Armstrong World Industries Inc
ARMSTRONG WORLD INDUSTRIES INC (Form: 10-Q, Received: 07/29/2016 08:18:53)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

( Mark One

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2016

OR

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to                

Commission File Number 1-2116 

 

ARMSTRONG WORLD INDUSTRIES, INC.

(Exact name of registrant as specified in its charter) 

 

 

Pennsylvania

 

23-0366390

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

2500 Columbia Avenue, Lancaster, Pennsylvania

 

17603

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code (717) 397-0611

 

Indicate by check mark whether the registrant; (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter time period that the registrant was required to submit and post such files).    Yes   x     No   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

 

Large accelerated filer

x

 

Accelerated filer

o

 

Non-accelerated filer

o

 

Smaller reporting company

o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   o     No   x

Number of shares of Armstrong World Industries, Inc.’s common stock outstanding as of July 21, 2016 – 55,497,188.

 

 

 

 


 

TABLE OF CONTENTS

 

 

 

 

 

PAGE

Cautionary Note Regarding Forward-Looking Statements

 

3

 

 

 

PART I - FINANCIAL INFORMATION

 

 

Item 1.

 

Financial Statements

 

4

Item 2.

 

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

 

27

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

35

Item 4.

 

Controls and Procedures

 

35

 

 

 

PART II - OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

 

36

Item 1A.

 

Risk Factors

 

36

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

37

Item 3.

 

Defaults Upon Senior Securities

 

37

Item 4.

 

Mine Safety Disclosures

 

37

Item 5.

 

Other Information

 

37

Item 6.

 

Exhibits

 

38

Signatures

 

40

 

 

2


 

When we refer to AWI," the "Company," "we," "our" and "us ," we are referring to Armstrong World Industries, Inc. and its subsidiaries.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this Quarterly Report on Form 10-Q and the documents incorporated by reference may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Those forward-looking statements are subject to various risks and uncertainties and include all statements that are not historical statements of fact and those regarding our intent, belief or expectations, including, but not limited to, our expectations concerning our residential and commercial markets and their effect on our operating results; our expectations regarding the payment of dividends, and our ability to increase revenues, earnings and EBITDA (as such terms are defined by documents incorporated by reference herein). Words such as “anticipate,” “expect,” “intend,” “plan,” “target,” “project,” “predict,” “believe,” “may,” “will,” “would,” “could,” “should,” “seek,” “estimate” and similar expressions are intended to identify such forward-looking statements. These statements are based on management’s current expectations and beliefs and are subject to a number of factors that could lead to actual results materially different from those described in the forward-looking statements. Although we believe that the assumptions underlying the forward-looking statements are reasonable, we can give no assurance that our expectations will be attained. Factors that could have a material adverse effect on our financial condition, liquidity, results of operations or future prospects or which could cause actual results to differ materially from our expectations include, but are not limited to:

 

·

global economic conditions;

 

·

construction activity;

 

·

the separation of the flooring business;

 

·

competition;

 

·

key customers;

 

·

availability and costs of raw materials and energy;

 

·

international operations;

 

·

covenants in our debt agreements;

 

·

our indebtedness;

 

·

our liquidity;

 

·

our WAVE joint venture;

 

·

environmental matters;

 

·

strategic transactions;

 

·

plant construction projects;

 

·

negative tax consequences;

 

·

defined benefit plan obligations;

 

·

claims and litigation;

 

·

labor;

 

·

our intellectual property rights;

 

·

costs savings and productivity initiatives; and

 

·

other risks detailed from time to time in our filings with the Securities and Exchange Commission (the “SEC”), press releases and other communications, including those set forth under “Risk Factors” included in our Annual Report on Form 10-K and in the documents incorporated by reference.

Such forward-looking statements speak only as of the date they are made. We expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statements to reflect any change in our expectations with regard thereto or change in events, conditions or circumstances on which any statement is based.

