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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
September 30, 2020
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 001-37589
ARMSTRONG FLOORING, INC.
(Exact name of Registrant as specified in its
charter)
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Delaware |
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47-4303305 |
(State or other jurisdiction of incorporation or
organization) |
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(I.R.S. employer Identification number) |
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2500 Columbia Avenue |
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17603 |
Lancaster |
Pennsylvania |
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(Address of principal executive offices) |
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(Zip Code) |
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(717) |
672-9611 |
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(Registrant’s telephone number, including area code) |
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Securities registered pursuant to Section 12(b) of the
Act: |
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
Common Stock, $0.0001 par value |
AFI |
New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject
to such filing requirements for the past 90
days. Yes
þ
No
¨
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period
that registrant was required to submit such
files.) Yes
þ
No
☐
Indicate by check mark whether the Registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company or an emerging growth company. See
definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and "emerging growth company" in
Rule 12b-2 of the Exchange Act.
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Large accelerated filer |
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
☐ |
If an emerging growth company, indicate by check mark if the
Registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act.
☐
Indicate by check mark whether the Registrant is a shell company
(as defined by Rule 12b-2 of the Exchange Act).
Yes
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No
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The Registrant had 21,626,222 shares of common stock, $0.0001 par
value, outstanding at October 26, 2020.
Armstrong Flooring, Inc.
Table of Contents
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Page Number
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PART I
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Item 1.
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Item 2.
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Item 3.
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Item 4.
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PART II
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Item 1.
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Item 1A.
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Item 2.
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Item 3.
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Item 4.
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Item 5
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Item 6.
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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING
STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q ("Form
10-Q") and the documents incorporated by reference may constitute
forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Those forward-looking
statements are subject to various risks and uncertainties and
include all statements that are not historical statements of fact
and those regarding our intent, belief or expectations, including,
but not limited to, our expectations concerning our commercial and
residential markets and their effect on our operating results, and
our ability to increase revenues, income and earnings before
interest, taxes, depreciation and amortization. Words such as
“anticipate,” “expect,” “intend,” “plan,” “target,” “project,”
“predict,” “believe,” “may,” “will,” “would,” “could,” “should,”
“seek,” “estimate” and similar expressions are intended to identify
such forward-looking statements. These statements are based on
management’s current expectations and beliefs and are subject to a
number of factors that could lead to actual results materially
different from those described in the forward-looking statements.
Although we believe that the assumptions underlying the
forward-looking statements are reasonable, we can give no assurance
that our expectations will be attained. Factors that could have a
material adverse effect on our financial condition, liquidity,
results of operations or future prospects or which could cause
actual results to differ materially from our expectations include,
but are not limited to:
•the
impact of COVID-19 on the economy, demand for our products and our
operations, including the measures taken by governmental
authorities to address it, which may precipitate or exacerbate
other risks and/or uncertainties;
•global
economic conditions;
•competition;
•availability
and costs of raw materials and energy;
•key
customers;
•construction
activity;
•execution
of strategy;
•international
operations;
•debt
covenants;
•liquidity;
•debt;
•information
systems and transition services;
•personnel;
•intellectual
property rights;
•claims
and litigation;
•labor;
•internal
controls;
•environmental
and regulatory matters;
•outsourcing;
and
•other
risks detailed from time to time in our filings with the Securities
and Exchange Commission ("SEC"), press releases and other
communications, including those set forth under “Risk Factors”
included in our Annual Report on Form 10-K and our Quarterly Report
on Form 10-Q for the three months ended March 31, 2020 and in the
documents incorporated by reference.
Such forward-looking statements speak only as of the date they are
made. We expressly disclaim any obligation to release publicly any
updates or revisions to any forward-looking statements to reflect
any change in our expectations with regard thereto or change in
events, conditions or circumstances on which any statement is
based.
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Armstrong Flooring, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
(Dollars in millions, except per share data)
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Three Months Ended
September 30 |
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Nine
Months Ended September 30 |
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2020 |
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2019 |
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2020 |
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2019 |
Net sales |
$ |
156.6 |
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$ |
165.6 |
|
|
$ |
440.9 |
|
|
$ |
485.0 |
|
Cost of goods sold |
129.0 |
|
|
153.8 |
|
|
365.3 |
|
|
414.9 |
|
Gross profit |
27.6 |
|
|
11.8 |
|
|
75.6 |
|
|
70.1 |
|
Selling, general and administrative expenses |
37.7 |
|
|
40.0 |
|
|
104.6 |
|
|
110.2 |
|
Operating (loss) |
(10.1) |
|
|
(28.2) |
|
|
(29.0) |
|
|
(40.1) |
|
Interest expense |
2.8 |
|
|
0.8 |
|
|
4.6 |
|
|
2.7 |
|
Other (income) expense, net |
(1.5) |
|
|
0.7 |
|
|
(2.4) |
|
|
1.2 |
|
(Loss) from continuing operations before income taxes |
(11.4) |
|
|
(29.7) |
|
|
(31.2) |
|
|
(44.0) |
|
Income tax expense (benefit) |
0.3 |
|
|
— |
|
|
— |
|
|
(3.0) |
|
Net (loss) from continuing operations |
(11.7) |
|
|
(29.7) |
|
|
(31.2) |
|
|
(41.0) |
|
|
|
|
|
|
|
|
|
Net (loss) income from discontinued operations |
— |
|
|
(1.7) |
|
|
— |
|
|
7.6 |
|
Net (loss) |
$ |
(11.7) |
|
|
$ |
(31.4) |
|
|
$ |
(31.2) |
|
|
$ |
(33.4) |
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share of common stock: |
|
|
|
|
|
|
|
Basic (loss) per share of common stock from continuing
operations |
$ |
(0.53) |
|
|
$ |
(1.36) |
|
|
$ |
(1.42) |
|
|
$ |
(1.65) |
|
Basic (loss) earnings per share of common stock from discontinued
operations |
— |
|
|
(0.08) |
|
|
— |
|
|
0.31 |
|
Basic (loss) per share of common stock |
$ |
(0.53) |
|
|
$ |
(1.44) |
|
|
$ |
(1.42) |
|
|
$ |
(1.34) |
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share of common stock: |
|
|
|
|
|
|
|
Diluted (loss) per share of common stock from continuing
operations |
$ |
(0.53) |
|
|
$ |
(1.36) |
|
|
$ |
(1.42) |
|
|
$ |
(1.65) |
|
Diluted (loss) earnings per share of common stock from discontinued
operations |
— |
|
|
(0.08) |
|
|
— |
|
|
0.31 |
|
Diluted (loss) per share of common stock |
$ |
(0.53) |
|
|
$ |
(1.44) |
|
|
$ |
(1.42) |
|
|
$ |
(1.34) |
|
|
|
|
|
|
|
|
|
See accompanying notes to Condensed Consolidated Financial
Statements (Unaudited).
Armstrong Flooring, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, |
|
Nine Months Ended
September 30, |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
Net (loss) |
$ |
(11.7) |
|
|
$ |
(31.4) |
|
|
$ |
(31.2) |
|
|
$ |
(33.4) |
|
Changes in other comprehensive income (loss), net of
tax: |
Foreign currency translation adjustments |
3.6 |
|
|
(3.7) |
|
|
2.7 |
|
|
(4.3) |
|
Derivative adjustments |
(0.3) |
|
|
0.1 |
|
|
0.1 |
|
|
(0.7) |
|
Pension and postretirement adjustments |
0.9 |
|
|
1.9 |
|
|
3.1 |
|
|
3.7 |
|
Total other comprehensive income (loss) |
4.2 |
|
|
(1.7) |
|
|
5.9 |
|
|
(1.3) |
|
Total comprehensive (loss) |
$ |
(7.5) |
|
|
$ |
(33.1) |
|
|
$ |
(25.3) |
|
|
$ |
(34.7) |
|
See accompanying notes to Condensed Consolidated Financial
Statements (Unaudited).
Armstrong Flooring, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
(Dollars in millions, except par value)
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020 |
|
December 31, 2019 |
Assets |
|
|
|
Current assets: |
|
|
|
Cash and cash equivalents |
$ |
22.2 |
|
|
$ |
27.1 |
|
|
|
|
|
Accounts and notes receivable, net |
43.8 |
|
|
36.1 |
|
Inventories, net |
129.9 |
|
|
111.6 |
|
|
|
|
|
Prepaid expenses and other current assets |
13.8 |
|
|
10.7 |
|
Assets held-for-sale |
19.3 |
|
|
— |
|
Total current assets |
229.0 |
|
|
185.5 |
|
Property, plant, and equipment, net |
246.0 |
|
|
277.2 |
|
Operating lease assets |
5.3 |
|
|
6.0 |
|
Intangible assets, net |
20.5 |
|
|
25.4 |
|
Deferred income tax assets |
5.3 |
|
|
5.3 |
|
Other noncurrent assets |
2.5 |
|
|
2.8 |
|
Total assets |
$ |
508.6 |
|
|
$ |
502.2 |
|
Liabilities and Stockholders’ Equity |
|
|
|
Current liabilities: |
|
|
|
Short-term debt |
$ |
6.3 |
|
|
$ |
— |
|
Current installments of long-term debt |
2.1 |
|
|
0.2 |
|
Accounts payable and accrued expenses |
112.9 |
|
|
104.4 |
|
|
|
|
|
|
|
|
|
Total current liabilities |
121.3 |
|
|
104.6 |
|
Long-term debt, net of unamortized debt issuance costs |
62.1 |
|
|
42.5 |
|
Noncurrent operating lease liabilities |
2.3 |
|
|
2.7 |
|
Postretirement benefit liabilities |
56.2 |
|
|
59.7 |
|
Pension benefit liabilities |
11.1 |
|
|
16.0 |
|
Other long-term liabilities |
8.3 |
|
|
6.0 |
|
|
|
|
|
Deferred income tax liabilities |
2.4 |
|
|
2.4 |
|
Total liabilities |
263.7 |
|
|
233.9 |
|
Commitments and contingencies |
|
|
|
Stockholders’ equity: |
|
|
|
Common stock with par value $.0001 per share: 100,000,000 shares
authorized; 28,376,662 issued and 21,626,222 outstanding shares as
of September 30, 2020 and 28,357,658 issued and 21,519,761
outstanding shares as of December 31, 2019 |
— |
|
|
— |
|
Preferred stock with par value $.0001 per share: 15,000,000 shares
authorized; none issued |
— |
|
|
— |
|
Treasury stock, at cost, 6,750,440 shares as of September 30, 2020
and 6,837,897 shares as of December 31, 2019 |
(87.3) |
|
|
(88.9) |
|
Additional paid-in capital |
677.0 |
|
|
676.7 |
|
Accumulated deficit |
(276.0) |
|
|
(244.8) |
|
Accumulated other comprehensive (loss) |
(68.8) |
|
|
(74.7) |
|
Total stockholders’ equity |
244.9 |
|
|
268.3 |
|
Total liabilities and stockholders’ equity |
$ |
508.6 |
|
|
$ |
502.2 |
|
See accompanying notes to Condensed Consolidated Financial
Statements (Unaudited).
