Form 10-Q
Table of Contents

 

 

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 September 30, 2013

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  x     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  x     No  ¨

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   ¨    Accelerated filer   x
Non-accelerated filer   ¨    Smaller reporting company   ¨

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

Number of shares of Armstrong World Industries, Inc.’s common stock outstanding as of October 22, 2013 – 54,153,915.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         PAGE  

Cautionary Note Regarding Forward-Looking Statements

     3   

PART I—FINANCIAL INFORMATION

  

Item 1.

  Financial Statements      5   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      27   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      37   

Item 4.

  Controls and Procedures      37   

PART II—OTHER INFORMATION

  

Item 1.

  Legal Proceedings      38   

Item 1A.

  Risk Factors      38   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      38   

Item 3.

  Defaults Upon Senior Securities      38   

Item 4.

  Mine Safety Disclosures      38   

Item 5.

  Other Information      38   

Item 6.

  Exhibits      39   

Signatures

     40   

 

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Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this report 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 operations and future prospects or which could cause actual results to differ materially from our expectations include, but are not limited to:

• global economic conditions including inflation, deflation, interest rates, availability of capital, consumer spending rates, energy availability and costs, and the effects of governmental initiatives to manage economic conditions;

• the risk that downturns in construction activity could adversely affect our business and results of operations;

• the risk that our indebtedness and degree of leverage could adversely affect our cash flow and our ability to operate our business, make payments on our indebtedness and declare dividends on our capital stock;

• the possibility that a number of covenants contained in the agreements that govern our indebtedness, impose significant operating and financial restrictions on our business;

• the possibility that our indebtedness may increase our vulnerability to negative unforeseen events;

• the effect of our indebtedness on our liquidity;

• our ability to generate sufficient cash flow from operations to fund our needs and remain in compliance with our debt covenants;

• the risk that the availability of raw materials and energy decreases or that the costs of these materials increase and we are unable to pass along the increased costs;

• the possibility that competition can reduce demand for our products or cause us to lower prices;

• the risk that we may lose sales to one of our major customers;

• the risk that the costs of construction and operation of our new manufacturing plants may exceed our projections;

• the risk that adverse judgments in regulatory actions, product claims, environmental claims and other litigation may not be covered by insurance in all circumstances;

• the risk that our intellectual property rights may not provide meaningful commercial protection for our products or brands;

 

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• integration obstacles or costs associated with the pursuit or consummation of strategic transactions;

• the risk that our LEAN initiatives may not achieve expected savings in our operating costs or improve operating results;

• the risk of changes in foreign currency exchange rates, interest rates and commodity prices;

• changes in the political, regulatory and business environments of our international markets, including changes in trade regulations;

• the risk that increased costs of labor, labor disputes, work stoppages or union organizing activity could delay or impede production and reduce sales and profits;

• the risk that our decision to outsource our information technology infrastructure and certain finance and accounting functions will make us more dependent upon third parties;

• the risk that our principal shareholders could significantly influence our management and our affairs;

• the cost and difficulty of complying with increasing and evolving regulation; 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 herein, under “Risk Factors” included elsewhere 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.

 

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PART I —FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Armstrong World Industries, Inc., and Subsidiaries

Condensed Consolidated Statements of Earnings and Comprehensive Income

(amounts in millions, except per share data)

Unaudited

 

     Three Months
Ended
September 30,
2013
    Three Months
Ended
September 30,
2012
    Nine Months
Ended
September 30,
2013
    Nine Months
Ended
September 30,
2012
 

Net sales

   $ 729.7      $ 694.7      $ 2,058.6      $ 2,006.1   

Cost of goods sold

     549.8        507.8        1,569.9        1,508.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     179.9        186.9        488.7        497.5   

Selling, general and administrative expenses

     103.0        94.0        326.9        312.6   

Restructuring charges, net

     (0.1     (0.2     (0.2     —     

Equity earnings from joint venture

     (16.6     (15.5     (46.2     (44.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     93.6        108.6        208.2        228.9   

Interest expense

     11.4        14.1        56.4        39.7   

Other non-operating expense

     0.2        0.2        0.9        0.5   

Other non-operating (income)

     —          (0.6     (2.7     (2.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings from continuing operations before income taxes

     82.0        94.9        153.6        190.8   

Income tax expense

     26.1        20.9        63.9        55.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings from continuing operations

     55.9        74.0        89.7        135.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss from discontinued operations, net of tax benefit of ($6.6) and ($7.2) in 2012

     —          (11.1     —          (12.3

Loss on sale of discontinued business, net of tax benefit of ($2.9) and ($3.4) in 2013

     (5.5     —          (6.4     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss from discontinued operations

     (5.5     (11.1     (6.4     (12.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

   $ 50.4      $ 62.9      $ 83.3      $ 122.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

        

Foreign currency translation adjustments

     6.2        10.4        (8.7     7.1   

Derivative (loss) gain

     (2.7     (2.9     13.8        (7.2

Pension and postretirement adjustments

     3.9        2.7        18.8        7.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income

     7.4        10.2        23.9        7.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 57.8      $ 73.1      $ 107.2      $ 130.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share of common stock, continuing operations:

        

Basic

   $ 0.95      $ 1.25      $ 1.51      $ 2.28   

Diluted

   $ 0.94      $ 1.24      $ 1.50      $ 2.26   

Loss per share of common stock, discontinued operations:

        

Basic

     ($0.09     ($0.19     ($0.11     ($0.21

Diluted

     ($0.09     ($0.19     ($0.11     ($0.21

Net earnings per share of common stock:

        

Basic

   $ 0.86      $ 1.06      $ 1.40      $ 2.07   

Diluted

   $ 0.85      $ 1.05      $ 1.39      $ 2.05   

Average number of common shares outstanding:

        

Basic

     58.4        58.9        58.9        58.8   

Diluted

     59.0        59.4        59.5        59.4   

Dividend declared per common share

     —          —          —        $ 8.55   

See accompanying notes to Condensed Consolidated Financial Statements beginning on page 9.

 

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Armstrong World Industries, Inc., and Subsidiaries

Condensed Consolidated Balance Sheets

(amounts in millions, except share data)

 

     Unaudited
September 30,
2013
    December 31,
2012
 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 137.7      $ 336.4   

Accounts and notes receivable, net

     260.5        204.6   

Inventories, net

     384.4        369.8   

Deferred income taxes

     56.1        49.9   

Income tax receivable

     15.8        16.9   

Other current assets

     51.9        42.3   
  

 

 

   

 

 

 

Total current assets

     906.4        1,019.9   

Property, plant, and equipment, less accumulated depreciation and amortization of $615.2 and $583.8, respectively

     1,058.2        1,005.0   

Prepaid pension costs

     71.3        39.6   

Investment in joint venture

     133.4        133.5   

Intangible assets, net

     525.9        527.7   

Deferred income taxes

     38.2        35.1   

Other noncurrent assets

     81.5        93.5   
  

 

 

   

 

 

 

Total assets

   $ 2,814.9      $ 2,854.3   
  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

    

Current liabilities:

    

Current installments of long-term debt

   $ 17.5      $ 33.0   

Accounts payable and accrued expenses

     399.5        346.3   

Income tax payable

     6.9        4.1   

Deferred income taxes

     1.3        1.3   
  

 

 

   

 

 

 

Total current liabilities

     425.2        384.7   

Long-term debt, less current installments

     1,050.1        1,038.0   

Postretirement benefit liabilities

     240.7        248.5   

Pension benefit liabilities

     246.1        247.9   

Other long-term liabilities

     69.2        86.6   

Income taxes payable

     83.3        63.3   

Deferred income taxes

     120.7        66.2   
  

 

 

   

 

 

 

Total noncurrent liabilities

     1,810.1        1,750.5   

Shareholders’ equity:

    

Common stock, $0.01 par value per share, authorized 200 million shares; issued 59,208,637 shares, outstanding 54,151,255 shares in 2013 and 58,934,050 shares issued and outstanding in 2012

     0.6        0.6   

Capital in excess of par value

     1,091.5        1,076.8   

Retained earnings

     196.4        113.1   

Treasury stock, at cost, 5,057,382 shares in 2013

     (261.4     —     

Accumulated other comprehensive (loss)

     (447.5     (471.4
  

 

 

   

 

 

 

Total shareholders’ equity

     579.6        719.1   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 2,814.9      $ 2,854.3   
  

 

 

   

 

 

 

See accompanying notes to Condensed Consolidated Financial Statements beginning on page 9.

 

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Armstrong World Industries, Inc., and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity

(amounts in millions, except share data)

Unaudited

 

     Nine Months Ended September 30, 2013  
     Common Stock      Additional
Paid-In
    Retained     Treasury Stock    

Accumulated

Other
Comprehensive

       
     Shares     Amount      Capital     Earnings     Shares      Amount     Income (Loss)     Total  

Balance at beginning of period

     58,934,050      $ 0.6       $ 1,076.8      $ 113.1        —           —          ($471.4   $ 719.1   

Stock issuance

     274,587                   

Repurchase of common stock

     (5,057,382            5,057,382       ($ 261.4       (261.4

Share-based employee compensation

          14.7                 14.7   

Net earnings

            83.3               83.3   

Other comprehensive income

                   23.9        23.9   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at end of period

     54,151,255      $ 0.6       $ 1,091.5      $ 196.4        5,057,382       ($ 261.4     ($447.5   $ 579.6   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
     Nine Months Ended September 30, 2012  
     Common Stock      Additional
Paid-In
    Retained     Treasury Stock    

Accumulated

Other
Comprehensive

       
     Shares     Amount      Capital     Earnings     Shares      Amount     Income (Loss)     Total  

Balance at beginning of period

     58,424,691      $ 0.6       $ 1,467.5      $ 77.1        —           —          ($415.0   $ 1,130.2   

Stock issuance

     397,640                   

Share-based employee compensation

          20.3                 20.3   

Net earnings

            122.9               122.9   

Dividends declared

            (95.3            (95.3

Dividends declared in excess of retained earnings

          (412.9              (412.9

Other comprehensive income

                   7.5        7.5   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at end of period

     58,822,331      $ 0.6       $ 1,074.9      $ 104.7        —           —          ($407.5   $ 772.7   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying notes to Condensed Consolidated Financial Statements beginning on page 9.

