Armstrong World Industries Inc
ARMSTRONG WORLD INDUSTRIES INC (Form: 10-Q, Received: 05/01/2017 08:34:05)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

( Mark One

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

For the quarterly period ended March 31, 2017

OR

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       No  

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       No  

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

 

Large accelerated filer

 

Accelerated filer

 

Non-accelerated filer

 

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

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

Number of shares of Armstrong World Industries, Inc.’s common stock outstanding as of April 24, 2017 – 53,193,852.

 

 

 

 

 


 

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

 

25

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

31

Item 4.

 

Controls and Procedures

 

31

 

 

 

PART II - OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

 

32

Item 1A.

 

Risk Factors

 

32

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

32

Item 3.

 

Defaults Upon Senior Securities

 

32

Item 4.

 

Mine Safety Disclosures

 

32

Item 5.

 

Other Information

 

32

Item 6.

 

Exhibits

 

33

Signatures

 

34

 

 

 

2


 

When we refer to “AWI,” the “Company,” “we,” “our” or “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 herein 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 and domestic economic conditions;

 

construction activity;

 

the tax consequences of the separation of the flooring business from our ceilings (building products) business;

 

competition;

 

key customers;

 

availability and costs of raw materials and energy;

 

international operations;

 

Worthington Armstrong Venture (“WAVE”), our joint venture with Worthington Industries, Inc.;

 

environmental matters;

 

covenants in our debt agreements;

 

our indebtedness;

 

our liquidity;

 

strategic transactions;

 

negative tax consequences;

 

defined benefit plan obligations;

 

claims and litigation;

 

labor;

 

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 forward-looking statement is based.

3


 

PART I  - FINANC IAL INFORMATION

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 March 31, 2017

 

 

Three Months Ended March 31, 2016

 

Net sales

 

$

315.4

 

 

$

287.4

 

Cost of goods sold

 

 

216.1

 

 

 

203.1

 

Gross profit

 

 

99.3

 

 

 

84.3

 

Selling, general and administrative expenses

 

 

54.6

 

 

 

53.7

 

Separation costs

 

 

-

 

 

 

27.1

 

Equity earnings from joint venture

 

 

(18.3

)

 

 

(18.1

)

Operating income

 

 

63.0

 

 

 

21.6

 

Interest expense

 

 

9.2

 

 

 

21.9

 

Other non-operating expense

 

 

1.8

 

 

 

-

 

Other non-operating (income)

 

 

(3.4

)

 

 

(5.2

)

Earnings from continuing operations before income taxes

 

 

55.4

 

 

 

4.9

 

Income tax expense

 

 

24.6

 

 

 

12.0

 

Earnings (loss) from continuing operations

 

 

30.8

 

 

 

(7.1

)

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

   of $ -, and $ 0.1

 

 

-

 

 

 

(4.5

)

(Loss) gain from disposal of discontinued business, net of tax expense

    (benefit) of $0.3 and ($1.8)

 

 

(0.4

)

 

 

1.7

 

Net (loss) from discontinued operations

 

 

(0.4

)

 

 

(2.8

)

Net earnings (loss)

 

$

30.4

 

 

$

(9.9

)

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

11.1

 

 

 

1.4

 

Derivative gain

 

 

0.1

 

 

 

1.6

 

Pension and postretirement adjustments

 

 

2.5

 

 

 

7.8

 

Total other comprehensive income

 

 

13.7

 

 

 

10.8

 

Total comprehensive income

 

$

44.1

 

 

$

0.9

 

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

 

 

 

 

 

 

 

 

Basic

 

$

0.57

 

 

$

(0.13

)

Diluted

 

$

0.56

 

 

$

(0.13

)

(Loss) per share of common stock, discontinued operations:

 

 

 

 

 

 

 

 

Basic

 

$

(0.01

)

 

$

(0.05

)

Diluted

 

$

(0.01

)

 

$

(0.05

)

Net earnings (loss) per share of common stock:

 

 

 

 

 

 

 

 

Basic

 

$

0.56

 

 

$

(0.18

)

Diluted

 

$

0.56

 

 

$

(0.18

)

Average number of common shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

54.1

 

 

 

55.6

 

Diluted

 

 

54.5

 

 

 

55.6

 

 

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 data) 

 

 

 

Unaudited March 31, 2017

 

 

December 31, 2016

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

81.0

 

 

$

141.9

 

Accounts and notes receivable, net

 

 

127.2

 

 

 

108.3

 

Inventories, net

 

 