Armstrong Flooring, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
Treasury Stock |
|
Additional Paid-in Capital |
|
Accumulated Other Comprehensive (Loss) |
|
Accumulated Deficit |
|
Total Equity |
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
|
|
|
December 31, 2019 |
21,519,761 |
|
$ |
— |
|
|
6,837,897 |
|
$ |
(88.9) |
|
|
$ |
676.7 |
|
|
$ |
(74.7) |
|
|
$ |
(244.8) |
|
|
$ |
268.3 |
|
Net (loss) |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(13.2) |
|
|
(13.2) |
|
Stock-based employee compensation, net |
36,072 |
|
|
— |
|
|
(36,072) |
|
|
0.7 |
|
|
— |
|
|
— |
|
|
— |
|
|
0.7 |
|
Other comprehensive income |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
0.1 |
|
|
— |
|
|
0.1 |
|
March 31, 2020 |
21,555,833 |
|
|
— |
|
|
6,801,825 |
|
|
(88.2) |
|
|
676.7 |
|
|
(74.6) |
|
|
(258.0) |
|
|
255.9 |
|
Net (loss) |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(6.3) |
|
|
(6.3) |
|
Stock-based employee compensation, net |
37,689 |
|
|
— |
|
|
(18,685) |
|
|
0.3 |
|
|
0.3 |
|
|
— |
|
|
— |
|
|
0.6 |
|
Other comprehensive income |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
1.6 |
|
|
— |
|
|
1.6 |
|
June 30, 2020 |
21,593,522 |
|
|
— |
|
|
6,783,140 |
|
|
(87.9) |
|
|
677.0 |
|
|
(73.0) |
|
|
(264.3) |
|
|
251.8 |
|
Net (loss) |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(11.7) |
|
|
(11.7) |
|
Stock-based employee compensation, net |
32,700 |
|
|
— |
|
|
(32,700) |
|
|
0.6 |
|
|
— |
|
|
— |
|
|
— |
|
|
0.6 |
|
Other comprehensive income |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
4.2 |
|
|
— |
|
|
4.2 |
|
September 30, 2020 |
21,626,222 |
|
|
$ |
— |
|
|
6,750,440 |
|
|
$ |
(87.3) |
|
|
$ |
677.0 |
|
|
$ |
(68.8) |
|
|
$ |
(276.0) |
|
|
$ |
244.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
Treasury Stock |
|
Additional Paid-in Capital |
|
Accumulated Other Comprehensive (Loss) |
|
(Accumulated Deficit) |
|
Total Equity |
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
|
|
|
December 31, 2018 |
25,832,193 |
|
|
$ |
— |
|
|
2,452,165 |
|
|
$ |
(39.7) |
|
|
$ |
678.6 |
|
|
$ |
(61.6) |
|
|
$ |
(186.3) |
|
|
$ |
391.0 |
|
Net (loss) |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(16.7) |
|
|
(16.7) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based employee compensation, net |
53,908 |
|
|
— |
|
|
(50,251) |
|
|
0.9 |
|
|
(0.5) |
|
|
— |
|
|
— |
|
|
0.4 |
|
Other comprehensive income |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
2.9 |
|
|
— |
|
|
2.9 |
|
March 31, 2019 |
25,886,101 |
|
|
— |
|
|
2,401,914 |
|
|
(38.8) |
|
|
678.1 |
|
|
(58.7) |
|
|
(203.0) |
|
|
377.6 |
|
Net income |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
14.7 |
|
|
14.7 |
|
Repurchase of common stock |
(4,504,504) |
|
|
— |
|
|
4,504,504 |
|
|
(51.3) |
|
|
— |
|
|
— |
|
|
— |
|
|
(51.3) |
|
Stock-based employee compensation, net |
93,305 |
|
|
— |
|
|
(49,130) |
|
|
0.9 |
|
|
0.1 |
|
|
— |
|
|
— |
|
|
1.0 |
|
Other comprehensive (loss) |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(2.5) |
|
|
— |
|
|
(2.5) |
|
June 30, 2019 |
21,474,902 |
|
|
— |
|
|
6,857,288 |
|
|
(89.2) |
|
|
678.2 |
|
|
(61.2) |
|
|
(188.3) |
|
|
339.5 |
|
Net (loss) |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(31.4) |
|
|
(31.4) |
|
Stock-based employee compensation, net |
24,888 |
|
|
— |
|
|
— |
|
|
— |
|
|
0.1 |
|
|
— |
|
|
— |
|
|
0.1 |
|
Other comprehensive (loss) |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(1.7) |
|
|
— |
|
|
(1.7) |
|
September 30, 2019 |
21,499,790 |
|
|
$ |
— |
|
|
6,857,288 |
|
|
$ |
(89.2) |
|
|
$ |
678.3 |
|
|
$ |
(62.9) |
|
|
$ |
(219.7) |
|
|
$ |
306.5 |
|
See accompanying notes to Condensed Consolidated Financial
Statements (Unaudited).
Armstrong Flooring, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30 |
|
2020 |
|
2019 |
Cash flows from operating activities: |
|
|
|
Net (loss)
|
$ |
(31.2) |
|
|
$ |
(33.4) |
|
Adjustments to reconcile net (loss) to net cash (used for)
operating activities: |
|
|
|
Depreciation and amortization
|
32.0 |
|
|
35.2 |
|
Gain on disposal of discontinued operations |
— |
|
|
(7.6) |
|
Inventory write down |
— |
|
|
13.6 |
|
Deferred income taxes
|
(0.9) |
|
|
(3.5) |
|
Stock-based compensation
|
2.0 |
|
|
2.4 |
|
Gain from long-term disability plan change
|
(1.1) |
|
|
— |
|
U.S. pension expense
|
2.8 |
|
|
4.2 |
|
Other non-cash adjustments, net
|
0.6 |
|
|
(0.2) |
|
Changes in operating assets and liabilities:
|
|
|
|
Receivables
|
(7.7) |
|
|
(4.5) |
|
Inventories
|
(18.0) |
|
|
13.7 |
|
Accounts payable and accrued expenses
|
11.2 |
|
|
(22.0) |
|
Income taxes payable and receivable |
0.6 |
|
|
(0.2) |
|
Other assets and liabilities |
(6.6) |
|
|
0.5 |
|
Net cash (used for) operating activities |
(16.3) |
|
|
(1.8) |
|
Cash flows from investing activities: |
|
|
|
Purchases of property, plant and equipment
|
(15.2) |
|
|
(22.9) |
|
Proceeds from sale of assets |
0.1 |
|
|
— |
|
Net payment related to the sale of discontinued
operations |
— |
|
|
(1.9) |
|
Net cash (used for) investing activities |
(15.1) |
|
|
(24.8) |
|
Cash flows from financing activities: |
|
|
|
Proceeds from revolving credit facility
|
43.1 |
|
|
— |
|
Payments on revolving credit facility
|
(79.2) |
|
|
(25.0) |
|
Issuance of long-term debt
|
70.0 |
|
|
— |
|
Financing costs
|
(7.4) |
|
|
(0.1) |
|
Payments on long-term debt
|
(0.2) |
|
|
(3.0) |
|
Purchases of treasury stock
|
— |
|
|
(51.3) |
|
Proceeds from exercised stock options
|
— |
|
|
0.1 |
|
Value of shares withheld related to employee tax
withholding
|
— |
|
|
(0.8) |
|
Net cash provided by (used for) financing activities |
26.3 |
|
|
(80.1) |
|
Effect of exchange rate changes on cash and cash
equivalents |
0.2 |
|
|
(0.5) |
|
Net (decrease) in cash and cash equivalents |
(4.9) |
|
|
(107.2) |
|
Cash and cash equivalents at beginning of year |
27.1 |
|
|
173.8 |
|
Cash and cash equivalents at end of period |
$ |
22.2 |
|
|
$ |
66.6 |
|
|
|
|
|
Supplemental Cash Flow Disclosure: |
|
|
|
Amounts in accounts payable for capital expenditures
|
$ |
2.9 |
|
|
$ |
2.2 |
|
Interest paid |
3.6 |
|
|
2.5 |
|
Income taxes paid, net |
0.4 |
|
|
1.2 |
|
See accompanying notes to Condensed Consolidated Financial
Statements (Unaudited).
Armstrong Flooring, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share data)
NOTE 1. BUSINESS AND BASIS OF PRESENTATION
Background
Armstrong Flooring, Inc. (“AFI”) is a leading global producer of
resilient flooring products for use primarily in the construction
and renovation of commercial, residential 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.
Basis of Presentation
These Condensed Consolidated Financial Statements are prepared in
accordance with generally accepted accounting principles in the
United States of America ("U.S. GAAP"). The Condensed Consolidated
Financial Statements include management estimates and judgments,
where appropriate. Management uses estimates to record many items
including certain asset values, allowances for expected credit
losses, inventory obsolescence, lower of cost or market or net
realizable value charges, warranty reserves, workers compensation,
general liability and environmental claims and income taxes. When
preparing an estimate, management determines the amount based upon
the consideration of relevant information. Management may confer
with outside parties, including outside counsel. Actual results may
differ from these estimates. In the opinion of management, all
adjustments of a normal recurring nature have been included to
provide a fair statement of the results for the reporting periods
presented. Operating results for the three and nine months ended
September 30, 2020 and 2019 included in this report are
unaudited. Quarterly results are not necessarily indicative of
annual results, primarily due to the seasonality of the business
and the possibility of changes in economic conditions between
periods.
