Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
Armstrong Flooring, Inc. ("AFI" or the "Company") is a leading global producer of flooring products for use primarily in the construction and renovation of commercial, residential and institutional buildings. We design, manufacture, source and sell resilient flooring products primarily in North America and the Pacific Rim. As of December 31, 2019, we operated 8 manufacturing plants in three countries, including 6 manufacturing plants located throughout the U.S. and one plant each in China and Australia.
Geographic Areas
See Note 3 to the Consolidated Financial Statements for additional financial information by geographic areas.
Recent Events
During the second quarter of 2017, we acquired vinyl composition tile ("VCT") assets of Mannington Mills, Inc., a nationally recognized flooring company, for a cash purchase price of $36.1 million including transaction costs (the "VCT Acquisition"). See Note 15 to the Consolidated Financial Statements for further information.
On November 14, 2018, AFI entered into a Stock Purchase Agreement with Tarzan Holdco Inc., ("TZI"), an affiliate of American Industrial Partners ("AIP"), to sell our 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., a Delaware Corporation ("AWP"), including its direct and indirect wholly owned subsidiaries. We received proceeds of $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 a payment to TZI of $1.9 million in 2019. The historical financial results of the North American wood flooring business have been reflected in our Consolidated Financial Statements as a discontinued operation for all periods presented.
Factors Affecting Our Business
Net Sales
Overview
Demand for our products is influenced by economic conditions. We closely monitor publicly available macroeconomic trend data that provides insight to commercial and residential market activity; this includes Gross Domestic Product growth indices, the Architecture Billings Index and the Consumer Confidence Index, as well as housing starts and existing home sales.
Demand for our products is also influenced by consumer preferences. In addition, our channel partners raise or lower their inventory levels according to their expectations of market demand and consumer preferences, which directly affects our sales.
Markets
We compete in both the commercial and residential markets in North America and primarily the commercial market in the Pacific Rim. Our business operates in a competitive environment across all our product categories, and excess capacity exists in much of the industry. We continue to see efforts by various competitors to price aggressively as a means to gain market share.
Management's Discussion and Analysis of Financial Condition and Results of Operations
We continue to see a decline in demand for our traditional resilient products, including VCT and particularly vinyl sheet products used in residential applications. The decline in vinyl sheet is driven by loss of market share to competitors as well as consumer trends, which have continued to favor alternate products, including luxury vinyl tile ("LVT") products.
The flooring market continues to experience LVT growth. Given its attractive visuals and performance characteristics, LVT growth has exceeded that of the overall flooring market. We believe LVT growth has and will continue to come partially at the expense of other product categories in both the soft and hard surface flooring markets.
We are the largest producer of VCT which is primarily used in commercial environments.
Operating Expenses
We source certain products from China. Tariff increases drive inflation on these sourced products. Raw material costs have stabilized and in some areas have improved. Productivity improvements at our manufacturing plants will continue to drive benefits in operating results.
Tariff
The U.S. government announced a tariff of 10% on certain flooring products imported to the U.S. from China, effective on September 24, 2018 with an additional 15% effective on May 10, 2019. This tariff increase has an impact on products we import from China. In order to partially offset the impact, we implemented price increases that went into effect in the fourth quarter of 2018, and additional price increases that went into effect in the second quarter of 2019 on select impacted products. On November 8, 2019, an exclusion on tariffs of certain flooring products was announced. The exclusion applies retroactively to September 24, 2018. We will be filing for tariff refunds on these products in 2020. A portion of the refunds may be shared with our customers who purchased the impacted products. In addition, we reduced prices on select impacted products in the fourth quarter of 2019.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
2019 Compared to 2018
Consolidated Results from Continuing Operations
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|
|
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|
|
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|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
Change
|
(Dollars in millions)
|
2019
|
|
2018
|
|
$
|
|
%
|
Net sales
|
$
|
626.3
|
|
|
$
|
728.2
|
|
|
$
|
(101.9
|
)
|
|
(14.0
|
)%
|
Cost of goods sold
|
541.0
|
|
|
585.0
|
|
|
(44.0
|
)
|
|
(7.5
|
)%
|
Gross profit
|
85.3
|
|
|
143.2
|
|
|
(57.9
|
)
|
|
(40.4
|
)%
|
Selling, general and administrative expenses
|
146.4
|
|
|
160.6
|
|
|
(14.2
|
)
|
|
(8.8
|
)%
|
Operating (loss)
|
(61.1
|
)
|
|
(17.4
|
)
|
|
(43.7
|
)
|
|
NM
|
|
Interest expense
|
4.4
|
|
|
4.8
|
|
|
(0.4
|
)
|
|
|
Other expense, net
|
1.8
|
|
|
2.9
|
|
|
(1.1
|
)
|
|
|
(Loss) from continuing operations before income taxes
|
(67.3
|
)
|
|
(25.1
|
)
|
|
(42.2
|
)
|
|
|
Income tax expense (benefit)
|
1.6
|
|
|
(6.0
|
)
|
|
7.6
|
|
|
|
(Loss) from continuing operations
|
(68.9
|
)
|
|
(19.1
|
)
|
|
(49.8
|
)
|
|
|
Earnings (loss) from discontinued operations, net of tax
|
—
|
|
|
9.9
|
|
|
(9.9
|
)
|
|
|
Gain (loss) on disposal of discontinued operations, net of tax
|
10.4
|
|
|
(153.8
|
)
|
|
164.2
|
|
|
|
Net earnings (loss) from discontinued operations
|
$
|
10.4
|
|
|
$
|
(143.9
|
)
|
|
$
|
154.3
|
|
|
|
Net (loss)
|
$
|
(58.5
|
)
|
|
$
|
(163.0
|
)
|
|
$
|
104.5
|
|
|
|
_____________
NM: not meaningful
Net Sales
Net sales by percentage point change are shown in the table below:
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|
|
|
|
|
|
|
|
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|
|
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|
|
|
|
|
|
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|
Year Ended December 31,
|
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Change
|
|
Percentage Point Change Due to
|
(Dollars in millions)
|
2019
|
|
2018
|
|
$
|
|
%
|
|
Price
|
|
Volume
|
|
Mix
|
|
Currency
|
|
$
|
626.3
|
|
|
$
|
728.2
|
|
|
$
|
(101.9
|
)
|
|
(14.0
|
)%
|
|
(0.1
|
)
|
|
(9.8
|
)
|
|
(3.2
|
)
|
|
(0.9
|
)
|
Net sales for the year ended December 31, 2019 decreased compared to the year ended December 31, 2018 primarily due to unfavorable volume. Unfavorable volume reflected relative changes in distributor inventory levels compared to the prior year due to significant customer purchases in the distribution channel in 2018 ahead of U.S. tariffs and decline in traditional categories. Volume was also lower due to share loss in some categories within the distribution channel. Unfavorable mix was driven by lower relative LVT sales, which was impacted by higher distributor stocking in 2018 ahead of tariff increases.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Operating (Loss)
Operating results for the year ended December 31, 2019 declined compared to the year ended December 31, 2018. The results were impacted by the margin impact of lower net sales, a $13.6 million inventory write down in connection with a change in product strategy (see Note 12 to the Consolidated Financial Statements), a $5.9 million write off of merchandising materials in connection with a decreased demand of residential displays following our go to market change (see Note 13 to the Consolidated Financial Statements) and $4.6 million of accelerated depreciation expense recorded in connection with the shutdown of our commercial production line in our South Gate, California plant, partially offset by a decrease in SG&A expenses, primarily due to $18.9 million of income received from transition services agreements with TZI and lower incentive compensation expense.
Other expense, net: Other expense, net of $1.8 million and $2.9 million for the years ended December 31, 2019 and 2018, respectively, primarily reflected costs for defined-benefit pension and postretirement plans.
Income tax expense (benefit): For the year ended December 31, 2019 we recorded an income tax expense of $1.6 million compared to an income tax benefit of $6.0 million for the year ended December 31, 2018. The effective tax rates were (2.4%) and 23.9% for the years ended December 31, 2019 and 2018, respectively. The change in effective rates was primarily driven by changes in the mix of income among tax jurisdictions and categories other than continuing operations, as well as the effects of unbenefitted losses.
Discontinued operations: For the year ended December 31, 2019, a $10.4 million gain on disposal of discontinued operations was realized primarily due to the resolution of our antidumping case. See Note 22 to the Consolidated Financial Statements for additional information. The 2018 loss on disposal of discontinued operations of $153.8 million related to our sale of the North American wood flooring business. This loss was partially offset by $9.9 million earnings from discontinued operations which reflected the operating results of the North American wood flooring business prior to the sale. See Note 9 to the Consolidated Financial Statements.
Management's Discussion and Analysis of Financial Condition and Results of Operations
2018 Compared to 2017
Consolidated Results from Continuing Operations
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|
|
|
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|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
Change
|
(Dollars in millions)
|
2018
|
|
2017
|
|
$
|
|
%
|
Net sales
|
$
|
728.2
|
|
|
$
|
704.1
|
|
|
$
|
24.1
|
|
|
3.4
|
%
|
Cost of goods sold
|
585.0
|
|
|
553.0
|
|
|
32.0
|
|
|
5.8
|
%
|
Gross profit
|
143.2
|
|
|
151.1
|
|
|
(7.9
|
)
|
|
(5.2
|
)%
|
Selling, general and administrative expenses
|
160.6
|
|
|
163.8
|
|
|
(3.2
|
)
|
|
(2.0
|
)%
|
Operating (loss)
|
(17.4
|
)
|
|
(12.7
|
)
|
|
(4.7
|
)
|
|
NM
|
|
Interest expense
|
4.8
|
|
|
2.7
|
|
|
2.1
|
|
|
|
Other expense, net
|
2.9
|
|
|
3.7
|
|
|
(0.8
|
)
|
|
|
(Loss) from continuing operations before income taxes
|
(25.1
|
)
|
|
(19.1
|
)
|
|
(6.0
|
)
|
|
|
Income tax (benefit)
|
(6.0
|
)
|
|
(2.0
|
)
|
|
(4.0
|
)
|
|
|
(Loss) from continuing operations
|
(19.1
|
)
|
|
(17.1
|
)
|
|
(2.0
|
)
|
|
|
Earnings (loss) earnings from discontinued operations, net of tax
|
9.9
|
|
|
(24.7
|
)
|
|
34.6
|
|
|
|
(Loss) on disposal of discontinued operations, net of tax
|
(153.8
|
)
|
|
—
|
|
|
(153.8
|
)
|
|
|
Net (loss) from discontinued operations
|
$
|
(143.9
|
)
|
|
$
|
(24.7
|
)
|
|
$
|
(119.2
|
)
|
|
|
Net (loss)
|
$
|
(163.0
|
)
|
|
$
|
(41.8
|
)
|
|
$
|
(121.2
|
)
|
|
|
_____________
NM: not meaningful
Net Sales
Net sales by percentage point change are shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Change
|
|
Percentage Point Change Due to
|
(Dollars in millions)
|
2018
|
|
2017
|
|
$
|
|
%
|
|
Price
|
|
Volume
|
|
Mix
|
|
Currency
|
|
$
|
728.2
|
|
|
$
|
704.1
|
|
|
$
|
24.1
|
|
|
3.4
|
%
|
|
1.0
|
|
|
(2.2
|
)
|
|
4.5
|
|
|
0.1
|
|
Net sales for the year ended December 31, 2018 increased compared to the year ended December 31, 2017 primarily due to favorable mix, increase in price in response to higher input costs and significant customer purchases in the distribution channel in 2018 ahead of U.S. tariffs, partially offset by lower volume. Double-digit sales growth in LVT contributed to favorable mix while volume was impacted by declines in traditional categories.
Operating (Loss)
Operating results for the year ended December 31, 2018 declined compared to the year ended December 31, 2017. The decline reflected the impact of higher input costs which more than offset the benefit of higher net sales, lower manufacturing costs, improved productivity and lower selling, general and administrative ("SG&A") expenses.
Other expense, net: Other expense, net of $2.9 million and $3.7 million for the years ended December 31, 2018 and 2017, respectively, primarily reflected costs for defined-benefit pension and postretirement plans.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Income tax expense: For the year ended December 31, 2018, income tax benefit was $6.0 million compared to an income tax benefit of $2.0 million for the year ended December 31, 2017. The effective tax rates were 23.9% and 10.5% for the years ended December 31, 2018 and 2017, respectively. The tax benefit rate was higher in 2018 primarily due to domestic valuation allowances established during the prior period and the release of foreign valuation allowances in 2018 offset by the reduction in the U.S. tax rate from 35% to 21% in 2018.
Discontinued operations: For the years ended December 31, 2018 and December 31, 2017 discontinued operations earnings of $9.9 million and loss of $24.7 million, respectively, reflected the operating results of the North American wood flooring business. In 2018, we recognized a loss on the sale of the North American wood flooring business of $153.8 million. See Note 9 to the Consolidated Financial Statements.
Liquidity and Capital Resources
In March 2017, our board of directors authorized a share repurchase program of up to $50.0 million. The authorization of the repurchase program was aligned with our goal to increase the efficiency of our capital structure over time while preserving sufficient liquidity to invest in growth projects and other value-accretive opportunities. From inception of the program through May 3, 2019, we repurchased 2.5 million shares under the program for a total cost of $41.0 million.
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 existing share repurchase program, effective immediately. The authorization to purchase additional shares under the repurchase program was aligned with our goal to return a portion of the net sale proceeds from the wood flooring business, which closed on December 31, 2018.
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 $11.42 per share, for a total cost of $51.4 million, including fees and expenses. After the completion of the tender offer, we have no remaining authorization to purchase further shares.
Any shares not used to fulfill employee stock award obligations are held in treasury.
Our primary sources of liquidity are, and we anticipate that they will continue to be, cash generated from operations, proceeds from asset sales and borrowings under our secured ABL Facility described below. We believe these sources are sufficient to fund our capital needs, planned capital expenditures, and to meet our interest and other contractual obligations in the near term. Our liquidity needs for operations vary throughout the year with the majority of our cash flows generated in the second and third quarters. We believe the absence of cash flow from discontinued operations will not materially impact our future liquidity and capital resources.
Cash and cash equivalents totaled $27.1 million as of December 31, 2019 of which $9.1 million was held in the U.S.
Cash Flows
The discussion that follows includes cash flows related to discontinued operations.
The table below shows our cash (used for) provided by operating, investing and financing activities:
Management's Discussion and Analysis of Financial Condition and Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(Dollars in millions)
|
2019
|
|
2018
|
|
2017
|
Cash (used for) provided by operating activities
|
$
|
(6.0
|
)
|
|
$
|
62.5
|
|
|
$
|
62.9
|
|
Cash (used for) provided by investing activities
|
(29.4
|
)
|
|
60.6
|
|
|
(80.5
|
)
|
Cash (used for) provided by financing activities
|
(111.1
|
)
|
|
13.3
|
|
|
24.4
|
|
Operating activities
Operating activities for 2019 used $6.0 million of cash. Cash used was primarily due to changes in working capital, primarily accounts payable and accrued expenses, partially offset by inventory. Changes in working capital were partially offset by earnings exclusive of net non-cash expenses, primarily depreciation and amortization.
Operating activities for 2018 provided $62.5 million of cash. Cash was generated through earnings exclusive of non-cash expenses, primarily loss on sale of discontinued operations and depreciation and amortization. Changes in working capital primarily reflected higher inventory levels, higher accounts payable and accrued expenses, and lower accounts receivable.
Operating activities for 2017 provided $62.9 million of cash. Cash was generated through earnings exclusive of non-cash expenses, primarily depreciation and amortization, impairment and pension, and by changes in working capital. Changes in working capital primarily reflected lower inventories, partially offset by lower accounts payable and accrued expenses and changes in other assets and liabilities.
Investing activities
Investing activities for 2019 used cash of $29.4 million primarily for purchases of property, plant and equipment.
Investing activities for 2018 provided cash of $60.6 million primarily due to the net proceeds from the sale of discontinued operations, partially offset by purchases of property, plant and equipment.
Net cash used for investing activities of $80.5 million for the year ended December 31, 2017 was primarily due to purchases of property, plant and equipment. Included in the outflow was the cash paid for the acquisition of the VCT assets of Mannington Mills, Inc. for $36.1 million including transaction costs.
Financing activities
Net cash used for financing activities for 2019 of $111.1 million was primarily for purchase of treasury stock and net payments of debt.
Net cash provided by financing activities for 2018 was $13.3 million which primarily reflected proceeds from our new debt facility, partially offset by net payments on our ABL facility.
Cash provided in 2017 was $24.4 million which primarily reflected net proceeds from debt partially offset by purchases of treasury stock.
Debt
In connection with the sale of the wood business, on December 31, 2018, we entered into a credit agreement (the "Credit Agreement"). The Credit Agreement provided us with a $150.0 million secured credit facility (the "Credit Facility"), consisting of a $75.0 million revolving facility and a $75.0 million term loan facility. The revolving facility included
Management's Discussion and Analysis of Financial Condition and Results of Operations
a $25.0 million sublimit for the issuance of letters of credit and a $15.0 million sublimit for swing line loans. The Credit Facility is scheduled to mature on December 31, 2023. The Credit Agreement provided for an uncommitted accordion feature that allowed us to request an increase in the revolving facility or the term loan facility in an aggregate amount not to exceed $25.0 million.
On November 1, 2019, we entered into a First Amendment to the Credit Agreement (the "Amendment"). The Amendment amends the Credit Agreement to, among other things, decrease the size of the Credit Facility to $100.0 million, consisting of a $75.0 million revolving facility and a $25.0 million term loan facility (the "Amended Credit Facility"), and converted term loans outstanding in excess of $25.0 million to revolver borrowings.