 

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Armstrong World Industries, Inc., and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(amounts in millions)

Unaudited

 

     Nine Months Ended
September 30,
 
     2013     2012  

Cash flows from operating activities:

    

Net earnings

   $ 83.3      $ 122.9   

Adjustments to reconcile net earnings to net cash provided by operating activities:

    

Depreciation and amortization

     79.4        85.7   

Write off of debt financing costs

     18.9        —     

Loss on sale of discontinued operations

     9.8        —     

Fixed asset impairment

     —          4.9   

Gain on sale of fixed assets

     (4.1     (0.1

Deferred income taxes

     28.0        0.8   

Share-based compensation

     12.7        12.1   

Impairment on assets of discontinued operations

     —          17.5   

Equity earnings from joint venture

     (46.2     (44.0

U.S. pension credit

     (1.6     (9.2

Restructuring charges, net

     (0.2     —     

Restructuring payments

     (0.2     (2.7

Changes in operating assets and liabilities:

    

Receivables

     (56.9     (41.4

Inventories

     (15.9     (15.2

Other current assets

     (8.7     (3.2

Other noncurrent assets

     0.8        (1.1

Accounts payable and accrued expenses

     64.4        (6.0

Income taxes payable

     23.7        42.0   

Other long-term liabilities

     (23.6     (22.0

Other, net

     (1.9     0.1   
  

 

 

   

 

 

 

Net cash provided by operating activities

     161.7        141.1   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of property, plant and equipment

     (139.9     (125.7

Restricted cash

     —          1.5   

Return of investment from joint venture

     46.4        48.4   

Payment of company owned life insurance, net

     (0.1     (0.3

Proceeds from the sale of assets

     7.2        14.4   
  

 

 

   

 

 

 

Net cash (used for) investing activities

     (86.4     (61.7
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from long-term debt

     1,083.0        251.9   

Payments of long-term debt

     (1,086.4     (12.4

Financing costs

     (7.1     (8.1

Special dividends paid

     (1.0     (503.5

Proceeds from exercised stock options

     4.3        9.4   

Payment for treasury stock acquired

     (261.4     —     
  

 

 

   

 

 

 

Net cash (used for) financing activities

     (268.6     (262.7
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (5.4     1.3   
  

 

 

   

 

 

 

Net (decrease) in cash and cash equivalents

     (198.7     (182.0

Cash and cash equivalents at beginning of year

     336.4        480.6   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 137.7      $ 298.6   
  

 

 

   

 

 

 

Supplemental Cash Flow Disclosures:

    

Interest paid

   $ 32.2      $ 34.3   

Income taxes paid, net

     8.8        5.5   

Amounts in accounts payable for capital expenditures

     15.8        15.3   

See accompanying notes to Condensed Consolidated Financial Statements beginning on page 9.

 

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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions)

NOTE 1. BUSINESS AND BASIS OF PRESENTATION

Armstrong World Industries, Inc. (“AWI”) is a Pennsylvania corporation incorporated in 1891. When we refer to “we”, “our” and “us” in these notes, we are referring to AWI and its subsidiaries. We use the term “AWI” when we are referring solely to Armstrong World Industries, Inc.

In December 2000, AWI filed a voluntary petition for relief (the “Filing”) under Chapter 11 of the U.S. Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) in order to use the court-supervised reorganization process to achieve a resolution of AWI’s asbestos-related liability. On October 2, 2006, AWI’s court-approved plan of reorganization (“POR”) became effective and AWI emerged from Chapter 11. All claims in AWI’s Chapter 11 case have been resolved and closed.

On October 2, 2006, the Armstrong World Industries, Inc. Asbestos Personal Injury Settlement Trust (“Asbestos PI Trust”) was created to address AWI’s personal injury (including wrongful death) asbestos-related liability. All present and future asbestos-related personal injury claims against AWI, including contribution claims of co-defendants but excluding certain foreign claims against subsidiaries, arising directly or indirectly out of AWI’s pre-Filing use of, or other activities involving, asbestos are channeled to the Asbestos PI Trust.

In August 2009, Armor TPG Holdings LP (“TPG”) and the Asbestos PI Trust entered into agreements whereby TPG purchased 7,000,000 shares of AWI common stock from the Asbestos PI Trust and acquired an economic interest in an additional 1,039,777 shares from the Asbestos PI Trust. During the fourth quarter of 2012, the Asbestos PI Trust and TPG together sold 5,980,000 of their shares in a secondary public offering. Additionally, during the third quarter of 2013, the Asbestos PI Trust and TPG together sold 12,057,382 of their remaining shares in a secondary public offering. During this transaction we paid approximately $260 million to acquire 5,057,382 shares to be held in treasury. The treasury share purchase was funded by existing cash and borrowings under our credit and securitization facilities. As a result of these transactions the Asbestos PI Trust and TPG together now hold approximately 35% of AWI’s outstanding shares and maintain a shareholders’ agreement, pursuant to which they agree to vote their shares together on certain matters. We did not sell any shares and did not receive any proceeds from these offerings.

In September 2012, we entered into a definitive agreement to sell our cabinets business for $27 million. The sale was completed in October 2012. The transaction was subject to working capital adjustments which were completed in the second quarter of 2013. The financial results of the cabinets business, which were previously shown as a separate reporting segment, have been reclassified as discontinued operations for all periods presented. See Note 3 to the Condensed Consolidated Financial Statements for additional financial information related to discontinued operations.

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, 2012. 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, 2012. 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. 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.

Certain amounts in the prior year’s Condensed Consolidated Financial Statements have been recast to conform to the 2013 presentation.

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, 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.

 

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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions)

 

In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-11 “Income Taxes—Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” which is part of Accounting Standards Codification (“ASC”) 740: Income Taxes. The new guidance requires an entity to present an unrecognized tax benefit and a net operating loss (“NOL”) carryforward, a similar tax loss, or a tax credit carryforward on a net basis as part of a deferred tax asset, unless the unrecognized tax benefit is not available to reduce the deferred tax asset component or would not be utilized for that purpose, then a liability would be recognized. The guidance is to be applied prospectively and will be effective for us beginning January 1, 2014. Since this guidance impacts presentation only, it will have no effect on our financial condition, results of operations or cash flows.

In February 2013, the FASB issued new guidance that is now part of ASC 220: “Comprehensive Income – Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”. The new guidance requires an entity to disclose in a single location the effects of reclassifications out of accumulated other comprehensive income “(“AOCI”). For items reclassified out of AOCI and into net income in their entirety, entities must disclose the effect of the reclassification on each affected net income item. For AOCI reclassification items that are not reclassified in their entirety into net income, entities must provide a cross reference to other required U.S. GAAP disclosures. The standard does not change the items which must be reported in other comprehensive income. These provisions are to be applied prospectively and were effective for us January 1, 2013. There was no impact on our financial condition, results of operations or cash flows as a result of the adoption of this guidance.

The FASB also issued new guidance that limits the scope of instruments subject to ASU 2011-11: “Balance Sheet – Disclosures about Offsetting Assets and Liabilities” originally issued in December 2011. The 2011 guidance required an entity to provide additional disclosures to allow investors to better compare financial statements prepared under U.S. GAAP with financial statements prepared under International Financial Reporting Standards. The 2013 guidance limits the scope of the 2011 guidance requirements to derivatives, repurchase and reverse repurchase agreements, and securities borrowing and lending agreements subject to master netting arrangements or similar agreements. This guidance is to be applied retrospectively and was effective for us beginning January 1, 2013. Since this guidance impacts presentation only, it had no effect on our financial condition, results of operations or cash flows.

Operating results for the third quarter and first nine months of 2013 and 2012 included in this report are unaudited. However, these Condensed Consolidated Financial Statements have been reviewed by an independent registered public accounting firm in accordance with standards of the Public Company Accounting Oversight Board (United States) for a limited review of interim financial information.

NOTE 2. SEGMENT RESULTS

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2013      2012      2013      2012  

Net sales to external customers

           

Building Products

   $ 335.5       $ 325.9       $ 944.6       $ 926.1   

Resilient Flooring

     246.2         246.4         713.1         727.2   

Wood Flooring

     148.0         122.4         400.9         352.8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net sales to external customers

   $ 729.7       $ 694.7       $ 2,058.6       $ 2,006.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions)

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2013     2012     2013     2012  

Segment operating income (loss)

        

Building Products

   $ 86.7      $ 81.1      $ 210.7      $ 177.9   

Resilient Flooring

     22.5        25.3        46.6        57.9   

Wood Flooring

     2.6        13.5        5.6        29.8   

Unallocated Corporate (expense)

     (18.2     (11.3     (54.7     (36.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Total consolidated operating income

   $ 93.6      $ 108.6      $ 208.2      $ 228.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2013      2012     2013     2012  

Total consolidated operating income

   $ 93.6       $ 108.6      $ 208.2      $ 228.9   

Interest expense

     11.4         14.1        56.4        39.7   

Other non-operating expense

     0.2         0.2        0.9        0.5   

Other non-operating income

     —           (0.6     (2.7     (2.1
  

 

 

    

 

 

   

 

 

   

 

 

 

Earnings from continuing operations before income taxes

   $ 82.0       $ 94.9      $ 153.6      $ 190.8   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

     September 30,
2013
     December 31,
2012
 

Segment assets

     

Building Products

   $ 1,055.9       $ 975.1   

Resilient Flooring

     647.7         617.6   

Wood Flooring

     348.3         326.4   

Unallocated Corporate

     763.0         935.2   
  

 

 

    

 

 

 

Total consolidated assets

   $ 2,814.9       $ 2,854.3   
  

 

 

    

 

 

 

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.

During the third quarter of 2012, we sold the assets of the Patriot wood flooring distribution business.

In March 2012, we made the decision to permanently close a previously idled ceiling tile plant in Mobile, AL. As a result, during the first quarter of 2012 we recorded accelerated depreciation of $9.3 million for machinery and equipment and a $4.6 million impairment charge for buildings in cost of goods sold. The preliminary fair values were determined by management estimates and an independent valuation based on information available at that time (considered Level 2 inputs in the fair value hierarchy). During the third quarter of 2013, we sold this facility and recorded a pre-tax gain of $3.8 million within selling, general and administrative (“SG&A”) expense (inclusive of release of unused environmental liabilities and asset retirement obligations).

 

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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions)

 

NOTE 3. – DISCONTINUED OPERATIONS

In September 2012, we entered into a definitive agreement to sell our cabinets business to American Industrial Partners (“AIP”) for $27 million in cash. During the third quarter of 2012, we recorded an impairment charge of $17.5 million on the cabinets’ assets to reflect the expected proceeds from the sale. The sale was completed in October 2012. The transaction was subject to working capital adjustments which were completed in the second quarter of 2013.

During the third quarter of 2013, we recorded an estimated liability of $7.5 million for a potential withdrawal liability related to a multi-employer pension plan. See Note 20 to the Condensed Consolidated Financial Statements for further information.

The financial results of the cabinets business have been reclassified as discontinued operations for all periods presented. The Condensed Consolidated Statement of Cash Flows does not separately report the cash flows of the discontinued operation.

The following is a summary of the operating results of the cabinets business, (previously shown as the Cabinets reporting segment), which are included in discontinued operations.

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2013     2012     2013     2012  

Net Sales

     —        $ 35.4        —        $ 102.0   

(Loss) before income tax

     ($8.4     ($17.7     ($9.8     ($19.5

Income tax benefit

     2.9        6.6        3.4        7.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) from discontinued operations

     ($5.5     ($11.1     ($6.4     ($12.3
  

 

 

   

 

 

   

 

 

   

 

 

 

NOTE 4. ACCOUNTS AND NOTES RECEIVABLE

 

     September 30,
2013
    December 31,
2012
 

Customer receivables

   $ 281.3      $ 228.1   

Customer notes

     1.1        4.5   

Miscellaneous receivables

     7.7        7.6   

Less allowance for warranties, discounts and losses

     (29.6     (35.6
  

 

 

   

 

 

 

Accounts and notes receivable, net

   $ 260.5      $ 204.6   
  

 

 

   

 

 

 

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

 

     September 30,
2013
    December 31,
2012
 

Finished goods

   $ 289.2      $ 265.9   

Goods in process

     31.5        27.6   

Raw materials and supplies

     117.7        107.8   

Less LIFO and other reserves

     (54.0     (31.5
  

 

 

   

 

 

 

Total inventories, net

   $ 384.4      $ 369.8   
  

 

 

   

 

 

 

 

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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions)

 

NOTE 6. OTHER CURRENT ASSETS

 

     September 30,
2013
     December 31,
2012
 

Prepaid expenses

   $ 45.8       $ 39.0   

Fair value of derivative assets

     2.3         0.3   

Other

     3.8         3.0   
  

 

 

    

 

 

 

Total other current assets

   $ 51.9       $ 42.3   
  

 

 

    

 

 

 

NOTE 7. EQUITY INVESTMENT

Investment in joint venture at September 30, 2013 reflected our 50% equity interest in our Worthington Armstrong Venture (“WAVE”) joint venture with Worthington Industries, Inc. Condensed income statement data for WAVE is summarized below:

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2013      2012      2013      2012  

Net sales

   $ 102.5       $ 96.8       $ 291.0       $ 282.8   

Gross profit

     47.4         43.4         132.5         126.0   

Net earnings

     36.8         34.5         102.7         97.6   

NOTE 8. INTANGIBLE ASSETS

The following table details amounts related to our intangible assets as of September 30, 2013 and December 31, 2012.