The accounting policies used in preparing the Condensed
Consolidated Financial Statements in this Quarterly Report on Form
10-Q are the same as those used in preparing the Consolidated
Financial Statements for the year ended December 31, 2019,
except as noted below. These statements should therefore be read in
conjunction with the Consolidated Financial Statements and notes
that are included in the Annual Report on Form 10-K for the fiscal
year ended December 31, 2019.
All significant intercompany transactions within AFI have been
eliminated from the Condensed Consolidated Financial
Statements.
COVID-19
The COVID-19 pandemic has significantly impacted our business and
resulted in lower than expected revenue in 2020. In response, we
have implemented several cost reduction initiatives including
reduced capital spending, implementing a furlough of certain
salaried employees and reduced employee benefits for a portion of
the year. We are also pursuing a plan expected to monetize non-core
assets. The ultimate duration and impact of the pandemic on our
future results is unknown. We have incurred net losses for the past
several years, and negative cash flows from operations beginning in
2019. The pandemic’s impacts, our recurring losses and our negative
cash flows resulted in the identification of a triggering event
requiring impairment testing of our North America long-lived assets
in the first quarter of 2020. The results of this testing indicated
that, as of March 31, 2020, our North America long-lived assets
were not impaired. Our actual results for the nine months ended
September 30, 2020 exceeded the assumptions used in our first
quarter 2020 impairment test. While no long-lived asset impairment,
significant inventory write-down or significant incremental
accounts receivable reserves were recorded in the first nine months
of 2020, such charges are possible in the future, which could have
a material adverse effect on our future results.
Reclassifications
Certain reclassifications have been made to prior year amounts to
conform with current year classifications.
Recently Adopted and Recently Issued Accounting
Standards
The following accounting standards have been adopted in
2020:
On January 1, 2020, we adopted Accounting Standards Update
("ASU")
2016-13,
"Measurement of Credit Losses on Financial Instruments."
The guidance and subsequent amendments issued, requires immediate
recognition of estimated credit losses that are expected to occur
over the remaining life of many financial assets. The most notable
impact of this ASU related to our processes around the assessment
of the adequacy of our allowance for doubtful accounts on trade
account receivables. We adopted using the modified retrospective
transition method. The adoption of the standard did not have a
material impact on our financial condition, results of operations
or cash flows.
Armstrong Flooring, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share data)
On January 1, 2020, we adopted ASU 2018-13,
"Disclosure Framework-Changes to the Disclosure Requirements for
Fair Value Measurement."
The guidance eliminates, adds and modifies certain disclosure
requirements. Adoption of the standard did not have an impact on
our financial condition, results of operations or cash
flows.
On January 1, 2020, we adopted 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. Adoption of the
standard did not have an impact on our financial condition, results
of operations or cash flows.
On January 1, 2020, we adopted 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. We adopted
using the prospective transition method. This standard did not have
a material impact on our financial condition, results of operations
and cash flows.
The following accounting standards have been issued and become
effective for the Company at a future date:
In December 2019, the Financial Accounting Standards Board ("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 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 and cash flows.
NOTE 2. REVENUE
We disaggregate revenue based on customer geography as geography
represents the most appropriate depiction of how the nature, timing
and uncertainty of revenues and cash flows are impacted by economic
factors.
The following table presents our revenues disaggregated by
geographic area based upon the location of the
customer.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30 |
|
Nine
Months Ended September 30 |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
Net sales |
|
|
|
|
|
|
|
United States |
$ |
116.3 |
|
|
$ |
125.1 |
|
|
$ |
345.4 |
|
|
$ |
371.0 |
|
China |
22.3 |
|
|
20.6 |
|
|
46.3 |
|
|
51.1 |
|
Canada |
7.8 |
|
|
8.7 |
|
|
21.3 |
|
|
29.3 |
|
Australia |
6.9 |
|
|
7.1 |
|
|
19.4 |
|
|
21.3 |
|
Other |
3.3 |
|
|
4.1 |
|
|
8.5 |
|
|
12.3 |
|
Total net sales |
$ |
156.6 |
|
|
$ |
165.6 |
|
|
$ |
440.9 |
|
|
$ |
485.0 |
|
NOTE 3. SEVERANCE
In the second quarter of 2019, we recorded $2.9 million in selling,
general and administrative ("SG&A") expenses for severance and
related expenses to reflect the separation costs for our former
President and Chief Executive Officer.
Armstrong Flooring, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share data)
NOTE 4. INCOME TAXES
The following table presents details related to our income
taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30 |
|
Nine
Months Ended September 30 |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
(Loss) from continuing operations before income taxes |
$ |
(11.4) |
|
|
$ |
(29.7) |
|
|
$ |
(31.2) |
|
|
$ |
(44.0) |
|
Income tax expense (benefit) |
0.3 |
|
|
— |
|
|
— |
|
|
(3.0) |
|
Effective tax rate |
(2.7) |
% |
|
— |
% |
|
— |
% |
|
6.8 |
% |
Pursuant to the FASB's
Accounting Standards Codification - Topic 740 - Income
Taxes,
we are required to consider all items (including items recorded in
discontinued operations and other comprehensive income) in
determining the amount of income tax expense (benefit) that results
from a loss from continuing operations.
For the three months and nine months ended September 30, 2020 we
recognized an income tax expense consisting of U.S. income tax
benefit offset by a foreign income tax expense from various
jurisdictions. The U.S. income tax benefit relates to a reduction
in the Company’s valuation allowance due to the tax impact of the
gains in other comprehensive income.
For the three months and nine months ended September 30, 2019, we
recognized an income tax benefit consisting of a U.S. income tax
benefit and a foreign income tax expense from various
jurisdictions. The U.S. income tax benefit relates to a reduction
in our valuation allowance due to the tax impact of the gains from
resolution of our antidumping case in discontinued operations and
gains on other comprehensive income.
Upon audit, taxing authorities may challenge all or part of an
uncertain income tax position. AFI regularly assesses the outcome
of potential examinations in each of the taxing jurisdictions when
determining the adequacy of the amount of unrecognized tax benefit
recorded. We do not expect to record any material changes during
2020 to our unrecognized tax benefits as of December 31,
2019.
As of September 30, 2020, we consider foreign unremitted
income to be permanently reinvested.
NOTE 5. DISCONTINUED OPERATIONS
In December 2018, we completed the sale of our wood business to
Tarzan Holdco, Inc. ("TZI"), a Delaware corporation and an
affiliate of American Industrial Partners. The proceeds from the
sale were $90.2 million, net of closing costs, transaction fees and
taxes. The transaction was subject to a customary post-closing
working capital adjustment process which resulted in us making a
$1.9 million payment to TZI in the third quarter of
2019.
The following is a summary of the results related to the net gain
on disposal of the wood business, which is included in discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30, 2019 |
|
Nine
Months Ended September 30, 2019 |
(Loss) gain on disposal of discontinued operations before income
tax |
$ |
(2.3) |
|
|
$ |
10.3 |
|
Income tax (benefit) expense |
(0.6) |
|
|
2.7 |
|
Net (loss) income on disposal of discontinued
operations |
$ |
(1.7) |
|
|
$ |
7.6 |
|
Armstrong Flooring, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share data)
During the second quarter of 2019, we reached a resolution in our
antidumping case regarding our previously operated plant in
Kunshan, China that manufactured multilayered wood flooring. We
resolved our potential liability outside of litigation pursuant to
a settlement agreement with the petitioners. As a result, we
reversed the previously recognized liability of $11.4 million,
which was reflected in gain on disposal of discontinued
operations.
NOTE 6. EARNINGS (LOSS) PER SHARE OF COMMON STOCK
The table below details the calculation and reconciliation of
shares used in the calculation for basic and diluted earnings
(loss) per share calculations for the periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30 |
|
Nine Months Ended
September 30 |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
|
|
|
|
|
|
|
|
Net (loss) from continuing operations |
$ |
(11.7) |
|
|
$ |
(29.7) |
|
|
$ |
(31.2) |
|
|
$ |
(41.0) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
Weighted average common shares outstanding |
21,600,477 |
|
|
21,496,319 |
|
|
21,567,629 |
|
|
24,300,804 |
|
Weighted average common shares, vested not yet issued |
357,635 |
|
|
401,402 |
|
|
340,599 |
|
|
552,198 |
|
Weighted average common shares outstanding - Basic |
21,958,112 |
|
|
21,897,721 |
|
|
21,908,228 |
|
|
24,853,002 |
|
Dilutive impact of stock-based compensation plans |
— |
|
|
— |
|
|
— |
|
|
— |
|
Weighted average common shares outstanding - Diluted |
21,958,112 |
|
|
21,897,721 |
|
|
21,908,228 |
|
|
24,853,002 |
|
|
|
|
|
|
|
|
|
(Loss) per share of common stock from continuing
operations: |
Basic (loss) per share of common stock from continuing
operations |
$ |
(0.53) |
|
|
$ |
(1.36) |
|
|
$ |
(1.42) |
|
|
$ |
(1.65) |
|
Diluted (loss) per share of common stock from continuing
operations |
$ |
(0.53) |
|
|
$ |
(1.36) |
|
|
$ |
(1.42) |
|
|
$ |
(1.65) |
|
The diluted loss per share was calculated using basic common shares
outstanding, as inclusion of potentially dilutive common shares
would be anti-dilutive.
Performance-based employee compensation awards are considered
potentially dilutive in the initial period in which the performance
conditions are met.
The following stock-based compensation awards were excluded from
the computation of diluted (loss) per share of common stock from
continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30 |
|
Nine Months Ended
September 30 |
|
|
|
2020 |
|
2019 |
|
2020 |
|
2019 |
|
|
|
|
Potentially dilutive common shares excluded from diluted
computation, as inclusion would be anti-dilutive |
981,739 |
|
|
753,898 |
|
|
1,019,716 |
|
|
535,111 |
|
|
|
|
Performance awards excluded from diluted computation, as
performance conditions not met |
154,679 |
|
|
330,392 |
|
170,119 |
|
|
394,632 |
|
|
|
|
Armstrong Flooring, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share data)
NOTE 7. ACCOUNTS AND NOTES RECEIVABLE
The following table presents accounts and note receivables,
net:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2020 |
|
December 31,
2019 |
Customer receivables |
$ |
58.1 |
|
|
$ |
47.1 |
|
Miscellaneous receivables |
4.5 |
|
|
7.2 |
|
Less: allowance for product claims, discounts, returns and
losses |
(18.8) |
|
|
(18.2) |
|
Total accounts and notes receivable, net |
$ |
43.8 |
|
|
$ |
36.1 |
|
On January 1, 2020 we adopted
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. 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 expected credit losses. We adopted this ASU using the
modified retrospective transition method. The adoption of the
standard did not have a material impact on our results of
operations or cash flows.
