ARMSTRONG WORLD INDUSTRIES INC - Quarter Report: 2009 September (Form 10-Q)

Form 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

ARMSTRONG WORLD INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)



Pennsylvania	1-2116	23-0366390

(State or other jurisdiction of incorporation or organization)	Commission file number	(I.R.S. Employer Identification No.)



P. O. Box 3001, Lancaster, Pennsylvania		17604

(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (717) 397-0611

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 Yes þ No o days.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter time period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):


Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o

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

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes þ No o

Number of shares of Armstrong World Industries, Inc.’s common stock outstanding as of October 23, 2009 — 57,355,763.

TABLE OF CONTENTS


SECTION	PAGES

Uncertainties Affecting Forward-Looking Statements		3-5

PART I — FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements		6-28

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		29-42

Item 3. Quantitative and Qualitative Disclosures about Market Risk		43

Item 4. Controls and Procedures		43

PART II — OTHER INFORMATION

Item 1. Legal Proceedings		44

Item 1A. Risk Factors		44

Item 2. Unregistered Sales of Equity Securities and the Use of Proceeds		44

Item 6. Exhibits		45-48

Signatures		49

Exhibit 10.8
Exhibit 10.17
Exhibit 10.26
Exhibit 10.27
Exhibit 10.28
Exhibit 10.32
Exhibit 15
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

Uncertainties Affecting Forward-Looking Statements

Our disclosures here and in other public documents and comments contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Those statements provide our future expectations or forecasts and can be identified by our use of words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “outlook,” etc. in discussions of future operating or financial performance or the outcome of contingencies such as liabilities or legal proceedings.

Any of our forward-looking statements may turn out to be wrong. Actual results may differ materially from our expected results. Forward-looking statements involve risks and uncertainties (such as those discussed in the Risk Factors section below) because they relate to events and depend on circumstances that may or may not occur in the future. We undertake no obligation to update any forward-looking statement.

Risk Factors

As noted in the introductory section titled “Uncertainties Affecting Forward-Looking Statements” above, our business, operations and financial condition are subject to various risks. These risks should be taken into account in evaluating any investment decision involving Armstrong. It is not possible to predict or identify all factors that could cause actual results to differ materially from expected and historical results. The following discussion is a summary of what we believe to be our most significant risk factors. These and other factors could cause our actual results to differ materially from those in forward-looking statements made in this report.

We try to reduce both the likelihood that these risks will affect our businesses and their potential impact. But, no matter how accurate our foresight, how well we evaluate risks, and how effective we are at mitigating them, it is still possible that one of these problems or some other issue could have serious consequences for us, up to and including a materially adverse effect. See related discussions in this document and our other SEC filings for more details and subsequent disclosures.

Our business is dependent on construction activity. Downturns in construction activity and global economic conditions, such as weak consumer confidence and weak credit markets, adversely affect our business and our profitability.

Our businesses have greater sales opportunities when construction activity is strong and, conversely, have fewer opportunities when such activity declines. Construction activity tends to increase when economies are strong, interest rates are favorable, government spending is strong, and consumers are confident. When the economy is weak and access to credit is limited, customers, distributors and suppliers are at heightened risk of defaulting on their obligations. Since most of our sales are in the U.S., its economy is the most important for our business, but conditions in Europe, Canada and Asia also are significant. A prolonged economic downturn would exacerbate the adverse effect on our business and profitability.

We require a significant amount of liquidity to fund our operations.

Our liquidity needs vary throughout the year. There are no significant debt maturities until 2011 and 2013 under our existing senior credit facility. We believe that cash on hand and generated from operations will be adequate to address our foreseeable liquidity needs. If future operating performance declines significantly, we cannot assure that our business will generate sufficient cash flow from operations to fund our needs or to remain in compliance with our debt covenants.

Our markets are highly competitive. Competition can reduce demand for our products or cause us to lower prices. Failure to compete effectively by meeting consumer preferences and/or maintaining market share would adversely affect our results.

Our customers consider our products’ performance, product styling, customer service and price when deciding whether to purchase our products. Shifting consumer preference in our highly competitive markets, e.g., from residential vinyl products to other flooring products, styling preferences or inability to offer new competitive performance features could hurt our sales. For certain products there is excess industry capacity in several geographic markets, which tends to increase price competition, as does competition from overseas competitors with lower cost structures.

If the availability of raw materials and energy decreases, or the costs increase, and we are unable to pass along increased costs, our operating results could be affected adversely.

The cost and availability of raw materials, packaging materials, energy and sourced products are critical to our operations. For example, we use substantial quantities of natural gas, petroleum-based raw materials, hardwood lumber and mineral fiber in our manufacturing operations. The cost of some items has been volatile in recent years and availability has sometimes been tight. We source some materials from a limited number of suppliers, which, among other things, increases the risk of unavailability. Limited availability could cause us to reformulate products or to limit our production. The impact of increased costs is greatest where our ability to pass along increased costs through price increases on our products is limited, whether due to competitive pressures or other factors.

Reduction in sales to key customers could have a material adverse effect on our revenues and profits.

Some of our businesses are dependent on a few key customers such as The Home Depot, Inc. and Lowe’s Companies, Inc. The loss of sales to one of these major customers, or changes in our business relationship with them, could hurt both our revenues and profits.

Changes in the political, regulatory and business environments of our international markets, including changes in trade regulations and currency exchange fluctuations, could have an adverse effect on our business.

A significant portion of our products move in international trade, particularly among the U.S., Canada, Europe and Asia. Also, approximately 30% of our annual revenues are from operations outside the U.S. Our international trade is subject to currency exchange fluctuations, trade regulations, import duties, logistics costs and delays and other related risks. They are also subject to variable tax rates, credit risks in emerging markets, political risks, uncertain legal systems, restrictions on repatriating profits to the U.S., and loss of sales to local competitors following currency devaluations in countries where we import products for sale.

Capital investments and restructuring actions may not achieve expected savings in our operating costs.

We look for ways to make our operations more efficient and effective. We reduce, move and expand our plants and operations as needed. Each action generally involves substantial planning and capital investment. We can err in planning and executing our actions, which could hurt our customer service and cause unplanned costs.

Labor disputes or work stoppages could hurt production and reduce sales and profits.

Most of our manufacturing employees are represented by unions and are covered by collective bargaining or similar agreements that must be periodically renegotiated. Although we anticipate that we will reach new contracts as current ones expire, our negotiations may result in a significant increase in our costs. Failure to reach new contracts could lead to work stoppages, which could hurt production, revenues, profits and customer relations.

Adverse judgments in regulatory actions, product claims and other litigation could be costly. Insurance coverage may not be available or adequate in all circumstances.

While we strive to ensure that our products comply with applicable government regulatory standards and internal requirements, and that our products perform effectively and safely, customers from time to time could claim that our products do not meet contractual requirements, and users could claim to be harmed by use or misuse of our products. This could give rise to breach of contract, warranty or recall claims, or claims for negligence, product liability, strict liability, personal injury or property damage. The building materials industry has been subject to claims relating to silicates, mold, PCBs, PVC, formaldehyde, toxic fumes, fire-retardant properties and other issues, as well as for incidents of catastrophic loss, such as building fires. Product liability insurance coverage may not be available or adequate in all circumstances. In addition, claims may arise related to patent infringement, environmental liabilities, distributor terminations, commercial contracts, antitrust or competition law, employment law and employee benefits issues, and other regulatory matters. While we have in place processes and policies to mitigate these risks and to investigate and address such claims as they arise, we cannot predict the costs to defend or resolve such claims.

Our principal shareholders could significantly influence our business and our affairs.

The Armstrong World Industries, Inc. Asbestos Personal Injury Settlement Trust (“Asbestos PI Trust”), formed in 2006 as part of AWI’s emergence from bankruptcy, and Armor TPG Holdings LLC (“TPG”) together hold more than 60% of AWI’s outstanding shares and have entered into a shareholders’ agreement pursuant to which the Asbestos PI Trust and TPG have agreed to vote their shares together on certain matters. Such a large percentage of ownership could result in below average equity market liquidity and affect matters which require approval by our shareholders.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Armstrong World Industries, Inc., and Subsidiaries

Condensed Consolidated Statements of Earnings

(amounts in millions, except per share data)

Unaudited


	Three			Three			Nine			Nine
	Months			Months			Months			Months
	Ended			Ended			Ended			Ended
	September 30,			September 30,			September 30,			September 30,
	2009			2008			2009			2008

Net sales	$	753.0		$	929.6		$	2,127.0		$	2,684.6
Cost of goods sold		565.0			717.9			1,643.6			2,061.8

Gross profit		188.0			211.7			483.4			622.8

Selling, general and administrative expenses		156.8			145.9			421.3			452.7
Restructuring charges, net		—			—			—			0.8
Equity earnings from joint venture		(12.8	)		(16.4	)		(30.1	)		(48.1	)

Operating income		44.0			82.2			92.2			217.4

Interest expense		4.9			7.5			13.9			23.7
Other non-operating expense		0.2			0.8			0.5			1.2
Other non-operating (income)		(0.9	)		(2.1	)		(2.6	)		(8.5	)

Earnings from continuing operations before income taxes		39.8			76.0			80.4			201.0

Income tax (benefit) expense		(24.6	)		36.9			(1.1	)		94.4

Earnings from continuing operations		64.4			39.1			81.5			106.6

(Loss) from discontinued operations, net of income tax of $0.0, $0.0, $0.0 and $0.4		—			(0.2	)		—			(0.1	)

Net earnings	$	64.4		$	38.9		$	81.5		$	106.5


Earnings per share of common stock, continuing operations:
Basic	$	1.13		$	0.69		$	1.43		$	1.87
Diluted	$	1.12		$	0.68		$	1.43		$	1.87

(Loss) per share of common stock, discontinued operations:
Basic	$	—		$	—		$	—		$	—
Diluted	$	—		$	—		$	—		$	—

Net earnings per share of common stock:
Basic	$	1.13		$	0.68		$	1.43		$	1.87
Diluted	$	1.12		$	0.68		$	1.43		$	1.87

Average number of common shares outstanding:
Basic		56.9			56.4			56.6			56.4
Diluted		57.0			56.5			56.7			56.4

See accompanying notes to Condensed Consolidated Financial Statements beginning on page 10.

Armstrong World Industries, Inc., and Subsidiaries
Condensed Consolidated Balance Sheets
(amounts in millions, except share data)


	Unaudited
	September 30,			December 31,
	2009			2008
Assets
Current assets:
Cash and cash equivalents	$	522.0		$	355.0
Accounts and notes receivable, net		292.7			247.9
Inventories, net		467.4			544.0
Deferred income taxes		20.4			14.4
Income tax receivable		23.7			22.0
Other current assets		52.0			78.2

Total current assets		1,378.2			1,261.5

Property, plant and equipment, less accumulated depreciation and amortization of $383.1 and $278.9, respectively		924.8			954.2

Prepaid pension costs		38.4			0.3
Investment in joint venture		196.3			208.2
Intangible assets, net		615.6			626.3
Deferred income taxes		63.0			219.6
Other noncurrent assets		84.3			81.7

Total assets	$	3,300.6		$	3,351.8


Liabilities and Shareholders’ Equity
Current liabilities:
Short-term debt	$	2.3		$	1.3
Current installments of long-term debt		40.1			40.9
Accounts payable and accrued expenses		335.8			337.0
Income tax payable		8.0			1.6
Deferred income taxes		4.6			4.6

Total current liabilities		390.8			385.4

Long-term debt, less current installments		440.6			454.8
Postretirement and postemployment benefit liabilities		310.1			312.8
Pension benefit liabilities		202.7			211.4
Other long-term liabilities		57.5			62.4
Income taxes payable		0.7			164.7
Deferred income taxes		12.9			9.0

Total noncurrent liabilities		1,024.5			1,215.1
Shareholders’ equity:
Common stock, $0.01 par value per share, authorized 200 million shares; issued 57,355,763 shares and 57,049,495 shares, respectively		0.6			0.6
Capital in excess of par value		2,051.0			2,024.7
Retained earnings		148.2			66.7
Accumulated other comprehensive (loss)		(323.0	)		(348.8	)

Total shareholders’ equity		1,876.8			1,743.2

Non-controlling interest		8.5			8.1

Total equity		1,885.3			1,751.3

Total liabilities and equity	$	3,300.6		$	3,351.8

See accompanying notes to Condensed Consolidated Financial Statements beginning on page 10.