 

 

3


 

PART I  - FINANC IAL INFOR MATION

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 June 30, 2016

 

 

Three Months Ended June 30, 2015

 

 

Six Months Ended June 30, 2016

 

 

Six Months Ended June 30, 2015

 

Net sales

 

$

314.3

 

 

$

306.1

 

 

$

601.7

 

 

$

598.1

 

Cost of goods sold

 

 

222.8

 

 

 

214.6

 

 

 

425.9

 

 

 

417.5

 

Gross profit

 

 

91.5

 

 

 

91.5

 

 

 

175.8

 

 

 

180.6

 

Selling, general and administrative expenses

 

 

55.8

 

 

 

61.6

 

 

 

109.5

 

 

 

125.9

 

Separation costs

 

 

3.9

 

 

 

5.1

 

 

 

31.0

 

 

 

9.4

 

Equity earnings from joint venture

 

 

(19.9

)

 

 

(16.4

)

 

 

(38.0

)

 

 

(30.0

)

Operating income

 

 

51.7

 

 

 

41.2

 

 

 

73.3

 

 

 

75.3

 

Interest expense

 

 

12.5

 

 

 

11.4

 

 

 

34.4

 

 

 

22.6

 

Other non-operating expense

 

 

-

 

 

 

0.2

 

 

 

-

 

 

 

2.7

 

Other non-operating (income)

 

 

(2.1

)

 

 

(3.4

)

 

 

(7.3

)

 

 

(5.4

)

Earnings from continuing operations before income taxes

 

 

41.3

 

 

 

33.0

 

 

 

46.2

 

 

 

55.4

 

Income tax expense

 

 

24.7

 

 

 

17.9

 

 

 

36.7

 

 

 

34.6

 

Earnings from continuing operations

 

 

16.6

 

 

 

15.1

 

 

 

9.5

 

 

 

20.8

 

Net earnings (loss) from discontinued operations, net of tax expense

   of $-, $7.3, $0.1 and $10.7

 

 

-

 

 

 

14.8

 

 

 

(4.5

)

 

 

12.9

 

Gain (loss) from disposal of discontinued business, net of tax

   (benefit) of ($0.1), $-, ($1.9) and ($43.4)

 

 

0.3

 

 

 

(0.3

)

 

 

2.0

 

 

 

42.5

 

Net earnings (loss) from discontinued operations

 

 

0.3

 

 

 

14.5

 

 

 

(2.5

)

 

 

55.4

 

Net earnings

 

$

16.9

 

 

$

29.6

 

 

$

7.0

 

 

$

76.2

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(13.2

)

 

 

7.4

 

 

 

(11.8

)

 

 

(7.9

)

Derivative (loss)

 

 

(2.1

)

 

 

(0.6

)

 

 

(0.5

)

 

 

(1.1

)

Pension and postretirement adjustments

 

 

9.2

 

 

 

9.2

 

 

 

17.0

 

 

 

21.1

 

Total other comprehensive (loss) income

 

 

(6.1

)

 

 

16.0

 

 

 

4.7

 

 

 

12.1

 

Total comprehensive income

 

$

10.8

 

 

$

45.6

 

 

$

11.7

 

 

$

88.3

 

Earnings per share of common stock, continuing operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.30

 

 

$

0.27

 

 

$

0.17

 

 

$

0.37

 

Diluted

 

$

0.29

 

 

$

0.27

 

 

$

0.17

 

 

$

0.37

 

Earnings (loss) per share of common stock, discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.01

 

 

$

0.26

 

 

$

(0.04

)

 

$

0.99

 

Diluted

 

$

0.01

 

 

$

0.26

 

 

$

(0.04

)

 

$

0.98

 

Net earnings per share of common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.30

 

 

$

0.53

 

 

$

0.13

 

 

$

1.36

 

Diluted

 

$

0.30

 

 

$

0.53

 

 

$

0.13

 

 

$

1.36

 

Average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

55.6

 

 

 

55.5

 

 

 

55.6

 

 

 

55.4

 

Diluted

 

 

56.0

 

 

 

55.8

 

 

 

55.9

 

 

 

55.8

 

 

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 data) 

 

 

 

Unaudited

June 30, 2016

 

 

December 31, 2015

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

99.4

 

 

$

209.3

 

Accounts and notes receivable, net

 

 

126.9

 

 

 

114.3

 

Inventories, net

 

 

104.2

 

 

 

101.4

 

Current assets of discontinued operations

 

 

-

 

 

 

381.3

 

Deferred income taxes

 

 

34.6

 

 

 

29.7

 

Income tax receivable

 

 

4.6

 

 

 

11.1

 

Other current assets

 

 

20.3

 

 

 

33.7

 

Total current assets

 

 

390.0

 

 

 

880.8

 

Property, plant, and equipment, less accumulated depreciation and amortization of

   $430.0 and $403.8, respectively

 

 

661.1

 

 

 

648.1

 

Prepaid pension costs

 

 

8.2

 

 

 

8.3

 

Investment in joint venture

 

 

119.6

 

 

 

130.8

 

Intangible assets, net

 

 