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 credits against accounts receivable from the
independent distributor to AFI.
The following table summarizes the activity for the allowance for
product claims:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30 |
|
2020 |
|
2019 |
Balance as of January 1 |
$ |
(9.0) |
|
|
$ |
(6.4) |
|
|
|
|
|
Reductions for payments |
4.9 |
|
|
5.2 |
|
Current year claim accruals |
(5.9) |
|
|
(7.5) |
|
Balance as of September 30 |
$ |
(10.0) |
|
|
$ |
(8.7) |
|
NOTE 8. INVENTORIES
The following table presents details related to our inventories,
net:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2020 |
|
December 31,
2019 |
Finished goods |
$ |
101.2 |
|
|
$ |
87.1 |
|
Goods in process |
5.7 |
|
|
4.5 |
|
Raw materials and supplies |
23.0 |
|
|
20.0 |
|
Total inventories, net |
$ |
129.9 |
|
|
$ |
111.6 |
|
Armstrong Flooring, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share data)
NOTE 9. PROPERTY, PLANT AND EQUIPMENT
The following table presents details related to our property, plant
and equipment, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2020 |
|
December 31,
2019 |
Land |
$ |
10.2 |
|
|
$ |
28.2 |
|
Buildings |
80.1 |
|
|
88.3 |
|
Machinery and equipment |
461.2 |
|
|
444.6 |
|
Computer software |
16.4 |
|
|
15.3 |
|
Construction in progress |
12.3 |
|
|
19.2 |
|
Less accumulated depreciation and amortization |
(334.2) |
|
|
(318.4) |
|
Total property, plant and equipment, net |
$ |
246.0 |
|
|
$ |
277.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30 |
|
Nine Months Ended September
30 |
|
|
2020 |
|
2019 |
|
2020 |
|
2019 |
Depreciation expense |
|
$ |
9.3 |
|
|
$ |
11.1 |
|
|
$ |
26.8 |
|
|
$ |
29.9 |
|
The Company reclassified to Assets held-for-sale, $19.3 million of
primarily land and buildings for two properties that met all
related criteria under U.S. GAAP as of September 30, 2020. The
ultimate sale of these assets is expected to occur within one year
from initial classification as Assets held-for-sale. Long-lived
assets that meet the held-for-sale criteria are reported at the
lower of their carrying value or fair value, less estimated costs
to sell. The Company had no Assets held-for-sale as of December 31,
2019. Assets held-for-sale are recorded as current assets and are
presented as a separate caption on the Company's Condensed
Consolidated Balance Sheets.
NOTE 10. INTANGIBLE ASSETS
The following table details amounts related to our intangible
assets, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020 |
|
December 31, 2019 |
|
Estimated Useful Life |
|
Gross Carrying Amount |
|
Accumulated Amortization |
|
Gross Carrying Amount |
|
Accumulated Amortization |
Finite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
Contractual arrangements |
5 years |
|
$ |
36.5 |
|
|
$ |
22.4 |
|
|
$ |
36.4 |
|
|
$ |
17.3 |
|
Intellectual property |
2-15 years |
|
5.5 |
|
|
1.9 |
|
|
5.3 |
|
|
1.7 |
|
Subtotal |
|
|
42.0 |
|
|
24.3 |
|
|
41.7 |
|
|
19.0 |
|
Indefinite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
Trademarks and brand names |
Indefinite |
|
2.8 |
|
|
|
|
2.7 |
|
|
|
Total intangible assets, net |
|
|
$ |
44.8 |
|
|
$ |
24.3 |
|
|
$ |
44.4 |
|
|
19.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30 |
|
Nine Months Ended September 30 |
|
|
2020 |
|
2019 |
|
2020 |
|
2019 |
Amortization expense |
|
$ |
1.7 |
|
|
$ |
1.7 |
|
|
$ |
5.2 |
|
|
$ |
5.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Condensed Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share data)
NOTE 11. LEASES
On October 16, 2020, we entered into a new lease for additional
warehouse space. The term of the lease is five years and will
commence on November 1, 2020. This lease will be recorded as an
operating lease.
On June 26, 2020, we entered into new Headquarters ("HQ") and
Technical Center lease agreements with High Properties. The term of
the HQ lease is ten years and four months, with an anticipated
commencement date of June 1, 2021. The term of the Technical Center
lease is ten years and seven months, with an anticipated
commencement date of March 1, 2021. Both leases will be recorded as
operating leases.
In the second quarter of 2019, we recognized $0.9 million and $1.6
million of sublease income and income from non-lease components,
respectively, in SG&A expenses related to termination fees
received from TZI due to the cancellation of a sublease before the
end of the lease term.
NOTE 12. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The following table details amounts related to our accounts payable
and accrued expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020 |
|
December 31,
2019 |
Payables, trade and other |
$ |
78.2 |
|
|
$ |
70.5 |
|
Employment costs |
14.7 |
|
|
13.8 |
|
Other accrued expenses |
17.0 |
|
|
16.8 |
|
Current operating lease liabilities |
2.9 |
|
|
3.3 |
|
Income tax payable |
0.1 |
|
|
— |
|
Total accounts payable and accrued expenses |
$ |
112.9 |
|
|
$ |
104.4 |
|
NOTE 13. DEBT
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2020 |
|
December 31,
2019 |
Credit lines (international) |
$ |
4.3 |
|
|
$ |
— |
|
Insurance premiums financing |
2.0 |
|
|
— |
|
Short-term debt |
6.3 |
|
|
— |
|
Current installment of Term Loan Facility |
1.8 |
|
|
— |
|
Current installment of finance leases |
0.3 |
|
|
0.2 |
|
Current installments of long-term debt |
2.1 |
|
|
0.2 |
|
Noncurrent portion of Term Loan Facility |
68.2 |
|
|
— |
|
ABL Facility |
— |
|
|
42.2 |
|
Noncurrent portion of finance leases |
0.6 |
|
|
0.3 |
|
Total principal balance outstanding |
68.8 |
|
|
42.5 |
|
Less: Deferred financing costs, net |
(6.7) |
|
|
— |
|
Long-term debt, net of unamortized debt issuance costs: |
62.1 |
|
|
42.5 |
|
Total |
$ |
70.5 |
|
|
$ |
42.7 |
|
Armstrong Flooring, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share data)
On June 23, 2020, we entered into a Third Amendment to the ABL
Credit Facility (the "Amended ABL Credit Facility"), which reduces
commitments from $100 million to $90 million, amends the interest
rates applicable to the loans, modifies certain financial
maintenance and other covenants, and permits indebtedness under the
Term Loan Agreement defined below. The Amended ABL Credit Facility
provides for a borrowing base that is derived from our accounts
receivable and inventory, collectively, with the equity interests
in the guarantors, (the "ABL Priority Collateral"), subject to
certain reserves and other limitations. The Amended ABL Credit
Facility matures in December 2023.
The Amendment permits us to grant a first priority security
interest in real estate, machinery and equipment and intellectual
property collateral to Pathlight Capital LP (the "Term Loan Agent")
(collectively, the “Term Loan Priority Collateral”). Bank of
America, N.A., as administrative agent and collateral agent (in
such capacities, the “ABL Agent”) will not have a security interest
in the real property securing the Term Loan Agreement (as defined
below) but will have a second priority security interest in
machinery and equipment and intellectual property constituting Term
Loan Priority Collateral.
Borrowings under the Amended ABL Credit Facility will bear interest
at a rate per annum equal to, at our option, a base rate or a
Eurodollar rate equal to the London interbank offered rate
(“LIBOR”) for the relevant interest period, plus, in each case, an
applicable margin determined in accordance with the provisions of
the Amendment. The base rate will be the highest of (a) the
federal funds rate plus 0.50%, (b) the prime rate of Bank of
America, N.A., and (c) LIBOR plus 1.00%. The applicable margin
for borrowings under the Amended ABL Credit Facility will be
determined based on the Company’s Consolidated Leverage Ratio (as
defined in the Amendment) and will range from 1.75% to 3.00% with
respect to base rate borrowings and 2.75% to 4.00% with respect to
Eurodollar rate borrowings. In addition to paying interest on
outstanding principal under the Amended ABL Credit Facility, we
will pay a commitment fee to the lenders with respect to the
unutilized revolving commitments thereunder at a rate ranging from
0.375% to 0.50% depending on the Company’s Consolidated Leverage
Ratio.
In addition, the Amendment also amends certain financial covenants.
The Amended ABL Credit Facility requires, among other things, that
we maintain a minimum Consolidated Cash Flow (as defined in the
Amendment) for the three-fiscal quarter period ending September 30,
2020 and for any four-fiscal quarter period ending thereafter, have
minimum Availability (as defined in the Amended ABL Credit
Facility) of $30 million and, during a Financial Covenant Trigger
Period (as defined in the Amendment), maintain a minimum
Consolidated Fixed Charge Coverage Ratio (as defined in the
Amendment) of at least 1.00 to 1.00 (such covenants, the “Financial
Covenants”).
On June 23, 2020 we also entered into a new term loan facility with
Pathlight Capital LP as the administrative agent ("Term Loan
Agreement"). The Term Loan Agreement provides us with a secured
term loan credit facility of $70 million (the “Term Loan
Facility”). The borrowing base is derived from the Company’s
machinery and equipment, intellectual property and real property,
subject to certain reserves and other limitations. The Term Loan
Facility is scheduled to mature on June 23, 2025. The
principal balance of the Term Loan Facility is payable in quarterly
installments beginning in June 2021. We used the proceeds of the
Term Loan Facility to pay down the Amended ABL Credit
Facility.
Borrowings under the Term Loan Facility will bear interest at a
rate per annum equal to LIBOR for a three-month interest period,
plus an applicable margin of 12.00%.
We must use cash proceeds from certain dispositions, including
sales of real estate, equity and debt issuances and extraordinary
events to prepay outstanding loans under the Term Loan Facility,
subject to specified exceptions, including the prepayment
requirements with respect to the Amended ABL Credit Facility.