On December 18, 2019, we entered into a Second Amendment to the Credit Agreement which converts the entire Credit Facility of $100.0 million to an asset-based revolving credit facility ("ABL Facility"). Obligations under the ABL Facility are secured by qualifying accounts receivable, inventories and select machinery and equipment of our wholly owned domestic subsidiaries. The Second Amendment also decreased the Letter of Credit sublimit from $25.0 million to $20.0 million.
As of December 31, 2019, total borrowings outstanding under our ABL Facility were $42.2 million, while outstanding letters of credit were $3.9 million.
Borrowings under the ABL Facility bear interest at a rate equal to an adjusted base rate or the London Interbank Offered Rate ("LIBOR") plus an applicable margin, which varies according to the net leverage ratio and was 2.25% as of December 31, 2019. As of December 31, 2019, the interest rate of 3.94% was determined using the LIBOR plus applicable margin. We are required to pay a commitment fee, payable quarterly in arrears, on the average daily unused amount of the revolving ABL Facility, which varies according to the net leverage ratio and was 0.20% as of December 31, 2019. Outstanding letters of credit issued under the ABL Facility are subject to fees which will be due quarterly in arrears based on the applicable margin described above plus a fronting fee. The total rate for letters of credit was 2.375% as of December 31, 2019.
All obligations under the ABL Facility are guaranteed by each of our wholly owned domestic subsidiaries that individually, or together with its subsidiaries, has assets of more than $1.0 million. All obligations under the ABL Facility, and guarantees of those obligations, are secured by all of the present and future assets of the Company and the guarantors, subject to certain exceptions and exclusions as set forth in the ABL Facility and other security and collateral documents.
Due to its stated five-year maturity, this obligation in presented as long-term obligation in our Consolidated Balance Sheet. However, we may repay this obligation at any time, without penalty.
Debt Covenants
The Second Amendment modifies a number of covenants that, among other things, require us to provide Bank of America ("the Agent") with certain information with respect to the Company and the borrowing base and to maintain or otherwise preserve the collateral in favor of the Agent and further restricts our ability to make acquisitions and modifies restrictions on our ability to repurchase equity.
In addition, the Second Amendment also amends certain financial covenants applicable to us and our subsidiaries. The ABL Facility requires, among other things, that we maintain a Consolidated Fixed Charge Coverage Ratio (as defined in the Second Amendment) during a Financial Covenant Trigger Period (as defined in the Second Amendment) of at least 1.00 to 1.00 as well as meet a minimum Consolidated EBITDA (as defined in the Second Amendment) and limit on capital expenditures.
Management's Discussion and Analysis of Financial Condition and Results of Operations
As of December 31, 2019 the Fixed Charge Coverage Ratio covenant was not applicable. As of December 31, 2019, we were in compliance with the minimum Consolidated EBITDA covenant.
Off-Balance Sheet Arrangements
No disclosures are required pursuant to Item 303(a)(4) of Regulation S-K.
Contractual Obligations
As part of our normal operations, we enter into numerous contractual obligations that require specific payments during the term of the various agreements. The following table includes amounts under contractual obligations existing as of December 31, 2019. Only known payments that are dependent solely on the passage of time are included. Obligations under contracts that contain minimum payment amounts are shown at the minimum payment amount. Contracts that contain variable payment structures without minimum payments are excluded. Purchase orders that are entered into in the normal course of business are also excluded because they are generally cancelable and not legally binding. Amounts are presented below based upon the currently scheduled payment terms. Actual future payments may differ from the amounts presented below due to changes in payment terms or events affecting the payments.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
Thereafter
|
|
Total
|
Debt
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
42.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
42.2
|
|
Operating lease obligations (1)
|
3.6
|
|
|
1.3
|
|
|
0.3
|
|
|
0.2
|
|
|
0.2
|
|
|
1.1
|
|
|
6.7
|
|
Finance lease obligation
|
0.3
|
|
|
0.2
|
|
|
0.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.6
|
|
Scheduled interest and fee payments (2)
|
2.0
|
|
|
2.0
|
|
|
2.8
|
|
|
3.4
|
|
|
—
|
|
|
—
|
|
|
10.2
|
|
Unconditional purchase obligations (3)
|
14.6
|
|
|
1.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16.0
|
|
Pension contributions (4)
|
0.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.2
|
|
Other obligations(5)
|
10.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10.1
|
|
Total contractual obligations
|
$
|
30.8
|
|
|
$
|
4.9
|
|
|
$
|
3.2
|
|
|
$
|
45.8
|
|
|
$
|
0.2
|
|
|
$
|
1.1
|
|
|
$
|
86.0
|
|
_____________
(1) Operating lease obligations include the minimum payments due under existing agreements with non-cancelable lease terms in excess of one year.
(2) For debt with variable interest rates, we projected future interest payments based on market interest rates and the balance outstanding as of December 31, 2019.
(3) Unconditional purchase obligations include (a) purchase contracts whereby we must make guaranteed minimum payments of a specified amount regardless of how little material is actually purchased (“take or pay” contracts) and (b) service agreements. Unconditional purchase obligations exclude contracts entered into during the normal course of business that are non-cancelable and have fixed per unit fees, but where the monthly commitment varies based on usage.
(4) Pension contributions include estimated required contributions for our defined-benefit pension plans. We are not presenting estimated payments in the table above beyond 2020 as funding can vary significantly from year to year based upon changes in the fair value of plan assets, funding regulations and actuarial assumptions.
(5) Other obligations include inventory in transit where the title has not been assumed by us, however we are committed to make payment once the shipment reaches its destination as per the contract.
The table does not include $0.7 million of unrecognized tax benefits under ASC 740 "Income Taxes." Due to the uncertainty relating to these positions, we are unable to reasonably estimate the ultimate amount or timing of the settlement of these issues. See Note 8 to the Consolidated Financial Statements for more information.
Management's Discussion and Analysis of Financial Condition and Results of Operations
This table excludes obligations related to postretirement benefits since we voluntarily provide these benefits. The amount of benefit payments we made in 2019 was $7.0 million. See Note 18 to the Consolidated Financial Statements for additional information regarding future expected cash payments for postretirement benefits.
We are party to supply agreements, some of which require the purchase of inventory remaining at the supplier upon termination of the agreement. The last such agreement will expire in 2020. Had these agreements terminated as of December 31, 2019, we would have been obligated to purchase approximately $1.9 million of inventory. Historically, due to production planning, we have not had to purchase material amounts of product at the end of similar contracts. Accordingly, no liability has been recorded for these guarantees.
Letters of credit are issued to third party suppliers, insurance and financial institutions and typically can only be drawn upon in the event of our failure to pay our obligations to the beneficiary. This table summarizes the commitments we have available in the U.S. for use as of December 31, 2019. Letters of credit are currently arranged through our Credit Facility. See Note 17 to the Consolidated Financial Statements for more information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
Thereafter
|
|
Total
|
Other Commercial Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters of credit
|
$
|
3.9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
$
|
3.9
|
|
Critical Accounting Estimates
In preparing our consolidated financial statements in accordance with U.S. generally accepted accounting principles ("GAAP"), we are required to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We evaluate our estimates and assumptions on an ongoing basis, using relevant internal and external information. We believe that our estimates and assumptions are reasonable. However, actual results may differ from what was estimated and could have a significant impact on the financial statements.
We have identified the following as our critical accounting estimates. We have discussed these critical accounting estimates with our audit committee.
U.S. Pension and Postretirement Benefit Costs — We maintain pension and postretirement plans throughout North America, with the most significant plans located in the U.S. Our defined-benefit pension and postretirement benefit costs are developed from actuarial valuations. These valuations are calculated using a number of assumptions, which represent management’s best estimate of the future. The assumptions that have the most significant impact on reported results are the discount rate, the estimated long-term return on plan assets and mortality rates. These assumptions are generally updated annually.
The discount rate is used to determine retirement plan liabilities and to determine the interest cost component of net periodic pension and postretirement cost. Management utilizes the Aon Hewitt AA only above median yield curve, which is a hypothetical AA yield curve comprised of a series of annualized individual discount rates, as the primary basis for determining the discount rate. As of December 31, 2019, we assumed a discount rate of 3.25% for the U.S. defined-benefit pension plans. As of December 31, 2019, we assumed a discount rate of 3.20% for the U.S. postretirement plans. The effects of any change in discount rate will be amortized into earnings as described below. Absent any other changes, a one-quarter percentage point increase or decrease in the discount rates for the U.S. pension and postretirement plans would be expected to change 2020 operating income by approximately $1.0 million.
Management's Discussion and Analysis of Financial Condition and Results of Operations
We manage two U.S. defined-benefit pension plans, a qualified funded plan and a nonqualified unfunded plan. For the qualified funded plan, the expected long-term return on plan assets represents a long-term view of the future estimated investment return on plan assets. This estimate is determined based on the target allocation of plan assets among asset classes and input from investment professionals on the expected performance of the asset classes over 20 years. Historical asset returns are monitored and considered when we develop our expected long-term return on plan assets. An incremental component is added for the expected return from active management based on historical information. These forecasted gross returns are reduced by estimated management fees and expenses. The actual return on plan assets achieved for 2019 was 19.20%. The difference between the actual and expected rate of return on plan assets will be amortized into earnings as described below.
The expected long-term return on plan assets used in determining our 2019 U.S. pension cost was 6.30%. We have assumed a return on plan assets during 2020 of 5.70%. The 2020 expected return on assets was calculated in a manner consistent with 2019. A one-quarter percentage point increase or decrease in the 2020 assumption would be expected to increase or decrease 2020 operating income by approximately $0.9 million.
We use the Society of Actuaries Pri-2012 Generational Mortality Table with MP-2019 projection scales.
Actual results that differ from our various pension and postretirement plan estimates are captured as actuarial gains/losses. When certain thresholds are met, the gains and losses are amortized into future earnings over the expected remaining service period of plan participants, which is approximately eight years for our U.S. pension plans and ten years for our U.S. postretirement plans. Changes in assumptions could have significant effects on earnings in future years.
See Note 18 to the Consolidated Financial Statements for additional information.
Impairments of Tangible and Intangible Assets— We review long-lived asset groups, which include long-lived tangible and intangible assets, for impairment when indicators of impairment exist, such as operating losses and/or negative cash flows. If an evaluation of the undiscounted future cash flows generated by the asset indicates impairment, the asset is written down to its estimated fair value, which is based on its discounted future cash flows. The principal assumption used in these impairment tests is future cash flows, which are derived from those used in our operating plan and strategic planning processes.
The revenue and cash flow estimates used in applying our impairment and recoverability tests are based on management’s analysis of information available at the time of the impairment test. Actual results lower than the estimate could lead to significant future impairments. If future testing indicates that fair values have declined below carrying value, our financial condition and results of operations would be affected.
There were no material impairment charges in 2019.
We cannot predict the occurrence of certain events that might lead to material impairment charges in the future. Such events may include, but are not limited to, the impact of economic environments, particularly related to the commercial and residential construction industries, material adverse changes in relationships with significant customers, or strategic decisions made in response to economic and competitive conditions.
See Notes 2 and 15 to the Consolidated Financial Statements for additional information.
Income Taxes — Our effective tax rate is primarily determined based on our pre-tax income and the statutory income tax rates in the jurisdictions in which we operate. The effective tax rate also reflects the tax impacts of items treated differently for tax purposes than for financial reporting purposes. Some of these differences are permanent, such as expenses that are not deductible in our tax returns, and some differences are temporary, reversing over time, such as
Management's Discussion and Analysis of Financial Condition and Results of Operations
depreciation expense. These temporary differences create deferred income tax assets and liabilities. Deferred income tax assets are also recorded for net operating loss (“NOL”) carryforwards.
Deferred income tax assets and liabilities are recognized by applying enacted tax rates to temporary differences that exist as of the balance sheet date. We reduce the carrying amounts of deferred tax assets by a valuation allowance if, based on the available evidence, it is more likely than not that such assets will not be realized. The need to establish valuation allowances for deferred tax assets is assessed quarterly.
In assessing the requirement for, and amount of, a valuation allowance in accordance with the more likely than not standard, we give appropriate consideration to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability and foreign source income (“FSI”), the duration of statutory carryforward periods, and our experience with operating loss and tax credit carryforward expirations. A history of cumulative losses is a significant piece of negative evidence used in our assessment. If a history of cumulative losses is incurred for a tax jurisdiction, forecasts of future profitability are not used as positive evidence related to the realization of the deferred tax assets in the assessment.
As further described in Note 8 to the Consolidated Financial Statements, our Consolidated Balance Sheet as of December 31, 2019 includes net deferred income tax assets of $32.3 million. Included in this amount are deferred federal income tax assets for postretirement and postemployment benefits of $17.5 million, foreign NOL deferred tax assets of $10.5 million, state NOL deferred income tax assets of $3.1 million, and federal NOL deferred income tax assets of $11.5 million. We have established valuation allowances in the amount of $35.8 million consisting of $10.1 million for foreign deferred tax assets, primarily foreign operating loss carryovers, $5.4 million for state deferred tax assets, and $20.3 million federal deferred tax assets. While we have considered future taxable income in assessing the need for the valuation allowances based on our best available projections, if these estimates and assumptions change in the future or if actual results differ from our projections, we may be required to adjust our valuation allowances accordingly. Such adjustments could be material to our Consolidated Financial Statements.
Inherent in determining our effective tax rate are judgments regarding business plans and expectations about future operations. These judgments include the amount and geographic mix of future taxable income, the amount of FSI, limitations on usage of NOL carryforwards, the impact of ongoing or potential tax audits, earnings repatriation plans, and other future tax consequences.
We estimate we will need to generate future U.S. taxable income of approximately $142.7 million for state income tax purposes during the respective realization periods (ranging from 2020 to 2039) in order to fully realize the net deferred income tax assets.
Our ability to utilize deferred tax assets may be impacted by certain future events, such as changes in tax legislation and insufficient future taxable income prior to expiration of certain deferred tax assets.
We recognize the tax benefits of an uncertain tax position if those benefits are more likely than not to be sustained based on existing tax law. Additionally, we establish a reserve for tax positions that are more likely than not to be sustained based on existing tax law, but uncertain in the ultimate benefit to be sustained upon examination by the relevant taxing authorities. Unrecognized tax benefits are subsequently recognized at the time the more likely than not recognition threshold is met, the tax matter is effectively settled or the statute of limitations for the relevant taxing authority to examine and challenge the tax position has expired, whichever is earlier.
See Note 8 to the Consolidated Financial Statements for additional information.
Sales-related Accruals — We provide direct customer and end-user warranties for our products and honor approved accommodation claims. Standard warranties cover manufacturing defects that would prevent the product from
Management's Discussion and Analysis of Financial Condition and Results of Operations
performing in line with its intended and marketed use. Generally, the terms of these warranties range up to 30 years (limited lifetime), and provide for the repair or replacement of the defective product including limited labor costs. We collect and analyze warranty and accommodation claims data with a focus on the historical amount of claims, the products involved, the amount of time between the warranty claims and the products’ respective sales and the amount of current sales.
We also maintain numerous customer relationships that incorporate different sales incentive programs (primarily volume rebates and promotions). The rebates vary by customer and usually include tiered incentives based on the level of customers’ purchases. Certain promotional allowances are also tied to customer purchase volumes. We estimate the amount of expected annual sales during the course of the year and use the projected sales amount to estimate the cost of the incentive programs. For sales incentive programs that are on the same calendar basis as our fiscal calendar, actual sales information is used in the year-end accruals.
The amount of actual experience related to these accruals could differ significantly from the estimated amounts during the year. If this occurs, we adjust our accruals accordingly. We maintained sales-related accruals for warranty and accommodation claims and sales incentives of $20.1 million and $13.6 million as of December 31, 2019 and 2018, respectively. We record the costs of these accruals as a reduction of gross sales.
Accounting Pronouncements Effective in Future Periods
See Note 2 to the Consolidated Financial Statements for a description of recent accounting pronouncements including the dates, or expected dates, of adoption, and effects, or expected effects, on our disclosures, results of operations, and financial condition.
Item 8. Financial Statements
The following consolidated financial statements are filed as part of this Annual Report on Form 10-K:
|
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|
Page Number
|
|
|
Financial Statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Armstrong Flooring, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Armstrong Flooring, Inc. and subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes and financial statement schedule II (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 10, 2020 expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 2 and Note 6 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019 due to the adoption of Financial Accounting Standards Board (FASB) Accounting Standard Codification Topic 842, Leases, and the related FASB Accounting Standard Updates.
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for revenue as of January 1, 2018 due to the adoption of FASB Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, and the related FASB Accounting Standard Updates.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the
amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2015. Philadelphia, Pennsylvania
March 10, 2020
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Armstrong Flooring, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Armstrong Flooring, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, because of the effect of the material weakness, described below, on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes and financial statement schedule II (collectively, the consolidated financial statements), and our report dated March 10, 2020 expressed an unqualified opinion on those consolidated financial statements.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment:
Information technology general controls (ITGCs) were not designed and implemented over two information technology (IT) systems that support the processing of certain sales incentives, which are recorded as a reduction of net sales and accounts receivable. As a result, business process automated and manual controls that are dependent on the affected ITGCs were ineffective because they could have been adversely impacted. These control deficiencies were a result of: risk-assessment processes inadequate to identify and evaluate responses to risks in the financial reporting process; and failure to implement monitoring control activities when involving a third party service provider.