440.7

 

 

 

447.2

 

Non-current assets of discontinued operations

 

 

-

 

 

 

499.3

 

Deferred income taxes

 

 

10.0

 

 

 

19.7

 

Income taxes receivable

 

 

4.1

 

 

 

2.4

 

Other non-current assets

 

 

63.3

 

 

 

57.0

 

Total assets

 

$

1,697.0

 

 

$

2,693.6

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current installments of long-term debt

 

$

10.0

 

 

$

52.1

 

Accounts payable and accrued expenses

 

 

202.2

 

 

 

231.1

 

Current liabilities of discontinued operations

 

 

-

 

 

 

149.6

 

Income tax payable

 

 

9.6

 

 

 

3.2

 

Deferred income taxes

 

 

0.6

 

 

 

0.3

 

Total current liabilities

 

 

222.4

 

 

 

436.3

 

Long-term debt, less current installments

 

 

863.8

 

 

 

936.2

 

Postretirement benefit liabilities

 

 

88.8

 

 

 

87.2

 

Pension benefit liabilities

 

 

61.5

 

 

 

62.1

 

Other long-term liabilities

 

 

36.6

 

 

 

43.3

 

Non-current liabilities of discontinued operations

 

 

-

 

 

 

149.1

 

Income taxes payable

 

 

99.3

 

 

 

92.3

 

Deferred income taxes

 

 

122.2

 

 

 

118.3

 

Total non-current liabilities

 

 

1,272.2

 

 

 

1,488.5

 

Shareholders' equity:

 

 

 

 

 

 

 

 

Common stock, $0.01 par value per share, 200 million shares authorized, 60,542,365

   shares issued, and 55,484,983 shares outstanding as of June 30, 2016 and

   60,416,446 shares issued and 55,359,064 shares outstanding as of December 31, 2015

 

 

0.6

 

 

 

0.6

 

Additional paid-in capital

 

 

516.9

 

 

 

1,151.8

 

Retained earnings

 

 

372.2

 

 

 

365.2

 

Treasury stock, at cost, 5,057,382 shares

 

 

(261.4

)

 

 

(261.4

)

Accumulated other comprehensive (loss)

 

 

(425.9

)

 

 

(487.4

)

Total shareholders' equity

 

 

202.4

 

 

 

768.8

 

 

Total liabilities and shareholders' equity

 

$

1,697.0

 

 

$

2,693.6

 

 

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 

 

 

 

Six Months Ended June 30, 2016

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

Treasury Stock

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional

Paid-In

Capital

 

 

Retained

Earnings

 

 

Shares

 

 

Amount

 

 

Accumulated

Other

Comprehensive

(Loss)

 

 

Total

 

Balance at beginning of period

 

 

55,359,064

 

 

$

0.6

 

 

$

1,151.8

 

 

$

365.2

 

 

 

5,057,382

 

 

$

(261.4

)

 

$

(487.4

)

 

$

768.8

 

Stock issuance

 

 

125,919

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based employee compensation

 

 

 

 

 

 

 

 

 

 

7.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7.0

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7.0

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4.7

 

 

 

4.7

 

Separation of Armstrong Flooring, Inc.

 

 

 

 

 

 

 

 

 

 

(641.9

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

56.8

 

 

 

(585.1

)

Balance at end of period

 

 

55,484,983

 

 

$

0.6

 

 

$

516.9

 

 

$

372.2

 

 

 

5,057,382

 

 

$

(261.4

)

 

$

(425.9

)

 

$

202.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2015

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

Treasury Stock

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional

Paid-In

Capital

 

 

Retained

Earnings

 

 

Shares

 

 

Amount

 

 

Accumulated

Other

Comprehensive

(Loss)

 

 

Total

 

Balance at beginning of period

 

 

55,126,153

 

 

$

0.6

 

 

$

1,134.4

 

 

$

271.0

 

 

 

5,057,382

 

 

$

(261.4

)

 

$

(495.5

)

 

$

649.1

 

Stock issuance

 

 

176,819

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based employee compensation

 

 

 

 

 

 

 

 

 

 

9.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9.9

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

76.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

76.2

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12.1

 

 

 

12.1

 

Balance at end of period

 

 

55,302,972

 

 

$

0.6

 

 

$

1,144.3

 

 

$

347.2

 

 

 

5,057,382

 

 

$

(261.4

)

 

$

(483.4

)

 

$

747.3

 

 

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

 

 

 

Six Months Ended June 30,

 

 

 

2016

 