Prepayments of loans under the Term Loan Facility prior to the
third anniversary of the closing date are subject to certain
premiums.
All obligations under the Term Loan Agreement 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 and are secured by a first priority lien on the
Term Priority Collateral and a second priority lien on the ABL
Priority Collateral.
The Term Loan Agreement contains a number of covenants that, among
other things and subject to certain exceptions, restrict our
ability to create liens, to undertake fundamental changes, to incur
debt, to sell or dispose of assets, to make investments, to make
restricted payments such as dividends, distributions or equity
repurchases, to change the nature of our businesses, to enter into
transactions with affiliates and to enter into certain burdensome
agreements.
Armstrong Flooring, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share data)
In addition, the Term Loan Agreement requires us to comply with the
amended ABL Credit Facility Financial Covenants. The Term Loan
Agreement also contains customary affirmative covenants and events
of default, including a cross-default provision in respect of
certain material indebtedness and a change of control provision. If
an event of default occurs, the lenders may choose to accelerate
the maturity of the Term Loan Facility and require repayment of all
obligations thereunder.
The Company capitalized $6.9 million of fees related to the new
term loan facility, all of which had been recorded and principally
paid at June 30, 2020. The deferred financing costs will be
amortized through 2025 over the life of the term loan
facility.
NOTE 14. PENSION AND OTHER POSTRETIREMENT BENEFIT
PROGRAMS
The following table summarizes our pension and postretirement
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30 |
|
Nine Months Ended
September 30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
2019 |
|
2020 |
|
2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined-benefit pension, U.S. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
$ |
0.6 |
|
|
$ |
0.7 |
|
|
$ |
1.9 |
|
|
$ |
2.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost |
3.2 |
|
|
3.7 |
|
|
9.4 |
|
|
11.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected return on plan assets |
(5.3) |
|
|
(5.4) |
|
|
(16.0) |
|
|
(16.2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss |
2.5 |
|
|
2.5 |
|
|
7.6 |
|
|
7.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total, defined-benefit pension, U.S. |
$ |
1.0 |
|
|
$ |
1.5 |
|
|
$ |
2.9 |
|
|
$ |
4.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined-benefit pension, Canada |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost |
$ |
0.1 |
|
|
$ |
0.1 |
|
|
$ |
0.3 |
|
|
$ |
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected return on plan assets |
(0.1) |
|
|
(0.2) |
|
|
(0.4) |
|
|
(0.5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss |
0.1 |
|
|
0.2 |
|
|
0.3 |
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total, defined-benefit pension, Canada |
$ |
0.1 |
|
|
$ |
0.1 |
|
|
$ |
0.2 |
|
|
$ |
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined-benefit postretirement, U.S. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
$ |
— |
|
|
$ |
0.1 |
|
|
$ |
— |
|
|
$ |
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost |
0.5 |
|
|
0.6 |
|
|
1.5 |
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service credits |
— |
|
|
— |
|
|
(0.2) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial gains |
(1.2) |
|
|
(0.8) |
|
|
(3.6) |
|
|
(2.4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total, defined-benefit postretirement, U.S. |
$ |
(0.7) |
|
|
$ |
(0.1) |
|
|
$ |
(2.3) |
|
|
$ |
(0.3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Armstrong Flooring, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share data)
NOTE 15. ACCUMULATED OTHER COMPREHENSIVE (LOSS)
The following table summarizes the activity, by component, related
to the change in Accumulated other comprehensive
(loss).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustments |
|
Derivative Adjustments |
|
Pension and Postretirement Adjustments |
|
Total Accumulated Other Comprehensive (Loss) Income |
Balance, December 31, 2019 |
$ |
(0.5) |
|
|
$ |
(0.6) |
|
|
$ |
(73.6) |
|
|
$ |
(74.7) |
|
Other comprehensive income before reclassifications, net of tax
impact of $ −, $0.1, $- and $0.1, respectively |
2.7 |
|
|
0.4 |
|
|
— |
|
|
3.1 |
|
Amounts reclassified from accumulated other comprehensive (loss),
net of tax |
— |
|
|
(0.3) |
|
|
3.1 |
|
|
2.8 |
|
Net current period other comprehensive income |
2.7 |
|
|
0.1 |
|
|
3.1 |
|
|
5.9 |
|
Balance, September 30, 2020 |
$ |
2.2 |
|
|
$ |
(0.5) |
|
|
$ |
(70.5) |
|
|
$ |
(68.8) |
|
|
|
|
|
|
|
|
|
Balance, December 31, 2018 |
$ |
1.7 |
|
|
$ |
0.8 |
|
|
$ |
(64.1) |
|
|
$ |
(61.6) |
|
Other comprehensive (loss) before reclassifications, net of tax
impact of $ - , $0.2, $(0.2), and $ -, respectively |
(4.3) |
|
|
(0.1) |
|
|
(0.4) |
|
|
(4.8) |
|
Amounts reclassified from accumulated other comprehensive (loss)
income |
— |
|
|
(0.6) |
|
|
4.1 |
|
|
3.5 |
|
Net current period other comprehensive (loss) income |
(4.3) |
|
|
(0.7) |
|
|
3.7 |
|
|
(1.3) |
|
Balance, September 30, 2019 |
$ |
(2.6) |
|
|
$ |
0.1 |
|
|
$ |
(60.4) |
|
|
$ |
(62.9) |
|
Armstrong Flooring, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share data)
The amounts reclassified from Accumulated other comprehensive
(loss) and the affected line item of the Condensed Consolidated
Statements of Operations are presented in the table
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30 |
|
Nine Months Ended September
30 |
|
|
|
|
|
2020 |
|
2019 |
|
2020 |
|
2019 |
|
|
|
|
|
Affected Line Item |
Derivative adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts - purchases |
$ |
— |
|
|
$ |
(0.1) |
|
|
$ |
(0.2) |
|
|
$ |
(0.3) |
|
|
|
|
|
|
Cost of goods sold |
Foreign exchange contracts - sales |
— |
|
|
(0.1) |
|
|
(0.1) |
|
|
(0.3) |
|
|
|
|
|
|
Net sales |
Total before tax |
— |
|
|
(0.2) |
|
|
(0.3) |
|
|
(0.6) |
|
|
|
|
|
|
|
Tax impact |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
Income tax expense (benefit) |
Total reclassifications of derivative adjustments, net of
tax |
— |
|
|
(0.2) |
|
|
(0.3) |
|
|
(0.6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and postretirement adjustments: |
Prior service cost amortization |
— |
|
|
— |
|
|
(0.2) |
|
|
— |
|
|
|
|
|
|
Other (income) expense, net |
Amortization of net actuarial loss |
1.4 |
|
|
1.9 |
|
|
4.3 |
|
|
5.2 |
|
|
|
|
|
|
Other (income) expense, net |
Total before tax |
1.4 |
|
|
1.9 |
|
|
4.1 |
|
|
5.2 |
|
|
|
|
|
|
|
Tax impact |
(0.3) |
|
|
(0.4) |
|
|
(1.0) |
|
|
(1.1) |
|
|
|
|
|
|
Income tax expense (benefit) |
Total reclassifications of pension and postretirement adjustments,
net of tax |
1.1 |
|
|
1.5 |
|
|
3.1 |
|
|
4.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reclassifications for the period, net of tax |
$ |
1.1 |
|
|
$ |
1.3 |
|
|
$ |
2.8 |
|
|
$ |
3.5 |
|
|
|
|
|
|
|
Armstrong Flooring, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Dollars in millions, except per share data)
NOTE 16. LITIGATION AND RELATED MATTERS
Environmental Matters.
Environmental Compliance
Our manufacturing and research facilities are affected by various
federal, state and local requirements relating to the discharge of
materials and the protection of the environment. We make
expenditures necessary for compliance with applicable environmental
requirements at each of our operating facilities. These regulatory
requirements continually change, therefore we cannot predict with
certainty future expenditures associated with compliance with
environmental requirements.
Environmental Sites
In connection with our current or legacy manufacturing operations,
or those of former owners, we may from time to time become involved
in the investigation, closure and/or remediation of existing or
potential environmental contamination under the Comprehensive
Environmental Response, Compensation and Liability Act, and state
or international Superfund and similar type environmental laws. For
those matters, we may have rights of contribution or reimbursement
from other parties or coverage under applicable insurance policies;
however, we cannot predict with certainty the future identification
of or expenditure for any investigation, closure or remediation of
any environmental site.
Summary of Financial Position
There were no material liabilities recorded as of
September 30, 2020 and December 31, 2019 for potential
environmental liabilities that we consider probable and for which a
reasonable estimate of the probable liability could be
made.
Other Claims
We are involved in various lawsuits, claims, investigations and
other legal matters from time to time that arise in the ordinary
course of conducting business, including matters involving our
products, intellectual property, relationships with suppliers,
relationships with distributors, relationships with competitors,
employees and other matters. For example, we are currently a party
to various litigation matters that involve product liability, tort
liability and other claims under a wide range of allegations,
including illness due to exposure to certain chemicals used in the
workplace, or medical conditions arising from exposure to product
ingredients or the presence of trace contaminants. In some 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 Sections 10(b) and
20(a) 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 March 6, 2018 and November 4,
2019. On March 2, 2020, the court issued an order appointing
a lead plaintiff and lead counsel. On July 2, 2020, the lead
plaintiff filed an amended complaint asserting similar violations
and expanding the alleged class period to cover alleged false
and/or misleading statements or omissions made between March 6,
2018 and March 3, 2020. On August 17, 2020, the Company moved
to dismiss the amended complaint, and the lead plaintiff filed an
opposition on October 1, 2020. 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 continue vigorously defending
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.
Item 2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations
Our Management’s Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") is provided in addition to the
accompanying Condensed Consolidated Financial Statements and notes
to assist readers in understanding our results of operations,
financial condition, and cash flows. This interim MD&A should
be read in conjunction with the MD&A in our Annual Report on
Form 10-K for the fiscal year ended December 31,
2019.
Executive Overview
Armstrong Flooring, Inc. ("AFI" or the "Company") is a leading
global producer of resilient flooring products for use primarily in
the construction and renovation of commercial, residential and
institutional buildings. We design, manufacture, source and sell
flooring products primarily in North America and the Pacific Rim.