The material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2019 consolidated financial statements, and this report does not affect our report on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Philadelphia, Pennsylvania
March 10, 2020
Armstrong Flooring, Inc. and Subsidiaries
Consolidated Statements of Operations
(Dollars in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Net sales
|
$
|
626.3
|
|
|
$
|
728.2
|
|
|
$
|
704.1
|
|
Cost of goods sold
|
541.0
|
|
|
585.0
|
|
|
553.0
|
|
Gross profit
|
85.3
|
|
|
143.2
|
|
|
151.1
|
|
Selling, general and administrative expenses
|
146.4
|
|
|
160.6
|
|
|
163.8
|
|
Operating (loss)
|
(61.1
|
)
|
|
(17.4
|
)
|
|
(12.7
|
)
|
Interest expense
|
4.4
|
|
|
4.8
|
|
|
2.7
|
|
Other expense, net
|
1.8
|
|
|
2.9
|
|
|
3.7
|
|
(Loss) from continuing operations before income taxes
|
(67.3
|
)
|
|
(25.1
|
)
|
|
(19.1
|
)
|
Income tax expense (benefit)
|
1.6
|
|
|
(6.0
|
)
|
|
(2.0
|
)
|
(Loss) from continuing operations
|
(68.9
|
)
|
|
(19.1
|
)
|
|
(17.1
|
)
|
Earnings (loss) from discontinued operations, net of tax
|
—
|
|
|
9.9
|
|
|
(24.7
|
)
|
Gain (loss) on disposal of discontinued operations, net of tax
|
10.4
|
|
|
(153.8
|
)
|
|
—
|
|
Net earnings (loss) from discontinued operations
|
10.4
|
|
|
(143.9
|
)
|
|
(24.7
|
)
|
Net (loss)
|
$
|
(58.5
|
)
|
|
$
|
(163.0
|
)
|
|
$
|
(41.8
|
)
|
|
|
|
|
|
|
Basic (loss) per share of common stock:
|
|
|
|
|
Basic (loss) per share of common stock from continuing operations
|
$
|
(2.85
|
)
|
|
$
|
(0.73
|
)
|
|
$
|
(0.63
|
)
|
Basic earnings (loss) per share of common stock from discontinued operations
|
0.43
|
|
|
(5.54
|
)
|
|
(0.91
|
)
|
Basic (loss) per share of common stock
|
$
|
(2.42
|
)
|
|
$
|
(6.27
|
)
|
|
$
|
(1.54
|
)
|
Diluted (loss) per share of common stock:
|
|
|
|
|
Diluted (loss) per share of common stock from continuing operations
|
$
|
(2.85
|
)
|
|
$
|
(0.73
|
)
|
|
$
|
(0.63
|
)
|
Diluted earnings (loss) per share of common stock from discontinued operations
|
0.43
|
|
|
(5.54
|
)
|
|
(0.91
|
)
|
Diluted (loss) per share of common stock
|
$
|
(2.42
|
)
|
|
$
|
(6.27
|
)
|
|
$
|
(1.54
|
)
|
See accompanying notes to consolidated financial statements.
Armstrong Flooring, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(Dollars in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Net (loss)
|
$
|
(58.5
|
)
|
|
$
|
(163.0
|
)
|
|
$
|
(41.8
|
)
|
Changes in other comprehensive (loss), net of tax:
|
|
|
|
|
|
Foreign currency translation adjustments
|
(2.2
|
)
|
|
(6.0
|
)
|
|
7.2
|
|
Derivatives (loss) gain
|
(1.4
|
)
|
|
1.7
|
|
|
(1.5
|
)
|
Pension and postretirement adjustments
|
(9.5
|
)
|
|
7.8
|
|
|
1.6
|
|
Total other comprehensive (loss) income
|
(13.1
|
)
|
|
3.5
|
|
|
7.3
|
|
Total comprehensive (loss)
|
$
|
(71.6
|
)
|
|
$
|
(159.5
|
)
|
|
$
|
(34.5
|
)
|
See accompanying notes to consolidated financial statements.
Armstrong Flooring, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in millions, except par value)
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Assets
|
|
|
|
Current assets:
|
|
|
|
Cash
|
$
|
27.1
|
|
|
$
|
173.8
|
|
Accounts and notes receivable, net
|
36.1
|
|
|
39.0
|
|
Inventories, net
|
111.6
|
|
|
139.5
|
|
Income tax receivable
|
0.7
|
|
|
0.6
|
|
Prepaid expenses and other current assets
|
10.0
|
|
|
18.0
|
|
Total current assets
|
185.5
|
|
|
370.9
|
|
Property, plant and equipment, less accumulated depreciation and amortization of $318.4 and $318.8, respectively
|
277.2
|
|
|
296.1
|
|
Operating lease assets
|
6.0
|
|
|
—
|
|
Intangible assets, less accumulated amortization of $19.0 and $12.0, respectively
|
25.4
|
|
|
32.0
|
|
Deferred income taxes
|
5.3
|
|
|
5.6
|
|
Other noncurrent assets
|
2.8
|
|
|
3.6
|
|
Total assets
|
$
|
502.2
|
|
|
$
|
708.2
|
|
Liabilities and Stockholders' Equity
|
|
|
|
Current liabilities:
|
|
|
|
Short-term debt
|
$
|
—
|
|
|
$
|
25.0
|
|
Current installments of long-term debt
|
0.2
|
|
|
3.7
|
|
Accounts payable and accrued expenses
|
104.4
|
|
|
141.4
|
|
Income tax payable
|
—
|
|
|
0.5
|
|
Total current liabilities
|
104.6
|
|
|
170.6
|
|
Long-term debt
|
42.5
|
|
|
70.6
|
|
Noncurrent operating lease liabilities
|
2.7
|
|
|
—
|
|
Postretirement benefit liabilities
|
59.7
|
|
|
55.7
|
|
Pension benefit liabilities
|
16.0
|
|
|
11.3
|
|
Other long-term liabilities
|
5.8
|
|
|
6.7
|
|
Noncurrent income taxes payable
|
0.2
|
|
|
0.2
|
|
Deferred income taxes
|
2.4
|
|
|
2.1
|
|
Total liabilities
|
233.9
|
|
|
317.2
|
|
Stockholders' equity:
|
|
|
|
Common stock with par value $.0001 per share: 100,000,000 shares authorized; 28,357,658 issued and 21,519,761 outstanding shares as of December 31, 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, 6,837,897 shares as of December 31, 2019 and 2,452,165 shares as of December 31, 2018
|
(88.9
|
)
|
|
(39.7
|
)
|
Additional paid-in capital
|
676.7
|
|
|
678.6
|
|
Accumulated deficit
|
(244.8
|
)
|
|
(186.3
|
)
|
Accumulated other comprehensive (loss)
|
(74.7
|
)
|
|
(61.6
|
)
|
Total stockholders' equity
|
268.3
|
|
|
391.0
|
|
Total liabilities and stockholders' equity
|
$
|
502.2
|
|
|
$
|
708.2
|
|
See accompanying notes to consolidated financial statements.
Armstrong Flooring, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net AWI Investment
|
|
Additional Paid-in Capital
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
Retained Earnings (Accumulated Deficit)
|
|
Total Equity
|
|
Common Stock
|
|
Treasury Stock
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|
|
|
|
December 31, 2016
|
27,895,671
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
673.3
|
|
|
$
|
(59.8
|
)
|
|
$
|
10.0
|
|
|
$
|
623.5
|
|
Net (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(41.8
|
)
|
|
(41.8
|
)
|
Net transfers (to) AWI
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.8
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.8
|
)
|
Repurchase of common stock
|
(2,455,604
|
)
|
|
—
|
|
|
2,455,604
|
|
|
(40.0
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(40.0
|
)
|
Reclassification of net parent investment to additional paid-in capital
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.8
|
|
|
(0.8
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Stock-based employee compensation, net
|
294,155
|
|
|
—
|
|
|
(6,608
|
)
|
|
0.1
|
|
|
—
|
|
|
1.7
|
|
|
—
|
|
|
—
|
|
|
1.8
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7.3
|
|
|
—
|
|
|
7.3
|
|
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 on ASU 2018-02 related to tax reform as of January 1
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(12.6
|
)
|
|
12.6
|
|
|
—
|
|
Net (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(163.0
|
)
|
|
(163.0
|
)
|
Repurchase of common stock
|
(69,353
|
)
|
|
—
|
|
|
69,353
|
|
|
(1.0
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1.0
|
)
|
Stock-based employee compensation, net
|
167,324
|
|
|
—
|
|
|
(66,184
|
)
|
|
1.2
|
|
|
—
|
|
|
4.4
|
|
|
—
|
|
|
—
|
|
|
5.6
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3.5
|
|
|
—
|
|
|
3.5
|
|
December 31, 2018
|
25,832,193
|
|
|
$
|
—
|
|
|
2,452,165
|
|
|
$
|
(39.7
|
)
|
|
$
|
—
|
|
|
$
|
678.6
|
|
|
$
|
(61.6
|
)
|
|
$
|
(186.3
|
)
|
|
$
|
391.0
|
|
Net (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(58.5
|
)
|
|
(58.5
|
)
|
Repurchase of common stock
|
(4,504,504
|
)
|
|
—
|
|
|
4,504,504
|
|
|
(51.4
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(51.4
|
)
|
Stock-based employee compensation, net
|
192,072
|
|
|
—
|
|
|
(118,772
|
)
|
|
2.2
|
|
|
—
|
|
|
(1.9
|
)
|
|
—
|
|
|
—
|
|
|
0.3
|
|
Other comprehensive (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(13.1
|
)
|
|
—
|
|
|
(13.1
|
)
|
December 31, 2019
|
21,519,761
|
|
|
$
|
—
|
|
|
6,837,897
|
|
|
$
|
(88.9
|
)
|
|
$
|
—
|
|
|
$
|
676.7
|
|
|
$
|
(74.7
|
)
|
|
$
|
(244.8
|
)
|
|
$
|
268.3
|
|
See accompanying notes to consolidated financial statements.
Armstrong Flooring, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Cash flows from operating activities:
|
|
|
|
|
|
Net (loss)
|
$
|
(58.5
|
)
|
|
$
|
(163.0
|
)
|
|
$
|
(41.8
|
)
|
Adjustments to reconcile net (loss) to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
50.7
|
|
|
55.1
|
|
|
78.7
|
|
(Gain) loss on disposal of discontinued operations
|
(10.4
|
)
|
|
153.8
|
|
|
—
|
|
Intangible asset impairment
|
—
|
|
|
—
|
|
|
12.5
|
|
Inventory write down
|
13.6
|
|
|
—
|
|
|
—
|
|
Deferred income taxes
|
1.1
|
|
|
2.4
|
|
|
(3.0
|
)
|
Stock-based compensation
|
1.2
|
|
|
5.4
|
|
|
2.2
|
|
U.S. pension expense
|
5.6
|
|
|
6.8
|
|
|
8.9
|
|
Write off of debt financing costs
|
0.8
|
|
|
0.6
|
|
|
—
|
|
Other non-cash adjustments, net
|
0.2
|
|
|
(0.8
|
)
|
|
(0.6
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Receivables
|
2.9
|
|
|
16.3
|
|
|
(2.5
|
)
|
Inventories
|
14.1
|
|
|
(39.4
|
)
|
|
30.4
|
|
Accounts payable and accrued expenses
|
(26.0
|
)
|
|
16.8
|
|
|
(10.5
|
)
|
Income taxes payable and receivable
|
(0.5
|
)
|
|
2.8
|
|
|
(3.0
|
)
|
Other assets and liabilities
|
(0.8
|
)
|
|
5.7
|
|
|
(8.4
|
)
|
Net cash (used for) provided by operating activities
|
(6.0
|
)
|
|
62.5
|
|
|
62.9
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Purchases of property, plant and equipment
|
(28.9
|
)
|
|
(35.3
|
)
|
|
(44.8
|
)
|
Net (payments) proceeds related to sale of discontinued operations
|
(1.9
|
)
|
|
90.2
|
|
|
—
|
|
Proceeds from the sale of assets
|
1.4
|
|
|
5.7
|
|
|
0.4
|
|
Cash paid for acquisition
|
—
|
|
|
—
|
|
|
(36.1
|
)
|
Net cash (used for) provided by investing activities
|
(29.4
|
)
|
|
60.6
|
|
|
(80.5
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
Proceeds from revolving credit facility
|
47.2
|
|
|
82.0
|
|
|
90.0
|
|
Payments on revolving credit facility
|
(30.0
|
)
|
|
(142.0
|
)
|
|
(25.0
|
)
|
Issuance of long-term debt
|
—
|
|
|
75.0
|
|
|
—
|
|
Payments of long-term debt
|
(75.3
|
)
|
|
—
|
|
|
—
|
|
Financing costs
|
(0.8
|
)
|
|
(0.7
|
)
|
|
—
|
|
Payments on capital lease
|
—
|
|
|
(0.2
|
)
|
|
(0.2
|
)
|
Purchases of treasury stock
|
(51.4
|
)
|
|
(1.0
|
)
|
|
(40.0
|
)
|
Proceeds from exercised stock options
|
0.1
|
|
|
0.8
|
|
|
1.4
|
|
Value of shares withheld related to employee tax withholding
|
(0.9
|
)
|
|
(0.6
|
)
|
|
(1.8
|
)
|
Net cash (used for) provided by financing activities
|
(111.1
|
)
|
|
13.3
|
|
|
24.4
|
|
Effect of exchange rate changes on cash and cash equivalents
|
(0.2
|
)
|
|
(1.6
|
)
|
|
1.6
|
|
Net (decrease) increase in cash and cash equivalents
|
(146.7
|
)
|
|
134.8
|
|
|
8.4
|
|
Cash and cash equivalents at beginning of year
|
173.8
|
|
|
39.0
|
|
|
30.6
|
|
Cash and cash equivalents at end of year
|
$
|
27.1
|
|
|
$
|
173.8
|
|
|
$
|
39.0
|
|
Cash and cash equivalents at end of year from discontinued operations
|
—
|
|
|
—
|
|
|
(1.1
|
)
|
Cash and cash equivalents at end of year of continuing operations
|
$
|
27.1
|
|
|
$
|
173.8
|
|
|
$
|
40.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Supplemental Cash Flow Disclosure:
|
|
|
|
|
|
Amounts in accounts payable for capital expenditures
|
$
|
5.6
|
|
|
$
|
8.5
|
|
|
$
|
7.8
|
|
Interest paid
|
3.1
|
|
|
3.4
|
|
|
2.8
|
|
Income taxes (refunded) paid, net
|
1.0
|
|
|
(1.4
|
)
|
|
(2.8
|
)
|
See accompanying notes to consolidated financial statements.
Armstrong Flooring, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
NOTE 1. BUSINESS AND BASIS OF PRESENTATION
Business
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.
Former Parent Separation
On April 1, 2016, we became an independent company as a result of the separation by Armstrong World Industries, Inc. ("AWI"), a Pennsylvania corporation, of its Resilient Flooring and Wood Flooring segments from its Building Products segment (the "Separation"). The Separation was effected by allocating the assets and liabilities related primarily to the Resilient Flooring and Wood Flooring segments to AFI and then distributing the common stock of AFI to AWI’s shareholders (the "Distribution"). The Separation and Distribution (together, the "Spin-off") resulted in AFI and AWI becoming two independent, publicly traded companies, with AFI owning and operating the Resilient Flooring and Wood Flooring segments and AWI continuing to own and operate a ceilings business.
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.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation Policy
The Consolidated Financial Statements and accompanying data in this report include the accounts of AFI and its subsidiaries. All significant intercompany transactions have been eliminated from the Consolidated Financial Statements.
Use of Estimates
We prepare our financial statements in conformity with U.S. generally accepted accounting principles ("GAAP"), which requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses. When preparing an estimate, management determines the amount based upon the consideration of relevant internal and external information. Actual results may differ from these estimates.
Revenue Recognition
We recognize revenue when control of the promised goods is transferred to our customers, in an amount that reflects
the consideration we expect to be entitled to in exchange for those goods.
Our primary performance obligation to our customers is the delivery of flooring products pursuant to purchase orders. Control of the products we sell transfers to our customers at the point in time when the goods are shipped. Our standard sales terms are primarily Free On Board (“FOB”) shipping point. Our typical payment terms are 30 days and our sales arrangements do not contain any significant financing component for our customers. Our customer arrangements do not generate contract assets or liabilities that are material to the Consolidated Financial Statements.
Armstrong Flooring, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
Each purchase order sets forth the transaction price for the products purchased under that arrangement. Some customer arrangements include variable consideration, such as volume rebates, some of which depend upon our customers meeting specified performance criteria, such as a purchasing level over a period of time. We use judgment to estimate the most likely amount of variable consideration at each reporting date.
We generally do not incur any incremental costs to obtain or fulfill our customer contracts that require capitalization and expense such costs as incurred when the amortization period is less than one year.
We disaggregate revenue based on customer geography as this category represents the most appropriate depiction of how the nature, timing and uncertainty of revenues and cash flows are impacted by economic factors. See Note 3 to the Consolidated Financial Statements for our revenues disaggregated by geography.
Warranties
We provide our customers with a product warranty that provides assurance that the products we sell meet standard specifications and are free of defects. We maintain a reserve for claims incurred under our standard product warranty programs. We allocate a portion of the transaction price for each sale to our performance obligation to provide service type warranties to our customers.
Sales Incentives
Sales incentives to customers are reflected as a reduction of net sales.
Shipping and Handling Costs
We treat shipping and handling that occurs after our customer obtains control of the products as a fulfillment activity and not as a promised service. Shipping and handling costs are reflected as a component of cost of goods sold.