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net earnings

 

$

7.0

 

 

$

76.2

 

Adjustments to reconcile net earnings to net cash (used for) provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

50.2

 

 

 

57.4

 

Write off of debt financing costs

 

 

1.1

 

 

 

-

 

Deferred income taxes

 

 

3.5

 

 

 

(29.9

)

Share-based compensation

 

 

6.7

 

 

 

7.6

 

Equity earnings from joint venture

 

 

(38.0

)

 

 

(30.0

)

Separation costs

 

 

31.0

 

 

 

9.4

 

Loss on interest rate swap

 

 

10.7

 

 

 

-

 

U.S. pension expense

 

 

8.6

 

 

 

12.6

 

Non-cash foreign currency translation on intercompany loans

 

 

(5.0

)

 

 

(4.1

)

Other non-cash adjustments, net

 

 

1.1

 

 

 

0.2

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Receivables

 

 

(39.7

)

 

 

(28.5

)

Inventories

 

 

0.6

 

 

 

(16.0

)

Other current assets

 

 

9.6

 

 

 

(3.3

)

Other non-current assets

 

 

(8.9

)

 

 

(3.0

)

Accounts payable and accrued expenses

 

 

(90.0

)

 

 

4.4

 

Income taxes payable

 

 

18.9

 

 

 

8.5

 

Other long-term liabilities

 

 

(18.7

)

 

 

(5.4

)

Other, net

 

 

(4.1

)

 

 

2.8

 

Net cash (used for) provided by operating activities

 

 

(55.4

)

 

 

58.9

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(53.4

)

 

 

(56.2

)

Return of investment from joint venture

 

 

49.2

 

 

 

28.1

 

Other investing activities

 

 

0.3

 

 

 

3.8

 

Net cash (used for) investing activities

 

 

(3.9

)

 

 

(24.3

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from revolving credit facility and other short-term debt

 

 

90.0

 

 

 

-

 

Payments of revolving credit facility and other short-term debt

 

 

(90.0

)

 

 

-

 

Proceeds from long-term debt

 

 

363.5

 

 

 

-

 

Payments of long-term debt

 

 

(432.1

)

 

 

(18.1

)

Financing costs

 

 

(8.1

)

 

 

-

 

Special dividends paid

 

 

-

 

 

 

(1.2

)

Proceeds from exercised stock options

 

 

0.1

 

 

 

4.3

 

Cash transferred to Armstrong Flooring, Inc.

 

 

(9.1

)

 

 

-

 

Excess tax benefit from share-based awards

 

 

2.8

 

 

 

0.1

 

Payment of company owned life insurance loans, net

 

 

-

 

 

 

(0.1

)

Net cash (used for) financing activities

 

 

(82.9

)

 

 

(15.0

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(3.2

)

 

 

(3.3

)

Net (decrease) increase in cash and cash equivalents

 

 

(145.4

)

 

 

16.3

 

Cash and cash equivalents at beginning of year

 

 

244.8

 

 

 

185.3

 

Cash and cash equivalents at end of period

 

 

99.4

 

 

 

201.6

 

Cash and cash equivalents at end of period of discontinued operations

 

 

-

 

 

 

32.8

 

Cash and cash equivalents at end of period of continuing operations

 

$

99.4

 

 

$

168.8

 

Supplemental Cash Flow Disclosures:

 

 

 

 

 

 

 

 

Interest paid

 

$

17.6

 

 

$

19.9

 

Income taxes paid, net

 

 

9.7

 

 

 

23.3

 

Amounts in accounts payable for capital expenditures

 

 

7.4

 

 

 

20.9

 

 

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" and "us" in these notes, we are referring to AWI and its subsidiaries.

On April 1, 2016, we completed our previously announced separation of Armstrong Flooring, Inc. (“AFI”) by allocating the assets and liabilities related primarily to the Resilient Flooring 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.  Subsequent to the separation and distribution, AWI and AFI operate as two independent, publicly-traded companies, with AFI owning and operating the Resilient Flooring and Wood Flooring segments and AWI continuing to own and operate the Building Products (Ceilings) segment.  AFI’s historical financial results have been reflected in AWI’s Consolidated Financial Statements as a discontinued operation for all periods presented.  Separation costs for the three and six months ended June 30, 2016 were $3.9 million and $31.0 million, respectively. Separation costs for the three and six months ended June 30, 2015 were $5.1 million and $9.4 million, respectively.  Separation costs for all periods primarily related to outside professional services and employee compensation and retention and severance accruals which were recorded within the Unallocated Corporate segment in conjunction with this initiative. Beginning in the second quarter of 2016, AFI’s historical financial results for periods prior to April 1, 2016 are reflected in our Condensed Consolidated Financial Statements as a discontinued operation.  See Note 3 for additional information.