Armstrong World Industries, Inc., and Subsidiaries
Condensed Consolidated Statements of Shareholders’ Equity
(amounts in millions)
Unaudited


	Nine Months Ended September 30, 2009
	Total					AWI Shareholders					Non-Controlling Interest
Non-Controlling Interest:
Balance at beginning of year	$	8.1									$	8.1

Common stock:
Balance at beginning of year and September 30	$	0.6				$	0.6					—

Capital in excess of par value:
Balance at beginning of year	$	2,024.7				$	2,024.7					—
Share-based employee compensation		26.3					26.3					—

Balance at September 30	$	2,051.0				$	2,051.0					—

Retained earnings:
Balance at beginning of year	$	66.7				$	66.7					—
Net earnings for period		81.9		$	81.9		81.5		$	81.5		0.4	$	0.4


Balance at September 30	$	148.6				$	148.2				$	0.4

Accumulated other comprehensive (loss):
Balance at beginning of year	$	(348.8	)			$	(348.8	)				—
Foreign currency translation adjustments		26.7					26.7					—
Derivative gain, net		0.3					0.3					—
Pension and postretirement adjustments		(1.2	)				(1.2	)				—

Total other comprehensive income		25.8			25.8		25.8			25.8		—		—


Balance at September 30	$	(323.0	)			$	(323.0	)				—

Comprehensive income				$	107.7				$	107.3			$	0.4

Total equity	$	1,885.3				$	1,876.8				$	8.5


	Nine Months Ended September 30, 2008
	Total						AWI Shareholders						Non-Controlling Interest
Non-Controlling Interest:
Balance at beginning of year	$	7.4											$	7.4

Common stock:
Balance at beginning of year and September 30	$	0.6					$	0.6						—

Capital in excess of par value:
Balance at beginning of year	$	2,112.6					$	2,112.6						—
Share-based employee compensation		4.8						4.8						—
Dividends in excess of retained earnings		(95.4	)					(95.4	)					—

Balance at September 30	$	2,022.0					$	2,022.0						—

Retained earnings:
Balance at beginning of year	$	147.5					$	147.5						—
Dividends		(161.8	)					(161.8	)					—
Net earnings for period		106.6		$	106.6			106.5		$	106.5			0.1	$	0.1


Balance at September 30	$	92.3					$	92.2					$	0.1

Accumulated other comprehensive income:
Balance at beginning of year	$	176.0					$	176.0						—
Foreign currency translation adjustments		(14.6	)					(15.1	)					0.5
Derivative gain, net		1.3						1.3						—
Pension and postretirement adjustments		(2.0	)					(2.0	)					—

Total other comprehensive (loss) income		(15.3	)		(15.3	)		(15.8	)		(15.8	)		0.5		0.5


Balance at September 30	$	160.7					$	160.2						0.5

Comprehensive income				$	91.3					$	90.7					0.6

Total equity	$	2,283.0					$	2,275.0					$	8.0

See accompanying notes to Condensed Consolidated Financial Statements beginning on page 10.

Armstrong World Industries, Inc., and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(amounts in millions)
Unaudited


	Nine Months Ended
	September 30
	2009			2008
Cash flows from operating activities:
Net earnings	$	81.5		$	106.5
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		112.9			113.4
Deferred income taxes		150.6			66.7
Share-based compensation		38.1			4.8
Equity earnings from joint venture, net		(30.1	)		(48.1	)
Distributions from joint venture		—			41.5
U.S. pension credit		(43.7	)		(47.3	)
Changes in operating assets and liabilities:
Receivables		(39.0	)		(59.8	)
Inventories		83.6			(17.6	)
Other current assets		9.8			(1.1	)
Other noncurrent assets		(2.0	)		(3.2	)
Accounts payable and accrued expenses		(9.3	)		(26.4	)
Income taxes payable/receivable, net		(158.3	)		9.9
Other long-term liabilities		(13.4	)		(12.1	)
Cash distributed under the POR		—			(2.9	)
Other, net		(2.5	)		3.9

Net cash provided by operating activities		178.2			128.2

Cash flow from investing activities:
Purchases of property, plant and equipment and computer software		(63.6	)		(55.3	)
Divestitures (acquisitions)		8.0			(0.8	)
Return of investment from joint venture		42.0			—
Other, net		1.7			0.4

Net cash (used for) investing activities		(11.9	)		(55.7	)

Cash flows from financing activities:
Increase in short-term debt, net		0.9			0.8
Issuance of long-term debt		2.4			5.4
Payments of long-term debt		(17.5	)		(13.3	)
Financing costs		—			(2.6	)
Special dividend paid		(1.3	)		(256.4	)

Net cash (used for) financing activities		(15.5	)		(266.1	)


Effect of exchange rate changes on cash and cash equivalents		16.2			(5.7	)


Net increase (decrease) in cash and cash equivalents		167.0			(199.3	)
Cash and cash equivalents at beginning of year		355.0			514.3


Cash and cash equivalents at end of period	$	522.0		$	315.0

See accompanying notes to Condensed Consolidated Financial Statements beginning on page 10.

Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(dollar amounts in millions)

NOTE 1. BUSINESS AND BASIS OF PRESENTATION

Armstrong World Industries, Inc. (“AWI”) is a Pennsylvania corporation incorporated in 1891. When we refer to “we”, “our” and “us” in this report, we are referring to AWI and its subsidiaries.

On December 6, 2000 AWI filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) in order to use the court-supervised reorganization process to achieve a resolution of its asbestos liability. Also filing under Chapter 11 were two of AWI’s wholly-owned subsidiaries, Nitram Liquidators, Inc. and Desseaux Corporation of North America, Inc. On October 2, 2006, when all conditions precedent were met, AWI’s court-approved Plan of Reorganization (“POR”) became effective, and AWI emerged from Chapter 11. See Note 1 to our 2008 Form 10-K for more information on the Chapter 11 Case.

In August 2009 Armor TPG Holdings LLC (“TPG”) and the Armstrong World Industries, Inc. Asbestos Personal Injury Settlement Trust (“Asbestos PI Trust”) entered into an agreement whereby TPG purchased 7,000,000 shares of AWI common stock from the Asbestos PI Trust, and acquired an economic interest in an additional 1,039,777 shares from the Asbestos PI Trust. The Asbestos PI Trust and TPG together hold more than 60% of AWI’s outstanding shares and have entered into a shareholders’ agreement pursuant to which the Asbestos PI Trust and TPG have agreed to vote their shares together on certain matters.

The accounting policies used in preparing the Condensed Consolidated Financial Statements in this Form 10-Q are the same as those used in preparing the Consolidated Financial Statements for the year ended December 31, 2008. These statements should therefore be read in conjunction with the Consolidated Financial Statements and notes that are included in the Form 10-K for the fiscal year ended December 31, 2008. In the opinion of management, all adjustments of a normal recurring nature have been included to provide a fair statement of the results for the reporting periods presented. Quarterly results are not necessarily indicative of annual earnings, primarily due to the different level of sales in each quarter of the year and the possibility of changes in general economic conditions.

Certain amounts in the prior year’s Condensed Consolidated Financial Statements and related notes thereto have been recast to conform to the 2009 presentation.

These Condensed Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The statements include management estimates and judgments, where appropriate. Management utilizes estimates to record many items including asset values, allowances for bad debts, inventory obsolescence and lower of cost or market charges, pension assets and liabilities, stock compensation, warranty, workers’ compensation, general liability, income taxes and environmental claims. 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 September 2006 the Financial Accounting Standards Board (“FASB”) issued new guidance on fair value. The new guidance, which is now part of Accounting Codification Statement (“ASC”) 820, “Fair Value Measurements and Disclosures” establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. ASC 820 was effective for fiscal years beginning after November 15, 2007. However the effective date for certain non-financial assets and liabilities was deferred to fiscal years beginning after November 15, 2008. There was no material impact from our adoption of the remaining portions of ASC 820 on January 1, 2009.

In December 2007 the FASB issued new guidance on consolidations. The new guidance, which is now part of ASC 810, “Consolidation” requires the recognition of a non-controlling interest (formerly known as a “minority interest”) as equity in the consolidated financial statements and separate from the parent’s

Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(dollar amounts in millions)

equity. The amount of net income attributable to the non-controlling interest is immaterial for the three and nine months ended September 30, 2009, and, therefore, is included in consolidated net income on the face of the income statement. ASC 810 was effective for fiscal years, and all interim periods within those fiscal years, beginning after December 15, 2008. As a result of the adoption of this pronouncement on January 1, 2009, we recast our December 31, 2008 balance sheet to move $8.1 million from minority interest ($7.0 million within Liabilities) and other comprehensive income ($1.1 million within Equity) to non-controlling interest (within Equity).

In November 2008 the FASB issued new guidance on equity method accounting considerations. The new guidance, which is now part of ASC 323, “Investments-Equity Method and Joint Ventures” discusses the accounting for contingent consideration agreements of an equity method investment and the requirement for the investor to recognize its share of any impairment charges recorded by the investee. ASC 323 requires the investor to record share issuances by the investee as if it has sold a portion of its investment with any resulting gain or loss being reflected in earnings. ASC 323 was effective for interim periods and fiscal years beginning after December 15, 2008. There was no material impact from our adoption of ASC 323 on January 1, 2009.

Effective January 1, 2009 we prospectively implemented new guidance, which is now part of ASC 815, “Derivatives and Hedging”. ASC 815 enhances the disclosure requirements for derivative instruments and hedging activities to provide users of financial statements with a better understanding of the objectives of a company’s derivative use and the risks managed.

Effective January 1, 2009 we adopted new guidance, which is now part of ASC 260, “Earnings Per Share”. Under ASC 260, share-based payment awards (whether vested or unvested) that contain nonforfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are participating securities and shall be included in the computation of earnings per share (“EPS”) pursuant to the two-class method as described in ASC 260. All prior-period EPS data presented has been adjusted retrospectively to conform to the provisions of ASC 260.

In May 2009 the FASB issued new guidance, which is now part of ASC 855, “Subsequent Events”. ASC 855 requires management to evaluate subsequent events through the date the financial statements were issued or the date the financial statements were available to be issued. ASC 855 was effective for annual and interim periods ending after June 15, 2009. We have evaluated subsequent events through the issuance of the third quarter 10-Q on October 28, 2009.

In June 2009 the FASB issued SFAS No. 167 (“FAS 167”), “Amendments to FASB Interpretation No. FIN 46 (R)”, which amends the consolidation guidance applicable to variable interest entities. FAS 167 has not yet been codified; but is effective as of the beginning of the first fiscal year that begins after November 15, 2009. We are currently evaluating the impact of the January 1, 2010 adoption of this Statement on our financial statements.

In June 2009 the FASB issued new guidance, which is now part of ASC 105, “Generally Accepted Accounting Principles”. ASC 105 has become the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernment entities. It also modifies the GAAP hierarchy to include only two levels of GAAP; authoritative and non-authoritative. ASC 105 was effective for financial statements issued for interim and annual periods ending after September 15, 2009. We adopted ASC 105 for the reporting of our 2009 third quarter results. The adoption had no impact on the reporting of our financial position, results of operations, or cash flows.

Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(dollar amounts in millions)

Operating results for the third quarter and first nine months of 2009 and the corresponding periods of 2008 included in this report are unaudited. However, these Condensed Consolidated Financial Statements have been reviewed by an independent registered public accounting firm in accordance with standards of the Public Company Accounting Oversight Board (United States) for a limited review of interim financial information.

NOTE 2. SEGMENT RESULTS


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
Net sales to external customers	2009		2008		2009		2008
Resilient Flooring	$	282.6	$	336.9	$	794.1	$	973.5
Wood Flooring		140.1		171.0		389.7		500.1
Building Products		292.1		374.1		827.7		1,070.4
Cabinets		38.2		47.6		115.5		140.6

Total net sales to external customers	$	753.0	$	929.6	$	2,127.0	$	2,684.6


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
Segment operating income (loss)	2009			2008			2009			2008
Resilient Flooring	$	12.4		$	1.2		$	7.0		$	8.6
Wood Flooring		11.2			8.5			4.3			23.4
Building Products		57.4			75.0			132.3			200.9
Cabinets		(3.0	)		(1.1	)		(10.0	)		(3.9	)
Unallocated Corporate (expense)		(34.0	)		(1.4	)		(41.4	)		(11.6	)

Total consolidated operating income	$	44.0		$	82.2		$	92.2		$	217.4


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
Total consolidated operating income	$	44.0		$	82.2		$	92.2		$	217.4
Interest expense		4.9			7.5			13.9			23.7
Other non-operating expense		0.2			0.8			0.5			1.2
Other non-operating income		(0.9	)		(2.1	)		(2.6	)		(8.5	)

Earnings from continuing operations before income taxes	$	39.8		$	76.0		$	80.4		$	201.0


	September 30,		December 31,
Segment assets	2009		2008
Resilient Flooring	$	673.8	$	670.2
Wood Flooring		444.6		470.9
Building Products		990.8		1,049.6
Cabinets		62.5		71.2

Total segment assets		2,171.7		2,261.9
Assets not assigned to segments		1,128.9		1,089.9

Total consolidated assets	$	3,300.6	$	3,351.8

Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(dollar amounts in millions)

The European resilient flooring business has incurred operating losses and negative cash flows for several years, with recent performance impacted by deteriorating market conditions. In 2009 we conducted our annual strategic planning process and now expect this negative performance will continue for some time.

Because the projected undiscounted cash flows are not sufficient to recover the net book value of the fixed assets, we compared the fair value of the assets to the carrying amount. The fair values were determined by management estimates of market prices and independent valuations (considered Level 2 inputs in the fair value hierarchy as described in Note 12). Fair value estimates indicated that there was no impairment.

NOTE 3. DISCONTINUED OPERATIONS

In March 2008, we recorded a gain of $1.0 million ($0.6 million net of income tax) arising from the settlement of a legal dispute relating to our former Insulation Products segment. The segment was sold in 2000. This gain was classified as discontinued operations since the original divestiture was reported as discontinued operations.