Advertising Costs
We recognize advertising expenses as they are incurred.
Pension and Postretirement Benefits
We have benefit plans that provide for pension, medical and life insurance benefits to certain eligible employees when they retire from active service. The cost of plan amendments that provide for benefits already earned by plan participants is amortized over the expected future working lifetime or the life expectancy of plan participants. A market-related value of plan assets methodology is utilized in the calculation of expected return on assets. The methodology recognizes gains and losses on long duration bonds immediately, while gains and losses on other assets are recognized in the calculation over a five-year period. We use a December 31 measurement date for our pension and postretirement benefit plans.
Taxes
The provision for income taxes has been determined using the asset and liability approach of accounting for income taxes to reflect the expected future tax consequences of events recognized in the financial statements. Deferred income tax assets and liabilities are recognized by applying enacted tax rates to temporary differences that exist as of the balance sheet date which result from differences in the timing of reported taxable income between tax and financial reporting.
We reduce the carrying amounts of deferred tax assets by a valuation allowance if, based on the available evidence, it is more likely than not that such assets will not be realized. The need to establish valuation allowances for deferred tax
Armstrong Flooring, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
assets is assessed quarterly. In assessing the requirement for, and amount of, a valuation allowance in accordance with the more likely than not standard for all periods, we give appropriate consideration to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability and foreign source income, the duration of statutory carryforward periods, and our experience with operating loss and tax credit carryforward expirations. A history of cumulative losses is a significant piece of negative evidence used in our assessment. If a history of cumulative losses is incurred for a tax jurisdiction, forecasts of future profitability are not used as positive evidence related to the realization of the deferred tax assets in the assessment.
We recognize the tax benefits of an uncertain tax position only if those benefits are more likely than not to be sustained based on existing tax law. Additionally, we establish a reserve for tax positions that are more likely than not to be sustained based on existing tax law, but uncertain in the ultimate benefit to be sustained upon examination by the relevant taxing authorities. Unrecognized tax benefits are subsequently recognized at the time the more likely than not recognition threshold is met, the tax matter is effectively settled or the statute of limitations for the relevant taxing authority to examine and challenge the tax position has expired, whichever is earlier.
We account for all interest and penalties on uncertain income tax positions as income tax expense.
Taxes collected from customers and remitted to governmental authorities are reported on a net basis.
Earnings per Share
Basic earnings per share is computed by dividing the earnings attributable to common shares by the sum of the weighted average number of shares of common stock outstanding during the period and the weighted average number of stock-based awards that have vested but not yet been issued during the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and short-term investments that have maturities of three months or less when purchased.
Receivables
We sell the vast majority of our products to select, pre-approved customers using customary trade terms that allow for payment in the future. Customer trade receivables and miscellaneous receivables, net of allowances for doubtful accounts, customer credits and warranties are reported in accounts and notes receivable on a net basis. Cash flows from the collection of receivables are classified as operating cash flows on the Consolidated Statements of Cash Flows.
We establish credit-worthiness prior to extending credit. We estimate the recoverability of receivables each period. This estimate is based upon new information in the period, which can include the review of available financial statements and forecasts, as well as discussions with legal counsel and the management of the debtor company. We provide allowances as events occur which impact the collectability of the receivable. Account balances are charged off against the allowance when the potential for recovery is considered remote. We do not have any off-balance-sheet credit exposure related to our customers.
Inventories
U.S. inventories are valued at the lower of cost or market, and cost is determined using the last-in, first-out ("LIFO") method of accounting. Non-U.S. inventories are valued at the lower of cost or net realizable value, and cost is determined using the first-in, first-out ("FIFO") method of accounting.
Armstrong Flooring, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
Property Plant and Equipment
Property, plant and equipment is recorded at cost reduced by accumulated depreciation. Depreciation expense is recognized on a straight-line basis over assets’ estimated useful lives. Machinery and equipment includes manufacturing equipment (depreciated over 3 to 15 years), computer equipment (depreciated over 3 to 5 years) and office furniture and equipment (depreciated over 5 to 7 years). Within manufacturing equipment, assets that are subject to accelerated obsolescence or wear, such as tooling and engraving equipment, are depreciated over shorter periods (3 to 7 years). Heavy production equipment, such as conveyors, kilns and mixers, are depreciated over longer periods (10 to 15 years). Buildings are depreciated over 15 to 30 years, depending on factors such as type of construction and use. Computer software is amortized over 3 to 7 years.
Property, plant and equipment is tested for impairment when indicators of impairment exist, such as operating losses and/or negative cash flows. If an evaluation of the undiscounted future cash flows generated by an asset group indicates impairment, the asset group is written down to its estimated fair value, which is based on its discounted future cash flows. The principal assumption used in these impairment tests is future cash flows, which are derived from those used in our operating plan and strategic planning processes.
Intangible Assets
Our indefinite-lived intangible assets are primarily trademarks which are integral to our corporate identity and expected to contribute indefinitely to our corporate cash flows. We conduct our annual impairment test for indefinite-lived intangible assets during the fourth quarter and we conduct interim impairment tests if indicators of potential impairment exist.
An impairment is recognized if the carrying amount of the asset exceeds its fair value. We first perform a qualitative assessment to determine if it is necessary to perform a quantitative impairment test. If a quantitative impairment test is deemed necessary, the method used to determine the fair value of our indefinite-lived intangible assets is the relief-from-royalty method. The principal assumptions used in our application of this method are revenue growth rate, discount rate and royalty rate. Revenue growth rates are derived from those used in our operating plan and strategic planning processes. The discount rate assumption is calculated based upon an estimated weighted average cost of capital, which we believe reflects the overall level of inherent risk and the rate of return a market participant would expect to achieve. The royalty rate assumption represents the estimated contribution of the intangible asset to overall profits. The method used for valuing our indefinite-lived intangible assets did not change from prior periods.
Our long-lived intangible assets are primarily contractual arrangements (amortized over 5 years), which includes non-compete agreements, and intellectual property (amortized over 2 to 15 years), which includes developed technology and patents. We review long-lived intangible assets for impairment if indicators of potential impairment exist, such as operating losses and/or negative cash flows. If an evaluation of the undiscounted future cash flows generated by the asset indicates impairment, the asset group is written down to its estimated fair value, which is based on its discounted future cash flows. The principal assumption used in these impairment tests is future cash flows, which are derived from those used in our operating plan and strategic planning processes.
Foreign Currency Transactions
For our subsidiaries with non-U.S. dollar functional currency, assets and liabilities are translated at period-end exchange rates. Revenues and expenses are translated at exchange rates effective during each month. Foreign currency translation gains or losses are included as a component of accumulated other comprehensive income ("AOCI") within equity. Gains or losses on foreign currency transactions are recognized through net income (loss).
Armstrong Flooring, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
Stock-Based Employee Compensation
We issue stock-based compensation to certain employees and non-employee directors in different forms, including performance stock awards ("PSAs"), performance stock units ("PSUs"), and restricted stock units ("RSUs"). We record stock-based compensation expense based on an estimated grant-date fair value. The expense is reflected as a component of selling, general and administrative (“SG&A”) expenses on our Consolidated Statements of Operations. Stock-based compensation expense includes an estimate for forfeitures and anticipated achievement levels and is generally recognized on a straight-line basis over the vesting period for the entire award.
Net AWI Investment
The Consolidated Statements of Stockholders' Equity include net cash transfers and other property transfers between AWI and AFI. The initial net AWI investment balance included assets and liabilities incurred by AWI on behalf of AFI such as accrued liabilities related to corporate allocations including administrative expenses for legal, accounting, treasury, information technology, human resources and other services. Other assets and liabilities recorded by AWI, whose related income and expense had been allocated to AFI, were also included in net AWI investment.
The impact of the Spin-off on equity is reflected in net transfers from AWI on the Consolidated Statements of Stockholders' Equity.
During 2017, we recorded adjustments primarily related to the tax attributes assumed upon the Spin-off in the amount of $0.7 million.
Recently Adopted Accounting Standards
On January 1, 2018, we adopted Accounting Standards Codification ("ASC") 606, "Revenue from Contracts with
Customers," and all the related amendments. The impact of the standard is limited to our accounting for warranties and returns. We adopted the standard using the modified retrospective transition method and we recorded a cumulative catch up adjustment to increase accumulated deficit in the amount of $4.1 million, increase prepaid expenses and other current assets by $0.4 million and decrease accounts receivable, net by $4.5 million. The adoption of the standard did not have a material impact on our results of operations or cash flows, but did result in new disclosures.
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 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.
Armstrong Flooring, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Impact of 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 6 to the 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. Adoption of the standard will not materially impact our financial condition, results of operations or cash flows.
In August 2018, the FASB issued ASU 2018-13, "Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement." The guidance eliminates, adds and modifies certain disclosure requirements. This new guidance is effective for fiscal years beginning after December 15, 2019 for public companies. Early adoption is permitted for either the entire standard or provisions that eliminate or modify requirements. Adoption of the standard will not impact our financial condition, results of operations or cash flows.
In August 2018, the FASB issued ASU 2018-14, "Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans." The guidance changes the disclosure requirements by eliminating certain disclosures that are no longer considered cost beneficial and added new ones that are considered pertinent. The guidance is effective for fiscal years ending after December 15, 2020 for public companies. Early adoption is permitted. Adoption of the standard will not impact our financial condition, results of operations or cash flows.
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. Adoption of the standard will not materially impact our financial condition, results of operations or cash flows.
In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740)." The guidance simplifies accounting for income taxes by removing certain exceptions. This new guidance is effective for fiscal years beginning after
Armstrong Flooring, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
December 15, 2020 for public companies. Early adoption is permitted. We are continuing to evaluate the impact the adoption of this standard will have on our financial condition, results of operations or cash flows.
Subsequent Events
We have evaluated subsequent events for potential recognition and disclosure through the date the Consolidated Financial Statements included in the Form 10-K were issued.
NOTE 3. NATURE OF OPERATIONS
Geographic Areas
The sales in the table below are allocated to geographic areas based upon the location of the customer.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Net trade sales
|
|
|
|
|
|
United States
|
$
|
474.4
|
|
|
$
|
563.4
|
|
|
$
|
549.9
|
|
China
|
68.4
|
|
|
68.7
|
|
|
59.3
|
|
Canada
|
37.9
|
|
|
49.2
|
|
|
48.6
|
|
Other
|
45.6
|
|
|
46.9
|
|
|
46.3
|
|
Total
|
$
|
626.3
|
|
|
$
|
728.2
|
|
|
$
|
704.1
|
|
The long-lived assets in the table below include property, plant and equipment, net. Long-lived assets by geographic area are reported by location of the operations to which the asset is attributed.
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
United States
|
$
|
192.3
|
|
|
$
|
205.9
|
|
China
|
72.7
|
|
|
78.0
|
|
Other
|
12.2
|
|
|
12.2
|
|
Total
|
$
|
277.2
|
|
|
$
|
296.1
|
|
Information about Major Customers
In 2019, net sales to one customer exceeded 10% of our total net sales. Total net sales to this customer were $124.4 million in 2019. We monitor the creditworthiness of our customers and generally do not require collateral.
NOTE 4. SEVERANCE EXPENSE
In the second quarter of 2019, we recorded $2.9 million in SG&A expenses for severance and related expenses to reflect the separation costs for our former President and Chief Executive Officer.
In connection with the divestiture of our North American wood flooring business we announced a cost optimization plan in 2018 to improve our existing cost structure by eliminating essentially all shared costs that will not be covered by transition service agreements with AIP. The new structure was expected to better reflect the simplification of our operations as a purely resilient flooring company. We eliminated approximately 45 positions, and the impacted employees received severance benefits. We recognized charges of $2.4 million in SG&A expenses in the fourth quarter of 2018.
Armstrong Flooring, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
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.
In the first quarter of 2017, we announced the combination of our commercial and residential go-to-market structures and related organization. The new structure was designed to provide enhanced support and responsiveness to retailers and contractors and to foster greater alignment with distributors, which cover both commercial and residential markets. As a result of this reorganization, approximately 40 positions were eliminated, and the impacted employees received severance benefits. We recognized charges of $4.6 million in SG&A expense as a result of this reorganization.
NOTE 5. STOCK-BASED COMPENSATION
Prior to the Spin-off, AWI issued stock-based compensation awards to employees and directors that became employees or directors of AFI. These awards included employee stock options, employee and director RSUs, and employee PSUs.
In April 2016, AFI adopted the Armstrong Flooring, Inc. 2016 Long-Term Incentive Plan (the "2016 LTIP") and the Armstrong Flooring, Inc. 2016 Directors' Stock Unit Plan (the "2016 Directors' Plan"), which collectively comprised a new compensation program that allows for the grant to certain employees and non-employee directors of AFI different forms of benefits, including PSAs, PSUs, and RSUs. On June 2, 2017, our stockholders approved an amendment and restatement of the 2016 LTIP. Under the 2016 LTIP, our board of directors initially authorized up to 5,500,000 shares of common stock for issuance and the amendment authorized an additional 2,100,000 shares of common stock for issuance. Our board of directors authorized up to 600,000 shares of common stock that may be issued pursuant to the 2016 Directors' Plan. As of December 31, 2019, 1,863,537 shares and 188,351 shares were available for future grants under the 2016 LTIP and the 2016 Directors' Plan, respectively.
New Awards
The Management Development and Compensation Committee of the Board of Directors granted the following awards under the 2016 LTIP Plan and the 2016 Directors' Plan:
PSAs, PSUs and Performance-Based Restricted Stock Units ("PBRSUs") — PSAs, PSUs and PBRSUs were granted to key executive employees and certain management employees of AFI. The PSAs, PSUs and PBRSUs are units of restricted Company common stock that vest based on the achievement of certain performance conditions.
PSA and PSUs — The performance condition for 75.0% of the awards is based on earnings before interest, taxes, depreciation and amortization ("EBITDA"). The performance condition for the remaining 25.0% of the awards is based on cumulative free cash flow, defined as cash flow from operations, less cash used in investing activities.
Performance awards issued to key executive employees in 2017 are also indexed to the achievement of specified levels of absolute total shareholder return, and the fair value was measured using a Monte-Carlo simulation on the date of grant. For performance awards that are not indexed to the achievement of specified levels of absolute total shareholder return, the fair value was measured using our stock price on the date of grant. If the performance conditions are met, the awards vest at the conclusion of the performance period, which is generally at the end of the third fiscal year following the date of grant.
Armstrong Flooring, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
The following table summarizes the assumptions used to measure the fair value of the annual grant of performance awards that are also indexed to the achievement of specified levels of absolute total shareholder return.
|
|
|
|
|
|
2017
|
Weighted-average grant-date fair value
|
$
|
15.41
|
|
|
|
Assumptions
|
|
Risk-free rate of return
|
1.6
|
%
|
Expected volatility
|
31.4
|
%
|
Expected term (in years)
|
3.0
|
|
Expected dividend yield
|
—
|
|
We did not issue any such awards in 2019 or 2018.
The risk free rate of return was determined based on the implied yield available on zero-coupon U.S. Treasury bills at the time of grant with a remaining term equal to the expected term of the award. The expected volatility was based on peer volatility since, as of the valuation date, we did not have a sufficient number of trading days to rely on our own trading history. The expected term represented the performance period on the underlying award. The expected dividend yield was assumed to be zero because, at the time of each grant, we had no plans to declare a dividend.
PBRSUs — PBRSUs were issued to the CEO on September 11, 2019. The number of shares earned is based upon the achievement of five stock price hurdles over the period from September 11, 2019 through September 11, 2024. The five per share stock price hurdles are $10.50, $12.25, $14.00, $15.75 and $17.50. A Monte-Carlo valuation was performed to simulate possible future stock prices for AFI over the time remaining period of the award.
The following table summarized the Monte-Carlo inputs and grant-date fair value price used for the PBRSUs.
|
|
|
|
|
|
2019
|
Grant-date stock price (AFI closing stock price on September 11, 2019)
|
$
|
7.43
|
|
|
|
Assumptions
|
|
Risk-free rate of return
|
1.59
|
%
|
Expected volatility
|
41.45
|
%
|
Expected dividend yield
|
—
|
|
The Monte-Carlo valuation provided a fair value for each of the five per share stock price hurdles discussed above, respectively: $5.93, $5.28, $4.70, $4.20, and $3.75, and provided derived service periods of three years for the first two hurdles and four years for the remaining three hurdles.
We did not issue any such awards in 2018 or 2017.
The risk free rate of return was determined based on the implied yield available on zero-coupon U.S. Treasury bills at the time of grant with a remaining term equal the expected term of the award. The expected volatility was based on a weighted average of the volatility of AFI and the average volatility of our compensation peer group's volatilities. The expected dividend yield was assumed to be zero because, at the time of the grant, we had no plans to declare a dividend.
Armstrong Flooring, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
RSUs — RSUs were granted to key executive employees and certain management employees of AFI. The RSUs are units representing shares of Company common stock which are converted to shares of Company common stock at the end of the service period. There are no performance conditions associated with these awards. Generally, vesting occurs with one third of the awards vesting at the end of one, two and three years from the date of grant. The fair value of RSUs was measured using our stock price on the date of grant.
