense was $18.7 million in the first nine months of 2020 compared to $31.6 million in the first nine months of 2019.

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

Other non-operating income, net, was $3.2 in the third quarter of 2020 compared to $5.1 million in the third quarter of 2019.

The decrease primarily related to a $2 million special termination benefit charge recorded in the third quarter of 2020 related to our RIP.

Other non-operating expense, net, was $361.8 million in the first nine months of 2020, compared to $16.0 million of income, net, in the first nine months of 2019.

The increase in expense was primarily related to the $374.4 million settlement loss and the $2 million special termination benefit charge, both related to our RIP.

Interest expense was $5.7 million in the first quarter of 2021, compared to $6.7 million in the first quarter of 2020.

The decrease in the first quarter of 2021 was primarily due to lower interest rates.

Other non-operating income, net, was $1.3 million in the first quarter of 2021 compared to $369.4 million of expense in the first quarter of 2020.

The decrease in expense was primarily related to the absence of the $374.4 million settlement related to our RIP, partially offset by lower credits from non-service cost components of pension and postretirement net period benefit costs.

See Note 14 to the Condensed Consolidated Financial Statements for further information.

Income tax expense was $15.2 million in the third quarter of 2020 compared to $16.0 million in the third quarter of 2019.

The effective tax rate for the third quarter of 2020 was 21.9% as compared to 15.0% for the same period of 2019.

The effective tax rate was higher primarily due to the absence of a 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 rate increases were both partially offset by the current year tax benefit related to the sale of our mineral fiber plant in China.

Income tax benefit was $50.9 million in the first nine months of 2020 compared to $48.8 million of income tax expense in the first nine months of 2019.

Excluding the impact of the pension settlement that occurred in the first quarter of 2020, income tax expense was $45.0 million in the first nine months of 2020.

The effective tax rate was 30.0% in the first nine months of 2020 compared to 20.4% in the same period of 2019.

The effective tax rate was higher than 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 recognized on the sale of our mineral fiber plant in China.

Total Other Comprehensive Loss (“OCL”) was $5.5 million in the third quarter of 2020 compared to Total Other Comprehensive Income (“OCI”) of $81.4 million in the third quarter of 2019.

Total OCI was $266.3 million in the first nine months of 2020 compared to $79.9 million in the first nine months of 2019.

The change in OCI in the third quarter of 2020 compared to the same period in 2019 was primarily driven by foreign currency translation adjustments, primarily $81.2 million of foreign currency translation adjustments that were reclassified out of Accumulated Other Comprehensive Income (“AOCI”) concurrent with the Sale in third quarter of 2019.

Foreign currency translation adjustments represent the change in the U.S.

dollar value of assets and liabilities denominated in foreign currencies.

The change in OCI in the first nine months of 2020 was primarily driven by pension and postretirement adjustments, primarily a $374.4 million partial settlement loss related to our RIP, partially offset by the absence of the aforementioned reclassification of foreign currency translation adjustments related to the Sale in the third quarter of 2019.

Income tax expense was $12.2 million in the first quarter of 2021 compared to an income tax benefit of $77.5 million in the first quarter of 2020.

The effective tax rate for the first quarter of 2021 was 24.6% as compared to 25.8% for the same period of 2020.

Excluding the tax impact of the pension settlement recorded in the first quarter of 2020, the effective tax rate was flat in the first quarter of 2021 compared to the same period of 2020.

Total Other Comprehensive Income (“OCI”) was $4.6 million in the first quarter of 2021 compared to $274.4 million in the first quarter of 2020.

The change in OCI in the first quarter of 2021 compared to the same period in 2020 was driven by pension and postretirement adjustments, primarily related to the absence of the $278.6 settlement loss, net of taxes, related to our RIP.

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

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

Also impacting the change in OCI in both periods w ere derivative gains/losses.

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

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

Foreign currency translation adjustments represent the change in the U.S.

dollar value of

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

assets and liabilities denominated in foreign currencies.

Amounts in the first quarter of 2021 and 2020 were driven primarily by changes in the Canadian dollar.