On March 27, 2007 we entered into an agreement to sell Tapijtfabriek H. Desseaux N.V. and its subsidiaries — the principal operating companies in our European Textile and Sports Flooring business. These companies were first classified as discontinued operations at October 2, 2006. The sale transaction was completed in April 2007 and total proceeds of $58.8 million were received during 2007. Certain post completion adjustments specified in the agreement were disputed by the parties after the sale. The matter was referred to an independent expert and on December 30, 2008 a final decision was reached with all disputed items awarded in our favor. The disputed amount was recorded as a receivable since April 2007 with the interest receivable recorded in December 2008 (included as part of ‘Other current assets’). Full payment of $8.0 million was received in January 2009. There was no impact to earnings in the reported periods other than a loss on expected disposal of discontinued operations of $0.2 million and $0.7 million recorded in the quarter and nine months ended September 30, 2008, respectively.

NOTE 4. ACCOUNTS AND NOTES RECEIVABLE


	September 30,			December 31,
	2009			2008
Customer receivables	$	332.0		$	287.1
Customer notes		2.9			6.7
Miscellaneous receivables		6.9			8.6
Less allowance for discounts and losses		(49.1	)		(54.5	)

Net accounts and notes receivable	$	292.7		$	247.9

The increase in net accounts and notes receivable is primarily due to higher sales in September 2009 than in December 2008.

Generally, we sell our products to select, pre-approved customers whose businesses are affected by changes in economic and market conditions. We consider these factors and the financial condition of each customer when establishing our allowance for losses from doubtful accounts.

Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(dollar amounts in millions)

NOTE 5. INVENTORIES


	September 30,			December 31,
	2009			2008
Finished goods	$	297.9		$	371.2
Goods in process		40.6			39.6
Raw materials and supplies		140.2			152.7
Less LIFO and other reserves		(11.3	)		(19.5	)

Total inventories, net	$	467.4		$	544.0

We have reduced inventories due to sales and market conditions.

NOTE 6. OTHER CURRENT ASSETS


	September 30,		December 31,
	2009		2008
Prepaid expenses	$	26.3	$	34.5
Fair value of derivative asset		2.5		11.7
Receivable related to discontinued operations		—		8.0
Assets held for sale		7.9		7.8
Other		15.3		16.2

Total other current assets	$	52.0	$	78.2

NOTE 7. EQUITY INVESTMENTS

Investment in joint venture of $196.3 million at September 30, 2009 reflected the equity interest in our 50% investment in our Worthington Armstrong Venture (“WAVE”) joint venture. We account for our WAVE joint venture using the equity method of accounting. Our recorded investment in WAVE was higher than our 50% share of the carrying values reported in WAVE’s consolidated financial statements. These differences are due to our adopting fresh-start reporting upon emerging from Chapter 11 in 2006, while WAVE’s consolidated financial statements do not reflect fresh-start reporting. See Note 11 “Equity Investments” in our 2008 Form 10-K for more information. Condensed income statement data for WAVE is summarized below:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2009		2008		2009		2008
Net sales	$	83.4	$	116.3	$	240.0	$	340.4
Gross profit		36.2		45.4		91.3		132.9
Net earnings		29.0		36.0		70.1		106.1

Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(dollar amounts in millions)

NOTE 8. INTANGIBLE ASSETS

The following table details amounts related to our intangible assets as of September 30, 2009 and December 31, 2008.


		September 30, 2009				December 31, 2008
		Gross				Gross
	Estimated	Carrying		Accumulated		Carrying		Accumulated
	Useful Life	Amount		Amortization		Amount		Amortization
Amortizing intangible assets
Customer relationships	20 years	$	171.4	$	25.6	$	171.4	$	19.2
Developed technology	15 years		81.0		16.1		81.0		12.0
Other	Various		10.9		0.5		9.5		0.3

Total		$	263.3	$	42.2	$	261.9	$	31.5


Non-amortizing intangible assets
Trademarks and brand names	Indefinite		394.5				395.9


Total intangible assets		$	657.8			$	657.8


Aggregate Amortization Expense
For the nine months ended September 30, 2009				$	10.7
For the nine months ended September 30, 2008				$	10.8

NOTE 9. SEVERANCES AND RELATED COSTS

In the first quarter of 2009, we recorded $8.9 million of severance and related expenses to reflect the separation costs for approximately 800 employees. The charges were recorded in selling, general and administrative expenses (“SG&A”) ($4.5 million) and cost of goods sold ($4.4 million).

In the first quarter of 2008, we recorded $6.1 million of severance and related expenses to reflect the termination costs for certain corporate employees. We also recorded a reduction of our stock compensation expense of $1.5 million related to stock grants that were forfeited by these employees. These costs were recorded as SG&A expenses.

During the third quarter of 2008, we recorded $7.5 million of severance charges primarily related to organizational and manufacturing changes for our European resilient flooring business. The organizational changes are due to the decision to consolidate and outsource several SG&A functions. The manufacturing changes related to the decision to cease production of automotive carpeting and other specialized textile flooring products. These charges were recorded as part of cost of goods sold ($1.7 million) and SG&A expense ($5.8 million).

Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(dollar amounts in millions)

NOTE 10. INCOME TAX EXPENSE


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
Earnings from continuing operations before income taxes	$	39.8		$	76.0		$	80.4		$	201.0
Income tax (benefit) expense		(24.6	)		36.9			(1.1	)		94.4
Effective tax rate		(61.8	)%		48.6	%		(1.4	)%		47.0	%

The reduction in the effective tax rate for the third quarter and first nine months of 2009 was primarily due to the recognition of previously unrecognized tax benefits discussed below.

In October, 2007, we received $178.7 million in refunds for federal income taxes paid over the preceding ten years. The refunds resulted from the carryback of a portion of net operating losses created by the funding of the Asbestos PI Trust in October, 2006. The refunds were subject to an examination by the Internal Revenue Service (“IRS”). Upon receipt of the refunds in the fourth quarter of 2007, we recorded a liability of $144.6 million pending completion of the IRS audit. We also recorded a non-current deferred tax asset of $144.6 million for future tax benefits that would result from a disallowance of the refunds. In addition, we had accrued $10.0 million of interest as of June 30, 2009 on this unrecognized tax benefit as income tax expense.

The IRS completed its audit and in July 2009 notified us that the Joint Committee on Taxation of the U.S. Congress had also issued its final approval of our refunds. Therefore, in the third quarter of 2009, we recorded a decrease in the liability for previously unrecognized tax benefits of $154.6 million. We also recorded a decrease in non-current deferred tax assets of $144.6 million for the reduction in future tax benefits from the settlement of this tax position. As a result, we recorded an income tax benefit of $10.0 million in the third quarter of 2009 for the settlement of this tax position.

Additionally, through the second quarter of 2009 we had accrued U.S. income taxes of approximately $50 million for unremitted earnings of foreign subsidiaries that are not considered to be permanently reinvested. Due to uncertainty regarding the net operating loss carryover discussed above, we provided a valuation allowance of $31.3 million on the foreign tax credits that would be available upon the remittance of these earnings to the U.S. With the settlement of the IRS audit in July 2009, this uncertainty is eliminated. Therefore, in the third quarter of 2009, we removed the valuation allowance on these foreign tax credits. In addition, we recognized $4.4 million of additional foreign tax credits primarily as a result of the re-evaluation of tax positions in prior years. Thus, we recognized in the third quarter of 2009 a tax benefit for these items of $35.7 million.

Except as discussed above, we do not expect to record any other material changes during 2009 to unrecognized tax benefits that were claimed on tax returns covering tax years ending on or before December 31, 2008.

Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(dollar amounts in millions)

NOTE 11. PENSIONS

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


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
U.S. defined-benefit plans
Pension Benefits
Service cost of benefits earned during the period	$	4.5		$	4.3		$	13.5		$	13.0
Interest cost on projected benefit obligation		24.0			24.5			72.0			73.4
Expected return on plan assets		(42.7	)		(43.9	)		(128.3	)		(131.5	)
Amortization of prior service cost		0.4			0.1			1.3			0.3

Net periodic pension (credit)	$	(13.8	)	$	(15.0	)	$	(41.5	)	$	(44.8	)

Retiree Health and Life Insurance Benefits
Service cost of benefits earned during the period	$	0.5		$	0.4		$	1.4		$	1.3
Interest cost on projected benefit obligation		4.2			4.7			12.5			14.2
Amortization of net actuarial gain		(1.1	)		(0.3	)		(3.3	)		(1.1	)

Net periodic postretirement benefit cost	$	3.6		$	4.8		$	10.6		$	14.4


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
Non-U.S. defined-benefit plans
Pension Benefits
Service cost of benefits earned during the period	$	1.3		$	1.7		$	3.7		$	5.2
Interest cost on projected benefit obligation		4.9			5.2			14.2			15.7
Expected return on plan assets		(3.3	)		(4.1	)		(9.5	)		(12.5	)
Amortization of net actuarial gain		(0.3	)		(0.1	)		(0.8	)		(0.4	)

Net periodic pension cost	$	2.6		$	2.7		$	7.6		$	8.0

We previously disclosed in our financial statements for the year ended December 31, 2008 that we expected to contribute $31.7 million to our U.S. retiree health and life insurance plans in 2009. As of September 30, 2009, $15.6 million of contributions have been made. We presently estimate that we will need to contribute an additional $6.8 million to fund our U.S. retiree health and life insurance plans in 2009 for a total of $22.4 million.

NOTE 12. FINANCIAL INSTRUMENTS

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


	September 30, 2009						December 31, 2008
	Carrying			Estimated			Carrying			Estimated
	amount			Fair Value			amount			Fair Value
Assets/(Liabilities):
Money market investments	$	229.5		$	229.5		$	192.1		$	192.1
Long-term debt, including current portion		(480.7	)		(456.0	)		(495.7	)		(405.0	)
Foreign currency contract obligations		1.5			1.5			7.4			7.4
Natural gas contracts		(5.9	)		(5.9	)		(13.5	)		(13.5	)
Interest rate swap contracts		(0.1	)		(0.1	)		—			—

Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(dollar amounts in millions)

The carrying amounts of cash and cash equivalents (which consists primarily of money market investments and bank deposits), receivables, accounts payable and accrued expenses, short-term debt and current installments of long-term debt approximate fair value because of the short-term maturity of these instruments. The fair value estimates of long-term debt were based upon quotes from a major financial institution taking into consideration current rates for debt of the same remaining maturities. The fair value estimates of foreign currency contract obligations are estimated from national exchange quotes. The fair value estimates of natural gas contracts and interest rate swap contracts are estimated by obtaining quotes from major financial institutions.

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

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

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

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

Assets and liabilities measured at fair value on a recurring basis are summarized below:


	September 30, 2009					December 31, 2008
	Fair value based on					Fair value based on
			Other			Quoted,		Other
	Quoted, active		observable			active		observable
	markets		inputs			markets		inputs
	“Level 1”		“Level 2”			“Level 1”		“Level 2”
Assets/(Liabilities):
Money market investments	$	229.5		—		$	192.1		—
Foreign currency contract obligations		1.5		—			7.4		—
Natural gas contracts		—	$	(5.9	)		—	$	(13.5	)
Interest rate swap contracts		—		(0.1	)		—		—

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

NOTE 13. DERIVATIVE FINANCIAL INSTRUMENTS

We are exposed to market risk from changes in foreign exchange rates, interest rates and commodity prices that could impact our results of operations and financial condition. We use forward swaps and option contracts to hedge these exposures. We regularly monitor developments in the capital markets and only enter into currency and swap transactions with established counterparties having investment grade ratings. Exposure to individual counterparties is controlled and derivative financial instruments are entered into with a diversified group of major financial institutions. Forward swaps and option contracts are entered into for periods consistent with underlying exposure and do not constitute positions

Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(dollar amounts in millions)

independent of those exposures. At inception, we formally designate and document our derivatives as either (1) a hedge of a forecasted transaction or “cash flow” hedge, or (2) a hedge of the fair value of a recognized liability or asset or “fair value” hedge. We also formally assess, both at inception and at least quarterly thereafter, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in either the fair value or cash flows of the hedged item. If it is determined that a derivative ceases to be a highly effective hedge, or if the anticipated transaction is no longer probable of occurring, we discontinue hedge accounting, and any future mark to market adjustments are recognized in earnings. We use derivative financial instruments as risk management tools and not for speculative trading purposes.

Commodity Price Risk — We purchase natural gas for use in the manufacture of ceiling tiles and other products, and to heat many of our facilities. As a result, we are exposed to movements in the price of natural gas. We have a policy to reduce cost volatility for North American natural gas purchases by purchasing natural gas forward contracts and swaps, purchased call options, and zero-cost collars up to 15 months forward to reduce our overall exposure to natural gas price movements. There is a high correlation between the hedged item and the hedged instrument. The gains and losses on these transactions offset gains and losses on the transactions being hedged. These instruments are designated as cash flow hedges. The mark-to-market gain or loss on qualifying hedges is included in other comprehensive income to the extent effective, and reclassified into cost of goods sold in the period during which the underlying gas is consumed. The mark-to-market gains or losses on ineffective portions of hedges are recognized in cost of goods sold immediately. The earnings impact of the ineffective portion of these hedges was not material for the three or nine months ended September 30, 2009. The contracts are based on forecasted usage of natural gas measured in Million British Thermal Units.