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, 2015.  These statements should therefore be read in conjunction with the Consolidated Financial Statements and notes that are included in the Form 10-K for the fiscal year ended December 31, 2015.  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 second quarter and first six months of 2016 and 2015 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, allowances for bad debts, inventory obsolescence and lower of cost or market 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.  Management may confer with outside parties, including outside counsel.  Actual results may differ from these estimates. 

Certain amounts in the prior year’s Condensed Consolidated Financial Statements have been recast to conform to the 2016 presentation.

Recently Adopted Accounting Standards

In June 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-12 “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period,”  which amends Accounting Standards Codification (“ASC”) Topic 718: Compensation-Stock Compensation.  This new guidance requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition and should not be reflected in the estimate of the grant-date fair value of the award.  The guidance was effective for annual periods beginning after December 15, 2015.  There was no impact on our financial condition, results of operations or cash flows as a result of the adoption of this guidance.

In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs.”   This standards update amends existing guidance to require the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability instead of a deferred charge.  In August 2015, the FASB issued ASU 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements,” which was issued to address the presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements.  ASU 2015-03 and 2015-15 were effective for annual reporting periods beginning after December 15, 2015.  We adopted ASU 2015-03 and 2015-15 retrospectively, resulting in a $4.1 million reduction to other non-current assets and a corresponding decrease to long-term debt as of March 31, 2016.  As of December 31, 2015, our adoption of these ASC updates resulted in a $4.7 million reduction to other non-current assets and a corresponding decrease to long-term debt.  There was no impact on results of operations as a result of the adoption of this guidance.

8


Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(dollar amounts in millions, except share data)

 

In April 2015, the FASB issued ASU 2015 -05, “Customer's Accounting for Fees Paid in a Cloud Computing Arrangement , which provides guidance to determine when a customer's fees paid in a cloud computing arrangement include a software license.  If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses.  If the arrangement does not include a software license, the customer should account for a cloud computing arrangement as a service contract.  This new guidance was effective for annual reporting periods beginning after December  15, 2015.  There was no impact on our financial condition, results of operations or cash flows as a result of the adoption of this gu idance.

Recently Issued Accounting Standards

In May 2014, the FASB issued ASU 2014-09,  “Revenue from Contracts with Customers.”   The guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to a customer.  The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective.  In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers: Deferral of the Effective Date” which defers the effective date for ASU 2014-09 by one year.  In March 2016, the FASB issued ASU 2016-08, “Principal versus Agent Considerations (Reporting Gross versus Net),” which clarifies the implementation guidance in ASU 2014-09 relating to principle versus agent considerations.  In April 2016, the FASB issued ASU 2016-10, “Identifying Performance Obligations and Licensing” which clarifies the implementation guidance in ASU 2014-09 relating to the identification of performance obligations in a contract, including how entities should account for shipping and handling services it provides after control of goods transfers to a customer.  ASU 2016-10 also clarifies guidance on the timing and pattern of revenue recognition for intellectual property licenses.  These ASC updates are effective for annual reporting periods beginning after December 15, 2017, but early adoption is permitted.  We have not selected a transition method and are currently evaluating the impact these ASC updates would have on our financial condition, results of operations and cash flows.

In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory,” which requires inventory that is measured on a first-in, first-out or average cost basis to be measured at lower of cost and net realizable value, as opposed to the lower of cost or market.  For inventory that is measured under the last-in, first-out (“LIFO”) basis or the retail recovery method, there is no change to current measurement requirements.  This new guidance must be applied prospectively and is effective for annual reporting periods beginning after December 15, 2016, but early adoption is permitted.  We are currently evaluating the impact the adoption of this standard would have on our financial condition, results of operations and cash flows.

In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes,” which requires entities with a classified balance sheet to present all deferred tax assets and liabilities as non-current.  This new guidance is effective for annual reporting periods beginning after December 15, 2016.  We are currently evaluating the impact the adoption of this standard would have on our financial condition and cash flows.

In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities,” which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments.  Most notably, this new guidance requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income.  This new guidance is effective for annual reporting periods beginning after December 15, 2017.  We are currently evaluating the impact the adoption of this standard would have on our financial condition, results of operations and cash flows.

