Financial Data and Key Metrics Changes - For the full year 2020, sales were $937 million, down 10% from 2019, with adjusted EBITDA of $330 million, down 18% from 2019, coming in at the high end of guidance [10] - Q4 2020 sales were $239 million, down 3% year-over-year, with adjusted EBITDA falling 19% and margins contracting 580 basis points [25] - Adjusted diluted earnings per share for Q4 2020 was $0.77, down 31% compared to the previous year [25] Business Line Data and Key Metrics Changes - In the Mineral Fiber business, Q4 sales were down 7% year-over-year, but improved sequentially from Q3 when sales were down 14% [28] - The Architectural Specialties segment saw a 13% increase in sales, driven by acquisitions, offsetting a 9% organic sales decline [30] - Adjusted EBITDA for the Mineral Fiber segment was down $15 million or 19%, while the Architectural Specialties segment's direct margins expanded significantly due to higher margins from acquisitions [29][30] Market Data and Key Metrics Changes - The marketplace showed mixed conditions, with New Orleans experiencing strength due to Hurricane damage, while the upper Midwest and Southern California moderated [9] - The number of healthcare projects bid during the quarter increased, but activity in education slowed [9] - The company noted that underlying conditions remain choppy, creating near-term uncertainty as building owners adapt their facilities for safe occupancy [10] Company Strategy and Development Direction - The company is focusing on growth, digitalization, and sustainability, with a commitment to healthy spaces and improving indoor air quality [8][15] - Armstrong completed three acquisitions in 2020, enhancing its capabilities in felt products, custom metal capabilities, and design technology [18] - The launch of new products, including AirAssure and Vidashield, reflects a strategic pivot to meet the demand for healthier spaces [19][21] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in emerging from the pandemic as a stronger company, with a focus on cash conservation and maintaining talent [16] - The company anticipates revenue growth of 10% to 13% in 2021, driven by a return to positive mix and continued like-for-like pricing [35] - Management highlighted the importance of healthy spaces in commercial construction, with 92% of architects discussing healthier designs with clients [24] Other Important Information - The company reported a strong adjusted free cash flow of $212 million for the year, representing 23% of sales [35] - Armstrong's net debt-to-EBITDA ratio was 1.8x, providing considerable headroom under its credit agreement [26] - The company has resumed its share repurchase program and is returning capital expenditures to pre-pandemic levels [16] Q&A Session Summary Question: Update on product acceptance for new healthy space products - Management reported quick progress in specifications and installations for new products, indicating strong market engagement [49] Question: Types of projects for new products - The company is engaged in both new construction and renovation projects, with broad market interest in creating healthy spaces [51] Question: Managing inflation and its impact on guidance - Management acknowledged rising material costs and has implemented price increases to stay ahead of inflation [53] Question: SG&A increases and their persistence - The increase in SG&A was driven by growth initiatives and acquisitions, with expectations for continued investment in growth [54][56] Question: Growth in top seven markets - Sequential improvement was noted in key markets, with confidence in guidance for 2021 based on historical sales proportions [62][64] Question: Record backlog in Architectural Specialty segment - The backlog reflects continued market penetration and a strong pipeline of projects across various verticals [67] Question: Margin profile of the Kanopi digital initiative - Expected margins for the Kanopi initiative are in line with the rest of the business, with high fall-through rates anticipated [71]

PART I [ITEM 1. BUSINESS](index=5&type=section&id=ITEM%201.%20BUSINESS) AWI is a leading producer of ceiling and wall systems in the Americas, focusing on innovation, acquisitions, and sustainability initiatives - AWI is a leading producer of ceiling and wall systems in the Americas, focusing on innovation, portfolio expansion through acquisitions, and sustainability[11](index=11&type=chunk)[12](index=12&type=chunk) - In 2020, AWI acquired Arktura LLC, Moz Designs, Inc., and TURF Design, Inc., all integrated into the Architectural Specialties segment to expand offerings in metal and felt ceilings and walls[14](index=14&type=chunk) - The sale of EMEA and Pacific Rim businesses, including WAVE's corresponding operations, was completed on September 30, 2019. In 2020, AWI remitted **$25.9 million** to WAVE from the proceeds and recorded a **$12.0 million** loss related to post-closing adjustments for pension liabilities[17](index=17&type=chunk)[18](index=18&type=chunk) - Commercial construction revenue is driven by new construction and renovation, with renovation representing the majority. Residential construction is primarily influenced by existing home renovation[21](index=21&type=chunk)[22](index=22&type=chunk) - Approximately **70%** of consolidated net sales in 2020 were to distributors, with large home centers accounting for about **10%**. GMS Inc. and Foundation Building Materials, Inc. individually exceeded **10%** of consolidated gross sales[24](index=24&type=chunk) - AWI's sustainability program is structured around three pillars: People (community engagement, diverse workforce, safety), Planet (reducing greenhouse gas, water, and waste), and Product (chemical-free, low-footprint, and LEED-compliant solutions)[35](index=35&type=chunk)[36](index=36&type=chunk)[37](index=37&type=chunk) - As of December 31, 2020, AWI had approximately **2,700 employees**, an increase from **2,500** in 2019, primarily due to 2020 acquisitions. Approximately **59%** of U.S. production employees are unionized[39](index=39&type=chunk) [ITEM 1A. RISK FACTORS](index=11&type=section&id=ITEM%201A.%20RISK%20FACTORS) AWI faces diverse operational, strategic, financial, legal, and economic risks impacting its financial condition and operations - Key operational risks include sales fluctuations to major customers, volatility in raw material and energy costs, and the performance of the WAVE joint venture[51](index=51&type=chunk)[52](index=52&type=chunk)[53](index=53&type=chunk) - Strategic risks involve the successful execution and integration of mergers, acquisitions, and joint ventures, as well as the realization of anticipated benefits from digitalization and new technology investments[57](index=57&type=chunk)[59](index=59&type=chunk) - Financial risks include potential negative tax consequences, restrictive covenants in debt agreements, the overall level of indebtedness, liquidity requirements, and the impact of defined benefit plan obligations[60](index=60&type=chunk)[63](index=63&type=chunk)[65](index=65&type=chunk)[66](index=66&type=chunk)[68](index=68&type=chunk)[69](index=69&type=chunk) - Legal and regulatory risks cover environmental liabilities (e.g., CERCLA sites), product liability claims, intellectual property infringement, and risks associated with international operations[72](index=72&type=chunk)[73](index=73&type=chunk)[79](index=79&type=chunk)[80](index=80&type=chunk) - General economic and other factors posing risks include unstable market conditions, dependence on North American commercial construction activity, intense market competition, customer consolidation, geographic concentration of business, and potential disruptions from information technology failures or cybersecurity breaches[82](index=82&type=chunk)[84](index=84&type=chunk)[85](index=85&type=chunk)[87](index=87&type=chunk)[88](index=88&type=chunk)[89](index=89&type=chunk) - The COVID-19 pandemic has created significant volatility and economic disruption, impacting customer demand, construction activity, and potentially leading to future asset impairments or bad debt reserves[94](index=94&type=chunk) [ITEM 1B. UNRESOLVED STAFF COMMENTS](index=18&type=section&id=ITEM%201B.