Director Awards — RSUs were granted to our non-employee directors under the 2016 Directors' Plan. These awards generally have a vesting period of one year, and any dividends paid prior to vesting are forfeitable if the award does not vest. The awards are generally payable six months following the director’s separation from service on the board. The fair value of non-employee director RSUs was measured using our stock price on the date of grant. The following table summarizes activity related to the non-employee director RSUs.
|
|
|
|
|
|
|
2019
|
|
2018
|
Vested and not yet delivered as of December 31
|
203,261
|
|
|
174,442
|
Granted
|
57,012
|
|
|
67,288
|
Outstanding as of December 31
|
260,273
|
|
|
241,730
|
Modified Awards
In connection with the Spin-off, in accordance with the Employee Matters Agreement between AFI and AWI, certain executives, employees and non-employee directors were entitled to receive equity compensation awards of AFI in replacement of previously outstanding awards granted prior to the Spin-off under various AWI stock incentive plans. These awards included stock options, RSUs, and PSUs. In connection with the Spin-off, these awards were converted into new AFI equity awards using a formula designed to preserve the intrinsic value of the awards immediately prior to the Spin-off on April 1, 2016. The modification did not result in a change to the value of the awards. Therefore, no additional compensation expense related to the award modification was recorded. The terms and conditions of the AWI awards were replicated and, as necessary, adjusted to ensure that the vesting schedule and economic value of the awards was unchanged by the conversion.
The following table summarizes information about AFI's modified stock options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares (in thousands)
|
|
Weighted-Average Exercise Price (per share)
|
|
Weighted-Average Remaining Contractual Term (years)
|
|
Aggregate Intrinsic Value (in millions)
|
Outstanding as of December 31, 2018
|
|
453.5
|
|
|
$
|
12.89
|
|
|
3.6
|
|
$
|
0.2
|
|
Exercised
|
|
(5.7
|
)
|
|
13.98
|
|
|
|
|
|
Cancelled
|
|
(5.7
|
)
|
|
14.55
|
|
|
|
|
|
Outstanding as of December 31, 2019
|
|
442.1
|
|
|
12.85
|
|
|
2.7
|
|
—
|
|
Options exercisable
|
|
442.1
|
|
|
12.85
|
|
|
2.7
|
|
—
|
|
The options expire between 2020 and 2024. When options are exercised, we may issue new shares, use treasury shares (if available), acquire shares held by investors, or a combination of these alternatives in order to satisfy the option exercises.
Armstrong Flooring, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
The following table presents information related to stock option exercises:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
Total intrinsic value of stock options exercised
|
$
|
—
|
|
|
$
|
0.3
|
|
Cash proceeds received from stock options exercised
|
0.1
|
|
|
0.8
|
|
Total Awards
The table below summarizes activity related to the PSAs, PSUs, PBRSUs, and RSUs. The non-employee director activity is not reflected in the RSU activity below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PSAs, PSUs and PBRSUs
|
|
RSUs
|
|
|
Number of Shares (in thousands)
|
|
Weighted-Average Grant-Date Fair Value (per share)
|
|
Number of Shares (in thousands)
|
|
Weighted-Average Grant-Date Fair Value (per share)
|
Non-vested as of December 31, 2018
|
|
1,102.5
|
|
|
$
|
13.88
|
|
|
324.6
|
|
|
$
|
16.13
|
|
Granted
|
|
572.3
|
|
|
7.75
|
|
|
622.8
|
|
|
7.39
|
|
Vested
|
|
(108.8
|
)
|
|
19.90
|
|
|
(116.9
|
)
|
|
15.82
|
|
Cancelled
|
|
(437.5
|
)
|
|
12.73
|
|
|
—
|
|
|
—
|
|
Forfeited
|
|
(260.2
|
)
|
|
13.76
|
|
|
(159.7
|
)
|
|
15.18
|
|
Non-vested as of December 31, 2019
|
|
868.3
|
|
|
10.53
|
|
|
670.8
|
|
|
8.28
|
|
The table above contains 4,174 and 6,895 PSUs as of December 31, 2019 and 2018, respectively, which are accounted for as liability awards as they may be settled in cash. The table above contains 14,118 and 6,825 RSUs as of December 31, 2019 and 2018, respectively, which are accounted for as liability awards as they may be settled in cash.
In 2019, the weighted-average per share grant-date fair value of performance-based awards and RSUs granted was $7.75 and $7.39, respectively. The fair value of performance-based awards and RSUs that vested in 2019 was $2.2 million and $1.8 million, respectively.
In 2018, the weighted-average per share grant-date fair value of performance-based awards and RSUs granted was $13.94 and $16.12, respectively. No PSAs and PSUs vested in 2018. The fair value of RSU's that vested in 2018 was $2.1 million.
Stock-based compensation expense is generally recognized on a straight-line basis over the vesting period and is recorded as a component of SG&A. Total stock-based compensation expense included in the Consolidated Statements of Operations and the related tax effects are presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Stock-based compensation expense
|
$
|
1.2
|
|
|
$
|
4.7
|
|
|
$
|
1.5
|
|
Income tax benefit
|
—
|
|
|
1.1
|
|
|
0.8
|
|
To the extent the vesting-date fair value is greater than the grant-date fair value, the excess tax benefit is recorded as an income tax benefit in the Consolidated Statements of Operations. For the years ended December 31, 2019, 2018 and 2017 the income tax expense was $0.1 million, $0.1 million, and the income tax benefit $0.5 million, respectively related to grant-date fair value from the exercise of stock options and vesting of stock-based awards.
Armstrong Flooring, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
As of December 31, 2019, $5.2 million of total unrecognized compensation expense related to non-vested stock-based compensation arrangements is expected to be recognized over a weighted-average period of 3.2 years.
NOTE 6. LEASES
We lease certain real estate (warehouse and office space), vehicles and equipment. For leases with an initial term of less than thirteen 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 nine 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:
|
|
•
|
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 the lease renewals, termination options and purchase options, and in assessing impairment of the right-of-use asset 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:
|
|
|
|
|
|
|
|
Year Ended
|
|
|
December 31, 2019
|
Finance lease cost
|
|
|
Amortization of right-of-use asset
|
|
$
|
0.3
|
|
Operating lease cost
|
|
4.1
|
|
Short-term lease cost
|
|
1.4
|
|
Sublease income
|
|
(1.4
|
)
|
Total lease cost
|
|
$
|
4.4
|
|
During 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.
Armstrong Flooring, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
The following table summarizes supplemental balance sheet information related to leases:
|
|
|
|
|
|
|
Balance Sheet Classification
|
December 31, 2019
|
Assets
|
|
|
Operating lease assets
|
Operating lease assets
|
$
|
6.0
|
|
Finance lease assets
|
Property, plant and equipment, less accumulated depreciation
|
0.6
|
|
Total lease assets
|
|
$
|
6.6
|
|
|
|
|
Liabilities
|
|
|
Current
|
|
|
Operating
|
Accounts payable and accrued expenses
|
$
|
3.3
|
|
Finance
|
Current installments of long-term debt
|
0.2
|
|
Noncurrent
|
|
|
Operating
|
Noncurrent operating lease liabilities
|
2.7
|
|
Finance
|
Long-term debt
|
0.3
|
|
Total lease liabilities
|
|
$
|
6.5
|
|
The following table summarizes supplemental cash flow information related to leases:
|
|
|
|
|
|
|
|
Year Ended
|
|
|
December 31, 2019
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
Operating cash flows from operating leases
|
|
$
|
4.1
|
|
Financing cash flows from finance leases
|
|
$
|
0.3
|
|
Armstrong Flooring, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
The following table summarized weighted average remaining lease term and weighted average discount rate:
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
Weighted Average
|
|
|
Remaining Lease Term (Years)
|
|
Discount Rate
|
|
|
|
|
|
Operating leases
|
|
3.5
|
|
6.0
|
%
|
Finance leases
|
|
3.2
|
|
5.4
|
%
|
The following table provides future minimum payments at December 31, 2019, by year and in the aggregate, for leases having non-cancelable lease terms in excess of one year:
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
Finance Leases
|
2020
|
|
$
|
3.6
|
|
$
|
0.3
|
|
2021
|
|
1.3
|
|
0.2
|
|
2022
|
|
0.3
|
|
0.1
|
|
2023
|
|
0.2
|
|
—
|
|
2024
|
|
0.2
|
|
—
|
|
Thereafter
|
|
1.1
|
|
—
|
|
Total
|
|
$
|
6.7
|
|
$
|
0.6
|
|
The following table provides future minimum payments having non-cancelable lease terms in effect at December 31, 2018 under the previous lease standard, ASC 840:
|
|
|
|
|
|
|
|
Total Minimum Lease Payments
|
Scheduled minimum lease payments
|
|
|
2019
|
|
$
|
10.0
|
|
2020
|
|
7.1
|
|
2021
|
|
2.0
|
|
2022
|
|
0.3
|
|
2023
|
|
0.2
|
|
Thereafter
|
|
0.8
|
|
Total
|
|
$
|
20.4
|
|
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:
Armstrong Flooring, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
Operating Leases
|
Finance Leases
|
Future minimum lease payments
|
|
$
|
6.7
|
|
$
|
0.6
|
|
Less: Unamortized interest
|
|
0.7
|
|
0.1
|
|
Total lease liability
|
|
$
|
6.0
|
|
$
|
0.5
|
|
NOTE 7. RELATIONSHIP WITH AWI
On April 1, 2016, in connection with the completion of the Spin-off, we entered into several agreements with AWI that provided for the separation and allocation between AFI and AWI of the assets, employees, liabilities and obligations of AWI and its subsidiaries attributable to periods prior to, at and after the Spin-off. These agreements also govern the relationship between AFI and AWI subsequent to the completion of the Spin-off.
The Tax Matters Agreement generally governs AFI’s and AWI’s respective rights, responsibilities and obligations after the Spin-off with respect to tax liabilities and benefits, tax attributes, the preparation and filing of tax returns, the control of audits and other tax proceedings, and other matters regarding taxes for any tax period ending on or before the distribution date, as well as tax periods beginning after the distribution date. In addition, the Tax Matters Agreement provides that AFI is liable for taxes incurred by AWI that may arise if AFI takes, or fails to take, certain actions that may result in the separation, the distribution or certain related transactions failing to qualify as tax-free for U.S. federal income tax purposes. AWI received an opinion from its tax counsel that the Spin-off qualified as a tax-free transaction for AWI and its shareholders.
Pursuant to the Trademark License Agreement, AWI provided AFI with a perpetual, royalty-free license to use the “Armstrong” trade name and logo.
Pursuant to the Transition Trademark License agreement, AFI provided AWI with a five-year, royalty-free license to use the “Inspiring Great Spaces” tagline, logo and related color scheme.
Under the Campus Lease Agreement, AFI leased certain portions of AWI's campus for use as AFI's corporate headquarters. The Campus Lease Agreement provides for an initial term of five years from April 1, 2016.
NOTE 8. INCOME TAXES
U.S. Tax Reform
On December 22, 2017, the U.S government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Reform Act”). The Tax Reform Act made broad and complex changes to the U.S. tax code that has impacted our fiscal year ending December 31, 2018, including, but not limited, reducing the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018, limiting the carryover of net operating losses to 80% of taxable income, and modifying the deductibility of certain expenses.
We recognized the income tax effects of the Tax Reform Act in our 2017 Consolidated Financial Statements in accordance with SAB No. 118, which provides SEC staff guidance for the application of ASC Topic 740, "Income Taxes," in the reporting period in which the Tax Reform Act was signed into law. We completed our analysis of the Tax Reform Act during 2018 and recorded an additional income tax expense of $0.1 million in 2018, due to the impact of filing our 2017 U.S. Federal Tax Return.
Armstrong Flooring, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
The following table presents loss from continuing operations before income taxes for U.S. and international operations based on the location of the entity to which such earnings are attributable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Domestic
|
$
|
(65.6
|
)
|
|
$
|
(28.1
|
)
|
|
$
|
(18.0
|
)
|
Foreign
|
(1.7
|
)
|
|
3.0
|
|
|
(1.1
|
)
|
Total
|
$
|
(67.3
|
)
|
|
$
|
(25.1
|
)
|
|
$
|
(19.1
|
)
|
The following table presents the components of the income tax benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Current
|
|
|
|
|
|
Federal
|
$
|
0.3
|
|
|
$
|
0.3
|
|
|
$
|
(4.7
|
)
|
Foreign
|
0.4
|
|
|
0.6
|
|
|
(0.4
|
)
|
State and local
|
0.1
|
|
|
0.2
|
|
|
—
|
|
Subtotal
|
0.8
|
|
|
1.1
|
|
|
(5.1
|
)
|
Deferred
|
|
|
|
|
|
Federal
|
0.1
|
|
|
(4.6
|
)
|
|
(0.3
|
)
|
Foreign
|
0.6
|
|
|
(2.5
|
)
|
|
0.1
|
|
State and local
|
0.1
|
|
|
—
|
|
|
3.3
|
|
Subtotal
|
0.8
|
|
|
(7.1
|
)
|
|
3.1
|
|
Total
|
$
|
1.6
|
|
|
$
|
(6.0
|
)
|
|
$
|
(2.0
|
)
|
As of December 31, 2019, we reviewed our position with regard to foreign unremitted earnings and determined that unremitted earnings would continue to be permanently reinvested. Accordingly, we have not recorded foreign withholding taxes on approximately $12.7 million of undistributed earnings of foreign subsidiaries that could be subject to taxation if remitted to the U.S. because we currently plan to keep these amounts permanently invested overseas. It is not practicable to calculate the residual income tax that would result if these basis differences reversed due to the complexities of the tax law and the hypothetical nature of the calculations.
Armstrong Flooring, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
The following table presents the differences between our income tax benefit at the U.S. federal statutory income tax rate and our effective income tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Continuing operations tax at statutory rate
|
$
|
(14.1
|
)
|
|
$
|
(5.3
|
)
|
|
$
|
(6.7
|
)
|
Increase in valuation allowances on deferred federal income tax assets
|
14.3
|
|
|
0.2
|
|
|
—
|
|
Increase in valuation allowances on deferred state income tax assets
|
2.1
|
|
|
0.7
|
|
|
5.2
|
|
State income tax benefit, net of federal benefit
|
(1.8
|
)
|
|
(0.6
|
)
|
|
(0.8
|
)
|
Tax on foreign and foreign-source income
|
1.2
|
|
|
1.1
|
|
|
(1.4
|
)
|
Permanent book/tax differences
|
1.1
|
|
|
1.7
|
|
|
0.6
|
|
Research and development credits
|
(0.9
|
)
|
|
(0.6
|
)
|
|
(0.7
|
)
|
Increase/(decrease) in valuation allowances on deferred foreign income tax assets
|
0.1
|
|
|
(3.4
|
)
|
|
2.0
|
|
State law changes, net of federal benefit
|
—
|
|
|
—
|
|
|
(1.1
|
)
|
Impact of Tax Reform Act
|
—
|
|
|
0.1
|
|
|
0.8
|
|
Other
|
(0.4
|
)
|
|
0.1
|
|
|
0.1
|
|
Total
|
$
|
1.6
|
|
|
$
|
(6.0
|
)
|
|
$
|
(2.0
|
)
|
Armstrong Flooring, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
The tax effects of principal temporary differences between the carrying amounts of assets and liabilities and their tax bases are summarized in the following table. Management believes it is more likely than not that the results of future operations will generate sufficient taxable income in the appropriate jurisdiction and foreign source income to realize deferred tax assets, net of valuation allowances. In arriving at this conclusion, we considered the profit or loss before tax generated for the years 2017 through 2019, as well as future reversals of existing taxable temporary differences and projections of future profit before tax and foreign source income.
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Deferred income tax assets (liabilities)
|
|
|
|
Postretirement and postemployment benefits
|
$
|
17.5
|
|
|
$
|
16.7
|
|
Net operating losses
|
25.1
|
|
|
19.3
|
|
Accrued expenses
|
4.2
|
|
|
9.1
|
|
Deferred compensation
|
2.6
|
|
|
5.5
|
|
Customer claims reserves
|
4.2
|
|
|
2.9
|
|
Goodwill
|
2.2
|
|
|
2.2
|
|
Pension benefit liabilities
|
3.5
|
|
|
2.3
|
|
Tax credit carryforwards
|
3.4
|
|
|
2.6
|
|
Intangibles
|
2.8
|
|
|
1.7
|
|
Other
|
2.6
|
|
|
0.8
|
|
Total deferred income tax assets
|
68.1
|
|
|
63.1
|
|
Valuation allowances
|
(35.8
|
)
|
|
(29.7
|
)
|
Net deferred income tax assets
|
32.3
|
|
|
33.4
|
|
Accumulated depreciation
|
(20.6
|
)
|
|
(20.2
|
)
|
Inventories
|
(6.7
|
)
|
|
(8.7
|
)
|
Other
|
(2.1
|
)
|
|
(1.0
|
)
|
Total deferred income tax liabilities
|
(29.4
|
)
|
|
(29.9
|
)
|
Net deferred income tax assets
|
$
|
2.9
|
|
|
$
|
3.5
|
|
Deferred income taxes have been classified in the Consolidated Balance Sheet as:
|
|
|
|
Deferred income tax assets—noncurrent
|
$
|
5.3
|
|
|
$
|
5.6
|
|
Deferred income tax liabilities—noncurrent
|
(2.4
|
)
|
|
(2.1
|
)
|
Net deferred income tax assets
|
$
|
2.9
|
|
|
$
|
3.5
|
|
We reduce the carrying amounts of deferred tax assets by a valuation allowance if, based on the available evidence, it is more likely than not that such assets will not be realized. The need to establish valuation allowances for deferred tax assets is assessed quarterly. In assessing the requirement for, and amount of, a valuation allowance in accordance with the more likely than not standard for all periods, we give appropriate consideration to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability and foreign source income, the duration of statutory carryforward periods, and our experience with operating loss and tax credit carryforward expirations. A history of cumulative losses is a significant piece of negative evidence used in our assessment. If a history of cumulative losses is incurred for a tax jurisdiction, forecasts of future profitability are not used as positive evidence related to the realization of the deferred tax assets in the assessment.