REPORTABLE SEGMENT RESULTS

1 unchanged sentence

(dollar amounts in millions)

Three Months Ended

Change is (Unfavorable)

Three Months Ended September 30,

Total segment net sales

Operating income

Nine Months Ended September 30,

Total segment net sales

Operating income

Net sales decreased in the third quarter of 2020 due to lower volumes of $29 million and unfavorable AUV of $3 million.

The decrease in net sales in the first nine months of 2020 was due to lower volumes of $81 million and unfavorable AUV of $5 million.

The decreases in volumes were driven by a significant decrease in demand due to the COVID-19 pandemic.

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

Operating income decreased in the third quarter of 2020 primarily due to a $28 million reduction in WAVE equity earnings, a $20 million negative impact due to lower volumes, and a $5 million impact from lower AUV.

Partially offsetting these decreases to operating income was a $6 million reduction in manufacturing costs and a $2 million reduction in incentive compensation expenses.

Operating income decreased in the first nine months of 2020 primarily due to a $56 million negative impact due to lower volumes, a $35 million reduction in WAVE equity earnings and a $15 million impact from lower AUV.

Partially offsetting these decreases to operating income was a $20 million decrease in legal and professional fees incurred in the first quarter of 2019 under a settlement agreement with Rockfon, a $19 million reduction in manufacturing costs, a $6 million reduction in incentive compensation expenses and a $4 million increase in cost reimbursements, net of related expenses, earned under our Transition Services Agreement with Knauf.

Net sales decreased in the first quarter of 2021 due to lower volumes of $14 million, partially offset by favorable AUV of $5 million.

The decreases in volumes were driven by a decrease in demand due to COVID-19.

The favorable AUV was driven by favorable price and mix due to the sale of higher end ceiling products.

Operating income decreased in the first quarter of 2021 primarily due to a $9 million negative impact from lower volumes and a $7 million increase in incentive and deferred compensation expenses, partially offset by a $2 million increase in operating income from favorable AUV, a $2 million reduction in manufacturing costs and a $2 million increase in WAVE equity earnings.

Architectural Specialties

(dollar amounts in millions)

Three Months Ended

Change is Favorable/(Unfavorable)

Three Months Ended September 30,

Total segment net sales

Operating income

Nine Months Ended September 30,

Total segment net sales

Operating income

Net sales increased $1 million in the third quarter of 2020 and decreased $7 million for the first nine months of 2020.

Net sales in both periods were negatively impacted by a reduction in demand across almost all product categories and geographies as a result of the COVID-19 pandemic.

Net sales for the third quarter and first nine months of 2020 increased $8 million and $15 million, respectively, due to the impact of the 2020 Acquisitions and 2019 Acquisitions.

Operating income in the third quarter and first nine months of 2020 decreased due to the impact of lower sales, excluding the impact of the 2020 Acquisitions and 2019 Acquisitions.

Also contributing to the decrease in operating income was additional amortization expense related to the 2020 Acquisitions and the 2019 Acquisitions.

Operating (loss) income

Net sales increased $12 million in the first quarter of 2021 due to a $17 million contribution from the 2020 Acquisitions, partially offset by a reduction in demand due to COVID-19.

Operating loss for the first quarter of 2021 was primarily due to a $4 million increase in acquisition-related expenses and a $6 million increase in amortization expense related to the 2020 Acquisitions.

The decrease in operating income in comparison to the first quarter of 2020 was also impacted by lower sales excluding the 2020 Acquisitions and an increase in manufacturing and SG&A expenses due to additional investments in manufacturing capacity and selling and design capabilities.

Unallocated Corporate

Unallocated corporate operating income was $5 million in the third quarter of 2020 compared to $2 million of operating loss in the same period of 2019.

Unallocated corporate operating income was $16 million in the first nine months of 2020 compared to $6 million

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

of operating loss in the first nine months of 2019.

The increase in both periods was primarily due to the gain related to th e sale of our idled mineral fiber plant in China .

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

Unallocated corporate operating loss was $2 million in the first quarter of 2021 and 2020.

FINANCIAL CONDITION AND LIQUIDITY

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

Operating activities in the first nine months of 2020 provided $148.4 million of cash, compared to $121.4 million in the first nine months of 2019.

The increase was primarily due to higher cash earnings, partially offset by lower tax payments.

Net cash used for investing activities was $52.2 million in the first nine months of 2020, compared to $70.9 million in the first nine months of 2019.