 

          September 30, 2013      December 31, 2012  
     Estimated
Useful Life
   Gross
Carrying
Amount
     Accumulated
Amortization
     Gross
Carrying
Amount
     Accumulated
Amortization
 

Amortizing intangible assets

              

Customer relationships

   20 years    $ 165.4       $ 58.1       $ 165.4       $ 51.9   

Developed technology

   15 years      82.6         38.0         81.9         33.8   

Other

   Various      21.5         1.8         15.0         1.3   
     

 

 

    

 

 

    

 

 

    

 

 

 

Total

      $ 269.5       $ 97.9       $ 262.3       $ 87.0   
     

 

 

    

 

 

    

 

 

    

 

 

 

Non-amortizing intangible assets

              

Trademarks and brand names

   Indefinite      354.3            352.4      
     

 

 

       

 

 

    

Total intangible assets

      $ 623.8          $ 614.7      
     

 

 

       

 

 

    

 

     Nine Months Ended  
     September 30,  
     2013      2012  

Amortization expense

   $ 10.8       $ 10.5   
  

 

 

    

 

 

 

 

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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions)

 

NOTE 9. OTHER NON-CURRENT ASSETS

 

     September 30,
2013
     December 31,
2012
 

Cash surrender value of Company owned life insurance policies

   $ 60.0       $ 58.8   

Debt financing costs

     9.5         23.9   

Other

     12.0         10.8   
  

 

 

    

 

 

 

Total other non-current assets

   $ 81.5       $ 93.5   
  

 

 

    

 

 

 

NOTE 10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

     September 30,
2013
     December 31,
2012
 

Payables, trade and other

   $ 261.0       $ 216.7   

Employment costs

     79.9         81.6   

Other

     58.6         48.0   
  

 

 

    

 

 

 

Total accounts payable and accrued expenses

   $ 399.5       $ 346.3   
  

 

 

    

 

 

 

NOTE 11. SEVERANCES AND RELATED COSTS

In the first quarter of 2013, we recorded $5.2 million for severance and related costs to reflect approximately 40 position eliminations in our European Resilient Flooring business ($1.8 million in cost of goods sold and $1.0 million in SG&A expense) and approximately 40 position eliminations in our Resilient Flooring business in Australia ($2.4 million in cost of goods sold).

In the second quarter of 2012, we recorded $3.4 million for severance and related costs in SG&A expense ($3.2 million) and cost of goods sold ($0.2 million) to reflect approximately 35 position eliminations in our European Building Products business, primarily as a result of streamlining SG&A functions.

NOTE 12. INCOME TAX EXPENSE

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2013     2012     2013     2012  

Earnings from continuing operations before income taxes

   $ 82.0      $ 94.9      $ 153.6      $ 190.8   

Income tax expense

     26.1        20.9        63.9        55.6   

Effective tax rate

     31.8     22.0     41.6     29.1

The effective tax rate for the third quarter and first nine months of 2013 was higher than the comparable periods of 2012 due to the provision of valuation allowances reducing deferred tax assets generated during the periods related to increased losses of certain foreign affiliates and to the release of foreign tax credit valuation allowance in the third quarter of 2012. The increase in the effective tax rate for the third quarter and first nine months of 2013 was partially offset by a release of state net operating loss valuation allowance and certain state tax law changes in the third quarter.

We do not expect to record any material changes during 2013 to unrecognized tax benefits that were claimed on tax returns covering tax years ending on or before December 31, 2012.

As of September 30, 2013, we consider foreign unremitted earnings to be permanently reinvested.

 

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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions)

 

NOTE 13. DEBT

On March 15, 2013, we refinanced our $1.3 billion senior credit facility and amended the underlying credit agreement. The new facility is composed of a $250 million revolving credit facility (with a $150 million sublimit for letters of credit), a $550 million Term Loan A and a $475 million Term Loan B. The terms of the facility resulted in a lower interest rate spread (2.5% vs. 3.0%) than our previous facility. We also extended the maturity of Term Loan A from November 2015 to March 2018 and of Term Loan B from March 2018 to March 2020.

The primary covenant change resulting from the refinancing related to mandatory prepayments required under the senior credit facility. This is an annual leverage test beginning with the year ending December 31, 2013, where, if our ratio of consolidated funded indebtedness minus AWI and domestic subsidiary unrestricted cash and cash equivalents up to $100 million to consolidated EBITDA (“Consolidated Net Leverage Ratio”) is greater than or equal to 3.5 to 1.0, we would be required to make a prepayment of 50% of fiscal year Consolidated Excess Cash Flow, as defined by the credit agreement. If our Consolidated Net Leverage Ratio is less than 3.5 to 1.0, no prepayment would be required. This test is on a fiscal year basis, except for the first period ending December 31, 2013, for which the Consolidated Excess Cash Flow is calculated for the period April 1, 2013 to December 31, 2013. During the first nine months of 2013, we were in compliance with all covenants of the previous and amended senior credit facilities.

In connection with the refinancing, we incurred $8.3 million for bank, legal, and other fees, of which $7.2 million was capitalized and is being amortized into interest expense over the life of the loans. Additionally, we wrote off $18.9 million of unamortized debt financing costs in the first quarter of 2013 related to our previous credit facility to interest expense.

On March 28, 2013, we amended our $100 million Accounts Receivable Securitization Facility with the Bank of Nova Scotia. We decreased the facility to $75 million to reduce commitment fees on unused capacity. The maturity was extended to March 2016. The balance of the subordinated notes payable, which is eliminated in consolidation, totaled $129.7 million as of September 30, 2013.

NOTE 14. PENSIONS AND OTHER BENEFIT PROGRAMS

Following are the components of net periodic benefit costs (credits):

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2013     2012     2013     2012  

U.S. defined-benefit plans:

        

Pension benefits

        

Service cost of benefits earned during the period

   $ 4.3      $ 3.9      $ 12.7      $ 11.8   

Interest cost on projected benefit obligation

     19.9        22.7        59.8        68.0   

Expected return on plan assets

     (34.2     (34.9     (102.4     (104.9

Amortization of prior service cost

     0.5        0.5        1.4        1.4   

Amortization of net actuarial loss

     10.2        5.8        30.7        17.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic pension cost (credit)

   $ 0.7        ($2.0   $ 2.2        ($6.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Retiree health and life insurance benefits

        

Service cost of benefits earned during the period

   $ 0.3      $ 0.3      $ 0.9      $ 0.9   

Interest cost on projected benefit obligation

     2.4        3.0        7.3        8.5   

Amortization of prior service credit

     (0.2     (0.1     (0.5     (0.4

Amortization of net actuarial gain

     (0.8     (1.3     (2.7     (5.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic postretirement benefit cost

   $ 1.7      $ 1.9      $ 5.0      $ 3.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-U.S. defined-benefit pension plans

        

Service cost of benefits earned during the period

   $ 0.8      $ 0.5      $ 2.2      $ 1.5   

Interest cost on projected benefit obligation

     3.2        3.8        9.8        11.6   

Expected return on plan assets

     (2.3     (2.5     (7.1     (7.6

Amortization of net actuarial loss

     0.7        0.3        2.1        1.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic pension cost

   $ 2.4      $ 2.1      $ 7.0      $ 6.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions)

 

NOTE 15. FINANCIAL INSTRUMENTS

We do not hold or issue financial instruments for trading purposes. The estimated fair values of our financial instruments are as follows:

 

     September 30, 2013     December 31, 2012  
     Carrying
amount
    Estimated fair
value
    Carrying
amount
    Estimated fair
value
 

Assets (Liabilities), net:

        

Total debt, including current portion

     ($1,067.6     ($1,062.6     ($1,071.0     ($1,075.9

Foreign currency contract obligations

     1.9        1.9        (1.8     (1.8

Natural gas contracts

     (0.5     (0.5     (2.7     (2.7

Interest rate swap contracts

     (10.6     (10.6     (25.7     (25.7

The carrying amounts of cash and cash equivalents of $137.7 million at September 30, 2013 and $336.4 million at December 31, 2012 (composed of bank deposits), receivables, accounts payable and accrued expenses, and short-term debt approximate fair value because of the short-term maturity of these instruments. The fair value estimates of long-term debt, including current installments of long-term debt were based upon quotes from a major financial institution of recently observed trading levels of our Term Loan B debt. The fair value estimates of foreign currency contract obligations are estimated from market quotes provided by a well-recognized national market data provider. The fair value estimates of natural gas contracts are estimated using internal valuation models with verification by obtaining quotes from major financial institutions. For natural gas swap transactions, fair value is calculated using NYMEX market quotes provided by a well-recognized national market data provider. For natural gas option based strategies, fair value is calculated using an industry standard Black-Scholes model with market based inputs, including but not limited to, underlying asset price, strike price, implied volatility, discounted risk free rate and time to expiration, provided by a well-recognized national market data provider. The fair value estimates for interest rate swap contracts are estimated by obtaining quotes from major financial institutions with verification by internal valuation models.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. U.S. GAAP establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of inputs used to measure fair value are as follows:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

 

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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions)

 

Assets and liabilities are summarized below:

 

     September 30, 2013     December 31, 2012  
     Fair value based on     Fair value based on  
     Quoted,
active
markets
    Other
observable
inputs
    Quoted,
active
markets
    Other
observable
inputs
 
     Level 1     Level 2     Level 1     Level 2  

Assets (Liabilities), net:

        

Total debt, including current portion

     ($470.3     ($592.3     ($792.4     ($283.5

Foreign currency contract obligations

     1.9        —          (1.8     —     

Natural gas contracts

     —          (0.5     —          (2.7

Interest rate swap contracts

     —          (10.6     —          (25.7

We do not have any financial assets or liabilities that are valued using Level 3 (unobservable) inputs.

NOTE 16. DERIVATIVE FINANCIAL INSTRUMENTS

We are exposed to market risk from changes in foreign exchange rates, interest rates and commodity prices that could impact our results of operations, cash flows and financial condition. We use forward swaps and option contracts to hedge these exposures. Exposure to individual counterparties is controlled and derivative financial instruments are entered into with a diversified group of major financial institutions. Forward swaps and option contracts are entered into for periods consistent with underlying exposure and do not constitute positions independent of those exposures. At inception, hedges that we designate as hedging instruments are formally documented as either (1) a hedge of a forecasted transaction or “cash flow” hedge, or (2) a hedge of the fair value of a recognized liability or asset or “fair value” hedge. We also formally assess both at inception and at least quarterly thereafter, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in either the fair value or cash flows of the hedged item. If it is determined that a derivative ceases to be a highly effective hedge, or if the anticipated transaction is no longer probable of occurring, we discontinue hedge accounting, and any future mark to market adjustments are recognized in earnings. We use derivative financial instruments as risk management tools and not for speculative trading purposes.