As of June 30, 2009 we de-designated several monthly natural gas hedge contracts maturing in 2009 and 2010 due to their over hedged positions. The over hedged positions were due to updated projected production volumes (and gas usage) at our U.S. ceilings plants that are significantly lower than originally forecasted when the hedges were entered. We discontinued hedge accounting on the hedges and re-designated a portion of the original contracts based upon our revised forecasts, which have been designated as cash flow hedges. Starting in July 2009 the fair value adjustments for the portion of the derivative contracts not designated as a hedge have been recognized in cost of goods sold. The earnings impact related to the over hedged portion of these hedges was not material for the three or nine months ended September 30, 2009.

Currency Rate Risk —

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

We use foreign currency forward exchange contracts to reduce our exposure to the risk that the eventual net cash inflows and outflows, resulting from the sale of products to foreign customers and purchases from foreign suppliers, will be adversely affected by changes in exchange rates. These derivative instruments are used for forecasted transactions and are classified as cash flow hedges. Cash flow hedges are executed quarterly up to 15 months forward and allow us to further reduce our overall exposure to exchange rate movements, since gains and losses on these contracts offset gains and losses on the transactions being hedged. Gains and losses on these instruments are deferred in other comprehensive income, to the extent effective, until the underlying transaction is recognized in earnings. The earnings impact of the ineffective portion of these hedges was not material for the three or nine months ended September 30, 2009.

Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(dollar amounts in millions)

Intercompany Loan Hedges — We also use foreign currency forward exchange contracts to hedge exposures created by cross-currency intercompany loans. The underlying intercompany loans are classified as short-term and translation adjustments related to these loans are recorded in other non- operating income or expense. The offsetting gains or losses on the related derivative contracts are also recorded in other non-operating income or expense. These transactions are generally executed on a six-month rolling basis and are decreased or increased as repayments are made or additional intercompany loans are extended.

Interest Rate Risk — We utilize interest rate swaps to minimize the fluctuations in earnings caused by interest rate volatility. Interest expense on variable-rate liabilities increases or decreases as a result of interest rate fluctuations. In February 2009 we entered into interest rate swaps with a total notional amount of $100 million that mature in December 2009. Under the terms of the swaps, we receive 1-month LIBOR and pay a fixed rate over the hedged period. These swaps are designated as cash flow hedges against changes in LIBOR for a portion of our variable rate debt.

Financial Statement Impacts

The following tables detail amounts related to our derivatives as of September 30, 2009 and for the three and nine months ended September 30, 2009.


	Asset Derivatives
	Balance Sheet
	Location	Fair Value
Derivatives designated as hedging instruments under ASC 815
Foreign exchange contracts – purchases and sales	Other current assets	$	1.8
Natural gas commodity contracts	Other non-current assets		0.2

Total derivatives designated as hedging instruments		$	2.0


Derivatives not designated as hedging instruments under ASC 815
Foreign exchange contracts – intercompany loans	Other current assets	$	0.7

Total derivatives not designated as hedging instruments		$	0.7


	Liability Derivatives
	Balance Sheet
	Location	Fair Value
Derivatives designated as hedging instruments under ASC 815
Natural gas commodity contracts	Accounts payable and accrued expenses	$	4.8
Foreign exchange contracts – purchases and sales	Accounts payable and accrued expenses		1.0
Interest rate swap contracts	Accounts payable and accrued expenses		0.1

Total derivatives designated as hedging instruments		$	5.9

Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(dollar amounts in millions)


	Liability Derivatives
	Balance Sheet
Derivatives not designated as hedging instruments under ASC 815	Location	Fair Value
Natural gas commodity contracts	Accounts payable and accrued expenses	$	1.3

Total derivatives not designated as hedging instruments		$	1.3


	Amount of Gain/(Loss)
	Recognized in Other
	Comprehensive
	Income (“OCI”)
Derivatives in ASC 815 Cash Flow Hedging Relationships	(Effective Portion)
Natural gas commodity contracts	$	(5.4	)
Foreign exchange contracts – purchases and sales		0.7
Interest rate swap contracts		(0.1	)

Total	$	(4.8	)


	Gain/(Loss) Reclassified from Accumulated OCI into Income
	(Effective Portion) (a)
		Three Months Ended			Nine Months Ended
Derivatives in ASC 815 Cash		September 30, 2009			September 30, 2009
Flow Hedging Relationships	Location	Amount			Amount
Natural gas commodity contracts	Cost of goods sold	$	(6.8	)	$	(16.3	)
Foreign exchange contracts – purchases and sales	Cost of goods sold		0.4			0.8

Total		$	(6.4	)	$	(15.5	)


(a)		As of September 30, 2009 the amount of existing gains/ (losses) in AOCI expected to be recognized in earnings over the next twelve months is $(5.1) million.


		Location of
		Gain/(Loss)
		Recognized in Income
		on Derivative
		(Ineffective Portion)
Derivatives in ASC 815 Cash Flow Hedging Relationships		(b)
Natural gas commodity contracts		Cost of goods sold

Foreign exchange contracts – purchases and sales		SG&A expense

Interest rate swap contracts		Interest expense


(b)		The amount of gain/(loss) recognized in income for the three and nine months ended September 30, 2009 represents $0.0 and $(0.8) million, respectively, related to the ineffective portion of the hedging relationships. No gains or losses are excluded from the assessment of hedge effectiveness.

The amount of gain recognized in income for derivative instruments not designated as hedging instruments was $0.6 million and $1.5 million for the three months and nine months ended September 30, 2009, respectively.

Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(dollar amounts in millions)

NOTE 14. PRODUCT WARRANTIES

We provide direct customer and end-user warranties for our products. These warranties cover manufacturing defects that would prevent the product from performing in line with its intended and marketed use. The terms of these warranties vary by product and generally provide for the repair or replacement of the defective product. We collect and analyze warranty claims data with a focus on the historic amount of claims, the products involved, the amount of time between the warranty claims and their respective sales and the amount of current sales. The following table summarizes the activity for the accrual of product warranties for the first nine months of 2009 and 2008:


	2009			2008
Balance at January 1	$	16.3		$	17.6
Reductions for payments		(15.4	)		(17.7	)
Current year warranty accruals		14.3			18.6
Preexisting warranty accrual changes		(0.2	)		(0.5	)
Effects of foreign exchange translation		—			(0.1	)

Balance at September 30	$	15.0		$	17.9

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

NOTE 15. STOCK-BASED COMPENSATION PLANS

In August 2009 TPG and the Asbestos PI Trust entered into an agreement whereby TPG purchased 7,000,000 shares of AWI common stock from the Asbestos PI Trust, and acquired an economic interest in an additional 1,039,777 shares from the Asbestos PI Trust. The Asbestos PI Trust and TPG together hold more than 60% of AWI’s outstanding shares and have entered into a shareholders’ agreement pursuant to which the Asbestos PI Trust and TPG have agreed to vote their shares together on certain matters. Under the terms our 2006 Long-Term Incentive Plan, a change in control occurred, causing the accelerated vesting of all unvested stock compensation issued to employees and directors. The non-cash charge to earnings related to this accelerated vesting was $31.6 million.


	Nine Months Ended September 30, 2009
							Weighted-
				Weighted-			average		Aggregate
	Number of			average			remaining		intrinsic
	shares			exercise			contractual		value
	(thousands)			price			term (years)		(millions)
Option shares outstanding at beginning of period		1,532.9		$	29.85
Options granted		434.9			13.46
Option shares exercised		—			—
Options forfeited		(232.0	)		(27.12	)

Option shares outstanding at end of period		1,735.8		$	30.16			7.4	$	14.9

Option shares exercisable at end of period		1,735.8			30.16			7.4	$	14.9
Option shares expected to vest		—			—

Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(dollar amounts in millions)

The fair value of option grants was estimated on the date of grant using the Black-Scholes option pricing model. The weighted average assumptions for options granted in the nine months ended September 30, 2009 are presented in the table below.


	Nine Months
	Ended
	September 30,
	2009
Weighted-average grant date fair value of options granted (dollars per option)	$	4.77
Assumptions
Risk free rate of return		2.1	%
Expected volatility		32.7	%
Expected term (in years)		6.0
Expected dividend yield		0.0	%

The risk free rate of return is determined based on the implied yield available on zero coupon U.S. Treasury bills at the time of grant with a remaining term equal to the expected term of the option. Because reorganized Armstrong’s stock has only been trading since the fourth quarter of 2006, the expected volatility is established based on an average of the actual historical volatilities of the stock prices of a peer group of companies. The expected life is the midpoint of the average vesting period and the contractual life of the grant. For the same reasons mentioned earlier we are using an allowable simplified method to determine an appropriate expected term for our option valuation assumptions. The expected dividend yield is assumed to be zero because, at the time of each grant, we had no plans to declare a dividend. The assumptions outlined above are applicable to all option grants.

In addition to options, we have also granted restricted stock and restricted stock units. These awards generally had vesting periods of two to four years at the grant date. A summary of the 2009 activity related to these awards follows:


	Non-Vested Stock Awards
				Weighted-
				average fair
	Number of			value at grant
	Shares			date
January 1, 2009		607,486		$	36.86
Granted		445,183			13.46
Vested		(947,459	)		26.53
Forfeited		(105,210	)		(34.23	)

September 30,2009		—		$	—

In the first nine months of 2009, we granted 116,624 performance restricted shares to our Chief Executive Officer, which entitled him to receive a specified number of shares of common stock on December 31, 2011, provided certain cumulative financial targets were achieved over the three-year performance period. We estimated the fair value of these share awards based on the market price of the underlying stock on the date of grant. This award vested to the maximum extent (an additional 58,312 shares) on August 28, 2009 as a result of the change in control described above.

In addition to the equity awards described above, as of December 31, 2008 we had 30,924 phantom shares outstanding for non-employee directors under the 2006 Phantom Stock Unit Plan. These awards are settled in cash and generally had vesting periods of one to three years. As of September 30, 2009 all

Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(dollar amounts in millions)

shares were vested. The awards are generally payable six months following the director’s separation from service. The total liability recorded for these shares as of September 30, 2009 was $1.4 million. The awards under the 2006 Phantom Stock Unit Plans are not reflected in the Non-Vested Stock Awards table above.

During 2008, we adopted the 2008 Directors Stock Unit Plan. The 2006 Phantom Stock Unit Plan is still in place; however, no additional shares will be granted under that plan. Under the 2008 Directors Stock Unit Plan we currently have 111,950 restricted stock units outstanding. These awards generally had vesting periods of one to three years, and as of September 30, 2009 all 111,950 shares were vested. The awards are generally payable six months following the director’s separation from service. The awards under the stock unit plans are not reflected in the Non-Vested Stock Awards table above.

Share-based compensation cost, including the impact of the accelerated vesting, was $38.6 million ($29.2 million net of tax benefit) in the first nine months of 2009. Share-based compensation expense is recorded as a component of SG&A expenses. There has been no cash flow impact to date for these awards.

Due to the change in control described above, we have recognized 100% of the compensation expense for all unvested awards as of August 28, 2009, resulting in no unrecognized compensation cost as of September 30, 2009.

NOTE 16. SUPPLEMENTAL CASH FLOW INFORMATION


	Nine Months Ended
	September 30,
	2009		2008
Interest paid	$	8.5	$	18.8
Income taxes paid, net	$	6.7	$	18.1

NOTE 17. LITIGATION AND RELATED MATTERS

ENVIRONMENTAL MATTERS

Environmental Expenditures

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. Regulatory requirements continually change, therefore we cannot predict with certainty future expenditures associated with compliance with environmental requirements.

Environmental Remediation

Summary

We are actively involved in proceedings under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), and similar state “Superfund” laws at four off-site locations. We have also been investigating and/or remediating environmental contamination allegedly resulting from past industrial activity at three domestic and five foreign current or former plant sites. In some cases, we have agreed to jointly fund the required investigation and remediation, while at some sites, we dispute the liability, the proposed remedy or the proposed cost allocation among the potentially responsible parties (“PRPs”). With respect to a few sites, we are one of many PRPs which have potential liability for the required investigation and remediation of each site. We may also have rights of contribution or reimbursement from other parties or coverage under applicable insurance policies.

Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(dollar amounts in millions)

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

Effects of Chapter 11

Upon AWI’s emergence from Chapter 11 on October 2, 2006, AWI’s environmental liabilities with respect to properties that AWI does not own or operate (such as formerly owned sites, or landfills to which AWI’s waste was taken) were discharged. Claims brought by a federal or state agency alleging that AWI should reimburse the claimant for money that it spent cleaning up a site which AWI does not own or operate, and claims by private parties, such as other PRPs with respect to sites with multiple PRPs, were discharged upon emergence. Environmental obligations with respect to AWI’s subsidiaries and to property that they currently own or operate have not been discharged.

In addition to the right to sue for reimbursement of the money it spends, however, CERCLA also gives the federal government the right to sue for an injunction compelling a defendant to perform a cleanup. Several state statutes give similar injunctive rights to those states. While we believe such rights against AWI were also discharged upon AWI’s emergence from Chapter 11, there does not appear to be controlling judicial precedent in that regard. Thus, according to some cases, while a governmental agency’s right to require AWI to reimburse it for the costs of cleaning up a site may be dischargeable, the same government agency’s right to compel us to spend our money cleaning up the same site may not be discharged even though the financial impact to AWI would have been the same in both instances if the liability had not been discharged.