116.1

 

 

 

109.0

 

Income tax receivable

 

 

10.0

 

 

 

26.2

 

Other current assets

 

 

19.2

 

 

 

20.8

 

Total current assets

 

 

353.5

 

 

 

406.2

 

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

   $469.6 and $445.5, respectively

 

 

689.2

 

 

 

669.6

 

Prepaid pension costs

 

 

68.1

 

 

 

56.6

 

Investment in joint venture

 

 

105.3

 

 

 

106.2

 

Goodwill and intangible assets, net

 

 

456.8

 

 

 

434.5

 

Deferred income taxes

 

 

13.9

 

 

 

15.4

 

Income taxes receivable

 

 

6.5

 

 

 

5.7

 

Other non-current assets

 

 

64.5

 

 

 

63.8

 

Total assets

 

$

1,757.8

 

 

$

1,758.0

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Short-term debt

 

$

15.0

 

 

$

-

 

Current installments of long-term debt

 

 

32.5

 

 

 

25.0

 

Accounts payable and accrued expenses

 

 

172.4

 

 

 

197.1

 

Income tax payable

 

 

1.2

 

 

 

2.0

 

Total current liabilities

 

 

221.1

 

 

 

224.1

 

Long-term debt, less current installments

 

 

840.5

 

 

 

848.6

 

Postretirement benefit liabilities

 

 

83.9

 

 

 

84.8

 

Pension benefit liabilities

 

 

87.6

 

 

 

86.3

 

Other long-term liabilities

 

 

29.4

 

 

 

29.1

 

Income taxes payable

 

 

54.9

 

 

 

62.2

 

Deferred income taxes

 

 

169.2

 

 

 

156.5

 

Total non-current liabilities

 

 

1,265.5

 

 

 

1,267.5

 

Shareholders' equity:

 

 

 

 

 

 

 

 

Common stock, $0.01 par value per share, 200 million shares authorized, 60,675,542

   shares issued and 53,316,614 shares outstanding as of March 31, 2017 and

   60,597,140 shares issued and 54,428,233 shares outstanding as of December 31, 2016

 

 

0.6

 

 

 

0.6

 

Additional paid-in capital

 

 

506.9

 

 

 

504.9

 

Retained earnings

 

 

509.0

 

 

 

469.9

 

Treasury stock, at cost, 7,358,928 shares as of March 31, 2017 and 6,168,907

   shares as of December 31, 2016

 

 

(355.2

)

 

 

(305.2

)

Accumulated other comprehensive (loss)

 

 

(390.1

)

 

 

(403.8

)

Total shareholders' equity

 

 

271.2

 

 

 

266.4

 

Total liabilities and shareholders' equity

 

$

1,757.8

 

 

$

1,758.0

 

 

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 March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

Common Stock

 

 

Paid-In

 

 

Retained

 

 

Treasury Stock

 

 

Comprehensive

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Shares

 

 

Amount

 

 

Income (Loss)

 

 

Total

 

Balance at beginning of period

 

 

54,428,233

 

 

$

0.6

 

 

$

504.9

 

 

$

469.9

 

 

 

6,168,907

 

 

$

(305.2

)

 

$

(403.8

)

 

$

266.4

 

Cumulative effect impact of ASU 2016-09

    adoption

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8.7

 

Stock issuance

 

 

78,402

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based employee compensation

 

 

 

 

 

 

 

 

 

 

1.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1.1

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30.4

 

Separation of AFI

 

 

 

 

 

 

 

 

 

 

0.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.9

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13.7

 

 

 

13.7

 

Acquisition of treasury stock

 

 

(1,190,021

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,190,021

 

 

 

(50.0

)

 

 

 

 

 

 

(50.0

)

Balance at end of period

 

 

53,316,614

 

 

$

0.6

 

 

$

506.9

 

 

$

509.0

 

 

 

7,358,928

 

 

$

(355.2

)

 

$

(390.1

)

 

$

271.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

Common Stock

 

 

Paid-In

 

 

Retained

 

 

Treasury Stock

 

 

Comprehensive

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Shares

 

 

Amount

 

 

Income (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

 

 

118,493

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based employee compensation

 

 

 

 

 

 

 

 

 

 

0.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.6

 

Net (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9.9

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9.9

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.8

 

 

 

10.8

 

Balance at end of period

 

 

55,477,557

 

 

$

0.6

 

 

$

1,152.4

 

 

$

355.3

 

 

 

5,057,382

 

 

$

(261.4

)

 