Counterparty Risk

We only enter into derivative transactions with established counterparties having a credit rating of BBB or better. We monitor counterparty credit default swap levels and credit ratings on a regular basis. All of our derivative transactions with counterparties are governed by master International Swap and Derivatives Association agreements (“ISDAs”) with netting arrangements. These agreements can limit our exposure in situations where we have gain and loss positions outstanding with a single counterparty. We do not post nor do we receive cash collateral with any counterparty for our derivative transactions. As of September 30, 2013, we had no cash collateral posted or received for any of our derivative transactions. These ISDAs do not have any credit contingent features; however, a default under our bank credit facility would trigger a default under these agreements. Exposure to individual counterparties is controlled, and thus we consider the risk of counterparty default to be negligible.

Commodity Price Risk

We purchase natural gas for use in the manufacture of ceiling tiles and other products, and to heat many of our facilities. As a result, we are exposed to fluctuations in the price of natural gas. We have a policy to reduce cost volatility for North American natural gas purchases by purchasing natural gas forward contracts and swaps, purchased call options, and zero-cost collars up to 24 months forward to reduce our overall exposure to natural gas price movements. There is a high correlation between the hedged item and the hedged instrument. The gains and losses on these transactions offset gains and losses on the transactions being hedged. These instruments are designated as cash flow hedges. At September 30, 2013 and December 31, 2012, the notional amount of these hedges was $18.7 million and $21.5 million, respectively. The mark-to-market gain or loss on qualifying hedges is included in other comprehensive income to the extent effective, and reclassified into cost of goods sold in the period during which the underlying gas is consumed. The mark-to-market gains or losses on ineffective portions of hedges are recognized in cost of goods sold immediately. The earnings impact of the

 

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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions)

 

ineffective portion of these hedges was not material for the third quarter or first nine months of 2013 and 2012. The contracts are based on forecasted usage of natural gas measured in mmBtu’s.

Currency Rate Risk – Sales and Purchases

We manufacture and sell our products in a number of countries throughout the world and, as a result, we are exposed to movements in foreign currency exchange rates. To a large extent, our global manufacturing and sales provide a natural hedge of foreign currency exchange rate movement, as foreign currency expenses generally offset foreign currency revenues. We manage our cash flow exposures on a net basis and use derivatives to hedge the majority of our unmatched foreign currency cash inflows and outflows. As of September 30, 2013, our major foreign currency exposures are to the Canadian dollar, the Australian dollar, and the Euro.

We use foreign currency forward exchange contracts to reduce our exposure to the risk that the eventual net cash inflows and outflows resulting from the sale of products to foreign customers and purchases from foreign suppliers will be adversely affected by changes in exchange rates. These derivative instruments are used for forecasted transactions and are classified as cash flow hedges. Cash flow hedges are executed quarterly, generally up to 15 months forward, and allow us to further reduce our overall exposure to exchange rate movements, since gains and losses on these contracts offset gains and losses on the transactions being hedged. The notional amount of these hedges was $121.0 million and $129.7 million at September 30, 2013 and December 31, 2012, respectively. Gains and losses on these instruments are recorded in other comprehensive income, to the extent effective, until the underlying transaction is recognized in earnings. The earnings impact of the ineffective portion of these hedges was not material for the third quarter or first nine months of 2013 and 2012.

Currency Rate Risk—Intercompany Loans and Dividends

We also use foreign currency forward exchange contracts to hedge exposures created by cross-currency intercompany loans and dividends. The translation adjustments related to these loans are recorded in other non-operating income or expense. The offsetting gains or losses on the related derivative contracts are also recorded in other non-operating income or expense. These contracts are decreased or increased as repayments are made or additional intercompany loans are extended or adjusted for intercompany dividend activity as necessary. We did not have any open hedges related to intercompany loans and dividends as of September 30, 2013 and December 31, 2012.

Interest Rate Risk

We utilize interest rate swaps to minimize the fluctuations in earnings caused by interest rate volatility. Interest expense on variable-rate liabilities increases or decreases as a result of interest rate fluctuations. The following table summarizes our interest rate swaps:

 

Trade Date

   Notional
Amount
     Interest Rate
Paid
    Coverage Period    Risk Coverage  

March 31, 2011

   $ 100.0         2.303   March 2011 to November 2015      Term Loan A   

March 31, 2011

   $ 200.0         2.523   March 2011 to November 2015      Term Loan B   

March 27, 2012

   $ 250.0         1.928   March 2012 to March 2018      Term Loan B   

March 27, 2012

   $ 200.0         2.810   November 2015 to March 2018      Term Loan B   

April 16, 2013

   $ 250.0         1.398   November 2015 to March 2018      Term Loan A   

Under the terms of the Term Loan A swaps we receive 3-month LIBOR and pay a fixed rate over the hedged period. Under the terms of the Term Loan B swaps, we receive the greater of 3-month LIBOR or the 1% LIBOR Floor and pay a fixed rate over the hedged period. These swaps are designated as cash flow hedges against changes in LIBOR for a portion of our variable rate debt.

Financial Statement Impacts

The following tables detail amounts related to our derivatives as of September 30, 2013 and December 31, 2012. Our derivative assets and liabilities not designated as hedging instruments were not material as of September 30, 2013 and December 31, 2012. The derivative asset and liability amounts below are shown in gross amounts; we have not netted assets with liabilities.

 

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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions)

 

    Derivative Assets    

Derivative Liabilities

 
        Fair Value         Fair Value  
    Balance Sheet
Location
  September 30,
2013
    December 31,
2012
   

Balance Sheet Location

  September 30,
2013
    December 31,
2012
 

Derivatives designated as hedging instruments

           

Natural gas commodity contracts

  Other current

assets

    —          —        Accounts payable and accrued expenses   $ 0.5      $ 2.7   

Foreign exchange contracts

  Other current
assets
  $ 2.3      $ 0.3      Accounts payable and accrued expenses     0.4       2.1  

Interest rate swap contracts

  Other long-
term assets
    4.0       —        Other long-term liabilities     14.6       25.7  
   

 

 

   

 

 

     

 

 

   

 

 

 

Total derivatives designated as hedging instruments

    $ 6.3      $ 0.3        $ 15.5      $ 30.5   
   

 

 

   

 

 

     

 

 

   

 

 

 

 

    Amount of Gain (Loss)
Recognized in
Accumulated Other
Comprehensive Income
(“AOCI”) (Effective
Portion)(a)
    Location of Gain
(Loss) Reclassified
from AOCI into
Income (Effective
Portion)
    Gain (Loss) Reclassified from AOCI into
Income (Effective Portion)
 
    Nine Months Ended          

Three Months

Ended

   

Nine Months

Ended

 
    September 30,           September 30,     September 30,  
    2013     2012           2013     2012     2013     2012  

Derivatives in Cash Flow Hedging Relationships

             

Natural gas commodity contracts

    ($0.5     ($4.5     Cost of goods sold        ($0.3     ($2.2     ($2.3     ($7.3

Foreign exchange contracts – purchases and sales

    1.9       (2.7     Cost of goods sold        0.7       (0.6     0.8       (1.4

Interest rate swap contracts

    (10.6     (27.1     Interest Expense        —          —          —          —     
 

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Total

    ($9.2     ($34.3     $ 0.4        ($2.8     ($1.5     ($8.7
 

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) As of September 30, 2013 the amount of existing gains in Accumulated OCI expected to be recognized in earnings over the next twelve months is $1.4 million.

 

     Location of Gain (Loss) Recognized in
Income on Derivatives (Ineffective
Portion) (a)
 

Derivatives in Cash Flow Hedging Relationships

  

Natural gas commodity contracts

     Cost of goods sold   

Foreign exchange contracts – purchases and sales

     SG&A expense   

Interest rate swap contracts

     Interest expense   

 

(a) The amount of gain (loss) recognized in income related to the ineffective portion of the hedging relationships was immaterial for the three months and nine months ended September 30, 2013 and September 30, 2012. No gains or losses are excluded from the assessment of the hedge effectiveness.

The amount of gain recognized in income for derivative instruments not designated as hedging instruments was zero for both the third quarter and first nine months of 2013 and 2012.

 

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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions)

 

NOTE 17. PRODUCT WARRANTIES

We provide direct customer and end-user warranties for our products. These warranties cover manufacturing defects that would prevent the product from performing in line with its intended and marketed use. The terms of these warranties vary by product and generally provide for the repair or replacement of the defective product. We collect and analyze warranty claims data with a focus on the historic amount of claims, the products involved, the amount of time between the warranty claims and their respective sales and the amount of current sales. The following table summarizes the activity for the accrual of product warranties for the first nine months of 2013 and 2012:

 

     2013     2012  

Balance at January 1,

   $ 11.5      $ 12.1   

Reductions for payments

     (12.3     (11.6

Current year warranty accruals

     12.3        12.3   

Preexisting warranty accrual changes

     (0.3     (0.9

Effects of foreign exchange translation

     (0.1     (0.1
  

 

 

   

 

 

 

Balance at September 30,

   $ 11.1      $ 11.8   
  

 

 

   

 

 

 

The warranty provision and related reserve are recorded as a reduction of sales and accounts receivable.

NOTE 18. OTHER LONG-TERM-LIABILITIES

 

     September 30,
2013
     December 31,
2012
 

Long-term deferred compensation arrangements

   $ 22.8       $ 23.4   

Long-term portion of derivative liabilities

     14.6         25.7   

U.S. workers’ compensation

     7.6         8.4   

Postemployment benefit liabilities

     6.3         7.2   

Environmental liabilities

     7.7         10.7   

Other

     10.2         11.2   
  

 

 

    

 

 

 

Total other long-term liabilities

   $ 69.2       $ 86.6   
  

 

 

    

 

 

 

NOTE 19. ACCUMULATED OTHER COMPREHENSIVE INCOME

 

    Foreign
Currency
Translation
Adjustments(1)
    Derivative
(Loss)
Gain (1)
    Pension and
Postretirement
Adjustments(1)
    Total
Accumulated
Other
Comprehensive
(Loss) (1)
 

Balance, December 31, 2012

  $ 30.1        ($19.2     ($482.3     ($471.4

Other comprehensive income before reclassifications, net of tax (expense) benefit of $ -, ($6.6), $0.7, and ($5.9)

    (8.7     12.8        (1.3     2.8   

Amounts reclassified from accumulated other comprehensive income

    —          1.0        20.1        21.1   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive (loss) income

    (8.7     13.8        18.8        23.9   
 

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2013

  $ 21.4        ($5.4     ($463.5     ($447.5
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  Amounts are net of tax

 

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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions)

 

     Amounts Reclassified
from Accumulated
Other Comprehensive
Income
   

Affected Line Item in the
Consolidated Statement of
Earnings and
Comprehensive Income

Derivative (Loss) Gain:

    

Natural gas commodity contracts

   $ 2.3      Cost of goods sold

Foreign exchange contracts—purchases and sales

     (0.8   Cost of goods sold
  

 

 

   

Total before tax

     1.5     

Tax impact

     (0.5   Income tax expense
  

 

 

   

Total net of tax

     1.0     
  

 

 

   

Pension and Postretirement Adjustments:

    

Prior service cost amortization

     0.6      Cost of goods sold

Prior service cost amortization

     0.4      SG&A expense

Amortization of net actuarial loss

     16.0      Cost of goods sold

Amortization of net actuarial loss

     14.0      SG&A expense
  

 

 

   

Total before tax

     31.0     

Tax impact

     (10.9   Income tax expense
  

 

 

   

Total net of tax

     20.1     
  

 

 

   

Total reclassifications for the period

   $ 21.1     
  

 

 

   

NOTE 20. LITIGATION AND RELATED MATTERS

ENVIRONMENTAL MATTERS

Environmental Compliance

Our manufacturing and research facilities are affected by various federal, state and local requirements relating to the discharge of materials and the protection of the environment. We make expenditures necessary for compliance with applicable environmental requirements at each of our operating facilities. These regulatory requirements continually change, therefore we cannot predict with certainty future expenditures associated with compliance with environmental requirements.