Specific Events

AWI is subject to an order of the Oregon Department of Environmental Quality (“DEQ”) to investigate and remediate hazardous substances present at its St. Helens, Oregon facility which was previously owned by Kaiser Gypsum Company, Inc. (“Kaiser”) and then Owens Corning Fiberglas Corp. (“OC”). Costs and responsibilities for the remedial investigation and remedy design are being shared with Kaiser pursuant to an agreement between AWI and Kaiser. Contributions to these costs are also being made available by DEQ pursuant to its settlement with OC for OC’s liabilities for the property.

DEQ subsequently approached AWI to perform investigations in Scappoose Bay adjacent to the St. Helens, Oregon facility. AWI has denied liability for any contamination in Scappoose Bay. However, Kaiser entered into an agreement with DEQ to conduct such investigations in the Bay, and AWI and OC have cooperated with Kaiser and provided a portion of the funding for the investigation, without waiving any defenses to liability. AWI continues to deny all liability for any contamination of the adjacent bay. We are not currently able to estimate with reasonable certainty any amounts we may incur with respect to the bay, although it is possible that such amounts may be material.

Summary of Financial Position

Liabilities of $6.3 million and $6.5 million at September 30, 2009 and December 31, 2008, respectively, were for potential environmental liabilities that we consider probable and for which a reasonable estimate of the probable liability could be made. Where existing data is sufficient to estimate the liability, that estimate has been used; where only a range of probable liabilities is available and no amount within that range is more likely than any other, the lower end of the range has been used. As assessments and

Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(dollar amounts in millions)

remediation activities progress at each site, these liabilities are reviewed to reflect new information as it becomes available. These liabilities are undiscounted.

The estimated liabilities above do not take into account any claims for recoveries from insurance or third parties. It is our policy to record probable recoveries that are either available through settlement or anticipated to be recovered through negotiation or litigation as assets in the Consolidated Balance Sheets. The amount of the recorded asset for estimated recoveries was zero at September 30, 2009 and December 31, 2008 respectively.

Actual costs to be incurred at identified sites may vary from our estimates. Based on our current knowledge of the identified sites, we are not able to estimate with reasonable certainty future costs which may exceed amounts already recognized.

PATENT INFRINGEMENT CLAIMS

We are a defendant in a lawsuit claiming patent infringement related to some of our laminate flooring products. We are being defended and indemnified by our supplier for costs and potential damages related to the litigation. The jury verdict has held the asserted patent claims to be non-infringed and invalid for a number of reasons. The plaintiff has filed an appeal.

In the second quarter of 2007, a second lawsuit claiming patent infringement related to some of our laminate flooring products was settled without cost to us. We obtained a release with respect to past damages accruing up to June 30, 2008. Pursuant to its indemnity obligations, our supplier bore the costs of the litigation. With respect to certain laminate flooring products manufactured for AWI since July 1, 2008, the prior claims could be reasserted with full availability to AWI of all defenses previously raised. In such a case, AWI is the beneficiary of limited indemnities for litigation costs and potential damages.

In the third quarter of 2009 AWI filed a lawsuit against Congoleum Corporation seeking a judgment to invalidate a patent Congoleum holds relating to its Dura-Ceramic^® vinyl tile. AWI also claims that Congoleum is violating federal law in its marketing of this product. Congoleum has filed a response claiming that AWI is infringing its patent, and seeks damages and injunctive relief.

OTHER CLAIMS

Additionally, from time to time we are involved in various other claims and legal actions involving product liability, patent infringement, breach of contract, distributor termination, employment law issues and other actions arising in the ordinary course of business. While complete assurance cannot be given to the outcome of these claims, we do not believe there is a reasonable possibility that a loss exceeding amounts already recognized would be material.

NOTE 18. SPECIAL CASH DIVIDEND

On February 25, 2008 our Board of Directors declared a special cash dividend of $4.50 per common share, payable on March 31, 2008, to shareholders of record on March 11, 2008. This special cash dividend resulted in an aggregate cash payment to our shareholders of $256.4 million in the first quarter of 2008. A portion of the special dividend ($1.3 million) was deferred and paid in the third quarter of 2009. The dividend was recorded as a reduction of retained earnings to the extent that retained earnings were available at the dividend declaration date. Dividends in excess of retained earnings were recorded as a reduction of capital in excess of par value.

Armstrong World Industries, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(dollar amounts in millions)

NOTE 19. EARNINGS PER SHARE

Earnings per share components may not add due to rounding.

The following table is a reconciliation of net earnings to net earnings attributable to common shares used in our basic and diluted EPS calculations for the three month and nine month periods ended September 30, 2009 and 2008:


	Three Months Ended						Nine Months Ended
	September 30						September 30
	2009			2008			2009			2008
Net earnings	$	64.4		$	38.9		$	81.5		$	106.5
Net earnings allocated to non-vested share awards		(0.3	)		(0.3	)		(0.6	)		(1.0	)

Net earnings attributable to common shares	$	64.1		$	38.6		$	80.9		$	105.5

The following table is a reconciliation of basic shares outstanding to diluted shares outstanding for the three month and nine month periods ended September 30, 2009 and 2008:


	Three Months Ended				Nine Months Ended
	September 30				September 30
millions of shares	2009		2008		2009		2008
Basic shares outstanding		56.9		56.4		56.6		56.4
Dilutive effect of stock option awards		0.1		0.1		0.1		—

Diluted shares outstanding		57.0		56.5		56.7		56.4

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
Armstrong World Industries, Inc.:

We have reviewed the accompanying condensed consolidated balance sheet of Armstrong World Industries, Inc. and subsidiaries (“the Company”) as of September 30, 2009, the related condensed consolidated statements of earnings for the three-month and nine-month periods ended September 30, 2009 and 2008, and the related condensed consolidated statements of cash flows and equity for the nine-month periods ended September 30, 2009 and 2008. These condensed consolidated financial statements are the responsibility of the Company’s management.

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

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

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Armstrong World Industries, Inc. and subsidiaries as of December 31, 2008, and the related consolidated statements of earnings, cash flows, and shareholders’ equity for the year then ended (not presented herein); and in our report dated February 25, 2009, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2008, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ KPMG LLP

Philadelphia, Pennsylvania
October 28, 2009

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion should be read in conjunction with the financial statements and the accompanying notes included elsewhere in this Form 10-Q. This discussion contains forward-looking statements based on our current expectations, which are inherently subject to risks and uncertainties. Actual results and the timing of certain events may differ significantly from those referred to in such forward-looking statements. We undertake no obligation beyond what is required under applicable securities law to publicly update or revise any forward-looking statement to reflect current or future events or circumstances, including those set forth in the section entitled “Uncertainties Affecting Forward-Looking Statements” and elsewhere in this Form 10-Q.

Financial performance metrics excluding the translation effect of changes in foreign exchange rates are not in compliance with U.S. generally accepted accounting principles (“GAAP”). We believe that this information improves the comparability of business performance by excluding the impacts of changes in foreign exchange rates when translating comparable foreign currency amounts. We calculate the translation effect of foreign exchange rates by applying constant foreign exchange rates to the equivalent periods’ reported foreign currency amounts. We believe that this non-GAAP metric provides a clearer picture of our operating performance. Furthermore, management evaluates the performance of the businesses excluding the effects of foreign exchange rates.

We maintain a website at http://www.armstrong.com. Information contained on our website is not necessarily incorporated into this document. Annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, all amendments to those reports and other information about us are available free of charge through this website as soon as reasonably practicable after the reports are electronically filed with the Securities and Exchange Commission (“SEC”). These materials are also available from the SEC’s website at www.sec.gov.

OVERVIEW

We are a leading global producer of flooring products and ceiling systems for use primarily in the construction and renovation of residential, commercial and institutional buildings. Through our United States (“U.S.”) operations and U.S. and international subsidiaries, we design, manufacture and sell flooring products (primarily resilient and wood) and ceiling systems (primarily mineral fiber, fiberglass and metal) around the world. We also design, manufacture and sell kitchen and bathroom cabinets in the U.S. As of September 30, 2009 we operated 37 manufacturing plants in 9 countries, including 23 plants located throughout the U.S. In response to economic conditions, in the second quarter of 2009 we idled a Resilient Flooring plant in Canada, a Wood Flooring plant in Mississippi and a Building Products plant in Alabama. In the third quarter of 2009 we announced the closure of a Cabinets plant in Nebraska.

Through Worthington Armstrong Venture (“WAVE”), our joint venture with Worthington Industries, Inc., we also have an interest in seven additional plants in five countries that produce suspension system (grid) products for our ceiling systems.

Our business strategy focuses on product innovation, product quality and customer service. In our businesses, these factors are the primary determinants of market share gain or loss. Our objective is to ensure that anyone buying a floor or ceiling can find an Armstrong product that meets his or her needs. Our cabinet strategy is more focused — on stock cabinets in select geographic markets. In these segments, we have the same objectives: high quality, good customer service and products that meet our customers’ needs. Our markets are very competitive, which limits our pricing flexibility. This requires that we increase our productivity each year — both in our plants and in our administration of the businesses.

Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)

On December 6, 2000, AWI filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) in order to use the court-supervised reorganization process to achieve a resolution of its asbestos liability. Also filing under Chapter 11 were two of AWI’s wholly-owned subsidiaries, Nitram Liquidators, Inc. and Desseaux Corporation of North America, Inc. On October 2, 2006, when all conditions precedent were met, AWI’s court-approved Plan of Reorganization became effective, and AWI emerged from Chapter 11. See Note 1 to our 2008 Form 10-K for more information on the Chapter 11 Case.

In August 2009 TPG and the Asbestos PI Trust entered into an agreement whereby TPG purchased 7,000,000 shares of Armstrong common stock from the Asbestos PI Trust, and acquired an economic interest in an additional 1,039,777 shares from the Asbestos PI Trust. The Asbestos PI Trust and TPG together hold more than 60% of AWI’s outstanding shares and have entered into a shareholders’ agreement pursuant to which the Asbestos PI Trust and TPG have agreed to vote their shares together on certain matters.

Reportable Segments

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

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

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

Cabinets — produces kitchen and bathroom cabinetry and related products, which are used primarily in the U.S. residential new construction and renovation markets. Through our system of Company-owned and independent distribution centers and through direct sales to builders, our Cabinets segment provides design, fabrication and installation services to single and multi-family homebuilders, remodelers and consumers under the brand names Armstrong^® and Bruce^®. All of Cabinets’ sales are in the U.S.

We also report an Unallocated Corporate segment, which includes assets, liabilities, income and expenses that have not been allocated to the business units.

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)

Financial highlights for the third quarter and first nine months:


						Change is Favorable/
						(Unfavorable)
									Excluding
									Effects of
									Foreign
									Exchange
	2009		2008			As Reported			Rates
Three months ended September 30
Total Consolidated Net Sales	$	753.0	$	929.6			(19.0	)%		(16.7	)%

Operating Income	$	44.0	$	82.2			(46.5	)%		(46.3	)%

Net increase in cash and cash equivalents	$	119.2	$	74.8		Favorable			Favorable

Nine months ended September 30
Total Consolidated Net Sales	$	2,127.0	$	2,684.6			(20.8	)%		(17.1	)%

Operating Income	$	92.2	$	217.4			(57.6	)%		(56.1	)%

Net increase (decrease) in cash and cash equivalents	$	167.0	$	(199.3	)	Favorable			Favorable

Excluding the translation effect of changes in foreign exchange rates, third quarter sales and operating income decreased compared to the prior year, as market trends experienced in the first half generally continued. Broad weakness continued across global residential and commercial markets. The margin impact from sales volume declines offset the combined benefit from input cost deflation, reduced manufacturing costs and lower selling, general and administrative (“SG&A”) expenses. The majority of the year-over-year decline in third quarter operating income was due to a previously announced $31.6 million non-cash charge from accelerated vesting of stock compensation due to a transaction between TPG and the Asbestos PI Trust. See Note 15 to the Condensed Consolidated Financial Statements.

•

Resilient Flooring sales declined across geographic regions on lower volumes. Despite lower sales, operating income for the quarter increased due to reduced input costs, lower SG&A expenses and fewer expenses related to cost reduction actions. Year-to-date, operating income remained below the prior year as the margin impact of lower volumes more than offset lower costs.

•

Wood Flooring sales continued to decline due to weak domestic residential housing markets. Operating income for the quarter increased as raw material deflation, lower manufacturing costs and reduced SG&A expenses more than offset the margin impact of lower sales. Year-to-date, operating income remained below the prior year as the margin impact of lower volumes more than offset lower costs.

•

Building Products sales and operating income for the quarter and year-to-date declined reflecting lower activity in global commercial construction markets.

•

Cabinets sales and operating income for the quarter and year-to-date continued to decline due to weak domestic residential housing markets.

In the first nine months of 2009, cash balances increased by $167.0 million primarily due to cash earnings, distributions from WAVE, and decreases in working capital, partially offset by capital

Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)

expenditures. In the first nine months of 2008, cash balances were reduced primarily due to a special cash dividend to shareholders and increased investment in working capital.