%20UNRESOLVED%20STAFF%20COMMENTS) No unresolved staff comments are reported - No unresolved staff comments[95](index=95&type=chunk) [ITEM 2. PROPERTIES](index=18&type=section&id=ITEM%202.%20PROPERTIES) AWI operates 16 manufacturing plants across the U.S. and Canada, with corporate headquarters in Lancaster, PA - AWI's corporate headquarters is located on a 100-acre campus in Lancaster, Pennsylvania[95](index=95&type=chunk) - As of December 31, 2020, AWI had **16 manufacturing plants** (14 in the U.S., 2 in Canada), with 8 owned and 8 leased. Three new plants were acquired in 2020 through acquisitions[95](index=95&type=chunk)[96](index=96&type=chunk) - The WAVE joint venture operates six additional plants in the U.S. for producing suspension system (grid) products[95](index=95&type=chunk) [ITEM 3. LEGAL PROCEEDINGS](index=18&type=section&id=ITEM%203.%20LEGAL%20PROCEEDINGS) Significant legal proceedings are incorporated by reference from Note 27 to the Consolidated Financial Statements - Significant legal proceedings are detailed in Note 27 to the Consolidated Financial Statements[97](index=97&type=chunk) [ITEM 4. MINE SAFETY DISCLOSURES](index=19&type=section&id=ITEM%204.%20MINE%20SAFETY%20DISCLOSURES) Mine safety disclosures are not applicable to AWI - Mine safety disclosures are not applicable[98](index=98&type=chunk) PART II [ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES](index=20&type=section&id=ITEM%205.%20MARKET%20FOR%20THE%20REGISTRANT%27S%20COMMON%20EQUITY%2C%20RELATED%20STOCKHOLDER%20MATTERS%20AND%20ISSUER%20PURCHASES%20OF%20EQUITY%20SECURITIES) AWI common stock trades on NYSE; **$0.81 per share** dividends declared in 2020, with **$593.8 million** remaining for share repurchases - AWI's common shares trade on the New York Stock Exchange under the ticker symbol "AWI"[100](index=100&type=chunk) - As of February 17, 2021, there were 217 holders of record of AWI's common stock[100](index=100&type=chunk) - Dividends declared in 2020 totaled **$0.81 per share**. A dividend of **$0.21 per common share** was declared on February 17, 2021, payable March 18, 2021[101](index=101&type=chunk) - The share repurchase program, authorized up to **$1,200.0 million** through December 31, 2023, was restarted on October 21, 2020, after a temporary suspension due to COVID-19. **$593.8 million** remained under authorization as of December 31, 2020[102](index=102&type=chunk) Issuer Purchases of Equity Securities (Q4 2020) | Period | Total Number of Shares Purchased | Average Price per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | |:---|:---|:---|:---| | October 1 – 31, 2020 | 645 | $60.51 | - | | November 1 – 30, 2020 | 30,000 | $78.57 | 30,000 | | December 1 – 31, 2020 | 96,907 | $79.18 | 96,523 | | **Total** | **127,552** | | **126,523** | - During 2020, AWI repurchased **0.5 million shares** for **$44.4 million** (average **$87.27/share**). Since inception, **9.7 million shares** have been repurchased for **$606.2 million** (average **$62.35/share**)[103](index=103&type=chunk) [ITEM 6. SELECTED FINANCIAL DATA](index=21&type=section&id=ITEM%206.%20SELECTED%20FINANCIAL%20DATA) AWI adopted SEC rule amendments, eliminating the requirement for five-year selected financial data - AWI has early adopted SEC rule amendments, eliminating the requirement to provide selected financial data for the last five fiscal years[105](index=105&type=chunk) [ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=22&type=section&id=ITEM%207.%20MANAGEMENT%27S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) AWI's 2020 saw **9.7%** net sales decrease and **19.7%** operating income fall due to COVID-19, with strong liquidity and strategic acquisitions [Overview](index=22&type=section&id=Overview) AWI, incorporated in 1891, is a leading producer of ceiling systems for commercial and residential buildings in the Americas - AWI is a leading producer of ceiling systems for commercial and residential buildings in the Americas[108](index=108&type=chunk) [COVID-19 Impact](index=22&type=section&id=COVID-19%20Impact) COVID-19 significantly decreased customer demand in 2020, prompting reduced spending, with no asset impairments recorded - AWI experienced a significant decrease in customer demand in both segments during Q2-Q4 2020 due to COVID-19, with the most significant impacts in major metropolitan areas[109](index=109&type=chunk) - In response to COVID-19, AWI reduced capital expenditures and discretionary spending, including compensation, travel, and marketing expenses[109](index=109&type=chunk) - All manufacturing facilities were operational as of December 31, 2020, except for one idled prior to the pandemic[110](index=110&type=chunk) - AWI did not record any asset impairments, inventory charges, or material bad debt reserves related to COVID-19 in **2020**, but future events may require such charges[111](index=111&type=chunk) [Acquisitions](index=22&type=section&id=Acquisitions) In 2020, AWI acquired Arktura, Moz, and TURF, expanding its Architectural Specialties segment with metal and felt products - In December 2020, AWI acquired Arktura LLC, a designer and fabricator of metal and felt ceilings, walls, partitions, and facades[112](index=112&type=chunk) - In August 2020, AWI acquired Moz Designs, Inc., a designer and fabricator of custom architectural metal ceilings, walls, dividers, and column covers[112](index=112&type=chunk) - In July 2020, AWI acquired TURF Design, Inc., a designer and manufacturer of acoustic felt ceilings and wall products[112](index=112&type=chunk) - All recent acquisitions (2018-2020) are included in the Architectural Specialties segment[115](index=115&type=chunk) [Discontinued Operations](index=23&type=section&id=Discontinued%20Operations) AWI finalized the sale of EMEA and Pacific Rim businesses in 2019, remitting **$25.9 million** to WAVE in 2020 - The sale of EMEA and Pacific Rim businesses to Knauf International GmbH was completed on September 30, 2019[116](index=116&type=chunk) - In **2020**, AWI remitted **$25.9 million** to WAVE from the sale proceeds and recorded a **$12.0 million** loss primarily related to post-closing adjustments for pension liabilities[116](index=116&type=chunk) - Transition Services Agreement with Knauf expired in 2020, but royalty-free intellectual property licenses and supply agreements remain in place[117](index=117&type=chunk) [Manufacturing Plants](index=23&type=section&id=Manufacturing%20Plants) AWI operates 16 manufacturing plants in the U.S. and Canada, including three new plants from 2020 acquisitions - As of December 31, 2020, AWI had **16 manufacturing plants** in the U.S. and Canada, with three added from 2020 acquisitions[119](index=119&type=chunk) - AWI sold its idled mineral fiber plant in China during 2020[119](index=119&type=chunk) - WAVE operates six additional plants in the U.S. for suspension system products[119](index=119&type=chunk) [Reportable Segments](index=23&type=section&id=Reportable%20Segments) AWI operates in Mineral Fiber, Architectural Specialties, and Unallocated Corporate segments, each with distinct product focuses - AWI's operating segments are Mineral Fiber, Architectural Specialties, and Unallocated Corporate[120](index=120&type=chunk) - Mineral Fiber segment produces suspended mineral fiber and soft fiber ceiling systems for commercial and residential use, and includes equity earnings from the WAVE joint venture[120](index=120&type=chunk)[121](index=121&type=chunk) - Architectural Specialties segment produces and sources diverse ceiling and wall products (metal, wood, etc.) for commercial settings, with revenues often project-driven[122](index=122&type=chunk) - Unallocated Corporate includes unallocated assets, liabilities, income, and expenses, such as cash, pension plans, interest rate swaps, debt, and income tax balances[123](index=123&type=chunk) [Factors Affecting Revenues](index=24&type=section&id=Factors%20Affecting%20Revenues) Revenues in 2020 were impacted by **$87 million** lower volumes and **$14 million** unfavorable AUV due to COVID-19, partially offset by acquisitions - In 2020, AWI experienced an **$87 million** reduction in volumes compared to 2019, primarily due to decreased demand from COVID-19[125](index=125&type=chunk) - Unfavorable Average Unit Value (AUV) decreased total consolidated net sales for 2020 by approximately **$14 million** compared to 2019[126](index=126&type=chunk) Impact of Acquisitions on Architectural Specialties Net Sales (2019-2020) | | 2020 (millions) | 2019 (millions) | |:---|:---|:---| | 2019 Acquisitions | $29.6 | $25.0 | | 2020 Acquisitions | $18.2 | - | | **Total** | **$47.8** | **$25.0** | - Historically, sales are stronger in Q2 and Q3 due to favorable weather and construction cycles; however, 2020 sales were weaker in Q2-Q4 due to COVID-19[127](index=127&type=chunk) [Factors Affecting Operating Costs](index=25&type=section&id=Factors%20Affecting%20Operating%20Costs) Operating costs in 2020 were positively impacted by **$3 million** lower raw material and energy costs, with **$2.8 million** in acquisition expenses - Operating expenses consist of direct production costs (raw materials, labor, energy), manufacturing overhead, freight, sourced product costs, and SG&A[128](index=128&type=chunk) - In **2020**, lower raw material and energy costs positively impacted operating income by **$3 million** compared to 2019[128](index=128&type=chunk) 2020 Acquisition-Related Expenses (millions) | | 2020 | Affected Line Item | |:---|:---|:---| | Deferred revenue | $0.7 | Net sales | | Change in fair value of contingent consideration | $0.1 | SG&A expenses | | Deferred cash and restricted stock expenses | $0.5 | SG&A expenses | | Backlog | $1.4 | SG&A expenses | | Inventory | $0.1 | Cost of goods sold | | **Total** | **$2.8** | | [RESULTS OF OPERATIONS](index=25&type=section&id=RESULTS%20OF%20OPERATIONS) In 2020, net sales decreased **9.7%** to **$936.9 million**, operating income fell **19.7%**, resulting in a **$99.1 million** net loss due to a pension settlement Consolidated Results from Continuing Operations (2020 vs. 2019) | (dollar amounts in millions) | 2020 | 2019 | Change | |:---|:---|:---|:---| | Total consolidated net sales | $936.9 | $1,038.1 | (9.7)% | | Operating income | $254.8 | $317.4 | (19.7)% | - Consolidated net sales decreased by **$101 million**, driven by **$87 million** lower volumes and **$14 million** unfavorable AUV, primarily due to COVID-19 impacts[134](index=134&type=chunk) - Cost of goods sold increased to **64.4%** of net sales in 2020 (from **61.9%** in 2019) due to unfavorable AUV and acquisition impacts, partially offset by productivity gains[135](index=135&type=chunk) - SG&A expenses decreased by **$11 million** to **$163.3 million** (**17.4%** of net sales) in 2020, primarily due to lower legal/professional fees and incentive compensation, partially offset by a charitable endowment and acquisition-related increases[136](index=136&type=chunk) - Equity earnings from the WAVE joint venture decreased to **$64.0 million** in 2020 from **$96.6 million** in 2019, mainly due to lower volumes and unfavorable AUV from COVID-19[138](index=138&type=chunk) - Other non-operating expense, net, was **$357.4 million** in 2020, compared to **$20.4 million** income in 2019, primarily due to a **$374.4 million** pension settlement loss[139](index=139&type=chunk) - AWI reported a net loss of **$99.1 million** in 2020, compared to net earnings of **$214.5 million** in 2019[227](index=227&type=chunk) [REPORTABLE SEGMENT RESULTS](index=27&type=section&id=REPORTABLE%20SEGMENT%20RESULTS) Mineral Fiber net sales decreased **12.2%**, Architectural Specialties net sales marginally decreased, and Unallocated Corporate improved due to an asset sale Mineral Fiber Segment Performance (2020 vs. 2019) | (dollar amounts in millions) | 2020 | 2019 | Change | |:---|:---|:---|:---| | Total segment net sales | $726.0 | $826.6 | (12.2)% | | Operating income | $218.7 | $289.6 | (24.5)% | - Mineral Fiber net sales decreased by **$89 million** due to lower volumes and **$12 million** due to unfavorable AUV, both impacted by COVID-19[142](index=142&type=chunk) Architectural Specialties Segment Performance (2020 vs. 2019) | (dollar amounts in millions) | 2020 | 2019 | Change | |:---|:---|:---|:---| | Total segment net sales | $210.9 | $211.5 | (0.3)% | | Operating income | $22.3 | $35.9 | (37.9)% | - Architectural Specialties net sales were negatively impacted by COVID-19 demand reduction, but increased by **$23 million** due to 2019 and 2020 acquisitions[144](index=144&type=chunk) - Unallocated Corporate operating income was **$14 million** in 2020 (vs. **$8 million** loss in 2019), primarily due to a **$21 million** gain from the sale of an idled mineral fiber plant in China[146](index=146&type=chunk) [FINANCIAL CONDITION AND LIQUIDITY](index=27&type=section&id=FINANCIAL%20CONDITION%20AND%20LIQUIDITY) Operating cash flow increased to **$218.8 million** in 2020, with **$141.1 million** used in investing and **$13.5 million** provided by financing activities - Operating activities provided **$218.8 million** of cash in 2020, up from **$182.7 million** in 2019, due to lower tax payments and positive working capital changes[148](index=148&type=chunk) - Net cash used for investing activities increased to **$141.1 million** in 2020 (from **$89.1 million** in 2019) due to higher acquisition payments and remittances to WAVE, partially offset by asset sales and lower capital expenditures[148](index=148&type=chunk) - Net cash provided by financing activities was **$13.5 million** in 2020, a favorable change from **$384.9 million** used in 2019, primarily due to decreased debt payments and lower share repurchases[148](index=148&type=chunk) - AWI has a **$1,000.0 million** variable rate senior credit facility, comprising a **$500.0 million** revolving credit facility and a **$500.0 million** Term Loan A, maturing in September 2024[150](index=150&type=chunk) - As of December 31, 2020, total borrowings outstanding were **$225.0 million** under the revolving credit facility and **$493.7 million** under Term Loan A. AWI was in compliance with all debt covenants[151](index=151&type=chunk) Interest Rate Swaps (millions) | Trade Date | Notional Amount | Coverage Period | Risk Coverage | |:---|:---|:---|:---| | November 14, 2016 | $200.0 | December 2016 to March 2021 | USD-LIBOR | | November 28, 2018 | $200.0 | November 2018 to November 2023 | USD-LIBOR | | November 28, 2018 | $100.0 | March 2021 to March 2025 | USD-LIBOR | | March 6, 2020 | $50.0 | March 2020 to March 2022 | USD-LIBOR | | March 10, 2020 | $50.0 | March 2021 to March 2024 | USD-LIBOR | | March 11, 2020 | $50.0 | March 2021 to March 2024 | USD-LIBOR | - As of December 31, 2020, AWI had **$136.9 million** in cash and cash equivalents[154](index=154&type=chunk) Future Payments of Long-Term Debt and Interest (millions) | | 2021 | 2022 | 2023 | 2024 | Total | |:---|:---|:---|:---|:---|:---|\ | Long-term debt | $25.0 | $25.0 | $25.0 | $643.7 | $718.7 | | Scheduled interest payments | $20.9 | $20.4 | $19.6 | $11.8 | $72.7 | - In 2021, AWI expects to spend **$75.0-$80.0 million** on capital expenditures and **$40.0 million** on dividends[158](index=158&type=chunk) [CRITICAL ACCOUNTING ESTIMATES](index=29&type=section&id=CRITICAL%20ACCOUNTING%20ESTIMATES) AWI's critical accounting estimates involve U.S. pension costs, income taxes, asset impairments, environmental liabilities, and business combinations - Critical accounting estimates include U.S. pension and postretirement benefit costs, income taxes, impairments of long-lived tangible and intangible assets and goodwill, environmental liabilities, and business combinations and contingent consideration[159](index=159&type=chunk) - For U.S. pension and postretirement plans, key assumptions are the discount rate (**2.68%** for pension, **2.37%** for postretirement in 2020) and expected long-term return on plan assets (**5.25%** for 2020, **3.25%** for 2021)[160](index=160&type=chunk)[161](index=161&type=chunk)[163](index=163&type=chunk) - As of December 31, 2020, AWI had **$79.4 million** in valuation allowances for deferred tax assets, including FTC carryforwards (**$17.7 million**), state NOLs (**$42.4 million**), and capital loss carryforwards (**$19.3 million**)[169](index=169&type=chunk)[170](index=170&type=chunk) - Impairment tests for indefinite-lived intangibles and goodwill use assumptions like revenue growth rates, discount rates, and royalty rates. No impairment charges were recorded in 2020, 2019, or 2018[173](index=173&type=chunk)[174](index=174&type=chunk) - Environmental liabilities of **$1.2 million** were recorded as of December 31, 2020, for probable and estimable remediation costs at two domestically owned locations[176](index=176&type=chunk)[488](index=488&type=chunk) - Business combinations involve significant estimates for fair value allocation, especially for intangible assets and contingent consideration, which are re-measured each reporting period[179](index=179&type=chunk)[180](index=180&type=chunk)[181](index=181&type=chunk) [ACCOUNTING PRONOUNCEMENTS EFFECTIVE IN FUTURE PERIODS](index=32&type=section&id=ACCOUNTING%20PRONOUNCEMENTS%20EFFECTIVE%20IN%20FUTURE%20PERIODS) AWI is evaluating ASU 2019-12, "Simplifying the Accounting for Income Taxes," effective for fiscal years after December 15, 2020 - AWI is evaluating the impact of ASU 2019-12, "Simplifying the Accounting for Income Taxes," effective for fiscal years beginning after December 15, 2020[281](index=281&type=chunk) [ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=33&type=section&id=ITEM%207A.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) AWI manages interest rate risk with swaps, monitoring LIBOR to SOFR transition, with a **0.25%** LIBOR increase impacting 2021 interest by **$0.7 million** - AWI's primary market risk is from changes in interest rates, hedged with forward swap contracts[184](index=184&type=chunk) - AWI is monitoring the transition from LIBOR to SOFR, effective in late 2021[185](index=185&type=chunk) - A hypothetical **0.25%** increase in LIBOR interest rates would increase 2021 interest expense by approximately **$0.7 million**[187](index=187&type=chunk) Interest Rate Swaps as of December 31, 2020 (millions) | Trade Date | Notional Amount | Coverage Period | Risk Coverage | |:---|:---|:---|:---| | November 14, 2016 | $200.0 | December 2016 to March 2021 | USD-LIBOR | | November 28, 2018 | $200.0 | November 2018 to November 2023 | USD-LIBOR | | November 28, 2018 | $100.0 | March 2021 to March 2025 | USD-LIBOR | | March 6, 2020 | $50.0 | March 2020 to March 2022 | USD-LIBOR | | March 10, 2020 | $50.0 | March 2021 to March 2024 | USD-LIBOR | | March 11, 2020 | $50.0 | March 2021 to March 2024 | USD-LIBOR | - As of December 31, 2020, AWI had **$650.0 million** in notional interest rate swaps, with a net liability of **$28.9 million**[188](index=188&type=chunk) Long-Term Debt Obligations as of December 31, 2020 (millions) | Scheduled maturity date | 2021 | 2022 | 2023 | 2024 | 2025 | After 2025 | Total | |:---|:---|:---|:---|:---|:---|:---|:---|\ | Variable rate principal payments | $25.0 | $25.0 | $25.0 | $643.7 | - | - | $718.7 | | Average interest rate | 1.61% | 1.63% | 1.76% | 2.06% | - | - | 2.02% | [ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA](index=35&type=section&id=ITEM%208.%20FINANCIAL%20STATEMENTS%20AND%20SUPPLEMENTARY%20DATA) AWI's audited financial statements for 2018-2020 received an unqualified opinion from KPMG LLP, with pension and contingent consideration as critical audit matters [Quarterly Financial Information for the Quarter Ended December 31, 2020 (Unaudited)](index=36&type=section&id=Quarterly%20Financial%20Information%20for%20the%20Quarter%20Ended%20December%2031%2C%202020%20%28Unaudited%29) Q4 2020 consolidated net sales decreased **3.3%** to **$239 million**, with operating income at **$44.1 million** and EPS at **$0.72** - Consolidated net sales in Q4 2020 decreased **3.3%** to **$239 million**, driven by **$7 million** unfavorable AUV and **$1 million** lower volumes[196](index=196&type=chunk) - Mineral Fiber net sales decreased **7.2%** in Q4 2020, while Architectural Specialties net sales increased **5.9%** due to 2020 acquisitions[196](index=196&type=chunk) - Cost of goods sold was **65.3%** of net sales in Q4 2020, up from **64.1%** in Q4 2019, due to unfavorable AUV and acquisition impacts[197](index=197&type=chunk) - SG&A expenses increased to **$54.5 million** (**22.8%** of net sales) in Q4 2020, primarily due to a **$10 million** charitable endowment and **$5 million** from 2020 acquisitions[198](index=198&type=chunk) - Operating income in Q4 2020 was **$44.1 million**, down from **$62.2 million** in Q4 2019[200](index=200&type=chunk) - Basic and diluted earnings per share were both **$0.72** in Q4 2020[200](index=200&type=chunk) [Management's Report on Internal Control over Financial Reporting](index=37&type=section&id=Management%27s%20Report%20on%20Internal%20Control%20over%20Financial%20Reporting) Management and KPMG LLP concluded AWI's internal control over financial reporting was effective as of December 31, 2020 - Management concluded that AWI's internal control over financial reporting was effective as of December 31, 2020[203](index=203&type=chunk) - KPMG LLP, an independent registered public accounting firm, audited and attested to the effectiveness of AWI's internal control over financial reporting[203](index=203&type=chunk) [Report of Independent Registered Public Accounting Firm](index=38&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) KPMG LLP issued an unqualified opinion on AWI's internal control over financial reporting and consolidated financial statements - KPMG LLP issued an unqualified opinion on the effectiveness of AWI's internal control over financial reporting as of December 31, 2020[207](index=207&type=chunk) - KPMG LLP also issued an unqualified opinion on the consolidated financial statements for the three-year period ended December 31, 2020[208](index=208&type=chunk) [Report of Independent Registered Public Accounting Firm (Financial Statements)](index=39&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm%20%28Financial%20Statements%29) KPMG LLP issued an unqualified opinion on AWI's financial statements, highlighting pension obligations and contingent consideration as critical audit matters - KPMG LLP issued an unqualified opinion on AWI's consolidated financial statements for the three-year period ended December 31, 2020[214](index=214&type=chunk) - A critical audit matter was the evaluation of pension and postretirement benefit obligations, specifically the discount rates, which required subjective auditor judgment and specialized actuarial skills[220](index=220&type=chunk)[221](index=221&type=chunk) - Another critical audit matter was the evaluation of the fair value of contingent consideration liability for the TURF acquisition, which involved complex judgment due to unobservable market inputs for revenue, EBITDA forecasts, volatility, and discount rates[222](index=222&type=chunk)[223](index=223&type=chunk)[224](index=224&type=chunk) [Consolidated Statements of Operations and Comprehensive Income](index=42&type=section&id=Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Income) AWI reported a **$99.1 million** net loss in 2020, a significant decline from 2019, primarily due to a **$357.4 million** pension settlement loss Consolidated Statements of Operations and Comprehensive Income (2018-2020) | (amounts in millions, except per share data) | 2020 | 2019 | 2018 | |:---|:---|:---|:---|\ | Net sales | $936.9 | $1,038.1 | $975.3 | | Cost of goods sold | $603.8 | $643.0 | $641.8 | | Gross profit | $333.1 | $395.1 | $333.5 | | Selling, general and administrative expenses | $163.3 | $174.3 | $159.0 | | Gain related to sale of fixed and intangible assets | $(21.0) | - | - | | Equity earnings from joint venture | $(64.0) | $(96.6) | $(74.9) | | Operating income | $254.8 | $317.4 | $249.4 | | Interest expense | $24.1 | $38.4 | $39.2 | | Other non-operating expense (income), net | $357.4 | $(20.4) | $(32.5) | | (Loss) earnings from continuing operations before income taxes | $(126.7) | $299.4 | $242.7 | | Income tax (benefit) expense | $(42.6) | $57.1 | $53.1 | | (Loss) earnings from continuing operations | $(84.1) | $242.3 | $189.6 | | Net (loss) from discontinued operations | $(15.0) | $(27.8) | $(3.7) | | Net (loss) earnings | $(99.1) | $214.5 | $185.9 | | Total other comprehensive income (loss) | $266.8 | $83.4 | $(59.4) | | Total comprehensive income | $167.7 | $297.9 | $126.5 | | Basic (Loss) earnings per share, continuing operations | $(1.76) | $4.97 | $3.68 | | Diluted (Loss) earnings per share, continuing operations | $(1.76) | $4.88 | $3.63 | | Basic (Loss) per share, discontinued operations | $(0.31) | $(0.57) | $(0.07) | | Diluted (Loss) per share, discontinued operations | $(0.31) | $(0.56) | $(0.07) | | Basic Net (loss) earnings per share | $(2.07) | $4.40 | $3.61 | | Diluted Net (loss) earnings per share | $(2.07) | $4.32 | $3.56 | | Average number of common shares outstanding (Basic) | 47.9 | 48.7 | 51.3 | | Average number of common shares outstanding (Diluted) | 47.9 | 49.5 | 52.1 | [Consolidated Balance Sheets](index=43&type=section&id=Consolidated%20Balance%20Sheets) Total assets increased to **$1,718.5 million** in 2020, with liabilities at **$1,267.6 million** and shareholders' equity at **$450.9 million** Consolidated Balance Sheets (2020 vs. 2019) | (amounts in millions) | December 31, 2020 | December 31, 2019 | |:---|:---|:---|\ | **Assets** | | | | Cash and cash equivalents | $136.9 | $45.3 | | Accounts and notes receivable, net | $78.3 | $85.1 | | Inventories, net | $81.5 | $68.5 | | Income taxes receivable | $2.3 | $30.0 | | Other current assets | $12.8 | $15.5 | | **Total current assets** | **$311.8** | **$244.4** | | Property, plant, and equipment, net | $529.9 | $524.6 | | Operating lease assets | $19.2 | $35.3 | | Finance lease assets | $20.4 | - | | Prepaid pension costs | $119.5 | $94.8 | | Investment in joint venture | $41.2 | $58.5 | | Goodwill | $160.7 | $53.0 | | Intangible assets, net | $457.5 | $411.9 | | Deferred income taxes | - | $10.4 | | Income taxes receivable | $0.6 | $2.5 | | Other non-current assets | $57.7 | $57.9 | | **Total assets** | **$1,718.5** | **$1,493.3** | | **Liabilities and Shareholders' Equity** | | | | Current installments of long-term debt | $25.0 | $6.3 | | Accounts payable and accrued expenses | $136.5 | $143.5 | | Operating lease liabilities | $4.8 | $5.2 | | Finance lease liabilities | $2.0 | - | | Income taxes payable | $4.0 | $0.2 | | **Total current liabilities** | **$172.3** | **$155.2** | | Long-term debt, less current installments | $690.5 | $604.5 | | Operating lease liabilities | $14.6 | $30.1 | | Finance lease liabilities | $18.8 | - | | Postretirement benefit liabilities | $74.9 | $71.0 | | Pension benefit liabilities | $40.4 | $46.6 | | Other long-term liabilities | $76.5 | $37.8 | | Income taxes payable | $21.2 | $19.3 | | Deferred income taxes | $158.4 | $163.9 | | **Total non-current liabilities** | **$1,095.3** | **$973.2** | | **Total liabilities** | **$1,267.6** | **$1,128.4** | | Total shareholders' equity | $450.9 | $364.9 | | **Total liabilities and shareholders' equity** | **$1,718.5** | **$1,493.3** | [Consolidated Statements of Shareholders' Equity](index=44&type=section&id=Consolidated%20Statements%20of%20Shareholders%27%20Equity) Shareholders' equity increased to **$450.9 million** in 2020, influenced by a net loss, dividends, share repurchases, and comprehensive income Consolidated Statements of Shareholders' Equity (2018-2020) | (amounts in millions, except share data) | Common Stock Shares | Common Stock Amount | Additional Paid-In Capital | Retained Earnings | Treasury Stock Shares | Treasury Stock Amount | Accumulated Other Comprehensive (Loss) | Total | |:---|:---|:---|:---|:---|:---|:---|:---|:---|\ | **December 31, 2017** | **52,772,139** | **$0.6** | **$516.8** | **$598.2** | **8,010,597** | **$(385.6)** | **$(345.9)** | **$384.1** | | Cumulative effect impact of ASU 2018-02 adoption | - | - | - | $54.3 | - | - | $(54.3) | - | | Stock issuance, net | 770,988 | - | - | - | - | - | - | - | | Cash dividends - $0.175 per common share | - | - | - | $(8.6) | - | - | - | $(8.6) | | Share-based employee compensation | - | - | $30.6 | - | - | - | - | $30.6 | | Net earnings | - | - | - | $185.9 | - | - | - | $185.9 | | Other comprehensive (loss) | - | - | - | - | - | - | $(59.4) | $(59.4) | | Acquisition of treasury stock | (4,734,888) | - | - | - | 4,734,888 | $(306.6) | - | $(306.6) | | **December 31, 2018** | **48,808,239** | **$0.6** | **$547.4** | **$829.8** | **12,745,485** | **$(692.2)** | **$(459.6)** | **$226.0** | | Cumulative effect impact of ASU 2017-12 adoption | - | - | - | $(0.1) | - | - | $0.1 | - | | Stock issuance, net | 709,671 | - | - | - | - | - | - | - | | Cash dividends - $0.725 per common share | - | - | - | $(36.0) | - | - | - | $(36.0) | | Share-based employee compensation | - | - | $8.3 | - | - | - | - | $8.3 | | Net earnings | - | - | - | $214.5 | - | - | - | $214.5 | | Other comprehensive income | - | - | - | - | - | - | $83.4 | $83.4 | | Acquisition of treasury stock | (1,525,562) | - | - | - | 1,525,562 | $(131.3) | - | $(131.3) | | **December 31, 2019** | **47,992,348** | **$0.6** | **$555.7** | **$1,008.2** | **14,271,047** | **$(823.5)** | **$(376.1)** | **$364.9** | | Stock issuance, net | 335,936 | - | - | - | - | - | - | - | | Cash dividends - $0.810 per common share | - | - | - | $(39.3) | - | - | - | $(39.3) | | Share-based employee compensation | - | - | $2.0 | - | - | - | - | $2.0 | | Net (loss) | - | - | - | $(99.1) | - | - | - | $(99.1) | | Other comprehensive income | - | - | - | - | - | - | $266.8 | $266.8 | | Restricted stock issued to employees in connection with acquisition | 94,230 | - | $(4.0) | - | (94,230) | $4.0 | - | - | | Acquisition of treasury stock | (508,693) | - | - | - | 508,693 | $(44.4) | - | $(44.4) | | **December 31, 2020** | **47,913,821** | **$0.6** | **$553.7** | **$869.8** | **14,685,510** | **$(863.9)** | **$(109.3)** | **$450.9** | [Consolidated Statements of Cash Flows](index=45&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Operating cash flow increased to **$218.8 million** in 2020, with **$141.1 million** used in investing and **$13.5 million** provided by financing activities Consolidated Statements of Cash Flows (2018-2020) | (amounts in millions) | 2020 | 2019 | 2018 | |:---|:---|:---|:---|\ | **Cash flows from operating activities:** | | | | | Net (loss) earnings | $(99.1) | $214.5 | $185.9 | | Depreciation and amortization | $84.0 | $72.1 | $79.4 | | Loss on disposal of discontinued operations | $16.4 | $31.2 | $19.3 | | Write-off of debt refinancing fees | - | $2.7 | - | | Gain related to sale of fixed and intangible assets | $(21.0) | - | - | | Deferred income taxes | $(89.3) | $14.0 | $(3.8) | | Share-based compensation | $6.8 | $9.5 | $14.0 | | Equity earnings from joint venture | $(64.0) | $(96.6) | $(74.9) | | U.S. pension cost (credit) | $367.7 | $(7.5) | $(26.3) | | Other non-cash adjustments, net | $0.9 | $2.5 | $2.9 | | Changes in operating assets and liabilities: | | | | | Receivables | $12.7 | $(1.1) | $13.2 | | Inventories | $(7.7) | $(7.2) | $(8.9) | | Accounts payable and accrued expenses | $(11.8) | $(19.9) | $5.4 | | Income taxes receivable and payable, net | $35.2 | $(8.4) | $7.5 | | Other assets and liabilities | $(12.0) | $(23.1) | $(10.5) | | **Net cash provided by operating activities** | **$218.8** | **$182.7** | **$203.2** | | **Cash flows from investing activities:** | | | | | Purchases of property, plant and equipment | $(55.4) | $(71.3) | $(71.9) | | Return of investment from joint venture | $81.5 | $85.2 | $141.7 | | Cash paid for acquisitions, net of cash acquired | $(164.6) | $(56.4) | $(22.2) | | Proceeds from the sale of assets | $21.7 | - | - | | Cash consideration received from Knauf | - | - | $330.0 | | Payments of proceeds from Knauf to investment in joint venture | $(25.9) | - | $(70.0) | | Payments to Knauf upon disposal of discontinued operations | $(6.4) | $(47.9) | - | | Proceeds from company-owned life insurance, net | $8.0 | $1.3 | $2.0 | | **Net cash (used for) provided by investing activities** | **$(141.1)** | **$(89.1)** | **$309.6** | | **Cash flows from financing activities:** | | | | | Proceeds from short-term debt | $30.0 | - | - | | Payments of short-term debt | $(30.0) | - | - | | Payments for finance leases | $(1.8) | - | - | | Proceeds from revolving credit facility | $290.0 | $185.0 | - | | Payments of revolving credit facility | $(180.0) | $(70.0) | - | | Proceeds from long-term debt | - | $500.0 | - | | Payments of long-term debt | $(6.3) | $(825.4) | $(32.5) | | Financing costs | - | $(2.9) | - | | Dividends paid | $(39.2) | $(35.6) | $(8.6) | | (Payments) proceeds from share-based compensation plans, net of tax | $(4.8) | $(4.7) | $18.4 | | Payments for treasury stock acquired | $(44.4) | $(131.3) | $(306.6) | | **Net cash provided by (used for) financing activities** | **$13.5** | **$(384.9)** | **$(329.3)** | | Effect of exchange rate changes on cash and cash equivalents | $0.4 | $0.9 | $(7.4) | | **Net increase (decrease) in cash and cash equivalents** | **$91.6** | **$(290.4)** | **$176.1** | | Cash and cash equivalents at beginning of year of continuing operations | $45.3 | $325.7 | $159.6 | | **Cash and cash equivalents at end of period** | **$136.9** | **$45.3** | **$335.7** | | Supplemental Cash Flow Disclosures: Interest paid | $24.1 | $33.1 | $29.9 | | Income tax payments, net | $10.9 | $58.4 | $51.6 | | Amounts in accounts payable for capital expenditures | $1.0 | $1.9 | $1.9 | [Notes to Consolidated Financial Statements](index=46&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) Notes detail AWI's business, accounting policies, segment data, acquisitions, and financial instruments, including a **$12.0 million** pension liability loss - Note 1 details 2020 acquisitions (Arktura, Moz, Turf) and the finalization of the EMEA/Pacific Rim business sale, including a **$12.0 million** loss from pension liability adjustments[240](index=240&type=chunk)[243](index=243&type=chunk) - Note 2 outlines significant accounting policies, including revenue recognition (point-in-time), business combinations (acquisition method, fair value estimates for contingent consideration), and the adoption of new accounting standards for credit losses and goodwill impairment in 2020[248](index=248&type=chunk)[255](index=255&type=chunk)[274](index=274&type=chunk)[275](index=275&type=chunk) - Note 3 provides segment information, geographic sales data, and property, plant and equipment details, including a **$21.0 million** gain from the sale of an idled mineral fiber plant in China in 2020[282](index=282&type=chunk)[293](index=293&type=chunk) Net Sales by Geographic Area (millions) | Geographic Areas | 2020 | 2019 | 2018 | |:---|:---|:---|:---|\ | **Mineral Fiber:** | | | | | United States | $674.1 | $769.0 | $739.2 | | Canada | $51.9 | $57.6 | $62.4 | | **Total Mineral Fiber** | **$726.0** | **$826.6** | **$801.6** | | **Architectural Specialties:** | | | | | United States | $192.8 | $192.3 | $157.5 | | Canada | $18.1 | $19.2 | $16.2 | | **Total Architectural Specialties** | **$210.9** | **$211.5** | **$173.7** | | **Total net sales** | **$936.9** | **$1,038.1** | **$975.3** | Net Sales by Major Customer Group (Mineral Fiber, millions) | Mineral Fiber | 2020 | 2019 | 2018 | |:---|:---|:---|:---|\ | Distributors | $525.2 | $622.9 | $601.4 | | Home centers | $96.1 | $85.2 | $84.0 | | Direct customers | $54.3 | $61.2 | $60.3 | | Retailers and other | $50.4 | $57.3 | $55.9 | | **Total** | **$726.0** | **$826.6** | **$801.6** | Net Sales by Major Customer Group (Architectural Specialties, millions) | Architectural Specialties | 2020 | 2019 | 2018 | |:---|:---|:---|:---|\ | Distributors | $135.5 | $138.3 | $129.8 | | Direct customers | $73.3 | $68.0 | $36.7 | | Retailers and other | $2.1 | $5.2 | $7.2 | | **Total** | **$210.9** | **$211.5** | **$173.7** | - Note 5 details the 2020 acquisitions of Arktura (**$90.6 million** cash, **$30.0 million** contingent), Moz (**$4.2 million** cash, **$4.7 million** contingent), and Turf (**$70.0 million** cash, **$48.0 million** contingent), and their impact on goodwill and intangible assets[300](index=300&type=chunk)[301](index=301&type=chunk)[304](index=304&type=chunk)[305](index=305&type=chunk)[306](index=306&type=chunk) - Note 6 provides summarized financial information for discontinued operations, including a **$15.0 million** net loss in 2020, primarily from the EMEA and Pacific Rim businesses[322](index=322&type=chunk) - Note 11 details the investment in the WAVE joint venture, with distributions of **$81.5 million** in 2020. WAVE's net earnings were **$137.8 million** in 2020[337](index=337&type=chunk)[340](index=340&type=chunk) - Note 12 outlines lease costs, with operating lease cost of **$5.6 million** and finance lease cost of **$2.6 million** in 2020. Weighted average remaining lease term for operating leases was **6.5 years** and for finance leases was **10.7 years**[345](index=345&type=chunk)[350](index=350&type=chunk) - Note 13 shows goodwill increased to **$160.7 million** in 2020 (from **$53.0 million** in 2019) due to acquisitions. Total intangible assets were **$666.2 million**. Amortization expense was **$22.1 million** in 2020[353](index=353&type=chunk)[355](index=355&type=chunk) - Note 16 details income tax information, including **$79.4 million** in valuation allowances for deferred tax assets as of December 31, 2020[362](index=362&type=chunk) - Note 17 reports total long-term debt of **$715.5 million** as of December 31, 2020, with **$225.0 million** under the revolving credit facility and **$493.7 million** under Term Loan A[372](index=372&type=chunk) - Note 18 covers pension and other benefit programs, including a **$374.4 million** settlement loss in Q1 2020 related to the transfer of certain RIP obligations. U.S. pension plans were overfunded by **$79.0 million** as of December 31, 2020[382](index=382&type=chunk)[383](index=383&type=chunk)[389](index=389&type=chunk) - Note 19 details financial instruments and contingent consideration, with acquisition-related contingent consideration valued at **$16.9 million** as of December 31, 2020[421](index=421&type=chunk)[423](index=423&type=chunk)[428](index=428&type=chunk) - Note 20 describes derivative financial instruments, primarily interest rate swaps used for hedging, with a net liability of **$28.9 million** as of December 31, 2020[435](index=435&type=chunk)[439](index=439&type=chunk) - Note 22 outlines share-based compensation plans, with **$17.0 million** of unrecognized compensation cost expected to be recognized over a weighted-average period of **3.1 years**[457](index=457&type=chunk) - Note 24 details shareholders' equity, including the common stock repurchase program (**0.5 million shares** for **$44.4 million** in 2020) and dividends paid (**$0.81 per share** in 2020)[461](index=461&type=chunk)[462](index=462&type=chunk)[463](index=463&type=chunk) - Note 27 addresses litigation and environmental matters, including **$1.2 million** in environmental liabilities as of December 31, 2020, and the settlement of the Rockfon litigation in 2019[488](index=488&type=chunk)[490](index=490&type=chunk) PART III [ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE](index=90&type=section&id=ITEM%2010.%20DIRECTORS%2C%20EXECUTIVE%20OFFICERS%20AND%20CORPORATE%20GOVERNANCE) This section details AWI's executive officers and adherence to its Code of Business Conduct and Code of Ethics for Financial Professionals - Key executive officers as of February 23, 2021, include Victor D. Grizzle (President & CEO), Brian L. MacNeal (SVP, CFO), and Stephen F. McNamara (VP, Controller)[502](index=502&type=chunk) - AWI has adopted a Code of Business Conduct and a Code of Ethics for Financial Professionals, applicable to all employees, executives, and directors, to promote ethical conduct and compliance[503](index=503&type=chunk) - No waivers or exemptions from the Code of Business Conduct were applicable to any director or executive officer in 2020[505](index=505&type=chunk) [ITEM 11. EXECUTIVE COMPENSATION](index=91&type=section&id=ITEM%2011.%20EXECUTIVE%20COMPENSATION) Executive compensation information is incorporated by reference from AWI's 2021 annual meeting of shareholders proxy statement - Executive compensation details are incorporated by reference from the 2021 proxy statement[507](index=507&type=chunk) [ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS](index=91&type=section&id=ITEM%2012.%20SECURITY%20OWNERSHIP%20OF%20CERTAIN%20BENEFICIAL%20OWNERS%20AND%20MANAGEMENT%20AND%20RELATED%20STOCKHOLDER%20MATTERS) Security ownership and equity compensation plan information is incorporated by reference from AWI's 2021 proxy statement - Security ownership and equity compensation plan information is incorporated by reference from the 2021 proxy statement[509](index=509&type=chunk) [ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE](index=91&type=section&id=ITEM%2013.%20CERTAIN%20RELATIONSHIPS%20AND%20RELATED%20TRANSACTIONS%2C%20AND%20DIRECTOR%20INDEPENDENCE) Information on related transactions and director independence is incorporated by reference from AWI's 2021 proxy statement - Information on related transactions and director independence is incorporated by reference from the 2021 proxy statement[510](index=510&type=chunk) [ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES](index=91&type=section&id=ITEM%2014.%20PRINCIPAL%20ACCOUNTANT%20FEES%20AND%20SERVICES) Principal accountant fees and services information is incorporated by reference from AWI's 2021 proxy statement - Principal accountant fees and services information is incorporated by reference from the 2021 proxy statement[511](index=511&type=chunk) PART IV [ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES](index=92&type=section&id=ITEM%2015.%20EXHIBITS%20AND%20FINANCIAL%20STATEMENT%20SCHEDULES) This section lists AWI's financial statements, schedules, and various agreements, including CEO and CFO certifications - The section lists AWI's consolidated financial statements and Worthington Armstrong Venture's consolidated financial statements[513](index=513&type=chunk) - Key exhibits include the Separation and Distribution Agreement, Amended and Restated Credit Agreement, and various Long-Term Incentive Plans[514](index=514&type=chunk)[515](index=515&type=chunk)[516](index=516&type=chunk) - Certifications from the Chief Executive Officer and Chief Financial Officer are included as exhibits[516](index=516&type=chunk)[517](index=517&type=chunk)[518](index=518&type=chunk) [ITEM 16. FORM 10-K SUMMARY](index=95&type=section&id=ITEM%2016.%20FORM%2010-K%20SUMMARY) No Form 10-K Summary is provided in this report - No Form 10-K Summary is provided[519](index=519&type=chunk) [SIGNATURES](index=96&type=section&id=SIGNATURES) The report is signed by AWI's CEO, CFO, Principal Accounting Officer, and other directors, certifying compliance - The report is signed by the Director, President and Chief Executive Officer, Principal Financial Officer, Principal Accounting Officer, and other directors[520](index=520&type=chunk)[521](index=521&type=chunk) [SCHEDULE II](index=97&type=section&id=SCHEDULE%20II) Schedule II details AWI's Valuation and Qualifying Reserves for bad debts, discounts, warranties, and inventory obsolescence Valuation and Qualifying Reserves (millions) | | Balance at beginning of year | Additions charged to earnings | Deductions | Balance at end of year | |:---|:---|:---|:---|:---|\ | **2018** | | | | | | Provision for bad debts | $0.3 | $0.1 | $(0.1) | $0.3 | | Provision for discounts | $1.5 | $19.2 | $(19.4) | $1.3 | | Provision for warranties | $0.1 | $4.2 | $(3.9) | $0.4 | | **2019** | | | | | | Provision for bad debts | $0.3 | $0.7 | $(0.3) | $0.7 | | Provision for discounts | $1.3 | $21.0 | $(20.9) | $1.4 | | Provision for warranties | $0.4 | $3.0 | $(3.2) | $0.2 | | Provision for inventory obsolescence | - | $0.6 | $(0.1) | $0.5 | | **2020** | | | | | | Provision for bad debts | $0.7 | $0.9 | $(0.2) | $1.4 | | Provision for discounts | $1.4 | $19.4 | $(19.5) | $1.3 | | Provision for warranties | $0.2 | $5.5 | $(4.8) | $0.9 | | Provision for inventory obsolescence | $0.5 | $0.1 | $(0.6) | - |

Financial Data and Key Metrics Changes - Sales for Q3 2020 were $246 million, down 11% year-over-year, but a significant improvement from a 25% decline in Q2 2020 [16][9] - Adjusted EBITDA was $92 million, down 19% from the previous year, with margins contracting by 370 basis points [12][16] - Adjusted diluted earnings per share were $1.07, a decrease of 22% year-over-year [16] - Cash balance at quarter-end was $139 million, with total liquidity of $454 million, down $33 million from the previous quarter [17] Business Line Data and Key Metrics Changes - Mineral Fiber segment sales were down 14% year-over-year but showed sequential improvement from a 26% decline in Q2 [18] - Architectural Specialties segment sales increased by 1% due to acquisitions, offsetting a 12% organic sales decline [21] - Adjusted EBITDA for the Mineral Fiber segment decreased by 21% due to volume declines, while the Architectural Specialties segment saw margin expansion despite flat sales [20][21] Market Data and Key Metrics Changes - Demand improved sequentially in Q3, with daily Mineral Fiber sales improving from down 15% in July to down 11% in September [8] - The New York metro area, a key territory, continued to lag behind other regions, impacting overall sales performance [9][10] - Construction activity showed signs of recovery in territories previously impacted by COVID-19 restrictions, but delays emerged in less affected areas [10][11] Company Strategy and Development Direction - The company is focused on creating healthier spaces in response to the pandemic, introducing new products like the 24/7 Defend family aimed at improving indoor air quality [26][28] - Two acquisitions were completed in Q3, enhancing the company's capabilities in custom architectural solutions [14][21] - The company plans to continue investing in innovation and digitalization while maintaining a prudent approach to share repurchases [49][51] Management's Comments on Operating Environment and Future Outlook - Management noted ongoing uncertainty in the market as building owners adapt to new safety protocols, impacting renovation projects [11][62] - The company anticipates a full-year revenue decline of 10% to 11%, primarily driven by volume, with expectations for a gradual recovery in 2021 [24][25] - Management expressed confidence in the company's ability to emerge stronger post-pandemic, supported by strong cash flow generation [13][32] Other Important Information - The company approved a 5% increase in its quarterly dividend to $0.21 per share and restarted its share repurchase program [13][18] - Adjusted free cash flow declined by $53 million compared to the previous year, largely due to COVID-19 impacts [16][22] Q&A Session Summary Question: Outlook for AUV in 2020 - Management indicated that AUV is expected to be relatively flat, with potential for slight improvement in Q4 [35] Question: Architectural Specialty segment performance - Management confirmed that the segment's performance was in line with expectations, with strong order intake for future projects [38] Question: Regional performance and pent-up demand - Management noted that while some regions have returned to average performance, the New York metro area continues to lag, with no significant pent-up demand expected [40][42] Question: Project backlog and bidding activity - Management reported record order intake in the Architectural Specialty segment, with larger projects continuing while smaller discretionary projects face delays [45][46] Question: Capital allocation priorities - Management reiterated a focus on investing in the business and pursuing acquisitions, with share repurchases being a lower priority for now [49][51] Question: Impact of potential political changes - Management does not foresee significant impacts from political changes on business dynamics, emphasizing the company's adaptability [58]

UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 Title of each class Trading Symbol(s) Name of each exchange on which registered Common Stock, $0.01 par value per share AWI New York Stock Exchange FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2020 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commis ...

Armstrong World Industries, Inc. (NYSE:AWI) Q2 2020 Earnings Conference Call July 28, 2020 11:00 AM ET Company Participants Tom Waters - Vice President, Corporate Finance Vic Grizzle - Chief Executive Officer Brian MacNeal - Chief Financial Officer Conference Call Participants John Lovallo - Bank of America Merrill Lynch Maggie Grady - Jeffries Susan Maklari - Goldman Sachs Brian Biros - Thompson Research Group Keith Hughes - SunTrust Robinson Humphrey Kenneth Zener - KeyBanc Capital Markets Adam Baumgarten ...

[PART I - FINANCIAL INFORMATION](index=4&type=section&id=PART%20I%20-%20FINANCIAL%20INFORMATION) [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) This section presents Armstrong World Industries, Inc.'s unaudited condensed consolidated financial statements and notes for Q2 and YTD 2020 and 2019 [Condensed Consolidated Statements of Operations and Comprehensive Income](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Income) Net sales and operating income decreased significantly in Q2 and YTD 2020, with a substantial net loss for the six-month period due to a pension settlement Q2 & YTD 2020 Financial Performance (in millions, except per share data) | Metric | Q2 2020 | Q2 2019 | YTD 2020 | YTD 2019 | | :--- | :--- | :--- | :--- | :--- | | **Net Sales** | $203.2 | $272.0 | $451.9 | $514.1 | | **Gross Profit** | $67.8 | $103.4 | $159.1 | $194.8 | | **Operating Income** | $62.4 | $87.2 | $138.4 | $141.9 | | **Earnings (Loss) from Continuing Operations** | $49.5 | $63.7 | $(173.1) | $100.1 | | **Net Earnings (Loss)** | $50.3 | $54.5 | $(175.9) | $93.6 | | **Diluted EPS from Continuing Operations** | $1.03 | $1.28 | $(3.61) | $2.01 | [Condensed Consolidated Balance Sheets](index=5&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Total assets increased to **$1,544.3 million** as of June 30, 2020, driven by cash and receivables, with total liabilities and shareholders' equity also growing Balance Sheet Summary (in millions) | Account | June 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | **Total Current Assets** | $320.0 | $244.4 | | **Total Assets** | $1,544.3 | $1,493.3 | | **Total Current Liabilities** | $156.9 | $155.2 | | **Total Liabilities** | $1,141.4 | $1,128.4 | | **Total Shareholders' Equity** | $402.9 | $364.9 | [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Net cash from operating activities increased to **$78.7 million** for YTD 2020, driven by favorable working capital and lower tax payments, with investing activities providing cash Six Months Ended June 30 Cash Flow Summary (in millions) | Cash Flow Category | 2020 | 2019 | | :--- | :--- | :--- | | **Net cash provided by operating activities** | $78.7 | $47.0 | | **Net cash provided by (used for) investing activities** | $10.3 | $(31.6) | | **Net cash (used for) financing activities** | $(16.7) | $(102.6) | | **Net increase (decrease) in cash** | $71.8 | $(85.4) | | **Cash and cash equivalents at end of period** | $117.1 | $250.3 | [Notes to Condensed Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) The notes provide detailed information on accounting policies, acquisitions, segment results, debt structure, a significant pension settlement, and litigation matters - In February 2020, the company settled **$1,045.3 million** of retiree defined benefit pension obligations, resulting in a settlement loss of **$374.4 million** recorded in the first quarter[99](index=99&type=chunk)[101](index=101&type=chunk) - During Q2 2020, the company sold its idled mineral fiber plant in China, recording a gain of **$14.1 million**[45](index=45&type=chunk) - Subsequent to the quarter end, on July 27, 2020, the company acquired TURF Design Inc. for **$70.0 million** in cash, plus up to **$48.0 million** in contingent consideration[41](index=41&type=chunk) Segment Net Sales (in millions) | Segment | Q2 2020 | Q2 2019 | YTD 2020 | YTD 2019 | | :--- | :--- | :--- | :--- | :--- | | **Mineral Fiber** | $157.9 | $214.1 | $355.6 | $410.8 | | **Architectural Specialties** | $45.3 | $57.9 | $96.3 | $103.3 | | **Total Net Sales** | $203.2 | $272.0 | $451.9 | $514.1 | Segment Operating Income (in millions) | Segment | Q2 2020 | Q2 2019 | YTD 2020 | YTD 2019 | | :--- | :--- | :--- | :--- | :--- | | **Mineral Fiber** | $45.6 | $79.4 | $115.6 | $127.0 | | **Architectural Specialties** | $4.3 | $9.5 | $11.8 | $18.7 | | **Unallocated Corporate** | $12.5 | $(1.7) | $11.0 | $(3.8) | | **Total Operating Income** | $62.4 | $87.2 | $138.4 | $141.9 | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=30&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the significant negative impact of COVID-19 on customer demand and sales in Q2 2020, covering consolidated and segment results, company responses, and liquidity [Overview and COVID-19 Impact](index=30&type=section&id=Overview%20and%20COVID-19%20Impact) The company experienced a significant decrease in customer demand in Q2 2020 due to COVID-19, leading to reduced capital expenditures, deferred tax payments, and a suspended share repurchase program - The company experienced a significant decrease in customer demand in Q2 2020 due to COVID-19, with lower net sales expected for the remainder of 2020 compared to 2019[152](index=152&type=chunk) - In response to COVID-19, the company has reduced capital expenditures, discretionary spending (compensation, travel, marketing), and deferred U.S. federal income tax payments[152](index=152&type=chunk) - To bolster liquidity, the company borrowed an additional **$100.0 million** from its revolving credit facility and **$30.0 million** from its accounts receivable securitization facility in March 2020, and temporarily suspended its share repurchase program[154](index=154&type=chunk) [Results of Continuing Operations](index=33&type=section&id=Results%20of%20Continuing%20Operations) Consolidated net sales for Q2 2020 fell **25.3%** to **$203.2 million**, with operating income decreasing **28.4%**, primarily due to lower volumes and reduced legal fees Consolidated Results Summary (in millions) | Period | Net Sales | % Change | Operating Income | % Change | | :--- | :--- | :--- | :--- | :--- | | **Q2 2020** | $203.2 | (25.3)% | $62.4 | (28.4)% | | **YTD 2020** | $451.9 | (12.1)% | $138.4 | (2.5)% | - The decrease in SG&A for the first six months of 2020 was largely due to a **$20 million** decrease in legal and professional fees, driven by expenses incurred in Q1 2019 under a settlement with Rockfon[179](index=179&type=chunk) - Other non-operating expense for the first six months of 2020 was **$365.0 million**, primarily due to the **$374.4 million** settlement loss associated with the U.S. Retirement Income Plan (RIP)[184](index=184&type=chunk) [Reportable Segment Results](index=34&type=section&id=Reportable%20Segment%20Results) Both Mineral Fiber and Architectural Specialties segments saw significant Q2 2020 declines in net sales and operating income due to lower volumes and demand, while Unallocated Corporate income increased from a plant sale - **Mineral Fiber:** Q2 2020 net sales decreased **26.2%** due to lower volumes (**$55M**) and unfavorable AUV (**$1M**). Operating income fell **42.6%** due to lower volumes, reduced WAVE equity earnings, and unfavorable AUV[188](index=188&type=chunk)[189](index=189&type=chunk) - **Architectural Specialties:** Q2 2020 net sales decreased **21.8%** (**$13M**) due to reduced demand across most product categories as a result of COVID-19. Operating income fell **54.7%** due to lower sales volumes and increased amortization expense from 2019 acquisitions[192](index=192&type=chunk)[193](index=193&type=chunk) - **Unallocated Corporate:** Operating income increased in Q2 and YTD 2020 primarily due to a **$14 million** gain on the sale of the company's idled mineral fiber plant in China[194](index=194&type=chunk) [Financial Condition and Liquidity](index=35&type=section&id=Financial%20Condition%20and%20Liquidity) As of June 30, 2020, the company held **$117.1 million** in cash and **$370.0 million** available credit, with operating cash flow increasing to **$78.7 million** for YTD 2020, and was compliant with all debt covenants - As of June 30, 2020, the company had **$117.1 million** of cash and cash equivalents and **$370.0 million** available under its revolving credit facility[207](index=207&type=chunk) - The company is subject to two main financial covenants: an interest coverage ratio (>= 3.0 to 1.0) and a leverage ratio (<= 3.75 to 1.0). As of June 30, 2020, the company was in compliance with all covenants[200](index=200&type=chunk) - In March 2020, the company amended its Accounts Receivable Securitization Facility, decreasing it to **$30.0 million** and extending the maturity. As of June 30, 2020, the facility was fully drawn[204](index=204&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=38&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section refers to the company's 2019 Annual Report on Form 10-K for detailed information on its exposure to market risks, including interest rate, foreign currency, and commodity price risks - The company directs investors to its 2019 Annual Report on Form 10-K for a full discussion of its exposure to market risks[210](index=210&type=chunk) [Controls and Procedures](index=38&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2020, with no material changes to internal control over financial reporting during the quarter - The principal executive officer and chief financial officer concluded that the company's disclosure controls and procedures were effective as of June 30, 2020[211](index=211&type=chunk) - No material changes were made to the company's internal control over financial reporting during the fiscal quarter ended June 30, 2020[211](index=211&type=chunk) [PART II - OTHER INFORMATION](index=39&type=section&id=PART%20II%20-%20OTHER%20INFORMATION) [Legal Proceedings](index=39&type=section&id=Item%201.%20Legal%20Proceedings) This section incorporates by reference Note 21, detailing the company's involvement in environmental matters at three domestic sites and other ordinary course litigation - The company refers to Note 21 for details on legal proceedings, which primarily concern environmental investigation and remediation at several sites[213](index=213&type=chunk) [Risk Factors](index=39&type=section&id=Item%201A.%20Risk%20Factors) The company highlights public health pandemics, specifically COVID-19, as a material risk due to uncertainty regarding its duration, government actions, and impact on construction and customer demand - The company identifies public health epidemics like COVID-19 as a significant risk factor, citing uncertainty regarding its duration, government responses, and impact on construction activity and customer demand[214](index=214&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=39&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company repurchased **0.4 million** shares for **$34.4 million** during YTD 2020, temporarily suspending the program in March, but later approving an additional **$500 million** authorization, totaling **$1.2 billion** - The share repurchase program was temporarily suspended in March 2020[216](index=216&type=chunk) - On July 28, 2020, the Board of Directors approved an additional **$500.0 million** for the share repurchase program, increasing the total authorization to **$1.2 billion** and extending it through December 31, 2023[216](index=216&type=chunk) Share Repurchase Summary | Period | YTD Repurchases (shares) | YTD Cost (millions) | Since Inception Repurchases (shares) | Since Inception Cost (millions) | | :--- | :--- | :--- | :--- | :--- | | **Six Months Ended June 30, 2020** | 0.4 million | $34.4 | 9.6 million | $596.2 | [Exhibits](index=41&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed as part of the Quarterly Report on Form 10-Q, including CEO and CFO certifications and XBRL data files