$

(476.6

)

 

$

770.3

 

 

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

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net earnings (loss)

 

$

30.4

 

 

$

(9.9

)

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

 

Depreciation and amortization

 

 

18.9

 

 

 

30.2

 

Deferred income taxes

 

 

27.4

 

 

 

(1.5

)

Share-based compensation

 

 

2.5

 

 

 

2.6

 

Equity earnings from joint venture

 

 

(18.3

)

 

 

(18.1

)

Separation costs

 

 

-

 

 

 

27.1

 

Loss on interest rate swap

 

 

-

 

 

 

10.7

 

U.S. pension (credit) expense

 

 

(6.2

)

 

 

5.4

 

Other non-cash adjustments, net

 

 

(0.3

)

 

 

(3.0

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Receivables

 

 

(15.3

)

 

 

(27.5

)

Inventories

 

 

(2.3

)

 

 

0.3

 

Other current assets

 

 

1.8

 

 

 

(8.9

)

Other non-current assets

 

 

(0.6

)

 

 

(4.6

)

Accounts payable and accrued expenses

 

 

(28.3

)

 

 

(68.2

)

Income taxes payable

 

 

3.8

 

 

 

7.3

 

Other long-term liabilities

 

 

(1.5

)

 

 

(4.6

)

Other, net

 

 

(1.4

)

 

 

(2.3

)

Net cash provided by (used for) operating activities

 

 

10.6

 

 

 

(65.0

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(25.3

)

 

 

(28.5

)

Return of investment from joint venture

 

 

19.2

 

 

 

17.9

 

Cash paid for acquisition

 

 

(31.4

)

 

 

-

 

Other investing activities

 

 

-

 

 

 

0.3

 

Net cash (used for) investing activities

 

 

(37.5

)

 

 

(10.3

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from revolving credit facility and other short-term debt

 

 

25.0

 

 

 

40.0

 

Payments of revolving credit facility and other short-term debt

 

 

(10.0

)

 

 

(40.0

)

Payments of long-term debt

 

 

(0.6

)

 

 

(20.7

)

Financing costs

 

 

(0.6

)

 

 

-

 

Proceeds from exercised stock options

 

 

0.1

 

 

 

-

 

Excess tax benefit from share-based awards

 

 

-

 

 

 

0.6

 

Payment for treasury stock acquired

 

 

(50.0

)

 

 

-

 

Net cash (used for) financing activities

 

 

(36.1

)

 

 

(20.1

)

Effect of exchange rate changes on cash and cash equivalents

 

 

2.1

 

 

 

0.4

 

Net (decrease) in cash and cash equivalents

 

 

(60.9

)

 

 

(95.0

)

Cash and cash equivalents at beginning of year

 

 

141.9

 

 

 

244.8

 

Cash and cash equivalents at end of period

 

 

81.0

 

 

 

149.8

 

Cash and cash equivalents at end of period of discontinued operations

 

 

-

 

 

 

9.1

 

Cash and cash equivalents at end of period of continuing operations

 

$

81.0

 

 

$

140.7

 

Supplemental Cash Flow Disclosures:

 

 

 

 

 

 

 

 

Interest paid

 

$

7.7

 

 

$

10.1

 

Income tax (refunds) payments, net

 

 

(6.2

)

 

 

3.9

 

Amounts in accounts payable for capital expenditures

 

 

2.4

 

 

 

8.3

 

 

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.

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, 2016.  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, 2016.  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 first quarter of 2017 and 2016 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. 

On April 1, 2016, we completed our separation of Armstrong Flooring, Inc. (“AFI”).  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 first three months of 2016 were $27.1 million and recorded within the Unallocated Corporate segment.  Separation costs primarily related to outside professional services and employee compensation, retention and severance accruals.  

On January 13, 2017, we acquired the business and assets of Tectum, Inc. (“Tectum”), based in Newark, Ohio.  Tectum is a manufacturer of acoustical ceiling, wall and structural solutions for commercial building applications with two manufacturing facilities.   Tectum’s operations from the date of acquisition, and its assets and liabilities as of March 31, 2017, have been included as a component of our Americas segment.  See Note 3 for additional information.

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 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.  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 2017 presentation.

Recently Adopted Accounting Standards

In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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.  The adoption of this standard on January 1, 2017 did not impact on our financial condition, results of operations or cash flows.