Environmental Sites

Summary

We are actively involved in the investigation, closure and/or remediation of existing or potential environmental contamination under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), and state or international Superfund and similar type environmental laws at several domestically- and internationally-owned, formerly owned and non-owned locations allegedly resulting from past industrial activity. In a few cases, we are one of several potentially responsible parties (“PRPs”) and have agreed to jointly fund the required investigation and remediation, while preserving our defenses to the liability. We may also have rights of contribution or reimbursement from other parties or coverage under applicable insurance policies.

Estimates of our future liability at the environmental sites are based on evaluations of currently available facts regarding each individual site. We consider factors such as our activities associated with the site, existing technology, presently enacted laws and regulations and prior company experience in remediating contaminated sites. Although current law imposes joint and several liability on all parties at Superfund sites, our contribution to the remediation of these sites is expected to be limited by the number of other companies potentially liable for site remediation. As a result, our estimated liability reflects only our expected share. In determining the probability of contribution, we consider the solvency of other parties, the site activities of other parties, whether liability is being disputed, the terms of any existing agreements and experience with similar matters, and the effect of our Chapter 11 reorganization upon the validity of the claim.

 

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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions)

 

Specific Material Events

St Helens, OR

In August 2010, we entered into a Consent Order (the “Consent Order”) with the Oregon Department of Environmental Quality (“ODEQ”), along with Kaiser Gypsum Company, Inc. (“Kaiser”), and Owens Corning Sales LLC (“OC”), with respect to our St. Helens, OR Building Products facility, which was previously owned by Kaiser and then OC. The Consent Order, which replaces a previous order of the ODEQ requiring us to investigate and remediate hazardous substances present at the facility, requires that we and Kaiser complete a remedial investigation and feasibility study (“RI/FS”) on the portion of the site owned by us (“Owned Property”), which is comprised of Upland and Lowland areas. The Consent Order further requires us, Kaiser and OC to conduct an RI/FS in the In-Water area of the adjacent Scappoose Bay. We are currently in an investigation phase for both the Owned Property and the Scappoose Bay and are actively conducting sampling and analysis at these sites. We submitted the draft Remedial Investigation Report and the draft Ecological Risk Assessment for the entire site to ODEQ in August 2013. We are preparing the draft Remedial Investigation Report for the Upland and the draft Human Health Risk Assessments for the Upland, Lowland and In-Water areas for future submission to ODEQ. At this time, we have determined that it is probable that remedial action for certain portions of the Owned Property will be required. The current estimate of our future liability at the site includes the known investigation work required by the Consent Order and the current projected cost of possible remedies for certain portions of the Owned Property. At this time, we are unable to reasonably estimate any remediation costs that we may ultimately incur with respect to other portions of the Owned Property or the Scappoose Bay, although such costs may be material. If additional investigative or remedial action is required by ODEQ, it could result in additional costs greater than the amounts currently estimated and those costs may be material.

Costs and responsibilities for investigation, including the current RI/FS for the Owned Property, continue to be shared with Kaiser pursuant to a cost sharing agreement with Kaiser. Contemporaneously with the execution of the Consent Order, we, Kaiser and OC also entered into a separate cost sharing agreement for both the investigation and possible remediation of the Scappoose Bay. Kaiser’s shares under the cost sharing agreements are being funded by certain insurance policies, which comprise substantially all of Kaiser’s assets. If Kaiser and OC are unwilling or unable to fulfill their obligations under the cost sharing agreements, or seek to contest or challenge the allocations, or if Kaiser’s insurance policies are unable to fund Kaiser’s shares, it could result in additional cost to us greater than the amounts currently estimated and those costs may be material.

The principal contaminants at the St. Helens site are arsenic and dioxin compounds from historic operations by prior owners of the plant. As part of the investigation on the site pursuant to the Consent Order, we conducted an analysis of the raw materials used in our manufacturing processes at the St. Helens facility to identify possible sources of these same contaminants. Our testing found low levels of naturally occurring dioxin in sourced clay, known as ball clay, used in the production of some of our fire-retardant products at our St. Helens manufacturing facility. Based on the data from the soil and sediment samples from our St. Helens property and the data from the ball clay, we do not believe that the presence of dioxin in our raw material will have a material impact on our ultimate liability at the site. In addition, consistent with our health and safety policies, we tested employee exposure levels at two facilities representative of our handling procedures at all plants that use this ball clay and, as a result of such testing, do not believe that the ball clay poses a hazard to our employees based on applicable regulatory standards. Based on the manufacturing process and the amount of raw material utilized, we also believe that the dioxin levels in our finished products do not pose a hazard to installers or consumers. While we have not received any claims related to this raw material or our fire-retardant products, there can be no assurance that the raw material or the finished products will not become the subject of legal claims or regulatory actions or that such claims or actions will not have a material adverse effect on our financial condition or results of operations.

Macon, GA

The U.S. Environmental Protection Agency (“EPA”) has listed two landfills located on a portion of our Building Products facility in Macon, GA, along with the former Macon Naval Ordnance Plant landfill adjacent to our property, and portions of Rocky Creek (collectively, the “Macon Site”) as a Superfund site on the National Priorities List due to the presence of contaminants, most notably PCBs. In September 2010, we entered into an Administrative Order on Consent for a Removal Action with the EPA to investigate PCB contamination in one of the landfills on our property, the Wastewater Treatment Plant Landfill (the “WWTP Landfill”) that is a portion of the Superfund Site. We concluded the investigative phase of the Removal Action for the WWTP Landfill and submitted our final Engineering Evaluation/Cost Analysis (“EE/CA”) to the EPA, which included a proposed

 

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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions)

 

remedy. The EPA approved the EE/CA in the first quarter of 2013 and held a public comment period for the EE/CA, to which the agency received no comments. The EPA issued an Action Memorandum in July 2013 selecting our recommended remedy for the Removal Action. We are currently negotiating an Administrative Order on Consent for Removal Action and will begin work once finalized. Our estimate of future liability includes costs for the remedial work for the WWTP Landfill. Additionally, it is probable that we will incur field investigation, engineering and oversight costs associated with a RI/FS with respect to the remainder of the Superfund site, including Rocky Creek (the “Remaining Site”). We have not yet entered into an Order with the EPA for the Remaining Site and, as a result, have not yet commenced an investigation of this portion of the site. Accordingly, we are able to estimate only a small portion of the probable costs that may be associated with the RI/FS for the Remaining Site. We anticipate, however, that the EPA may require significant investigative work for the Remaining Site and that we may ultimately incur costs in remediating any contamination discovered during the RI/FS. We are unable to reasonably estimate the total costs associated with the investigation work or any resulting remediation therefrom, although such amounts may be material.

Mobile, AL

In the second quarter of 2012, we recorded a liability for probable and estimable costs associated with the clean closure of a non-hazardous containment pond located on the property of our previously idled Mobile, AL Building Products plant. We completed the clean closure, received approval from the Alabama Department of Environmental Management in September 2013 and completed the sale of the plant, which included this lagoon, in September 2013.

Elizabeth City, NC

This site is a former cabinet manufacturing facility that was operated by Triangle Pacific Corporation, now known as Armstrong Wood Products, Inc. (“Triangle Pacific”) from 1977 until 1996. The site was formerly owned by the U.S. Navy (“Navy”) and Westinghouse, now CBS Corporation (“CBS”). We assumed ownership of the site when we acquired the stock of Triangle Pacific in 1998. Prior to our acquisition, the NC Department of Environment and Natural Resources listed the site as a hazardous waste site. In 1997, Triangle Pacific entered into a cost sharing agreement with Westinghouse whereby the parties agreed to share equally in costs associated with investigation and potential remediation. In 2000, Triangle Pacific and CBS entered into an RI/FS with the EPA for the site. In 2007, we and CBS entered into an agreement with the Navy whereby the Navy agreed to pay one third of defined past and future investigative costs up to a certain amount, which has now been exhausted. Although the parties initially submitted the RI/FS work plan to the EPA in 2004, the EPA did not approve the RI/FS work plan until August 2011. We are in an investigation phase with respect to this site and current estimated liabilities include only our share of the probable costs for investigative work required by the EPA. We are unable to reasonably estimate any additional investigative costs or determine whether remediation will be required. If remediation is required, the related costs may be material, although we expect these costs to be shared with CBS and the Navy.

Summary of Financial Position

Liabilities of $7.7 million at September 30, 2013 and $10.7 million at December 31, 2012 were recorded for potential environmental liabilities, on a global basis, that we consider probable and for which a reasonable estimate of the probable liability could be made. Where existing data is sufficient to estimate the liability, that estimate has been used; where only a range of probable liabilities is available and no amount within that range is more likely than any other, the lower end of the range has been used. As assessments and remediation activities progress at each site, these liabilities are reviewed to reflect new information as it becomes available. These liabilities are undiscounted.

The estimated liabilities above do not take into account any claims for recoveries from insurance or third parties. It is our policy to record probable recoveries that are either available through settlement or anticipated to be recovered through negotiation or litigation as assets in the Condensed Consolidated Balance Sheets. No material amounts were recorded for probable recoveries at September 30, 2013 or December 31, 2012.

Actual costs to be incurred at identified sites may vary from our estimates. Based on our knowledge of the identified sites, it is not possible to reasonably estimate future costs in excess of amounts already recognized.

 

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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions)

 

MULTI-EMPLOYER PENSION WITHDRAWAL LIABILITY CLAIM

On February 15, 2013, we received a demand notice from the Carpenters Labor-Management Pension Fund (“Fund”) of a deemed withdrawal relating to the sale of our cabinets business to AIP in 2012. The Fund claims that the sale triggered a withdrawal liability to the Fund relating to unfunded vested plan benefits attributable to our role as a contributing employer under the Employee Retirement Income Security Act of 1974 and the Multiemployer Pension Plan Amendments Act of 1980, notwithstanding the assumption and maintenance by AIP of ongoing contribution obligations under the applicable union bargaining agreement. The claimed amount is $15.2 million, payable in a lump-sum or over 20 years on a quarterly basis. Pursuant to the demand notice, we provided information and reviewed the determination with the Fund, and have made regular quarterly payments under protest pending resolution of the dispute. On September 24, 2013, the Fund informed us that it disagrees with our position that the sale of assets transaction did not trigger a withdrawal liability. We now have the opportunity to identify any inaccuracies in the determination of the claimed amount of unfunded vested plan benefits allocated to us, and to arbitrate the matter. We are pursuing both of these opportunities and have notified the Fund of our intent to proceed to arbitration. Under our sale agreements with AIP, we have agreed to indemnify AIP with respect to a portion of any potential withdrawal liability that may be incurred by AIP in the event of a withdrawal by AIP from the Fund, but such indemnities only apply in the event that the sale of assets transaction itself did not trigger withdrawal liability. During the third quarter of 2013, we recorded a liability of $7.5 million relative to this matter. The amount was recorded within Discontinued Operations (due to the association with the divestiture of the cabinets business). Adjustments to our liability could be recorded based upon completion of our actuarial analysis of unfunded vested plan benefits and the arbitration process. We do not believe that the ultimate disposition of this matter will have a material adverse effect on our financial condition, liquidity or results of operations.

Prior to the cabinets business divestiture, we made contributions of $0.8 million to the Fund during 2012.