In February 2016, the FASB issued ASU 2016-02, “Leases,” which amends accounting for leases, most notably by requiring a lessee to recognize the assets and liabilities that arise from a lease agreement.  Specifically, this new guidance will require lessees to recognize a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term, with limited exceptions.  The accounting applied by a lessor is largely unchanged from that applied under existing U.S. GAAP.  This new guidance is effective for annual reporting periods beginning after December 15, 2018 and must be adopted under a modified retrospective basis.  We are currently evaluating the impact the adoption of this standard would have on our financial condition, results of operations and cash flows.

In March 2016, the FASB issued ASU 2016-05, “Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships,” which amends ASC Topic 815: Derivatives and Hedging.  This new guidance clarifies that a novation, or a change in the counterparty to a derivative instrument, by itself would not cause a hedge accounting relationship to be discontinued.  This new guidance is effective for annual reporting periods beginning after December 15, 2016 and may be adopted prospectively or retroactively.  We are currently evaluating the impact the adoption of this standard would have on our financial condition, results of operations and cash flows.

9


Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(dollar amounts in millions, except share data)

 

In March 2016, the FASB iss ued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting , which amends ASC Topic  718: Compensation-Stock Compensation.  This new guidance simplifies accounting for share-based payments, most notably by requiring all excess tax benefits an d tax deficiencies to be recorded as income tax benefits or expense in the income statement and by allowing entities to recognize forfeitures of awards when the y occur.  This new guidance is effective for annual reporting periods beginning after December 1 5, 2016 and may be adopted prospectively or retroactively.  We are currently evaluating the impact the adoption of this standard would have on our financial condition, results of operations and cash flows.

 

 

NOTE 2. SEGMENT RESULTS

Effective April 1, 2016 and in connection with our separation of AFI, our former Resilient Flooring and Wood Flooring segments have been excluded from our results of continuing operations.  In addition, effective April 1, 2016, we disaggregated our former Building Products operating segment into the following three distinct geographical segments:  Americas, Europe, Middle East and Africa (“EMEA”) and Pacific Rim.

Each of our geographical segments produces suspended fiber and metal ceilings for use in commercial and institutional settings in addition to sourcing complimentary ceiling products.  Residential ceiling products are sold in the Americas primarily to wholesalers and retailers (including large home centers).  Each segment also includes the results of our Worthington Armstrong Venture (“WAVE”) joint venture with Worthington Industries, Inc., which manufactures suspension system (grid) products that are invoiced by both us and WAVE.  

Effective April 1, 2016, we reclassified the majority of the assets and liabilities formally reported in our Unallocated Corporate segment to our Americas segment.  The assets and liabilities reclassified to our Americas segment most notably included the Armstrong trade name intangible asset, property, plant and equipment comprised primarily of Corporate campus facilities, the cash surrender value of life insurance supporting deferred compensation liabilities, income tax asset and liabilities, and pension and postretirement assets and liabilities.  

Balance sheet items classified as Unallocated Corporate for all periods presented primarily include cash and cash equivalents and outstanding borrowings under our senior credit facilities.  

Segment results below have been restated for all periods presented as a result of the disaggregation of our former Building Products segment and the reclassification of Unallocated Corporate assets.  These revisions did not impact any previously reported consolidated revenues, gross profit, results of continuing operations, asset or liability balances.  

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net sales to external customers

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas

 

$

214.8

 

 

$

202.7

 

 

$

414.9

 

 

$

394.0

 

EMEA

 

 

65.6

 

 

 

68.6

 

 

 

125.2

 

 

 

139.1

 

Pacific Rim

 

 

33.9

 

 

 

34.8

 

 

 

61.6

 

 

 

65.0

 

Total net sales to external customers

 

$

314.3

 

 

$

306.1

 

 

$

601.7

 

 

$

598.1

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Segment operating income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas

 

$

64.3

 

 

$

71.9

 

 

$

120.4

 

 

$

136.3

 

EMEA

 

 

(5.3

)

 

 

(6.2

)

 

 

(9.3

)

 

 

(8.3

)

Pacific Rim

 

 

(2.1

)

 

 

(1.5

)

 

 

(3.4

)

 

 

(4.0

)

Unallocated Corporate

 

 

(5.2

)

 

 

(23.0

)

 

 

(34.4

)

 

 

(48.7

)

Total consolidated operating income

 

$

51.7

 

 

$

41.2

 

 

$

73.3

 

 

$

75.3

 

10


Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(dollar amounts in millions, except share data)

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2016