Factors Affecting Revenues

Markets. We compete in building material markets around the world. The majority of our sales are in North America and Europe. During the third quarter of 2009, these markets experienced the following:

•

According to the U.S. Census Bureau, in the third quarter of 2009, housing starts in the U.S. residential market rose 9.3% from the second quarter to 0.59 million units, at seasonally adjusted and annualized rates (SAAR), but still down 32.0% compared to the third quarter of 2008. Housing completions in the U.S. declined 8.2% from the second quarter to 0.75 million (SAAR) in the third quarter of 2009, down 30.9% from a year earlier. The National Association of Realtors indicated that sales of existing homes increased 5.9% year over year to 5.30 million units (SAAR) in the third quarter.

According to the U.S. Census Bureau, U.S. retail sales through building materials, garden equipment and supply stores (an indicator of home renovation activity) decreased 13.7% year-over-year in the third quarter of 2009.

•

According to the U.S. Census Bureau the rate of change in the key commercial segments, in nominal dollars terms, was -16.3% in the third quarter of 2009. Construction activity in the office, healthcare, retail and education segments changed by -21.3%, 0.7%, -34.2%, -0.8%, respectively, in the third quarter of 2009.

•

Markets in European countries experienced broad declines. The declines were particularly acute in Eastern European markets.

•

Activity in Pacific Rim markets also remained slow.

Quality and Customer Service Issues. Our quality and customer service are critical components of our total value proposition. In the first nine months of 2009, we experienced no significant quality or customer service issues.

Pricing Initiatives. We periodically modify prices in response to changes in costs for raw materials and energy, and to market conditions and the competitive environment. The net impact of these pricing initiatives improved sales in the first nine months of 2009 compared to the first nine months of 2008. The most significant pricing actions were:

•

Resilient Flooring, Wood Flooring and Building Products had no significant pricing actions in the first nine months.

•

Cabinets implemented a February price increase.

In certain cases, realized price increases are less than the announced price increases because of competitive reactions and changing market conditions.

We estimate prior year pricing actions increased our total consolidated net sales in the third quarter of 2009 by approximately $5 million and in the first nine months of 2009 by approximately $38 million, when compared to the same periods of 2008.

Mix. Each of our businesses offers a wide assortment of products that are differentiated by style/design and by performance attributes. Pricing for products within the assortment varies. Changes in the relative quantity of products purchased at the different price points can impact year-to-year comparisons of net sales and operating income. Compared to the same periods in 2008, we estimate mix changes

Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)

decreased our total consolidated net sales in the third quarter of 2009 by approximately $1 million and increased sales in the first nine months of 2009 by approximately $2 million.

Factors Affecting Operating Costs

Operating Expenses. Our operating expenses comprise direct production costs (principally raw materials, labor and energy), manufacturing overhead costs, freight, costs to purchase sourced products and SG&A expenses.

Our largest individual raw material expenditures are for lumber and veneers, PVC resins and plasticizers. Natural gas is also a significant input cost. Fluctuations in the prices of these inputs are generally beyond our control and have a direct impact on our financial results. In the third quarter and first nine months of 2009, these input costs were approximately $22 million and $46 million, respectively, lower than in the same periods of 2008.

Factors Affecting Cash Flow

Typically, we generate cash in our operating activities. The amount of cash generated in a period is dependent on a number of factors, including the amount of operating profit generated, changes in the amount of working capital (such as inventory, receivables and payables) required to operate our businesses and investments in property, plant & equipment and computer software (“PP&E”).

During the first nine months of 2009, our cash and cash equivalents increased by $167.0 million. This was primarily due to cash earnings, distributions from WAVE, and decreases in working capital, partially offset by capital expenditures. Cash and cash equivalents decreased by $199.3 million for the first nine months of 2008. This was due to a special cash dividend paid to shareholders and increased investment in working capital partially offset by cash earnings and distributions from WAVE. See Financial Condition and Liquidity for further discussion.

Employee Relations

As of September 30, 2009, we had approximately 11,000 full-time and part-time employees worldwide, compared to approximately 12,200 employees as of December 31, 2008. The decline relates primarily to reductions in the manufacturing workforce as a result of significant sales volume declines. As of the date of this filing, no employees are working under expired contracts.

Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)

RESULTS OF OPERATIONS

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

2009 COMPARED TO 2008
CONSOLIDATED RESULTS


					Change is (Unfavorable)
								Excluding Effects of
					As			Foreign Exchange
	2009		2008		Reported			Rates⁽¹⁾
Three months ended September 30
Net Sales:
Americas	$	538.0	$	649.7		(17.2	)%		(16.9	)%
Europe		175.1		228.6		(23.4	)%		(15.6	)%
Pacific Rim		39.9		51.3		(22.2	)%		(17.1	)%

Total Consolidated Net Sales	$	753.0	$	929.6		(19.0	)%		(16.7	)%

Operating Income	$	44.0	$	82.2		(46.5	)%		(46.3	)%

Nine months ended September 30
Net Sales:
Americas	$	1,545.8	$	1,884.4		(18.0	)%		(17.2	)%
Europe		471.8		660.4		(28.6	)%		(17.9	)%
Pacific Rim		109.4		139.8		(21.7	)%		(12.4	)%

Total Consolidated Net Sales	$	2,127.0	$	2,684.6		(20.8	)%		(17.1	)%

Operating Income	$	92.2	$	217.4		(57.6	)%		(56.1	)%


⁽¹⁾		Excludes unfavorable foreign exchange effect in translation on net sales of $31.4 million for three months and $126.1 million for nine months. Excludes unfavorable foreign exchange effect in translation on operating income of $2.0 million for three months and $9.1 million for nine months.

Consolidated net sales, excluding the translation effect of changes in foreign exchange rates, declined 17% in the third quarter and the first nine months. For both periods, significant volume declines more than offset very modest improvements in price realization (as described previously in “Pricing Initiatives”).

Net sales in the Americas decreased 17% in the third quarter and 18% in the first nine months as volume declined in all segments.

Excluding the translation effect of changes in foreign exchange rates, net sales in the European markets decreased by $29 million for the quarter and $97 million for the first nine months. Modestly improved product mix partially offset lower volume for Building Products, while Resilient Flooring sales declined on lower volume.

Excluding the translation effect of changes in foreign exchange rates, net sales in the Pacific Rim decreased $7 million for the quarter and $15 million for the first nine months on lower volumes.

Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)

2009 and 2008 operating expenses were impacted by several significant items. The significant items, which impacted cost of goods sold (“COGS”), SG&A and restructuring charges, include:


Increase / (Reduction) in Expenses
		Three Months Ended						Nine Months Ended
	Where	September 30,						September 30,
Item	Reported	2009			2008			2009			2008
Cost reduction initiatives expenses ⁽¹⁾	COGS	$	2.6		$	2.5		$	6.0		$	2.5
Cost reduction initiatives expenses	SG&A		0.4	⁽¹⁾		5.8	⁽²⁾		0.4	⁽¹⁾		10.4	⁽²⁾
Chapter 11 related post-emergence (income) expenses, net ⁽³⁾	SG&A		—			—			—			(1.3	)
Review of strategic alternatives ⁽⁴⁾	SG&A		—			—			—			1.2
Accelerated stock compensation expense ⁽⁵⁾	SG&A		31.6						31.6			—
Cost reduction initiatives expenses ⁽⁶⁾	Restructuring		—			—			—			0.8


⁽¹⁾		Related to organizational and manufacturing changes for our European flooring business. 2009 amounts include accelerated depreciation to reflect the closure of our Auburn Cabinets facility.

⁽²⁾		Represents costs for corporate severances, partially offset by related reductions in stock compensation expense.

⁽³⁾		These costs represent professional and administrative fees incurred primarily to resolve remaining claims related to AWI’s Chapter 11 Case and distribute proceeds to creditors, and expenses incurred by Armstrong Holdings, Inc., our former publicly held parent holding company, as it completed its plan of dissolution.

⁽⁴⁾		Represents costs incurred as a result of a review of strategic alternatives that we initiated in 2007 and concluded in 2008.

⁽⁵⁾		Represents non-cash charges related to accelerated vesting of stock compensation issued to employees and directors.

⁽⁶⁾		Represents an increase in a reserve related to a non-cancelable operating lease as a result of a change in building tax rates.

Cost of goods sold in the third quarter of 2009 was 75.0% of net sales, compared to 77.2% in the same period of 2008. Cost of goods sold in the first nine months of 2009 was 77.3% of net sales, compared to 76.8% in the same period of 2008. For the quarter, the percentage declined as reduced input and manufacturing costs more than offset the decline in sales. For the first nine months, the percentage increase was the result of lower sales volume and higher cost reduction expenses more than offsetting lower input and manufacturing costs.

SG&A expenses in the third quarter of 2009 were $156.8 million, or 20.8% of net sales compared to $145.9 million, or 15.7% of net sales for the corresponding period in 2008. SG&A expenses in the first nine months of 2009 were $421.3 million, or 19.8% of net sales, compared to $452.7 million, or 16.9% of net sales for the corresponding period in 2008. The change in expense for both the three and nine months was primarily due to reduced spending in all segments, offset by the $31.6 million accelerated stock compensation expense. The increase in SG&A expenses as a percent of net sales is due to the significant decrease in net sales.

Equity earnings from our WAVE joint venture were $12.8 million in the third quarter of 2009, compared to $16.4 million in the third quarter of 2008, and $30.1 million in the first nine months of 2009, compared to $48.1 million in the first nine months of 2008. See Note 7 for further information.

Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)

We recorded operating income of $44.0 million in the third quarter of 2009 compared to operating income of $82.2 million in the third quarter of 2008. We recorded operating income of $92.2 million in the first nine months of 2009 compared to operating income of $217.4 million in the first nine months of 2008.

Interest expense was $4.9 million in the third quarter of 2009 compared to $7.5 million in the third quarter of 2008. Interest expense was $13.9 million in the first nine months of 2009 compared to $23.7 million in the first nine months of 2008. The decrease in 2009 is primarily due to decreases in average interest rates and outstanding debt balances.

Income tax (benefit) expense was ($24.6) million and $36.9 million for the third quarter of 2009 and 2008, respectively. The effective tax rate for the third quarter of 2009 was -61.8% as compared to a rate of 48.6% for 2008. The effective tax rate for third quarter 2009 was significantly lower than 2008 due to the recognition of tax benefits related to the settlement of the IRS audit in July 2009. Income tax (benefit) expense was ($1.1) million and $94.4 million for the first nine months of 2009 and 2008, respectively. The effective tax rate for the first nine months of 2009 was -1.4% versus 47.0% for 2008. The effective tax rate for the first nine months of 2009 was lower than 2008 due to the recognition of tax benefits related to the settlement of the IRS audit in July 2009 partially offset by higher unbenefitted foreign losses. See Note 10 to the Condensed Consolidated Financial Statements.

Net earnings of $64.4 million for the third quarter of 2009 compared to net earnings of $38.9 million for the third quarter of 2008. Net earnings of $81.5 million for the first nine months of 2009 compared to net earnings of $106.5 million for the first nine months of 2008.

REPORTABLE SEGMENT RESULTS

Resilient Flooring


					Change is Favorable/
					(Unfavorable)
								Excluding Effects
								of Foreign
	2009		2008		As Reported			Exchange Rates⁽¹⁾
Three months ended September 30
Net Sales:
Americas	$	180.9	$	214.5		(15.7	)%		(15.3	)%
Europe		85.0		99.5		(14.6	)%		(5.9	)%
Pacific Rim		16.7		22.9		(27.1	)%		(21.2	)%

Total Consolidated Net Sales	$	282.6	$	336.9		(16.1	)%		(13.2	)%

Operating Income	$	12.4	$	1.2	Favorable			Favorable

Nine months ended September 30
Net Sales:
Americas	$	528.2	$	630.5		(16.2	)%		(15.3	)%
Europe		221.7		283.2		(21.7	)%		(10.2	)%
Pacific Rim		44.2		59.8		(26.1	)%		(14.7	)%

Total Consolidated Net Sales	$	794.1	$	973.5		(18.4	)%		(13.9	)%

Operating Income	$	7.0	$	8.6		(18.6	)%		(5.0	)%


⁽¹⁾		Excludes unfavorable foreign exchange effect in translation on net sales of $13.4 million for three months and $54.0 million for nine months. Excludes favorable foreign exchange effect in translation on operating income of $0.1 million for three months and an unfavorable impact on foreign exchange effect in translation on operating income of $1.2 million for nine months.

Net sales in the Americas decreased $33.6 million for the third quarter and $102.3 million during the first nine months. For both periods, volume declined due to broad weakness in residential and commercial markets. Modest price realization was offset by a less profitable product mix.

Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)

Excluding the translation effect of changes in foreign exchange rates, net sales in the European markets decreased $4.8 million for the quarter and $23.6 million for the first nine months due to lower volume of commercial and residential products.

Excluding the translation effect of changes in foreign exchange rates, net sales in the Pacific Rim decreased $3.9 million for the quarter and $7.1 million during the first nine months. Lower volume was partially offset by a better product mix.

Operating income increased significantly in the third quarter by $11.2 million, and decreased $1.6 million for the first nine months. For the quarter, raw material cost deflation, lower freight costs and reduced SG&A expenses offset the margin impact of lower global volume and lower product mix profitability. For the first nine months, the margin impact of lower global volume and less profitable product mix in the Americas slightly more than offset raw material cost deflation, lower freight costs and reduced SG&A and manufacturing expenses. Operating income included European resilient flooring income of $0.2 million for the third quarter and a loss of $20.5 million for the first nine months of 2009, compared to losses of $9.2 million and $23.2 million, respectively, for the same periods in 2008. In addition, both 2009 and 2008 operating profit were impacted by previously described items as detailed in the following table.