Armstrong Flooring, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
The following table presents the components of our valuation allowance against deferred income tax assets:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
Federal
|
$
|
20.3
|
|
|
$
|
9.4
|
|
State
|
5.4
|
|
|
2.8
|
|
Foreign
|
10.1
|
|
|
17.5
|
|
Total
|
$
|
35.8
|
|
|
$
|
29.7
|
|
The valuation allowances offset federal, state and foreign deferred tax assets, credits, and operating loss carryforwards.
The following is a summary of our net operating loss (“NOL”) carryforwards:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
State
|
$
|
56.7
|
|
|
$
|
17.6
|
|
Foreign
|
42.0
|
|
|
65.3
|
|
Federal
|
54.7
|
|
|
14.0
|
|
As of December 31, 2019, $41.2 million of state NOL carryforwards expire between 2020 and 2038, and $41.6 million of foreign NOL carryforwards expire between 2020 and 2024. The remainder are available for carryforward indefinitely.
We estimate we will need to generate future taxable income of approximately $142.7 million for state income tax purposes during the respective realization periods (ranging from 2020 to 2039) in order to fully realize the net deferred income tax assets discussed above.
We have $0.7 million of unrecognized tax benefits ("UTBs") as of December 31, 2019. Of this amount, $0.1 million, net of federal benefit, if recognized in future periods, would impact the reported effective tax rate.
It is reasonably possible that certain UTBs may increase or decrease within the next twelve months due to tax examination changes, settlement activities, expirations of statute of limitations, or the impact on recognition and measurement considerations related to the results of published tax cases or other similar activities. Over the next twelve months, we estimate UTB's may decrease by $0.1 million related to state statutes expiring.
The following table presents a reconciliation of the total amounts of UTBs, excluding interest and penalties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Unrecognized tax benefits as of January 1
|
$
|
1.6
|
|
|
$
|
4.8
|
|
|
$
|
5.0
|
|
Gross change for current year positions
|
—
|
|
|
0.2
|
|
|
0.4
|
|
(Decreases) for prior period positions
|
(0.9
|
)
|
|
(3.4
|
)
|
|
(0.6
|
)
|
Unrecognized tax benefits balance as of December 31
|
$
|
0.7
|
|
|
$
|
1.6
|
|
|
$
|
4.8
|
|
The 2018 decrease related to prior period positions includes $3.1 million related to discontinued operations.
We conduct business globally, and as a result, we file income tax returns in the U.S., various states and international jurisdictions. In the normal course of business, we are subject to examination by taxing authorities throughout the world in such major jurisdictions as Australia, Canada, China and the U.S. Generally, we have open tax years subject to tax audit on average of between three years and six years. With few exceptions, the statute of limitations is no longer open
Armstrong Flooring, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
for state or non-U.S. income tax examinations for the years before 2013. We have not significantly extended any open statutes of limitation for any major jurisdiction and have reviewed and accrued for, where necessary, tax liabilities for open periods. The tax years 2013 through 2019 are subject to future potential tax adjustments.
The following table details amounts related to certain other taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Payroll taxes
|
$
|
10.0
|
|
|
$
|
11.7
|
|
|
$
|
10.9
|
|
Property and franchise taxes
|
3.2
|
|
|
2.5
|
|
|
2.5
|
|
NOTE 9. DISCONTINUED OPERATIONS
In November 2018, we entered into a definitive agreement to sell our wood business to TZI, an affiliate of AIP. The sale was completed in December 2018. 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.
On December 31, 2018, in connection with the sale of our wood business, TZI and AFI entered into agreements related to transition services, intellectual property, and subleases.
Pursuant to the transition service agreement AFI provided transitional services in areas including human resources, customer service, operations, finance and IT. In consideration for the services, TZI paid AFI $11.9 million of net fees that varied based on the scope of services provided, plus a $3.0 million administrative fee, which are reflected as a reduction of SG&A expense. TZI reimbursed AFI for AFI’s out-of-pocket costs and expenses in connection with providing the services.
Pursuant to the intellectual property agreement, AFI provided TZI a non-exclusive, royalty-free, non-sublicensable, non-assignable license in and to certain trademarks.
Under the subleases agreement TZI leased certain premises located at the AFI campus through March 30, 2021 with the option to terminate the sublease any time after six months from the effective date of the sublease with 30-days' prior notice. TZI terminated the lease in 2019 and paid a termination fee of $2.5 million. Sublease income received prior to the termination totaled $1.5 million.
As a part of the transition service agreement, we facilitated sales into Canada for TZI in 2019 through our Canadian subsidiary as an agent.
The financial results of the wood business have been classified as discontinued operations for all periods presented. The Consolidated Statements of Cash Flows does not separately report the cash flows of the discontinued operation.
Armstrong Flooring, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
The following is a summary of the operating results of the wood business, which are included in discontinued operations. These results exclude overhead allocations.
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Net Sales
|
$
|
387.0
|
|
|
$
|
429.6
|
|
Cost of goods sold
|
330.7
|
|
|
407.5
|
|
Gross profit
|
56.3
|
|
|
22.1
|
|
Selling, general and administrative expenses
|
36.6
|
|
|
39.4
|
|
Intangible asset impairment
|
—
|
|
|
12.5
|
|
Operating earnings (loss)
|
19.7
|
|
|
(29.8
|
)
|
Interest expense
|
—
|
|
|
0.1
|
|
Other expense, net
|
—
|
|
|
1.0
|
|
Earnings (loss) before income tax
|
19.7
|
|
|
(30.9
|
)
|
Income tax expense (benefit)
|
9.8
|
|
|
(6.2
|
)
|
Net earnings (loss) from discontinued operations
|
$
|
9.9
|
|
|
$
|
(24.7
|
)
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Depreciation and Amortization
|
$
|
10.3
|
|
|
$
|
40.0
|
|
Capital Expenditures
|
(8.0
|
)
|
|
(12.3
|
)
|
The following is a summary of the results related to the net gain (loss) on disposal of wood business which is included in discontinued operations:
|
|
|
|
|
|
|
|
|
2019
|
2018
|
Gain (loss) on disposal of discontinued operations before income tax
|
$
|
10.4
|
|
$
|
(153.8
|
)
|
Income tax expense
|
—
|
|
—
|
|
Net gain (loss) on disposal of discontinued operations
|
$
|
10.4
|
|
$
|
(153.8
|
)
|
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 22 for further information.
Armstrong Flooring, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
NOTE 10. EARNINGS PER SHARE OF COMMON STOCK
The table below shows a reconciliation of the numerator and denominator for basic and diluted earnings per share calculations for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Numerator
|
|
|
|
|
|
|
(Loss) from continuing operations
|
|
$
|
(68.9
|
)
|
|
$
|
(19.1
|
)
|
|
$
|
(17.1
|
)
|
Earnings (loss) from discontinued operations, net of tax
|
|
10.4
|
|
|
(143.9
|
)
|
|
(24.7
|
)
|
Net (loss)
|
|
$
|
(58.5
|
)
|
|
$
|
(163.0
|
)
|
|
$
|
(41.8
|
)
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
23,597,877
|
|
|
25,780,214
|
|
|
26,977,475
|
|
Weighted average number of vested shares not yet issued
|
|
518,460
|
|
|
188,195
|
|
|
136,504
|
|
Weighted average number of common shares outstanding - Basic
|
|
24,116,337
|
|
|
25,968,409
|
|
|
27,113,979
|
|
Dilutive stock-based compensation awards outstanding
|
|
—
|
|
|
—
|
|
|
—
|
|
Weighted average number of common shares outstanding - Diluted
|
|
24,116,337
|
|
|
25,968,409
|
|
|
27,113,979
|
|
The diluted loss per share was calculated using basic common shares outstanding, as inclusion of potentially dilutive common shares would be anti-dilutive for those calculations.
Performance-based employee compensation awards are considered potentially dilutive in the initial period in which the performance conditions are met.
The following awards were excluded from the computation of diluted (loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Potentially dilutive common shares excluded from diluted computation as inclusion would be anti-dilutive
|
611,399
|
|
|
474,910
|
|
743,678
|
|
Performance awards excluded from diluted computation, as performance conditions not met
|
343,505
|
|
|
862,256
|
|
849,483
|
|
Armstrong Flooring, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
NOTE 11. ACCOUNTS AND NOTES RECEIVABLE
The following table presents accounts and notes receivables, net of allowances:
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Customer receivables
|
$
|
47.1
|
|
|
$
|
45.4
|
|
Miscellaneous receivables
|
7.2
|
|
|
6.2
|
|
Less: allowance for product warranties, discounts and losses
|
(18.2
|
)
|
|
(12.6
|
)
|
Total
|
$
|
36.1
|
|
|
$
|
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:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
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
|
6.8
|
|
|
7.5
|
|
Current year claim accruals
|
(9.4
|
)
|
|
(6.6
|
)
|
Balance as of December 31
|
$
|
(9.0
|
)
|
|
$
|
(6.4
|
)
|
NOTE 12. INVENTORIES
The following table presents details related to our inventories, net:
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Finished goods
|
$
|
87.1
|
|
|
$
|
110.5
|
|
Goods in process
|
4.5
|
|
|
5.7
|
|
Raw materials and supplies
|
20.0
|
|
|
23.3
|
|
Total
|
$
|
111.6
|
|
|
$
|
139.5
|
|
|
|
|
|
Inventories valued on a LIFO basis
|
$
|
84.6
|
|
|
$
|
113.3
|
|
Inventories valued on FIFO or other basis
|
$
|
27.0
|
|
|
$
|
26.2
|
|
The distinction between the use of different methods of inventory valuation is primarily based on geographic location. We value our inventories on a LIFO basis only in the United States.
Inventory values were lower than would have been reported on a total FIFO basis by $4.7 million and $3.0 million as of December 31, 2019 and 2018, respectively.
Armstrong Flooring, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
On September 11, 2019, Michel S. Vermette was appointed Chief Executive Officer of the Company and initiated the implementation of a new multi-year product strategy and 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 13. PREPAID EXPENSES AND OTHER CURRENT ASSETS
The following table presents details related to our prepaid expenses and other current assets:
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Prepaid expenses
|
$
|
5.7
|
|
|
$
|
6.8
|
|
Merchandising materials
|
3.1
|
|
|
9.4
|
|
Other
|
1.2
|
|
|
1.8
|
|
Total
|
$
|
10.0
|
|
|
$
|
18.0
|
|
Merchandising materials of $5.9 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 14. PROPERTY, PLANT AND EQUIPMENT
The following table presents details related to our property, plant and equipment, net:
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Land
|
$
|
28.2
|
|
|
$
|
29.6
|
|
Buildings
|
88.3
|
|
|
91.8
|
|
Machinery and equipment
|
444.6
|
|
|
452.8
|
|
Computer software
|
15.3
|
|
|
19.2
|
|
Construction in progress
|
19.2
|
|
|
21.5
|
|
Less accumulated depreciation and amortization
|
(318.4
|
)
|
|
(318.8
|
)
|
Total
|
$
|
277.2
|
|
|
$
|
296.1
|
|
Property, plant and equipment depreciation expense for the years ended December 31, 2019 and 2018 was $43.7 million and $37.5 million, respectively.
NOTE 15. INTANGIBLE ASSETS
Armstrong Flooring, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
The following table details amounts related to our intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
|
Estimated Useful Life
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
Long-lived intangible assets
|
|
|
|
|
|
|
|
|
Contractual arrangements
|
5 years
|
|
$
|
36.4
|
|
|
$
|
17.3
|
|
|
$
|
36.4
|
|
|
$
|
10.7
|
|
Intellectual property
|
2-15 years
|
|
5.3
|
|
|
1.7
|
|
|
5.0
|
|
|
1.3
|
|
Subtotal
|
|
|
41.7
|
|
|
$
|
19.0
|
|
|
41.4
|
|
|
$
|
12.0
|
|
Indefinite-lived intangible assets
|
|
|
|
|
|
|
|
|
Trademarks and brand names
|
Indefinite
|
|
2.7
|
|
|
|
|
2.6
|
|
|
|
Total
|
|
|
$
|
44.4
|
|
|
|
|
$
|
44.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Amortization expense
|
|
$
|
7.0
|
|
|
$
|
7.2
|
|
|
$
|
4.2
|
|
During the second quarter of 2017, we acquired vinyl composition tile ("VCT") assets for $36.1 million, consisting of equipment and trademarks of Mannington Mills, Inc. ("Mannington Mills") under an agreement that included non-compete provisions. We allocated $33.6 million of the purchase price to intangible assets and the remainder to inventories and equipment. The assigned intangible asset classes were contractual arrangements, $33.3 million, with an estimated useful life of five years, and intellectual property, $0.3 million, with an estimated useful life of two years.
In addition, Mannington Mills was eligible for contingent consideration of up to $9.0 million based on sales of our VCT flooring products for the twelve month periods ending June 30, 2019 and June 30, 2020 (“measurement periods”) compared to a base period of combined AFI and Mannington Mills sales for the 12 month period ended June 30, 2017. The contingent consideration was tiered for each of the separate twelve month measurement periods ranging from consideration of zero to a maximum of $4.5 million in each measurement period. No contingent consideration was due for the twelve month period ending June 30, 2019. No contingent liability has been recognized for the twelve month period ending June 30, 2020 as we concluded that such liability is not probable. Any contingent liability recognized will be recorded as an adjustment to the value of the acquired assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
2024
|
Expected annual amortization expense
|
$
|
7.0
|
|
|
$
|
7.0
|
|
|
$
|
3.7
|
|
|
$
|
0.4
|
|
$
|
0.4
|
|
Armstrong Flooring, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
NOTE 16. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The following table details amounts related to our accounts payable and accrued expenses:
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Payables, trade and other
|
$
|
70.5
|
|
|
$
|
99.5
|
|
Employment costs
|
13.8
|
|
|
25.0
|
Other accrued expenses
|
16.8
|
|
|
16.9
|
Current operating lease liabilities
|
3.3
|
|
|
—
|
|
Total
|
$
|
104.4
|
|
|
$
|
141.4
|
|
NOTE 17. DEBT
The following table presents details related to our debt:
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Revolver
|
$
|
42.2
|
|
|
$
|
25.0
|
|
Current portion of Term Loan A
|
—
|
|
|
3.7
|
|
Noncurrent portion of Term Loan A
|
—
|
|
|
70.6
|
|
Noncurrent portion of finance lease liabilities
|
0.3
|
|
|
—
|
|
Total
|
$
|
42.5
|
|
|
$
|
99.3
|
|
In connection with the sale of the wood business, on December 31, 2018, we entered into a credit agreement (the "Credit Agreement"). The Credit Agreement provided us with a $150.0 million secured Credit Facility (the "Credit Facility"), consisting of a $75.0 million revolving facility and a $75.0 million term loan facility. The revolving facility included a $25.0 million sublimit for the issuance of letters of credit and a $15.0 million sublimit for swing line loans. The Credit Facility is scheduled to mature on December 31, 2023. The Credit Agreement provided for an uncommitted accordion feature that allowed us to request an increase in the revolving facility or the term loan facility in an aggregate amount not to exceed $25.0 million.
On November 1, 2019, we entered into a First Amendment to the Credit Agreement (the "Amendment"). The Amendment amended the Credit Agreement to, among other things, decrease the size of the Credit Facility to $100.0 million, consisting of a $75.0 million revolving facility and a $25.0 million term loan facility (the "Amended Credit Facility") and converted term loans outstanding in excess of $25.0 million to revolver borrowings.
On December 18, 2019, we entered into a Second Amendment to the Credit Agreement which converts the entire Credit Facility of $100.0 million to an asset-based revolving credit facility ("ABL Facility"). Obligations under the ABL Facility are secured by qualifying accounts receivable, inventories and select machinery and equipment of our wholly owned domestic subsidiaries. The Second Amendment also decreased the Letter of Credit sublimit from $25.0 million to $20.0 million.
As of December 31, 2019, total borrowings outstanding under our ABL Facility were $42.2 million, while outstanding letters of credit were $3.9 million.
Borrowings under the ABL Facility bear interest at a rate equal to an adjusted base rate or the London Interbank Offered Rate ("LIBOR") plus an applicable margin, which varies according to the net leverage ratio and was 2.25% as of December 31, 2019. As of December 31, 2019, the interest rate of 3.94% was determined using LIBOR plus applicable margin. We are required to pay a commitment fee, payable quarterly in arrears, on the average daily unused amount of the revolving ABL Facility, which varies according to the net leverage ratio and was 0.20% as of December 31,
Armstrong Flooring, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
2019. Outstanding letters of credit issued under the ABL Facility are subject to fees which will be due quarterly in arrears based on the applicable margin described above plus a fronting fee. The total rate for letters of credit was 2.375% as of December 31, 2019.
All obligations under the ABL Facility are guaranteed by each of our wholly owned domestic subsidiaries that individually, or together with its subsidiaries, has assets of more than $1.0 million. All obligations under the ABL Facility, and guarantees of those obligations, are secured by all of the present and future assets of the Company and the guarantors, subject to certain exceptions and exclusions as set forth in the ABL Facility and other security and collateral documents.
Due to its stated five-year maturity, this obligation is presented as a long-term obligation in our Consolidated Balance Sheet. However, we may repay this obligation at any time, without penalty.