OTHER CLAIMS

We are involved in various lawsuits, claims, investigations and other legal matters from time to time that arise in the ordinary course of conducting business, including matters involving our products, intellectual property, relationships with suppliers, distributors, relationships with competitors, employees and other matters. While complete assurance cannot be given to the outcome of these proceedings, we do not believe that any of these matters, individually or in the aggregate, will have a material adverse effect on our financial condition, liquidity or results of operations.

NOTE 21. SPECIAL CASH DIVIDEND

On March 23, 2012, our Board of Directors declared a special cash dividend in the amount of $8.55 per share, or approximately $508 million in the aggregate, of which $502.9 million was paid on April 10, 2012 to the shareholders of record as of April 3, 2012. Payment of an additional $1.5 million was made during the remainder of 2012. The unpaid portion of the dividend at September 30, 2013 relates to unvested employee and director shares and units and is reflected in current liabilities ($1.9 million) and other long term liabilities ($1.5 million). The dividends will be paid when the underlying employee awards vest, while vested director awards will be paid upon their separation from service on the Board of Directors. The dividend was funded in part by existing cash and in part by the proceeds of additional debt issued under our Term Loan B. The dividend was recorded as a reduction of retained earnings to the extent that retained earnings were available at the dividend declaration date. Dividends in excess of retained earnings were recorded as a reduction of capital in excess of par value.

 

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Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollar amounts in millions)

 

NOTE 22. EARNINGS PER SHARE

Earnings per share (“EPS”) components may not add due to rounding.

The following table is a reconciliation of earnings to earnings attributable to common shares used in our basic and diluted EPS calculations for the three month and nine month periods ended September 30, 2013 and 2012:

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2013     2012     2013     2012  

Earnings from continuing operations

   $ 55.9      $ 74.0      $ 89.7      $ 135.2   

Earnings allocated to participating non-vested share awards

     (0.3     (0.5     (0.5     (1.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings from continuing operations attributable common shares

   $ 55.6      $ 73.5      $ 89.2      $ 134.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table is a reconciliation of basic shares outstanding to diluted shares outstanding for the three month and nine month periods ended September 30, 2013 and 2012 (shares in millions):

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2013      2012      2013      2012  

Basic shares outstanding

     58.4         58.9         58.9         58.8   

Dilutive effect of stock option awards

     0.6         0.5         0.6         0.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted shares outstanding

     59.0         59.4         59.5         59.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Options to purchase 358,402 and 106,440 shares of common stock were outstanding at September 30, 2013 and 2012, respectively, but not included in the computation of diluted earnings per share, because they were anti-dilutive.

 

 

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Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Armstrong World Industries, Inc.:

We have reviewed the accompanying condensed consolidated balance sheet of Armstrong World Industries, Inc. and subsidiaries (the “Company”) as of September 30, 2013 and the related condensed consolidated statements of earnings and comprehensive income for the three-month and nine-month periods ended September 30, 2013 and 2012, and the related condensed consolidated statements of cash flows and shareholders’ equity for the nine-month periods ended September 30, 2013 and 2012. These condensed consolidated financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Armstrong World Industries, Inc. and subsidiaries as of December 31, 2012, and the related consolidated statements of earnings and comprehensive income, cash flows, and equity for the year then ended (not presented herein); and in our report dated February 27, 2013, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2012, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ KPMG LLP

Philadelphia, Pennsylvania

October 28, 2013

 

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Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion should be read in conjunction with the financial statements, the accompanying notes, the cautionary note regarding forward-looking statements and risk factors included in this report and our Annual Report on Form 10-K for the year ended December 31, 2012.

OVERVIEW

We are a leading global producer of flooring products and ceiling systems for use primarily in the construction and renovation of residential, commercial and institutional buildings. Through our United States (“U.S.”) operations and U.S. and international subsidiaries, we design, manufacture and sell flooring products (primarily resilient and wood) and ceiling systems (primarily mineral fiber, fiberglass and metal) around the world. As of September 30, 2013 we operated 35 manufacturing plants in eight countries, including 20 plants located throughout the U.S.

Reportable Segments

Building Products — produces suspended mineral fiber, soft fiber and metal ceiling systems for use in commercial, institutional and residential settings. In addition, our Building Products segment sources complementary ceiling products. Our products, which are sold worldwide, are available in numerous colors, performance characteristics and designs, and offer attributes such as acoustical control, rated fire protection and aesthetic appeal. Commercial ceiling materials and accessories are sold to resale distributors and ceiling systems contractors. Residential ceiling products are sold in North America primarily to wholesalers and retailers (including large home centers). Suspension system (grid) products manufactured by Worthington Armstrong Venture (“WAVE”) are sold by both us and WAVE.

Resilient Flooring — produces and sources a broad range of floor coverings primarily for homes and commercial and institutional buildings. Manufactured products in this segment include vinyl sheet, vinyl tile and linoleum flooring. In addition, our Resilient Flooring segment sources and sells laminate flooring products, vinyl tile products, vinyl sheet products, adhesives, and installation and maintenance materials and accessories. Resilient Flooring products are offered in a wide variety of types, designs, and colors. We sell these products worldwide to wholesalers, large home centers, retailers, contractors and to the manufactured homes industry.

Wood Flooring — produces and sources wood flooring products for use in new residential construction and renovation, with some commercial applications in stores, restaurants and high-end offices. The product offering includes pre-finished solid and engineered wood floors in various wood species, and related accessories. Virtually all of our Wood Flooring sales are in North America. Our Wood Flooring products are generally sold to independent wholesale flooring distributors and large home centers.

Unallocated Corporate — includes assets, liabilities, income and expenses that have not been allocated to the business units. Balance sheet items classified as Unallocated Corporate are primarily income tax related accounts, cash and cash equivalents, the Armstrong brand name, the U.S. prepaid pension cost and long-term debt. Expenses for our corporate departments and certain benefit plans are allocated to the reportable segments based on known metrics, such as specific activity, headcount, or net sales. The remaining items, which cannot be attributed to the reportable segments without a high degree of generalization, are reported in Unallocated Corporate.

The assets, liabilities and financial results related to our formerly owned cabinets business are classified as discontinued operations for all periods presented.

See Note 2 to the Condensed Consolidated Financial Statements for additional financial information on our consolidated company and our reportable segments.

 

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Factors Affecting Revenues

Markets. We compete in building material markets around the world. The majority of our sales are in North America and Europe. We closely monitor publicly available macroeconomic trends that provide insight to commercial and residential market activity including Gross Domestic Product, the Architecture Billings Index and the Consumer Confidence Index. In addition, we noted several factors and trends within our markets that directly affected our business performance during the third quarter of 2013, including:

Americas

We noted softness in commercial markets, particularly education and, to a lesser extent, healthcare, as public spending remained constrained. In addition, we saw some regional variability in the office market, and strength in retail. These trends impacted both our Building Products and Resilient Flooring businesses, but with greater impact on Resilient Flooring as a significant portion of our commercial sales in Resilient Flooring originate from the education and healthcare markets.

Residential markets continued to improve, driven primarily by strength in builder activity while renovation activity increased slightly. These trends impacted our Wood and Resilient Flooring businesses.

Europe, Middle East and Africa (“EMEA”)

The majority of our sales in EMEA are to commercial markets in sectors dependent on public spending. Continued softness in commercial sectors, such as office, education and healthcare, contributed to mixed results across EMEA. These trends impacted our Building Products and Resilient Flooring businesses.

Pacific Rim

A continued soft commercial construction market in Australia negatively impacted our Resilient Flooring and Building Products businesses. Commercial markets in India and Southeast Asia grew, while China experienced positive results in the office, education and healthcare segments.

Pricing Initiatives. We periodically modify prices in each of our business segments in response to changes in costs for raw materials and energy, and to market conditions and the competitive environment. In certain cases, realized price increases are less than the announced price increases because of competitive reactions and changing market conditions. We estimate that pricing actions increased our third quarter 2013 total consolidated net sales by $14 million and in the first nine months of 2013 by $23 million, when compared to the same periods of 2012.

We implemented three price increases in our wood flooring business in the Americas, price increases in our Building Products business in the Americas and Asia, and a grid price increase, all in the third quarter of 2013. We may implement additional pricing actions if raw material prices continue at, or rise from, current levels.

Mix. Each of our businesses offers a wide assortment of products that are differentiated by style, design and performance attributes. Pricing and margins for products within the assortment vary. Changes in the relative quantity of products purchased at the different price points can impact year-to-year comparisons of net sales and operating income. We estimate that mix improvements increased our total consolidated net sales in the third quarter by approximately $4 million and in the first nine months of 2013 by $8 million when compared to the same periods of 2012.

Factors Affecting Operating Costs

Operating Expenses. 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.

 

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Our largest individual raw material expenditures are for lumber and veneers, PVC resins and plasticizers. Natural gas is also a significant input cost. Fluctuations in the prices of these inputs are generally beyond our control and have a direct impact on our financial results. In the third quarter and first nine months of 2013, costs for raw materials, sourced products and energy negatively impacted operating income by $12 million and $28 million, respectively, when compared to the same periods of 2012.

During the first quarter of 2012, we incurred approximately $4 million of net costs related to the collective bargaining contract settlement with employees at the Marietta, PA Building Products plant. During the first quarter of 2012, we also decided to close our previously idled Building Products plant in Mobile, AL. During the third quarter of 2013 we sold this facility and recorded a pre-tax gain of $3.8 million within SG&A expense (inclusive of release of unused environmental liabilities and asset retirement obligations). We will continue to evaluate the efficiency of our manufacturing footprint and may take additional actions in support of our cost and standardization initiatives. The charges associated with any additional cost reduction initiatives could include severance and related termination benefits, fixed asset write-downs, asset impairments and accelerated depreciation and may be material to our financial statements.

Employees

As of September 30, 2013, we had approximately 8,700 full-time and part-time employees worldwide, compared to 8,500 as of December 31, 2012. Most of the increase related to crews added at our wood flooring plants.

Throughout 2014, collective bargaining agreements covering approximately 1,100 employees at four plants are scheduled to expire. One of these agreements, covering approximately 700 employees, is scheduled to expire in February 2014.

RESULTS OF CONTINUING OPERATIONS

Unless otherwise indicated, net sales in these results of continuing operations are reported based upon the location where the sale was made. Please refer to Notes 2 and 3 to the Condensed Consolidated Financial Statements for a reconciliation of operating income to consolidated earnings from continuing operations before income taxes and additional financial information related to discontinued operations.

CONSOLIDATED RESULTS FROM CONTINUING OPERATIONS

(dollar amounts in millions)

 

     2013      2012      Change is Favorable/
(Unfavorable)
 

Three Months Ended September 30,

        

Net sales:

        

Americas

   $ 530.4       $ 498.3         6.4

EMEA

     145.0         140.7         3.1

Pacific Rim

     54.3         55.7         (2.5 )% 
  

 

 

    

 

 

    

 

 

 

Total consolidated net sales

   $ 729.7       $ 694.7         5.0

Operating income

   $ 93.6       $ 108.6         (13.8 )% 

Nine Months Ended September 30,

        

Net sales:

        

Americas

   $ 1,497.6       $ 1,441.0         3.9

EMEA

     403.9         403.8         0.0

Pacific Rim

     157.1         161.3         (2.6 )% 
  

 

 

    

 

 

    

 

 

 

Total consolidated net sales

   $ 2,058.6       $ 2,006.1         2.6

Operating income

   $ 208.2       $ 228.9         (9.0 )% 

The increase in consolidated net sales during the third quarter was driven by $24 million of higher volume and by favorable price and mix of $18 million. The increase in consolidated net sales during the first nine

 

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months of 2013 was driven by $49 million of higher volume and by favorable price and mix of $32 million. Sales were negatively impacted by the sale of the Patriot wood flooring distribution business which occurred in the third quarter of 2012 and negatively impacted sales for the third quarter and first nine months of 2013 by approximately $7 million and $26 million, respectively, when compared to the same periods of 2012.