Increase / (Reduction) in Expenses
	Three Months Ended				Nine Months Ended
	September 30				September 30
Item	2009		2008		2009		2008
Cost reduction initiatives expenses ⁽¹⁾	$	1.8	$	8.3	$	5.3	$	8.3

⁽¹⁾

Represents costs primarily for organizational and manufacturing changes for our European flooring business

Wood Flooring


					Change is
					Favorable/
	2009		2008		(Unfavorable)
Three months ended September 30
Total Segment Net Sales⁽¹⁾	$	140.1	$	171.0		(18.1	)%

Operating Income	$	11.2	$	8.5		31.8	%

Nine months ended September 30
Total Segment Net Sales⁽¹⁾	$	389.7	$	500.1		(22.1	)%

Operating Income	$	4.3	$	23.4		(81.6	)%


⁽¹⁾		Virtually all Wood Flooring products are sold in the Americas, primarily in the U.S.

Net sales decreased by $30.9 million for the third quarter and $110.4 million for the first nine months due to lower volume driven by continued declines in domestic residential housing markets.

Operating income increased by $2.7 million for the third quarter due to reduced operating costs consisting of raw material, freight, manufacturing and SG&A costs, partially offsetting the margin impact of significantly lower sales. Year to date operating income decreased $19.1 million primarily due to the margin impact of significantly lower sales, partially offset by reduced operating costs.

Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)

Building Products


					Change is (Unfavorable)
								Excluding Effects of
					As			Foreign Exchange
	2009		2008		Reported			Rates⁽¹⁾
Three months ended September 30
Net Sales:
Americas	$	178.8	$	216.6		(17.5	)%		(17.1	)%
Europe		90.1		129.1		(30.2	)%		(23.1	)%
Pacific Rim		23.2		28.4		(18.3	)%		(14.0	)%

Total Consolidated Net Sales	$	292.1	$	374.1		(21.9	)%		(18.7	)%

Operating Income	$	57.4	$	75.0		(23.5	)%		(21.2	)%

Nine months ended September 30

Net Sales:
Americas	$	512.4	$	613.2		(16.4	)%		(15.4	)%
Europe		250.1		377.2		(33.7	)%		(23.7	)%
Pacific Rim		65.2		80.0		(18.5	)%		(10.8	)%

Total Consolidated Net Sales	$	827.7	$	1,070.4		(22.7	)%		(17.7	)%

Operating Income	$	132.3	$	200.9		(34.1	)%		(31.4	)%


⁽¹⁾		Excludes unfavorable foreign exchange effect in translation on net sales of $17.6 million for three months and $68.8 million for nine months. Excludes unfavorable foreign exchange effect in translation on operating income of $2.5 million for three months and $8.8 million for nine months.

Net sales in the Americas decreased $37.8 million for the quarter and $100.8 million for the first nine months. Volume declines primarily due to reduced commercial construction activity offset incremental benefits from modest prior year price increases implemented to offset inflationary pressure.

Excluding the translation effect of changes in foreign exchange rates, net sales in Europe decreased by $24.5 million for the quarter and $73.5 million for the first nine months. The reduction in sales was due to significant volume declines in both Western and Eastern European markets associated with reduced commercial construction activity.

Excluding the translation effect of changes in foreign exchange rates, net sales in the Pacific Rim decreased $3.5 million for the quarter and $7.6 million for the first nine months on volume declines across the region, partially offset by modest improvement in product mix.

Operating income decreased by $17.6 million for the quarter and $68.6 million for the first nine months. The combination of volume declines and lower income from WAVE offset the benefits of reduced manufacturing and SG&A expenses, lower freight and modest price realization.

Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)

Cabinets


							Change is
	2009			2008			(Unfavorable)
Three months ended September 30
Total Segment Net Sales⁽¹⁾	$	38.2		$	47.6			(19.7	)%

Operating (Loss)	$	(3.0	)	$	(1.1	)	Unfavorable

Nine months ended September 30

Total Segment Net Sales⁽¹⁾	$	115.5		$	140.6			(17.9	)%

Operating (Loss)	$	(10.0	)	$	(3.9	)	Unfavorable


⁽¹⁾		All Cabinets products are sold in the U.S.

Net sales decreased $9.4 million for the quarter and $25.1 million for the first nine months due to lower volume driven by continued declines in residential housing markets.

Operating income decreased $1.9 million for the quarter and $6.1 million for the first nine months, respectively. This was primarily due to the margin impact from lower sales, partially offset by lower manufacturing costs. In addition, 2009 operating profit was impacted by previously described items as detailed in the following table.

Increase / (Reduction) in Expenses

Three Months Ended

Nine Months Ended

September 30

Item

2009

2008

2009

2008

Cost reduction initiatives expenses ⁽¹⁾

1.2

—

1.2

—


⁽¹⁾		Auburn plant closure

Unallocated Corporate

Unallocated corporate expense of $34.0 million in the third quarter of 2009 increased from $1.4 million in the prior year. For the first nine months of 2009, expense of $41.4 million was higher than expense of $11.6 million in 2008. For both periods the increase was primarily due to accelerated stock compensation expense related to a change of control event which resulted in a non-cash charge of $31.6 million. In addition, 2008 operating profit was impacted by previously described items as detailed in the following table.


Increase / (Reduction) in Expenses
	Three Months Ended				Nine Months Ended
	September 30				September 30
Item	2009		2008		2009		2008
Cost reduction initiatives expenses ⁽¹⁾		—		—		—		5.4
Chapter 11 related post-emergence (income) expenses, net		—		—		—		(1.3	)
Review of strategic alternatives		—		—		—		1.2
Accelerated stock compensation expense		31.6		—		31.6		—


⁽¹⁾		Represents costs for corporate severances, partially offset by related reductions in stock compensation expense, and restructuring costs

Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)

FINANCIAL CONDITION AND LIQUIDITY

Cash Flow

As shown on the Condensed Consolidated Statements of Cash Flows, our cash and cash equivalents balance increased by $167.0 million in the first nine months of 2009, compared to a $199.3 million decrease in the first nine months of 2008.

Operating activities in the first nine months of 2009 provided $178.2 million of cash. This was primarily due to cash earnings, and decreases in inventories of $83.6 million in all business units due to lower current and projected sales activity. These cash inflows were partially offset by increases in accounts receivable of $39.0 million due to higher sales in September 2009 compared to sales in December 2008. Operating activities in the first nine months of 2008 provided $128.2 million of cash. This was primarily due to cash earnings and distributions from WAVE of $41.5 million. These were partially offset by increases in accounts receivable of $59.8 million due to higher sales in September 2008 compared to sales in December 2007 and the payment of incentive accruals during the first quarter of 2008.

Net cash used for investing activities was $11.9 million for the first nine months of 2009. This was primarily due to capital expenditures of $63.6 million partially offset by distributions from WAVE of $42.0 million (which were classified as a return of investment). Net cash used for investing activities was $56 million for the first nine months of 2008, and was primarily due to capital expenditures.

Net cash used for financing activities was $15.5 million for the first nine months of 2009, compared to $266.1 million used during the first nine months of 2008. The change was primarily due to a special cash dividend payment of $256.4 million during the first quarter of 2008.

Balance Sheet and Liquidity

Changes in significant balance sheet accounts and groups of accounts from December 31, 2008 to September 30, 2009 are as follows:


	September 30,		December 31,		Increase/
	2009		2008		(Decrease)
Cash and cash equivalents	$	522.0	$	355.0	$	167.0
Current assets, excluding cash and cash equivalents		856.2		906.5		(50.3	)

Total current assets	$	1,378.2	$	1,261.5	$	116.7

Cash and cash equivalents increased by $167.0 million during the first nine months of 2009 (see “Cash Flow”). The decrease in current assets, excluding cash and cash equivalents, was due to lower inventory in all business units and decreases in other current assets, due to the collection of a receivable related to the sale of Tapijtfabriek H. Desseaux N.V. and the decrease in the fair value of foreign currency derivatives. This was partially offset by higher accounts receivable because of greater sales in September 2009 than in December 2008.


	September 30,		December 31,
	2009		2008		(Decrease)
Property, plant and equipment, net	$	924.8	$	954.2	$	(29.4	)

The decrease was primarily due to depreciation of $102.3 million, partially offset by capital expenditures of $63.6 million and the effects of foreign currency.

Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)

Liquidity

Our liquidity needs for operations vary throughout the year. We retain lines of credit to facilitate our seasonal needs. On October 2, 2006, Armstrong executed a $1.1 billion senior credit facility with Bank of America, N.A., JPMorgan Chase Bank, N.A. and Barclays Bank PLC. This facility was made up of a $300 million revolving credit facility (with a $150 million sublimit for letters of credit), a $300 million Term Loan A (due in 2011), and a $500 million Term Loan B (due in 2013). As of September 30, 2009 there were no outstanding borrowings under the revolving credit facility, but $46.8 million in letters of credit were outstanding as of September 30, 2009 and, as a result, availability under the revolving credit facility was $253.2 million.

Letters of credit are issued to third party suppliers, insurance and financial institutions and typically can only be drawn upon in the event of AWI’s failure to pay its obligations to the beneficiary.

As of September 30, 2009, we had $522.0 million of cash and cash equivalents, $307.0 million in the U.S. and $215.0 million in various foreign jurisdictions.

On February 25, 2008, we executed an amendment to our senior credit facility. This amendment (a) permitted us to make “Special Distributions,” including dividends (such as the special cash dividend described below) or other distributions (whether in cash, securities or other property) of up to an aggregate of $500 million at any time prior to February 28, 2009 (this permission in the amendment expired on February 28, 2009), (b) require that we maintain minimum domestic liquidity of at least $100 million as of March 31, June 30, September 30 and December 31 of each year, which may be a combination of cash and cash equivalents and undrawn commitments under our revolving credit facility and (c) increased interest rates by 0.25% for the revolving credit facility and Term Loan A. As of September 30, 2009 our domestic liquidity was $307.0 million.

In addition to the minimum domestic liquidity covenant, our credit facility contains two other financial covenants: minimum Interest Coverage of 3.00 to 1.00 and maximum ratio of Indebtedness to EBITDA of 3.75 to 1.00. Please refer to the credit facility incorporated in our 2008 Form 10-K as Exhibit 10.10. As of September 30, 2009 our consolidated interest coverage ratio was 13.0 to 1.00 and our indebtedness to EBITDA was 1.77 to 1.00. Management believes that based on current financial projections default under these covenants is unlikely. As of September 30, 2009, fully borrowing under our revolving credit facility, provided we maintain minimum domestic liquidity of $100 million, would not violate these covenants.

No mandatory prepayments are required under the senior credit facility unless (a) our Indebtedness to EBITDA ratio is greater than 2.50 to 1.00, or (b) debt ratings from S&P are lower than BB (stable), or (c) debt ratings from Moody’s are lower than Ba2 (stable). If required, the prepayment amount would be 50% of Consolidated Excess Cash Flow (as defined in the credit facility, incorporated in our 2008 Form 10-K as Exhibit 10.10). Mandatory prepayments have not occurred since the inception of the agreement. Our current debt rating from S&P is BB (stable) and from Moody’s is Ba2 (stable).

On February 25, 2008, our Board of Directors declared a special cash dividend of $4.50 per common share, payable on March 31, 2008, to shareholders of record on March 11, 2008. This special cash dividend resulted in an aggregate payment to our shareholders of $256.4 million. The Board will continue to evaluate the return of cash to shareholders based on factors including actual and forecasted operating results, the outlook for global economies and credit markets, and our current and forecasted capital requirements.

As of September 30, 2009, our foreign subsidiaries had available lines of credit totaling $27.5 million, of which $3.9 million was used and $5.7 million was available only for letters of credit and guarantees, leaving $17.9 million of unused lines of credit available for foreign borrowings. However, these lines of credit are uncommitted, and poor operating results or credit concerns at the related foreign subsidiaries could result in the lines being withdrawn by the lenders. We have been able to maintain and, as needed, replace credit facilities to support our foreign operations.

Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)

In October 2007 we received $178.7 million of federal income tax refunds (see Note 17 to our 2008 Form 10-K). Upon receipt of the refunds, AWI recorded a liability of $144.6 million in the fourth quarter of 2007. During the second quarter of 2009, the Internal Revenue Service concluded its examination for the 2005 and 2006 tax years and approved the above refunds. Under the Internal Revenue Code, the refunds were subject to further review and approval by the Joint Committee on Taxation of the U.S. Congress (“Joint Committee”). In July 2009, we were notified by the IRS that the Joint Committee had approved our refunds. See Note 10.

We believe that cash on hand and generated from operations, together with lines of credit and the availability under the $300 million revolving credit facility, will be adequate to address our foreseeable liquidity needs based on current expectations of our business operations and for scheduled payments of debt obligations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

For information regarding our exposure to certain market risks, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our 2008 Form 10-K filing. There have been no significant changes in our financial instruments or market risk exposures from the amounts and descriptions disclosed therein.

Item 4. Controls and Procedures

(a)

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

(b)

Changes in Internal Control Over Financial Reporting. No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, 2009 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 17 to the Condensed Consolidated Financial Statements for a full description of our legal proceedings.