As of September 30, 2020, we operated eight manufacturing
plants in three countries. We operate six manufacturing plants
located throughout the United States (California, Illinois,
Mississippi, Oklahoma, and Pennsylvania) and one plant each in
China and Australia. As of September 30, 2020 and
December 31, 2019, we had approximately 1,700 and 1,600
full-time and part-time employees worldwide,
respectively.
During early 2020, the Company established a multi-year strategic
roadmap to transform and modernize its operations to become a
leaner, faster-growing and more profitable business. The
transformation encompasses three critical objectives: (i) expanding
customer reach; (ii) simplifying product offerings and operations;
and (iii) strengthening core capabilities. In addition, the Company
has implemented a new operating model to more effectively
accomplish these objectives by: (i) placing customers first by
aligning services and products through a more seamless value chain;
(ii) leading the industry in product innovation; (iii) simplifying
processes and operating complexity to become more competitive and
efficient; (iv) realigning the go-to-market model to reach all
relevant channels and customers; (v) implementing system changes to
improve operations, reduce costs and reignite organic growth; and
(vi) investing thoughtfully with a return-focused mindset. The goal
of this focused strategy is to transform and modernize AFI,
resulting in a company that is more agile, faster-growing and more
profitable.
To date, the Company has (i) announced the relocation of its
corporate headquarters, effective summer 2021, with estimated cost
savings of approximately 60% annually; (ii) begun the process of
consolidating U.S. manufacturing facilities with the intent to
monetize non-core assets; (iii) executed product portfolio
simplification and inventory optimization initiatives; (iv)
commenced manufacturing projects aimed at improving efficiency; (v)
begun to focus on enhancing customer experiences through new
methods of customer interactions and communication as well as the
introduction of a quick-ship program; and (vi) invested in product
innovations with a focus on U.S.-based manufacturing. The Company
has incurred approximately $1 million and $3 million in incremental
costs associated with the above business transformation initiatives
during the third quarter and nine months ended September 30, 2020,
respectively.
In June 2020, the Company amended its senior secured asset-based
revolving credit facility, modifying the facility size to $90.0
million with a maturity date in 2023. Additionally, the Company
entered into a $70 million term loan facility maturing in 2025 to
further strengthen its capital resources for business
transformation and growth initiatives. The Company capitalized $6.9
million of fees related to the new term loan facility, all of which
had been paid at June 30, 2020. The deferred financing costs will
be amortized through 2025 over the life of the term loan
facility.
COVID-19
The COVID-19 pandemic is significantly impacting our business and
results of operations. We are committed to safeguarding our
employees and the communities in which we operate, while continuing
to deliver our products to customers. We are following guidelines
and directives from governmental authorities and local health
authorities across our facilities to continue to operate safely and
responsibly. This includes working remotely, providing personal
protective equipment, limiting group meetings, restricting air
travel, enhancing cleaning and sanitizing procedures, and
practicing social distancing, among other risk mitigation
measures.
Our China plant was closed most of the month of February 2020. On
April 1, 2020, we announced a proactive two-week production
suspension in our North America plants beginning April 5, 2020 in
response to the increasing social and economic impact of COVID-19.
We continued to operate our warehouses. We reopened our North
America plants as planned following the two-week shut-down. Our
plants continued their operations during the third quarter.
However, beginning in August 2020 the Company's Australia plant
began to operate at approximately 60% capacity due to additional
governmental restrictions. We have not experienced, and do not
anticipate, material availability issues related to our raw
materials or finished goods.
To help mitigate the potential spread of the virus, our North
America sales team and corporate staff are working remotely and
will continue to do so indefinitely. In the second quarter we
furloughed approximately 100 employees, primarily administrative
employees from our corporate headquarters. Most of the furloughed
employees returned in July 2020. In addition, the employer match
for certain benefit plans was suspended through the end of the
third quarter of 2020 for salaried non-production
employees.
Inconsistent state and local government orders have resulted in and
will continue to have varying impacts to our results across
geographies and for some of our customers. Generally, home centers
have continued to operate. Construction is considered an essential
business in most of North America. However, some of our customers'
commercial projects in the retail, office, medical and educational
sectors have been postponed. These factors have led to a softer
demand environment in certain states and channels.
The ultimate duration and impact of the pandemic on our future
results is unknown.
Outlook
Looking forward, the Company remains committed to profitable growth
over the medium and long-term, however results will be negatively
impacted by COVID-19 for at least the remainder of 2020, and into
early 2021, primarily in the commercial markets served by the
Company as well as costs associated with Company's on-going
business transformation initiatives. The Company's view for the
remainder of 2020 and beyond is supported by the below factors,
which should be considered in the context of other risks, trends
and strategies described in this Quarterly Report, in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2019 and
in the Company's Quarterly Report on Form 10-Q for the three months
ended March 31, 2020:
•The
Company expects inventory levels to increase in the short-term to
support the new quick-ship program and initiatives to consolidate
manufacturing operations.
•Operating
results in the short-term will negatively be impacted by
incremental expenses necessary to execute the Company's business
transformation initiatives.
•The
Company remains committed to generating positive operating cash
flow in 2022.
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
provide 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.
We continue to see a decline in demand for our traditional
resilient products, including vinyl composition tile ("VCT") and,
particularly, vinyl sheet products used in residential
applications. The decline in vinyl sheet is driven by consumer
trends, which have continued to favor alternate products, including
luxury vinyl tile ("LVT") products. We are the largest producer of
VCT which is primarily used in commercial
environments.
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.
Tariffs
Tariffs impact the cost of products we import from China. 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. 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. Additional products
were added to the exclusion in the second quarter of 2020, also
retroactive to September 24, 2018. The exclusions expired in August
2020. We filed for tariff refunds on these products in 2020 and
record refunds as a reduction of previously recorded expense once
formal approval is received.
Results of Operations
Condensed Consolidated Results from Continuing
Operations
Below is a summary of comparative results of operations for the
three and nine months ended September 30, 2020 and
2019:
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Three Months Ended September 30 |
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Nine Months Ended September 30 |
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Change |
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Change |
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(Dollars in millions) |
2020 |
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2019 |
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$ |
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% |
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2020 |
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2019 |
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$ |
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% |
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Net sales |
$ |
156.6 |
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|
$ |
165.6 |
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$ |
(9.0) |
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(5.4) |
% |
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$ |
440.9 |
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$ |
485.0 |
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$ |
(44.1) |
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(9.1) |
% |
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Cost of goods sold |
129.0 |
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153.8 |
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(24.8) |
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(16.1) |
% |
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365.3 |
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414.9 |
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(49.6) |
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(12.0) |
% |
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Gross profit |
27.6 |
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11.8 |
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15.8 |
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NM* |
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75.6 |
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70.1 |
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5.5 |
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7.8 |
% |
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Selling, general and administrative expenses |
37.7 |
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40.0 |
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(2.3) |
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(5.8) |
% |
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104.6 |
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110.2 |
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(5.6) |
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(5.1) |
% |
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Operating (loss) |
(10.1) |
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(28.2) |
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18.1 |
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(64.2) |
% |
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(29.0) |
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(40.1) |
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11.1 |
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(27.7) |
% |
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Interest expense |
2.8 |
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0.8 |
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2.0 |
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4.6 |
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2.7 |
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1.9 |
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Other (income) expense, net |
(1.5) |
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0.7 |
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(2.2) |
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(2.4) |
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1.2 |
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(3.6) |
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(Loss) from continuing operations before income taxes |
(11.4) |
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(29.7) |
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18.3 |
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(31.2) |
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(44.0) |
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12.8 |
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Income tax expense (benefit) |
0.3 |
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— |
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0.3 |
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— |
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(3.0) |
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3.0 |
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Net (loss) from continuing operations |
(11.7) |
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(29.7) |
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18.0 |
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(31.2) |
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(41.0) |
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9.8 |
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Net (loss) income from discontinued operations |
— |
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(1.7) |
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1.7 |
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— |
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7.6 |
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(7.6) |
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Net (loss) |
$ |
(11.7) |
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$ |
(31.4) |
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$ |
19.7 |
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$ |
(31.2) |
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$ |
(33.4) |
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$ |
2.2 |
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NM*:
not meaningful
Three months ended September 30, 2020 compared to three months
ended September 30, 2019
Net sales
Net sales by percentage point change are shown in the table
below:
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Three Months Ended
September 30 |
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Change |
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Percentage Point Change Due to |
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(Dollars in millions) |
2020 |
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2019 |
|
$ |
|
% |
|
Price |
|
Volume |
|
Mix |
|
Currency |
|
$ |
156.6 |
|
|
$ |
165.6 |
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|
$ |
(9.0) |
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|
(5.4) |
% |
|
0.4 |
% |
|
(5.3) |
% |
|
0.3 |
% |
|
(0.8) |
% |
Net sales for the three months ended September 30, 2020
decreased compared to the three months ended September 30,
2019 primarily attributable to lower sales volumes due to COVID-19
pandemic related business disruptions, including the postponement
of certain commercial projects and slower activity at many
independent customer retail locations.
Cost of goods sold
Cost of goods sold for the three months ended September 30,
2020 was 82.4% of net sales compared to 92.9% of net sales in the
three months ended September 30, 2019. For the three months
ended September 30, 2020, costs of goods sold decreased compared to
the three months ended September 30, 2019. The decrease was
primarily attributable to lower sales volume due to COVID-19
pandemic related business disruptions and a prior year $13.6
million inventory write-down adjustment related to a multi-year
inventory optimization that did not repeat during
2020.
Selling, general & administrative expenses
Selling, general and administrative expenses for the three months
ended September 30, 2020 decreased compared to the three
months ended September 30, 2019 due to cost reduction measures
implemented in response to the impact of COVID-19, lower executive
transition costs and lower advertising and promotion; partially
offset by the net impact of income from a transition services
agreement and a $6.0 million write-off of merchandising materials
in three months ended September 30, 2019 that did not repeat
during 2020.
Interest expense
For the three months ended September 30, 2020, interest expense
increased compared to the three months ended September 30, 2019 due
to higher interest rates on debt outstanding resulting from the
Company's June 2020 refinancing.