In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting.”   This new guidance simplifies accounting for share-based payments, most notably by requiring all excess tax benefits and 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 they occur.  Effective January 1, 2017, we adopted the provisions of ASU 2016-09.  Upon adoption, we have elected to continue to estimate the impact of forfeitures when determining share-based compensation cost.  We prospectively adopted the provisions of this new guidance related to the recognition of excess tax benefits and deficiencies through income tax expense, the presentation of excess tax benefits from share-based compensation as operating cash outflows, and changes to diluted earnings per share computations, the impact of which were not material to our Condensed Consolidated Statements of Operations or Condensed Consolidated Statements of Cash Flows.  Finally, as required by ASU 2016-09, effective January 1, 2017, we recorded an $8.7 million cumulative-effect increase to Retained earnings and Deferred income taxes (assets), representing prior years’ tax benefits that were not previously recognized because the related tax deductions had not reduced income taxes payable.    

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

8


Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(dollar amounts in millions, except share data)

 

ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective.  In March 2016, the FASB issued ASU 2016-08, “Principal versus Agent Considerations (Reporting Gross versus Net),” which clarifies the implementation guidance 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 relating to the id entification 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.  In May 2016, the FASB issued ASU 2016-12, “Narrow-Scope Improvement s and Practical Expedients,” which clarifies the guidance related to the presentation of sales taxes, noncash consideration, and completed contracts and contract modifications.  In December 2016, the FASB issued ASU 2016-20, “Technical Corrections and Impr ovements to Topic 606, Revenue from Contracts with Customers,” which clarifies the scope and application of the adoption of the new revenue recognition standard.

Collectively, the revenue recognition ASC updates are effective for annual reporting periods beginning after December 15, 2017, but early adoption is permitted.  We intend to adopt these standards effective January 1, 2018 on a modified retrospective transition method and also intend on applying all practical expedients related to completed contracts upon adoption.  We are still evaluating the impact the adoption of these ASC updates will have on our financial condition, results of operations and cash flows.  Our final evaluation of the impact of adopting these ASC updates is expected to be completed during the third quarter of 2017.

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 do not believe the adoption of this standard will have a material impact 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 August 2016, the FASB issued ASU 2016-15 , “Classification of Certain Cash Receipts and Cash Payments.”   This guidance clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows.  This new guidance is effective for annual periods beginning after December 15, 2017.  We are currently evaluating the impact the adoption of this standard would have on our cash flows.

In March 2017, the FASB issued ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” which requires companies to report the service cost component of net benefit cost in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period.  The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented.  This new guidance is effective for annual periods beginning after December 15, 2018 and will have an impact on the classification of net benefit costs, which are currently included as a component of Costs of goods sold and Selling, general and administrative (“SG&A”) expenses, on our Condensed Consolidated Statements of Operations.  See Note 13 for details related to our components of net benefit costs.

 

 

NOTE 2. SEGMENT RESULTS

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

Net sales to external customers

 

 

 

 

 

 

 

 

Americas

 

$

219.8

 

 

$

200.1

 

EMEA

 

 

66.6

 

 

 

59.6

 

Pacific Rim

 

 

29.0

 

 

 

27.7

 

Total net sales to external customers

 

$

315.4

 

 

$

287.4

 

9


Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(dollar amounts in millions, except share data)

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

Segment operating income (loss)

 

 

 

 

 

 

 

 

Americas

 

$

67.2

 

 

$

56.1

 

EMEA

 

 

(3.1

)

 

 

(4.0

)

Pacific Rim

 

 

(1.1

)

 

 

(1.3

)

Unallocated Corporate

 

 

-

 

 

 

(29.2

)

Total consolidated operating income

 

$

63.0

 

 

$

21.6

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

Total consolidated operating income

 

$

63.0

 

 

$

21.6

 

Interest expense

 

 

9.2

 

 

 

21.9

 

Other non-operating expense

 

 

1.8

 

 

 

-

 

Other non-operating (income)

 

 

(3.4

)

 

 

(5.2

)

Earnings from continuing operations before income taxes

 

$

55.4

 

 

$

4.9

 

 

 

 

March 31, 2017

 

 

December 31, 2016

 

Segment assets

 

 

 

 

 

 

 

 

Americas

 

$

1,232.1

 

 

$

1,186.7

 

EMEA

 

 

289.1

 

 

 

275.5

 

Pacific Rim

 

 

145.3

 

 

 

145.0

 

Unallocated Corporate

 

 

91.3

 

 

 

150.8

 

Total consolidated assets

 

$

1,757.8

 

 

$

1,758.0

 

 

Impairment testing of our tangible assets occurs whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.