Debt Covenants
The Second Amendment modifies a number of covenants that, among other things, requires us to provide the Bank of America (the "Agent") with certain information with respect to the Company and the borrowing base and to maintain or otherwise preserve the collateral in favor of the Agent and further restricts our ability to make acquisitions and modifies restrictions on its ability to repurchase equity. The Second Amendment also modifies covenants as to capital expenditures.
In addition, the Second Amendment also amends certain financial covenants applicable to us and our subsidiaries. The ABL Facility requires, among other things, that we maintain a Consolidated Fixed Charge Coverage Ratio (as defined in the Second Amendment) during a Financial Covenant Trigger Period (as defined in the Second Amendment) of at least 1.00 to 1.00 as well as meet a minimum Consolidated EBITDA (as defined in the Second Amendment).
As of December 31, 2019 the Fixed Charge Coverage Ratio covenant was not applicable. As of December 31, 2019, we were in compliance with the minimum Consolidated EBITDA covenant.
NOTE 18. PENSION AND OTHER POSTRETIREMENT BENEFIT PROGRAMS
We have defined-benefit pension and other postretirement benefit plans covering eligible employees in North America. Benefits from defined-benefit pension plans are based primarily on an employee’s compensation and years of service. We fund our pension plans when appropriate. We fund postretirement benefits on a pay-as-you-go basis, with the retiree paying a portion of the cost for health care benefits by means of deductibles and contributions. We also have defined-contribution pension plans for eligible employees.
Our U.S. defined-benefit pension plans were amended to freeze accruals for remaining salaried non-production employees, effective December 31, 2017.
On November 14, 2018, AFI entered into a Stock Purchase Agreement with TZI, an affiliate of American Industrial Partners ("AIP"), to sell our 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. As a result of the sale, all plan participants in the Hartco Retiree Welfare Plan, one of AFI's three postretirement plans, were transferred to AHF, LLC, an affiliate of AIP. The transfer of all liabilities for the Hartco Retiree Welfare Plan were effective as of December 31, 2018. Also, as a result of the North American wood flooring business sale, AFI transferred a portion of the Retirement Income Plan ("RIP"), as of December 31, 2018 to AHF, LLC. The U.S. pension plan disclosures show the spun off liability and asset amounts and include the allocated actuarial loss for the affected participants.
Defined-Benefit Pension Plans
Armstrong Flooring, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
The following tables summarize the balance sheet impact of the pension benefit plans, as well as the related benefit obligations, assets, funded status and rate assumptions. The pension benefits disclosures include both the qualified, funded RIP and the Retirement Benefit Equity Plan, which is a nonqualified, unfunded plan designed to provide pension benefits in excess of the limits defined under Sections 415 and 401(a)(17) of the Internal Revenue Code. The disclosures also include our two Canadian pension plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plans
|
|
Canadian Pension Plans
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
Projected benefit obligations as of January 1
|
$
|
346.4
|
|
|
$
|
395.8
|
|
|
$
|
15.6
|
|
|
$
|
17.8
|
|
Liabilities transferred to AHF, LLC
|
—
|
|
|
(11.5
|
)
|
|
—
|
|
|
—
|
|
Service cost
|
2.7
|
|
|
3.8
|
|
|
—
|
|
|
—
|
|
Interest cost
|
15.0
|
|
|
14.6
|
|
|
0.6
|
|
|
0.6
|
|
Foreign currency translation adjustment
|
—
|
|
|
—
|
|
|
0.6
|
|
|
(1.2
|
)
|
Actuarial loss/(gain)
|
49.2
|
|
|
(33.4
|
)
|
|
1.3
|
|
|
0.5
|
|
Benefits paid
|
(18.7
|
)
|
|
(22.9
|
)
|
|
(1.8
|
)
|
|
(2.1
|
)
|
Projected benefit obligations as of December 31
|
394.6
|
|
|
346.4
|
|
|
16.3
|
|
|
15.6
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
Fair value of plan assets as of January 1
|
337.1
|
|
|
390.8
|
|
|
13.6
|
|
|
17.1
|
|
Assets to be transferred to AHF, LLC
|
—
|
|
|
(8.1
|
)
|
|
—
|
|
|
—
|
|
Actual return on plan assets
|
62.2
|
|
|
(22.8
|
)
|
|
1.7
|
|
|
(0.4
|
)
|
Employer contribution
|
0.1
|
|
|
0.1
|
|
|
0.1
|
|
|
0.1
|
|
Foreign currency translation adjustment
|
—
|
|
|
—
|
|
|
0.6
|
|
|
(1.1
|
)
|
Benefits paid
|
(18.7
|
)
|
|
(22.9
|
)
|
|
(1.8
|
)
|
|
(2.1
|
)
|
Fair value of plan assets as of December 31
|
380.7
|
|
|
337.1
|
|
|
14.2
|
|
|
13.6
|
|
Funded status of the plans
|
$
|
(13.9
|
)
|
|
$
|
(9.3
|
)
|
|
$
|
(2.1
|
)
|
|
$
|
(2.0
|
)
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation as of December 31
|
$
|
393.2
|
|
|
$
|
345.1
|
|
|
$
|
16.3
|
|
|
$
|
15.6
|
|
Armstrong Flooring, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
The table below presents the weighted-average assumptions used in computing the benefit obligations and net periodic benefit cost for the defined-benefit pension plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plans
|
|
Canadian Pension Plans
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Weighted average assumptions used to determine benefit obligations as of December 31
|
|
|
|
|
|
|
|
Discount rate
|
3.25
|
%
|
|
4.40
|
%
|
|
3.00
|
%
|
|
3.80
|
%
|
Rate of compensation increase
|
3.25
|
%
|
|
3.25
|
%
|
|
n/a
|
|
|
n/a
|
|
Weighted average assumptions used to determine net periodic benefit cost for the period:
|
|
|
|
|
|
|
|
Discount rate
|
4.40
|
%
|
|
3.75
|
%
|
|
3.80
|
%
|
|
3.30
|
%
|
Expected return on plan assets
|
6.30
|
%
|
|
5.85
|
%
|
|
4.90
|
%
|
|
4.90
|
%
|
Rate of compensation increase
|
3.25
|
%
|
|
3.25
|
%
|
|
n/a
|
|
|
n/a
|
|
Basis of Rate-of-Return Assumption
Long-term asset class return assumptions are determined based on the expected performance of the asset classes over 20 years. For the U.S. plans, these forecasted gross returns were reduced by estimated management fees and expenses, yielding a long-term return forecast of 6.30% and 5.85% for the years ended December 31, 2019 and 2018, respectively. For our Canadian plans, these forecasted gross returns were reduced by estimated management fees and expenses, yielding a long-term return forecast of 4.90% for each of the years ended December 31, 2019 and 2018.
Defined-benefit pension plans with benefit obligations in excess of plan assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plans
|
|
Canadian Pension Plans
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Projected benefit obligation, December 31
|
$
|
394.6
|
|
|
$
|
346.4
|
|
|
$
|
15.8
|
|
|
$
|
15.2
|
|
Accumulated benefit obligation, December 31
|
393.2
|
|
|
345.1
|
|
|
15.8
|
|
|
15.2
|
|
Fair value of plan assets, December 31
|
380.7
|
|
|
337.1
|
|
|
13.7
|
|
|
13.1
|
|
The components of net periodic pension cost for the U.S. defined-benefit pension plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Service cost of benefits earned during the period
|
$
|
2.7
|
|
|
$
|
3.8
|
|
|
$
|
5.4
|
|
Interest cost on projected benefit obligation
|
15.0
|
|
|
14.6
|
|
|
15.4
|
|
Expected return on plan assets
|
(21.7
|
)
|
|
(22.2
|
)
|
|
(22.7
|
)
|
Amortization of prior service cost
|
—
|
|
|
—
|
|
|
0.4
|
|
Recognized net actuarial loss
|
9.7
|
|
|
10.7
|
|
|
10.5
|
|
Net periodic pension cost
|
$
|
5.7
|
|
|
$
|
6.9
|
|
|
$
|
9.0
|
|
Armstrong Flooring, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
The components of net periodic pension cost (credit) for the Canadian defined-benefit pension plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Interest cost on projected benefit obligation
|
$
|
0.6
|
|
|
$
|
0.6
|
|
|
$
|
0.6
|
|
Expected return on plan assets
|
(0.7
|
)
|
|
(0.8
|
)
|
|
(0.9
|
)
|
Amortization of net actuarial loss
|
0.4
|
|
|
0.2
|
|
|
0.2
|
|
Net periodic pension cost (credit)
|
$
|
0.3
|
|
|
$
|
—
|
|
|
$
|
(0.1
|
)
|
Investment Policies
Our primary investment objective is to maintain the funded status of the plans such that the likelihood that we will be required to make significant contributions to the plan is limited. This objective is expected to be achieved by:
|
|
•
|
Investing a substantial portion of the plan assets in high quality corporate and treasury bonds whose duration is at least equal to that of the plan’s liabilities such that there is a relatively high correlation between the movements of the plan’s liability and asset values.
|
|
|
•
|
Investing in publicly traded equities in order to increase the ratio of plan assets to liabilities over time.
|
|
|
•
|
Limiting investment return volatility by diversifying among additional asset classes with differing expected rates of return and return correlations.
|
Each asset class used has a defined asset allocation target and allowable range. The tables below show the asset allocation targets and the December 31, 2019 and 2018 positions for each asset class:
|
|
|
|
|
|
|
|
|
|
|
Target Weight at
|
|
Position at December 31,
|
|
December 31, 2019
|
|
2019
|
|
2018
|
U.S. Asset Class
|
|
|
|
|
|
Fixed income securities
|
56
|
%
|
|
55
|
%
|
|
59
|
%
|
Equities
|
44
|
%
|
|
45
|
%
|
|
41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Target Weight at
|
|
Position at December 31,
|
|
December 31, 2019
|
|
2019
|
|
2018
|
Canadian Asset Class
|
|
|
|
|
|
Fixed income securities
|
50
|
%
|
|
50
|
%
|
|
50
|
%
|
Equities
|
48
|
%
|
|
48
|
%
|
|
48
|
%
|
Other
|
2
|
%
|
|
2
|
%
|
|
2
|
%
|
Pension plan assets are required to be reported and disclosed at fair value in the financial statements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Three levels of inputs may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Armstrong Flooring, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
The asset’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
The following tables set forth by level within the fair value hierarchy a summary of the U.S. and Canadian defined-benefit pension plan assets, net of payables for administrative expenses, measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value at December 31, 2019
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
U.S. Plans
|
|
|
|
|
|
|
|
Fixed income securities
|
$
|
—
|
|
|
$
|
207.9
|
|
|
$
|
—
|
|
|
$
|
207.9
|
|
Equities
|
—
|
|
|
173.2
|
|
|
—
|
|
|
173.2
|
|
Other
|
(0.4
|
)
|
|
—
|
|
|
—
|
|
|
(0.4
|
)
|
Net assets measured at fair value
|
$
|
(0.4
|
)
|
|
$
|
381.1
|
|
|
$
|
—
|
|
|
$
|
380.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value at December 31, 2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
U.S. Plans
|
|
|
|
|
|
|
|
Fixed income securities
|
$
|
—
|
|
|
$
|
202.4
|
|
|
$
|
—
|
|
|
$
|
202.4
|
|
Equities
|
—
|
|
|
143.2
|
|
|
—
|
|
|
143.2
|
|
Other
|
(0.4
|
)
|
|
—
|
|
|
—
|
|
|
(0.4
|
)
|
Net assets measured at fair value
|
$
|
(0.4
|
)
|
|
$
|
345.6
|
|
|
$
|
—
|
|
|
345.2
|
|
Assets to be transferred to AHF, LLC
|
|
|
|
|
|
|
(8.1
|
)
|
Net assets
|
|
|
|
|
|
|
$
|
337.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value at December 31, 2019
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Canadian Plans
|
|
|
|
|
|
|
|
Fixed income securities
|
$
|
—
|
|
|
$
|
7.0
|
|
|
$
|
—
|
|
|
$
|
7.0
|
|
Equities
|
—
|
|
|
6.9
|
|
|
—
|
|
|
6.9
|
|
Other
|
0.3
|
|
|
—
|
|
|
—
|
|
|
0.3
|
|
Net assets measured at fair value
|
$
|
0.3
|
|
|
$
|
13.9
|
|
|
$
|
—
|
|
|
$
|
14.2
|
|
Armstrong Flooring, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value at December 31, 2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Canadian Plans
|
|
|
|
|
|
|
|
Fixed income securities
|
$
|
—
|
|
|
$
|
6.9
|
|
|
$
|
—
|
|
|
$
|
6.9
|
|
Equities
|
—
|
|
|
6.5
|
|
|
—
|
|
|
6.5
|
|
Other
|
0.2
|
|
|
—
|
|
|
—
|
|
|
0.2
|
|
Net assets measured at fair value
|
$
|
0.2
|
|
|
$
|
13.4
|
|
|
$
|
—
|
|
|
$
|
13.6
|
|
Following is a description of the valuation methodologies used for assets.
Fixed income securities — Consists of registered investment funds, common and collective trust funds, and segregated funds investing in fixed income securities tailored to institutional investors. The fair values of the investments in this class are based on the underlying securities in each fund’s portfolio, which is the amount the fund would receive for the security upon a current sale.
Equities — Consists of investments in funds investing in equities tailored to institutional investors. The fair value of each fund is based on the underlying securities in each fund’s portfolio, which is the amount the fund would receive for the security upon a current sale.
Other — Consists of cash and cash equivalents and other payables and receivables (net). The carrying amounts of cash and cash equivalents approximate fair value due to the short-term maturity of these instruments. The carrying amounts of payables and receivables approximate fair value due to the short-term nature of these instruments.
Armstrong Flooring, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
Defined-Benefit Postretirement Benefit Plans
The following tables summarize the balance sheet impact of the postretirement benefit plans, as well as the related benefit obligations, assets, funded status and rate assumptions.
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Change in benefit obligation:
|
|
|
|
Projected benefit obligations as January 1
|
$
|
62.2
|
|
|
$
|
76.4
|
|
Service cost
|
0.2
|
|
|
0.4
|
|
Interest cost
|
2.5
|
|
|
2.6
|
|
Plan participants' contributions
|
2.2
|
|
|
1.6
|
|
Plan amendments
|
(2.6
|
)
|
|
—
|
|
Effect of curtailment
|
—
|
|
|
(0.2
|
)
|
Actuarial loss/(gain)
|
10.0
|
|
|
(9.0
|
)
|
Benefits paid
|
(9.2
|
)
|
|
(9.6
|
)
|
Projected benefit obligation as of December 31
|
65.3
|
|
|
62.2
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
Fair value of plan assets as January 1
|
—
|
|
|
—
|
|
Employer contribution
|
7.0
|
|
|
8.0
|
|
Plan participants' contribution
|
2.2
|
|
|
1.6
|
|
Benefits paid
|
(9.2
|
)
|
|
(9.6
|
)
|
Fair value of plan assets as of December 31
|
—
|
|
|
—
|
|
Funded status of the plans
|
$
|
(65.3
|
)
|
|
$
|
(62.2
|
)
|
The table below presents the weighted-average assumptions used in computing the benefit obligations and net periodic benefit cost for the U.S. defined-benefit postretirement benefit plans:
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Weighted average discount rate used to determine benefit obligations as of December 31
|
3.20
|
%
|
|
4.30
|
%
|
Weighted average discount rate used to determine net periodic benefit cost
|
4.30
|
%
|
|
3.60
|
%
|
The components of net periodic postretirement (benefit) cost were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Service cost of benefits earned during the period
|
$
|
0.2
|
|
|
$
|
0.4
|
|
|
$
|
0.4
|
|
Interest cost on accumulated postretirement benefit obligations
|
2.5
|
|
|
2.6
|
|
|
3.2
|
|
Amortization of net actuarial (gain)
|
(3.1
|
)
|
|
(2.5
|
)
|
|
(2.4
|
)
|
Net periodic postretirement (benefit) cost
|
$
|
(0.4
|
)
|
|
$
|
0.5
|
|
|
$
|
1.2
|
|
For measurement purposes, an average rate of annual increase in the per capita cost of covered health care benefits of 7.1% for pre-65 retirees and 6.5% to 8.2% for post-65 retirees (depending on plan type) was assumed for 2020, decreasing
Armstrong Flooring, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
ratably to an ultimate rate of 4.5% by 2028. Assumed health care cost trend rates can have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects on the defined-benefit postretirement benefit plans for 2020:
|
|
|
|
|
|
|
|
|
|
One percentage point
|
|
Increase
|
|
Decrease
|
(Decrease) increase on total service and interest cost components
|
$
|
—
|
|
|
$
|
—
|
|
(Decrease) increase on postretirement benefit obligation
|
(0.9
|
)
|
|
1.2
|
|
Financial Statement Impacts
Amounts recognized in assets and (liabilities) on the Consolidated Balance Sheets at year end consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Benefits
|
|
Canadian Pension Benefits
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Pension benefit liabilities
|
$
|
(13.9
|
)
|
|
$
|
(9.3
|
)
|
|
$
|
(2.1
|
)
|
|
$
|
(2.0
|
)
|
Net amount recognized
|
$
|
(13.9
|
)
|
|
$
|
(9.3
|
)
|
|
$
|
(2.1
|
)
|
|
$
|
(2.0
|
)
|
|
|
|
|
|
|
|
|
|
|
Postretirement Benefits
|
|
2019
|
|
2018
|
Accounts payable and accrued expenses
|
$
|
(5.6
|
)
|
|
$
|
(6.5
|
)
|
Postretirement benefit liabilities
|
(59.7
|
)
|
|
(55.7
|
)
|
Net amount recognized
|
$
|
(65.3
|
)
|
|
$
|
(62.2
|
)
|
Pre-tax amounts recognized in AOCI at year end for our pension and postretirement benefit plans consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Benefits
|
|
Canadian Pension Benefits
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net actuarial (loss)
|
$
|
(123.1
|
)
|
|
$
|
(124.2
|
)
|
|
$
|
(4.8
|
)
|
|
$
|
(4.7
|
)
|
|
|
|
|
|
|
|
|
|
|
Postretirement Benefits
|
|
2019
|
|
2018
|
Net actuarial gain
|
$
|
30.5
|
|
|
$
|
41.0
|
|
We expect to amortize $10.1 million and $0.4 million of previously unrecognized net actuarial losses into U.S. and Canadian plan pension cost, respectively, in 2020. We expect to amortize $2.4 million of previously unrecognized net actuarial gains into postretirement benefit cost in 2020.