Income tax
We recorded income tax expense of $0.3 million for the three months
ended September 30, 2020 compared to no income tax expense for the
three months ended September 30, 2019. The current year income tax
expense consists of U.S. income tax benefit offset by a foreign
income tax expense from various jurisdictions. The U.S. income tax
benefit relates to a reduction in the Company’s valuation allowance
due to the tax impact of the gains in other comprehensive
income.
Discontinued operations
For the three months ended September 30, 2019, a $1.7 million loss
on disposal of discontinued operations was primarily related to the
working capital adjustment.
Nine months ended September 30, 2020 compared to September 30,
2019
Net sales
Net sales by percentage point change are shown in the table
below:
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Nine Months Ended September 30 |
|
Change |
|
Percentage Point Change Due to |
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(Dollars in millions) |
2020 |
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2019 |
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$ |
|
% |
|
Price |
|
Volume |
|
Mix |
|
Currency |
|
$ |
440.9 |
|
|
$ |
485.0 |
|
|
$ |
(44.1) |
|
|
(9.1) |
% |
|
(1.6) |
% |
|
(8.0) |
% |
|
0.9 |
% |
|
(0.4) |
% |
Net sales for the nine months ended September 30, 2020
decreased compared to the nine months ended September 30, 2019
primarily attributable to lower sales volumes due to the COVID-19
pandemic and shelter-in-place related business disruptions,
including the temporary closing of many independent customer retail
locations and the postponement of certain commercial projects,
partially offset by increased activity with home centers and other
residential channels.
Cost of goods sold
Cost of goods sold for the nine months ended September 30,
2020 was 82.9% of net sales compared to 85.5% of net sales in the
nine months ended September 30, 2019. For the nine months
ended September 30, 2020, costs of goods sold decreased compared to
the nine months ended September 30, 2019. The decrease was
primarily due to lower sales volumes and a prior year $13.6 million
inventory write-down adjustment related to a multi-year inventory
optimization that did not repeat during 2020.
Selling, general & administrative expenses
Selling, general and administrative expenses for the nine months
ended September 30, 2020 decreased compared to the nine months
ended September 30, 2019 due to cost reduction measures
implemented in response to the impact of COVID-19 and lower
executive transition costs, partially offset by the net impact of
income from a transition service agreement, a $2.5 million benefit
from an early lease termination fee and a $6.0 million write-off of
merchandising materials in the nine months ended September 30,
2019, none of which repeated in the current period.
Interest expense
For the nine months ended September 30, 2020, interest expense
increased compared to the nine months ended September 30, 2019 due
to higher interest rates on debt outstanding resulting from the
Company's June 2020 refinancing.
Income tax benefit
No income tax benefit was recorded for the nine months ended
September 30, 2020 compared to income tax benefit of $3.0 million
for the nine months ended September 30, 2019. The effective tax
rate for the nine months ended September 30, 2020 is 0.3% compared
to the rate of 6.8% for the same period of 2019. The change in
effective rates is primarily driven by the tax impact of the gains
from the resolution of our antidumping case reported as
discontinued operations in 2019.
Discontinued operations
For the nine months ended September 30, 2019, a $7.6 million gain
on disposal of discontinued operations was realized, primarily due
to the resolution of an antidumping case.
Liquidity and Capital Resources
During the second quarter of 2020, the Company entered into a Third
Amendment to the ABL Credit Facility (the "Amended ABL Credit
Facility") and entered into a new term loan facility with Pathlight
Capital LP as the administrative agent ("Term Loan Agreement) which
provides us with a secured term loan credit facility of $70 million
(the “Term Loan Facility”). We used the proceeds of the Term Loan
Facility to pay down the Amended ABL Credit Facility.
All obligations under the Amended ABL Credit Facility and Term Loan
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
Amended ABL Credit Facility and Term Loan 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 Amended ABL Credit
Facility, Term Loan Facility and other security and collateral
documents.
Amended ABL Credit Facility
On June 23, 2020 we entered into the Amendment, which reduces
commitments from $100 million to $90 million, amends the interest
rates applicable to the loans, modifies certain financial
maintenance and other covenants, and permits indebtedness under the
Term Loan Agreement. The Amended ABL Credit Facility provides for a
borrowing base that is derived from our accounts receivable and
inventory, collectively, with the equity interests in the
guarantors, the Amended ABL Priority Collateral, subject to certain
reserves and other limitations. The Amended ABL Credit Facility
matures in December 2023.
The Amendment permits us to grant a first priority security
interest in real estate, machinery and equipment and intellectual
property collateral to the Term Loan Agent (collectively, the “Term
Loan Priority Collateral”). Bank of America, N.A., as
administrative agent and collateral agent (in such capacities, the
“ABL Agent”) will not have a security interest in the real property
securing the Term Loan Agreement but will have a second priority
security interest in machinery and equipment and intellectual
property constituting Term Loan Priority Collateral.
Borrowings under the Amended ABL Credit Facility will bear interest
at a rate per annum equal to, at our option, a base rate or a
Eurodollar rate equal to the London interbank offered rate
(“LIBOR”) for the relevant interest period, plus, in each case, an
applicable margin determined in accordance with the provisions of
the Amendment. The base rate will be the highest of (a) the
federal funds rate plus 0.50%; (b) the prime rate of Bank of
America, N.A.; and (c) LIBOR plus 1.00%. The applicable margin
for borrowings under the Amended ABL Credit Facility will be
determined based on the Company’s Consolidated Leverage Ratio (as
defined in the Amendment) and will range from 1.75% to 3.00% with
respect to base rate borrowings and 2.75% to 4.00% with respect to
Eurodollar rate borrowings. In addition to paying interest on
outstanding principal under the Amended ABL Credit Facility, we
will pay a commitment fee to the lenders with respect to the
unutilized revolving commitments thereunder at a rate ranging from
0.375% to 0.50% depending on the Company’s Consolidated Leverage
Ratio (as defined in the Amendment).
In addition, the Amendment also modifies certain financial
covenants. The Amended ABL Credit Facility requires, among other
things, that we maintain a minimum Consolidated Cash Flow (as
defined in the Amendment) for the three-fiscal quarter period
ending September 30, 2020 and for any four-fiscal quarter period
ending thereafter, have minimum Availability (as defined in the
Amended ABL Credit Facility) of $30 million and, during a Financial
Covenant Trigger Period (as defined in the Amendment), maintain a
minimum Consolidated Fixed Charge Coverage Ratio (as defined in the
Amendment) of at least 1.00 to 1.00 (such covenants, the “Financial
Covenants”).
Term Loan Facility
On June 23, 2020 we also entered into the Term Loan Agreement. The
borrowing base is derived from the Company’s machinery and
equipment, intellectual property and real property, subject to
certain reserves and other limitations. The Term Loan Facility is
scheduled to mature on June 23, 2025. The principal balance of the
Term Loan Facility is payable in quarterly installments beginning
in June 2021.
Borrowings under the Term Loan Facility will bear interest at a
rate per annum equal to LIBOR for a three-month interest period,
plus an applicable margin of 12.00%.
We must use cash proceeds from certain dispositions, including
sales of real estate, equity and debt issuances and extraordinary
events to prepay outstanding loans under the Term Loan Facility,
subject to specified exceptions, including the prepayment
requirements with respect to the Amended ABL Credit Facility.
Prepayments of loans under the Term Loan Facility prior to the
third anniversary of the closing date are subject to certain
premiums.
All obligations under the Term Loan Agreement 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 and are secured by a first priority lien on the Term
Priority Collateral and a second priority lien on the ABL Priority
Collateral.
The Term Loan Agreement contains a number of covenants that, among
other things and subject to certain exceptions, restrict our
ability to create liens, to undertake fundamental changes, to incur
debt, to sell or dispose of assets, to make investments, to make
restricted payments such as dividends, distributions or equity
repurchases, to change the nature of our businesses, to enter into
transactions with affiliates and to enter into certain burdensome
agreements.
In addition, the Term Loan Agreement requires us to comply with the
Amended ABL Credit Facility Financial Covenants.
The Term Loan Agreement also contains customary affirmative
covenants and events of default, including a cross-default
provision in respect of certain material indebtedness and a change
of control provision. If an event of default occurs, the lenders
may choose to accelerate the maturity of the Term Loan Facility and
require repayment of all obligations thereunder.
Cash Flow Summary
The table below shows our cash (used for) provided by operating,
investing and financing activities:
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|
|
|
(Dollars in millions) |
Nine Months Ended
September 30 |
2020 |
|
2019 |
Cash (used for) operating activities |
$ |
(16.3) |
|
|
$ |
(1.8) |
|
Cash (used for) investing activities |
(15.1) |
|
|
(24.8) |
|
Cash provided by (used for) financing activities |
26.3 |
|
|
(80.1) |
|
Operating Activities
- Net cash used for operating activities for the nine months ended
September 30, 2020 was $16.3 million, an increase of $14.5
million from the nine months ended September 30, 2019. The increase
was primarily related to lower net cash income and changes in
working capital, primarily inventory, other asset and liabilities
and receivables, partially offset by accounts payable and accrued
expenses.
Investing Activities
- Net cash used for investing activities for the nine months ended
September 30, 2020 was $15.1 million , a decrease of
$9.7 million from the nine months ended September 30, 2019.
The decrease is primarily due to decreased capital spending during
2020.
Financing Activities
- Net cash provided by financing activities for the nine months
ended September 30, 2020 was $26.3 million, an increase of
$106.4 million from net cash used by financing activities for the
nine months ended September 30, 2019. The increase was the result
of higher cash borrowings resulting from the Company's debt
refinancing during the second quarter of 2020 as well as treasury
stock repurchases in the prior year that did not repeat during
2020.
Sources and Uses of Cash
Our primary sources of liquidity are, and we anticipate that they
will continue to be, cash provided by operations, proceeds from
asset sales and borrowings under our credit facilities. We believe
these sources are sufficient to fund our capital needs and 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 typically generated in the second and third
quarters.
As of September 30, 2020, there were no borrowings outstanding
under our Amended ABL Credit Facility, while outstanding letters of
credit were $3.9 million. Total net availability under the Amended
ABL Credit Facility and Term Loan Facility as of September 30, 2020
was $83.4 million. During the fourth quarter of 2020 there will be
a reduction in available liquidity of $30 million until such time
as the Company is able to sell the South Gate, CA
facility.