Cash used for investing activities decreased in comparison to 2019 due to lower payments to Knauf, proceeds from the sale of our idled mineral fiber plant in China in the first nine months of 2020 and lower purchases of property, plant and equipment, partially offset by the remittance of Knauf proceeds to WAVE in the first nine months of 2020 and an increase in cash paid for acquisitions.

Net cash used for financing activities was $2.5 million in the first nine months of 2020, compared to $289.0 million in the first nine months of 2019.

The favorable change of cash was primarily due to decreased debt payments and lower repurchases of outstanding common stock, partially offset by a reduction in proceeds from borrowings.

Operating activities for the first three months of 2021 provided $19.6 million of cash, compared to $25.7 million in the first three months of 2020.

The decrease was primarily due to lower cash earnings, partially offset by positive working capital changes, primarily from accounts payable and accrued expenses.

Net cash used for investing activities was $8.8 million in the first three months of 2021, compared to $9.9 million of cash provided in the first three months of 2020.

The unfavorable change of cash in comparison to 2020 was primarily due to purchase price adjustments paid to Knauf in 2021.

Net cash used for financing activities was $26.2 million in the first three months of 2021, compared to $66.8 million of cash provided in the first three months of 2020.

The unfavorable change of cash was primarily due to a decrease in proceeds from borrowings and higher debt payments, partially offset by lower repurchases of outstanding common stock.

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

Our liquidity needs for operations vary throughout the year.

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

As of September 30, 2020, total borrowings outstanding under our senior credit facility were $185.0 million under the revolving credit facility and $500.0 million under Term Loan A.

As of September 30, 2020, we had a $25.0 million letter of credit facility, also known as our bi-lateral facility.

As of March 31, 2021, total borrowings outstanding under our senior credit facility were $225.0 million under the revolving credit facility and $487.4 million under Term Loan A.

We also have a $25.0 million letter of credit facility, also known as our bi-lateral facility.

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

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

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

As of March 31, 2021, we were in compliance with all covenants of the senior credit facility.

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

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

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November 28, 2018

November 2016 to March 2021

November 28, 2018

November 2018 to November 2023

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March 2021 to March 2024

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 a 1-month LIBOR.

Under the terms of the November 2018 swap maturing in 2023, we pay a fixed rate monthly and receive a 1-month LIBOR.

This is inclusive of a 0% floor.

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

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.

Under the terms of the November 2018 swap maturing in 2025, we pay a fixed rate monthly and receive 1-month LIBOR.

This is inclusive of a 0% floor.

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.

Under the terms of the March 2020 swap maturing in 2022, we pay a fixed rate monthly 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.

Under the terms of the March 2020 swaps maturing in 2024, we pay a fixed rate monthly and receive 1-month LIBOR.

These are inclusive of a 0% floor.

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

As of September 30, 2020, we had $138.8 million of cash and cash equivalents, $127.1 million in the U.S and $11.7 million in various foreign jurisdictions, primarily Canada.

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.

As of March 31, 2021, we had $121.6 million of cash and cash equivalents, $108.6 million in the U.S and $13.0 million in various foreign jurisdictions, primarily Canada.

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

1 unchanged sentence

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

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

March 31, 2021

Financing Arrangements

1 unchanged sentence

Revolving credit facility

As of September 30, 2020, we had $138.8 million of cash and cash equivalents and $315.0 million available under our revolving credit facility.

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

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

As of March 31, 2021, we had $121.6 million of cash and cash equivalents and $275.0 million available under our revolving credit facility.

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

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

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

CONTRACTUAL OBLIGATIONS

Information related to our contractual obligations at December 31, 2019 can be found in our Amendment No.

1 to the Annual Report on Form 10-K/A for the year ended December 31, 2019, Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations.

Our long-term debt obligations as of September 30, 2020 increased by $70.7 million, primarily due to additional borrowings under our revolving credit facility, net of repayments.

During the third quarter of 2020, we recorded $15.9 million of contingent consideration payable related to the acquisitions of Moz and Turf which will be paid out upon achievement of future performance objectives.

See Note 4 to the Condensed Consolidated Financial Statements for further information.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For information regarding our exposure to certain market risks, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Amendment No.

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

For information regarding our exposure to certain market risks, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the year ended December 31, 2020.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis