Quarterly Report (10-q)

Date : 11/05/2019 @ 1:02PM
Source : Edgar (US Regulatory)
Stock : Armstrong Flooring Inc (AFI)
Quote : 3.84  0.0 (0.00%) @ 11:59AM

Quarterly Report (10-q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
 
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-37589
ARMSTRONG FLOORING, INC.
(Exact name of Registrant as specified in its charter) 
Delaware
 
47-4303305
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. employer Identification number)
 
 
 
 
 
 
 
       2500 Columbia Avenue,
Lancaster,
PA
 
 
17604
(Address of principal executive offices)
 
(Zipcode)
 
(717)
672-9611
 
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.0001 par value
AFI
New York Stock Exchange

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   þ No   ¨
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that registrant was required to submit such files.)  Yes   þ No  
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
    








If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

The Registrant had 21,500,208 shares of common stock, $0.0001 par value, outstanding at October 31, 2019.
 
Armstrong Flooring, Inc.

Table of Contents
 
 
Page Number
 
1
 
 
 
PART I
 
Item 1.
 
 
2
 
3
 
4
 
5
 
7
 
9
Item 2.
23
Item 3.
30
Item 4.
30
 
 
 
PART II
 
Item 1.
31
Item 1A.
31
Item 2.
31
Item 3.
31
Item 4.
31
Item 5
31
Item 6.
32
 
 
 
33




CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

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

global economic conditions;
competition;
availability and costs of raw materials and energy;
key customers;
construction activity;
costs savings and productivity initiatives;
strategic transactions;
information systems and transition services;
personnel;
intellectual property rights;
international operations;
labor;
claims and litigation;
liquidity;
debt;
debt covenants;
outsourcing;
environmental and regulatory matters; and
other risks detailed from time to time in our filings with the Securities and Exchange Commission ("SEC"), press releases and other communications, including those set forth under “Risk Factors” included in our Annual Report on Form 10-K and in the documents incorporated by reference.

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



1


PART I: FINANCIAL INFORMATION
Item 1. Financial Statements

Armstrong Flooring, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
(Dollars in millions, except per share data)

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Net sales
$
165.6

 
$
208.9

 
$
485.0

 
$
574.4

Cost of goods sold
153.8

 
163.7

 
414.9

 
456.2

Gross profit
11.8

 
45.2

 
70.1

 
118.2

Selling, general and administrative expenses
40.0

 
40.8

 
110.2

 
119.0

Operating (loss) earnings
(28.2
)
 
4.4

 
(40.1
)
 
(0.8
)
Interest expense
0.8

 
0.9

 
2.7

 
2.9

Other expense, net
0.7

 
0.9

 
1.2

 
2.2

(Loss) earnings from continuing operations before income taxes
(29.7
)
 
2.6

 
(44.0
)
 
(5.9
)
Income tax (benefit)

 
(0.7
)
 
(3.0
)
 
(1.7
)
Net (loss) earnings from continuing operations
$
(29.7
)
 
$
3.3

 
$
(41.0
)
 
$
(4.2
)
Earnings from discontinued operations, net of tax

 
4.6

 

 
12.2

(Loss) gain on disposal of discontinued operations, net of tax
(1.7
)
 

 
7.6

 

Net (loss) earnings from discontinued operations
(1.7
)
 
4.6

 
7.6

 
12.2

Net (loss) earnings
$
(31.4
)
 
$
7.9

 
$
(33.4
)
 
$
8.0

 
 
 
 
 
 
 
 
Basic (loss) earnings per share of common stock:
 
 
 
 
 
 
 
Basic (loss) earnings per share of common stock from continuing operations
$
(1.36
)
 
$
0.13

 
$
(1.65
)
 
$
(0.16
)
Basic (loss) earnings per share of common stock from discontinued operations
(0.08
)
 
0.18

 
0.31

 
0.47

  Basic (loss) earnings per share of common stock
$
(1.44
)
 
$
0.31

 
$
(1.34
)
 
$
0.31

 
 
 
 
 
 
 
 
Diluted (loss) earnings per share of common stock:
 
 
 
 
 
 
 
Diluted (loss) earnings per share of common stock from continuing operations
$
(1.36
)
 
$
0.13

 
$
(1.65
)
 
$
(0.16
)
Diluted (loss) earnings per share of common stock from discontinued operations
(0.08
)
 
0.17

 
0.31

 
0.47

  Diluted (loss) earnings per share of common stock
$
(1.44
)
 
$
0.30

 
$
(1.34
)
 
$
0.31

 
 
 
 
 
 
 
 

See accompanying notes to Condensed Consolidated Financial Statements.


2


Armstrong Flooring, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(Dollars in millions)

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Net (loss) earnings
$
(31.4
)
 
$
7.9

 
$
(33.4
)
 
$
8.0

Changes in other comprehensive income, net of tax:
 
 
 
 
 
 
 
 Foreign currency translation adjustments
(3.7
)
 
(4.7
)
 
(4.3
)
 
(6.2
)
 Derivative gain (loss)
0.1

 
(0.6
)
 
(0.7
)
 
1.1

 Pension and postretirement adjustments
1.9

 
0.7

 
3.7

 
5.3

 Total other comprehensive (loss) income
(1.7
)
 
(4.6
)
 
(1.3
)
 
0.2

 Total comprehensive (loss) income
$
(33.1
)
 
$
3.3

 
$
(34.7
)
 
$
8.2


See accompanying notes to Condensed Consolidated Financial Statements.


3


Armstrong Flooring, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Dollars in millions, except par value)
 
September 30, 2019
 
December 31, 2018
 
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
66.6

 
$
173.8

Accounts and notes receivable, net
43.2

 
39.0

Inventories, net
111.5

 
139.5

Income tax receivable
0.9

 
0.6

Prepaid expenses and other current assets
9.9

 
18.0

Total current assets
232.1

 
370.9

Property, plant, and equipment, less accumulated depreciation and amortization of $338.2 and $318.8, respectively
281.2

 
296.1

Operating lease assets
6.9

 

Intangible assets, less accumulated amortization of $17.3 and $12.0, respectively
27.1

 
32.0

Deferred income taxes
5.5

 
5.6

Other noncurrent assets
2.5

 
3.6

Total assets
$
555.3

 
$
708.2

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
 Short-term debt
$

 
$
25.0

Current installments of long-term debt
4.0

 
3.7

Accounts payable and accrued expenses
104.7

 
141.4

Income tax payable

 
0.5

Total current liabilities
108.7

 
170.6

Long-term debt
68.1

 
70.6

Noncurrent operating lease liabilities
3.3

 

Postretirement benefit liabilities
51.9

 
55.7

Pension benefit liabilities
8.1

 
11.3

Other long-term liabilities
6.5

 
6.7

Noncurrent income taxes payable
0.2

 
0.2

Deferred income taxes
2.0

 
2.1

Total liabilities
248.8

 
317.2

Stockholders’ equity:
 
 
 
Common stock with par value $.0001 per share: 100,000,000 shares authorized; 28,357,078 issued and 21,499,790 outstanding shares as of September 30, 2019 and 28,284,358 issued and 25,832,193 outstanding shares as of December 31, 2018

 

Preferred stock with par value $.0001 per share: 15,000,000 shares authorized; none issued

 

Treasury stock, at cost, 6,857,288 shares as of September 30, 2019 and 2,452,165 shares as of December 31, 2018
(89.2
)
 
(39.7
)
Additional paid-in capital
678.3

 
678.6

Accumulated deficit
(219.7
)
 
(186.3
)
Accumulated other comprehensive (loss)
(62.9
)
 
(61.6
)
Total stockholders’ equity
306.5

 
391.0

Total liabilities and stockholders’ equity
$
555.3

 
$
708.2


See accompanying notes to Condensed Consolidated Financial Statements.

4


Armstrong Flooring, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
(Dollars in millions)
 
Common Stock
 
Treasury Stock
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive (Loss)
 
(Accumulated Deficit)
 
Total Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
December 31, 2018
25,832,193
 
$

 
2,452,165
 
$
(39.7
)
 
$
678.6

 
$
(61.6
)
 
$
(186.3
)
 
$
391.0

Net (loss)

 

 

 

 

 

 
(16.7
)
 
(16.7
)
Stock-based employee compensation, net
53,908

 

 
(50,251
)
 
0.9

 
(0.5
)
 

 

 
0.4

Other comprehensive income

 

 

 

 

 
2.9

 

 
2.9

March 31, 2019
25,886,101

 
$

 
2,401,914

 
$
(38.8
)
 
$
678.1

 
$
(58.7
)
 
$
(203.0
)
 
$
377.6

Net income

 

 

 

 

 

 
14.7

 
14.7

Repurchase of common stock
(4,504,504
)
 

 
4,504,504

 
(51.3
)
 

 

 

 
(51.3
)
Stock-based employee compensation, net
93,305

 

 
(49,130
)
 
0.9

 
0.1

 

 

 
1.0

Other comprehensive (loss)

 

 

 

 

 
(2.5
)
 

 
(2.5
)
June 30, 2019
21,474,902

 
$

 
6,857,288

 
$
(89.2
)
 
$
678.2

 
$
(61.2
)
 
$
(188.3
)
 
$
339.5

Net (loss)

 

 

 

 

 

 
(31.4
)
 
(31.4
)
Stock-based employee compensation, net
24,888

 

 

 

 
0.1

 

 

 
0.1

Other comprehensive (loss)

 

 

 

 

 
(1.7
)
 

 
(1.7
)
September 30, 2019
21,499,790

 
$

 
6,857,288

 
$
(89.2
)
 
$
678.3

 
$
(62.9
)
 
$
(219.7
)
 
$
306.5


5


 
Common Stock
 
Treasury Stock
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive (Loss)
 
(Accumulated Deficit)
 
Total Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
December 31, 2017
25,734,222

 
$

 
2,448,996

 
$
(39.9
)
 
$
674.2

 
$
(52.5
)
 
$
(31.8
)
 
$
550.0

Cumulative effect of adoption of ASC 606 new revenue recognition standard as of January 1

 

 

 

 

 

 
(4.1
)
 
(4.1
)
Cumulative effect of adoption of ASU 2018-02 related to tax reform as of January 1

 

 

 

 

 
(12.6
)
 
12.6

 

Net (loss)

 

 

 

 

 

 
(10.4
)
 
(10.4
)
Repurchase of common stock
(69,353
)
 

 
69,353

 
(1.0
)
 

 

 

 
(1.0
)
Stock-based employee compensation, net
77,258

 

 
(52,486
)
 
1.0

 
(0.1
)
 

 

 
0.9

Other comprehensive income

 

 

 

 

 
7.6

 

 
7.6

March 31, 2018
25,742,127

 
$

 
2,465,863

 
$
(39.9
)
 
$
674.1

 
$
(57.5
)
 
$
(33.7
)
 
$
543.0

Net income

 

 

 

 

 

 
10.5

 
10.5

Stock-based employee compensation, net
29,313

 

 
(13,698
)
 
0.2

 
0.9

 

 

 
1.1

Other comprehensive (loss)

 

 

 

 

 
(2.8
)
 

 
(2.8
)
June 30, 2018
25,771,440

 
$

 
2,452,165

 
$
(39.7
)
 
$
675.0

 
$
(60.3
)
 
$
(23.2
)
 
$
551.8

Net income

 

 

 

 

 

 
7.9

 
7.9

Stock-based employee compensation, net
55,582

 

 

 

 
1.7

 

 

 
1.7

Other comprehensive (loss)

 

 

 

 

 
(4.6
)
 

 
(4.6
)
September 30, 2018
25,827,022

 
$

 
2,452,165

 
$
(39.7
)
 
$
676.7

 
$
(64.9
)
 
$
(15.3
)
 
$
556.8

See accompanying notes to Condensed Consolidated Financial Statements.

6


Armstrong Flooring, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Dollars in millions)
 
Nine Months Ended September 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net (loss) income
$
(33.4
)
 
$
8.0

Adjustments to reconcile net (loss) income to net cash (used for) provided by operating activities:
 
 
 
Depreciation and amortization
35.2

 
42.3

Inventory write down
13.6

 

Deferred income taxes
(3.5
)
 
1.5

Stock-based compensation
2.4

 
3.6

(Gain) loss on sale/disposal of discontinued operations
(7.6
)
 

U.S. pension expense
4.2

 
5.1

Other non-cash adjustments, net
(0.2
)
 
0.6

Changes in operating assets and liabilities:
 
 
 
Receivables
(4.5
)
 
(41.3
)
Inventories
13.7

 
(31.7
)
Accounts payable and accrued expenses
(22.0
)
 
24.5

Income taxes payable and receivable
(0.2
)
 
3.4

Other assets and liabilities
0.5

 
1.8

Net cash (used for) provided by operating activities
(1.8
)
 
17.8

Cash flows from investing activities:
 
 
 
Purchases of property, plant and equipment
(22.9
)
 
(24.3
)
Net payment related to the sale of discontinued operations
(1.9
)
 

Other investing activities

 
0.1

Net cash used for investing activities
(24.8
)
 
(24.2
)
Cash flows from financing activities:
 
 
 
Proceeds from revolving credit facility

 
57.0

Payments on revolving credit facility
(25.0
)
 
(48.0
)
Financing costs
(0.1
)
 

Payments on long-term debt
(3.0
)
 

Payments on capital lease

 
(0.2
)
Purchases of treasury stock
(51.3
)
 
(1.0
)
Proceeds from exercised stock options
0.1

 
0.7

Value of shares withheld related to employee tax withholding
(0.8
)
 
(0.6
)
Net cash (used for) provided by financing activities
(80.1
)
 
7.9

Effect of exchange rate changes on cash and cash equivalents
(0.5
)
 
(1.1
)
Net (decrease) increase in cash and cash equivalents
(107.2
)
 
0.4

Cash and cash equivalents at beginning of year
173.8

 
39.0

Cash and cash equivalents at end of period
$
66.6

 
$
39.4

Cash and cash equivalents at end of period from discontinued operations

 
(3.2
)
Cash and cash equivalents at end of period from continuing operations
$
66.6

 
$
42.6

 
 
 
 
 
 
 
 
 
 
 
 

7


 
 
 
 
 
 
 
 
Supplemental Cash Flow Disclosure:
 
 
 
Amounts in accounts payable for capital expenditures
$
2.2

 
$
5.2

Interest paid
2.5

 
2.3

Income taxes paid (refunded), net
1.2

 
(1.6
)
See accompanying notes to Condensed Consolidated Financial Statements.

8


Armstrong Flooring, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in millions, except per share data)


NOTE 1. BUSINESS AND BASIS OF PRESENTATION
Background
Armstrong Flooring, Inc. (“AFI”) is a leading global producer of resilient flooring products for use primarily in the construction and renovation of residential, commercial and institutional buildings. AFI designs, manufactures, sources and sells resilient flooring products in North America and the Pacific Rim. When we refer to "AFI," "the Company," "we," "our," and "us" in this report, we are referring to Armstrong Flooring, Inc., a Delaware corporation, and its consolidated subsidiaries.
Discontinued Operations
On November 14, 2018, AFI entered into a Stock Purchase Agreement with Tarzan Holdco, Inc. ("TZI"), a Delaware corporation and an affiliate of American Industrial Partners ("AIP"), to sell its North American wood flooring business. On December 31, 2018, AIP completed the purchase of all of the issued and outstanding shares of Armstrong Wood Products, Inc. ("AWP"), a Delaware corporation, including its direct and indirect wholly owned subsidiaries.
Basis of Presentation
The historical results of operations and financial position of the North American wood flooring business are reported as discontinued operations in the Condensed Consolidated Statements of Operations. The historical information in the accompanying Notes to the Condensed Consolidated Financial Statements have been restated to reflect the effects of the sale of the North American wood flooring business. For further information on discontinued operations, see Note 5.
These Condensed Consolidated Financial Statements are prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP"). The statements include management estimates and judgments, where appropriate. Management uses estimates to record many items including certain asset values, allowances for bad debts, inventory obsolescence, lower of cost or market or net realizable value charges, warranty reserves, workers compensation, general liability and environmental claims and income taxes. When preparing an estimate, management determines the amount based upon the consideration of relevant information. Management may confer with outside parties, including outside counsel. Actual results may differ from these estimates. In the opinion of management, all adjustments of a normal, recurring nature have been included to provide a fair statement of the results for the reporting periods presented. Operating results for the three and nine months ended September 30, 2019 and 2018 included in this report are unaudited. Quarterly results are not necessarily indicative of annual earnings, primarily due to the different level of sales in each quarter of the year and the possibility of changes in economic conditions between periods.
Certain amounts in the prior year’s Condensed Consolidated Financial Statements and related notes thereto have been recast to conform to the 2019 presentation. Otherwise, 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, 2018, except as noted below. These statements should therefore be read in conjunction with the Consolidated Financial Statements and notes that are included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
All significant intercompany transactions within AFI have been eliminated from the Condensed Consolidated Financial Statements.
Recently Adopted Accounting Standards
On January 1, 2019, we adopted ASU 2016-02, "Leases." The guidance, and subsequent amendments issued, requires a lessee to recognize the assets and liabilities that arise from a lease agreement. Specifically, this new guidance requires

9


Armstrong Flooring, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in millions, except per share data)

lessees to recognize a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term, with limited exceptions.

Adoption of the new standard resulted in the recording of lease assets and lease liabilities of $9.2 million as of January 1, 2019.

 
 
December 31, 2018
 
Impact from Adoption
 
January 1, 2019
Assets
 
 
 
 
 
 
Operating lease assets
 
$

 
$
8.6

 
$
8.6

Finance lease assets
 

 
0.6

 
0.6

Total lease assets
 
$

 
$
9.2

 
$
9.2

 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
Current
 
 
 
 
 
 
      Operating
 
$

 
$
3.5

 
$
3.5

Noncurrent
 
 
 
 
 
 
      Operating
 

 
5.1

 
5.1

      Finance
 

 
0.6

 
0.6

Total lease liabilities
 
$

 
$
9.2

 
$
9.2



See Note 10 to the Condensed Consolidated Financial Statements.
Recently Issued Accounting Standards
In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments." The guidance requires immediate recognition of estimated credit losses that are expected to occur over the remaining life of many financial assets. This new guidance is effective for annual and interim periods in fiscal years beginning after December 15, 2019, but early adoption is permitted for annual and interim periods in fiscal years beginning after December 15, 2018. We are currently evaluating the impact the adoption of this standard would have on our financial condition, results of operations and cash flows. We believe that the most notable impact of this ASU will relate to our processes around the assessment of the adequacy of our allowance for doubtful accounts on trade account receivables.

In August 2018, the FASB issued ASU 2018-15, "Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract." The guidance aligns the requirements for capitalizing implementation costs in a cloud computing arrangement service contract with the requirements for capitalizing implementation costs incurred for an internal use software license. Capitalized implementation costs should be amortized over the term of the service agreement on a straight line basis and should be assessed for impairment in a manner similar to long-lived assets. This new guidance is effective for fiscal years beginning after December 15, 2019 for public companies. Early adoption is permitted. We do not believe there will be a material impact from the adoption of this standard on our financial condition, results of operations and cash flows.


10


Armstrong Flooring, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in millions, except per share data)

NOTE 2. REVENUE
We disaggregate revenue based on customer geography as geography represents the most appropriate depiction of how the nature, timing and uncertainty of revenues and cash flows are impacted by economic factors.
 The following table presents our revenues disaggregated by geographic area based upon the location of the customer.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Net sales
 
 
 
 
 
 
 
United States
$
125.1

 
$
163.8

 
$
371.0

 
$
450.3

China
20.6

 
21.5

 
51.1

 
49.9

Canada
8.7

 
12.7

 
29.3

 
39.8

Other
11.2

 
10.9

 
33.6

 
34.4

Total net sales
$
165.6

 
$
208.9

 
$
485.0

 
$
574.4


NOTE 3. SEVERANCE EXPENSE
In the second quarter of 2019, we recorded $2.9 million in selling, general and administrative ("SG&A") expenses for severance and related expenses to reflect the separation costs for our former President and Chief Executive Officer.

In the first quarter of 2018, we announced that we were changing our residential go-to-market strategy and empowering our distributors with the responsibilities of marketing, merchandising and direct sales representation. The new structure was designed to provide enhanced support and responsiveness to retailers. As a result of the reorganization, approximately 70 positions were eliminated, and the impacted employees received severance benefits. We recognized charges of $3.1 million primarily in SG&A expenses.

NOTE 4. INCOME TAXES
The following table presents details related to our income taxes:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
(Loss) earnings from continuing operations before income taxes
$
(29.7
)
 
$
2.6

 
$
(44.0
)
 
$
(5.9
)
Income tax (benefit)

 
(0.7
)
 
(3.0
)
 
(1.7
)
Effective tax rate
%
 
(26.9
)%
 
6.8
%
 
28.8
%

Pursuant to ASC 740, we are required to consider all items (including items recorded in discontinued operations and other comprehensive income) in determining the amount of tax benefit that results from a loss from continuing operations. As such, we recorded year to date income tax benefits of $3.8 million as a result of the income included in discontinued operations and other comprehensive income. The remaining tax expense relates to the mix of income among tax jurisdictions.
Upon audit, taxing authorities may challenge all or part of an uncertain income tax position. While AFI has no history of tax audits on a stand-alone basis, Armstrong World Industries ("AWI") was routinely audited by U.S. federal, state and local, and non-U.S. taxing authorities. Accordingly, AFI regularly assesses the outcome of potential examinations

11


Armstrong Flooring, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in millions, except per share data)

in each of the taxing jurisdictions when determining the adequacy of the amount of unrecognized tax benefit recorded. We do not expect to record any material changes during 2019 to our unrecognized tax benefits as of December 31, 2018.
As of September 30, 2019, we consider foreign unremitted earnings to be permanently reinvested.
NOTE 5. DISCONTINUED OPERATIONS
In December 2018, we completed the sale of our wood business to TZI. The proceeds from the sale were $90.2 million, net of closing costs, transaction fees and taxes. The transaction was subject to a customary post-closing working capital adjustment process which resulted in us making a $1.9 million payment to TZI in the third quarter of 2019.
The financial results of the wood business have been reclassified as discontinued operations for all periods presented. The Condensed Consolidated Statements of Cash Flows do not separately report the cash flows of the discontinued operation.
The following is a summary of the operating results of the wood business, which are included in discontinued operations.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2018
Net sales
$
100.8

 
$
299.2

Cost of goods sold
85.3

 
254.6

Gross profit
15.5

 
44.6

Selling, general and administrative expenses
8.7

 
27.5

Operating earnings
6.8

 
17.1

Interest expense

 

Other expense, net

 

Earnings before income tax
6.8

 
17.1

Income tax expense
2.2

 
4.9

Net earnings from discontinued operations
$
4.6

 
$
12.2

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2018
Depreciation and Amortization
$
2.9

 
$
8.8

Capital Expenditures
(1.7
)
 
(5.4
)

The following is a summary of the results related to the net (loss) gain on disposal of the wood business which is included in discontinued operations:

12


Armstrong Flooring, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in millions, except per share data)

 
Three Months Ended
September 30, 2019
 
Nine Months Ended
September 30, 2019
 
2019
 
2019
(Loss) gain on disposal of discontinued operations before income tax
$
(2.3
)
 
10.3

Income tax (benefit) expense
(0.6
)
 
2.7

Net (loss) gain on disposal of discontinued operations
$
(1.7
)
 
$
7.6

During the second quarter of 2019, we reached a resolution in our antidumping case resulting in a reversal of a previously recognized liability of $11.4 million, which was reflected in gain on disposal of discontinued operations. See Note 15 for further information.
NOTE 6. EARNINGS (LOSS) PER SHARE OF COMMON STOCK
Earnings per share components may not add due to rounding.
The table below shows a reconciliation of the numerator and denominator for basic and diluted earnings (loss) per share calculations for the periods indicated.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Numerator
 
 
 
 
 
 
 
Net (loss) earnings from continuing operations
$
(29.7
)
 
$
3.3

 
$
(41.0
)
 
$
(4.2
)
  Net (loss) earnings from discontinued operations
(1.7
)
 
4.6

 
7.6

 
12.2

Net (loss) earnings
$
(31.4
)
 
$
7.9

 
$
(33.4
)
 
$
8.0

 
 
 
 
 
 
 
 
Denominator
 
 
 
 
 
 
 
Weighted average number of common shares outstanding
21,496,319

 
25,793,019

 
24,300,804

 
25,763,550

Weighted average number of vested shares not yet issued
401,402

 
202,761

 
552,198

 
182,091

Weighted average number of common shares outstanding - Basic
21,897,721

 
25,995,780

 
24,853,002

 
25,945,641

Dilutive impact of stock-based compensation plans

 
187,067

 

 
128,635

Weighted average number of common shares outstanding - Diluted
21,897,721

 
26,182,847

 
24,853,002

 
26,074,276



For the three and nine months ended September 30, 2018, the diluted earnings per share was calculated using net income available to common stockholders divided by the diluted weighted average number of common shares outstanding during the period, determined using the treasury stock method. For the three and nine months ended September 30, 2019 the diluted loss per share was calculated using basic common shares outstanding, as inclusion of potentially dilutive common shares would be anti-dilutive.

Performance-based employee compensation awards are considered potentially dilutive in the initial period in which the performance conditions are met.


13


Armstrong Flooring, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in millions, except per share data)

The following awards were excluded from the computation of diluted earnings (loss) per share:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Potentially dilutive common shares excluded from diluted computation, as inclusion would be anti-dilutive
753,898

 
111,556

 
535,111

 
514,910
Performance awards excluded from diluted computation, as performance conditions not met
330,392

 
1,003,486

 
394,632

 
1,021,883

NOTE 7. ACCOUNTS AND NOTES RECEIVABLE
The following table presents accounts and note receivables, net of allowances:
 
September 30, 2019
 
December 31, 2018
Customer receivables
$
56.8

 
$
45.4

Miscellaneous receivables
4.3

 
6.2

Less: allowance for product claims, discounts, returns and losses
(17.9
)
 
(12.6
)
Total
$
43.2

 
$
39.0


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.
Allowance for product claims represents expected reimbursements for cost associated with warranty repairs and customer accommodation claims, the majority of which is provided to our independent distributors through a credit against accounts receivable from the distributor to AFI.

The following table summarizes the activity for the allowance for product claims:
 
Nine Months Ended September 30,
 
2019
 
2018
Balance as of January 1
$
(6.4
)
 
$
(5.6
)
Cumulative effect of adoption of new revenue recognition standard as of January 1

 
(1.7
)
Reductions for payments
5.2

 
5.6

Current year claim accruals
(7.5
)
 
(4.6
)
Balance as of September 30
$
(8.7
)
 
$
(6.3
)


14


Armstrong Flooring, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in millions, except per share data)


NOTE 8. INVENTORIES
The following table presents details related to our inventories, net:
 
September 30, 2019

December 31, 2018
Finished goods
$
84.8

 
$
110.5

Goods in process
5.1

 
5.7

Raw materials and supplies
21.6

 
23.3

Total
$
111.5

 
$
139.5


On September 11, 2019, Michel S. Vermette was appointed Chief Executive Officer of the Company and initiated the implementation of a new multi-year inventory optimization plan, which includes focusing on critical products and standardizing procedures to enable better decision making. As a result, we recorded a non-cash inventory write down of $13.6 million during the third quarter of 2019, primarily related to the write down of inventory in certain product categories to estimated liquidation value.

NOTE 9. PREPAID AND OTHER CURRENT ASSETS

The following table presents details related to our prepaid expenses and other current assets:

 
 
September 30, 2019
 
December 31, 2018
Prepaid expenses
 
$
5.7

 
$
6.8

Merchandising materials
 
2.7

 
9.4

Other
 
1.5

 
1.8

Total
 
$
9.9

 
$
18.0

 
 
 
 
 


Merchandising materials of $6.0 million were written off as obsolete in the third quarter of 2019 in connection with a decreased demand for residential displays following our go to market change in 2018.

NOTE 10. LEASES
We lease certain real estate (warehouse and office space), vehicles and equipment. For leases with an initial term of less than 13 months we recognize lease expense for these leases on a straight-line basis over the lease term. Leases with an initial term of thirteen months or more are recorded on the balance sheet. We consider all payments fixed unless there is a material impact to the balance sheet at any given time during the lease period.
Our leases have remaining lease terms of one month to ten years. Many leases include one or more options to renew, with renewal terms that can extend the lease term from one month to ten years or more. The exercise of lease renewal options is at our sole discretion. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The FASB allows companies transition and practical expedient elections to simplify the transition of the new standard. We have elected the following:

15


Armstrong Flooring, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in millions, except per share data)

We have elected to not restate comparative prior periods but instead recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption, if a difference existed between the initial lease liability and related right of use asset.
We have elected to use the hindsight practical expedient with respect to determining the lease term allowing us to consider the actual outcome of lease renewals, termination options and purchase options, and in assessing impairment of right-of-use assets for existing leases.
We have elected to combine lease and non-lease components as a single component and account for it as a lease for all asset classes with the exception of land and non-operating buildings. Lease and non-lease components of land and non-operating buildings are generally accounted for separately.
We have elected to use a portfolio approach to determine the discount rate and defined portfolio based on the geographic location of the asset by country and duration of the lease.
The following table summarizes components of lease expense:
 
 
Three Months Ended September 30, 2019
 
Nine Months Ended September 30, 2019
Finance lease cost
 
 
 
 
   Amortization of right-of-use asset
 
$

 
$
0.2

Operating lease cost
 
1.0

 
3.1

Short-term lease cost
 
0.4

 
1.0

Sublease income
 
(0.1
)
 
(1.5
)
Total lease cost
 
$
1.3

 
$
2.8



In the second quarter of 2019, we recognized $0.9 million and $1.6 million of sublease income and income from non-lease components, respectively, in SG&A expenses related to termination fees received from TZI due to the cancellation of a sublease before the end of the lease term.

The following table summarizes supplemental balance sheet information related to leases:
 
 
Balance Sheet Classification
 
September 30, 2019
Assets
 
 
 
 
Operating lease assets
 
Operating lease assets
 
$
6.9

Finance lease assets
 
Property, plant and equipment, less accumulated depreciation
 
0.5

Total lease assets
 
 
 
$
7.4

 
 
 
 
 
Liabilities
 
 
 
 
Current
 
 
 
 
      Operating
 
Accounts payable and accrued expenses
 
$
3.6

      Finance
 
Current installments of long-term debt
 
0.2

Noncurrent
 
 
 
 
      Operating
 
Noncurrent operating lease liabilities
 
3.3

      Finance
 
Long-term debt
 
0.3

Total lease liabilities
 
 
 
$
7.4



The following table summarizes supplemental cash flow information related to leases:

16


Armstrong Flooring, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in millions, except per share data)

 
 
Nine Months Ended September 30,
 
 
2019
Cash paid for amounts included in the measurement of lease liabilities
 
 
   Operating cash flows from operating leases
 
$
3.1

   Financing cash flows from finance leases
 
$
0.2



The following table summarizes weighted average remaining lease term and weighted average discount rate:
 
 
September 30, 2019
 
 
Weighted Average
 
 
Remaining Lease Term (Years)
 
Discount Rate
 
 
 
 
 
Operating leases
 
3.4
 
5.8
%
Finance leases
 
2.7
 
5.4
%


The following table provides future minimum payments at September 30, 2019, by year and in the aggregate, for leases having non-cancelable lease terms in excess of one year:
 
 
Operating Leases
 
Finance Leases
2019 (Remaining)
 
$
1.1

 
$
0.1

2020
 
3.6

 
0.2

2021
 
1.2

 
0.1

2022
 
0.3

 
0.1

2023
 
0.3

 

Thereafter
 
1.3

 

Total
 
$
7.8

 
$
0.5



In our 2018 Form 10-K we disclosed expected future minimum lease payments at December 31, 2018 of $20.4 million. The adoption of ASC 842 reduced the expected future minimum lease payments by removing costs related to non-lease components of existing contracts and agreements no longer defined as operating leases by $8.2 million and $2.3 million, respectively.

The following table provides reconciliation of future minimum lease payments and lease liability:
 
September 30, 2019
 
Operating Leases
 
Finance Leases
Future minimum lease payments
$
7.8

 
$
0.5

  Less: Unamortized interest
0.9

 

Total lease liability
$
6.9

 
$
0.5




17


Armstrong Flooring, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in millions, except per share data)

NOTE 11. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The following table details amounts related to our accounts payable and accrued expenses:
 
September 30, 2019
 
December 31, 2018
Payables, trade and other
$
72.1

 
$
99.5

Employment costs
14.4

 
25.0

Other accrued expenses
14.6

 
16.9

Current operating lease liabilities
3.6

 

Total
$
104.7

 
$
141.4


NOTE 12. PENSION AND OTHER POSTRETIREMENT BENEFIT PROGRAMS
The following table summarizes our pension and postretirement expense:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Defined-benefit pension, U.S.
 
 
 
 
 
 
 
Service cost
$
0.7

 
$
1.0

 
$
2.0

 
$
2.9

Interest cost
3.7

 
3.7

 
11.2

 
11.0

Expected return on plan assets
(5.4
)
 
(5.6
)
 
(16.2
)
 
(16.7
)
Amortization of net actuarial loss
2.5

 
2.6

 
7.3

 
8.0

Total, defined-benefit pension, U.S.
$
1.5

 
$
1.7

 
$
4.3

 
$
5.2

Defined-benefit pension, Canada
 
 
 
 
 
 
 
Interest cost
$
0.1

 
$
0.1

 
$
0.4

 
$
0.4

Expected return on plan assets
(0.2
)
 
(0.2
)
 
(0.5
)
 
(0.6
)
Amortization of net actuarial loss
0.2

 
0.1

 
0.3

 
0.2

Total, defined-benefit pension, Canada
$
0.1

 
$

 
$
0.2

 
$

Defined-benefit postretirement, U.S.
 
 
 
 
 
 
 
Service cost
$
0.1

 
$
0.1

 
$
0.2

 
$
0.3

Interest cost
0.6

 
0.7

 
1.9

 
2.0

Amortization of net actuarial gains
(0.8
)
 
(0.6
)
 
(2.4
)
 
(1.9
)
Total, defined-benefit postretirement, U.S.
$
(0.1
)
 
$
0.2

 
$
(0.3
)
 
$
0.4



18


Armstrong Flooring, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in millions, except per share data)

NOTE 13. COMMON STOCK REPURCHASE PLAN
On March 6, 2017, we announced that our board of directors had approved a share repurchase program pursuant to which we were authorized to repurchase up to $50.0 million of our outstanding shares of common stock. From inception of the share repurchase program through May 3, 2019, we repurchased approximately 2.5 million shares for a total cost of $41.0 million, with an average price of $16.23 per share. On May 3, 2019, we announced that our board of directors had authorized an increased share repurchase program for an additional $50.0 million beyond the $41.0 million already repurchased under the prior share repurchase program, effective immediately. Repurchases under the new program could be made through open market, block, and privately negotiated transactions, including Rule 10b5-1 plans, at times and in such amounts as management deemed appropriate, subject to market and business conditions, regulatory requirements and other factors.

On May 17, 2019, we announced the commencement of a modified "Dutch auction" self-tender offer to repurchase up to $50.0 million in cash of shares of our common stock. As a result of the auction, on June 21, 2019 we purchased 4,504,504 shares of common stock at a purchase price of $11.40 per share, for a total cost of $51.3 million, including fees and expenses. After the completion of the tender offer, we have no remaining authorization to purchase further shares.

NOTE 14. ACCUMULATED OTHER COMPREHENSIVE (LOSS)
The following table summarizes the activity, by component, related to the change in AOCI.
 
Foreign Currency Translation Adjustments
 
Derivative Adjustments
 
Pension and Postretirement Adjustments
 
Total Accumulated Other Comprehensive (Loss) Income
Balance, December 31, 2018
$
1.7

 
$
0.8

 
$
(64.1
)
 
$
(61.6
)
Other comprehensive (loss) before reclassifications, net of tax impact of $- , $0.2, ($0.2) and $-
(4.3
)
 
(0.1
)
 
(0.4
)
 
(4.8
)
Amounts reclassified from accumulated other comprehensive income

 
(0.6
)
 
4.1

 
3.5

Net current period other comprehensive (loss) income
(4.3
)
 
(0.7
)
 
3.7

 
(1.3
)
Balance, September 30, 2019
$
(2.6
)
 
$
0.1

 
$
(60.4
)
 
$
(62.9
)
 
 
 
 
 
 
 
 
Balance, December 31, 2017
$
7.7

 
$
(1.0
)
 
$
(59.2
)
 
$
(52.5
)
Cumulative effect of adoption of ASU 2018-02 as of January 1

 
0.1

 
(12.7
)
 
(12.6
)
Other comprehensive (loss) income before reclassifications, net of tax impact of $- , ($0.3), $0.3, and $-
(6.2
)
 
0.7

 
0.3

 
(5.2
)
Amounts reclassified from accumulated other comprehensive income

 
0.4

 
5.0

 
5.4

Net current period other comprehensive (loss) income
(6.2
)
 
1.1

 
5.3

 
0.2

Balance, September 30, 2018
$
1.5

 
$
0.2

 
$
(66.6
)
 
$
(64.9
)


19


Armstrong Flooring, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in millions, except per share data)

The amounts reclassified from AOCI and the affected line item of the Condensed Consolidated Statements of Operations are presented in the table below.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
 
2019
 
2018
 
2019
 
2018
 
Affected Line Item
Derivative adjustments
 
 
 
 
 
 
 
 
 
Foreign exchange contracts - purchases
$
(0.1
)
 
$
(0.1
)
 
$
(0.3
)
 
$

 
Cost of goods sold
Foreign exchange contracts - sales
(0.1
)
 

 
(0.3
)
 
0.4

 
Net sales
Foreign exchange contracts - sales

 

 

 
0.1

 
Earnings from discontinued operations
Total (income) expense before tax
(0.2
)
 
(0.1
)
 
(0.6
)
 
0.5

 
 
Tax impact

 

 

 
(0.1
)
 
Income tax (benefit)
Total (income) expense, net of tax
(0.2
)
 
(0.1
)
 
(0.6
)
 
0.4

 
 
Pension and postretirement adjustments
 
 
 
 
 
 
 
 
 
Amortization of net actuarial loss
1.9

 
2.1

 
5.2

 
6.3

 
Other expense, net
Tax impact
(0.4
)
 
(1.7
)
 
(1.1
)
 
(1.3
)
 
Income tax (benefit)
Total expense, net of tax
1.5

 
0.4

 
4.1

 
5.0

 
 
Total reclassifications for the period
$
1.3

 
$
0.3

 
$
3.5

 
$
5.4

 
 


NOTE 15. 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
In connection with our current or legacy manufacturing operations, or those of former owners, we may from time to time become involved in the investigation, closure and/or remediation of existing or potential environmental contamination under the Comprehensive Environmental Response, Compensation and Liability Act, and state or international Superfund and similar type environmental laws. For those matters, we may have rights of contribution or reimbursement from other parties or coverage under applicable insurance policies; however, we cannot predict with certainty the future identification of or expenditure for any investigation, closure or remediation of any environmental site.

20


Armstrong Flooring, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in millions, except per share data)

Summary of Financial Position
There were no material liabilities recorded as of September 30, 2019 and December 31, 2018 for potential environmental liabilities that we consider probable and for which a reasonable estimate of the probable liability could be made.
Antidumping and Countervailing Duty Cases
In October 2010, a coalition of U.S. producers of multilayered wood flooring (not including AWI and its subsidiaries) (“Petitioners”) filed petitions seeking antidumping duties (“AD”) and countervailing duties (“CVD”) with the United States Department of Commerce (“DOC”) and the United States International Trade Commission against imports of multilayered wood flooring from China.  The AD and CVD petitions ultimately resulted in DOC issuing AD and CVD orders (the “Orders”) against multilayered wood flooring imported into the U.S. from China. These Orders and the associated additional duties they have imposed have been the subject of extensive litigation, both at DOC and in the U.S. courts. Our consistent view through the course of this matter has been, and remains, that our imports were neither dumped nor subsidized.

Until October 2014, AWI operated a plant in Kunshan, China (“Armstrong Kunshan”) that manufactured multilayered wood flooring for export to the U.S. As a result, we have been directly involved in the multilayered wood flooring-related litigation at DOC and in the U.S. courts. Prior to the sale of our North American wood flooring business on December 31, 2018 (“Wood Sale”), we produced multilayered wood flooring domestically and imported multilayered wood flooring from third party suppliers in China. In connection with the Wood Sale, we retained the right to elect to defend and control the defense of the above matters, as well as the right to any related refunds or payments, and agreed to indemnify and hold the buyer from and against any and all duties, penalties, fines or other charges. Armstrong Kunshan was not sold as part of the Wood Sale but was sold to a separate buyer in December 2018.
We previously accrued for potential liability for imports of Armstrong Kunshan products made in the (i) second administrative review period (which covered imports of multilayered wood flooring made between December 1, 2012 and November 30, 2013 (AD) and between January 1, 2012 and December 31, 2012 (CVD), and (ii) third administrative review period (which covered all multilayered wood flooring imports made between December 1, 2013 and November 30, 2014 (AD) and between January 1, 2013 and December 31, 2013 (CVD)).
During the second quarter of 2019, we resolved our potential AD liability for the second and third administrative review periods outside of litigation pursuant to a settlement agreement with the Petitioners. As a result, the Petitioners did not appeal the Court of International Trade’s July 3, 2018 ruling ordering DOC to revoke the AD order with respect to Armstrong Kunshan. Accordingly, the revocation of the AD order with respect to Armstrong Kunshan has become final and DOC has instructed U.S. Customs and Border Protection (“CBP”) to liquidate, without imposition of AD duties, entries of subject merchandise produced and exported by Armstrong Kunshan. CBP began liquidating the Armstrong Kunshan entries without imposition of AD duties in May 2019, and we believe this process has been substantially completed.
There have been and there are expected to be subsequent administrative reviews for which we were not and are not expected to be subject; however, we are liable for other manufacturers’ applicable rates to the extent we were importer of record of products covered by the AD/CVD orders during such periods. While we accrue for potential AD/CVD liability for these periods, such amounts are and are expected to remain immaterial.
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, relationships with distributors, relationships with competitors, employees and other matters. For example, we are currently a party to various litigation matters that involve product liability, tort liability and other claims under a wide range of allegations, including illness due to exposure to certain chemicals used in the workplace, or medical conditions arising from exposure to product ingredients or the presence of trace contaminants. In some

21


Armstrong Flooring, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in millions, except per share data)

cases, these allegations involve multiple defendants and relate to legacy products that we and other defendants purportedly manufactured or sold. We believe these claims and allegations to be without merit and intend to defend them vigorously. For these matters, we also may have rights of contribution or reimbursement from other parties or coverage under applicable insurance policies.
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, results of operations, or cash flows.

NOTE 16. SUBSEQUENT EVENTS

In November 2019 we announced the planned shutdown of our commercial production line in our South Gate, California plant. Products currently produced on this line will be transitioned to our other U.S. plants, with an expected shutdown of this line on January 3, 2020. As a result of this shutdown, we expect to record accelerated depreciation on the production line assets of between $5 million and $10 million during the next quarter.

On November 1, 2019, we entered into a First Amendment to our Credit Agreement (the "Amendment"). The Amendment amends the Credit Agreement to, among other things, decrease the size of the Credit Facility to $100 million, consisting of a $75 million revolving facility and a $25 million term loan facility (the "Amended Credit Facility"), and converts term loans outstanding in excess of $25 million to revolver borrowings.

The Amendment also modified certain of the Credit Agreement financial covenants. Specifically, the Amended Credit Facility requires that we and our subsidiaries not:

Permit the Consolidated Net Leverage Ratio (as defined in the Amendment) to be greater than: (i) 3.00 to 1.00 from the effective date of the Amendment to December 31, 2019, (ii) 3.75 to 1.00 from January 1, 2020 through March 31, 2020, (iii) 2.50 to 1.00 from April 1, 2020 through June 30, 2020, and (iv) 2.00 to 1.00 from July 1, 2020 and thereafter;
Permit the Consolidated Fixed Charge Coverage Ratio (as defined in the Amendment at any time to be less than 1.25 to 1.00, provided that (i) the aggregate amount of all Capital Expenditures for the period ending September 30, 2019 will be deemed to be $16.5 million for purposes of calculating the Consolidated Fixed Charge Coverage Ratio and (ii) the Consolidated Fixed Charge Coverage Ratio will not be tested for the periods ending December 31, 2019 and March 31, 2020; and
Permit Consolidated EBITDA (as defined in the Amendment) to be less than (i) $20 million for the period ending December 31, 2019 and (ii) $15 million for the period ending March 31, 2020.


22


Item 2. Managem