 

 

NOTE 3. ACQUISITION AND DISCONTINUED OPERATIONS

Acquisition of Tectum, Inc.

On January 13, 2017, in connection with the acquisition of Tectum, the $31.4 million purchase price for Tectum was allocated to the tangible and intangible assets acquired and the liabilities assumed based on their estimated fair values, with the remaining unallocated amount recorded as goodwill.  The total fair value of tangible assets acquired, less liabilities assumed, in connection with the Tectum acquisition was $5.9 million.  The total fair value of intangible assets acquired, comprised of amortizable customer relationships and non-amortizing brand names, was $16.5 million, resulting in $9.0 million of goodwill.  

Separation and Distribution of AFI

On April 1, 2016, in connection with the separation and distribution of AFI, we entered into several agreements with AFI that, together with a plan of division, provide for the separation and allocation between AWI and AFI of the flooring assets, employees, liabilities and obligations of AWI and its subsidiaries attributable to periods prior to, at and after AFI’s separation from AWI, and govern the relationship between AWI and AFI subsequent to the completion of the separation and distribution.  These agreements include a Transition Services Agreement, a Tax Matters Agreement, an Employee Matters Agreement, a Trademark License Agreement, a Transition Trademark License Agreement and a Campus Lease Agreement.  Under the Transition Services Agreement, AWI and AFI will provide various services to each other during a transition period expiring no later than December 31, 2017.  We do not expect to extend the Transition Services Agreement beyond December 31, 2017.

10


Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(dollar amounts in millions, except share data)

 

The following is a summary of the results of operations related to AFI, our former Resilient Flooring and Wood Flooring segments, which are presented as discontinued operations.

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2016

 

Net sales

 

$

284.4

 

Cost of goods sold

 

 

237.2

 

Gross profit

 

 

47.2

 

Selling, general and administrative expenses

 

 

50.5

 

Operating (loss)

 

 

(3.3

)

Other non-operating expense, net

 

 

1.1

 

(Loss) from discontinued operations before income taxes

 

 

(4.4

)

Income tax expense

 

 

0.1

 

(Loss) from discontinued operations

 

$

(4.5

)

 

The following is a summary of total depreciation and amortization and capital expenditures related to AFI which are presented as discontinued operations and included as components of operating and investing cash flows on our consolidated statements of cash flows:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2016

 

Depreciation and amortization

 

$

11.4

 

Purchases of property, plant and equipment

 

 

(8.0

)

European Resilient Flooring

On December 4, 2014, our Board of Directors approved the cessation of funding to our DLW subsidiary, which at that time was our European flooring business.  As a result, DLW management filed for insolvency in Germany on December 11, 2014.  The German insolvency court subsequently appointed an administrator (the “Administrator”) to oversee DLW operations.

As of December 4, 2014, DLW had a net liability of $12.9 million, representing assets of $151.9 million and liabilities of $164.8 million, which were removed from our balance sheet.  This net liability was recognized as a contingent liability on our consolidated balance sheet pending the closure of the insolvency proceeding.  The net liability, included within Accounts payable and accrued expenses on our Condensed Consolidated Balance Sheets, was $11.9 million as of March 31, 2017.  In April 2017, we entered into a settlement agreement and mutual release with the Administrator on behalf of the DLW estate to settle all claims of the Administrator related to the insolvency for a cash payment of $11.8 million.  DLW was previously shown within our Resilient Flooring reporting segment.

The following is a summary of the results related to the flooring businesses which are included in discontinued operations.

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

(Loss) on disposal of discontinued business before income tax

 

$

(0.1

)

 

$

(0.1

)

Income tax expense (benefit)

 

 

0.3

 

 

 

(1.8

)

Net (loss) gain on disposal of discontinued business

 

$

(0.4

)

 

$

1.7

 

 

 

11


Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(dollar amounts in millions, except share data)

 

NOTE 4. ACCOUNTS AND NOTES RECEIVABLE

 

 

 

March 31, 2017

 

 

December 31, 2016

 

Customer receivables

 

$

126.2

 

 

$

106.9

 

Customer notes

 

 

1.2

 

 

 

1.5

 

Miscellaneous receivables

 

 

6.0

 

 

 

6.0

 

Less allowance for warranties, discounts and losses

 

 

(6.2

)

 

 

(6.1

)

Accounts and notes receivable, net

 

$

127.2

 

 

$

108.3

 

 

Generally, 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.

 

 

NOTE 5. INVENTORIES

 

 

 

March 31, 2017