Item 1A. Risk Factors

See page 3 for our “Risk Factors” discussion. Except as set forth below, there have been no material changes to the risk factors as previously disclosed in Part I, Item 1A of our 2008 Form 10-K.

Our 2008 Form 10-K Risk Factors liquidity discussion referenced a very substantial federal income tax refund received in 2007 and noted that if we were required to repay the refund, our liquidity position would be adversely affected. In July, we received a favorable ruling and approval of our refund from the Joint Committee on Taxation of the U.S. Congress. Accordingly, such risk has been removed from our liquidity risk factor disclosure. See Note 10.

The Armstrong World Industries, Inc. Asbestos Personal Injury Settlement Trust (“Asbestos PI Trust”), formed in 2006 as part of AWI’s emergence from bankruptcy, and Armor TPG Holdings LLC ”(TPG”) together hold more than 60% of AWI’s outstanding shares and have entered into a shareholders’ agreement pursuant to which the Asbestos PI Trust and TPG have agreed to vote their shares together on certain matters. Such a large percentage of ownership could result in below average equity market liquidity and affect matters which require approval by our shareholders.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(c)

Issuer Purchases of Equity Securities

Total Number of

Maximum

Number of

Purchased as

Shares that may

Part of Publicly

yet be

Total Number

Average Price

Announced

Purchased under

of Shares

Paid per

Plans or

the Plans or

Period

Purchased

Share¹

Programs²

Programs

July 1-31, 2009

382

16.71

—

August 1-31, 2009

411,651

31.90

—

September 1-30, 2009

—

Total

412,033

N/A


¹		Shares reacquired through the withholding of shares to pay employee tax obligations upon the vesting of restricted shares previously granted under the 2006 Long Term Incentive Plan.

²		The Company does not have a share buy-back program.

Item 6. Exhibits

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


Exhibit No.		Description

No. 2		Armstrong World Industries, Inc.’s Fourth Amended Plan of Reorganization, as amended by modifications through May 23, 2006, is incorporated by reference from the 2005 Annual Report on Form 10-K, wherein it appeared as Exhibit 2.3.

No. 3.1		Amended and Restated Certificate of Incorporation of Armstrong World Industries, Inc. is incorporated by reference from the Current Report on Form 8-K dated October 2, 2006, wherein it appeared as Exhibit 3.1.

No. 3.2		Bylaws of Armstrong World Industries, Inc. are incorporated by reference from the Current Report on Form 8-K dated October 2, 2006, wherein they appeared as Exhibit 3.2.

No. 10.1		Management Achievement Plan for Key Executives, effective as of November 28, 1983, as amended April 30, 2007 and December 8, 2008, is incorporated by reference from the 2008 Annual Report on Form 10-K, wherein it appeared as Exhibit 10.1. *

No. 10.2		Retirement Benefit Equity Plan, effective January 1, 2005, as amended October 29, 2007 and December 8, 2008, is incorporated by reference from the 2008 Annual Report on Form 10-K, wherein it appeared as Exhibit 10.2. *

No. 10.3		Bonus Replacement Retirement Plan, effective as of January 1, 1998, as amended January 1, 2007, is incorporated by reference from the 2007 Annual Report on Form 10-K, wherein it appeared as Exhibit 10.9.*

No. 10.4		Employment Agreement with Michael D. Lockhart, as amended, is incorporated by reference from the Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, wherein it appeared as Exhibit 10.8. *

No. 10.5		Hiring Agreement with F. Nicholas Grasberger III dated January 6, 2005 is incorporated by reference from the Current Report filed on Form 8-K/A on January 6, 2005, wherein it appeared as Exhibit 10.1. *

No. 10.6		Indemnification Agreement with F. Nicholas Grasberger III dated January 6, 2005 is incorporated by reference from the Current Report filed on Form 8-K/A on January 6, 2005, wherein it appeared as Exhibit 10.3. *

No. 10.7		Nonqualified Deferred Compensation Plan effective January 2005 is incorporated by reference from the 2005 Annual Report on Form 10-K, wherein it appeared as Exhibit 10.29. *

No. 10.8		Schedule of Armstrong World Industries, Inc. Nonemployee Directors Compensation is filed with this Report. *


Exhibit No.		Description

No. 10.9		Credit Agreement, dated as of October 2, 2006, by and among the Company, certain subsidiaries of the Company as guarantors, Bank of America, N.A., as Administrative Agent, the other lenders party thereto, JP Morgan Chase Bank, N.A. and Barclays Bank PLC, as Co-Syndication Agents and LaSalle Bank National Association and the Bank of Nova Scotia, as Co-Documentation Agents, is incorporated by reference from the Current Report on Form 8-K dated October 2, 2006, wherein it appeared as Exhibit 10.1.

No. 10.10		Amendment No. 1, dated February 25, 2008, to the Credit Agreement, dated October 2, 2006, by and among the Company, certain subsidiaries of the Company as guarantors, Bank of America, N.A., as Administrative Agent, the other lenders party thereto, JP Morgan Chase Bank, N.A. and Barclays Bank PLC, as Co-Syndication Agents and LaSalle Bank National Association and the Bank of Nova Scotia, as Co-Documentation Agents, is incorporated by reference from the 2007 Annual Report on Form 10-K, wherein it appeared as Exhibit 10.36.

No. 10.11		Armstrong World Industries, Inc. Asbestos Personal Injury Settlement Trust Agreement dated as of October 2, 2006, by and among Armstrong World Industries, Inc. and trustees, is incorporated by reference from the Current Report on Form 8-K dated October 2, 2006, wherein it appeared as Exhibit 10.2.

No. 10.12		Stockholder and Registration Rights Agreement, dated as of October 2, 2006, by and between Armstrong World Industries, Inc. and the Armstrong World Industries, Inc. Asbestos Personal Injury Settlement Trust is incorporated by reference from the Current Report on Form 8-K dated October 2, 2006, wherein it appeared as Exhibit 10.3.

No. 10.13		2006 Long-Term Incentive Plan, as amended February 23, 2009, is incorporated by reference from the 2008 Annual Report on Form 10-K, wherein it appeared as Exhibit 10.13. *

No. 10.14		Form of 2006 Long-Term Incentive Plan Stock Option Agreement is incorporated by reference from the Current Report on Form 8-K dated October 2, 2006, wherein it appeared as Exhibit 10.5. *

No. 10.15		Form of 2006 Long-Term Incentive Plan Restricted Stock Award Agreement is incorporated by reference from the Current Report on Form 8-K dated October 2, 2006, wherein it appeared as Exhibit 10.6. *

No. 10.16		Form of 2006 Long-Term Incentive Plan notice of restricted stock and/or option award is incorporated by reference from the Current Report on Form 8-K dated October 2, 2006, wherein it appeared as Exhibit 10.7. *

No. 10.17		Form of Indemnification Agreement for Directors and Officers of Armstrong World Industries, Inc. is incorporated by reference from the Current Report on Form 8-K dated October 2, 2006, wherein it appeared as Exhibit 10.8. A Schedule of Participating Directors and Officers is filed with this Report. *

No. 10.18		2006 Phantom Stock Unit Plan, as amended December 8, 2008, is incorporated by reference from the 2008 Annual Report on Form 10-K, wherein it appeared as Exhibit 10.18. *


Exhibit No.		Description

No. 10.19		2006 Phantom Stock Unit Agreement is incorporated by reference from the Current Report on Form 8-K dated October 23, 2006, wherein it appeared as Exhibit 10.3. A Schedule of Participating Directors is incorporated by reference from the 2006 Annual Report on Form 10-K, wherein it appeared as Exhibit 10.36. *

No. 10.20		2007 Award under the 2006 Phantom Stock Unit Agreement and the Schedule of Participating Directors are incorporated by reference from the Current Report on Form 8-K dated October 22, 2007, wherein they appeared as Exhibits 10.1 and 10.2, respectively. *

No. 10.21		Stipulation and Agreement with Respect to Claims of Armstrong Holdings, Inc. and Armstrong Worldwide, Inc.; and Motion for Order Approving Stipulation and Agreement are incorporated by reference from the Current Report on Form 8-K dated February 26, 2007, wherein they appeared as Exhibits 99.2 and 99.3, respectively.

No. 10.22		Form of grant letter used in connection with the equity grant of stock options and performance restricted shares under the 2006 Long-Term Incentive Plan to Michael D. Lockhart is incorporated by reference from the 2007 Annual Report on Form 10-K, wherein it appeared as Exhibit 10.34.*

No. 10.23		Form of grant letter used in connection with awards of restricted stock under the 2006 Long-Term Incentive Plan is incorporated by reference from the 2007 Annual Report on Form 10-K, wherein it appeared as Exhibit 10.35.*

No. 10.24		Form of grant letter used in connection with award of stock options under the 2006 Long-Term Incentive Plan is incorporated by reference from the Quarterly Report on Form 10-Q for the quarter ended March 31, 2008, wherein it appeared as Exhibit 10.37. *

No. 10.25		2008 Directors Stock Unit Plan, as amended December 8, 2008 is incorporated by reference from the 2008 Annual Report on Form 10-K, wherein it appeared as Exhibit 10.27. *

No. 10.26		Form of Service Commencement Award to each of James C. Melville and Edward E. Steiner is filed with this Report. *

No. 10.27		Form of 2009 Award under the 2008 Director Stock Unit Plan is filed with this Report. *

No. 10.28		Schedule of Participating Directors to the 2009 Award under the 2008 Directors Stock Unit Plan is filed with this Report. *

No. 10.29		Form of Change in Control Agreement with certain officers is incorporated by reference from the Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, wherein it appeared as Exhibit 10.37. *

No. 10.30		Schedule of Participating Officers to the Form of Change in Control Agreement is incorporated by reference from the Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, wherein it appeared as Exhibit 10.38. *

No. 10.31		Form of Change in Control Agreement with Michael D. Lockhart is incorporated by reference from the Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, wherein it appeared as Exhibit 10.39. *


Exhibit No.		Description

No. 10.32		Form of Indemnification Agreement for certain directors of Armstrong World Industries, Inc. is filed with this Report. A Schedule of Participating Directors is filed with this Report. *

No. 10.33		Non-Disclosure Agreement, dated July 30, 2009, between Armstrong World Industries, Inc. and TPG Capital, L.P. (incorporated by reference to Exhibit 3 to the Schedule 13D filed by TPG Advisors VI, Inc., TPG Advisors V, Inc., David Bonderman and James G. Coulter with the SEC on August 11, 2009).

No. 10.34		Undertaking Letter from TPG Capital L.P., dated August 10, 2009, to Armstrong World Industries, Inc. (incorporated by reference to Exhibit (e)(4) to the Schedule 14D-9 filed by Armstrong World Industries, Inc. with the SEC on September 15, 2009).

No. 15		Awareness Letter from Independent Registered Public Accounting Firm.

No. 31.1		Certification of Principal Executive Officer required by Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act.

No. 31.2		Certification of Principal Financial Officer required by Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act.

No. 32.1		Certification of Chief Executive Officer required by Rule 13a and 18 U.S.C. Section 1350 (furnished herewith).

No. 32.2		Certification of Chief Financial Officer required by Rule 13a and 18 U.S.C. Section 1350 (furnished herewith).

No. 99.1		Shareholders’ Agreement, dated as of August 28, 2009, by and among Armor TPG Holdings LLC and Armstrong World Industries, Inc. Asbestos Personal Injury Settlement Trust (incorporated by reference to Exhibit (d)(3) of the Schedule TO filed on September 3, 2009, by TPG Advisors VI, Inc., Armor TPG Holdings LLC and others with respect to Armstrong World Industries, Inc.).


*		Management Contract or Compensatory Plan.

SIGNATURES

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


	Armstrong World Industries, Inc.
	By:	/s/ William C. Rodruan
		William C. Rodruan, Interim Chief Financial Officer

	By:	/s/ Jeffrey D. Nickel
		Jeffrey D. Nickel, Senior Vice President,
		General Counsel and Corporate Secretary

	By:	/s/ Stephen F. McNamara
		Stephen F. McNamara, Vice President and Controller
		(Principal Accounting Officer)

Date: October 28, 2009

EXHIBIT INDEX


No. 10.8		Schedule of Nonemployee Directors Compensation.

No. 10.17		A Schedule of Participating Directors and Officers to form of Indemnification Agreement for Directors and Officers of Armstrong World Industries, Inc. incorporated by reference from the Current Report on Form 8-K dated October 2, 2006, wherein it appeared as Exhibit 10.8.

No. 10.26		Form of Service Commencement Award to each of James C. Melville and Edward E. Steiner.

No. 10.27		Form of 2009 Award under the 2008 Director Stock Unit Plan.

No. 10.28		Schedule of Participating Directors to the 2009 Award under the 2008 Directors Stock Unit Plan.

No. 10.32		Form of Indemnification Agreement for certain directors of Armstrong World Industries, Inc. A Schedule of Participating Directors.

No. 15		Awareness Letter from Independent Registered Public Accounting Firm.

No. 31.1		Certification of Principal Executive Officer required by Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act.

No. 31.2		Certification of Principal Financial Officer required by Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act.

No. 32.1		Certification of Chief Executive Officer required by Rule 13a and 18 U.S.C. Section 1350 (furnished herewith).

No. 32.2		Certification of Chief Financial Officer required by Rule 13a and 18 U.S.C. Section 1350 (furnished herewith).