Net sales in the Americas improved during the third quarter of 2013 driven primarily by higher volumes and improvements in price. Net sales in the Americas increased during the first nine months of 2013 driven primarily by higher volumes in the wood business which were partially offset by lower commercial volumes, and improvements in price and mix. Sales were negatively impacted in both periods by the sale of the Patriot wood flooring distribution business.

Net sales in the EMEA markets improved during the third quarter of 2013 driven primarily by favorable foreign exchange impact of approximately $6 million and favorable mix, which were partially offset by lower volumes. Net sales in the EMEA markets were flat during the first nine months of 2013 as favorable foreign exchange impact of approximately $7 million and improved mix were offset by lower volumes.

Net sales in the Pacific Rim declined during the third quarter of 2013 on unfavorable foreign exchange impact of $3 million, which more than offset improved volumes and mix. Net sales in the Pacific Rim declined during the first nine months of 2013 as unfavorable foreign exchange impact of $4 million and lower mix were only partially offset by improvements in volume. A continued soft commercial construction market in Australia negatively impacted volumes in both periods in our Resilient Flooring and Building Products businesses.

Cost of goods sold in the third quarter of 2013 was 75.3% of net sales, compared to 73.1% for the same period in 2012. Cost of goods sold in the first nine months of 2013 was 76.3% of net sales, compared to 75.2% for the same period in 2012. The increases were primarily due to raw material inflation, and increased production costs in the wood flooring segment. The nine month comparison was impacted by approximately $20 million of costs associated with the closure of our Mobile, AL facility, $15 million of which was recorded in the first quarter of 2012.

SG&A expenses in the third quarter of 2013 were $103.0 million, or 14.1% of net sales, and in the first nine months of 2013 were $326.9 million, or 15.9% of net sales, compared to $94.0 million, or 13.5% of net sales, and $312.6 million, or 15.6% of net sales, for the corresponding periods in 2012. The increase was primarily due to emerging market growth initiatives and increased Unallocated Corporate expenses. See Reportable Segment Results for additional information.

Equity earnings from our WAVE joint venture were $16.6 million for the third quarter of 2013 compared to $15.5 million in the third quarter of 2012, and $46.2 million for the first nine months of 2013 compared to $44.0 million in the first nine months of 2012. See Note 7 to the Condensed Consolidated Financial Statements for further information.

Interest expense was $11.4 million for the third quarter of 2013 compared to $14.1 million in the third quarter of 2012. The decrease in the third quarter was primarily due to the first quarter 2013 amendment to our senior credit facility. The terms were modified from LIBOR plus 300 basis points to LIBOR plus 250 basis points. Interest expense was $56.4 million in the first nine months of 2013 compared to $39.7 million in the first nine months of 2012. The increase in the first nine months of 2013 over the prior year was primarily due to the write-off of unamortized debt financing costs associated with the refinancing of our senior credit facility in the first quarter of 2013 (see Liquidity for further information).

Income tax expense was $26.1 million and $20.9 million for the third quarter of 2013 and 2012, respectively. The effective tax rate for the third quarter of 2013 was 31.8% as compared to a rate of 22.0% for the same period of 2012. Income tax expense was $63.9 million and $55.6 million for the first nine months of 2013 and 2012, respectively. The effective tax rate for the first nine months of 2013 was 41.6% as compared to a rate of 29.1% for the same period of 2012. The effective tax rate for both the three and nine month periods of 2013 was higher than the comparable periods of 2012 due to the

 

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provision of valuation allowances reducing deferred tax assets generated during the periods related to increased losses of certain foreign affiliates and to the release of foreign tax credit valuation allowance in the third quarter of 2012. The increase in the effective tax rate for the third quarter and first nine months of 2013 was partially offset by a release of state net operating loss valuation allowance and certain state tax law changes in the third quarter.

Total other comprehensive income (“OCI”) was $7.4 million income and $10.2 million income for the third quarters of 2013 and 2012, respectively, and was $23.9 million income and $7.5 million income for the first nine months of 2013 and 2012, respectively. Foreign currency translation adjustments represent the change in the U.S. dollar value of assets and liabilities denominated in foreign currencies. Amounts in all periods were driven primarily by changes in the exchange rates of the British Pound, the Euro and the Australian dollar. Derivative gain/loss represents the mark to market value adjustments of our derivative assets and liabilities and the recognition of gains and losses previously deferred in OCI. The period changes are primarily due to the mark to market changes related to our interest rate swap derivatives. Pension and postretirement adjustments represent the amortization of actuarial gains and losses related to our defined-benefit pension and postretirement plans. The amounts in all periods primarily related to the amortization of losses on the U.S. pension plans.

REPORTABLE SEGMENT RESULTS

Building Products

(dollar amounts in millions)

 

     2013      2012      Change is Favorable  

Three Months Ended September 30,

        

Net sales:

        

Americas

   $ 208.7       $ 204.6         2.0

EMEA

     93.3         88.7         5.2

Pacific Rim

     33.5         32.6         2.8
  

 

 

    

 

 

    

 

 

 

Total segment net sales

   $ 335.5       $ 325.9         2.9

Operating income

   $ 86.7       $ 81.1         6.9

Nine Months Ended September 30,

        

Net sales:

        

Americas

   $ 590.3       $ 576.7         2.4

EMEA

     257.9         256.1         0.7

Pacific Rim

     96.4         93.3         3.3
  

 

 

    

 

 

    

 

 

 

Total segment net sales

   $ 944.6       $ 926.1         2.0

Operating income

   $ 210.7       $ 177.9         18.4

The increase in Building Products net sales in the third quarter of 2013 was driven by $2 million of higher volume and by favorable price and mix of $8 million. The increase in Building Products net sales in the first nine months of 2013 was driven by favorable price and mix of $21 million, which was only partially offset by $2 million of lower volume.

Net sales in the Americas increased in the third quarter and first nine months of 2013. Price and mix improved in both periods, while volumes were flat in the third quarter, but were down for the first nine months of 2013.

Net sales in the EMEA markets increased in the third quarter of 2013, driven primarily by favorable foreign exchange impact of approximately $3 million and favorable mix. Net sales in the EMEA markets increased in the first nine months of 2013 as volume declines were more than offset by improvements in mix and favorable foreign exchange impact of approximately $3 million.

 

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Net sales increased in the Pacific Rim in the third quarter of 2013 driven by improvements in volume and mix, which were partially offset by unfavorable foreign exchange impact of approximately $2 million. Net sales increased in the Pacific Rim in the first nine months of 2013 driven by higher volumes which were partially offset by unfavorable foreign exchange impact of approximately $2 million and unfavorable mix and price.

Operating income improved during the third quarter of 2013, aided by favorable contribution from price and mix of $7 million and higher earnings from WAVE of $1 million, which were only partially offset by higher SG&A expenses of $4 million, net of the $3.8 million pre-tax gain on sale of our Mobile, AL facility.

The increase in operating income in the first nine months of 2013 was driven by $20 million of accelerated depreciation, impairment and other charges associated with the closure of our Mobile, AL facility, and approximately $4 million of net charges related to the collective bargaining contract settlement with employees at the Marietta, PA plant, both recorded in the first half of 2012. During the first nine months of 2013, we experienced favorable price and mix of $12 million, improvements in manufacturing costs of $7 million (net of investments in China and Russia) and higher earnings from WAVE of $4 million, which were only partially offset by higher SG&A expenses of $7 million and the margin impact of lower volumes of $4 million.

Resilient Flooring

(dollar amounts in millions)

 

            Change is Favorable/  
     2013      2012      (Unfavorable)  

Three Months Ended September 30,

        

Net sales:

        

Americas

   $ 173.7       $ 171.3         1.4

EMEA

     51.7         52.0         (0.6 )% 

Pacific Rim

     20.8         23.1         (10.0 )% 
  

 

 

    

 

 

    

 

 

 

Total segment net sales

   $ 246.2       $ 246.4         (0.1 )% 

Operating income

   $ 22.5       $ 25.3         (11.1 )% 

Nine Months Ended September 30,

        

Net sales:

        

Americas

   $ 506.4       $ 511.5         (1.0 )% 

EMEA

     146.0         147.7         (1.2 )% 

Pacific Rim

     60.7         68.0         (10.7 )% 
  

 

 

    

 

 

    

 

 

 

Total segment net sales

   $ 713.1       $ 727.2         (1.9 )% 

Operating income

   $ 46.6       $ 57.9         (19.5 )% 

Resilient Flooring net sales were flat in the third quarter of 2013 as favorable foreign exchange impact of approximately $2 million was offset by $2 million of unfavorable price and mix. The decline in Resilient Flooring net sales in the first nine months of 2013 was driven by $16 million of lower volume, which was only partially offset by favorable mix and price of $1 million.

Net sales in the Americas increased in the third quarter of 2013 as residential and commercial volumes improved and mix was favorable, which were only partially offset by the impact of unfavorable price. Net sales in the Americas decreased in the first nine months of 2013, driven primarily by lower residential and commercial volumes and unfavorable price which were only partially offset by improvements in mix.

Net sales in the EMEA markets decreased slightly in the third quarter of 2013, as favorable foreign exchange was offset by the impact of lower volumes. Net sales in the EMEA markets declined in the first nine months of 2013 as improvements in mix and price were unable to offset volume declines.

 

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Net sales in the Pacific Rim declined in the third quarter and first nine months of 2013, driven primarily by lower volumes in Australia.

The decline in operating income in the third quarter of 2013 was driven primarily by lower price and mix of $3 million and unfavorable foreign exchange impact of approximately $1 million, which were only partially offset by $2 million of lower manufacturing and input costs as higher productivity in the Americas and Europe more than offset plant start-up costs in China. The decline in operating income for the first nine months of 2013 was driven primarily by the margin impact of lower volumes of $8 million and lower price and mix of $2 million, which were only partially offset by improvements in manufacturing and input costs of $3 million and reductions in SG&A expenses of $2 million. The comparison was also impacted by $7 million of severance charges associated with cost reduction actions in Australia and EMEA in the first half of 2013.

Wood Flooring

(dollar amounts in millions)

 

            Change is Favorable/  
     2013      2012      (Unfavorable)  

Three Months Ended September 30,

        

Total segment net sales

   $ 148.0       $ 122.4         20.9

Operating income

   $ 2.6       $ 13.5         (80.7 )% 

Nine Months Ended September 30,

        

Total segment net sales

   $ 400.9       $ 352.8         13.6

Operating income

   $ 5.6       $ 29.8         (81.2 )% 

Net sales increased in the third quarter of 2013, driven primarily by higher volumes of $22 million, and favorable price and mix of $10 million. Net sales increased in the first nine months of 2013, driven by higher volumes of $68 million, and favorable mix and price of $7 million. The higher volumes were driven by strong demand from independent distributors as gains in new residential construction drove increased demand from builders. Sales also improved as a result of share gains and new product introductions with independent distributors and the home center channel. Price positively impacted sales in the third quarter, driven by realization from multiple pricing actions during the year. The sale of the Patriot wood flooring distribution business, which occurred in the third quarter of 2012, negatively impacted sales for the third quarter and first nine months of 2013 by approximately $7 million and $26 million, respectively, when compared to the same periods of 2012.