We expect to contribute $0.1 million each to our U.S. and Canadian defined-benefit pension plans and $5.6 million to our U.S. postretirement benefit plans in 2020.
Armstrong Flooring, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid over the next ten years for our U.S. and Canadian plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Benefits
|
|
Canadian Pension Benefits
|
|
Postretirement Benefits
|
2020
|
$
|
19.1
|
|
|
$
|
1.4
|
|
|
$
|
5.6
|
|
2021
|
19.1
|
|
|
1.3
|
|
|
5.3
|
|
2022
|
20.1
|
|
|
1.2
|
|
|
5.0
|
|
2023
|
21.0
|
|
|
1.2
|
|
|
4.6
|
|
2024
|
21.6
|
|
|
1.1
|
|
|
4.3
|
|
2025-2029
|
114.4
|
|
|
5.3
|
|
|
17.5
|
|
These estimated benefit payments are based on assumptions about future events. Actual benefit payments may vary significantly from these estimates.
Costs for defined-contribution pension plans were $5.5 million and $6.2 million in 2019 and 2018, respectively.
NOTE 19. DERIVATIVE FINANCIAL INSTRUMENTS
We are exposed to market risk from changes in foreign exchange rates that could impact our financial condition, results of operations and cash flows. We enter into derivative contracts, including contracts to hedge our foreign currency exchange rate exposures. Exposure to individual counterparties is controlled and derivative financial instruments are entered into with a diversified group of major financial institutions. Forward swap contracts are entered into for periods consistent with underlying exposure and do not constitute positions independent of those exposures. At inception, hedges designated as hedging instruments are formally documented as either (1) a hedge of a forecasted transaction or “cash flow” hedge, or (2) a hedge of the fair value of a recognized liability or asset or “fair value” hedge. Derivatives are formally assessed both at inception and at least quarterly thereafter, to ensure that derivatives used in hedging transactions are highly effective in offsetting changes in either the fair value or cash flows of the hedged item. If it is determined that a derivative ceases to be a highly effective hedge, or if the anticipated transaction is no longer probable of occurring, hedge accounting is discontinued, and any future mark-to-market adjustments are recognized in earnings. We use derivative financial instruments as risk management tools and not for speculative trading purposes.
Counterparty Risk
We only enter into derivative transactions with established counterparties having a credit rating of BBB or better. Counterparty credit default swap levels and credit ratings are monitored on a regular basis in an effort to reduce the risk of counterparty default. All of our derivative transactions with counterparties are governed by master International Swap and Derivatives Association agreements (“ISDAs”) with netting arrangements. These agreements can limit exposure in situations where gain and loss positions are outstanding with a single counterparty. We neither post nor receive cash collateral with any counterparty for our derivative transactions. These ISDAs do not have credit contingent features; however, a default under our Credit Facility would trigger a default under these agreements.
Armstrong Flooring, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
Currency Rate Risk – Sales and Purchases
We manufacture and sell our products in a number of countries and, as a result, we are exposed to movements in foreign currency exchange rates. To a large extent, our global manufacturing and sales provide a natural hedge of foreign currency exchange rate movement, as foreign currency expenses generally offset foreign currency revenues. We manage our cash flow exposures on a net basis and use derivatives to hedge the majority of our unmatched foreign currency cash inflows and outflows. Before considering the impacts of any hedging, our major foreign currency exposures as of December 31, 2019, based on operating profits by currency, are from the Canadian Dollar, the Chinese Renminbi, and the Australian Dollar.
We use foreign currency forward exchange contracts to reduce our exposure to the risk that the eventual net cash inflows and outflows resulting from the sale of products to foreign customers and purchases from foreign suppliers will be adversely affected by changes in exchange rates. These derivative instruments are used for forecasted transactions and are classified as cash flow hedges. These cash flow hedges are executed quarterly, generally up to 18 months forward. The notional amount of these hedges was $23.1 million and $24.9 million as of December 31, 2019 and 2018, respectively. Gains and losses on these instruments are recorded in other comprehensive income (loss), to the extent effective, until the underlying transaction is recognized in earnings. The mark-to-market gains or losses on ineffective portions of hedges are recognized in SG&A expense.
Currency Rate Risk – Intercompany Loans and Dividends
We may use foreign currency forward exchange contracts to hedge exposures created by cross-currency intercompany loans and dividends. The translation adjustments related to these loans are recorded in other expense, net. The offsetting gains and losses on the related derivative contracts are also recorded in other expense, net. These contracts are decreased or increased as repayments are made or additional intercompany loans are extended or adjusted for intercompany dividend activity as necessary. The notional amount of these hedges was $16.6 million and $17.7 million as of December 31, 2019 and 2018, respectively.
Financial Statement Impacts
The following table presents the classification of derivative assets and liabilities within the Consolidated Balance Sheets. The foreign exchange contracts outstanding are presented gross as we have not netted derivative assets with derivative liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
|
Assets (1)
|
|
Liabilities (2)
|
|
Assets (1)
|
|
Liabilities (2)
|
Derivatives designated as cash flow hedging instruments
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
$
|
—
|
|
|
$
|
0.4
|
|
|
$
|
1.1
|
|
|
$
|
—
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
—
|
|
|
0.3
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
—
|
|
|
$
|
0.7
|
|
|
$
|
1.1
|
|
|
$
|
—
|
|
_____________
(1) Derivative assets are classified within prepaid expenses and other current assets as well as other non-current assets.
(2) Derivative liabilities are classified within accounts payable and accrued expenses as well as other long-term liabilities.
Armstrong Flooring, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
The following tables summarize the impact of the effective portion of derivative instruments on the Consolidated Statements of Operations and Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Losses) gains recognized in other comprehensive income ("OCI") (3)
|
|
Gains (losses) reclassified from
AOCI (3)
|
|
Year Ended December 31,
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
Cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
$
|
(0.8
|
)
|
|
$
|
2.0
|
|
|
$
|
(1.9
|
)
|
|
$
|
0.7
|
|
|
$
|
(0.3
|
)
|
|
$
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) recognized in income (3)
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Non-designated hedges
|
|
|
|
|
|
Foreign exchange contracts
|
$
|
0.1
|
|
|
$
|
1.5
|
|
|
$
|
(2.0
|
)
|
_____________
(3) Gains (losses) were included in net sales and cost of goods sold.
As of December 31, 2019, the amount of existing gains in AOCI expected to be recognized in earnings over the next twelve months is $0.3 million.
NOTE 20. FINANCIAL INSTRUMENTS
Financial instruments are required to be disclosed at fair value in the financial statements.
The fair value of cash, accounts and notes receivable and accounts payable and accrued expenses approximate their carrying amounts due to the short-term maturities of these assets and liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at December 31, 2019
|
|
Carrying amount
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Financial assets
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total financial assets
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
$
|
(0.7
|
)
|
|
$
|
(0.7
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(0.7
|
)
|
Total revolver
|
(42.2
|
)
|
|
—
|
|
|
(42.2
|
)
|
|
—
|
|
|
(42.2
|
)
|
Total financial liabilities
|
$
|
(42.9
|
)
|
|
$
|
(0.7
|
)
|
|
$
|
(42.2
|
)
|
|
$
|
—
|
|
|
$
|
(42.9
|
)
|
Armstrong Flooring, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at December 31, 2018
|
|
Carrying amount
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Financial assets
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
$
|
1.1
|
|
|
$
|
1.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1.1
|
|
Total financial assets
|
$
|
1.1
|
|
|
$
|
1.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1.1
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
Total revolver
|
$
|
(99.3
|
)
|
|
$
|
—
|
|
|
$
|
(99.3
|
)
|
|
$
|
—
|
|
|
$
|
(99.3
|
)
|
Total financial liabilities
|
$
|
(99.3
|
)
|
|
$
|
—
|
|
|
$
|
(99.3
|
)
|
|
$
|
—
|
|
|
$
|
(99.3
|
)
|
The fair values of our net foreign currency contracts were estimated from market quotes, which are considered to be Level 1 inputs.
Total revolver as of December 31, 2019 and 2018, consisted of the outstanding borrowings under the Credit Facility dated December 31, 2018 and amended November 1, 2019, and December 18, 2019. Borrowings under the Credit Facility are quoted in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the liability (Level 2 inputs) and accordingly, the carrying amount approximates fair value.
We do not have any assets or liabilities that are valued using Level 3 unobservable inputs.
NOTE 21. STOCKHOLDERS' EQUITY
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 $11.42 per share, for a total cost of $51.4 million , including fees and expenses. After the completion of the tender offer, we have no remaining authorization to purchase further shares.
Armstrong Flooring, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
Accumulated Other Comprehensive (Loss) Income
The amounts and related tax effects allocated to each component of AOCI in 2019, 2018 and 2017 are presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax Amount
|
|
Tax Impact
|
|
After-tax Amount
|
2019
|
|
|
|
|
|
Foreign currency translation adjustments
|
$
|
(2.2
|
)
|
|
$
|
—
|
|
|
$
|
(2.2
|
)
|
Derivative adjustments
|
(1.5
|
)
|
|
0.1
|
|
|
(1.4
|
)
|
Pension and postretirement adjustments
|
(9.5
|
)
|
|
—
|
|
|
(9.5
|
)
|
Total other comprehensive (loss)
|
$
|
(13.2
|
)
|
|
$
|
0.1
|
|
|
$
|
(13.1
|
)
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
Foreign currency translation adjustments
|
$
|
(6.0
|
)
|
|
$
|
—
|
|
|
$
|
(6.0
|
)
|
Derivative adjustments
|
2.3
|
|
|
(0.6
|
)
|
|
1.7
|
|
Pension and postretirement adjustments
|
8.5
|
|
|
(0.7
|
)
|
|
7.8
|
|
Total other comprehensive income
|
$
|
4.8
|
|
|
$
|
(1.3
|
)
|
|
$
|
3.5
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
Foreign currency translation adjustments
|
$
|
7.2
|
|
|
$
|
—
|
|
|
$
|
7.2
|
|
Derivative adjustments
|
(2.0
|
)
|
|
0.5
|
|
|
(1.5
|
)
|
Pension and postretirement adjustments
|
2.2
|
|
|
(0.6
|
)
|
|
1.6
|
|
Total other comprehensive income
|
$
|
7.4
|
|
|
$
|
(0.1
|
)
|
|
$
|
7.3
|
|
Armstrong Flooring, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
The following table summarizes the activity, by component, related to the change in AOCI for December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustments
|
|
Derivative Adjustments
|
|
Pension and Postretirement Adjustments
|
|
Total Accumulated Other Comprehensive Income (Loss)
|
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 $ — , ($0.5), $1.0 and $0.5
|
(6.0
|
)
|
|
1.4
|
|
|
1.2
|
|
|
(3.4
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
—
|
|
|
0.3
|
|
|
6.6
|
|
|
6.9
|
|
Net current period other comprehensive (loss) income
|
(6.0
|
)
|
|
1.7
|
|
|
7.8
|
|
|
3.5
|
|
Balance, December 31, 2018
|
$
|
1.7
|
|
|
$
|
0.8
|
|
|
$
|
(64.1
|
)
|
|
$
|
(61.6
|
)
|
Other comprehensive (loss) before reclassifications, net of tax impact of $ —, $0.1, $ — and $0.1
|
(2.2
|
)
|
|
(0.7
|
)
|
|
(16.5
|
)
|
|
(19.4
|
)
|
Amounts reclassified from accumulated other comprehensive (loss) income
|
—
|
|
|
(0.7
|
)
|
|
7.0
|
|
|
6.3
|
|
Net current period other comprehensive (loss)
|
(2.2
|
)
|
|
(1.4
|
)
|
|
(9.5
|
)
|
|
(13.1
|
)
|
Balance, December 31, 2019
|
$
|
(0.5
|
)
|
|
$
|
(0.6
|
)
|
|
$
|
(73.6
|
)
|
|
$
|
(74.7
|
)
|
Armstrong Flooring, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
The amounts reclassified from AOCI and the affected line item of the Consolidated Statements of Operations are presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Affected Line Item
|
Derivative adjustments
|
|
|
|
|
|
|
|
Foreign exchange contracts - purchases
|
$
|
(0.4
|
)
|
|
$
|
(0.1
|
)
|
|
$
|
0.1
|
|
|
Cost of goods sold
|
Foreign exchange contracts - purchases
|
—
|
|
|
—
|
|
|
(0.1
|
)
|
|
Earnings (loss) from discontinued operations
|
Foreign exchange contracts - sales
|
(0.3
|
)
|
|
0.4
|
|
|
0.3
|
|
|
Net sales
|
Foreign exchange contracts - sales
|
—
|
|
|
0.1
|
|
|
0.3
|
|
|
Earnings (loss) from discontinued operations
|
Total (income)/expense before tax
|
(0.7
|
)
|
|
0.4
|
|
|
0.6
|
|
|
|
Tax impact
|
—
|
|
|
(0.1
|
)
|
|
(0.2
|
)
|
|
Income tax expense (benefit)
|
Tax impact
|
—
|
|
|
—
|
|
|
—
|
|
|
Earnings (loss) from discontinued operations
|
Total (income)/expense, net of tax
|
(0.7
|
)
|
|
0.3
|
|
|
0.4
|
|
|
|
Pension and postretirement adjustments
|
|
|
|
|
|
|
|
Prior service cost amortization
|
—
|
|
|
—
|
|
|
0.4
|
|
|
Other expense, net
|
Amortization of net actuarial loss
|
7.0
|
|
|
8.4
|
|
|
8.4
|
|
|
Other expense, net
|
Amortization of net actuarial loss
|
—
|
|
|
(0.1
|
)
|
|
—
|
|
|
Earnings (loss) from discontinued operations
|
Total expense before tax
|
7.0
|
|
|
8.3
|
|
|
8.8
|
|
|
|
Tax impact
|
—
|
|
|
(1.8
|
)
|
|
(1.8
|
)
|
|
Income tax expense (benefit)
|
Tax impact
|
—
|
|
|
0.1
|
|
|
—
|
|
|
Earnings (loss) from discontinued operations
|
Total expense, net of tax
|
7.0
|
|
|
6.6
|
|
|
7.0
|
|
|
|
Total reclassifications for the period
|
$
|
6.3
|
|
|
$
|
6.9
|
|
|
$
|
7.4
|
|
|
|
NOTE 22. 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.
Armstrong Flooring, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
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.
Summary of Financial Position
There were no material liabilities recorded as of December 31, 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
Armstrong Flooring, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
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, distributors and 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 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.
On November 15, 2019, a shareholder filed a putative class action complaint in the United States District Court for the Central District of California alleging violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, promulgated thereunder, based on alleged false and/or misleading statements or omissions made between May 6, 2018 and November 4, 2019. We cannot predict the duration or outcome of this suit at this time. As a result, we are unable to estimate the reasonably possible loss arising from this lawsuit. The Company intends to vigorously defend itself in this matter.
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 23. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 Quarter Ended
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
Net sales
|
$
|
141.7
|
|
|
$
|
177.7
|
|
|
$
|
165.6
|
|
|
$
|
141.3
|
|
Gross profit
|
22.1
|
|
|
36.2
|
|
|
11.8
|
|
|
15.2
|
|
(Loss) earnings from continuing operations
|
(16.6
|
)
|
|
5.3
|
|
|
(29.7
|
)
|
|
(27.9
|
)
|
Per share of common stock:
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.63
|
)
|
|
$
|
0.20
|
|
|
$
|
(1.36
|
)
|
|
$
|
(1.27
|
)
|
Diluted
|
(0.63
|
)
|
|
0.20
|
|
|
(1.36
|
)
|
|
(1.27
|
)
|
|
|
|
|
|
|
|
|
|
2018 Quarter Ended
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
Net sales
|
$
|
164.3
|
|
|
$
|
201.2
|
|
|
$
|
208.9
|
|
|
$
|
153.8
|
|
Gross profit
|
29.3
|
|
|
43.7
|
|
|
45.2
|
|
|
25.0
|
|
(Loss) earnings from continuing operations
|
(10.4
|
)
|
|
2.9
|
|
|
3.3
|
|
|
(14.9
|
)
|
Per share of common stock:
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.40
|
)
|
|
$
|
0.11
|
|
|
$
|
0.13
|
|
|
$
|
(0.57
|
)
|
Diluted
|
(0.40
|
)
|
|
0.11
|
|
|
0.13
|
|
|
(0.57
|
)
|
The amounts above are reported on a continuing operations basis. The sum of the quarterly earnings per share data may not equal the total year amounts due to changes in the average shares outstanding and, for diluted data, the exclusion of the anti-dilutive effect in certain quarters.
Armstrong Flooring, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)