We are required to pay a commitment fee, payable quarterly in
arrears, on the average daily unused amount of the revolving
Amended ABL Credit Facility, which varies according to the net
leverage ratio and was 0.50% as of September 30, 2020. Outstanding
letters of credit issued under the Amended ABL Credit 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 4.125% as of September 30,
2020.
Our foreign subsidiaries had available lines of credit totaling
$8.8 million and there was $4.3 million of borrowings under these
lines of credit as of September 30, 2020.
Debt Covenants
The Amendment also amends certain financial covenants. The Amended
ABL Credit Facility and the Term Loan Facility require, among other
things, that we maintain a minimum Consolidated Cash Flow (as
defined in the Amendment) for the three-fiscal quarter period
ending September 30, 2020 and for any four-fiscal quarter period
ending thereafter, have minimum Availability (as defined in the
Amended ABL Credit Facility) of $30 million and, during a Financial
Covenant Trigger Period (as defined in the Amendment), maintain a
minimum Consolidated Fixed Charge Coverage Ratio (as defined in the
Amendment) of at least 1.00 to 1.00 (such covenants, the “Financial
Covenants”).
As of September 30, 2020, the minimum Consolidated Cash Flow
and the Fixed Charge Coverage Ratio covenants were not applicable.
As of September 30, 2020, we were in compliance with the minimum
availability requirement of $30 million.
See Note 13 to the Condensed Consolidated Financial Statements for
additional information related to the ABL Amendment and Term Loan
Facility.
Cash Management
The Company has various cash management systems throughout the
world that centralize cash in various bank accounts where it is
economically justifiable and legally permissible to do so. These
centralized cash balances are then redeployed to other operations
to reduce short-term borrowings and to finance working capital
needs or capital expenditures. Due to the transitory nature of cash
balances, they are normally invested in bank deposits that can be
withdrawn at will or in very liquid short-term bank time deposits.
The Company's policy is to primarily use the banks that participate
in our ABL credit facility located in the various countries in
which the Company operates. The Company monitors the
creditworthiness of banks and when appropriate will adjust banking
operations to reduce or eliminate exposure to less creditworthy
banks.
At September 30, 2020, the Company's Cash and cash equivalents
totaled $22.2 million, of which $8.3 million was held in the U.S.
and $13.9 million held by non-U.S. subsidiaries. At September 30,
2020 none of the Company's consolidated cash and cash equivalents
had regulatory restrictions that would preclude the transfer of
funds with and among subsidiaries. While the Company's remaining
non-U.S. cash and cash equivalents can be transferred with and
among subsidiaries, the majority of these non-U.S. cash balances
will be used to support the ongoing working capital needs and
continued growth of the Company's non-U.S. operations.
Contractual Obligations
On June 26, 2020, we entered into new Headquarters ("HQ") and
Technical Center lease agreements with High Properties. The term of
the HQ lease will be ten years and four months, with an anticipated
commencement date of June 1, 2021. Under the terms of the HQ lease,
we will lease an aggregate of approximately 58,500 square feet in
two existing adjacent buildings located in Lancaster, Pennsylvania.
During the first sixteen months of the HQ lease term, we will pay
an initial monthly rental rate of $26.75 per square foot, plus
operating expenses and real estate taxes, subject to a rent
abatement period, with a gradual rate increase for each twelve
month period thereafter, culminating with a monthly rental rate of
$31.97 per square foot, plus operating expenses and real estate
taxes, during the final twelve months of the HQ lease term. The
term of the Technical Center lease will be ten years and seven
months, with an anticipated commencement date of March 1, 2021.
Under the terms of the Technical Center lease, we will lease
approximately 32,143 square feet of an existing building also in
Lancaster, Pennsylvania. During the first sixteen months of the
Technical Center lease, we will pay an initial monthly rental rate
of $11.71 per square foot, plus operating expenses and real estate
taxes, subject to a rent abatement period, with a gradual rate
increase for each twelve month period thereafter, culminating with
a monthly rental rate of $13.30 per square foot, plus operating
expenses and real estate taxes, during the final twelve months of
the Technical Center lease. Both leases will be recorded as
operating leases.
Recent Accounting Pronouncements
See Note 1 to the Condensed Consolidated Financial Statements for a
discussion of recent accounting pronouncements, including
accounting pronouncements that are effective in future
periods.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
Market risks have not changed significantly from those disclosed in
“Quantitative and Qualitative Disclosures About Market Risk” and
included in Part II, Item 7, Management’s Discussion of Analysis of
Financial Condition and Results of Operations of the Company’s
Annual Report on Form 10-K for the fiscal year ended December 31,
2019.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains a system of disclosure controls and
procedures to give reasonable assurance that information required
to be disclosed in the Company's reports filed or submitted under
the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), is recorded, processed, summarized and reported within the
time periods specified in the rules and forms of the SEC. These
controls and procedures also give reasonable assurance that
information required to be disclosed in such reports is accumulated
and communicated to management to allow timely decisions regarding
required disclosures.
During the evaluation of disclosure controls and procedures and our
internal control over financial reporting as of December 31,
2019 conducted during the preparation of our financial statements,
which were included in our Annual Report on Form 10-K for the year
ended December 31, 2019, our management identified a material
weakness in internal control over financial reporting relating to
the design and implementation of information technology general
controls ("ITGCs") over two information technology ("IT") systems
that support our processing of certain sales incentives, which are
recorded as a reduction of 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. This control deficiency did not
result in any identified misstatements to the consolidated
financial statements as of and for the year ended December 31, 2019
and there were no changes to previously released financial results.
However, the control deficiency created a reasonable possibility
that a material misstatement to our consolidated financial
statements would not be prevented or detected on a timely basis
and, therefore, we concluded that as of December 31, 2019, our
internal control over financial reporting was not
effective.
As of September 30, 2020, the material weakness was not yet
remediated. As a result, our Chief Executive Officer and Chief
Financial Officer, together with management, concluded that, as of
September 30, 2020, our disclosure controls and procedures were not
effective. We have implemented and continue to implement measures
designed to ensure that the deficient ITGCs for the two IT systems
that support our processing of certain sales incentives are
remediated. We have been active in documenting and assessing the
design of ITGCs for the two IT systems that support our processing
of certain sales incentives, as well as the business process
automated and manual controls that are dependent on the affected
ITGCs. We have also updated our risk-assessment process to better
identify risks in the financial reporting process and have
implemented monitoring control activities when using a third party
service provider.
When fully implemented and operational, we believe the controls we
have designed will remediate the deficiencies that led to the
material weaknesses and strengthen our internal controls over
financial reporting. We expect that final design and implementation
of controls will be completed prior to the end of 2020. Management
will conclude on the remediation when the applicable controls have
operated for a sufficient time and management has concluded,
through testing, that these controls are operating
effectively.
Change in Internal Controls over Financial Reporting
On July 28, 2020, Tracy L. Marines resigned from her position as
Vice President and Controller effective August 28, 2020 at which
time Gregory D. Waina, the Company's Interim Chief Financial
Officer (principal financial officer) assumed the role and
responsibilities of principal accounting officer of the Company. On
and effective as of September 14, 2020, Phillip J. Gaudreau was
appointed to the position of Vice President and Controller at which
time he assumed the role and responsibilities of principal
accounting officer.
Amy P. Trojanowski was appointed to the position and
responsibilities of Senior Vice President and Chief Financial
Officer and assumed the role and responsibilities of principal
finance officer effective October 19, 2020. In connection with this
appointment, and also effective as of October 19, 2020, Gregory D.
Waina resigned from his position as the Company’s Interim Chief
Financial Officer (and principal financial officer), but will
remain with the Company in a consulting capacity to ensure a smooth
transition.
Except for the material weakness described above, no changes in our
internal control over financial reporting occurred during the
fiscal quarter ended September 30, 2020 that has materially
affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
See Note 16 to the Condensed Consolidated Financial Statements
included elsewhere in this report, which is incorporated herein by
reference.
Item 1A. Risk Factors
There have been no material changes in the Company's risk factors
discussed in Part I, Item 1A, Risk Factors during the current
quarter.
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds
(c) Issuer Purchases of Equity Securities
The following table includes information about the Company's stock
repurchases from July 1, 2020 to September 30,
2020:
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|
Period |
Total Number of Shares Purchased
1
|
|
Average Price Paid per Share |
|
Total Number of Shares Purchased as Part of Publicly Announced
Plans or Programs |
|
Approximate Dollar Value of Shares that may yet be Purchased under
the Plans or Programs |
July 1 - 31, 2020 |
278 |
|
|
$ |
3.07 |
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|
— |
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|
— |
|
August 1 - 31, 2020 |
1,666 |
|
|
$ |
3.20 |
|
|
— |
|
|
— |
|
September 1 - 30, 2020 |
129 |
|
|
$ |
4.03 |
|
|
— |
|
|
— |
|
Total |
2,073 |
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|
|
|
— |
|
|
— |
|
_____________
1
Shares reacquired through the withholding of shares to pay employee
tax obligations upon the exercise of options or vesting of
restricted units granted under the Company's long-term incentive
plans and those previously granted under Armstrong World
Industries' long-term incentive plans, which were converted to
Armstrong Flooring, Inc. units on April 1, 2016.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
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Exhibit
Number |
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Description |
3.1 |
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3.2 |
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10.1 |
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31.1 |
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31.2 |
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32.1 |
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32.2 |
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101.INS |
|
XBRL Instance Document - the instance document does not appear in
the Interactive Data File because its XBRL tags are embedded within
the Inline XBRL document.† |
101.SCH |
|
XBRL Taxonomy Extension Schema Document† |
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase Document† |
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase Document† |
101.LAB |
|
XBRL Taxonomy Extension Label Linkbase Document† |
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase Document† |
† |
Filed herewith. |
* |
Furnished herewith. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly
authorized.
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Armstrong Flooring, Inc. |
(Registrant) |
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Date: |
October 30, 2020 |
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By: |
/s/ Amy P. Trojanowski |
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Amy P. Trojanowski |
|
Senior Vice President and Chief Financial Officer |
|
(As Duly Authorized Officer and Principal Financial
Officer) |
|
|
Date: |
October 30, 2020 |
|
|
By: |
/s/ Phillip J. Gaudreau |
|
|
|
Phillip J. Gaudreau |
|
Vice President and Controller |
|
(As Duly Authorized Officer and Principal Accounting
Officer) |
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