The decrease in operating income in the third quarter and first nine months of 2013 was driven by higher manufacturing and input costs of $24 million and $45 million, respectively, which were only partially offset by the $6 million and $15 million impact of higher volumes and $8 million and $3 million impact of improved price and mix in the third quarter and first nine months of 2013, respectively. Increases in manufacturing and input costs were driven by rising lumber costs and higher labor costs as we increased our workforce to respond to the increased demand.

Unallocated Corporate

Unallocated corporate expense of $18.2 million in the third quarter and $54.7 million for the first nine months of 2013 increased from $11.3 million and $36.7 million, respectively, in the prior year. The increase in both periods was impacted by higher foreign and domestic pension expense, increased spending on outside professional services and higher expense associated with employee benefits when compared to the same periods of 2012.

 

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FINANCIAL CONDITION AND LIQUIDITY

Cash Flow

Operating activities in the first nine months of 2013 provided $161.7 million of cash, compared to $141.1 million in the first nine months of 2012. The increase in cash provided was primarily driven by changes in working capital.

Net cash used by investing activities was $86.4 million for the first nine months of 2013, compared to $61.7 million for the first nine months of 2012. The increase in cash used was primarily due to higher purchases of property, plant and equipment and lower proceeds from the sale of assets.

Net cash used by financing activities was $268.6 million for the first nine months of 2013, compared to $262.7 million during the first nine months of 2012. Net cash used in 2013 was impacted by the $261.4 million purchase of common stock for the treasury. Net cash used in 2012 was impacted by dividend payments of $503.5 million, partially offset by $251.9 million of long-term debt issued.

Liquidity

Our liquidity needs for operations vary throughout the year. We retain lines of credit to facilitate our seasonal cash flow needs, since cash flow is generally lower during the first and fourth quarters of our fiscal year. On March 15, 2013, we refinanced our $1.3 billion senior credit facility. The new facility is composed of a $250 million revolving credit facility (with a $150 million sublimit for letters of credit), a $550 million Term Loan A and a $475 million Term Loan B. The terms of the facility resulted in a lower interest rate spread (2.5% vs. 3.0%) than our previous facility. We also extended the maturity of Term Loan A from November 2015 to March 2018 and of Term Loan B from March 2018 to March 2020 and we amended our year end leverage tests (see below). Per the terms of the underlying agreement this $1.3 billion senior credit facility is secured by U.S. personal property, the capital stock of material U.S. subsidiaries and a pledge of 65% of the stock of our material first tier foreign subsidiaries.

Under the amended senior credit facility, beginning December 31, 2013, we are subject to year-end leverage tests that may trigger mandatory prepayments. If our ratio of consolidated funded indebtedness minus AWI and domestic subsidiary unrestricted cash and cash equivalents up to $100 million to consolidated EBITDA (“Consolidated Net Leverage Ratio”) is greater than 3.5 to 1.0, the prepayment amount would be 50% of fiscal year Consolidated Excess Cash Flow. These annual payments would be made beginning in the first quarter of 2014.

In connection with the refinancing, we incurred $8.3 million for bank, legal, and other fees, of which $7.2 million was capitalized and is being amortized into interest expense over the life of the loans. Additionally, we wrote off $18.9 million of unamortized debt financing costs in the first quarter of 2013 related to our previous credit facility to interest expense.

The amended 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 (“consolidated interest coverage ratio”) to be greater than or equal to 3.0 to 1.0 and requires the Consolidated Net Leverage Ratio to be less than or equal to 4.5 to 1.0 through December 31, 2013, 4.0 to 1.0 after December 31, 2013 through March 31, 2015 and 3.75 to 1.0 after March 31, 2015. During the first nine months of 2013, we were in compliance with all covenants of the previous and amended senior credit facilities.

The Revolving Credit and Term Loan A portions are currently priced at a spread of 2.50% over LIBOR and the Term Loan B portion is priced at 2.50% over LIBOR with a 1.00% LIBOR floor for its entire term. The Term Loan A and Term Loan B were both fully drawn and are currently priced on a variable interest

 

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rate basis. The following table summarizes our interest rate swaps:

 

Trade Date

   Notional
Amount
     Interest Rate
Paid
   

Coverage Period

  

Risk Coverage

March 31, 2011

   $ 100.0         2.303   March 2011 to November 2015    Term Loan A

March 31, 2011

   $ 200.0         2.523   March 2011 to November 2015    Term Loan B

March 27, 2012

   $ 250.0         1.928   March 2012 to March 2018    Term Loan B

March 27, 2012

   $ 200.0         2.810   November 2015 to March 2018    Term Loan B

April 16, 2013

   $ 250.0         1.398   November 2015 to March 2018    Term Loan A

These swaps are designated as cash flow hedges against changes in LIBOR for a portion of our variable rate debt. The unpaid balances of Term Loan A, the Revolving Credit and Term Loan B of the credit facility may be prepaid without penalty at the maturity of their respective interest reset periods. Any amounts prepaid on the Term Loan A or Term Loan B may not be re-borrowed.

As of September 30, 2013, we had $137.7 million of cash and cash equivalents, $26.4 million in the U.S. and $111.3 million in various foreign jurisdictions.

On March 23, 2012, our Board of Directors declared a special cash dividend in the amount of $8.55 per share, or $508 million in the aggregate, of which $502.9 million was paid on April 10, 2012. Payment of an additional $1.5 million was made during the remainder of 2012, and the remaining $3.4 million of the dividend is expected to be made when the underlying shares vest. The dividend was funded in part by surplus cash on our balance sheet, and in part by the proceeds of additional debt issued under our Term Loan B.

On March 28, 2013, we amended our $100 million Accounts Receivable Securitization Facility with the Bank of Nova Scotia, under which AWI and its subsidiary, Armstrong Hardwood Flooring Company, sell their U.S. receivables to Armstrong Receivables Company LLC (“ARC”), a Delaware entity that is consolidated in these financial statements. We decreased the facility to $75 million to reduce commitment fees on the unused capacity and extended the maturity date from December 2014 to March 2016.

On September 30, 2013, we had outstanding letters of credit totaling $72.0 million, of which $14.8 million was issued under the revolving credit facility, $57.0 million was issued under the securitization facility, and $0.2 million was issued by other banks of international subsidiaries. Letters of credit are 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.

 

     As of September 30, 2013  
     Limit      Used      Available  

Foreign Financing Arrangements

        

Lines of Credit Available for Borrowing

   $ 14.9         —         $ 14.9   

Lines of Credit Available for Letters of Credit

     1.6       $ 0.7         0.9   
  

 

 

    

 

 

    

 

 

 

Total

   $ 16.5       $ 0.7       $ 15.8   
  

 

 

    

 

 

    

 

 

 

These lines of credit are uncommitted, and poor operating results or credit concerns at the related foreign subsidiaries could result in the lines being withdrawn by the lenders. We have historically been able to maintain and, as needed, replace credit facilities to support our foreign operations.

Since 2009, our Board of Directors has approved the construction of five manufacturing plants. These include a U.S. mineral wool plant to supply our Building Products plants, mineral fiber ceiling plants in Russia and China, and two flooring plants in China. Total capital spending for these projects is currently projected to be approximately $310 million. As of September 30, 2013, we have completed construction of the mineral wool plant, mineral fiber ceiling plant in China and two flooring plants in China. Through September 30, 2013, we have incurred approximately $225 million related to these projects. Capital spending for the final plant will be incurred through 2014 with the majority of the remaining spending expected to occur in 2014. In July 2013, our Board of Directors approved the expansion of our Lancaster,

 

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PA flooring plant to include the manufacture of luxury vinyl tile. Total capital spending for this project is projected to be approximately $40 million and will be incurred though 2015 with the majority of the spending expected to occur in 2014.

During the third quarter of 2013, the Asbestos PI Trust and TPG together sold 12,057,382 of their remaining shares in a secondary public offering. During this transaction we paid approximately $260 million to acquire 5,057,382 shares to be held in treasury. The treasury share purchase was funded by existing cash, borrowings under our credit facility and our securitization facility. Funds borrowed to complete this transaction were repaid by the end of the third quarter.

We believe that cash on hand and cash generated from operations, together with lines of credit, availability under our $75 million securitization facility and the availability under our $250 million revolving credit facility, will be adequate to address our foreseeable liquidity needs based on current expectations of our business operations, capital expenditures and scheduled payments of debt obligations.

 

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ITEM 3. 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 2012 Annual Report on Form 10-K. There have been no material changes in our use of financial instruments to hedge against market risks or market risk exposures since December 31, 2012.

ITEM 4. CONTROLS AND PROCEDURES

 

(a) Evaluation of Disclosure Controls and Procedures. The Securities and Exchange Commission defines the term “disclosure controls and procedures” to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Act”), is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Based on the evaluation of the effectiveness of our disclosure controls and procedures by our management, with the participation of our principal executive officer and our chief financial officer, as of September 30, 2013, our principal executive officer and our chief financial officer have concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file or submit under the Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.

 

(b) Changes in Internal Control Over Financial Reporting. No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Act) occurred during the fiscal quarter ended September 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 20 to the Condensed Consolidated Financial Statements, which is incorporated herein by reference.

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors disclosed in our 2012 Annual Report on Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(c) Issuer Purchases of Equity Securities

 

Period 

   Total
Number of
Shares
Purchased 
     Average
Price Paid
per Share 
     Total Number of
Shares
Purchased as
Part of Publicly
Announced Plans
or Programs
   Maximum Number
of Shares that may
yet be Purchased
under the Plans or
Programs

July 1 - 31, 2013 1

     327       $ 50.48       —      —  

August 1 – 31, 2013 1

     3,768       $ 50.75       —      —  

September 1 – 30, 2013 3

     5,057,382       $ 51.41       —      —  
  

 

 

          

Total

     5,061,477          N/A    N/A
  

 

 

          

 

1  Shares reacquired through the withholding of shares to pay employee tax obligations upon the exercise of options or vesting of restricted shares previously granted under the 2011 Long Term Incentive Plan.
2  The Company does not have a share buy-back program.
3  Shares reacquired pursuant to a Share Repurchase Agreement dated September 10, 2013. The shares are held in Treasury as of September 30, 2013.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5. OTHER INFORMATION

None.

 

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ITEM 6. EXHIBITS

The following exhibits are filed as part of this Quarterly Report on Form 10-Q:

 

Exhibit No.

  

Description

No. 3.1    Amended and Restated Certificate of Incorporation of Armstrong World Industries, Inc. is incorporated by reference from the Current Report on Form 8-K filed on October 2, 2006, wherein it appeared as Exhibit 3.1.
No. 3.2    Bylaws of Armstrong World Industries, Inc., as amended, are incorporated by reference from the Current Report on Form 8-K filed on August 6, 2010, wherein they appeared as Exhibit 3.1.
No. 15    Awareness Letter from Independent Registered Public Accounting Firm. †
No. 31.1    Certification of Chief Executive Officer required by Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act. †
No. 31.2    Certification of Chief Financial Officer required by Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act. †
No. 32.1    Certification of Chief Executive Officer required by Rule 13a and 18 U.S.C. Section 1350 (furnished herewith).
No. 32.2    Certification of Chief Financial Officer required by Rule 13a and 18 U.S.C. Section 1350 (furnished herewith).
No. 101    Interactive Data Files

 

Filed herewith.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  Armstrong World Industries, Inc.
By:   /s/ Thomas B. Mangas
  Thomas B. Mangas, Senior Vice President and
  Chief Financial Officer (Principal Financial Officer)
By:   /s/ Stephen F. McNamara
  Stephen F. McNamara, Vice President and
  Controller (Principal Accounting Officer)

Date: October 28, 2013

 

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